WEBVTT - ‘Scared For the Market’ 0:00:12.840 --> 0:00:16.080 Hello, and welcome to What Goes Up, a Bloomberg Weekly 0:00:16.120 --> 0:00:19.760 Markets podcast. I'm Sarah Plants, a reporter on the Cross 0:00:19.760 --> 0:00:22.880 Asset team, and I'm Mike Reagan, a senior editor on 0:00:22.960 --> 0:00:26.360 the Markets team. Sort of the John Oates to Sarah's 0:00:26.440 --> 0:00:29.640 Darryl Hall. And this is going to be a you're 0:00:29.680 --> 0:00:31.960 going to keep coming up with. All right, let's keep 0:00:31.960 --> 0:00:33.839 you going. Let's see how many weeks you can go 0:00:34.640 --> 0:00:36.880 to this one, Like I'll grow a mustache and get 0:00:36.880 --> 0:00:40.360 a perm um. I don't know if people get perms anymore. 0:00:40.680 --> 0:00:43.360 Back in my day. You know, my classmates in high 0:00:43.360 --> 0:00:45.519 school spent more on perms than they do on their 0:00:45.520 --> 0:00:48.519 cars these day. I think. I don't think too many 0:00:48.520 --> 0:00:51.320 people perms nowadays, Mike, at least not like the eighties. 0:00:51.360 --> 0:00:55.840 At least not like the eighties. Coming anyway, are essential 0:00:55.920 --> 0:00:58.640 for podcast posts. I don't think you can really be 0:00:59.600 --> 0:01:02.040 a pie cats howse people trust? I think you're right, Ben, 0:01:02.320 --> 0:01:04.280 I think right, And we might as well introduce that 0:01:04.400 --> 0:01:06.920 voice there. That is our guest for the week. Very 0:01:06.959 --> 0:01:09.039 happy to have him on the show. He does not 0:01:09.120 --> 0:01:11.160 have a perm as far as I can tell from 0:01:11.200 --> 0:01:14.120 the sum video, but his name is Ben Inker. He 0:01:14.240 --> 0:01:18.360 is the head of asset allocation for GMO, the money 0:01:18.360 --> 0:01:21.520 management firm in Boston. Ben, welcome to the show. Thanks 0:01:21.600 --> 0:01:23.839 very much for having me. I think that means once 0:01:23.840 --> 0:01:26.040 the lawns are open in each of our areas, each 0:01:26.080 --> 0:01:29.440 of us will be going out and getting perms and 0:01:29.480 --> 0:01:32.319 will confirm the next time we're all in the same 0:01:32.360 --> 0:01:35.840 place together. But Ben, we're so excited to have you 0:01:35.920 --> 0:01:39.040 on the show. And lately, this past week stocks have 0:01:39.120 --> 0:01:42.200 been breaking out. The rally has been broadening out. All 0:01:42.240 --> 0:01:45.640 of a sudden. We've seen smaller companies, value stocks, firms 0:01:45.640 --> 0:01:48.800 really that have been hit hardest by the coronavirus. Well, 0:01:48.920 --> 0:01:52.400 they're all of a sudden leading this charge higher. But 0:01:53.080 --> 0:01:55.560 you over at GMO, you guys aren't buying it. So 0:01:55.760 --> 0:01:58.520 we're excited to discuss with you why that is and 0:01:58.560 --> 0:02:00.760 how you guys are going about changing your aff that 0:02:00.800 --> 0:02:04.040 allocation strategies. Yeah. So, I mean there's part of what 0:02:04.160 --> 0:02:07.760 you said that I think makes some sense. Uh, small 0:02:07.800 --> 0:02:13.400 cap stocks and value stocks were really left behind. Uh 0:02:13.600 --> 0:02:15.840 in the year up until now, they were underperforming on 0:02:15.880 --> 0:02:17.799 the way down, they were underperforming on the way up. 0:02:18.320 --> 0:02:21.880 They deserve to outperform. The thing we find a little 0:02:21.880 --> 0:02:27.880 bit mystifying is the general upward move for the market. UM, 0:02:27.919 --> 0:02:31.720 as near as we can see, the uncertainty about the 0:02:31.720 --> 0:02:35.680 economy really hasn't gone away, and almost all of that 0:02:35.840 --> 0:02:40.280 uncertainty is downside uncertainty. Uh. And yet you know, we're 0:02:40.360 --> 0:02:42.840 we're sitting here with the S and P five hundred 0:02:42.919 --> 0:02:46.440 downs something like five percent for the year in the 0:02:46.480 --> 0:02:51.640 worst economic crisis since the Great Depression. That just doesn't 0:02:51.720 --> 0:02:55.440 seem right, you know. But and I've read that you've 0:02:55.720 --> 0:02:59.160 Sarah said you've de risked the portfolios at your firm. 0:02:59.280 --> 0:03:02.080 I think I read the equity allocation of something like 0:03:03.280 --> 0:03:06.440 right now. So what is the rest in right now? 0:03:06.440 --> 0:03:09.600 I mean, obviously, Uh, you know, yields are so low 0:03:10.400 --> 0:03:14.320 money market yields are barely there. Where do you hide 0:03:14.320 --> 0:03:18.160 out in this environment? Yeah, that's a great question. And uh, 0:03:18.440 --> 0:03:21.320 maybe that's an explanation for why the market is going up. 0:03:21.400 --> 0:03:25.280 Maybe people are saying there is no alternative to owning equities. Uh, 0:03:25.360 --> 0:03:29.080 we think there is a better alternative to owning the market. UM, 0:03:29.560 --> 0:03:33.079 which comes back to the smaller cap stocks and the 0:03:33.200 --> 0:03:37.800 value stocks that we were talking about earlier. UM. Value 0:03:37.840 --> 0:03:42.760 stocks have had an absolutely horrendous twelve years relative to 0:03:42.800 --> 0:03:45.680 the market. They came into this year trading at some 0:03:45.760 --> 0:03:48.440 of the biggest valuation spreads we've ever seen, and then 0:03:48.480 --> 0:03:52.400 they proceeded to underperform by double digits. UM. So what 0:03:52.520 --> 0:03:56.800 we think makes more sense than just owning equities is 0:03:57.120 --> 0:04:01.240 going along a portfolio of value stocks and short the market. 0:04:01.840 --> 0:04:04.760 And the reason why we like that is, well, if 0:04:05.440 --> 0:04:07.920 the optimists are right in the economy can make a 0:04:08.000 --> 0:04:12.000 V shaped recovery, Well, those stocks that have just underperformed 0:04:12.000 --> 0:04:14.760 the market by double digits deserved to outperform the market 0:04:14.800 --> 0:04:17.840 quite strongly, So you should still make money. UM. And 0:04:18.040 --> 0:04:22.120 if the world gets disappointed, uh, and we don't make 0:04:22.160 --> 0:04:27.680 that that miraculous V shaped recovery, UM. Value has a 0:04:27.800 --> 0:04:31.800 lot of margin of safety here relative to the market. 0:04:32.640 --> 0:04:35.280 We can get some very bad news and they still 0:04:35.320 --> 0:04:39.680 don't deserve to underperform. And so as investors we love 0:04:40.000 --> 0:04:43.160 having a margin of safety UM. And there's very few 0:04:43.200 --> 0:04:47.000 assets today which offer a margin of safety. We do 0:04:47.240 --> 0:04:52.120 think along short portfolio, long the cheap guys, and short 0:04:52.160 --> 0:04:55.400 the broad market does actually have a margin of safety 0:04:55.560 --> 0:04:58.520 and deserves to make money in the good times and 0:04:58.600 --> 0:05:02.320 deserves to probably make money even if things do very badly, 0:05:02.920 --> 0:05:06.960 if they're really really horrible. Uh, you know, we enter 0:05:07.120 --> 0:05:11.680 the second Great Depression. Um, maybe they're not going to 0:05:11.720 --> 0:05:14.159 outperform in that environment, but they're going to do an 0:05:14.160 --> 0:05:17.320 awful lot better than a long equity position. So you 0:05:17.400 --> 0:05:19.440 just gave us a sense of how you guys are positioning. 0:05:19.440 --> 0:05:22.880 Now you short the broad market, go along the cheap guys. 0:05:23.160 --> 0:05:25.120 Can you give us a little bit more detail on 0:05:25.160 --> 0:05:27.600 how you guys are actually going about cutting that equity 0:05:27.640 --> 0:05:29.440 exposure though? I mean I get the sense that if 0:05:29.440 --> 0:05:31.560 you guys are shorting the broad market, then then you 0:05:31.600 --> 0:05:33.240 have to be pulling out out of a lot of 0:05:33.320 --> 0:05:37.080 large cap names, maybe those megacap tech names. I mean, 0:05:37.080 --> 0:05:41.559 how are you going about restructuring these portfolios to get there? Yeah, 0:05:41.720 --> 0:05:46.359 so you know the megacap tech. UM. I do find 0:05:46.400 --> 0:05:50.040 a little bit mystifying. You know, the Googles and facebooks 0:05:50.080 --> 0:05:53.520 of this world will certainly get through this. UM. But 0:05:53.720 --> 0:05:56.719 if you were an advertising firm and the world is 0:05:56.839 --> 0:05:59.280 entering a large recession, I don't think that's very good 0:05:59.279 --> 0:06:01.880 for your ad rates. UM. So I don't really know 0:06:01.920 --> 0:06:08.960 why these stocks should be going up, But UM, I 0:06:09.000 --> 0:06:15.159 recognize the fact UM that they are much less bothered 0:06:15.760 --> 0:06:20.040 by a really bad economic circumstance than most companies UH 0:06:20.080 --> 0:06:22.600 Not only do they have very strong competitive positions they 0:06:22.600 --> 0:06:27.680 are kind of largely monopolis, but they also have very 0:06:27.720 --> 0:06:30.200 strong balance sheets, so we don't have to worry about 0:06:30.240 --> 0:06:33.000 them from that. From that front, the market as a 0:06:33.040 --> 0:06:38.159 whole uh has neither of those benefits. UM. But because 0:06:38.240 --> 0:06:40.720 we didn't come into this owning a lot of US 0:06:40.800 --> 0:06:44.239 stocks to begin with, UM, we didn't want to take 0:06:44.760 --> 0:06:49.520 the so called basis risk of owning a bunch of 0:06:49.560 --> 0:06:53.840 European and Japanese cheap stocks and then shorting the SMP 0:06:53.920 --> 0:06:57.119 five hundreds. So what we actually did to take about 0:06:57.240 --> 0:07:01.800 thirty points of net equity exposure off of our portfolios, 0:07:02.200 --> 0:07:07.919 we shorted UM a lot of uh IFA stocks, so 0:07:08.120 --> 0:07:11.560 non US developed market stocks, which haven't had quite as 0:07:11.560 --> 0:07:13.560 strong a rally as the US but are still up 0:07:13.720 --> 0:07:18.800 probably somewhere in the mid twenties from the lows UM 0:07:18.840 --> 0:07:22.520 and are no longer really priced to deliver something particularly 0:07:22.520 --> 0:07:27.040 close to an equity like return, So we have kind 0:07:27.080 --> 0:07:31.800 of that value spread trade on in the developed world 0:07:31.840 --> 0:07:36.520 outside of the US. UM. We do have a few 0:07:36.720 --> 0:07:40.920 US stocks UM cyclicals that we bought in April, a 0:07:41.040 --> 0:07:45.280 few kind of stocks in our special Opportunities portfolio, and 0:07:45.320 --> 0:07:47.640 we chose to hedge those with S and P s UM. 0:07:48.080 --> 0:07:51.640 But mostly it's a non US equity portfolio, so our 0:07:51.680 --> 0:07:57.600 shorts are mostly non US equities as well. So Ben 0:07:57.640 --> 0:08:01.560 I I certainly share your cause in about this market 0:08:01.680 --> 0:08:04.320 right now, UH, As Sarah will tell you, I'm a 0:08:04.320 --> 0:08:07.440 big fan of confirmation bias. So I'm happy to uh 0:08:07.480 --> 0:08:10.000 to hear you speak a lot of the thoughts I've 0:08:10.000 --> 0:08:12.960 been saying to UM. But I would say, you know, 0:08:13.000 --> 0:08:16.200 if I'm gonna play Devil's advocate here and and lay 0:08:16.200 --> 0:08:19.800 out the bullish case, it is pretty compelling simply the 0:08:19.800 --> 0:08:23.800 the amount of money being thrown at the problem by 0:08:23.840 --> 0:08:26.200 the government and the Federal Reserve. I mean, the FED 0:08:26.280 --> 0:08:30.880 has basically inoculated the credit markets from the type of 0:08:31.520 --> 0:08:34.400 real trauma that could really make this a lot worse 0:08:34.440 --> 0:08:38.960 economically and and market wise. UM. People on unemployment now 0:08:39.080 --> 0:08:42.480 are getting in many cases being paid more than they 0:08:42.480 --> 0:08:45.439 were making before they lost their job, at least until 0:08:45.520 --> 0:08:51.320 that that federal UH extra help expires in July UM. 0:08:51.360 --> 0:08:54.120 But then unemployment claims being extended. There's a lot of 0:08:54.160 --> 0:08:57.920 money being thrown at this problem. Um, is it possible 0:08:58.640 --> 0:09:02.360 that you know it's it's problem solved given all the 0:09:02.440 --> 0:09:08.000 support being thrown at this it's definitely problem helped. Uh. 0:09:08.240 --> 0:09:10.560 Is it possible it's problem solved? I mean, you know, 0:09:10.679 --> 0:09:14.960 nothing is impossible, so maybe it's it's problem solved. You know. 0:09:15.000 --> 0:09:19.920 The reality with the credit markets is tighter credit spreads 0:09:19.960 --> 0:09:22.839 are helpful, but at the end of the day, what 0:09:22.880 --> 0:09:26.360 the credit markets need is corporate cash flow. Uh. And 0:09:26.480 --> 0:09:30.800 corporate cash flow is tough when revenue is down a 0:09:30.840 --> 0:09:35.920 ton um. And even as the economy opens up. I 0:09:35.960 --> 0:09:38.679 don't know whether the economists were the ones who coined this, 0:09:38.720 --> 0:09:42.440 but they talked about economy right, we can't get quite 0:09:42.440 --> 0:09:46.080 all the way back. It will feel better than April did, um, 0:09:46.120 --> 0:09:50.679 But until we can really get the pandemic behind us, 0:09:51.040 --> 0:09:53.480 we can't go all the way back. And the problem 0:09:53.559 --> 0:09:59.160 with being a economy is the economy was not built 0:09:59.440 --> 0:10:05.520 to run at the operational gearing right relative to GDP 0:10:06.040 --> 0:10:12.000 of corporate profits is large UM. So if the economy 0:10:12.040 --> 0:10:16.920 is running at even the drop off in earnings should 0:10:17.000 --> 0:10:20.320 be a multiple of that UM. But if you look 0:10:20.320 --> 0:10:23.800 at the earnings forecast. Q four earnings forecast is down 0:10:23.920 --> 0:10:26.959 six relative to Q four two nineteen, which was really 0:10:27.000 --> 0:10:32.160 one of the best quarters in history. UM. And that 0:10:32.280 --> 0:10:39.559 strikes us as wildly implausible. UM. The other issue where 0:10:39.559 --> 0:10:44.480 I think it's hard to fix the entirety of the problem, UM, 0:10:44.600 --> 0:10:48.120 is you can throw a lot of money around, but 0:10:48.320 --> 0:10:52.760 it isn't so easy getting it to the right places. Uh. 0:10:52.760 --> 0:10:55.800 And we've seen that with the p p P program, 0:10:55.880 --> 0:10:59.599 where you know the money was going to the wrong businesses. 0:10:59.760 --> 0:11:02.800 Bisness is that really were deserving of it. Couldn't get 0:11:02.840 --> 0:11:05.120 banks to answer the phone, They couldn't get the website 0:11:05.160 --> 0:11:08.200 to work. The money was not flowing and is still 0:11:08.240 --> 0:11:12.959 not flowing to the small businesses where it really needs 0:11:13.000 --> 0:11:16.280 to be. And frankly, on the unemployment side, the sad 0:11:16.320 --> 0:11:20.840 truth about this country is the state unemployment benefits have 0:11:21.040 --> 0:11:26.760 been made in many cases intentionally difficult to get right. 0:11:26.800 --> 0:11:28.120 You have to jump through a lot of hoops, you 0:11:28.160 --> 0:11:30.040 have to fill out a lot of forms. People don't 0:11:30.120 --> 0:11:33.880 understand how, and not everybody who is eligible, not everybody 0:11:33.920 --> 0:11:37.400 who should be getting the money is getting the money. Uh. 0:11:37.400 --> 0:11:41.160 And then the last piece that I think is worrying 0:11:41.240 --> 0:11:43.760 and Frankly, I worry about this more in the US 0:11:43.840 --> 0:11:46.280 than I do in the rest of the world. UM. 0:11:47.960 --> 0:11:50.199 I've been hearing a lot of people talk about the 0:11:50.240 --> 0:11:56.320 idea of UM resilience and supply chains, and people have 0:11:56.559 --> 0:11:59.679 learned from this that having a far flung supply chain 0:12:00.160 --> 0:12:02.959 is an unacceptable risk and they're going to have to 0:12:03.000 --> 0:12:07.000 do something about it. Honestly, I don't get that. Uh. 0:12:07.040 --> 0:12:11.439 You know, just in time inventory works of the time, 0:12:11.840 --> 0:12:14.240 So there's five percent of the time where it doesn't work, 0:12:14.280 --> 0:12:17.000 and so you can't produce the stuff you want. But man, 0:12:17.080 --> 0:12:21.760 the profitability on that five had better be awesome to 0:12:21.920 --> 0:12:25.120 make up for the higher cost of good soul in 0:12:25.240 --> 0:12:30.000 order to have that broadly resilient UH supply chain. On 0:12:30.040 --> 0:12:32.200 the other hand, the one thing that the US has 0:12:32.280 --> 0:12:38.080 done over the past twenty years is we've moved to 0:12:38.200 --> 0:12:43.480 this just in time corporate cash flow management, where most 0:12:43.600 --> 0:12:47.440 of the corporate system has levered themselves up in a 0:12:47.480 --> 0:12:52.520 way that works if everything is happening smoothly, and suddenly 0:12:52.559 --> 0:12:55.240 everything is not happening smoothly, and the wheels will not 0:12:55.360 --> 0:12:59.520 come off in the first month or two, but over 0:12:59.520 --> 0:13:03.080 the core of the next nine months, the next eighteen months. 0:13:03.880 --> 0:13:07.200 We have an awful lot of capital structures that were 0:13:07.240 --> 0:13:12.440 not designed to handle even a normal recession, let alone 0:13:12.679 --> 0:13:16.480 a very severe one. So it sounds like you're not 0:13:16.679 --> 0:13:19.680 a believer in this whole idea of uh sort of 0:13:20.080 --> 0:13:25.080 reflation as companies on shore overseas manufacturing again, I mean 0:13:25.080 --> 0:13:28.680 in a way that's that would be you know, assuming 0:13:28.760 --> 0:13:30.719 that pandemics or something and we're gonna have to deal 0:13:30.760 --> 0:13:32.800 with on a semi regular basis, you know, kind of 0:13:32.840 --> 0:13:35.480 fighting the last war rather than preparing for the future. 0:13:35.480 --> 0:13:38.959 I guess yeah, I mean, pandemics are something we will 0:13:39.000 --> 0:13:42.600 have to deal with periodically, a truly global pandemic. It 0:13:42.640 --> 0:13:46.520 doesn't matter a ton where your supply chain is, unless 0:13:46.520 --> 0:13:50.560 we're talking about you know, medical necessities where uh, you know, 0:13:50.720 --> 0:13:53.319 nationalism may become an issue and you really want to 0:13:53.360 --> 0:13:57.880 be producing your masks and and your swabs in the country. 0:13:58.760 --> 0:14:01.439 If everybody is having a mom it doesn't matter whether 0:14:01.679 --> 0:14:05.920 you're getting your stuff from Michigan or while the world 0:14:06.080 --> 0:14:10.520 is a smaller place than it used to be. Um, 0:14:10.800 --> 0:14:14.880 it's not obvious to me that, oh, pandemics are now 0:14:14.960 --> 0:14:18.440 something we should expect to happen once a decade, and 0:14:18.480 --> 0:14:20.280 I think that we can all hope that next time 0:14:20.320 --> 0:14:24.240 we will all be more prepared, considering now that pretty 0:14:24.320 --> 0:14:26.560 much every country around the globe has been through this. 0:14:27.000 --> 0:14:30.320 But Mike laid out the bowl case for us, and 0:14:30.360 --> 0:14:32.480 I'm just curious what you think, Ben, I mean, when 0:14:32.520 --> 0:14:38.080 does that reality actually strike then, of the realization of 0:14:38.480 --> 0:14:42.160 the depth of the recession that we are actually facing. 0:14:42.200 --> 0:14:44.640 I mean, I've seen this chart floating around this past 0:14:44.680 --> 0:14:47.480 week of the price liquidity ratio. So you have the 0:14:47.520 --> 0:14:50.640 market cap of the SMP plotted against them two money 0:14:50.680 --> 0:14:53.320 supply and people saying, look, it's below average. There's so 0:14:53.440 --> 0:14:57.040 much cash flooding the system. There actually is a lot 0:14:57.080 --> 0:15:00.440 of room potentially for upside in the market. I with 0:15:00.600 --> 0:15:04.240 that case, with that argument out there, when when is 0:15:04.280 --> 0:15:08.400 the reality of the depth of the recession actually take 0:15:08.480 --> 0:15:12.000 over and hit? Honestly, I don't entirely know. You know, 0:15:12.040 --> 0:15:14.680 the interesting thing about where we are right that this 0:15:14.800 --> 0:15:21.480 is we are beyond the depths of this recession. Right. 0:15:21.520 --> 0:15:23.240 We may get a w we may get an l 0:15:23.280 --> 0:15:28.680 who knows um, but probably the worst fall was March 0:15:28.720 --> 0:15:32.600 and April UM So it's a weird recession from that standpoint. 0:15:32.840 --> 0:15:35.680 The funny thing is, if you think about past recessions, 0:15:36.360 --> 0:15:39.200 most of the time, when you are two months into 0:15:39.240 --> 0:15:44.200 a recession, nobody has any idea the recession has occurred. Right. 0:15:44.240 --> 0:15:46.440 It is only well after the fact that we say, oh, 0:15:46.480 --> 0:15:52.240 guess what, this recession started in you know, December two 0:15:52.280 --> 0:15:56.600 thousand seven, and you didn't know it until September two eight. 0:15:56.640 --> 0:16:03.200 But the recession was really there. Um. So I think 0:16:03.520 --> 0:16:09.440 at some level, um, we haven't come to grips with 0:16:10.800 --> 0:16:18.320 the kind of the depth of the lasting problem here. 0:16:18.400 --> 0:16:21.280 There's been so much of a fixation on the acute 0:16:21.480 --> 0:16:26.880 problem um, and much less on the issue that you know, 0:16:26.960 --> 0:16:30.440 for all the money that is being thrown around, GDP 0:16:30.720 --> 0:16:34.400 is down a bunch, right, There is simply a lot 0:16:34.520 --> 0:16:43.040 less output happening. Um. And again, corporations thrive on output. 0:16:43.560 --> 0:16:48.120 The other thing that corporations rather desperately need is enough 0:16:48.200 --> 0:16:53.479 certainty to cause people to want to make investments. Um. 0:16:53.520 --> 0:16:59.840 And you know, maybe I am the person here who 0:17:00.200 --> 0:17:05.119 uh is just is kind of has has failed to 0:17:05.240 --> 0:17:09.120 drink the kool aid that everybody else has. But if 0:17:09.280 --> 0:17:13.879 I was running a kind of traditional business right now, 0:17:14.440 --> 0:17:16.720 I would not want to be doing a lot of investing. 0:17:17.000 --> 0:17:19.639 You know, I might have to invest in some ppe 0:17:19.800 --> 0:17:22.040 so people can come back to work or something. But 0:17:22.440 --> 0:17:24.520 I'm not going to build a new factory, you know, 0:17:24.680 --> 0:17:28.400 I'm not. I'm certainly not going to sign a long 0:17:28.520 --> 0:17:32.560 term lease for new office space because suddenly I've realized, well, actually, 0:17:32.640 --> 0:17:35.680 maybe people can work from home. Maybe that actually is 0:17:35.720 --> 0:17:40.480 a thing that can happen. UM. So you know, you know, 0:17:40.520 --> 0:17:45.000 the two biggest pieces of uh G d P are 0:17:45.720 --> 0:17:50.840 consumption and corporate investment. UH. And I don't see how 0:17:50.840 --> 0:17:55.800 corporate investment gets to normal until corporations are truly seeing Okay, 0:17:56.040 --> 0:18:00.280 I know what the future looks like, and it's good. Um. 0:18:00.320 --> 0:18:07.680 And frankly, even if currently unemployment benefits are pretty good, uh, 0:18:07.720 --> 0:18:11.400 I would think precautionary savings should be going up right now. 0:18:12.119 --> 0:18:15.719 Your certainty about what those benefits are going to be 0:18:15.840 --> 0:18:20.399 is pretty low. Um. Your certainty about your job situation 0:18:20.600 --> 0:18:23.600 is pretty low. I don't know whether. I mean. One 0:18:23.640 --> 0:18:27.800 of the things, um that could be going on, UM 0:18:28.440 --> 0:18:32.440 is that this recession, even more than normal recessions, has 0:18:32.520 --> 0:18:39.399 cost jobs from the lower paid segment of the workforce. UM. 0:18:39.960 --> 0:18:43.080 And you know, the rich people can work from home, 0:18:43.560 --> 0:18:47.080 and that's working okay for them as long as they 0:18:47.160 --> 0:18:51.399 have some child care somehow. Um. And and so maybe 0:18:51.480 --> 0:18:54.720 this just doesn't seem so bad if you are if 0:18:54.760 --> 0:18:57.160 you're working from home and uh, you know you've got 0:18:57.200 --> 0:19:00.400 some time back on your commute. Um, if you are 0:19:00.480 --> 0:19:03.720 not sure whether the businesses that you work for are 0:19:03.760 --> 0:19:06.439 ever going to come back and where your job is 0:19:06.480 --> 0:19:12.600 going to be Um if they don't. UM, I'd say, 0:19:12.960 --> 0:19:16.680 even if you're getting a surprisingly good unemployment check, which 0:19:16.680 --> 0:19:21.560 not everybody is, uh, i'd want to be saving some 0:19:21.640 --> 0:19:38.680 of that. You know. It's you make a great point 0:19:38.720 --> 0:19:41.520 about not having to date this recession or no one's 0:19:41.560 --> 0:19:45.240 waiting for the NBER to come out and officially officially 0:19:45.240 --> 0:19:48.119 give us the start date of this one. Um. But 0:19:48.119 --> 0:19:51.400 you know what I think of the reasons why recessions 0:19:51.440 --> 0:19:54.720 and bear markets always go hand in hand. Obviously, you 0:19:54.760 --> 0:19:59.560 know that their earnings damage uh causes valuations to be 0:19:59.640 --> 0:20:02.159 less a tractive to investors in the equity market. But 0:20:02.200 --> 0:20:04.879 I also think part of it might be, you know, 0:20:05.040 --> 0:20:07.960 stocks for a lot of individuals become sort of a 0:20:07.960 --> 0:20:11.000 piggy bank where you have to cash out if you 0:20:11.040 --> 0:20:14.399 had lost your job, you know, maybe cash out some 0:20:14.440 --> 0:20:17.159 of that retirement money to pay your mortgage, to to 0:20:17.200 --> 0:20:19.840 pay those tuition bills whatever it is, you know when 0:20:19.840 --> 0:20:22.600 and on the institutional side, um, maybe you have head 0:20:22.720 --> 0:20:25.119 hedge funds that you know have to de risk for 0:20:25.160 --> 0:20:27.520 a variety of reasons, margin calls and that sort of thing. 0:20:27.920 --> 0:20:30.720 So I what's weird about this one, and Sarah's written 0:20:30.800 --> 0:20:33.280 a lot about this, is we keep hearing sort of 0:20:33.280 --> 0:20:35.920 the opposite that all of a sudden, this retail trader, 0:20:36.920 --> 0:20:41.879 retail investor is super engaged in this market, uh Matt Levine. 0:20:41.880 --> 0:20:44.280 Sarah had a funny reference to your one of your 0:20:44.320 --> 0:20:48.240 stories saying, there's no other entertainment left, you know, everyone's 0:20:48.280 --> 0:20:51.639 done Netflix. So people are so bored they're they're firing 0:20:51.720 --> 0:20:55.760 up there their e trades and their schwab accounts. Um. 0:20:55.800 --> 0:21:00.000 I think he calls it b MH boredom, market boredom, 0:21:00.040 --> 0:21:03.520 the market hypothesis. So you know, but I wonder if 0:21:03.560 --> 0:21:05.640 you've given any thoughts to that, is that sort of 0:21:05.760 --> 0:21:09.159 you know, the people that are getting a little extra 0:21:09.359 --> 0:21:12.800 unemployment insurance uh cash, then they would have made otherwise 0:21:12.840 --> 0:21:16.560 everyone who got their stimulus check from the government. Is 0:21:16.600 --> 0:21:18.720 that part of this sort of little sugar high we've 0:21:18.720 --> 0:21:22.159 seen in this rebound. And if so, I mean to 0:21:22.200 --> 0:21:24.640 me that seems like it has an expiration date on 0:21:24.720 --> 0:21:28.600 it that is fast approaching. You know, the federal unemployment 0:21:28.880 --> 0:21:33.040 supplement I think expires in July. So, um, you know 0:21:33.080 --> 0:21:35.600 that seems like a little bit of euphoria that could 0:21:35.920 --> 0:21:38.880 get sapped out of the market pretty quickly. Yeah, I did. 0:21:38.960 --> 0:21:46.200 I did. Uh read that peace and quite enjoyed it. UM. 0:21:46.240 --> 0:21:49.680 In general, day traders don't have a lot of money 0:21:49.720 --> 0:21:51.720 and are not putting a lot of money to work, 0:21:52.400 --> 0:21:58.919 So I haven't seen the the hard data on it, UM, 0:21:58.960 --> 0:22:03.280 but I wouldn't be surprised if they were driving the 0:22:03.359 --> 0:22:08.760 performance of some of the particularly volatile stocks UM. But 0:22:08.920 --> 0:22:12.000 for them to be driving the overall market would be 0:22:12.320 --> 0:22:15.639 an impressive feat. Um. It takes a lot of money 0:22:15.640 --> 0:22:18.840 to do that. Uh. And And frankly, one of the 0:22:18.880 --> 0:22:23.119 things I'm impressed by. In recent years, the only buyer 0:22:23.240 --> 0:22:27.960 of note of US equities have been US corporations buying 0:22:27.960 --> 0:22:32.199 back their own stock um, and there has got to 0:22:32.320 --> 0:22:36.560 be an awful lot less of that going on right now. UM. 0:22:36.720 --> 0:22:39.920 So I will say I am impressed by the market's 0:22:39.960 --> 0:22:47.640 ability to go up without its big driver of demand there. UM. 0:22:47.680 --> 0:22:50.679 But UM, you know, there's the old saying that in 0:22:50.720 --> 0:22:53.359 the short term the market is a voting machine and 0:22:53.400 --> 0:22:56.639 the long term it is a weighing machine. UM. And 0:22:56.920 --> 0:23:02.840 the biggest reason why markets have a strong tendency to 0:23:03.000 --> 0:23:08.800 get cheap in really bad economic times, UM is because 0:23:09.800 --> 0:23:13.240 of the coincidence. And it's not a coincidence, it's it's 0:23:14.040 --> 0:23:18.400 completely causal. But UM, corporate cash flow drives up at 0:23:18.440 --> 0:23:22.919 the same time that people's other sources of income drives up. 0:23:23.480 --> 0:23:25.399 And the reason why there needs to be an equity 0:23:25.480 --> 0:23:28.080 risk premium is not just because equities are volatile. It's 0:23:28.160 --> 0:23:31.320 the circumstances in which equities are going to give you 0:23:31.400 --> 0:23:39.800 really bad returns UM. And I don't see that there's 0:23:39.880 --> 0:23:46.359 any way to unhook that in the longer term. UM. 0:23:46.720 --> 0:23:51.520 If stock prices, you know, stay up and and push higher, well, 0:23:51.560 --> 0:23:56.680 corporate cash flow is clearly worse. UM. Then I guess 0:23:56.720 --> 0:23:59.920 it could be that people are prepared to own equities 0:24:00.119 --> 0:24:04.600 much lower returns than they used to be UM. And 0:24:04.600 --> 0:24:09.439 and maybe that can work, and maybe that can be sustainable. 0:24:10.160 --> 0:24:13.959 We heard that story in two thousand UM part of 0:24:13.960 --> 0:24:16.399 the pitch for why the stock market made its sense 0:24:16.520 --> 0:24:20.840 was that there shouldn't be an equity risk premium. Um. Uh. 0:24:21.800 --> 0:24:24.159 It always struck me as a very strange thing because 0:24:24.160 --> 0:24:26.840 at the time, if you asked the people who were 0:24:26.840 --> 0:24:30.719 buying stocks, what returns were you expecting from stocks, they 0:24:30.720 --> 0:24:33.440 were expecting extraordinarily high returns. They weren't saying, Hey, I 0:24:33.480 --> 0:24:36.040 think I'm going to get you know, two percent plus inflation, 0:24:36.080 --> 0:24:39.520 but I'm good with that. Uh. And I haven't heard 0:24:39.600 --> 0:24:43.040 anybody saying, you know what, I'm buying Google today because 0:24:43.080 --> 0:24:46.359 I think it's going to give me two percent real um. 0:24:46.400 --> 0:24:49.080 And in this world, I'm fine with two percent real. 0:24:49.320 --> 0:24:56.679 If we were getting that, UM, I would be a 0:24:56.680 --> 0:25:02.080 little bit less scared for the market. Uh. Then if 0:25:02.119 --> 0:25:04.040 people are saying, well, look, with the Fed here, the 0:25:04.040 --> 0:25:07.800 market can't help but go up. And so all I 0:25:07.840 --> 0:25:11.680 care about is is the short term, I think scared 0:25:11.760 --> 0:25:14.119 for the market, we can we can leave it at that. 0:25:14.119 --> 0:25:19.840 That's your segway. We're living in unique times, crazy times. 0:25:19.840 --> 0:25:23.280 In the short term. This podcast is your place for 0:25:23.520 --> 0:25:26.280 thoughtful analysis. It's here in the long term, it's really 0:25:26.280 --> 0:25:28.800 a place just for crazy market stories that that we've 0:25:28.840 --> 0:25:32.280 all witnessed. It's so that's what people come for. They 0:25:32.280 --> 0:25:35.520 want their return on crazy things. So, um, I think 0:25:35.560 --> 0:25:38.880 we got a call into what goes Up hotline from 0:25:38.880 --> 0:25:42.920 a listener down in your state of sunny Florida. Let's 0:25:42.960 --> 0:25:45.600 give that a listen my neck of the woods. Well, 0:25:45.640 --> 0:25:48.040 my name is Morgan Hill, calling from Bookerts from Florida. 0:25:48.359 --> 0:25:52.359 My mestwor is for what goes Up? Uh blue Berg podcast? 0:25:53.440 --> 0:25:56.720 What's crazy about this market? What I've noticed just here 0:25:56.720 --> 0:26:03.560