WEBVTT - Army of Day Traders 0:00:00.400 --> 0:00:03.600 Strap on your parachute. It is time for What Goes 0:00:03.680 --> 0:00:13.720 Up with Sarah Ponziic and Mike Reagan. Hello and welcome 0:00:13.720 --> 0:00:16.880 to What goes Up, a Bloomberg Weekly markets podcast. I'm 0:00:16.880 --> 0:00:20.080 Sarah Pons, reporter on the Cross Asset team, and I'm 0:00:20.120 --> 0:00:23.360 Mike Reagan, a senior editor at Bloomberg. This week on 0:00:23.400 --> 0:00:26.400 the show, we are less than three weeks away from 0:00:26.440 --> 0:00:28.800 election day. It's hard to believe, but in the lead 0:00:28.880 --> 0:00:31.760 up there's been many narratives offered regarding what the market 0:00:31.840 --> 0:00:35.120 is pricing in a blue sweep, something else, and also 0:00:35.200 --> 0:00:38.560 advice offered on what investors should do in different outcomes 0:00:38.800 --> 0:00:42.000 should you listen to them. Our guestways in, and as always, 0:00:42.080 --> 0:00:44.920 we will close out the episode with our tradition the 0:00:44.960 --> 0:00:48.519 craziest thing I saw in markets this week, So I 0:00:48.600 --> 0:00:51.400 want to introduced a new tradition too, and that is 0:00:51.400 --> 0:00:53.400 an update on your puppy. I think I think we 0:00:53.440 --> 0:00:56.160 need to know how the Golden Doodle is doing. You know, 0:00:56.320 --> 0:01:00.240 the last two nights she slept soundly through the entire night, 0:01:00.760 --> 0:01:04.160 So big props to her, but also very exciting for 0:01:04.200 --> 0:01:06.320 me because certainly, if I was going to give you 0:01:06.400 --> 0:01:08.280 an update I'd say the first three nights I was 0:01:08.840 --> 0:01:12.480 very sleep deprived and up every couple hours with a 0:01:12.560 --> 0:01:16.240 whining puppy. But she's doing great. She's getting acclimated um 0:01:16.280 --> 0:01:18.640 to the city, as acclimated as you can get after 0:01:18.760 --> 0:01:22.400 coming off of a farm in Pennsylvania. Well, well, good 0:01:22.400 --> 0:01:25.240 news that you're well arrested. How many shoes has she destroyed? 0:01:25.720 --> 0:01:29.080 What's the tally? Surprisingly not many. She's still scared of 0:01:29.120 --> 0:01:31.280 shoes at this point in time. The little game we 0:01:31.319 --> 0:01:32.960 play is I put on my sneaker so she can't 0:01:32.959 --> 0:01:35.400 bite my toes and chase her around the apartment because 0:01:35.440 --> 0:01:37.560 it gets her to run um since she's scared of 0:01:37.560 --> 0:01:39.760 shoes if I have them on my feet. So no, 0:01:39.760 --> 0:01:42.679 no shoes eaten yet. That's a that's a success. That's 0:01:42.720 --> 0:01:45.039 pretty good. That's a good, good strategy you got there. 0:01:45.760 --> 0:01:48.120 And speaking of strategy, see what I did there? I 0:01:48.200 --> 0:01:50.440 see what you did there. We're very happy to have 0:01:50.600 --> 0:01:53.320 one of the best there is. Uh. Her name is 0:01:53.400 --> 0:01:57.600 Lizzen Saunders. She's the chief investment strategist at Charles schwab 0:01:58.000 --> 0:01:59.720 Lisen And welcome back to the show. It's been a while. 0:01:59.760 --> 0:02:02.960 I don't think we've talked since all the craziness started it. 0:02:03.160 --> 0:02:07.200 How are you faring during lockdown? Faring fairly well? Thank 0:02:07.240 --> 0:02:09.280 you and thanks for having me again. I think you're right. 0:02:09.320 --> 0:02:12.359 I think it was pre pandemic, right. How things have 0:02:12.480 --> 0:02:15.480 changed in the in less than a year. Indeed, so Listte, 0:02:15.480 --> 0:02:18.480 I was reading one of your recent commentaries, you know 0:02:18.800 --> 0:02:21.720 about uh, sort of the way to look at the 0:02:21.760 --> 0:02:24.640 market with the election coming up. It's funny, but you know, 0:02:24.680 --> 0:02:27.320 as journalists and strategists, I think we're both sort of 0:02:27.320 --> 0:02:30.480 forced to to fit the election into our world view, 0:02:30.520 --> 0:02:33.520 whether we like it or not. But what really stuck 0:02:33.560 --> 0:02:36.280 out to me is a few lines you had about, 0:02:36.320 --> 0:02:39.240 you know, obviously the old standard boiler plate that past 0:02:39.280 --> 0:02:42.359 returns or no guarantee of future results, and and how 0:02:42.480 --> 0:02:47.440 in this election, particularly in this economic environment, history probably 0:02:47.560 --> 0:02:50.640 is not as much of a guide as it perhaps 0:02:50.680 --> 0:02:52.840 we would like it to be. Um. So I'm just 0:02:52.919 --> 0:02:55.520 curious how you're looking at the you know, the election. 0:02:55.639 --> 0:02:58.440 Is there a danger of people sort of focusing too 0:02:58.520 --> 0:03:01.840 much on the horse race and what it means for markets? 0:03:01.919 --> 0:03:04.440 Is that is that something that you know you worry 0:03:04.440 --> 0:03:08.000 about clients a schwab sort of worrying a little too 0:03:08.080 --> 0:03:10.640 much about what's going to happen in November and less 0:03:10.680 --> 0:03:14.320 about the bigger sort of fundamentals and trends coming up 0:03:14.320 --> 0:03:16.400 in the next year. I do worry about it a 0:03:16.400 --> 0:03:18.880 little bit, and and that's partly due to the fact 0:03:18.960 --> 0:03:23.520 that the most common version of an election related question 0:03:23.600 --> 0:03:27.240 I get as it relates to markets is should I 0:03:27.320 --> 0:03:31.200 get out now, go to cash, and then put my 0:03:31.280 --> 0:03:34.920 money back in after the election when and I'll hear, 0:03:35.040 --> 0:03:38.800 you know, the inevitable volatility dies down. And I would 0:03:38.840 --> 0:03:42.240 say this in any environment and not just specific to 0:03:42.280 --> 0:03:45.840 an election. Um, get in and get out are not 0:03:45.920 --> 0:03:49.680 investing strategies. That's gambling on a moment in time. In 0:03:49.720 --> 0:03:52.760 this case, it would be gambling on some perceived election outcome, 0:03:52.800 --> 0:03:55.800 good or bad, and that's not investing. Investing should always 0:03:55.800 --> 0:03:58.400 be a process over time. And I think, well, it's 0:03:58.480 --> 0:04:02.080 human nature to say, if X happens, then why is 0:04:02.120 --> 0:04:05.240 going to happen and try to connect dots between a 0:04:05.440 --> 0:04:10.600 variable election, economic earnings, valuation, whatever it is, and what 0:04:10.720 --> 0:04:13.120 the market has been doing or is going to do. 0:04:13.360 --> 0:04:16.320 And wouldn't it be lovely if life was as easy 0:04:16.320 --> 0:04:19.600 as that? And it isn't, so, uh, you know, there. 0:04:19.600 --> 0:04:22.719 There are certainly strategies that individuals might want to employ 0:04:22.800 --> 0:04:25.440 if they really feel like they want to limit any 0:04:25.520 --> 0:04:29.040 kind of downside. So there's hedging strategies that can be done. 0:04:29.080 --> 0:04:32.200 But the whole get out now and then get back 0:04:32.240 --> 0:04:36.240 in that that's not a strategy. So stay invested. I'm 0:04:36.279 --> 0:04:38.680 curious what you think of some of these narratives that 0:04:38.720 --> 0:04:41.240 I alluded to that have been floating around that part 0:04:41.279 --> 0:04:43.400 of the reason that we have seen the market to 0:04:43.480 --> 0:04:46.320 return to resiliency is the fact that it is pricing 0:04:46.320 --> 0:04:48.560 in a blue sweep. What that means is we could 0:04:48.560 --> 0:04:51.680 see trillions of dollars worth of fiscal stimulus down the 0:04:51.720 --> 0:04:55.200 pipes that could then lead to a rotation to small 0:04:55.240 --> 0:04:59.400 caps or value. Do you buy these narratives? I mean, like, 0:04:59.400 --> 0:05:03.359 like Mike said, as journalists also um sometimes as a 0:05:03.440 --> 0:05:06.599 strategist or investors will look at the market and try 0:05:06.800 --> 0:05:10.400 to assign a narrative or backfit a narrative to anything 0:05:10.440 --> 0:05:12.719 we are seeing. Is it possible to actually go ahead 0:05:12.760 --> 0:05:15.080 and say, sure, yeah, this is what the markets pricing 0:05:15.120 --> 0:05:17.440 in or is this just a market that happens to 0:05:17.480 --> 0:05:21.520 be rallying for any any which reason? And this is 0:05:21.520 --> 0:05:23.920 what people are deciding the narrative is considering how close 0:05:23.920 --> 0:05:26.320 we are to an election. To your point, Sarah, it 0:05:26.440 --> 0:05:29.720 is impossible to quantify, particularly if you're actually talking about 0:05:29.760 --> 0:05:32.240 a narrative, and even if you believe in your heart 0:05:32.320 --> 0:05:35.120 that that is the underlying force behind what the market 0:05:35.200 --> 0:05:39.000 is doing, actually being precise about the impact it's having 0:05:39.040 --> 0:05:41.479 and how much is priced in. But I don't think 0:05:41.480 --> 0:05:43.920 it's a stretch to say and call it a narrative, 0:05:43.960 --> 0:05:47.240 call it an actual infusion of liquidity, but that the 0:05:47.880 --> 0:05:54.680 liquidity slash, fiscal the monetary fiscal combination, stimulus relief, whatever 0:05:55.040 --> 0:05:57.320 term you want to use, I think has been a 0:05:57.360 --> 0:06:03.680 powerful force um underpinning stocks. Not necessarily on any given 0:06:04.200 --> 0:06:06.880 day or week, but I think that has been an 0:06:06.880 --> 0:06:10.039 important story because in an environment, particularly when we were 0:06:10.040 --> 0:06:12.240 in the heart of the pandemic, the entire economy was 0:06:12.279 --> 0:06:16.599 shut down, we had the FED doing unprecedented things UH 0:06:16.640 --> 0:06:20.320 and Congress doing unprecedented things, particularly in both the concept 0:06:20.320 --> 0:06:24.560 of size and scope. That money has to go somewhere, 0:06:24.800 --> 0:06:27.520 and in the absence of an economy that's humming along, 0:06:28.400 --> 0:06:31.680 that money either can just stay in the pockets of 0:06:31.760 --> 0:06:36.000 individuals or stay in the financial system or find its 0:06:36.040 --> 0:06:38.839 way into asset markets, and that is clearly what happened, 0:06:38.880 --> 0:06:41.680 and I think more recently, yeah, I think from a 0:06:41.800 --> 0:06:46.080 macro perspective, the idea of more on the fiscal side 0:06:46.120 --> 0:06:50.080 and potentially a larger sum of that in the event 0:06:50.160 --> 0:06:52.719 of a Biden win relative to the size of the 0:06:52.760 --> 0:06:56.919 package currently being negotiated, could be an underpinning. But the 0:06:57.000 --> 0:07:00.240 reality is this market is largely being driven by a 0:07:00.279 --> 0:07:04.000 small handful of stocks being traded by, in many cases, 0:07:04.080 --> 0:07:07.359 really small investors. So that's not a narrative, that's the 0:07:07.440 --> 0:07:10.320 actual mechanics to some degree of what's happening. I'm not 0:07:10.360 --> 0:07:15.720 sure that cohort is necessarily focused on the big picture, um, 0:07:15.760 --> 0:07:19.679 you know, monetary fiscal they're just you know, chasing momentum stocks. 0:07:19.920 --> 0:07:22.640 So it's a combination, you know. Listen, that's a great 0:07:22.680 --> 0:07:24.720 point about the sort of the return of the day 0:07:24.760 --> 0:07:28.120 trader and the and the small dollar trader. Um. You know, 0:07:28.200 --> 0:07:31.560 I would have to assume that the move to commission 0:07:31.600 --> 0:07:37.800 free trading is somehow amplifying that. Uh that phenomenon does 0:07:37.840 --> 0:07:41.680 that make it sort of harder for you to sort 0:07:41.680 --> 0:07:44.360 of figure out where the market's going, what's going to 0:07:44.440 --> 0:07:47.960 happen next, You know, is that now that we're almost dominated, 0:07:48.000 --> 0:07:51.360 I think retail investors are I was looking at some 0:07:51.440 --> 0:07:54.920 numbers from Larry tab or are Bloomberg intelligence analysts who 0:07:54.960 --> 0:07:58.320 digs into market structure. It's one of the biggest cohorts 0:07:58.360 --> 0:08:01.320 of investors and traders right now. I think retail mom 0:08:01.320 --> 0:08:04.520 and pop traders actually rival hedge funds for as far 0:08:04.520 --> 0:08:07.800 as how much volume is is attributed attributable to them 0:08:07.800 --> 0:08:11.520 in the market. You know, I worry is is that 0:08:11.800 --> 0:08:15.720 retail trader base sort of a fickle and hard to 0:08:16.200 --> 0:08:19.680 analyze investor base, And what does that mean going forward 0:08:19.720 --> 0:08:22.080 in the market? Is it sort of a recipe for 0:08:22.240 --> 0:08:24.560 either I don't know, higher sort of a higher plateau 0:08:24.680 --> 0:08:28.720 evaluations were or could we expect sort of more volatility 0:08:28.800 --> 0:08:31.520 as a result of of you know, sort of smaller 0:08:31.520 --> 0:08:35.440 traders chasing the momentum or maybe perhaps even chasing it 0:08:35.480 --> 0:08:37.319 on the way down if they if they're so inclined 0:08:37.360 --> 0:08:39.679 to to start shorting the market. Um is is that 0:08:40.600 --> 0:08:42.400 I know this is a twelve part question which is 0:08:42.440 --> 0:08:46.040 my my specialty, but but how does how does this 0:08:46.280 --> 0:08:50.480 sort of up and coming group of traders dominating volume 0:08:50.880 --> 0:08:53.480 affect the way the market operates and how you're how 0:08:53.480 --> 0:08:56.679 you're watching and sort of analyzing what's going on. I mean, 0:08:56.679 --> 0:08:58.680 the short answer is, we don't know, because this is 0:08:58.679 --> 0:09:01.200 a cohort of traders that are brand new, so we 0:09:01.240 --> 0:09:03.840 don't have a long history. Now they're they're part of 0:09:03.880 --> 0:09:07.640 a larger cohort of course, retail investors. But this sort 0:09:07.640 --> 0:09:10.880 of what I've been calling newly minted day traders um 0:09:10.960 --> 0:09:16.880 largely trading via apps and more recently moving to a 0:09:16.920 --> 0:09:22.079 significant degree into the options market, into call short dated 0:09:22.160 --> 0:09:26.000 call buying, naked call buying. And so we don't yet 0:09:26.400 --> 0:09:30.360 have any history of this cohort in terms of what 0:09:30.559 --> 0:09:35.400 any negative market action might do to that cohort, because 0:09:35.600 --> 0:09:40.000 most of the dominance of that cohort started in the 0:09:40.120 --> 0:09:43.200 late March early April time frame, and there were many 0:09:43.400 --> 0:09:47.760 ingredients to the recipe that of of this power of 0:09:47.800 --> 0:09:53.079 this small retail trader. You mentioned zero percent commissions, Um, 0:09:53.160 --> 0:09:58.880 we a chub might have had something perfectly so maybe 0:09:59.040 --> 0:10:02.400 just you know, maybe I seem to recall we said 0:10:02.440 --> 0:10:05.400 something about that. And then of course for actional shares, 0:10:06.080 --> 0:10:10.520 and then the combination of pandemic related forces, people being 0:10:10.600 --> 0:10:15.200 home doing much more on their digital devices. Uh, no 0:10:15.760 --> 0:10:19.439 sports betting for quite some time, So I think it 0:10:19.600 --> 0:10:23.960 was just this tsunami of things that happened to really 0:10:24.960 --> 0:10:29.840 bring out this new form of trader. Now, what we 0:10:29.920 --> 0:10:33.560 don't know again is if we get into any significant 0:10:33.559 --> 0:10:36.720 market corrective phase beyond just what we had for a 0:10:36.760 --> 0:10:39.439 short period in June and a short period of September, 0:10:40.200 --> 0:10:43.679 whether they get beholdened on the long side, which was 0:10:43.720 --> 0:10:47.560 what happened in September, or they get scared out of 0:10:47.559 --> 0:10:49.440 the market if the pain is more severe than what 0:10:49.480 --> 0:10:52.720 we experienced, or do they just shift gears and start 0:10:52.760 --> 0:10:54.520 doing the same thing on the putch side of the 0:10:54.520 --> 0:10:57.280 options equation as they did on the call side. So 0:10:57.320 --> 0:10:59.840 we don't know. What I will say is the kind 0:10:59.840 --> 0:11:04.480 of speculative fraud we're seeing among that cohort is not 0:11:04.679 --> 0:11:09.960 matched by other measures of investor sentiment, either attitudinal or behavioral. 0:11:10.400 --> 0:11:13.840 So we don't have the same kind of speculative fervor 0:11:13.920 --> 0:11:19.880 whether it's in attitudinal surveys like AII or other measures 0:11:19.920 --> 0:11:23.160 that I think are tracking more what either older individual 0:11:23.360 --> 0:11:28.120 investors not traders are doing, or across the spectrum of institutions. 0:11:28.120 --> 0:11:32.040 And in fact, it's never happened before, but very recently 0:11:32.160 --> 0:11:37.840 we've seen this huge increase in call buying um by 0:11:37.960 --> 0:11:42.320 small traders at the same time a huge increase in 0:11:42.320 --> 0:11:46.280 index put buying, and that tends to be done by 0:11:46.320 --> 0:11:50.040 the commercial hedgers and the big institutions. So we have 0:11:50.280 --> 0:11:54.000 this incredible divergence between what we used to think of 0:11:54.040 --> 0:11:56.680 as the smart money and the dumb money. So far, 0:11:57.080 --> 0:11:59.000 to the extent you think of this cohort as the 0:11:59.080 --> 0:12:01.400 dumb money, they have been so dumb because they've been right, 0:12:01.760 --> 0:12:04.720 but they also haven't been tested to any significant degree. 0:12:04.800 --> 0:12:07.760 But I also think you know, Mike, you rightly cited 0:12:07.800 --> 0:12:11.440 these statistics around what percentage they represent in trading volume. 0:12:11.720 --> 0:12:14.720 But there's feeder effects of that. So if you're if 0:12:14.760 --> 0:12:16.880 you're a small trader and you're buying a call option, 0:12:17.080 --> 0:12:20.080 the market maker selling that call option has to purchase 0:12:20.080 --> 0:12:23.440 the underlying security as a hedge, So that forces the 0:12:23.480 --> 0:12:27.600 market makers to buy the same stocks that underlie the 0:12:27.640 --> 0:12:30.360 options that the small traders are doing. And then because 0:12:30.440 --> 0:12:34.280 a small subset of stocks represents such a large share 0:12:34.360 --> 0:12:37.240 of the overall index, it pushes the index up, and 0:12:37.280 --> 0:12:40.920 traditional institutions, who might be benchmarked against the SMP have 0:12:41.080 --> 0:12:44.040 no hope of beating the SMP unless they're in those names. 0:12:44.080 --> 0:13:01.520 So there is the circle in which we live. I've 0:13:01.520 --> 0:13:04.000 heard the last couple of weeks described as deja vu 0:13:04.200 --> 0:13:06.880 to August and September. Now to be seen if it 0:13:07.000 --> 0:13:09.840 ends the same way. But something I find really interesting 0:13:09.960 --> 0:13:11.960 is that in the middle of the summer, I feel 0:13:11.960 --> 0:13:15.760 like we constantly heard this idea that the only reason 0:13:16.000 --> 0:13:20.680 that we saw these smaller retail traders really uh active 0:13:20.679 --> 0:13:22.839 in the markets was because they were bored. There were 0:13:22.840 --> 0:13:26.960 no sports on Those that were young weren't in school, 0:13:27.320 --> 0:13:29.800 uh college was out of session. Well, now we're in 0:13:29.880 --> 0:13:33.360 late October, there are plenty of sports to watch on TV. 0:13:34.080 --> 0:13:36.240 Many have gone back to school. If that's the case, 0:13:36.240 --> 0:13:37.959 if you're a college aged kid, or at least you're 0:13:37.960 --> 0:13:42.040 taking classes virtually to some extent, and we hear these 0:13:42.360 --> 0:13:46.600 relations or comparisons to the dot com days. Is it possible, 0:13:46.720 --> 0:13:49.199 And I know it's dangerous to say it's different this time, 0:13:49.200 --> 0:13:51.320 but is it possible to say the difference now is 0:13:51.360 --> 0:13:54.680 that we do have this move to zero commissions, and 0:13:54.760 --> 0:13:56.880 it's very possible that this is a trend that's here 0:13:56.920 --> 0:13:59.040 to stay. This is a new cohort of the market 0:13:59.400 --> 0:14:02.960 that isn't just going to disappear. Well, I hope it's 0:14:03.040 --> 0:14:04.880 a new cohort of the market. I hope we have 0:14:05.000 --> 0:14:08.160 finally enticed younger investors into the world of investing in 0:14:08.160 --> 0:14:11.360 the stock market, because I think pre pandemic they were 0:14:11.400 --> 0:14:14.280 sort of written off as as dead. Never we're never 0:14:14.320 --> 0:14:17.440 going to entice younger investors into the market, maybe because 0:14:17.480 --> 0:14:21.880 of either they were burned through the financial crisis, or 0:14:21.920 --> 0:14:25.000 maybe they watched parents get burned through the financial crisis 0:14:25.000 --> 0:14:28.640 in Wall Street broadly was it's been sometimes painted with 0:14:28.680 --> 0:14:33.400 a very negative brush, so long term, I'm somewhat hopeful 0:14:34.000 --> 0:14:37.360 that doesn't mean there aren't risks in the very near term. Now, 0:14:37.480 --> 0:14:40.400 I think even now that sports is back and sports 0:14:40.400 --> 0:14:44.440 betting is back, what we have to remember is that 0:14:45.000 --> 0:14:48.600 this has become Partly why this has become popular is 0:14:48.640 --> 0:14:54.760 because it's working so far and so um This sort 0:14:54.760 --> 0:14:58.280 of cohort feeds off itself. There's a lot of platforms 0:14:58.320 --> 0:15:02.040 that it exposed what there's are are doing. It's almost 0:15:02.120 --> 0:15:06.640 like the you know, pelotonification of trading or the gamification 0:15:06.680 --> 0:15:10.600 of trading. So the bells and the whistles and the 0:15:10.680 --> 0:15:15.840 excitement of of doing well and making money. That um 0:15:15.880 --> 0:15:18.240 that I think is the It's a force in the 0:15:18.280 --> 0:15:22.720 near term. But if it eventually can morph into a 0:15:23.320 --> 0:15:27.280 true educated understanding of what it means to invest long 0:15:27.440 --> 0:15:31.280 term without significant carnage on the path from point A 0:15:31.360 --> 0:15:34.480 to point B, that would be great. UM. And I 0:15:34.520 --> 0:15:36.400 don't I don't view this as some bubble that's going 0:15:36.440 --> 0:15:40.960 to burst spectacularly and uh, these folks are going to 0:15:41.040 --> 0:15:43.280 be in a world of hurt. But there are some 0:15:43.400 --> 0:15:45.960 risks associated with it. Is just a question again of 0:15:46.040 --> 0:15:49.320 whether we can sort of bridge this gap and that 0:15:49.680 --> 0:15:54.479 in that span there's appropriate education because more than just anecdotally, 0:15:54.520 --> 0:15:56.720 we know that some of these traders, particularly in the 0:15:56.760 --> 0:16:00.520 options market, UM, may not be as educate hated about 0:16:00.560 --> 0:16:04.640 what they're doing as what an ideal scenario would be. Yes, 0:16:04.640 --> 0:16:07.160 Sarah points out sports her back on TV. Except for 0:16:07.200 --> 0:16:10.680 Sarah's Miami Heat, they got their season got canceled. It 0:16:10.760 --> 0:16:13.080 was a sad ending, but you know the fact that 0:16:13.120 --> 0:16:15.840 they made it to the finals. I'll take it. I'll 0:16:15.880 --> 0:16:18.800 take it well. I'll tell you, you know, speaking of 0:16:18.840 --> 0:16:23.280 that that sort of young aggressive cohort of investors, I 0:16:23.320 --> 0:16:25.240 will point out. I haven't had my shoes my shoes 0:16:25.280 --> 0:16:27.000 shined in a long time, so I don't have this 0:16:27.200 --> 0:16:31.120 sort of shoeshine guy anecdote. But my seventeen year old 0:16:31.160 --> 0:16:34.160 daughter just got a job and a couple of paychecks 0:16:34.160 --> 0:16:36.200 into it. She came up to me and said, I'm 0:16:36.240 --> 0:16:38.240 I really want to get into the stock market. Do 0:16:38.320 --> 0:16:40.720 you know anything about the stock market? And of course 0:16:40.760 --> 0:16:43.240 I was like, not, not really though, but does your 0:16:43.280 --> 0:16:47.520 daughter know what you do? Clai? Now I clearly realized 0:16:47.560 --> 0:16:49.320 she has not been paying attention at all. And when 0:16:49.320 --> 0:16:51.480 I when I explained to her what I do, but 0:16:51.560 --> 0:16:55.200 she did she mentioned Tesla. She do someone someone knew 0:16:55.240 --> 0:16:57.600 someone who made ten thousand dollars in Tesla and then 0:16:57.880 --> 0:17:00.520 someone else made enough money to buy buy a Tesla 0:17:00.600 --> 0:17:03.600 with what they've made on Tesla, So I do you 0:17:03.640 --> 0:17:07.119 know its? And it's getting to that sort of anecdotal level. 0:17:07.359 --> 0:17:10.439 I think, where you know? Again, who's I don't know 0:17:10.480 --> 0:17:12.919 anyone who gets their shoeshine anymore, but it's it's that 0:17:13.040 --> 0:17:17.680 sort of unsophisticated. It's sort of to me. I hate 0:17:17.680 --> 0:17:20.480 to bring the parallel to the cryptocurrency craze and the 0:17:20.480 --> 0:17:24.399 bitcoin craze a few years ago, but it almost feels 0:17:24.440 --> 0:17:27.200 like that to me, is this sort of piling in, 0:17:27.800 --> 0:17:32.119 uh into the momentum um? But I wonder, you know, 0:17:34.119 --> 0:17:37.680 put aside the election, put aside sort of what retail 0:17:37.720 --> 0:17:40.280 traders do next, and you get back to the fundamentals 0:17:40.280 --> 0:17:41.960 and you look at an smp it, I don't know, 0:17:42.080 --> 0:17:44.560 was it twenty seven and change on a on a 0:17:44.600 --> 0:17:47.520 trailing earnings basis. I know you're not gonna go to 0:17:47.560 --> 0:17:49.720 cash because the election is coming up, But does that 0:17:49.800 --> 0:17:53.439 sort of valuation, given all the unknowns with how the 0:17:53.560 --> 0:17:56.199 virus and the vaccine will progress, does that give you 0:17:56.240 --> 0:17:59.560 a pause at all to to sort of d risk um, 0:18:00.119 --> 0:18:02.919 you know, ahead of sort of how we see the 0:18:02.960 --> 0:18:06.600 economy shaping up next year. I think there may be 0:18:06.800 --> 0:18:09.840 reasons to de risk, especially if your portfolio is now 0:18:11.080 --> 0:18:16.119 grown potentially via lack of rebalancing, to a heavy emphasis 0:18:16.240 --> 0:18:20.560 on those kind of hot momentum areas of the market. Um. 0:18:20.680 --> 0:18:24.800 But I wouldn't use valuation as certainly not a singular 0:18:24.840 --> 0:18:28.080 reason to do that, because valuation of any variety, whether 0:18:28.080 --> 0:18:33.359 it's trailing pe forward, pe Schiller's cyclically adjusted pe, Tobin's 0:18:33.440 --> 0:18:38.560 q FED model, price to book price to sales um terrible, 0:18:38.720 --> 0:18:43.640 terrible market timing tool um. There's there's no correlation between 0:18:43.800 --> 0:18:47.359 what valuation is at any point in time and what 0:18:47.480 --> 0:18:49.840 the market does say over the subsequent one year period 0:18:49.880 --> 0:18:53.080 of time. Correlations go higher when you look out over 0:18:53.600 --> 0:18:56.840 many years, you know, call it ten year time periods. 0:18:56.880 --> 0:18:59.560 And the reason for that is we think of valuation, 0:19:00.440 --> 0:19:03.520 particularly in when you're talking about PE ratio, is having 0:19:03.640 --> 0:19:08.000 to quantifiable components. You know what the P is certainly 0:19:08.000 --> 0:19:09.840 on a trailing basis, you know what the E is 0:19:09.880 --> 0:19:12.719 on a forward basis. You know what the expectation is 0:19:12.800 --> 0:19:15.719 because it's published. So we therefore think of it as 0:19:15.800 --> 0:19:21.560 this fundamental indicator because there's quantifiable components. The reality is 0:19:21.640 --> 0:19:25.160 that valuation is a sentiment indicator more than it is 0:19:25.200 --> 0:19:28.320 a fundamental indicator. There are times where investors are willing 0:19:28.359 --> 0:19:31.879 to pay nosebleed valuations and find ways to justify it, 0:19:31.920 --> 0:19:34.640 and there's times when investors don't even want to pay 0:19:34.640 --> 0:19:37.399 a single digit PE ratio, like in early two thousand 0:19:37.400 --> 0:19:39.800 and nine. So it's a reflection of sentiment more than 0:19:39.800 --> 0:19:44.320 anything else. I think the valuation measure or measures that 0:19:44.520 --> 0:19:48.800 the cardon ardent bulls will use in this environment are 0:19:48.880 --> 0:19:52.480 equity risk premiums given that we've got short rates pinned 0:19:52.480 --> 0:19:54.480 at zero as far as the I can see, so 0:19:54.600 --> 0:19:58.600 the discount rate you're using to discount future earnings is 0:19:58.640 --> 0:20:02.639 basically zero, and on an equity risk premium relative to 0:20:02.880 --> 0:20:07.399 treasuries relative corporate bonds, stocks look relatively inexpensive. Mike, My 0:20:07.560 --> 0:20:09.679 sort of take on the other side of that is 0:20:10.040 --> 0:20:13.680 totally agree the discount rate is pegged at zero. However, 0:20:14.240 --> 0:20:18.280 it's a discount rate discounting a future stream of earnings. 0:20:18.560 --> 0:20:20.600 We are at some point going to actually have to 0:20:20.680 --> 0:20:24.240 see that future stream of earnings. A ZIRP environment is 0:20:24.240 --> 0:20:27.760 not going to sustain the market at infinitum without an 0:20:27.760 --> 0:20:30.840 eventual return in earnings. I just think that discount rate 0:20:30.880 --> 0:20:34.600 being pegged at zero is saying to investors that pay 0:20:34.640 --> 0:20:37.760 attention to this stuff, maybe you can lengthen your time 0:20:37.800 --> 0:20:41.080 horizon in terms of the weight until earnings moved back 0:20:41.080 --> 0:20:44.680 into positive territory supported by that low interest rate environment. 0:20:44.760 --> 0:20:49.560 So I get it um, But in broadly do I 0:20:49.640 --> 0:20:52.600 think there are risks in this market valuation and otherwise 0:20:52.760 --> 0:21:11.040 absolutely so. We do have to see that return in earnings, 0:21:11.080 --> 0:21:14.160 and this week earning season did kick off. We're expected 0:21:14.200 --> 0:21:17.760 to see another decline this quarter of about another decline 0:21:17.760 --> 0:21:20.800 in the fourth quarter. However, when I look at numbers, 0:21:20.840 --> 0:21:23.720 I still see consensus analyst estimates looking for about one 0:21:23.800 --> 0:21:26.920 sixty two of earnings per share in the SMP, which 0:21:27.000 --> 0:21:30.000 is not far off where we were just last year 0:21:30.040 --> 0:21:34.320 in Do you think that it's possible people are still 0:21:34.359 --> 0:21:37.280 too optimistic about one? I mean, if if you say 0:21:37.280 --> 0:21:39.200 that at some point we have to get those earnings, 0:21:39.200 --> 0:21:42.200 clearly they're pretty optimistic that we will, and and not 0:21:42.400 --> 0:21:46.240 too far away. Even in a normal environment, analysts when 0:21:46.240 --> 0:21:48.760 you're looking a year out tend to be too optimistic. 0:21:49.040 --> 0:21:51.199 Then as you get closer to the actual season for 0:21:51.240 --> 0:21:54.440 the quarter, they cut cut, cut, cut cut, ultimately setting 0:21:54.480 --> 0:21:57.720 the bar low enough such that the beat rate is 0:21:57.920 --> 0:22:01.720 you know, typically in the UM. Unique in this environment, 0:22:01.720 --> 0:22:04.800 of course, is the lack of visibility, the fact that 0:22:04.840 --> 0:22:07.800 a record number of companies have withdrawn guidance, certainly in 0:22:07.840 --> 0:22:11.040 the second quarter. So what analysts have done, at least 0:22:11.040 --> 0:22:14.200 for this year is when you know, absent that more 0:22:14.240 --> 0:22:18.920 precise guidance from companies UM and absent even macro visibility. 0:22:18.960 --> 0:22:21.439 Given the unique circumstances as virus as they aired on 0:22:21.480 --> 0:22:23.800 the side of cutting estimates too much, so you had 0:22:23.800 --> 0:22:27.680 a six percent beat rate for the second quarter. You're 0:22:27.760 --> 0:22:30.320 running out about a similar beat rate right now. Albeit 0:22:30.520 --> 0:22:33.520 were very early in in earning season at this point, 0:22:33.840 --> 0:22:36.240 and that may be the case for the fourth quarter 0:22:36.320 --> 0:22:39.879 as well. But I do think given what we know 0:22:40.040 --> 0:22:43.359 now about the economy and its trajectory, I think the 0:22:43.440 --> 0:22:47.040 numbers as they stand right now probably are a little 0:22:47.040 --> 0:22:50.639 bit high, but as they start to come down, it 0:22:50.680 --> 0:22:53.840 wouldn't be that abnormal relative to what we typically see 0:22:54.440 --> 0:22:58.000 in history. Ells as you point out, with the equity 0:22:58.119 --> 0:23:01.080 risk premium on the discount rate being close to zero, 0:23:01.160 --> 0:23:04.600 I mean, it brings us back to that old boogeyman inflation, 0:23:04.680 --> 0:23:07.840 you know, and I I feel like it's got to 0:23:07.840 --> 0:23:11.080 be the main risk for the stock market is some 0:23:11.200 --> 0:23:14.359