Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. This is Master's in
Speaker 1: Business with Barry Ridholts on Bloomberg Radio.
Speaker 2: This week on the podcast, I have another extra special guest.
Speaker 2: Doctor Eduard Danny is a really legend on Wall Street.
Speaker 2: He is both an investment strategist and an economist, and
Speaker 2: I'm very comfortable saying he does that better than anybody else.
Speaker 2: He has had a number of major market calls and
Speaker 2: economic calls that have been notable, not just because they
Speaker 2: were right, but for the way he uses the data
Speaker 2: to reach the right conclusion. He has consistently been bullish
Speaker 2: since the market bottoms in March o nine. He has
Speaker 2: talked about where a recession is and isn't coming. He's
Speaker 2: more or less nailed what the Fed was going to do,
Speaker 2: even though a lot of these calls have been outliers
Speaker 2: and very contrarian compared to the rest of the world
Speaker 2: of finance. Ed as a neighbor of mine lives the
Speaker 2: next town over. I've known him for a long time
Speaker 2: and I've just marveled at how he thinks about markets
Speaker 2: and the economy, and government and data. I subscribe to
Speaker 2: his daily notes and find them to be tremendously useful
Speaker 2: in contextualizing the fire hose of data, looking at what's
Speaker 2: important and what's not and how much of this stuff
Speaker 2: is just noise. I found this conversation to be informational, educational,
Speaker 2: and fascinating, and I think you will also, with no
Speaker 2: further ado, my interview with doctor Edyard Denny. Doctor Edyard Denny,
Speaker 2: Welcome back to Bloomberg, Barry.
Speaker 1: It's always a pleasure. Thank you for having me.
Speaker 2: Well, well, thank you for coming. It's always good to
Speaker 2: see you. We're neighbors. We probably don't get to see
Speaker 2: each other as much as we did pre pandemic.
Speaker 1: We have to catch up.
Speaker 2: We still have some bad pandemic habits that we have
Speaker 2: to break. Let's talk a little bit about your background.
Speaker 2: You have a fascinating academic background, a PhD in economics
Speaker 2: from Yale, and your thesis advisor is Nobel Laureate James Tobin.
Speaker 2: Tell us about working with Tobin.
Speaker 1: Well, it was certainly an honor and to work with
Speaker 1: somebody who won the Nobel Prize for his contribution to economics.
Speaker 1: But sometimes it wasn't that easy to understand his theories
Speaker 1: because they were mathematical and got complicated. But as a
Speaker 1: result of that, I turned to Janet Yalen. Janet Yalen
Speaker 1: had graduated from Yale in their PhD program six years
Speaker 1: before I attended, and she took meticulous notes. You know,
Speaker 1: she must have been one of those, you know, very
Speaker 1: focused students sitting in the front row of Tobin's class
Speaker 1: six years before I got there, and she took meticulous notes,
Speaker 1: just great notes, and they were xerox. And I think
Speaker 1: most of us who studied under Tobin basically got through
Speaker 1: Yale got our PhDs because of Janet Yellen's notes.
Speaker 2: That's really interesting. The undergrad at Cornell and then a
Speaker 2: master's degree also at Yale. That seems like a lot
Speaker 2: of education. Was the plan to go into academia or
Speaker 2: was it always Wall Street?
Speaker 1: Well, I didn't really know what I wanted to do
Speaker 1: when I was an undergraduate, so I took everything from
Speaker 1: a couple of courses of engineering, physics, math, political science,
Speaker 1: and economics. And based on all that, I realized I
Speaker 1: wasn't any good at math or at physics, so I
Speaker 1: had to go into something a little softer and easier.
Speaker 1: So I did go into a combination of politics and
Speaker 1: economics and then for my masters, I went to the
Speaker 1: International Relations program at Yale, which combined economics and political science.
Speaker 1: And then as I ended that two year program, I
Speaker 1: realized I accumulated enough to basically do a PhD in
Speaker 1: four years there as well, on top of you, not
Speaker 1: an extra four years one more year ago. Yeah, and
Speaker 1: then I just had to write a PhD dissertation. And
Speaker 1: I'd seen too many of my fellow students who are
Speaker 1: kind of hanging around the graduate program because they couldn't
Speaker 1: quite finish their PhD dissertations. I decided I was going
Speaker 1: to get out of there quick, and so I wrote
Speaker 1: a dissertation, empirical one that confirmed a lot of Tobin's theories.
Speaker 1: He absolutely loved it, and let me move on from there.
Speaker 2: So you graduate with a PhD in economics in nineteen
Speaker 2: seventy six. We're going to talk about inflation later, but
Speaker 2: I have to ask a lot of your peers who
Speaker 2: graduated in the mid seventies. It seemed to really leave
Speaker 2: a mark on them. Unlike most of them, you nailed
Speaker 2: inflation on the way up, you nailed it on the
Speaker 2: way now. So many of them seemed to be scarred
Speaker 2: by their nineteen seven experience. Why did that whole era
Speaker 2: of economists, and I'm including like big names like Laurence Summers,
Speaker 2: why did they get this so wrong?
Speaker 1: I think that they first start out with theories and
Speaker 1: then look for data to support it. And I can't
Speaker 1: really generalize about the economics profession, but I think there's
Speaker 1: enough attention to just you know, dealing with the facts,
Speaker 1: with the data, and with historical events. I lived through
Speaker 1: a lot of those historical events and learned from them.
Speaker 1: But I observed that, you know, inflation was in fact
Speaker 1: brought down in a very conventional way in the late
Speaker 1: seventies early eighties with very tight monetary policy. And then
Speaker 1: in the eighties I observed that we were saying de
Speaker 1: industrialization in America, but that was because of globalization, right,
Speaker 1: and which was deflation, which is deflationary. And in fact,
Speaker 1: I think it was in the early eighties, I don't know,
Speaker 1: I think it was eighty two eighty three. I predicted
Speaker 1: that we're probably going to see a period of disinflation,
Speaker 1: and part of that was also based on my view
Speaker 1: that as globalization prevailed, that'd be more global competition that
Speaker 1: would keep a lit on inflation.
Speaker 2: And you also wrote a piece in twenty twenty three
Speaker 2: about why conventional forecasting models were so wrong, and a
Speaker 2: lot of people, in particular, you mentioned Jamie Diamond had
Speaker 2: been expecting a recession. It seemed like almost every economist
Speaker 2: was expecting a recession and it never showed. Again, what
Speaker 2: did you get right? What did they get wrong?
Speaker 1: Well? I think most economists very logically believe that if
Speaker 1: the Fed's going to go from zero on the FED
Speaker 1: funds rate to five and a quarter percent, how could
Speaker 1: we not have a recession. My argument was that while
Speaker 1: the Feds certainly was tightening, they were also normalizing. I mean,
Speaker 1: so you had to not only look at where interest
Speaker 1: rates had gotten to, but where they came from. And
Speaker 1: they came from zero. So the really abnormality was the
Speaker 1: ultra ezy monetary policy that we had from the Great
Speaker 1: Financial Crisis to the Great Virus Crisis. And I felt
Speaker 1: that the economy was demonstrating that it could handle it,
Speaker 1: that it would be in fact relatively resilient. And of
Speaker 1: course you have to get the consumer right. And along
Speaker 1: the way, I concluded that while Jamie Diamond and others
Speaker 1: were focusing on the consumer running out of so called
Speaker 1: excess saving the idea that was that you know, consumers
Speaker 1: that accumulated two to three trillion dollars for during the
Speaker 1: two months of shutdowns, and then for all the helicopter
Speaker 1: money that was deposited in their accounts. I was pointing
Speaker 1: out increasingly that wait a second, the baby boomers have
Speaker 1: seventy five trillion dollars in retirement assets, and you know what,
Speaker 1: they're starting to retire.
Speaker 2: I love that chart. You actually showed that chart today. Yeah, wealth,
Speaker 2: it comes from the flow of funds cost SERF. But
Speaker 2: when you look at the millennials and the gen xers,
Speaker 2: wasn't everybody predicting the boomers were going to go broke
Speaker 2: they wouldn't have any money retired. Seventy five almost seventy
Speaker 2: seven trillion dollars. That's a lot of money.
Speaker 1: It's a lot of money. It's an ull time record high.
Speaker 1: The household sector in its entirety has over one hundred
Speaker 1: and fifty trillion dollars in net worth and that's assets
Speaker 1: minus liabilities, and it's all sorts of different assets. Its houses,
Speaker 1: its stocks, it's pensions, it's the whole, the whole thing.
Speaker 1: So that's at a record high. And the baby boomers
Speaker 1: own half of that roughly seventy five trillion dollars. And
Speaker 1: then the younger generations are kind of looking at Mom
Speaker 1: and Dad starting to retire, said, you know, I wish
Speaker 1: you a long and happy retirement, but don't spend it all.
Speaker 1: And so I think the savings rate's going to remain
Speaker 1: extremely low because the baby boomers are not saving anymore,
Speaker 1: They're spending. And I think that the younger generation can
Speaker 1: actually look forward to some substantial as being substantial beneficiaries
Speaker 1: of inherited wealth.
Speaker 2: Let's roll back to the work that you did with
Speaker 2: James Tobin and one, I believe he won the Nobel
Speaker 2: Prize yes for his work on fiscal spending. So when
Speaker 2: you have the Cares Act one, which was ten percent
Speaker 2: of GDP, as the Cares Act two and then the
Speaker 2: Cares Act three, shouldn't that offset whatever the Fed's going
Speaker 2: to do? And by the way, five percent isn't outrageously Hi,
Speaker 2: that's kind of average. Well.
Speaker 1: I think that's another good point is that not only
Speaker 1: did the consumers turn out to be resilient and they
Speaker 1: remain resilient, they're still spending and labor market has been
Speaker 1: really tight. The reason for that of course is the
Speaker 1: baby boomers are spending more on going out to restaurants, traveling,
Speaker 1: health care services. So guess what employment is doing all
Speaker 1: those industries all time record. You don't get a recession
Speaker 1: when construction and total parallel employment are at all time
Speaker 1: record highs. That's the other reason why the economy has
Speaker 1: done well is there's been a tremendous amount of fiscal
Speaker 1: spending that has led to a record spending on infrastructure.
Speaker 1: I mean you can actually see it in the data.
Speaker 1: It's not just there was an act and then nothing happened.
Speaker 1: There was a lot of spending, and then of course
Speaker 1: on shoring received a lot of tax benefits. So we've
Speaker 1: seen construction of factory facilities just exploding to the upside.
Speaker 1: And again those are all construction jobs, and they're going
Speaker 1: to need employees and so on.
Speaker 2: So nice Tailwhen we'll come back to that a little later,
Speaker 2: let's stay with the early days of your career because
Speaker 2: I really find it kind of unique. You're an economist
Speaker 2: at the New York Fed in seventy six and seventy seven.
Speaker 2: You're fairly young and new. Then what were you working
Speaker 2: on when you were at the New York Fed?
Speaker 1: Well, just by happenstance. They put me on writing memos,
Speaker 1: updating data. It wasn't really exciting stuff, but focused on
Speaker 1: the same things the loan industry. I mean, you can't
Speaker 1: think of anything like more boring. It's like and useless
Speaker 1: than analyzing the savings and loan industry in the in
Speaker 1: the late seventies.
Speaker 2: Right before it blew up.
Speaker 1: And then it blew up, and then I'm suddenly on
Speaker 1: Wall Street and I have a lot of knowledge of
Speaker 1: just what was going on in the SNL industry. So
Speaker 1: it really helped me to understand that crisis.
Speaker 2: So here's what I find so fascinating and unique about
Speaker 2: your career. You have been chief investment strategic at places
Speaker 2: like Deutsche Bank and Prudential, but you were also chief
Speaker 2: economists at E. F. Hutton, Prudential, Base CJ. Lawrence, which
Speaker 2: eventually gets bought by Deutsche Bank. Like, that's a rare
Speaker 2: pair of hats for one person. Aware tell us a
Speaker 2: little bit about how you managed to do both jobs.
Speaker 1: I did start at as an economist. I think I
Speaker 1: was at E. F. Hutton for about a year or two,
Speaker 1: and then the chief economists decided to move on, and
Speaker 1: so only a couple of years into Wall Street career,
Speaker 1: I was chief economist of E. F. Hutton, so that
Speaker 1: was pretty exciting. But I learned a lot from the
Speaker 1: strategist I worked with. There's a fellow by named Greg
Speaker 1: Smith who was a strategist at EF Hutton. Jim Moltz
Speaker 1: was a well regarded strategist c J. Lawrence, and so
Speaker 1: I learned a lot from them, and an opening became
Speaker 1: available to be a strategist at c J. Lawrence, which
Speaker 1: by then had become part of deutsch Bank Securities, and
Speaker 1: I jumped at it, and I said, look, I think
Speaker 1: I can do both jobs. And it just to me
Speaker 1: made sense to do both jobs because I don't know
Speaker 1: how you can be a well informed strategist without understanding
Speaker 1: of the economy.
Speaker 2: So when you were working for Lawrence as part of
Speaker 2: and eventually become chief investment strategy at Deutsche Bank, what
Speaker 2: was that like? Given the fact that they're based in
Speaker 2: Germany Many. I don't want to say most, but many
Speaker 2: of their clients are European. How did that change how
Speaker 2: you looked at the world.
Speaker 1: Well, I didn't really work for Deutsche Bank per se.
Speaker 1: I worked as the chief economists strategist for deutsch Bank Securities,
Speaker 1: which was still to a large extent based in the
Speaker 1: United States and had international clients, but we certainly had
Speaker 1: plenty in the US. So the transition from CJ. Lawrence
Speaker 1: being independent to CJ. Lawrence evolving into deutsch Bank Securities,
Speaker 1: nothing really changed for me. Quite honestly. What was very
Speaker 1: visible as Deutsche Bank spent a tremendous amount of money
Speaker 1: on expanding and so they hired the Frank quadtrone group.
Speaker 1: Sure yeah, and in the research investment banking department for
Speaker 1: a couple of years. At the time Quatrone brought Amazon
Speaker 1: to the marketplace, and I'm kicking myself, you know. I mean,
Speaker 1: there was I think thirteen bucks before all the splits,
Speaker 1: but it was an exciting time.
Speaker 2: Let me ask you about that exciting time. Your arm
Speaker 2: wall in the eighties and nineties arguably the biggest bull
Speaker 2: market of our lifetime. We'll see how far this one goes.
Speaker 2: Where we are today, What was it like in that
Speaker 2: era when people were still stock pickers, active mutual funds
Speaker 2: were attracting the flows. Everybody thought they could beat the market.
Speaker 2: We didn't quite have all the data yet. Tell us
Speaker 2: what that era was like, as a chief strategist on
Speaker 2: the street.
Speaker 1: Well, the eighties were certainly interesting, and near the tail
Speaker 1: end we had the crash in the stock market. The
Speaker 1: one day crash I scrambled to kind of understand what
Speaker 1: was going on, concluded as portfolio insurance, and that the
Speaker 1: week before the Houseways and Means Committee was starting to
Speaker 1: talk about taxing some of these transactions that were going
Speaker 1: on in M and A, and so a lot of
Speaker 1: the M and A stocks got hit quite hard. And
Speaker 1: my conclusion that it was largely a government a reaction
Speaker 1: to possible government regulation, and that probably would pass. And Restinkowski,
Speaker 1: who was the head of the House Committee at the time,
Speaker 1: did in fact pass on it. In December suddenly he
Speaker 1: just kind of evaporated. So I concluded within a couple
Speaker 1: of days that we were probably making it low in
Speaker 1: this bear market that only lasted really a few days.
Speaker 1: I mean officially it was October to December.
Speaker 2: But well, to be fair, I want to say by
Speaker 2: August of eighty seven, SMP was up forty something percent
Speaker 2: and we finished the year plus one percent. So that's
Speaker 2: quite a wackage that would constitute bear in my book.
Speaker 1: Right in the early nineties, I started to recognize the
Speaker 1: technology revolution that was going on.
Speaker 2: And I got they were early and vocal.
Speaker 1: Well, I was early in Vocal and as a matter
Speaker 1: of fact, I walked into a Barnes and Noble store
Speaker 1: I think in nineteen ninety four, early nineteen ninety five,
Speaker 1: and I'm pretty sure that I was the first one
Speaker 1: to have a website the Internet, obviously on Wall Street,
Speaker 1: and I know no other economists. I don't know how
Speaker 1: I got away with the Deutsche Bank. Why they would allow,
Speaker 1: you know, doctor Edyard Denny's economics network to be featured
Speaker 1: on the Internet without any any real mention of who
Speaker 1: I worked for.
Speaker 2: Well maybe that's the German ownership didn't understand us compliance world,
Speaker 2: I suppose so at that time, who knows? You launch
Speaker 2: in January seven, not that much earlier than the financial crisis.
Speaker 2: Tell us what led you to launching your Danny Research.
Speaker 1: Well, I had been on Wall Street for many years.
Speaker 1: It was getting a little stale. The lawyers were starting
Speaker 1: to take over, and there are more limits on what
Speaker 1: you could write about or who you could talk to,
Speaker 1: even in your own shop. Yet to get approval to
Speaker 1: go down to the trading desk, it just wasn't as
Speaker 1: exciting as it had been in the early two thousands,
Speaker 1: and suddenly, out of the blue, I got a call
Speaker 1: from Jim Olschlager, who runs Oak Associates in Akron, Ohio.
Speaker 1: And Jim was looking for somebody to work with him
Speaker 1: as a strategist in Akron, Ohio. So I talked to
Speaker 1: him and it sounded like a great opportunity. He made
Speaker 1: me an offer I couldn't refuse. So I accepted it
Speaker 1: and it was a three year deal and it worked
Speaker 1: out fine. But after two years I kind of missed
Speaker 1: just doing what I had been doing on the street. Meanwhile,
Speaker 1: Jim had allowed me to continue to write and to
Speaker 1: keep in touch with my client base. So I left
Speaker 1: in the end of two thousand and six and January first,
Speaker 1: two thousand and seven we started. I started there Denny
Speaker 1: Research as an independent research provider.
Speaker 2: Did you move to Ohio or I actually commuted.
Speaker 1: They have a great airport there, Canton Akron Airport is
Speaker 1: a wonderful.
Speaker 2: Airport, Farmingdale, l LaGuardia.
Speaker 1: LaGuardia And I'd leave on a Sunday and sometimes hang
Speaker 1: around there until it was there Thursday. But so I
Speaker 1: just kind of commuted and that was okay with Jim
Speaker 1: and I worked out fine, And of course I did
Speaker 1: some market with him, so I would kind of meet
Speaker 1: him at different parts of the country and we'd market together.
Speaker 2: Huh, let's talk about your clients. I'm assuming they're primarily institutional.
Speaker 1: Well, they have been primarily institutional, you know, since I've
Speaker 1: been on Wall Street, I guess you know. I did
Speaker 1: work for some firms that also had a huge retail
Speaker 1: base with like prudentials, so I certainly had a lot
Speaker 1: of interaction with both institutional and retail. When I moved
Speaker 1: to CJ. Lawrence is primarily institutional. It was all institutional, really,
Speaker 1: and then when I went off on my own, I
Speaker 1: continued with an institutional bent. The research was aimed at
Speaker 1: a fairly sophisticated professional investment community. But about two years
Speaker 1: ago we realized that there's a demand for what we
Speaker 1: do among individual investors. So we came up with something
Speaker 1: called R Danny quick Takes dot Com and that's a
Speaker 1: daily and it's shorter, and it's to the point, and
Speaker 1: it is what I've always done, which is kind of
Speaker 1: combined strategy and economics.
Speaker 2: I was going to say, you also put a lot
Speaker 2: of information online. Yes, that's there for free, right. I
Speaker 2: don't mean like a chart here or there, huge runs
Speaker 2: of data and charts and it's updated like daily.
Speaker 1: Yeah, it's automatically updated.
Speaker 2: How do you manage to handle all this that seems
Speaker 2: like a lot of work that you're essentially giving away.
Speaker 1: Well, several years ago, I didn't see the point of
Speaker 1: doing all these charts manually over and over again. And
Speaker 1: you know, when you run this chart, where is it?
Speaker 1: And so we came up with an in house program.
Speaker 1: This was when I was still on Wall Street. An
Speaker 1: in house program that ran these charts automatically when the
Speaker 1: data was available from our data vendor, and updated the
Speaker 1: charts and then put the charts in a proper place
Speaker 1: in the PDFs that focused on those particular topics. It
Speaker 1: worked great. I mean I think it was in some
Speaker 1: ways a very crude artificial intelligence tool. You know, she
Speaker 1: mentioned AI at least once in our interview. Year.
Speaker 2: Oh, we have lots of AI to talk about a
Speaker 2: little later.
Speaker 1: Yeah. But so anyways, this this smart program figured out
Speaker 1: how to paying the vendor and say anything new for me,
Speaker 1: and if there was, everything would be updated automatically. And
Speaker 1: we're still doing that and look, and that's your Denny
Speaker 1: Denny dot com here and now, if nobody was looking
Speaker 1: at our charts, I would still have the whole thing
Speaker 1: because that's what I used to write. And so what
Speaker 1: I'm doing is basically sharing the puzzle pieces, and anybody
Speaker 1: who wants to see how how I put the puzzles
Speaker 1: together has to subscribe to our research.
Speaker 2: And just to put some flesh on those bones. You
Speaker 2: post on valuation, the global economy, the US economy, inflation, credit,
Speaker 2: consumer spending, employee markets, pretty much anything that there's a
Speaker 2: regular data stream, it updates automation.
Speaker 1: That's correct.
Speaker 2: Huh, it's really really intriguing. Let's talk about putting some
Speaker 2: of those puzzle pieces together. You talk about the megacap eight,
Speaker 2: the Magnificent seven plus Netflix.
Speaker 1: I like movies as very so I'm a well aware
Speaker 1: any want to leave the Netflix out of there.
Speaker 2: Let me steer you away from the New Wonka movie
Speaker 2: because it's terrible. But how important are these eight stocks
Speaker 2: to the overall market this year and last?
Speaker 1: Well, I mean arithmetically, they're very important. They're about twenty
Speaker 1: eight percent of the market cap of the S and
Speaker 1: P five hundred, so they they're huge in terms of
Speaker 1: their impact. And some people look at that and say, well,
Speaker 1: that's not healthy. It's a sign that this market is vulnerable,
Speaker 1: and I'm empirical about it. It is what it is.
Speaker 1: These are Greek companies that they're here to stay. They've
Speaker 1: had a couple of sell offs that turn out to
Speaker 1: be great opportunities to get get into those stocks. So
Speaker 1: I think we have to find in that when you
Speaker 1: look at the evaluation multiple the S and P five hundred,
Speaker 1: maybe it's not the historical average of fifteen anymore. Maybe
Speaker 1: it's something more like something north of that, maybe even
Speaker 1: closer to twenty, which is where we are right now.
Speaker 1: And nobody seems to be particularly bothered by it, because
Speaker 1: these are companies that in fact have earnings, have customers,
Speaker 1: have a tremendous amount of cash flow, and don't seem
Speaker 1: to be that interest rate sensitive. They've got all the
Speaker 1: money in the world to expand, and they're always looking
Speaker 1: for new businesses.
Speaker 2: Michael Mobison put out a piece a couple of years
Speaker 2: ago talking about the intangibles that this market is not
Speaker 2: like the market of one hundred years ago, where you
Speaker 2: had giant factories, big foundries, massive demands for labor, material
Speaker 2: and income. A lot of the wealth today, a lot
Speaker 2: of the assets of these companies today are intangibles. They're copyrights,
Speaker 2: their trademarks and algorithe well, ep IP, all this intellectual property.
Speaker 2: Are we rationalizing a price of your market or is
Speaker 2: that a fair explanation.
Speaker 1: I think it's a fair explanation. I think it's also
Speaker 1: important to realize that the bull market we've had, in
Speaker 1: the upward trend in the stock market, certainly reflects the
Speaker 1: fact that the country is getting wealthier and wealthier. I
Speaker 1: know this is a very controversial subject because once you
Speaker 1: start getting into income and wealth, people talk about income
Speaker 1: and wealth inequality. But I think a fair amount of
Speaker 1: that is related to demography and as we said before,
Speaker 1: the record household net worth, record net worth for the
Speaker 1: baby boomers, and so there's a lot of money out
Speaker 1: there that needs to be invested. We're seeing that even
Speaker 1: in the government bond market. I mean, we all know
Speaker 1: that a lot of people have been pouring money into
Speaker 1: Nvidia and some of the other megacap eight though it
Speaker 1: seems to be the rally within those eight is even
Speaker 1: starting to narrow a bit of late.
Speaker 2: Someone called it the fabulous.
Speaker 1: Yeah, but you know that that will be meaningful until
Speaker 1: it isn't you know. I mean, I don't know that
Speaker 1: you want to bet against Elon Musk and you know
Speaker 1: what he's doing with the Tesla. But that's been an underperformer.
Speaker 2: Yeah, that's got cut in half over the past couple
Speaker 2: of years. Yeah. So, you know, people talk about the
Speaker 2: megacap eight as proof that the market is narrowing, and
Speaker 2: that's negative, but a quote of yours quote, the newble
Speaker 2: market has actually been fairly broad all along.
Speaker 1: Discuss well, again we start with the data and then
Speaker 1: come to the conclusion rather than the other way around.
Speaker 1: And so a lot of people have been looking at
Speaker 1: various measures of market breadth, like the ratio of S
Speaker 1: and P five hundred equal weighted to S and P
Speaker 1: five hundred market cap weighted, and it's been going down.
Speaker 1: So clearly the market's getting narrower. But when you actually
Speaker 1: look at it the one hundred plus industries that are
Speaker 1: in the S and P five hundred, what you see
Speaker 1: is that the sectors that have the megacap eight in
Speaker 1: the have done extremely well because of the outperformance of
Speaker 1: you know, the mega cap eight stocks. But then you
Speaker 1: also see that well waiting a second. There's a lot
Speaker 1: of stocks that are up and industries that are up
Speaker 1: a measly twenty percent, which is kind of bull mark
Speaker 1: a territory. So I think it's kind of a relative game.
Speaker 1: I mean, some stocks, particularly the mega cap eight, have
Speaker 1: done remarkably well, and there's been lots of others that
Speaker 1: have done unremarkably well but very decent returns.
Speaker 2: So another quote of yours I found kind of fascinating.
Speaker 2: People keep talking about in video like it's a bubble.
Speaker 2: But the Nvidia stock price is up about the same
Speaker 2: amount as in Vidia earnings, Right, how can that be
Speaker 2: a bubble?
Speaker 1: I don't think it is a bubble. It just looks
Speaker 1: like a bubble on a chart. You know, anything that you.
Speaker 2: Know goes vertical like that.
Speaker 1: Yeah, when everything goes vertical like that, Look at some
Speaker 1: point in video, because it's getting so much press, so
Speaker 1: much buzz, and it is making so much money with
Speaker 1: such high profit margins, is going to attract a lot
Speaker 1: of capital into competitors. And it's already doing that, you know,
Speaker 1: and video could be put out of business like overnight.
Speaker 1: If somebody suddenly came up with a quantum computer that
Speaker 1: that worked and you know operates. You know, lightning speed
Speaker 1: compared to half lightning speed of in videos chips, but
Speaker 1: in video keeps innovating. And that's that's what's so exciting
Speaker 1: about technology. Technology is always moving forward. It's actually a
Speaker 1: source of deflation because technology prices decline, and in addition
Speaker 1: to that, technology boosts productivity.
Speaker 2: So we've seen this sort of single stock going vertical before.
Speaker 2: We've seen it with Intel, we've seen it with Cisco.
Speaker 2: There's always one company that you know is in the
Speaker 2: right space and the right captures lightning in a bottle,
Speaker 2: and you know, all bets are off. But it sounds
Speaker 2: like we're not that late stage for Nvidio here.
Speaker 1: Well, you know, a lot of in the past couple
Speaker 1: of years, we've all been comparing the current decade, the
Speaker 1: twenty twenties, to previous decades. I've seen similarities between the
Speaker 1: twenty twenties and the nineteen twenties. Productivity, technology excitement started out.
Speaker 2: The new fangled car had come out.
Speaker 1: Yeah, it started out really depressing, and somehow or other
Speaker 1: it just turned out to be there wearing twenty twenties.
Speaker 1: So there's that analogy. Then, as we discussed earlier, there's
Speaker 1: the nineteen seventies, and that there's some analogies there. I mean, look,
Speaker 1: if the Middle East insanities eventually or at some point
Speaker 1: actually caused the price of oil to spike up to
Speaker 1: one hundred and higher, it is going to be the
Speaker 1: nineteen seventies all over again. But so far it hasn't been.
Speaker 1: I don't think it's going to be. But then there's
Speaker 1: the nineteen nineties. And people have asked me, if this
Speaker 1: is the nineteen nineties, where are we in the nineteen nineties,
Speaker 1: I said, well, probably more like December fifth, nineteen ninety six.
Speaker 1: That's when National Zuberance, the Irrational Xuberant speech by Alan Greenspan,
Speaker 1: and you know, he did a hamlet on us. He says,
Speaker 1: how do we know if we've got irrational exuberance in
Speaker 1: the market, And the market actually sold off on that, figuring,
Speaker 1: oh my god, he's thinking irrational exuberants. He just asked
Speaker 1: the question. And then the way he answered is that
Speaker 1: maybe we don't because inflation has come down and you know,
Speaker 1: we're doing all the right things. So I think we're
Speaker 1: more like in nineteen ninety six than in nineteen ninety nine.
Speaker 1: Still early on and again, if this is the Roaring
Speaker 1: twenty twenties, the decade still has a waye to go.
Speaker 2: Huh, really interesting. Let's talk about some of the things
Speaker 2: that other people seem to be getting wrong. Quote, you
Speaker 2: don't get a recession when unemployment is at all time lows.
Speaker 1: Explain Well, the pessimists would respond to that by saying,
Speaker 1: if you look at a chart of the unemployment rate,
Speaker 1: it's always at a cyclical low of sometime in an
Speaker 1: all time low right before recessions, which which is absolutely true.
Speaker 1: So when you see it like this, this low, you
Speaker 1: do have to start to worry about the historical precedents.
Speaker 1: I think a lot of the people have gotten it
Speaker 1: wrong so far. They may still get a recession. I'm
Speaker 1: not saying it's impossible, but a lot of them look
Speaker 1: at charts and said, look, the Yeeld curve has been inverted,
Speaker 1: and every time it's been inverted in the past, that's
Speaker 1: led to a recession. Leading indicators have been declining, and
Speaker 1: every time that's happened, that's been a recession. But I
Speaker 1: think that what many of them got wrong is that
Speaker 1: the process by which we get to recessions is the
Speaker 1: key here to understanding why we haven't had a recession.
Speaker 1: The inverted yeel curve in the past really did a
Speaker 1: good job of predicting a process that led to recession.
Speaker 1: So what was that process? The FED would be tightening,
Speaker 1: raising interest rates, and then at some point along the way,
Speaker 1: the bond investors would start to say, you know what,
Speaker 1: I know, I could get a higher yield than a
Speaker 1: two year than a ten year, but you know the
Speaker 1: ten years okay here because if the FED keeps raising
Speaker 1: interest rates, I want them to keep raising interest rates
Speaker 1: because something will break and then I'll be very happy
Speaker 1: owning a ten year bond because those yield will come
Speaker 1: tumbling down. And so what the inverted deal curve? It
Speaker 1: doesn't cause recessions. And I wrote a little study this
Speaker 1: in twenty nineteen, so I've been thinking about this for
Speaker 1: a while. What the point of that piece was that
Speaker 1: what happens when you get an inverted yeal curve is
Speaker 1: the bond market starts to anticipate a financial crisis and
Speaker 1: lo and behold, something does break and then that becomes
Speaker 1: a credit crunch, and that's what causes a recession. So
Speaker 1: you need to see a crisis, a credit crunch in
Speaker 1: a recession. That's been sort of the usual way it happens.
Speaker 1: And this time around, the inverted youal curve got it
Speaker 1: absolutely right. Again. We had a financial crisis in March
Speaker 1: of last year that lasted all of two days before
Speaker 1: the Fed FED came in and provided a tremendous amount
Speaker 1: of liquidity and we never had a recession.
Speaker 2: How often do we get an inverted yield curve starting
Speaker 2: with FED funds rates at zero? This seems to be
Speaker 2: almost a case of first impression.
Speaker 1: Yeah. Well, again, the pessimists, the crowd of naysayers, had
Speaker 1: a very logical possession, and that is, how could you
Speaker 1: see rates go from zero to five and a quarter
Speaker 1: five and a hare percent without something breaking, without having
Speaker 1: a recession. And the answer is, yeah, they were right,
Speaker 1: we get something broke. But the Fed had so much
Speaker 1: experience during the Great Financial Crisis and again during the
Speaker 1: Great Virus Crisis playing whack a mole in the credit market. See, now,
Speaker 1: some that'd be a liquidity crisis and they'd whack it
Speaker 1: and create another liquidity facility overnight. And that's what they
Speaker 1: did last year. Overnight. They you know, on a weekend,
Speaker 1: they came up with a liquidity facility that calmed everything down,
Speaker 1: so the crisis did not turn into a credit crunch
Speaker 1: and therefore did not turn into recession. High interest rates,
Speaker 1: I think we've been learning here don't inherently cause a recession.
Speaker 1: Obviously they've they caused the recession in the housing market.
Speaker 1: But I've been making the point for the past two years.
Speaker 1: We'll be very careful because the housing market, it was
Speaker 1: single family housing and went to recession. Multifamily did quite well.
Speaker 1: And so I said, you know what, let's talk about it.
Speaker 1: This is rolling recessions. And I've been doing this for
Speaker 1: a while, so in the mid eighties. I think I
Speaker 1: came up with the term rolling recessions back then when
Speaker 1: energy prices collapsed and everybody thought that the recession in
Speaker 1: Texas and Oklahoma was going to go national and it didn't.
Speaker 2: Huh. Interesting, Let's stick with the Fed because there are
Speaker 2: some really interesting quotes of yours. I want to throw
Speaker 2: your way. Quote there's really no need for the Fed
Speaker 2: to lower interest rates could be the most controversial thing
Speaker 2: I've heard you say the past few months. Tell us
Speaker 2: why you think the FED is fine at five to
Speaker 2: five and a quarter.
Speaker 1: Well, I think the Fed fed officials have this notion
Speaker 1: that the real interest rates matter. That if the Fed
Speaker 1: funds rated five and a quarter five and a half
Speaker 1: percent and the inflation rate is five or six percent,
Speaker 1: then you obviously don't you know, you have a very
Speaker 1: low real interest rates and inflation just at interest rate.
Speaker 1: I have a problem with that whole concept anyways, how
Speaker 1: do you inflation are just an overnight rate and what
Speaker 1: behavior does that actually impact? But now they're saying, you know,
Speaker 1: now that inflation has come down, let's say to three percent,
Speaker 1: that the real rate's gone up, and oh my god,
Speaker 1: it's going to be restrictive. It's going to push the
Speaker 1: economy into recession. I said, that's not my model for recessions.
Speaker 1: My model is inverted Yilker's financial crisis, credit crunch, recession.
Speaker 1: And I don't see that that happening. So the economy
Speaker 1: is demonstrating that there's no call for a freezing. But
Speaker 1: there is this view that comes from Milton Freedman that
Speaker 1: there's this long and variable lag between monetary policy and
Speaker 1: the economy, and I dispute that. I say, well, actually
Speaker 1: there's no lag at all. That's just tell me when
Speaker 1: the crisis is going to hit then the next day
Speaker 1: will be the credit crunch. In the day after that
Speaker 1: will be the recession.
Speaker 2: To be fair to Milton Friedman, back in the seventies,
Speaker 2: we had a lot less data. The Fed didn't even
Speaker 2: announce like people the young folks today don't realize. There
Speaker 2: wasn't even a Fed announcement that rates had been changed.
Speaker 2: You had to track the bond market and money supply
Speaker 2: to have a sense that was going on. So maybe
Speaker 2: there was a long invariable lag in the seventies or
Speaker 2: even the eighties. But today the Fed tells us what
Speaker 2: they're going to do, then they go out and do it.
Speaker 2: There's no surprises. Another phrase of yours that relates directly
Speaker 2: to this, Wall Street seems to be expecting four or
Speaker 2: five six cuts. You've been saying fewer and later maybe
Speaker 2: two or three cuts. And that's maybe and maybe maybe not. Yeah,
Speaker 2: So I know a lot of people that are banking
Speaker 2: on rate cuts coming. Yeah, you're much less convinced.
Speaker 1: I think it's people who would like to see the
Speaker 1: bullmarkt continue and think that the only way that's going
Speaker 1: to happen is if the FED provides the sweetener to
Speaker 1: make that happen. But I think the stock market's already
Speaker 1: demonstrated that they'll take the trade. And in other words,
Speaker 1: if the deal is rates don't come down, but the
Speaker 1: economy remains fairly strong and earnings come in strong and
Speaker 1: we have another technology boom, then we can live with that.
Speaker 2: Your latest report, your latest topical study in praise of profits.
Speaker 2: Those people who have been claiming zero interest rate policy
Speaker 2: and quantitative easing are the only things that were supporting
Speaker 2: the stock market in the twenty tens, and now that
Speaker 2: rates have gone up, you're going to see how important
Speaker 2: the FED was to equity prices. That's not proving to
Speaker 2: be true. Yeah.
Speaker 1: Yeah, I think that's another problem with macroeconomic models and
Speaker 1: the financial press, quite frankly, and that is always just
Speaker 1: focus on the FED and on Washington and the policy makers.
Speaker 1: And I keep pointing out that it's amazing how well
Speaker 1: this country has done for so many years, despite Washington,
Speaker 1: despite the meddling of the government. And what we have
Speaker 1: to do is give ourselves our selves credit. Us working stiffs.
Speaker 1: We go to work every day and we try to
Speaker 1: do things that make things better for us, our families,
Speaker 1: our communities, and you know what, we succeed despite the
Speaker 1: meddling of Washington, and that's what kind of gives me
Speaker 1: hope that as crazy as things are in our political system,
Speaker 1: the economy just continues to deliver. And anybody who you know,
Speaker 1: didn't like democratic president that bet against the stock market,
Speaker 1: anybody who didn't like a Republican president that better against
Speaker 1: the stock market that missed some pretty awfully good returns.
Speaker 2: I heard Obama was going to kill the stock market.
Speaker 2: Didn't happen. I heard, Oh, now Trump is in, He's
Speaker 2: going to kill the stock market. Didn't happen. This Biden's
Speaker 2: going to kill your market, Yeah, didn't happen to happen.
Speaker 2: I mean the takeaway is pay attention to profits and
Speaker 2: ignore what's going on in DC.
Speaker 1: Companies, businesses, whether they're public or private. We're all become
Speaker 1: very very good at managing in challenging times, and sometimes
Speaker 1: those challenges come from the government. It shouldn't be that way.
Speaker 1: The government should be on our side, not kind of
Speaker 1: picking our pockets, and yet we do remarkably well.
Speaker 2: So one of the things you said about inflation I
Speaker 2: found both to be fascinating and unique and very insightful.
Speaker 2: You were the first person I saw that pointed out
Speaker 2: CPI tends to go down as fast as it went up. Yeah,
Speaker 2: there's a symmetry here. When you get a giant searge,
Speaker 2: you'll get a giant collapse, which is what we saw
Speaker 2: in twenty two and twenty three. You go back to
Speaker 2: the seventies, it's long, it's slow, it builds its structural
Speaker 2: that sticks around for a long time. Again, I have
Speaker 2: to ask, what is it that makes this so symmetrical?
Speaker 2: Why is it that one?
Speaker 1: Well, the seventies was, with the benefit of hindsights early,
Speaker 1: so far an outlier. You had two energy shocks. You
Speaker 1: started out the decade with Nixon devaluing the dollar by
Speaker 1: closing the Golden Windows. The dollar took a dive. Commodity
Speaker 1: price a sword the anchovies didn't show up in Peru,
Speaker 1: so that affected soybean prices somehow or other. I wish it.
Speaker 2: Yeah, well butterfly, Yeah, yeah.
Speaker 1: It was really crazy kind of stuff. And inflation was
Speaker 1: coming down after you know, the seventy three energy crisis,
Speaker 1: but then we had one in seventy nine and it
Speaker 1: went back up. Also, labor unions were very powerful. The
Speaker 1: thirty percent viral sure thirty thirty five percent of the
Speaker 1: labor force had union contracts and they had cost of
Speaker 1: living adjustments. Now I think something like ten percent of
Speaker 1: the labor force is the private sector labor force as
Speaker 1: you UNII, so the and they don't coloes aren't widespread,
Speaker 1: so you didn't have this kind of automatic wage price spiral,
Speaker 1: which is what we had in the nineteen seventies. But
Speaker 1: in the current situation, Look, we had a terrible pandemic.
Speaker 1: I mean you have to you know, you have to
Speaker 1: be realistic. You have to, you know, go with the
Speaker 1: flow of what's actually happening instead of just imposing a model.
Speaker 1: And with a lot of the models missed is hey,
Speaker 1: we had a pandemic. It disrupted supply chains and that
Speaker 1: lasted for a certain period of time and they got fixed.
Speaker 1: And by the time they got fixed, consumers had already
Speaker 1: gone on a buying bench for goods and said, you know, no,
Speaker 1: mass they didn't really need any more goods, and they
Speaker 1: swung over the services and so goods inflation has come down,
Speaker 1: by the way. I think the other thing that the
Speaker 1: folks missed on why not getting inflation right is they
Speaker 1: didn't look at it globally. I mean, it was a
Speaker 1: layup that certainly it became obvious in earlier early on
Speaker 1: last year that China was in an property bubble depression.
Speaker 1: And again, I've been doing this for a while, and
Speaker 1: I saw it in Japan in the eighties. I saw
Speaker 1: it in the United States in two thousand and seven,
Speaker 1: two thousand and eight, And these property bubbles, they it
Speaker 1: takes five to seven years to get out of the
Speaker 1: deflationary consequences of them. And now people are starting to
Speaker 1: recognize that the Chinese are so desperate to goose up
Speaker 1: their econo that they're going wild in production. They're producing
Speaker 1: a lot of cheap cars and appliances, and they're exporting
Speaker 1: them around the world, and that's extremely deflationary.
Speaker 2: Huh, really intriguing. Let's talk about housing for a moment.
Speaker 2: Lots of folks are deeply concerned about commercial real estate.
Speaker 2: I know you've been a little more sanguine than some
Speaker 2: of the doom sayers in that space. What's going on
Speaker 2: with commercial real estate?
Speaker 1: Well, again, I put the commercial real estate story in
Speaker 1: the context of rolling recessions. And by the way, now
Speaker 1: we're seeing some rolling recoveries. For example, demand for goods
Speaker 1: by consumers is now starting to show more activity. But yeah,
Speaker 1: The idea was that, Okay, we are in a rolling
Speaker 1: recession of the commercial real estate market. But commercial real
Speaker 1: estate is a very diverse kind of market.
Speaker 2: It's multi family homes, its warehouses, its medical facilities, it's
Speaker 2: not just offices.
Speaker 1: Yeah. The other thing I point out is that in
Speaker 1: the Great Depression, there was no distress asset funds. And
Speaker 1: again this came from my understanding of the SNL crisis
Speaker 1: is the SNL crisis was finally resolved with the Resolution
Speaker 1: Trust Corporation, the RTC, and Wall Street said, hey, this
Speaker 1: is a great idea. Why don't we do this. Why
Speaker 1: don't we like put together a lot of money and
Speaker 1: just wait for something to blow up and buy stuff
Speaker 1: at twenty five cents on the dollar, you know, and
Speaker 1: then we have plenty of cash to fix these things
Speaker 1: and restructure them. I heard about them all going out
Speaker 1: out of business in Arizona. That's now a pickleball facility.
Speaker 1: And so it's we have a remarkably good industry that
Speaker 1: knows how to deal with distressed assets and clear the
Speaker 1: market so that instead of having a calamity in the
Speaker 1: banking sector, somebody loses a lot of money in their portfolio.
Speaker 1: It's reduces your rate of return in some portfolios, but
Speaker 1: somebody gets a really good deal out of it and
Speaker 1: turns it around and is hiring people again.
Speaker 2: Right, there's no such thing as toxic assets, only toxic prices.
Speaker 1: Correct.
Speaker 2: So let's talk about residential real estate. What's happening in
Speaker 2: that space. Clearly a huge shortfall in supply. How long
Speaker 2: does it take for that to get fixed?
Speaker 1: Yeah, that's that's a very complex situation, and I think
Speaker 1: it reflects a whole bunch of different developments. Certainly one
Speaker 1: of them is that a lot of people refinance their
Speaker 1: mortgages at record low mortgage rates, and they're kind of
Speaker 1: hesitant to sell our house. They don't want to sell
Speaker 1: our house and buy another house if they still need
Speaker 1: a mortgage. At these kind of mortgage rates.
Speaker 2: They were three and a half percent, it's seven percent.
Speaker 1: Yeah. Yeah, So that's a bad trade. Not only that,
Speaker 1: but it's like it makes you feel smart living in
Speaker 1: a house where you're not paying much in a mortgage.
Speaker 1: And by the way, forty percent of people who own houses,
Speaker 1: forty percent of them don't even have a mortgage. That
Speaker 1: goes back to the story. But the older Americans, the
Speaker 1: baby boomers, you know, don't really have much in the
Speaker 1: way of expenses. But maybe they're not moving either. I mean,
Speaker 1: a lot of peop people maybe moving down south. But
Speaker 1: some people are saying, you know, it wasn't a bad
Speaker 1: winner here in New York. Maybe we'll stay, maybe we'll
Speaker 1: get us a small place in Florida. So there's a
Speaker 1: lot going on here. But look at the home builders.
Speaker 1: Who would have thought with mortgage rates at these levels,
Speaker 1: that the home builders would be, you know, such great
Speaker 1: performers in the stock market. But it's this great opportunity
Speaker 1: for home builders. I think a lot of this has
Speaker 1: to do with the regulation. It's hard to get land,
Speaker 1: it's hard to get permission to do what you want
Speaker 1: in building and building housing. So I think a lot
Speaker 1: of that is really more once again the government meddling.
Speaker 2: But that's local government, not national government. You know, you know,
Speaker 2: you underbuild single family homes for a decade as the
Speaker 2: population grows. I'm more surprised we didn't anticipate this coming
Speaker 2: sooner rather than later. Everybody felt post financial crisis, oh
Speaker 2: that's it. We're never going to see a demand for
Speaker 2: housing again.
Speaker 1: And it's having a tremendous impact on younger people that
Speaker 1: you know, some of them are still living at home
Speaker 1: and they're delaying obviously having families. And even if they
Speaker 1: have an apartment, they may be delaying having families. So
Speaker 1: this is having demographic consequences that will have an impact
Speaker 1: along the way.
Speaker 2: We saw reduced household formation during the twenty tens, but
Speaker 2: that seems to be picking up again, right. I know
Speaker 2: that's something you track. When household formation rises, demand for
Speaker 2: houses tend to follow.
Speaker 1: Right absolutely. And so again we've had this rolling recession
Speaker 1: that's hit housing, single family housing, and yet home prices
Speaker 1: all time record high. So you really have to be
Speaker 1: very flexible in looking at this economy and recognize how
Speaker 1: things change, and you know how models it used to
Speaker 1: work don't work anymore.
Speaker 2: Let's talk about fiscal stimulus. You wrote a really interesting
Speaker 2: piece a couple of weeks ago. We had the Cares Act.
Speaker 2: CARES Act one was ten percent of GDP, CARES Act two,
Speaker 2: CARES Act three, CARES Act three under the Bond administration,
Speaker 2: the two previous CARES Act under the Trump administration, the
Speaker 2: Chips Act under the current administration, the Infrastructure Bill, the
Speaker 2: Inflation Reduction Act. Many of these are not single year spends,
Speaker 2: but decade long programs. Given the work you've done with
Speaker 2: Tobin on fiscal stimulus, how big a wind is at
Speaker 2: the back of this economy, given the coming decade of
Speaker 2: fiscal spend.
Speaker 1: I think again, the answer is in the data. And
Speaker 1: what the data shows is that you know, there's this
Speaker 1: monthly report I called Construction Put in Place that comes
Speaker 1: out from the government, and it's every month. The numbers
Speaker 1: are phenomenally strong outside of residential construction. So what we're
Speaker 1: seeing is that infrastructure spending all time record high. All
Speaker 1: these programs really are translating into actual dollars being spent
Speaker 1: on rebuilding or building new infrastructure. When you look at
Speaker 1: the private sector construction of structures, you see that manufacturing
Speaker 1: facilities are so so we're building lots of those, you know,
Speaker 1: EV plants and battery plants and semiconductor plants and so on.
Speaker 2: You've been talking about onshoring, so the reverse of what
Speaker 2: we saw in the eighties and nineties of offshoring. How
Speaker 2: significant an economic factor is. And obviously a lot of
Speaker 2: this traces back to the pandemic when we couldn't get
Speaker 2: you know, medical protective equipment or masks or really it
Speaker 2: was shocking to realize how much crucial infrastructure we decided
Speaker 2: to outsource. How substantial a chunk of the economy can
Speaker 2: all this onshoring be, and how long lasting is this?
Speaker 1: Well, that's a great question. I'm thinking that, as you said,
Speaker 1: it's got legs, it's gonna be with us for a while.
Speaker 1: And then, of course, once these facilities are built, there's
Speaker 1: going to be a lot of automation and robotics there,
Speaker 1: but they're still going to need to be supported. I mean,
Speaker 1: even artificial intelligence, given what we know about it today,
Speaker 1: requires a tutor to say no, no, no.
Speaker 2: You're you know you're stop hallucinating.
Speaker 1: Yes, not hallucinating. Right, So humans are still going to
Speaker 1: be essential. And we've got a very tight labor market
Speaker 1: for particularly for skilled workers, and as a result of that,
Speaker 1: I think that the onshoring effect continues. I mean, we've
Speaker 1: got really cheap energy here. Natural gas prices are low,
Speaker 1: record record.
Speaker 2: Oil production, I mean old time lies.
Speaker 1: I mean, you know, you you reduce your transportation costs
Speaker 1: if you produce here rather than elsewhere. But the labor
Speaker 1: problem is a problem, but I think it gets solved
Speaker 1: with the innovation, with technology and providing robotics, automation.
Speaker 2: What about the high skilled immigration that used to be
Speaker 2: a big part of the labor market in the nineties.
Speaker 1: I'm struggling with that immigration issue. I mean, we're talking
Speaker 1: that tens of thousands or hundreds of thousands, are talking
Speaker 1: a few million.
Speaker 2: This is shortfall of bodies to fill jobs.
Speaker 1: Yeah, but you've got the migrants coming in, and the
Speaker 1: question is at what point will they be allowed to work,
Speaker 1: At what point will they be actually reflected in the
Speaker 1: official statistics, and how many of them will actually be
Speaker 1: left here depending on the politics. I mean, there's one
Speaker 1: presidential candidate that has basically said that he's going to
Speaker 1: send them all back.
Speaker 2: So how realistic is that. We've heard that before. It
Speaker 2: doesn't really happen, does it.
Speaker 1: Well. The reality is that what we need is a
Speaker 1: lot more legal migration.
Speaker 2: Legal So when I talk about immigration, I'm really talking
Speaker 2: about Silicon Valley and C suite executives and high skilled
Speaker 2: people coming from places like China and India and Vietnam
Speaker 2: and Turkey and other places where Eastern Europe where they're
Speaker 2: highly educated in the STEM area, which we certainly could
Speaker 2: use more.
Speaker 1: We could use more of absolutely, and for many of them.
Speaker 1: They want to be here, they'd love to be invited here,
Speaker 1: and it's it's safer here. You know, if you're in Taiwan,
Speaker 1: well why not bring more people over from there? From
Speaker 1: Eastern Europe? Well, you know, with skills. But legal migration
Speaker 1: is the way to go because then you know that
Speaker 1: the people that are coming in are going to be
Speaker 1: working as opposed to being a burden on the social system.
Speaker 1: But that gets so political these days, it's hard to
Speaker 1: talk about.
Speaker 2: You mentioned legs. Let's talk about legs. Quote, this is
Speaker 2: a long term bullmarket. Discuss where we are in this
Speaker 2: bull market and how long could the long term be.
Speaker 1: Well, look, I think what clearly everybody knows and certainly
Speaker 1: has had a big impact on the psychology and the
Speaker 1: thought process that went to thinking about the past couple
Speaker 1: of years, is that recessions cause bear markets. The bear
Speaker 1: market anticipates that the way things are going in the
Speaker 1: credit system, we're going to get a bear market to stocks.
Speaker 1: And what happens is earnings expectations go down, and then
Speaker 1: valuations go down and earnings get really whacked because not
Speaker 1: only do revenues go down, but the profit margin goes down.
Speaker 1: So everything goes wrong, and the only question is are
Speaker 1: you going to be down twenty five percent or fifty percent?
Speaker 1: And is it going to last a year or is
Speaker 1: it going to last several years? And so there's a
Speaker 1: lot of uncertainty around that, and people say, get me out.
Speaker 1: I don't want to take risk. So I think to
Speaker 1: have an opinion about how long this bull mark's going
Speaker 1: to last, you have to have an opinion of well,
Speaker 1: when if we didn't get a recession now we had
Speaker 1: the most anticipated recession of all times the past two years,
Speaker 1: the Godeaux recession, the no show recession. Maybe it'll show up.
Speaker 1: But if you agree with me that that historically you
Speaker 1: need to see that tight monetary policy causes financial crisis,
Speaker 1: credit CORENCH recession, and that's not very likely, especially now
Speaker 1: that the FED has pretty I think I don't think
Speaker 1: they're going to be raising rates again, and if we
Speaker 1: get into trouble, I think they will lower interest rates.
Speaker 1: So it's how do you get a recession when the
Speaker 1: Fed now is on the right side of the monetary
Speaker 1: policy cycle and they have room to rates if that's necessary.
Speaker 1: But I raised the question of whether that will even
Speaker 1: be necessary, because I think the economy remains resilient. I
Speaker 1: think interest rates are appropriate where they are right now,
Speaker 1: and so I don't see a recession. And I've been
Speaker 1: promoting the idea of the roaring twenty twenties scenarios.
Speaker 2: Well, its twenty four, so you're saying four or five,
Speaker 2: six more years to go. Yeah, So it's interesting because.
Speaker 1: And those could be the biggest of the roar.
Speaker 2: Always the end of the bull market is the greatest gains.
Speaker 2: So when we look back at the past two years,
Speaker 2: we're recording this towards the end of the first quarter
Speaker 2: in twenty twenty four, twenty twenty two, SMP was off
Speaker 2: not quite twenty percent, about nineteen percent, the NAZDAK down
Speaker 2: about thirty percent. No real recession on an inflation adjusted basis.
Speaker 2: You had a couple of negative quoters of GDP, but
Speaker 2: you never had the full broad requirements of an actual recession.
Speaker 2: And then the great recovery in twenty two twenty three.
Speaker 2: Where does that leave us standing here? You mentioned not
Speaker 2: too long ago that hey, this market's come a long way,
Speaker 2: maybe it's time for a breather.
Speaker 1: Yeah. About a year ago, really now, I predicted that
Speaker 1: we would get to fifty four hundred by the end
Speaker 1: of this year, not that far away. That's that's the
Speaker 1: problem I'm having here, is like, I don't want to
Speaker 1: see this by the middle of the year.
Speaker 2: I was going to say, you go away in August
Speaker 2: and take the rest of the year off.
Speaker 1: The same thing happened last year. By the way, I
Speaker 1: thought we'd get to forty six hundred, we got to
Speaker 1: forty eight hundred, but we got to forty six hundred
Speaker 1: by the middle of last year's to the end of
Speaker 1: last year, and so yeah, I said, well, yeah, I'm
Speaker 1: not going to raise my forecast here, and then I
Speaker 1: did actually anticipate the correction that we had ten percent,
Speaker 1: and then that was down. The low was made October
Speaker 1: twenty seventh, and it's been vertical since then. As the
Speaker 1: age and.
Speaker 2: Just to put this in context, you take the sell
Speaker 2: off in twenty twenty two, you take the recovery in
Speaker 2: twenty twenty three, and the average over those two years,
Speaker 2: you're flat for two years. Yeah, that's why every time
Speaker 2: people say, oh, we've come so far, so fast. Yeah,
Speaker 2: flat over two years doesn't seem that fast, not much
Speaker 2: of a return, that's exactly right. So you're talking about
Speaker 2: AI again. Many people seem to like to talk about
Speaker 2: that as a bubble. What do you see going on
Speaker 2: in that sector?
Speaker 1: Well, I think at this point, given what I've experienced
Speaker 1: personally with things like chat GPT, you know when I
Speaker 1: think the roaring twenty twenties have started to get discounted
Speaker 1: in the stock market. On November thirtieth, twenty twenty two,
Speaker 1: that's when open Ai introduced chat GPT, and so I
Speaker 1: immediately signed up for the twenty dollars a month version
Speaker 1: of it.
Speaker 2: Pretty reasonable, right, twenty dollars a month through your Microsoft account.
Speaker 1: Yeah, And I thought, man, this is really great. Maybe
Speaker 1: it'll write my research for me and I can just
Speaker 1: do it from the beach. And I found out that
Speaker 1: I was spending more time finding the mistakes that you know,
Speaker 1: I mean, it's.
Speaker 2: You know, I mean, it's only going to get better.
Speaker 1: It's only going to get better. I mean, right now,
Speaker 1: it's kind of like auto fill. You know, where you're
Speaker 1: typing on word and it starts to anticipate what the
Speaker 1: next word might be. So it's kind of like autofill
Speaker 1: and speed and steroids. I mean, it actually gets you
Speaker 1: back to the old idea that Benjamin Franklin gave us,
Speaker 1: which was a speed. You know, haste makes waste, and
Speaker 1: so it's too fast. It sounds kind of credible. And
Speaker 1: I saw somebody did a some really beautiful videos and
Speaker 1: one was a bull in a china shop and the
Speaker 1: bull kept hitting all the china and none of it broke.
Speaker 1: So you know, the editor has to go back and
Speaker 1: explain to the artificial intelligence that when the bull hits
Speaker 1: that you got to show what is being broken. So
Speaker 1: it requires a tremendous amount of handholding, babysitting, editing from
Speaker 1: what I've seen so far, but so much money is
Speaker 1: being thrown in this area. It's basically just hypercomputing. It's
Speaker 1: the ability to anticipate what's going to come next. But
Speaker 1: some human is going to continue to need to monitor
Speaker 1: these things.
Speaker 2: I have personally found that I spend less time with
Speaker 2: Google when I'm researching a topic and more time with
Speaker 2: either Chat gbtor Perplexity, which is either Claude or I'm
Speaker 2: forgetting the other engine that drives that because it organizes
Speaker 2: the answers in such a usable ways. And Google has
Speaker 2: just become a MESSI of ads. Yeah, they were getting
Speaker 2: away with us for a long time and suddenly people
Speaker 2: will accuse them of being a monopoly. Clearly they're not.
Speaker 2: If a simple app can eat their lunch the way they.
Speaker 1: Well, that's the wonderful thing about technology is capitalists use
Speaker 1: technology are always looking for opportunities to put somebody out
Speaker 1: of business that's got a great business model. I understand
Speaker 1: that the CEO of Nvidia runs the company with the
Speaker 1: assumption that it's going to go out of business unless
Speaker 1: he's constantly thinking about what the next new new thing is.
Speaker 1: And you know, he started out with gaming and then
Speaker 1: went to bitcoin mining, and those worked until they didn't work.
Speaker 1: And now he's got GPU and he realizes that there's
Speaker 1: going to be something after GPU.
Speaker 2: Since you mentioned bitcoin, I saw a quote of yours
Speaker 2: asking the question, is bitcoin digital tulips? Tell us about bitcoin.
Speaker 1: I don't want to get any hate emails from people who.
Speaker 2: Love have fun being poor doctor ed.
Speaker 1: Well, that's that's the thing is. I want to confess
Speaker 1: that I've got a tremendous amount of fomo, you know
Speaker 1: when it comes to bitcoin. You know, I kept looking
Speaker 1: at it that you know, when it was two digits
Speaker 1: in price and three digits and it just kept going
Speaker 1: up and up, And I said this is this this,
Speaker 1: this has got to be a bubble. It may still
Speaker 1: be a bubble in the sense that it's there is
Speaker 1: a comparison with the tool of bubble in Holland centuries ago,
Speaker 1: but there's a huge difference, and that is once a
Speaker 1: u the tulips are sold to all the suckers. And
Speaker 1: at Amsterdam that was the end. You know, that was
Speaker 1: the beginning of the end of the bubble burst real quick.
Speaker 1: What's unique about bitcoin is it's a market that's opened
Speaker 1: twenty four by seven on a global basis, and there's
Speaker 1: a lot of people like myself with Fomo. I'll probably
Speaker 1: get in at the top.
Speaker 2: Let me know when you buy, so I could tell
Speaker 2: on I have a little bit. I have a little
Speaker 2: bit of bitcoin and a little bit of ether that
Speaker 2: we bought a couple of years ago. I mean, maybe
Speaker 2: I'm break even. I don't even pay attention to it.
Speaker 2: I think of it as like a single company, like, hey,
Speaker 2: it's an Amazon or an Apple, and if it works out, great.
Speaker 1: I have not tell anybody that they're wrong right to
Speaker 1: have it. I mean, I just you know, you need
Speaker 1: on a global basis, you continue to have buyers, and
Speaker 1: so far, so good.
Speaker 2: It would have been nice to buy it when it
Speaker 2: was one hundred bucks. That would have been, that would
Speaker 2: have been.
Speaker 1: Look, I'm an old fashioned kind of econdom miss strategy.
Speaker 1: So I need earnings, I need dividends, I need rents.
Speaker 1: I need something I can I can value. I don't
Speaker 1: really have any any of that.
Speaker 2: You're not a commodity investor, really not really No.
Speaker 1: I mean commodities go up, they go down, you know,
Speaker 1: and it's the old story. The best cure for high
Speaker 1: commodity prices is high commodity classic. But again, that makes
Speaker 1: a bitcoin different because you know, the algorithm is such
Speaker 1: that higher prices don't lead to more supply, though it
Speaker 1: does lead to more competitive doge coins and things like that.
Speaker 2: Huh really interesting. Let's talk about the book that you
Speaker 2: put out not too long ago, Predicting the Markets. You
Speaker 2: cover four decades as an economist and a strategist on
Speaker 2: Wall Street, and you put out so much research every day.
Speaker 2: How on earth did you find the time to put
Speaker 2: this together?
Speaker 1: Well, I don't play golf, okay, so that saves a
Speaker 1: lot of time. I do play tennis, yeah, and that's
Speaker 1: only about an hour. But I really enjoy it. And
Speaker 1: when it comes to the book, you know, I've been
Speaker 1: doing this for a while, you know, more than four decades,
Speaker 1: and by twenty fifteen sixteen, I got inspired to like
Speaker 1: put together there what I'd learned and mistakes made and
Speaker 1: insights accumulated. I felt like, you know, anybody who's just
Speaker 1: kind of getting into the business, they're not going to
Speaker 1: be able to experience what I experienced. It's exactly what
Speaker 1: the title says. As a professional autobiography, I actually did
Speaker 1: have quite quite a good time writing it.
Speaker 2: And you talk about predicting everything from stocks, bonds, commodities, currencies, earnings.
Speaker 2: How challenging is it predicting the future when you know
Speaker 2: the world is so uncertain and there are so many
Speaker 2: random events.
Speaker 1: Well, that's what makes it so interesting, right is you
Speaker 1: know there's no clear way to get it right all
Speaker 1: the time.
Speaker 2: But you've gotten it a lot more right than most people.
Speaker 2: And we'll go through a quick list of things. I
Speaker 2: have to ask you what you saw in each of
Speaker 2: these that led you to the right prediction. Starting with
Speaker 2: in the early eighties, you identify disinflation coming from globalization
Speaker 2: and technology, and the bullish result of that into the
Speaker 2: equity markets. What were you looking at that led to
Speaker 2: that conclusion.
Speaker 1: Well, in the early eighties, my focus was on disinflation
Speaker 1: attributable to the FED tightening up on monetary policy, and
Speaker 1: that we would have a pretty severe recession and that
Speaker 1: would potentially be deflationary, and.
Speaker 2: We ended up with a double what was it eighty
Speaker 2: and eighty one or eighty and eighty two.
Speaker 1: Yeah, But then along the way it globalization became a
Speaker 1: big deal in terms of my analysis, especially with the
Speaker 1: end of the Cold War in the late nineteen eighties.
Speaker 1: I had observed, based on the USCPI going all the
Speaker 1: way back to the eighteen hundreds, the CPI has these
Speaker 1: peaks historically, they're not random, They're actually associated with wars.
Speaker 1: And so my thought was that wars are obviously inflationary.
Speaker 1: You know, world trade gets cut off, competition is cut off,
Speaker 1: Commodity prices go up during war times. And so I said, well,
Speaker 1: wait a second, So if this is the end of
Speaker 1: a great war, the Cold War was, you know, there
Speaker 1: was some heat to it between the Vietnam and Serbia
Speaker 1: and all that, but it was maybe even a continuation
Speaker 1: of World War Two in some ways.
Speaker 2: Big spike in the mid forties early fifties and inflation.
Speaker 1: Yeah, that was actually one of the models that I
Speaker 1: looked at for thinking about the current situation, is that
Speaker 1: we had this huge spike in the after the war
Speaker 1: in durable goods inflation because all the soldiers came back
Speaker 1: and they wanted cars, and Ford was building bombers, and
Speaker 1: so it took him a couple of years to retool,
Speaker 1: and then all those durable goods inflation came down like
Speaker 1: a stone, just the way it did in the current environment.
Speaker 1: When we saw durable goods inflation going up with the
Speaker 1: supply disruptions, and then once the disruptions were ameliorated, it
Speaker 1: came right back down.
Speaker 2: I think that's the best parallel to the post. And then, yes,
Speaker 2: I agree people talk about the seventies and the nineties.
Speaker 2: Really you think about moving from a wartime footing to
Speaker 2: peace time footing and that whole transition and and up consumer.
Speaker 1: Demas So when the Cold War came to an end
Speaker 1: and the late edies of Berlin Well comes down, most
Speaker 1: economists are saying, this is going to be terrible for inflation,
Speaker 1: because all these people behind the Iron Curtain are going
Speaker 1: to want everything. It's going to be terrible for interest
Speaker 1: rates because they're going to need to borrow money. You know,
Speaker 1: it could work the other way around. It could be
Speaker 1: that all these people create bigger markets, more competition, more
Speaker 1: globalization as we call it now. Detente was a very
Speaker 1: powerful disinflationary force.
Speaker 2: Really interesting in ninety three. We talked about this earlier,
Speaker 2: but I want to spend a little more time on this.
Speaker 2: You called technologies growing impact the high tech revolution. Like
Speaker 2: that's a big, weighty phrase. What made you realize, Hey,
Speaker 2: this is more than just an incremental shift in how
Speaker 2: we spend money, this is revolutionary. What were you looking at?
Speaker 1: I have to admit him a bit of a geek.
Speaker 1: I grew up in California, in Campbell, California, which is
Speaker 1: right next to San Jose, and my father worked for IBM,
Speaker 1: and this was back in the sixties, and he used
Speaker 1: to bring home for tray and Cobol manuals and things
Speaker 1: like that. I had a lot of technology around me
Speaker 1: in California. I wish they wouldn't have moved back to
Speaker 1: the Northeast because I'd probably be a billionaire by now
Speaker 1: because I would have got into all that and the
Speaker 1: better weather and better weather. But yes, I've always had
Speaker 1: this fascination with technology, and it's been my view that
Speaker 1: economics has been badly merchandised as the optimal allocation of
Speaker 1: scarce resources. That's just a depressing idea that what, there's
Speaker 1: only so much and we all have to figure out
Speaker 1: the best way to distribute it. Well, no, no, no,
Speaker 1: economics is actually about technology solving that problem.
Speaker 2: It's about abundance, not scarcity.
Speaker 1: Yeah, and so I started to you know, I was
Speaker 1: an early believer on the Internet, and so early that
Speaker 1: in nineteen ninety five, as I mentioned before, I had
Speaker 1: my own website and you know, I had publications on there.
Speaker 1: They didn't the charts didn't automatically update. I wrote some
Speaker 1: of it. But then I had a software programmer who
Speaker 1: knew what we was doing, kind of really polish it
Speaker 1: off again. At Deutsche Bank, which you know, CJ. L
Speaker 1: R's Deutsche Bank, we had Frank Quatron's team coming in
Speaker 1: in the nineties, so there was a lot of technology
Speaker 1: analysts and so our morning meetings were full of discussions
Speaker 1: about technology and what impact it was doing. I mean,
Speaker 1: even when I was at EF Hutton, which was in
Speaker 1: the eighties, there was a lot of excitement about a
Speaker 1: company called Mitel, which was a telecom company. And as
Speaker 1: a matter of fact, you know, even back then there
Speaker 1: was there was a lot of hoopla about all this stuff.
Speaker 2: Way did quadt Trone end up? Was it? Credits? Was
Speaker 2: first Boston? I remember it was.
Speaker 1: I don't think, I think, I think, I really don't know.
Speaker 1: I think eventually he went off on his own, but
Speaker 1: you know, he did extremely well.
Speaker 2: When was it clear to you that the technology revolution
Speaker 2: had morphed into a bubble?
Speaker 1: In the late nineties, When Alan Greenspan started to talking
Speaker 1: about justifying what had happened in the stock market as
Speaker 1: a lottery, what was that. It was nineteen ninety nine.
Speaker 1: He gave a testimony about the stock market and he said, well,
Speaker 1: you know, yeah, things look stretched, but you know, you
Speaker 1: have to look at the stock market as a lottery.
Speaker 1: People buy a lottery ticket. It's not necessarily a rational thing,
Speaker 1: but you know, the payout is so great that it
Speaker 1: attracts a lot of buyers. So he gave what I
Speaker 1: call the lottery testimony, and that was one aspect of it.
Speaker 1: The thing that really nailed it for me, you know,
Speaker 1: it really was amazing timing was Barons ran a piece.
Speaker 1: I think it was actually at the beginning of two
Speaker 1: thousand and maybe at late nineteen ninety nine, where they
Speaker 1: said that all these dot coms were burning cash and
Speaker 1: they weren't going to get another round.
Speaker 2: Amazon dot Bomb, I think was the headline of I
Speaker 2: don't remember if that was Howard Marx or Baron's or both. Yeah,
Speaker 2: but that was January two thousand. The timing was pretty good.
Speaker 1: I think also Jeff Bezos made the front cover of
Speaker 1: Time magazine and that was the Curse.
Speaker 2: December ninety nine. Yeah, it was a quarter later. It
Speaker 2: was done. Let's talk about the two thousands. You identified
Speaker 2: the coming commodity boom after China joined the World Trade
Speaker 2: Organization in two thousand and one. In hindsight, that's perfectly obvious.
Speaker 2: A lot of people missed it. What led you to
Speaker 2: that conclusion.
Speaker 1: I'd seen lots of photographs and a few videos of
Speaker 1: what China looked like in the nineteen eighties. Not China overall,
Speaker 1: but you know, some of the urban areas Shanghai and
Speaker 1: things like that. They're all riding bicycles. They're all riding
Speaker 1: bicycles the nineteen eighties. And then I'm looking at some
Speaker 1: of these pictures of what's going on after they joined
Speaker 1: the World Trade Organization in two thousand and eleven and
Speaker 1: two thousand and one. They're all riding cars, and I'm
Speaker 1: reading about how you're getting all this migration away from
Speaker 1: the villages to the towns.
Speaker 2: And farms of the city.
Speaker 1: Yeah, from the farms of the city, and so urbanization
Speaker 1: always has a tremendous impact on an economy. We started
Speaker 1: to see all these ghost cities being built because the
Speaker 1: Chinese viewed empty apartments as a good place to stash
Speaker 1: some of their wealth. The commodity demand was pretty obvious,
Speaker 1: and you could see it in the charts, and I
Speaker 1: was recommending overweighting materials, energy and industrials MAI. This is
Speaker 1: after I and everybody else recommended TMT, you know, technology,
Speaker 1: media and telecom. That was what we all did in
Speaker 1: the nineteen nineties, and then in the two thousand there
Speaker 1: was MAI.
Speaker 2: So let's talk about the period leading up to the
Speaker 2: Great Financial Crisis. It was a lonely time to be
Speaker 2: a bear. Everybody was pretty bullish. What led you to
Speaker 2: turn bearish on financial stocks before the GFC?
Speaker 1: Yeah, Look, I don't want to take any credit for
Speaker 1: getting that market right rather than getting the financials, which actually,
Speaker 1: what I think about it was a pretty good call.
Speaker 1: But yeah, I think in two thousand and seven we
Speaker 1: started to get lots of news suggesting that the subprime
Speaker 1: mortgage market was going to take the could take the
Speaker 1: system down, and so I recommended underwaiting financials. You know,
Speaker 1: the better call would have been just get out of financials.
Speaker 2: I recall being on TV in early seven talking about
Speaker 2: derivatives and subprime and the anchors laughed at me. In hindsight,
Speaker 2: we all know what happened. Yeah, but throughout seven there
Speaker 2: wasn't a lot of love for anyone who was bearished. No, No,
Speaker 2: what sort of pushback did you get at the farm
Speaker 2: when you were talking about by then you had already
Speaker 2: launched your own.
Speaker 1: Firm at two thousand and seven.
Speaker 2: Yeah, So what sort of pushback did you get from
Speaker 2: clients saying underweight financials? Here was there?
Speaker 1: What was the response like, Well, you know, I've been
Speaker 1: around for a while, as I've said a few times
Speaker 1: on the program here, and I've got very good relationships
Speaker 1: with these people, and you know, many of them have
Speaker 1: been listening to me and you know, talking to me
Speaker 1: for years, so they kind of respect my opinion. I
Speaker 1: didn't really get much pushback. I mean, you know, I
Speaker 1: explained why, and they said, that makes sense.
Speaker 2: What about the bottom call March two thousand and nine.
Speaker 1: I'm very proud of that one. I was at Merrill Lynch,
Speaker 1: one of my accounts was Mary Lynch Asset Management in Princeton.
Speaker 1: Walked into the meeting. We were all depressed. You know,
Speaker 1: this was actually March sixth, two before. Yeah, so March sixth,
Speaker 1: the official I think was March ninth. But so I
Speaker 1: come out of the meeting and some one of the
Speaker 1: traders kind of walked by. I said, how's the market?
Speaker 1: Said it just hit six sixty six in the S
Speaker 1: and P five hundred. I said, that's the double number.
Speaker 2: By that number.
Speaker 1: Yeah, so actually I used that in marketing. My thought,
Speaker 1: I said, you know what this is like the Da
Speaker 1: Vinci code. You know, it's that six sixty six? Was
Speaker 1: was it? But no, I I thought that, you know,
Speaker 1: the bull bear ratio, which I tend to follow quite
Speaker 1: a bit, was down to zero point six. Everybody was bearish.
Speaker 2: Everything was at an extreme in March on nine. I mean,
Speaker 2: whether you look at sentiment or what have.
Speaker 1: You, there's also there was the issue of mark to market,
Speaker 1: and I had started a conversation with Gary Ackerman, who
Speaker 1: was a congressman from from Queen's I actually went to
Speaker 1: his office and I said, you got you got to
Speaker 1: stop this mark to market stuff. It's it's like a
Speaker 1: doom loop. And he listened. He didn't say anything. But then, uh,
Speaker 1: it was in March, I think March, right around after
Speaker 1: we bought him that he gave a speech in Congress
Speaker 1: in which he said they were going to hold the
Speaker 1: hearings and try to determine why why the regulatory agency
Speaker 1: hadn't eliminated mark to market.
Speaker 2: There was a fasby rule change not long after that.
Speaker 2: That's right, the Financial Accounting Standards Board. In the beginning
Speaker 2: there was some mark to make believe we used to
Speaker 2: call it. But at a certain point, if you're holding
Speaker 2: treasuries there in your hold to maturity account, why do
Speaker 2: you have to market?
Speaker 1: Exactly? It's exactly. That was the point I made, and
Speaker 1: Ackerman bought into it, and he was on the committee
Speaker 1: that made a difference. So with all kind of so
Speaker 1: I kind of knew what was going on in Washington,
Speaker 1: which is occasionally you know, it's giving me some some
Speaker 1: insights and that.
Speaker 2: So you've been pretty steadfastly bullish throughout the twenty tens
Speaker 2: and twenty twenties. What has kept you on the right
Speaker 2: side of this bull market trend this whole time?
Speaker 1: As a matter of fact, during that period, I kept
Speaker 1: a log book or a diary of what I call
Speaker 1: panic attacks, and so, you know, when Brexit occurred, people.
Speaker 2: Got all twenty thirteen something like that.
Speaker 1: Yeah, something like that. Anyways, when bregsit occurred, there was
Speaker 1: expectations that the market would take a dive, and it
Speaker 1: did for two days, and I said, okay, there's another
Speaker 1: panic attack. Because you know, the Great Financial Crisis was
Speaker 1: so traumatic that ever since then, people have been looking
Speaker 1: over their shoulders for the next calamity.
Speaker 2: Isn't it always that way? Don't these dislocations create a
Speaker 2: sense of PTSD amongst investors?
Speaker 1: Yeah? I think that's true. That's absolutely true.
Speaker 2: I have to ask you about you've been tracking the
Speaker 2: importance of the baby boomers to major trends. Is it true?
Speaker 2: Demography is destiny? Is that act?
Speaker 1: Yeah? Yeah, I mean most economists don't really study or
Speaker 1: do much work on demographics because it's just too slow,
Speaker 1: you know, to have any immediate impact, and all the
Speaker 1: cool kids are looking at, you know, the business cycle
Speaker 1: and calling the next recession. But I think demography is
Speaker 1: extremely important. It's been very helpful to me and understanding
Speaker 1: the US. But I got an interest in the subject
Speaker 1: because of a baby boomer, and there's seventy five million
Speaker 1: of US, or at least that's how many were born.
Speaker 1: I had this notion early on in my life that
Speaker 1: I was special and really important. Then I started to
Speaker 1: work for a living and started to study the economy.
Speaker 1: I realized that I was just one of seventy five
Speaker 1: million stiffs doing the exact same thing, nothing special about
Speaker 1: me at all. But it did give me some As
Speaker 1: Peter Lynch said, you know, sometimes just look at your
Speaker 1: life and look around you, and I'll give you some
Speaker 1: real insights. So demography is important, extremely important. Obviously with
Speaker 1: regards to China, it's it helped me understand that. I
Speaker 1: mean I have for the past few years. I've been
Speaker 1: saying China's not investable, partly because of the demographic issue.
Speaker 1: The consumers aren't going to be as red hot as
Speaker 1: people were anticipating. But it's also the government run by Maoist.
Speaker 2: Huh, really interesting last question before we get to our
Speaker 2: favorite questions. I know you track sentiment and pay attention
Speaker 2: to what goes on with that. Over the past couple
Speaker 2: of years, especially following the surgeon inflation, the sentiment has
Speaker 2: been worse than the eighty seven crash, worse than the
Speaker 2: dot com implosion, worse than the COVID lockdown, and worse
Speaker 2: than the Great Financial Crisis. How does this make any sense?
Speaker 1: It's a great setup for the Roaring twenty twenties, right, I.
Speaker 2: Mean, climbing the wall of worry? Is that what it's
Speaker 2: going to be, climbing wall of worry?
Speaker 1: I mean, there's so many things to worry about.
Speaker 2: But there's always things to worry about.
Speaker 1: There's always things to worry about. I don't know. I mean,
Speaker 1: this pretty scary stuff right now. On a geopolitical basis,
Speaker 1: we didn't talk about that, but.
Speaker 2: Ukraine, Middle East.
Speaker 1: Russia, I mean all that, it's it's all concerning. Stock
Speaker 1: market doesn't seem to care, and I think that's because
Speaker 1: the oil market hasn't really had an issue with it
Speaker 1: so far. So that's something to watch out for.
Speaker 2: All right, So let's jump to our favorite questions that
Speaker 2: we ask all our guests, and you're the perfect person
Speaker 2: to ask the first question. Tell us what you've been
Speaker 2: streaming these days, what's been keeping you entertained. It could
Speaker 2: be either shows or films.
Speaker 1: I'm a big fan of Netflix and the other movie
Speaker 1: movie channels. My wife and I do enjoy. We don't
Speaker 1: go to theaters the way the way we did, and
Speaker 1: so we do usually watch a movie at home on
Speaker 1: a Friday night. There's been a lot of really good,
Speaker 1: good flicks. One that I particularly thought was amazing was
Speaker 1: American Fiction.
Speaker 2: Just came out, just came really looks great. I want
Speaker 2: to and I want to count of me.
Speaker 1: I don't want Academy Awards. I'm not sure for what,
Speaker 1: but screen if I was doing yeah, I think so,
Speaker 1: but I would have nominated. I would have. I think
Speaker 1: it was nominated for Best Picture.
Speaker 2: And it's a great cast.
Speaker 1: Also, it's a great cast, and it's got a lot
Speaker 1: of irony of it about identity politics, and it's political
Speaker 1: without being political. It's very human.
Speaker 2: Yeah, so that's in my cueue give us another one.
Speaker 1: I saw Oppenheimer. But meanwhile, Spielberg keeps coming up with
Speaker 1: these great docu dramas about World War two and up
Speaker 1: in the Air. Yeah, Masters of the Air on Apple.
Speaker 2: That looks really fascinating, really really good. I saw a
Speaker 2: clip of one of the aerial dog fights. It's unbelieved, unbelievable, right,
Speaker 2: you're like right there, yeah, oh.
Speaker 1: Yeah, but when you realize that they got in these
Speaker 1: bombers recognizing that their chance of coming back was at
Speaker 1: best fifty percent at best, so you know they were
Speaker 1: really just the bravery there was, the achievement was was
Speaker 1: absolutely extraordinary. I do like World War two kind of
Speaker 1: docu dramas.
Speaker 2: I know you saw Offenheimer. I assume you saw a Barbie.
Speaker 2: Any of the films you want to mention.
Speaker 1: I think it's Griselda. It's it's a it's a docudrama
Speaker 1: about a lady who was a huge cocaine dealer in
Speaker 1: in Miami, and she was very entrepreneurialship she figured out
Speaker 1: that that there was a huge market and selling cocaine
Speaker 1: to upper middle middle class people.
Speaker 2: And the wife from from Modern Family, I'm drawn a
Speaker 2: blank on her. Yeah, yeah, she's hilarious.
Speaker 1: Oh she's she was phenomenal. The acting was was absolutely great.
Speaker 2: Huh. Let's talk about some of your early mentors who
Speaker 2: helped to shape your career.
Speaker 1: Well, I recall being at Cornell University and I was
Speaker 1: a member of a group that kind of brought in
Speaker 1: interesting speakers on economics and politics, and uh so I
Speaker 1: pitched Henry Kaufman over at Salomon Brothers, and I gave
Speaker 1: him a call ask him if he'd have any interest
Speaker 1: in coming and giving a talk to us. But he
Speaker 1: sort of was my role model. I wouldn't. He certainly
Speaker 1: wasn't my mentor. I liked the idea of being on
Speaker 1: Wall Street and being an economist, so I'd say he
Speaker 1: was kind of relevant in that regard.
Speaker 2: Let's talk about some books. What are you reading now
Speaker 2: and what are some of your favorites.
Speaker 1: Well, I think it's called The Engineers That Won World
Speaker 1: War Two, and I'm reading that. I had read another
Speaker 1: book about a liberator bomber. So that's why I really
Speaker 1: enjoyed the Spielberg Show. Other than that, these days, I
Speaker 1: haven't had a lot of time to read because we've
Speaker 1: been upgrading our chart system and I introduced this new product,
Speaker 1: the Quick Takes, So that's that's kept me pretty busy.
Speaker 1: So I'm writing a lot more than I'm reading.
Speaker 2: So let's get to our final two questions. What sort
Speaker 2: of advice would you give to a recent college grad
Speaker 2: interested in a career, either as an economist or an
Speaker 2: investment strategist or both.
Speaker 1: I think first and foremost is a learner write. Unfortunately,
Speaker 1: for my minimal observations about younger folks these days, they
Speaker 1: don't really know how to write. Maybe that's because everybody's
Speaker 1: texting and sending messages that way. You know, knowing something
Speaker 1: about grammar and being able to communicate in writing is important,
Speaker 1: but so is being able to do so verbally. You know,
Speaker 1: we live in a very media oriented kind of world
Speaker 1: these days, so I think that's important. History has always
Speaker 1: been important in my way of thinking about the markets.
Speaker 1: There's a long history to the stock market, and now
Speaker 1: that's history has become more relevant than ever. People are talking,
Speaker 1: is it the nineteen twenties, at the nineteen seventies, is
Speaker 1: in the nineteen nineties, And so it helps if you
Speaker 1: have a certain grounding and how that all works. I
Speaker 1: would even say geopolitics understanding you know, what are the
Speaker 1: risks in the Middle East, who are the players, what
Speaker 1: are the history of that area. Having a good solid
Speaker 1: background and all of that I think is helpful most importantly,
Speaker 1: don't get hung up with the learning from somebody who's
Speaker 1: selling a model that explains everything. Huh.
Speaker 2: Really interesting. And our final question, what do you know
Speaker 2: about the world of investing and research analysis today? You
Speaker 2: wish you knew thirty or forty years ago when you
Speaker 2: were first getting started.
Speaker 1: This may sound remarkably trivial, but I wish I knew,
Speaker 1: but I didn't really fully appreciate the power of dividend investing.
Speaker 1: The people that I see that have the biggest smiles
Speaker 1: on their faces in my cohort of baby boomers are
Speaker 1: the ones who've been long term investors. They bought stocks,
Speaker 1: they bought property, they invested for the long haul, and
Speaker 1: they didn't get pushed out of the market, you know,
Speaker 1: by volatility. They found opportunities the benefit of hindsight. I
Speaker 1: would have invested personally, and I would have stocks today
Speaker 1: that I would have bought many many years ago, which
Speaker 1: which I don't.
Speaker 2: Just the power of compound.
Speaker 1: The tower compounding, even a company like and it's just
Speaker 1: not not even dividends. I mean, if you think about Microsoft,
Speaker 1: there was a point where Microsoft, you know, in the nineties,
Speaker 1: was you know, the hot place to be, and then
Speaker 1: for many, many years it wasn't the hot place to
Speaker 1: be and look at it now.
Speaker 2: Just past Apple for the biggest market cap again.
Speaker 1: So you know, if you just have a diversified portfolio
Speaker 1: of well managed companies, I think the idea of buying
Speaker 1: companies where the founders are still there seems to be
Speaker 1: also a useful insight into what companies who want to
Speaker 1: invest in. People who kind of view their companies as
Speaker 1: their babies, that they created them, they want to make
Speaker 1: them better. It doesn't always work. Uber's management had a
Speaker 1: change along the way.
Speaker 2: We were work as well, but you know, I could
Speaker 2: give you a hundred other examples where it has worked.
Speaker 2: Thank you, Ed for being so generous with your time.
Speaker 2: We have been speaking with doctor Edyard Denny. He is
Speaker 2: the president and founder of your Denny Research. You can
Speaker 2: find all of his research and writings at yardenny dot com.
Speaker 2: If you enjoy this conversation, well check out any of
Speaker 2: the previous five hundred or so we've done over the
Speaker 2: past nine years. You can find those at iTunes, Spotify, YouTube,
Speaker 2: wherever you find your favorite podcasts. Be sure and check
Speaker 2: out my new podcast at the Money, ten minute Conversations
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Speaker 2: on Bloomberg Radio and in your Masters in Business podcasts.
Speaker 2: I would be remiss if I did not thank the
Speaker 2: crack team that helps put these conversations together every week.
Speaker 2: Juan Torres is my audio engineer. A Tick of Albron
Speaker 2: is my project manager. Anna Luke is my producer. Jean
Speaker 2: Russo is my head of research. Sage Bauman is the
Speaker 2: head of podcasts here at Bloomberg. I'm Barry Retolts. You've
Speaker 2: been listening to Masters in Business on Bloomberg Radio.