Animal Spirits Podcast - Existential Hurricane (EP.153)

Episode Date: July 1, 2020

On this week's show we discuss growing worries about the economy, a double-dip depression, why the Fed may have to backstop the banks, shorting commercial real estate, the dominance of the biggest tech stocks, lower interest rates for a long time, what about Japan, inflationary scars and much more. Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Battenick and Ben Carlson work for Ritt Holt's Wealth Management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritt Holt's wealth management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Rithold's wealth management may maintain position, and the securities discussed in this podcast.

Welcome to Animal Spirits with Michael and Ben. I'm getting worried again. Go ahead. This is where I stand. Didn't you think at this point after going through what was really kind of awful months for March and April, we went through the quarantine, didn't you assume we were going to have some sort of better plan on the other side of that?

That when we got to now, we would have something better in place than hoping and praying for a vaccine. because it feels like at this point, since we don't really have a plan in terms of better testing capabilities or tracking and tracing or whatever some of these other countries have done, if the economy improves at this point, that means that the virus is probably getting worse. And if the virus gets better, that means the economy is probably doing worse. So we've locked ourselves into the situation where there's no way to win right now since we didn't have a better plan in place. If we would just stop testing, then we would stop getting so many positive cases.

They opened up a bunch of restaurants in Michigan in the past two or three weeks, and like four or five big ones already that are pretty well known had to shut down because employees contracted the disease. And they have to close them and clean them. Don't you think that shows how this is going to be so hard to get a handle on? Because especially for businesses like that, it's just going to be a constant back and forth until we can get to the other side of this. I don't know how that whole hospitality industry, how, I don't know, 50% of it is just not

completely wiped off the map. It feels awful for people that have to deal with that in that industry, right? Yeah, this is interesting. So the governor of Texas said, as I said from the start, if the positive rate rose above 10%, Texas would take further action to mitigate the spread. At this time, it is clear that the rising cases is largely driven by certain types of activities, including Texas congregating in bars. So this is one of the areas that's breeding this, and Carl Kintinia retweeted this. And I thought this was really interesting. J.P. Morgan said, looking across categories of credit card spending, we find the level

of spending in restaurants three weeks ago was a strongest predictor of the rise in new virus cases over the subsequent three weeks. So in other words, people were going back to eat, back out to restaurants, and then three weeks later, we were seeing the cases pop up again. There was one bar in East Lansing, which is on the east side of Michigan, that they said was the start of 100 cases, and I'm sure it's probably more because they didn't even get everyone once you start tracking it down. I mean, what's depressing about all this, and there's a lot depressed about, is that isn't this still the first wave?

Yes. I mean, the second wave maybe just rolls in for the first, I guess. Isn't it possible that we could get a recession and then a month-long expansion and then another recession? Isn't it almost possible we see a double dip? Could we see two recessions in the same year? Are you considering that this was not even over yet? even though we started growing off of a low base. I don't think this one ever ended. I mean, if a recession has loosely defined as two quarters of contracting the GDP, and I actually think we did something about this a while ago,

that's not the only thing that the BLS, that's not their only input. But how did this ever end? I think the recession ended because we technically did start growing, but the depression never went away. How does that sound? Okay. I think we could honestly see waves of, I think the economy starting and stopping and growing and shrinking.

is probably going to be something that we're going to have to get used to for the next, I don't know, foreseeable future, unfortunately. I went into New York City yesterday for the first time since March 9th, gone to the office, get a bunch of my stuff. Did it look like I am legend, kind of? It was weird. So Josh and I drove in. I think it probably took us 50 minutes to get there, which has to be some sort of record,

at least for me. I've never flown in so quickly. So we got there at 7.30, and the only people on the streets were, and there was a few people of civilians here and there, but it was really mostly construction workers. it's just bizarre. There's a French pastry next to us. And obviously the lights were off, but all the tables were gone. There was nothing in the, what is the area called where they actually hold the pastries? There must be a name for that. I don't know. Shelves.

Shelves. Okay. Let's go with shelves. I mean, that doesn't sound too tactical. But I'm sure there's another one, yes. Everything was empty. All the stores were empty. It was so odd. And I just was thinking, like, how can an economy survive this? I mean, at some point, there's going to be, you would think just a tidal wave of bankruptcies, you would think that these companies that disappear are obviously, obviously not paying their rent. This trickles up to the landlords, trickles up to the banks, trickles up to the Fed, and then the taxpayers, I guess. The thing is, is that we're seeing this boom in e-commerce in other areas. The ridiculous part of this whole thing is through just luck alone, or an unlucky break for some people, certain industries and people and businesses are just screwed

through no fault of their own. Other ones are just booming, again, through no plan of their own. It just sort of happened that way. I'm thinking, I think I'm changing my mind on this idea about working from home. I thought that people were going to run back to work. And the idea that commercial real estate was going to be fine, I thought maybe the fears were overblown. I think I'm changing my mind on that. So there was an article in the Wall Street Journal over the week. And this guy, Jonathan Lidd has a hedge fund, and he's basically shorting the New York real estate market, specifically the office market. He said, quote, the New York office market is facing an existential hurricane. Office leasing volume in Manhattan fell 47% in the first quarter. And I didn't

even think about this. People outside of New York probably don't know this, but all of the construction on the west side was massive. It looked like a new city. There's a building. It looks like the Tony Stark building in Iron Man. I think JP Morgan. was moving their headquartered there, I think. And so it was just there's so much overgrowth there. So it's easy to look at that. And maybe that's like the little bubble that I'm in. It's easy to look at that and be like, oh my God, New York City office real estate is completely altered forever. However, and it's easy to get bearish when you think about it that way. How can companies survive? How are they not going to bankruptcies? And what does that do? Obviously, real estate is a huge

part of the economy. The other side of this is what really drives the American economy as consumer we're spending. And remarkably, that's pretty much all recovered. Right. Yeah, there's going to be pockets where like the depression continues for as long as this whole ordeal and crisis and pandemic continue. So I think in 08, everybody was hit by the recession. Pretty much everybody was hit. This for some people is a depression. For other people, business has never been better. It's just a very odd scenario that we're living in. So it's easy to go to extremes on both sides, I think.

Anecdotally from the work for home thing, I keep hearing from people too saying the longer this lasts and the more comfortable companies get with it, the employees themselves are going to continue to push for this. And if the companies can see that the productivity doesn't really drop off, I think especially with more established workers who have been at a place for a while and have some sort of responsibility or cachet or whatever at work and people know what they can do, I think it's going to be harder to tell them, no, you have to come to the office five days a week. I agree that you could have these hoteling sites where people, there are a bunch of open desks that people can use and share, but not everyone needs a desk or an office anymore.

Did you say hoteling? Yeah, that's what you call it when you have just like open desks at a place and people can share them. Never heard that one before? Nope, that's new to me. Thank you for putting it on my radar. All right. Think about that one.

I mean, we spoke about this a few weeks ago, but it's tough for young kids, for young people that are coming into the workforce. It's really tough. I don't know what you do. Do you shift it right back into grad school and hope that you can negotiate a lower tuition fee or something? I feel for young people, they're going to have to get. creative. So you talked about the banking stuff that eventually, we've been talking about this

for months, that has to roll up eventually. And the Fed obviously sees this coming. So last week, they said they did some stress tests and they put a cap on dividends and they banned buybacks for like 30 of the largest U.S. banks. And they haven't seen no. They're trying to show up their balance sheets. They know this stuff is coming. They know the banks are, if they're not in trouble yet, they're going to be eventually. This still is not something that is my biggest worry. which part that eventually it all runs downhill to the banks and all the crap will eventually get eaten by the banks because I just think the Fed can wave a magic wand and make those problems go away don't you think eventually the Fed just takes it all isn't that the end game I mean maybe

I'm being naive but I think that for the bank stuff in terms of bad loans I think the Fed is going to step in and take all this over and just say we got it okay makes sense but are there no ramifications is it don't worry the Fed's got it I think we're so deep into this and too far and the Fed has already done what it's done. You sound complacent. I'm just going to, you sound blasé. I don't see how you say I'm complacent. I said, I'm worried. I'm just as worried now, I think, as I was in March. It's like, this is my second wave of worry. You don't look worried. You're wearing a purple shirt with flowers on it. You got a beard on. You look pretty comfortable.

Sorry. Next time I'll wear a v neck like you. I'm saying there's a lot to be worried about, but I'm more worried about those businesses than I am about the banks. I think the Fed can essentially nationalize the banks if they want. But doesn't this sound absurd? I mean, I hear you, but we're saying that we're incredibly worried about businesses, the actual lifeblooded economy, but we're not worried about them going bankrupt because the Fed. I'm saying the businesses are probably going to go bankrupt, but the banks aren't going to be left holding the bag.

But it's all good. And again, this is one of those things where it's not fair. This is going to be another in-equal part of this crisis, is that the banks who made these loans will probably be fine and made whole in some way because the Fed will step in. and backstop them. But then the underlying businesses that go bad on these loans will probably be in a world of pain. And that's obviously where the rub comes and why this thing is going to exacerbate inequality. And it's just, this is like the most unfair crisis we've ever had. So a few weeks ago, we spoke about the $600 running out. And the Economic Policy Institute had

this amazing piece showing that in May, unemployment benefits were 14.6% of total wage and salary income, which is, from the looks of it, by far an all-time high. So there's an economist, Jason Furman, who said that the extra $600 is expected to boost GDP by 2.8%, which is incredible, and support just under 3 million jobs. So letting this $600 and UI benefits expire at the end of July, this is a quote from the article, would by itself cause more job loss than was seen in either of the recessions of the early 90s or early 2000s. How insane is that? It would be political suicide to let this go, but letting the $600 lapse would cause, again, a bigger recession than we saw in either the early 90s or

the early 2000s. I would be shocked if this didn't either get extended or, I mean, maybe they bump it down to 400 or something. But at this point, with 30 million people still receiving unemployment checks or something, this would be the double dip depression or something if this went off. A double-dip depression? Right. Basically. Has the initial jobless claims number sort of faded? I feel like we haven't heard about that that much.

Am I just not paying as close of attention? It's still seven figures, but the shock has worn off because we're used to it now. It's still over a million people every week. And unfortunately, we're just getting used to it. So here's another thing we can get used to. The Fed Punishing Savers. So there was an article in the Wall Street Journal saying that the, The Fed is looking to Australia for the way that their central bank basically capped yields

to keep interest rates low in the downturn. And it's basically the idea that the central bank buys enough government bonds to prevent the yields from rising to a certain level or pin them at specific levels. And this is the idea that... How can you do that? How can you cap yields? It's a supply and demand thing. If they buy enough, guess what?

You're buying bonds and the rates go down. If there's enough money chasing those yields, they're going to go down. Imagine being a saver in Australia, the punishment, plus the 150 degree weather. They've got their coronavirus under control, though, so you got that going for them, which is nice. But the Fed literally manipulating all yields now, not just the short term. I just think investors have to look out for potentially a very long time at yields just being nothing. Don't you think even if we got that Jeremy Siegel inflationary spike, it's possible the Fed just putting their foot down on the neck of the yields could keep them lower? and we see this inflation, but not how your rates potentially? Is that possible?

Don't they go hand in hand? Is the Fed that powerful? I guess it would depend how long inflation will be here. I mean, if we get a double-dip depression, maybe inflation will ever come anyway. The Fed is like Thanos. I just think, again, there's way more to worry about now, but in terms of markets, low yields for a long, long time is probably one of the other things that I'm worried about in terms of portfolio construction and investors and retirees and how they're going to handle that. I was talking to Josh about this yesterday. Did you realize this is kind of interesting that over the last three years, so all that we've talked about is the fangstocks, right?

Yes. I did not know this. Facebook and Google over the last three years have not kept up with the NASDAQ 100. Okay. So they underperformed? Yeah. I just, I don't know. I thought that was interesting.

Given the amount of attention they get, obviously Apple and Amazon and Microsoft and Netflix, were enormous, enormous outperformers. Okay. So they made up for it. So now it's just MAM? Microsoft app, is that it? The MAM stocks? All right.

I wouldn't have known. I mean, Facebook has gotten hurt a little late. I mean, they're still close to all-time highs, which is crazy. So hold on, just to show the disparity. So over the last three years, Facebook and Google are both around 50% performance. And the NASDAQ 100 is 80%. So that's pretty big. and Apple and Amazon are 160 and 170.

So massive outperformance from Apple and Amazon and Microsoft. So if you hold the fan mag stocks, diversification is really helping you here because you've got two stocks who are just doing okay and three stocks are doing amazing. See, diversification wins again. By the way, the stocks that are just doing okay are still outperforming the S&P handily. Right. They're not crushing it on a relative basis. They're just crushing it against everything.

else. So Bloomberg had a piece on Warren Buffett and his holding in the fan mag stocks. So doesn't he only own Apple? What else does he own? Yeah, I'm saying they're holding. So apparently they bought Apple, and I think it wasn't even him. It was one of his other new stock picking guys. Ted or Todd. They're not new anymore, I guess. Okay. But they bought in first quarter, 2016. So I looked back at it. And since 2016, Apple is up like 270%. The S&P is up. call it 63-ish. And Berkshire Hathaway is up 34%. Now, according to Bespoke, I feel like you alternate between Berkshire and Berkshire. It's an odd thing. A, because I've never heard anybody else call it Berkshire besides for you, but you alternate. I don't know. S-H-I-R-E, isn't that Shire?

But sometimes you say Berkshire. Anyhow, continue. I don't know, man. Lay off me. So B-Spoke says that Burke Scher's stake in Apple now represents 21% of this entire market cap. So I don't know how you reverse engineer this, but if Apple's up 270% since they bought it, and I'm sure they've added to it over time, and BRK has underperformed by 35% since then, how much worse would they be if they didn't buy Apple? I don't want to do the back of the envelope math on this, but X Apple, he's probably don't even worse, unfortunately, and that's probably not even a move he made. Well, yeah, it's impossible to say because this flows through to their earnings. So it's not like, it doesn't directly, directly affect their stock price, but of course it affects

their stock price. You know what I mean? Right. Yes, it's part of it. But their equity book is obviously they have a bunch of different businesses, but the fact that it's grown to be such a big part of it. I guess it's a good thing he got on the Apple train is what I'm saying, because otherwise things could be even worse. So this was a good question from a listener. About mid to late 2019, I said, fuck it and put most of my portfolio into Facebook, Apple, Microsoft and I've done really well. why shouldn't I put every penny into these stocks, along with Amazon, Netflix, and Google and just wait for some other businesses to get even close to them? I can't help but be curious about names like Shop and Spot and eventually the Airbnb IPO, but there's still a huge

part of me that says the fan mag is it. Change my mind. I think we're getting a lot of this lately where people just say, what's the point? I'm going to own the five or ten biggest stocks. Look how well they've done. You know what's interesting. I've been thinking about this a lot. that people like you and I that have read a lot about market history and are familiar with chapter and verse an answer to this question, why wouldn't I just put all my money in the best stocks, the biggest stocks, the best stocks. And we've seen examples of history of why this is never a good idea. What if, I'm just asking the question, so take it easy. What if everything that we've read has made us less prepared for a future where the past is no longer relevant,

that the idea that trees don't grow to the sky, what if these trees do grow to the sky? What if these giant companies have altered the landscape and this is just it going forward? This sounds very topy. I don't actually believe that. But this is what everyone is considering now after 10 years of this. Right. That's what everyone is trying to talk themselves into. But the fact that even a seed of doubt creeps into my brain makes me really empathetic to the idea

why these questions exist. Because you say like these businesses, again, let's just say that you haven't read all the stock market history. And all you know is what you see. These businesses are so entrenched in every single part of our daily lives, all of the giant companies in the past, whether they were industrial conglomerates or whatever. It was a product. It was a car. It was a telephone. These companies, Amazon, Google, even face. for some people. Apple, they are our life in every single aspect of our life. They were so entrenched. So that's why it's easy to say, you know what, these companies aren't going anywhere. Amazon in 10 years will still be Amazon. Google will still be Google. And I'm sympathetic to that argument.

Now, I guess the ultimate question is, yeah, but to what end? These can still be the dominant business in 10 years hence. But if investors overpay for them, then you're not going to get a good return on your investment. I think you could make the case that I think a lot of people are looking for mean reversion for these stocks to drop off. I think you could make the case that these stocks remain the largest stocks in the index. They just don't grow as fast. But they just don't grow as fast or they grow with the index. So I think you could make the case that even if they just say market weight, that's a huge thing. And then they just stay with the index. And they could stay there for a long time. So DFA had this story last week. I sent it to you right away because it proved you wrong from

what you said last week. Sorry. What did I say? Sorry, not sorry. What did I say? You said the top five stocks are 24% of the index. And I said, isn't it always the case? Maybe we're both right here because it hasn't been like this since the 1970s. It's the highest they've been in 50 years. Give me a break. Okay. From 1927 to 1972, basically the top five stocks were a constant 25% of the index, which is what it is now. It was different that time. Okay. But I'm saying, so if you look at it, they looked at the annualized return after becoming one of the 10 largest stocks. After three years, you outperformed by like 1% a year. After 5 years, you underperform by 1% a year. After 10 years, you underperform by 1.5% a year. So that's not a huge underperformance by any means, but they looked at the 10 largest stocks

by decade. And AT&T was up there in the 30s, 40s, 50s, 60s, 70s, even the 80s and finally dropped off. I'm saying, you could make the case that Apple and Amazon and Google and Microsoft will continue to stay up there, or maybe at least a handful of them, will continue to stay at the top. But that doesn't necessarily mean that they're going to outperform as much as they have in recent years because if not, then they will eat the whole index. I think it's both ways. And I would not bet against them dropping out of the top 10. I wouldn't say that they're going to continue to compound at such high rates of return because that's impossible. I'll say there's no way it can happen. The government would break them up or they would have to break themselves

up or. In six years, if this growth continues, in six years, these five stocks will be half of the index. Okay. So do you want to bet on that or do you want to bet on, I don't want to say history, But I guess everything we know about how markets work is that competition erodes their mode eventually. And maybe it doesn't. But again, the idea that they're going to continue to grow at the pace of which they have, I think, is insane. But they said this is the old norm. So they said AT&T was among the largest for six straight decades beginning in 1930. General Motors and General Electric were ranked in the top 10 at the start of multiple decades.

IBM and Exxon were also mainstays. So they say the concentration of the stock market and a few large companies is not the new normal to the old normal. I agree with that. This is kind of always as it has been. It's just we've never seen a concentration in a single industry like this as much. Is that fair to say? I mean, energy stocks in the 80s a little bit, but they dropped off pretty quick. So let's talk about the next set of stocks.

To me, this is wild. There was a chart. So you think about Shopify, Spotify, Zoom, all of the next horsemen. I don't know exactly which stocks. Actually, let's just go pull this up. Which stocks are in the NASDAQ Internet index? So this chart shows the NASDAQ Internet has a PE of, I don't know, 160. Now, of course, this chart looks like it's, it's not right to me. These stocks are never,

ever, ever cheap, obviously, but why does this not look right to you? These stocks have gone vertical and the earnings have probably remain unchanged or gone up a little. In like three months, it's gone from 40 PE to 160. The stocks haven't gone up that much, have they? I mean, the PE ratio on this chart is basically flatish or moving around between 40 and 60 from 2011 to 2020 and then it jumps to 160, something doesn't seem right here to me, unless it's just dominated by one stock or something. This chart doesn't look right to me. I'm just saying it's possible this is a chart crime. I'm throwing it out there. Reasonable doubt. There's 88 stocks, Zoom, Zillow, Yelp. I'm reading backwards. I don't know why. Wayfair, Uber, Twitter, Teledoc, Stamps.com, Spotify, Snap. I did not

realize stamps.com was a public company. I only knew it from hearing it on podcast ad reads. Me either. Good point. Netflix. All the usual suspects, Grubhub, GoDaddy, JD.com, you know the names. Fine, Ben, let's just say that it's 100, whatever it is. But yes, you're right. There are now other tech stocks that are taking off like crazy throughout this. This is the inequality of this crisis. E-commerce and tech stocks are going bananas and some of these other businesses that people are still using. So that's why this has been such a difficult crisis for some people and not for others.

incredible chart once again from sentiment trader. He said wild explosion and speculation. So he showed a chart, which I've never seen before, the NASDAQ volume divided by the S&P volume. So the NASDAQ volume ratio has gone through the roof and is now higher than at the peak of the dot-com bubble. In other words, people are trading NASDAQ stocks like crazy, as we've been talking about for a week. So how many indicators have there been in the last seven years that this is it? This is the top in tech. Do you think there's been an indicator like once every 10 days? Yes, yes. All right.

My cousin said they're putting their whole portfolio into this. Oh, for sure, for sure. So you have to take all these with a grain of salt or sand or whatever the hell it is. But what is undeniable is that people are going bonkers for tech stocks right now. Look at the chart of Spotify. Are you kidding me? Of Shopify, of Zoom. And it's not a commentary on these companies or anything like that.

Yeah, Ben, you're right. These arguments have been made for the last 10 years. This feels nifty-50-ish. In the late 1960s, early 1970s, Go-Go-Go years, there were these 50 stocks that the PEs just went vertical on. And no one wanted to buy anything else but these stocks. The crazy thing on that one to me is some of those stocks fell 60, 70, 80, 90 percent. It was like Xerox. It was also, I mean, some blue-chip stocks, but. They were blue-chip stocks because in the Go-Go years in 1969, all of those stocks got annihilated. And then coming out of that, there was a new bull market. I think stocks been

an all-time high in like 72 or something. And investment managers didn't want to get burned. So they bought the blue chips and they called them the one decision stocks or the nifty 50, 50, whatever. You can't pay too high in multiple. So it was McDonald's. It was Avon or, I mean, just blue chip names that were going for 50, 60 times earnings. But the crazy thing, Jeremy Siegel wrote this. I think he wrote it in the 90s. So it would be hard to update it. You'd have to update it now. But the prices were still out of whack and these companies got crushed. 30 years later, they still ended up outperforming. So couldn't that be a similar instance where we see some of these stocks just get so far ahead of themselves that eventually when the expectations get too high that they get crushed, but then they still do okay over the long term?

Amazon fell 99%. Now, I don't want to use the best company of all time as a baseline, but it's possible that these stocks have gotten ahead of themselves today, that these do end up being the dominant business of the future. And it just takes three years for them to catch up to their valuations or not. Or maybe they just keep going higher. Who knows? Yes, Amazon is like trying to pick the next Michael Jordan. That's almost not a fair comparison, but yes, I get what you're saying. So this is interesting. One of the things that we always get from people, anytime we talk about stocks for the long run, now stocks are good long term investment. They say, what about Japan? No, they say now show Japan. It's so awful. And if someone has that mindset, you're never going to change their mind probably. But the team at Verdad Capital had this interesting post where they looked at what happens if the U.S. does have a period where their interest rates stay low forever. So Japan effectively saw their interest rates go zero or negative since 1990. And they more or less haven't changed since then. They've been 1% or under since 1990, which is kind of crazy to think about. I think there's a tiny, small, not insignificant chance that we could see something like that here where interest rates stay low for a very, very long time. Is it possible that rates stay low for the next 30 years? I feel like that's such a giant, I'm not saying we're going to be Japan, but I think there's a possibility that rates stay low for longer than people could imagine. I mean, they've already been low since for going on 12 years, 13 years at this point, since 2008, so 12 years.

So what could cause rates to rise, I guess? Inflation. Well, inflation and growth. Or people selling. One of the explanations, I don't know if you could prove or disprove it. One of the explanations for rates staying low is just the overwhelming demand from investors. Yes, that they want to hold bonds, and that's retirees, and that's also governments, and yeah. So Verdad looked at this and said, okay, how are these different asset classes performed in this 30-year period where rates have been effectively zero? And so they looked at small value, large value, large growth, small growth. They also looked at corporate debt and then government bonds and commodities in real estate. And surprisingly, the two best performers were actually real estate and small cap value. I guess real estate makes sense when you consider their mortgages have probably been very low and you're adding leverage on an asset. So that kind of makes sense. Surprisingly, even from

such low yields, government bonds in Japan have given 2% a year, which all things considered is not that bad, probably because rates have continued to fall in or no negative there. So that's probably helped boost a little bit. But the best performer was small cap value, which I'm sure a lot of people, a lot of fundamental U.S. investors would smile about. Large cap growth has done less than 1% a year where small cap value did 7.1% a year. It's also the mirror image of what happened in the run-up to the peak in 89. That's what they said is if you looked at what the valuations were back then, the small-cat value, kind of like today, were kicked to the side while the other large-cap growth stocks did

well, and now it's flipped. But it's interesting to see that there was a fee in large-cap value did okay too. So value has worked okay in Japan, even with low rates, even small-cap growth did close to 4% a year. So it was mostly just those big large-cap companies in Japan that have done poorly. So when people say, now show Japan, you can now show them. Actually, there are parts have done well. Now, I don't know how big of a universe small cap value is in Japan, but it's actually done well. So there have been areas, because I've always wondered, how have investors there managed, unless they've just completely diversified globally, that there are pockets where people have done okay over there. And I think they're obviously better savers too. I was about to say maybe

they're just more conservative in nature and they're better savers. I don't know. I feel like we've asked Jeremy Schwartz to this multiple times. The numbers there aren't as bad as some people make them out to be, saying that stocks for the long run are dead because of Japan. So I guess the answer is invest in small cut value in Japan. Sure. So Airbnb continues on the comeback trail. I guess their CEO, Brian Chesky said yesterday that he thinks not only they're going to

not fall off, he thinks their numbers this year could be better than last year in terms of their growth, which is kind of crazy. And so he gave an interview with Axios where he said he thinks travel. is basically changed forever, that people aren't going to be getting on planes as much anymore and crossing borders. And he thinks a lot of these bigger cities that people would go to forever where he had mass tourism like Rome and Paris and London

and you stay in the hotels and you get on the buses and such. He thinks that it's going to be much smaller in the future that people are going to realize they don't have to get on an airplane. They could just go somewhere within their own borders and drive there that he thinks that's going to be the biggest bump in Airbnb's business. Do you think that is short-sighted or is that something that could actually happen? both. I think that could certainly be a reality for a year or two. But I think that plane travel will eventually return to, I'm making this up 90% of what it was. Could be. I don't know if that

takes three years. I mean, well, back to your work from home thing. How much is a business travel makeup of that? Don't you think that people have seen the light in that guess what? Maybe I don't need to get on a plane to go meet with you. I can just do it over Zoom. That's a good point. So there's two different classes of travelers. I was talking about family vacation or people traveling for pleasure, I think that business travel is going to be wrecked probably permanently, if I had to guess. He says their data showing them now. People are getting in cars and they're going to communities that are within 200 miles where they live and they're smaller communities and they're staying in homes, but they're staying for longer than they would have in the past. Makes sense to me.

I think that could have some legs. I don't think that's like you said forever, but I think that kind of thing could have some legs where people realize maybe this is just easier than getting my family of five on a plane. Yeah. Earlier in the show, I spoke about Facebook and randomly, I probably should have saved it for this. Somebody tweeted, online now accounts for almost two thirds of advertising and two landlords. Google and Facebook control 60% of worldwide digital real estate. How crazy is that? These charts from the economy is showing the ad spending in the United States by medium. Print obviously just wiped off the face of the planet, pretty much. Television is drinking, online exploding. Hence, Facebook and Google, Amazon is creeping up.

obviously there was a huge news this week about companies boycotting Facebook. If I had to guess, not really knowing much at all about the topic, I would say that this is a very temporary ban and they're going to be back because that's the best platform. It's a PR stunt, it feels like to me. I mean, you have two billion users on Facebook. Where else are you going? Right. So that's why this honestly is not that surprising me because you have two billion people on Facebook and how many people use Google every day. It kind of makes sense. The thing is, why does there need to be another search engine? Doesn't Google have an impenetrable remote, Or maybe for now, maybe they do for now.

I feel like Facebook is probably susceptible, but is there really going to be another social media platform that... Here's your thing that breaks these up. Eventually, they're either through their own choice or through the government, Amazon's going to spin on AWS and Google's going to spin out YouTube and Facebook's going to spin out WhatsApp or Instagram. That's what's going to have to happen. These are going to have to be standalone businesses again.

That's how these companies don't dominate for the next 100 years or whatever. How does that sound? Yeah. Can you see some of these firms getting ahead of that and saying, You know what? We don't want to go through all the regulation and all these lawsuits and stuff. Let's just do it on our own. Doubtful. Okay. I guess that's giving them a lot of credit. So a number of people last week asked for our thoughts on tips because we talked about Jeremy Siegel laid out this nice case for

inflation picking up because of spending. So people said, do you then think tips are a good investment option because tips protect against inflation? And people said, how do they work? So I wanted to give a little quick primer on. TIPS, which is Treasury, Inflation Protected Securities, which actually in the U.S. don't go back that far. I think they were started in the mid-90s. 97? I think in the U.K., they go back. Wait, were you better off investing $10,000 in 1997 into Tips or Amazon?

It's probably pretty close. Does Amazon count in the inflation statistics? No, no. Better pull up shadow stats. So tips pay interest just like a regular bond. So there is an interest rate right now. It's nothing. I think it's probably negative. But the thing that happens with the inflation is you're pretty much. principal gets adjusted. So if you buy a bond and you buy it at par, you'd pay $100 for a bond.

Let's say you had a yield of 1% on your tip. Inflation is 2%. So you'd receive $1 every year in income. In your new principal, if you had 2% inflation, it would be $102. So the next year, you'd earn 1% on $102 instead of $100. So adjust your principal up. And then at maturity, you'd receive that new adjusted principle. So it could go up very high and then you'd receive a kicker in or down to. Yeah, or down. But the thing is, at maturity, you'd receive that maturity, you'd receive either par or it's the higher of the two values. If there was massive deflation, you wouldn't eat that. You'd eat it on your yield, but not on the end. So, I mean, it's one of the most unique assets there is and that it's a true, real asset that protects you against

inflation. Adam Collins has done some really good work in this. Well, into this and the show notes of people that want to learn more. But he said, the most important thing to remember about tips is that they protect against unexpected inflation. Expected inflation is built into the yield of a regular treasury bond. So you could look at something called break-even, which is a difference in yield between just say nominal treasuries and tips. So it's all right there. There's no free lunch, but it's an interesting asset class. And I think that if there is inflation, one that's going to become very popular. That's why if there was that Siegel thing where you had this huge pop, tips would do really well because I think at that point it's not priced in,

obviously, right? I just think it wouldn't it be great if you could have different tips bonds depending on the type of inflation? So we've had this thing in recent years of inflation of things you need and deflation of the things you want. Would it be great if you could bet on a tips bond that was just health care costs in college inflation? I bet you there is a market for that. Obviously, not tips, but I bet you there is a betting market for prices of future goods. Because then you could also bet on deflation in college costs. Couldn't we see a deflation in college coming from you have to go online? Is there any way for the average investor to short the price of college, short the future of colleges? A school yesterday, a D3 school said they're dropping their tuition by 15%. It's so funny, we have a lot of

local colleges here who are in their board meetings, are talking about raising tuition right now, which seems unbelievably just so out of touch with reality of what's going on that they would try to increase their tuition prices while everything is having to go online and people aren't coming there. And that would be a bet I would be willing to make the college cost to go down in the coming years. Speaking of, what are your thoughts on maxing out investments in a 529? So far, inflation and education other than health care is much greater than the rest of the economy. With COVID, I believe it's like this person knew this segment was coming. I believe education institutions are rethinking the value they provide and the money they charge. Is it possible the rate

of growth of private tuition will permanently trend downward. Finally, why is Derek Thompson Ben's boy? Did you write this? So let me answer the last question first. So Derek Thompson is a fantastic writer for the Atlantic. Ben was on to him early. I think Ben bought stock back in 2013. I bought him at the IPO. He's been one of the best people to read in terms of the coverage of the coronavirus. That's one of the hard things about planning for your 529. What is the growth going to be? and what are the, we've talked to our financial advisors about this in the past. How do you plan out for something like that? I don't think you can perfectly plan out for something like that in terms of what is the growth going to be every year. It's tough. I think this is the type of thing where you don't need to set this in stone the day your child is born. You can make adjustments along the way. In fact, we might do a full episode on this in the future. Stay tuned for that. But I don't really have strong thoughts. I think that the idea that college is going to increase in prices the way it has in the past, to me, that's impossible. That's I'm not really, that's not on my radar that we're going to be paying $300,000 for our kids' education a year. My biggest advice would be to start early and work your way up in terms of your savings rate.

I mean, try to start when the kid is born. That would be my biggest piece of advice. Next. All right. I'm a retired and maintained a diversified 60, 40 portfolio, but worried that interest rates are so low that I'm taking excessive duration risk for virtually no return. I wonder if I can't accomplish the same thing by just laddering CDs. So instead of owning bonds, could you use a laddered CD approach? Yes, you can. I see no problem with that. The biggest issue there. The tradeoff is obviously liquidity. Liquidity, yeah. You don't have the ability to rebalance if and when you want to. The thing with CD is you could pay an early penalty. You just have to take a little bit of a loss. So if you wanted

to get out early, the thing is it depends if you need that money. So if you're retired and you need that for spending purposes, a lot of people spend from their bonds when stocks get shellacked. So it depends. Yeah, it's a liquidity thing. Or the other one would be a lot of people are thinking, why don't I just keep it in cash now instead of bonds because rates are so low. So I think that's an option, too. All right. I just watched the video post about the company public, a platform that aims to educate novice investors from making easily avoidable mistakes.

A noble cause and as retail investor myself, I love the sentiment. But generally speaking, the markets need losers to create winners. Every seller needs a buyer, every savvy investor needs a greater fool. All right, this keeps going. What's he getting at? Okay. What stops platforms with benefits like this from changing actively managed customers? And he's basically saying, is this the future of the industry?

And if so, does that change the dynamic? of markets. Does taking mistakes out make it harder to beat and that sort of thing? I look at this. So this video he was talking about was actually a video that Josh Brown did on our compound channel. And Josh did this video with Janik Maling, who is the founder and CEO Public. It's actually a newer one to me, so I hadn't heard much about them before Josh talked to him. And side note, Josh is taking these interviews that he's doing and putting in our compound podcast channel as well, which I guess maybe it's possibly, and I will be on in the future, but he's also doing his own weekly podcast on there talking

by himself and subscribe to that. But Josh is probably one of the few people that could hold one of those himself, don't you think? I don't know if I could handle doing that in my own. I actually told him that after I listened to it, Bill Simmons and Ryan Rusillo were talking about their journey in podcasting and how difficult it is to do a show on your own. And I thought about, actually you and I spoke about this a few weeks ago. Well, Bill Simmons did an intro and whatever he was doing. It was just 10, 15 minutes by himself. And it's a lot harder than it sounds. So yeah, I think that Josh is uniquely suited to do this by himself. So I agree. Yeah, give that a listen about this new public platform. But I would just say we talked about this

a few weeks ago. Speculation is as old as the hills and changing human nature is going to be really hard. So even though you can change a few people, I think you're never going to take that speculation out of some people that willingness to gamble. And I think this whole period has shown that there's a lot of people that are willing to gamble. So I think there will always be people who are willing to take the other side of your trade, whether it comes out right for them or not. All right. Recommendations, I'll go first. Bethany McLean and Joe Nocerra. I believe that I actually said that if they're writing the book for the COVID economy book, and I think that he was my choice, was he not? Yeah. And I actually started reading a piece of the action from your recommendation.

See, sometimes I do listen to you. He's very good. It's a great exploration of the middle class, and I had never even heard of that book before you mentioned it, and it's really well done about how we became a consumer society. So I highly recommend piggybacking your recommendation. I agree, a piece of the action. Okay, every Friday, financial advisors, listen up. Every Friday, Tadas Viscata is going to be sending the five best links for financial advisors, which is great. He's been doing this internally for us for a while. He's going to share this with the public. And it's just five. It's great. There's not 20 links. It's not overly burdensome. So it's a really well done newsletter. And I always find something that I hadn't read throughout the week. Yeah, we will look to the other show notes.

Okay, I'm back to reading, which feels kind of nice. Somebody recommended, I can't remember who. excellent recommendation called The Great Inflation in Its Aftermath by Robert J. Samuelson. I don't believe he has any relationship to Paul Samuelson. And he was a writer for The Washington Post. So this is one of those rare stories where the information is rich, but the writing is superb. So this is just a pleasure to read it. The first chapter is one of like the best things, one of the easiest readings I've ever read. So so good. I just want to share. Is it about Germany, Weimar or is it about the 70s? No, no, no, our inflation. Yeah. Okay. It's about the 70s. Correct. In the first decades after World War II, government and big business joined in an

unwritten alliance. Government promised to control the business cycle to minimize or eliminate recessions. Big companies pledged to raise living standards and provide economic security for workers, safe jobs, adequate health insurance, and reliable pensions. But when inflation overwhelmed the government's commitment to manage the business cycle, the implicit social contract broke down. The 1980s became a watershed in corporate practices. If companies couldn't rate prices, they would and did cut costs, layoffs, restructuring, and buyouts for early retirees became more widespread and acceptable. Capitalism, a word that had essentially disappeared from common usage in the early post-war decades, re-entered the popular vocabulary. The result was a

paradox. Although the overall economy grew more stable after 1982, individual sense of insecurity increased because companies were less bound by the norms of earlier post-war decades to preserve jobs and shield workers from disruptive changes. The new capitalism controlled inflation in part by breeding anxiety that kept wages and prices in check. It also tolerated greater inequality, grown gaps between the rich, the middle class, and the poor. So the 1970s basically screwed everyone. So, I mean, the book is basically about how important the rise and fall of inflation and disinflation were versus everything else. That was the dominant theme for the 70s, the 80s, the 90s, and the 2000s. One more piece. He said, we are losing a crucial

chunk of history. Indeed, its common creates bad history. I'm sorry, its omission creates bad history. Consider the dueling explanations for the economy's impressive performance in the 1980s and 1990s. Conservatives remember the 1980s nostalgically as Reagan's heroic moment when he cut taxes, reduced government, and revived the economy. The trouble is that much of the story is a myth. Lower tax rates occurred because budget deficits increased and some tax loopholes were closed. Meanwhile, liberals credit Bill Clinton's policies for the strong economy. of the 1990s, but Clinton's policies were the opposite of Reagan's. He raised taxes and curbed budget deficits. Both stories can't be correct, and in fact, neither is. Pretty good. I highly recommend

this. It's excellent. That makes sense why so many older investors were scarred and always looking for the 70s to come back again, even though they never did. Correct. It makes sense that that was their experience. It was the defining experience of a generation of investors. And the thing about inflation, unlike other economic events or other financial events that are just contained to the financial services, for example, is that inflation touches everybody. And it does so in such an erratic way where month to month, you have no idea what your bills are going to be. And the havoc that that wreaks on society across everybody is really just something else that we haven't seen. Thank God. I started watching the Eurovision song, whatever, that Will Ferrell movie.

How bad is it? I didn't even try. I watch 15 minutes. I don't love, so I love Will Ferrell. I think he's like the funniest guy ever, as everybody does. I don't love those movies, those Will Ferrell-style movies. For example, what's the basketball one? Well, then there was the ice skating one. The Blades of Glory did not care for that one. It looked kind of like that one to me. The basketball movie, I'm drawing a blank.

Yeah, it wasn't that good. I gave it 15 minutes. I laughed twice and I was like, I just, I don't need an hour and a half of this. I watched the vast of night. My dad was like kind of pounding at the table on this. he really enjoyed it. It's an Amazon movie. And I get why he liked it. It takes place in the 1950s. It's an alien type movie, not gory or anything at all. And it had sort of a Twilight Zone feel to it. And it was sort of a throwback to his era. But the first 20 or 30 minutes were pretty slow. But then it picked up. And the acting was incredible. The story was great. The writing was great. The music was great. So I understand why I think a lot of people are going to like this, probably people from my dad's generation. It was just a little bit too slow for me. me. So if you're an older listener, I think it's probably worth checking out, but I didn't love it. Okay. You know what my kids loved this week? The floor is lava on Netflix. You've obviously

heard of that game before. My kids, I don't know how every kid throughout history has ever... I haven't. You play like you're on your couch and you can't touch the ground, otherwise it's lava. Got it. Okay. You never play that as a kid? I don't think so. Somehow I played it as a kid. I don't know how my kids know it, but they've always played it. And there's a show on Netflix. It's a game show called the floor is lava. They set up rooms like an actual room and people have to jump on these things and not fall in the quote unquote lava, which is just orange colored water. And they don't have like American ninja people that are really athletic. They have just regular normal people that fall and hit their face and stuff. And my kids binged probably 10

episodes last week. I thought like, oh, this is the dumbest idea ever. And then we got into it. And my wife and I probably liked it more than the kids. But I wouldn't recommend it, but it's pretty entertaining. We got into the missing the last couple of weeks on Stars, which is a show from like 2018 or 17 that we just missed you pay for stars it got thrown into our bundle i trust me wow things must be good huh triple play i mean i thought it was the depression this guy's got stars i told you i'm the last man in america who's ever going to cut the cord so we watched the first season and it came out like 2014 or 15 it was pretty good it was about a detective who solves missing child cases but this second season i've never heard anyone talk about it it was amazing okay because nobody has stars so for the

three of you listening. Yeah. Stars has good movies, too. No, Stars is great. This show had like four or five amazing twists in it about a missing person's case. It was really good. I'd recommend. And finally, the last couple weeks, my nightly watch has been the Gary Shandling doc on HBO.

I never saw the Larry Sanders show. I didn't either. This doc made me want to watch it. Everyone seems to think that he's like one of the biggest comedic geniuses of all time. And Apatow just like worships him. He died a few years ago. they did this doc after he died. It was way too long. It was like four hours, but I really enjoyed it. They had a lot of good scenes with him and Seinfeld, but him and Seinfeld are like polar opposite people. And it got me thinking, so everyone assumes this guy's prevailing wisdom was he's a genius. But he was also like, he suffered depression. He was neurotic. He was at times hard to work for. It made me think, if you get to that level of success and people think that you're so legend, is it almost impossible for you to be normal and not be like, so Michael Jordan was a jerk. And Steve Jobs was also an a hole. Elon Musk is insane. Isn't that more of the norm that those people are going to be, there's

going to be something wrong with them to get to that place? It's basically impossible for someone to have that much success and be normal. Well, Warren Buffett's personal life, his marriage was incredibly bizarre. Yes, the personal life stuff of that Snowwall book was quite bizarre. I just think it seems like if you're going to reach that level of success, something has to be a little off with you. I wear Vex. Yes. All right. You're ready your first. Animal Spiritspot at gmail.com We'll talk to you next week.