Animal Spirits Podcast - Inflation Ahead (EP.152)

Episode Date: June 24, 2020

On this week's show we discuss Jeremy Siegel's inflationary scenario for the market, why it's time to stop complaining about the Fed, why poverty in the US actually improved during this crisis, is this another bubble, the garbage portfolio, why this is such a difficult time to invest as a retiree 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

Today's Animal Spirits is presented by Y charts. On today's show, we are going to talk about inflation, specifically some predictions from Wharton's Jeremy Siegel. And one of the reasons that we like Y charts specifically is not only the fact that they have all this functionality to search data, but you can also go deeper into the data and export it into Excel, which is something Michael and I like to do because sometimes we like to slice and dice the data even further. And so we're going to get into some of that on terms of World War II and inflation and some of the things Jeremy Siegel is seeing in the next two to three years. So stick around. Again, we're presented by Y charts. If you go to Y charts, tell them Animal Spirits sent you. Get 20% off your first

subscription. 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 Holtz 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 Ritthold'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 positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben on Barry's Masters in Business last week. He talked to Jeremy Siegel, author of Stocks for

the Long Run and a couple other books. By the way, I think I'm listening to too many podcasts because you sound like you're drunk right now. You sound like you're talking so slow. Okay. You need me to speed it up a little bit. Please. It also could be because you are drunk on pain killers. This is my pizza game or flu game. I had a kidney stone Sunday night. Holy cow. And so you had to go to the hospital. I woke up at 12.50 a.m. with a pain in my side and I just, I don't know what it was. Long story short, it was horrible. Did you think it was like your appendix? I thought I was dying. Like, I was kicking and screaming. I had no idea what to do.

Okay. And they basically gave you some painkillers and sent you on your way. That was long and the short of it. I was a huge sigh of relief when I found that I was just a kidney stone because obviously dark thoughts go through your head. It was not fun. I'm on the bend. Okay.

Until the kidney still one goes away. Yeah, it's still here. Anyway, like I was saying, could you please speed it up? All right. I'll see what I can do. So Jeremy Siegel talked to Barry and he laid out an interesting scenario for the market over the next few years. So he talked a few times about how.

all this stimulus is just, this is something that everyone's talked about, but he put a different spin on it. So you and I talked about they should sell bonds that could be used for this COVID thing. When we talked about that a couple months ago, we said, what if they did something like war bonds? He made a good point that during World War II, the U.S. government sold war bonds to households. And it's kind of crazy that they basically got the public to fund the war. Now it's the Fed buying bonds and households are getting checks. So this is almost like putting your foot on the gas twice in terms of this stimulus. So back then, they were taking money out of households and putting it into the government basically

to fund the war. Now it's the Fed taking over and the households are getting money. So he's saying because of all this money going to households and we're going to get into some of what that is meant for poverty later in the show. But he thinks that inflation is a risk that is on the table now that hasn't been in years. So he said over the next two to three years, we could see something in the range of 10 to 15% inflation, total. And so that would be, he's saying not hyperinflation, but two, three, four percent inflation, maybe 5% inflation. And that would effectively wipe out, if we got to 15% inflation over a couple of year period, that would effectively wipe out $3 trillion of that stimulus in terms of people always say who's going

to pay for it. That's what would happen. Nobody, all of us. Well, he says the people who would pay for it would be bondholders then. So if inflation wipes out $3 trillion of that debt, on a real basis. It's the bondholders who accepted these ridiculously low yields. And so he said in that scenario, interest rates would go to three to four percent maybe, which still doesn't sound that high historically. And then they would level off and we'd be back on the current trend of whatever. That would be interesting. Just the general rising prices because right now, if you see like where is their inflation, it's health care, it's colleges, it's everything that we've been talking about. But a general rise in prices hasn't really materialized in a while.

wouldn't this be one of the best case scenarios? Because when people predict inflation, a lot of times they don't really give a reason for it. So he's saying the reason would be there's going to be so much money that these households are going to want to spend now that they've repaired their balance sheets that when we get across this bridge, whenever that is, there's probably going to be a boom. And he's saying that's going to lead to inflation. We're going to get this thing where it's like the python eating a rabbit or something where it works its way through the system. And then he says, by that point, people are going to be expecting hyperinflation. So wouldn't that be a our scenario where we get this huge uptick in inflation, and then it just sort of levels off. It just takes it away. And so I looked back, so Whitecharts has inflation data going back to 1914, and it's 12-month year-over-year, and it's in a rolling period for that. So I looked back going that far. It's pretty rare recently. Going back historically, it's not that rare to see above 4 or 5% inflation. So since 1914, it's happened roughly 1 out of every 5 years for above 5% trailing 12-month inflation. It's been over 4% roughly 1-3rd of the time. But since 1983, inflation has only run above 5%, 4% of the time. And since the year 2000, inflation has only

been above 5% over their 12-months, 1% of the time. So this is something that we, in terms of newer investors or people who just in the last 20 to 30 years, maybe even 40 years, have not dealt with at all. I just think it would be interesting to see what the investor sentiment would be if inflation did rear its ugly head and people are saying, okay, here comes the 70s again, and then it didn't happen. How much of a head fake that would be? I don't think inflation is really on anybody's radar. But Columbia University did this thing talking about poverty rising and they say that poverty, they're expecting it to rise to 12.7% this year up from 12.5%. So really no change at all, which is remarkable considering that the economy was shut.

down for the better part of four months. They said that without the CARES Act, it would have reached 16.3% the people living in poverty, which would have been 12 million more people. So they showed this chart with and without the CARES Act. So they're effectively saying this stimulus has decreased poverty in this country, which how many people would have ever figured that would happen during a depression scenario where poverty actually improves? That kind of gets to Siegel's point of there's all these anecdotes that they showed in this was a New York Times story talking about this research from Columbia. But people are saying this is the first time in years or decades that I actually have a little bit of money left over after paying all my bills. Now, I keep coming back to what is going

to stop people from saying, okay, you've printed all this money. And let's say we do get like the Siegel thing where we have a little bit of inflation. And again, there's precedent. So here's the numbers after World War II. And I think that this is where Siegel probably gets his idea from, is World War II. So inflation was running at 1.7% in 1946. By 1947, a year later, it hit 19%. Then by 1949, it was back under 1%. Wait, hang on. I have a question.

From 46 to 47, it went from 1 to 19? Yes, in one year. So why did that happen? Because the war was over. People came home and they were given all of this money to get their life started and spend money. Yeah, you had this big boom working from the war of people coming back and spending. And yeah, then within two years, it was back under one.

So you had this initial boom from the war in this pent-up demand and spending, and then it went away. And I think that's kind of what he's framing his scenario on is we get this one-time big jump in inflation and it brings you up a level, and then it levels off. So the $600 stimulus relief, whatever you want to label it, is set to run out at the end of July? Or does it go through the July? I think sometime in July. But doesn't this set up the scenario for this huge group of people who, I don't know, call it the bottom 20% and say, why can't you just?

do this for us all the time. And what's to stop a politician from running on that platform and saying, you know what, you're right. If we can help bring people out of poverty and it doesn't lead to these nasty scenarios of hyperinflation or something, why wouldn't they do this? You could so see the other side going nuts. Oh, sure. Why should we pay for this? Yes. You know? Yeah, of course. But in this grand experiment, we've seen things happen that people did not expect at all in a number of different areas. And I think that's one where people are going to say, all right, well, if this doesn't mean the end of the world with our debt, then let's do it. Like, why worry about the great grandkids when there's people

suffering now, I guess is the point? The current $600 a week is replacing more than 100% of lost wages for two-thirds of American workers. That's a lot. And so Republicans want to end this outright when it runs out and Democrats want to extend it, but reduce the benefit down to $400. So $400, this is kind of interesting. this idea. It would only be available when a state's unemployment rate exceeds 15% and it would phase out entirely after it falls below 7%. So there is some sort of end game in mind. See, I think that's actually a pretty intelligent way of doing it. Put some rules and boundaries on it where when things get really bad, then this kicks in and it's like an automatic

stabilizer and when things get better, then it goes away. I think that's fairly reasonable, right? As a shock absorber? You would say that people who are free market people would say, this is not healthy. The more that you distort and intervene in markets, the worse off eventually you are going to be. And I don't know. This isn't market. So this is people. It is markets. The economy is the biggest market. Yeah, but I mean, the free market people, like, there's no such thing. People who have that idea just need to let it go because it doesn't exist. There's always going to be ways that the government is doing stuff. So why not do it in a way that actually helps more people, I think? Hard to argue with that. So the central bank has deployed 250

billion dollars to buy outstanding corporate bonds. I don't know why they're buying outstanding bonds. I understand to buy bonds directly from the issuer to provide liquidity, which they are going to be doing that as well, $500 billion for newly issued corporate bonds, wow, which is backed by $50 billion from the Treasury. Some big numbers here. They've been buying ETFs at a pace of around $300 million a day. And sounds like paying brokerage fees too. So someone broke down that they paid $300 grand in brokerage fees. So obviously the Fed does not have a Robin Hood account yet. But I get why it's kind of fun to debate this stuff and talk about should the Fed be doing it? Should they be doing this a different way? Is there more they could do less they could do?

Don't you think especially for investors? After a while, you just have to move on and stop worrying so much about what the Fed is doing and just say, you know what, this is the playing field. This is the hand we've been dealt. Instead of complaining about the Fed all the time and writing petitions to get the Fed to lose its charter or something and stop buying corporate bonds. I just, I don't see the point in after you've complained about it once, just move on and say, okay, this is the way the market is going to be and we have to accept it. Nobody thinks like that. People should think like that. That's a nice version of the world. Well, I guess I just will accept the things that I don't like. No, nobody behaves that way. It's just control.

You can control and stop blaming everything on the Fed. Like, I get it. There's investors out there who are mad that they didn't get to buy prices at lower levels and distressed asset. I completely understand it. Their alpha has been taken away by the Fed's beta, basically. But after a while, you have to move on and say, you know what, if this is going to be the way the markets are going to act because the Fed is a player, then I have to just accept it and invest with the understanding that the Fed is probably going to do this stuff from now on. Have you ever heard of behavioral economics? No. Please. People are not that rational.

Okay. But for their clients and for their asset dollars, you'd think that it's not even more about rational. It's about self-interest. Well, this is a separate argument entirely, but most of the people that are Fed haters are not managing money. I mean, some are, but most of them are not. So this is kind of a wild chart. If you look at LQD's total assets under management, it was hovering at around $30 billion for the last few years. It hit a high of $39 billion in 2017. Right now, it went from 30 billion or under $30 billion up to 53. Wow. From the Fed. That's wild. It was a fund that was down 22% or something, which for higher quality corporate bonds is a huge,

huge number in terms of a drawdown. Now it's up, I think, what, 5 or 6% this year? You're right. It was down at the lows. It was down 17.5% on the year. Now it's up 6% on the year. Unbelievable. Here's what the Fed is telling the government. They are saying, we're going to keep doing this, and they're just saying, you have so much more capacity for fiscal stimulus. Why don't you use it? That's basically what the Fed is trying to show. them. And they're just not getting it. Right? I think that's what the Fed has been doing for the last decade, basically saying you're not using your fiscal capacity as much as you could be to help

this recovery get even better. One of the reasons why I think the Fed was buying ETFs instead of individual bonds, and now they are buying individual bonds, is that with an ETF, they're not necessarily picking and choosing who they're going to help or not help. When they're buying individual bonds, well, how come you bought bonds in that company, an hour company? Right, but aren't they buying it using the index guidelines? They've created a broad-based index, yes. Right. Like I said, I think that made more sense to buy directly from the issue or then on the secondary market. Who did that help? I guess people that were trying to sell. I don't know. I agree. They're just unloading everything at this point. And yeah, you're right. This one probably doesn't make any sense.

But again, I just, I don't have the energy to like keep debating like the Fed should and shouldn't do. And it's just like they're doing what they're doing. Now let's invest accordingly. Well, Jim Bianco said that. He's one of the few who has been critical of the Fed for a long time now. And I don't know, probably two weeks ago. He's like, I underestimated the power of the Fed and buy, basically. He said on CNBC, I basically changed my mind. So yeah, kudos to him on that. So speaking of inflation and where it could come from, Brian Moynihan, the CEO of Bank of America, said the average balance of smaller accounts, those with less than $5,000 was up 30 to 40% at the end of May compared with 12 weeks previous. I'm not sure why they're changing. choosing 12 weeks previous. But I guess before the U.S. went into lockdown. That's why they're choosing that. So maybe if this money, obviously, this is not a cash on the side of that thing. This does not go into the stock market. For these smaller accounts, this is money that ultimately gets spent and

goes into the economy, perhaps leading to a little bit of inflation, or maybe a lot. Right. It's hard for people to believe that this could all come back. But if that does come rushing back into the economy, that's exactly what it could do. I forget who tweeted this. Market cap of 100 largest U.S. companies as a percent of all non-U.S. developed markets has reached, this was Jeff Wenninger. It's over 100%. The only other time this happened was in the dot-com bubble. So again, the 100 largest U.S. stocks are now bigger than all of the rest of the world combined. I did a little update on the big five stocks, Apple, Amazon, Microsoft, Google, and Facebook. So they just crossed $6 trillion for the first time ever. They're bigger than the next 24 largest S&P stocks combined.

which is Berkshire Visa, Johnson & Johnson, Walmart, MasterCard, J.P. Morgan, Procter & Gamble, United Health, Home Depot, Intel, Nvidia, Verizon, AT&T, Bank of America, Adobe, Disney, Netflix, PayPal, Exxon, Coke, Mark, Cisco, Pfizer, and Pepsi. Don't you think it's always like that, though? No. You think this is that far out of the realm of what it usually looks like? Yes, I do. It's a little bit bigger, but I don't think it's that much bigger. I think it is. So these five stocks were 10% of the market five years ago. Now they're 22%. Well, Bianco showed that chart a few weeks ago. The top five stocks are way larger than they normally are. I guess I'm looking back historically and it was at certain periods it was even bigger than this. You had one example. I think it was AT&T and Ford were like 18% of the market. But I don't know that this has to end badly. Like who says? Right. So Michael Santoli, who always has a kind of a good middle ground position on these things, talked about how there's

all these people calling this a bubble. I think GMOs, Jeremy Grantham again, called it a bubble. Santoli said, make no mistake, current evaluations appear aggressive, yet there's a big difference between a market price for subpar long-term returns that's susceptible to some downside gut checks along the way in a genuine bubble that distorts capital allocation and foretells profound losses for years to come. I think that's the camp that I would fall in that, yes, there's been some returns pulled forward and we're in a really tough position. But trying to say that this is the dot-com bubble, I think does a disservice to the fact that these companies are so big and powerful and so and profitable. Yes, and so much better than they were before. Okay, here's some numbers.

Grantham said, everyone can see and feel that this is different and can sense the bizarre nature of the market response. We are in the top 10% of historical price to earnings ratio for the S&P on prior earnings and simultaneously are in the worst 10% of economic situations. That's a really good quote. I think the easy hole to poke there is that this really horrible economic situation is temporary. Yes. Here's the thing. Let's say we somehow have a perfect handoff and we get the vaccine. and things go back to normal. Can we effectively call this, doesn't that almost end up in a 1987 situation where it's a blip on a longer term potentially? Barry and I did that video a few months back where he was arguing that the bull market is over and he didn't really believe

it. We were just having a friendly debate. And he was laughing and chuckling, but maybe... Possibly right, which would be crazy. No, no, hold on, hold on. In my opinion, wherever the market goes from here, that was a bare market. That absolutely was a bare market. Like, history will not change that. It might have been the quickest bear market ever, but stocks fall over 30%. Right. The same thing happened in 1987, but people still say that from 1982 to 1999 was the bull market. I mean, this is semantics here. But could we potentially get in a period like that where we had another five years of decent returns and then you add them out to the previous 10? Why not? I don't know. Did you see this chart from Robin Wigglesworth showing earnings for

U.S. technology stocks compared to the world ex-tech. They were basically both the same from 1975 to 2010. And then in 2010, we see a huge, huge decoupling. So again, this is not price to earnings ratio or anything like that. This is actual earnings. So they are dominating not just the market, but they are dominating business, obviously. The fundamentals have actually backed up a lot of the returns that they've had. That's what makes it so difficult for people, right? You could say that fundamentals, the actual, the results have outpaced expectations, which is insane considering how high expectations already were. Yes, it is hard to believe. So here's the other side of this, and this is just more of a shorter term thing.

So there was a piece from Man Group, and they looked at this garbage portfolio. And so they defined this garbage portfolio by companies with a credit default swap of more than a thousand basis points, meaning they have a poor credit profile. And they looked from April 1st to today. They did this garbage portfolio versus the rest of the U.S. stock market. And the garbage portfolio has outperformed by 10 times almost. I'm sure it's all of the airlines and cruise ships and those types of things. This is another wild chart. Well, I guess what I would like to see is, yes, it is.

This is obviously the rubber band snapping back. What did the garbage portfolio look like in the bare market? It probably felt 70%. I bet year to date it's probably still. below, even though it's outperformed by- Oh, for sure. Yes, it is pretty wild. This portfolio is probably still down 40 to 50%. But it's one of those things where it's hard to believe that the rest of the market has finally snapped back. I guess it could have only stretched so far. And you talk about the rubber band snapping back, but it isn't just these big

companies anymore. These other companies are trying to play catch-up as much as they can. That 100% right, it's easy to overlook the fact that it's not just the big five. So if you look at the NASDAQ equal weight, for example, that's also, I don't know, time high. And remember the market two weeks ago that downed 6% day? That was a huge down day. Like, that's a top 30 worst day ever. And the market just digested it and moved on. Yes. And it's almost forgotten at this point. By the way, apropos of nothing, Spotify is up 32% in the last five days. Oh, okay. Are you a shareholder, sir? Yes. You told me to stop patting myself in the back for that one. So I wasn't going to mention it. But I did? Yeah, I think so. All right. Take a lap.

All right. I think it's possible. They try to like take over the audio world. Obviously they are. They signed Kim Kardashian and Joe Rogan and the ringer to exclusive deals. I mean, it seems like they pop every time they sign one of those. I think they could be up at least 10 basis points if they picked up animal spirits. At least. This is the oops of the year. Did we talk about this fidelity report last week or was that this week? I can't remember. I think it's just this week and we both wrote about it. Okay. So there was a report in the Wall Street Journal saying that, this data was provided by fidelity. Nearly a third of investors, ages 65 and up, sold all of their stock holdings sometime between February and May. Again, nearly one third of investors ages 65 and up. And this was a story that was all over the place. I mean, this was pretty damning. It went pretty viral, social media wise. Yeah. And so there was a correction that's pretty bad. Four days later, basically. I think I'm just going to chalk this up to a miscommunication. somebody made a big mistake. I'm going to just assume this is not malicious or they were trying, but the correction is really bad. So what actually happened was of the 7.4% of investors aged 65 and up

who made a change, again, of the 7.4% of investors age 65 and up who made a change to their portfolio, 18% moved some money out of stocks. I honestly don't understand how the data got that jumbled, but they reported, of the 7.4% of investors age of 65 and up who made a change to their portfolio, a third moved some money out of stocks. That's the final thing. So of the 7.4 a third. So it's one third of 7.4%, which is a very small number. Basically 7% of all investors at Fidelity made a change in 18% of total moved some of their money out of stocks. So yes, a fraction. This was a bad one. On the other hand, so the other part of this article that I thought stood out to me is just they interviewed a lot of

retirees who are talking about, who are thinking about this and selling their stocks and what do I do. And I think you could make the case that for retirees, this is probably, if they're looking out over the long term, this is probably one of the hardest market scenarios in terms of long term, call it two to three decades out into the future that they've ever experienced. Because interest rates are so low, valuations are higher than they've been. I just think there's no easy answer. in terms of this is what you should do. This will make your life easier. It's basically accept little risk and earn basically nothing or accept more risk and put your portfolio at the whims of the stock market. And still earn below average returns likely. So in Siegel and Barry's

podcast, he said, I think 7525 is probably the new 6040. Honestly, for people who need to still see some growth above the rate of inflation, that kind of probably makes sense. Because if you have your money in just high-quality bonds, it's just not going to cut it these days. Your real returns are going to probably be negative, especially if we have some inflation. So you have to be willing to accept some risk. There's a lot of people just don't want to do that. It's a really definitely as a retired investor. It's a tough place to be. To that point, let's say that a 60-40 portfolio, I'm making up these averages, but just go with it here. If stocks did 8%, stocks were projected to do 8%, and bonds were projected to do 5%.

That gave you 6.8% nominal on a 60-40 portfolio. Now, even on a 75-25, let's say that you've got stocks doing 5%, and you've got bonds doing 1.5%. That gives you 4.1. Well, keep stocks at 8. Let's just say it's just bonds and stocks do okay. But we don't really think stocks are going to do 8%, do we? Let's just say we thread the needle and stocks do the long run and...

Fine, let's just say. By the way, when we're talking about long run, I'm thinking like 10 years. I'm not thinking 30 years, but whatever. All right, so let's just say that stocks do do 8%. Then a 75, 25 would still be below average. It would be 6.4 versus 6.8. Okay. So again, you're pinning a lot of it on the stock market, which unfortunately you don't have a lot of other choices at the moment.

Yes, I was going to make a joke, but I got nothing. maybe this is one of the reasons that a lot of these places are deciding to try to get into private equity. They're looking for something to juice the returns and trying to get retail into that some way. I don't know. It's difficult. I did a interview last week with CNBC India, and this was kind of interesting to me. They asked about people getting into day trading and how much of a big push that's been. And it sounds like it's not just a U.S.-centric thing. So someone sent me a story from there saying that India's lockdown has led to more than a million new stock traders as well. So this is actually a global phenomenon of people being

bored and getting into the stock market for the first time. So their brokerage accounts have seen, I think it was 1.2 million new accounts in March alone for trading. This is not just a U.S. theme. This is global. Did you, I'm taking a hard left here. Are you done? I'm sorry. I saw somewhere, I don't know if it was on Instagram or something that's saved by the Bell is coming back? Okay. I did not see that. Were you a saved by the bell person? I assume you were. Of course. That was right in my wheelhouse. Okay. So love Saved by the Bell. Like I said, who didn't? This blew my mind. The show was on. It first aired in 1988 and it was off the air by 1992. Yes, but it lived on TBS for another 12 years or something probably. Correct. But this is kind of interesting.

So the first season was Good Morning Miss Bliss. I didn't realize that's what it was called. Did you? Yeah. And the original one had a bunch of different kids. in it too. Like that guy, Mikey and some other people. So there was four seasons, but here's the thing. There was like a bazillion episodes. There was 16, 18, 26, and 26 episodes. That's why it felt like it was on forever. And then there was a special Hawaiian style, obviously, with Kelly's uncle. And then the college years was 19 episodes. That was pretty bad. And then that weird wedding in Las Vegas. Okay. I watched the college years. I'm not going to lie. By the way, what are they going to do, though? How are they going to do a saved by the bell? Like, I think I'm good

on that. I don't need to watch that. It's past me, but I'm sure. Zach Morris or A.C. Slater will be the principal now. And then I'm sure they gave someone enough money to come back. You know what is not aged well or who has not aged well? Screech. Yeah. Okay. Of course. Yes, he got canceled. All right. Study of the week. So some researchers from Ohio State and University of of Arizona looked at hedge fund fees from 1995 to 2016. These numbers are pretty wild. Hedge fund investors shelled out an average of 3.44% annually in management and incentives fees according to this study. They also find that investors earned net returns of basically 2% a year, meaning they paid $1.76 in costs for every dollar they got to keep. All told,

64% of the excess return of hedge funds in the study went to the managers in form of expenses, meaning the managers kept two out of every $3, basically, and investors left for one. Simon Lack did this thing, the hedge fund mirage, that basically came to the same conclusion that the average money invested in hedge funds did not keep pace with T-Bills or something along those lines. However, I don't think that, I mean, listen, the numbers are what they are. This is insane. Yeah. I can't believe that. And there's still 11,000 of these things. How have the industry not just been decimated? Because I think that the allure of high returns is always there. And guess what? Always possible. There are a ton of hedge funds that have made gazillions of

dollars for their investors. So maybe on average, it's not a good. place to invest. But if you hit it right, and you have to think about a lot of people, this is not a hundred percent of their money. So if they want to take 10 percent to their money and swing for the fences. So I don't know. I think the numbers are what they are, but I don't know that the average is the right way to look at this. I've just never understood because obviously everyone thinks, well, we're going to pick the top quartile or top decile funds. That's what everyone thinks. They assume the will have act. And this is, I'm talking about institutions here. They've never looked at the probabilities and thought, this is such a low probability event.

And guess what? We're not going to be David Swenson at Yale and fund the next big one that's going to hit it out of the park. Let's just assume we can't do that. Like, no one says that. How about this? No one also says, let's assume that we're not going to get in the top quartile. Let's buy index funds. They're not going to do that either. Right, which maybe some of them should. But I mean, you just start to see. The other thing is it took these places a long time to get these hedge funds in their portfolio in the first place. So if they're going to admit, you know what, this didn't work. This was a bad idea. That's basically saying we were wrong. And people have a hard time doing that. So instead they say, okay, the manager was wrong. Let's pick a different one because

there's 11,000 other ones. Next time, we'll find the right one. How can you bail on hedge funds now? Because they've sucked. Yeah, but I'm saying, if you've been in one that hasn't done well, to bail now, given where the market is, that's a tough proposition. That's what people have been saying for the last 10 years, though. Correct. So it's really a philosophical thing of your principles and is this really something we want to be involved in? Obviously, plenty of them do. So Sam Rowe and Miles Udlin do this morning brief for Yahoo Finance, and there was some good stuff in here. They shared data from Nick Coloss, co-founder of Data Track, which showed that every time historically, that corporate profits declined to 5% of GDP, they had a V-shaped recovery. This is a good chart.

So right now, we're still way above, we're still way above average, but I thought this is a good one. But as the numbers come in, they're going to be much lower. It sounds like the estimates are now only like a 30% drop in profits, which seems like it should be way, way lower. I was expecting, I don't know, 70, 80% hidden profits from this when this started. Doesn't that seem logical in March? Some companies are going to be like that. Yeah, but I'm talking about the overall market. I think we've just had so many of the other companies step to the forefront and pick up the slack. It's pretty amazing. So we've been talking for a few weeks or months now about how the real estate market is just being very resilient.

And Bloomberg had a piece about suburban Jersey homes are headed for the biggest price increase since 2005. A lot of this is people moving out of the city, pushing up homes there. So all of these places right outside of New York City are seeing these huge jumps. And they say, I was way wrong on this. I didn't think that people were going to actually flee the city as quickly as they are. And it sounds like it's on higher end homes, too. They said contracts to buy homes priced at more than $2.5 million soared 69% from a year earlier. That increase came entirely from counties just beyond the city. So there are a lot of people who are just looking to get out.

It's definitely happened. And obviously, there's going to be some people who make this decision and it was rash and they didn't think it through. But it's certainly happening. It sounds like New York is one of the place that it's happening from. So there was another one that the U.S. medium home price is now up to 349-9, an all-time high. It's up 3.2% year-over-year, 72% from the bottom in 2000. 11. Another just crazy data point in the crisis. Oh, wow. Wait, home prices bottomed in 2011. That's interesting. I didn't know that. It took a while. It took a few years for home prices continue to fall. I

haven't thought it might even been 2012, but this is 2011. So yeah. Maybe these people flee New York, hopefully it's a good thing where you'll have this another wave of young people coming in and maybe you can get rents and housing for a little cheaper than they could have in the past. So there'll be a natural buyer or renter waiting in the wings, I guess, and people who haven't been able to. I hope that would be the nice handoff, hopefully. Okay. So there was a story yesterday saying the city of Birmingham said that if Alabama football does not happen this fall, local businesses, hotels, restaurants, whatever could lose out on $2 billion in the fall. Oh my gosh. That's Alabama? Yes. So that's got to be a giant, giant portion of that local economy.

that's a college town it's probably everything football is everything to them but isn't this going to be the kind of thing where money is going to be driving so many of these decisions like the new york times had this piece on is college screwed basically and they talked about how the health effects are so high in some of these places just don't know what they're going to do aren't so many of these colleges just going to have to just do it and say risks be damned because the money is just too great to pass up on. Do you think that's what a lot of the decisions are going to come down to? Yeah. I'm curious to see what happens in September. Here's a survey of the week. 94% of school district superintendents representing the country's 13,000 school districts,

that's a pretty good sample size, right? They say they aren't ready to announce when they'll reopen or resume in-person instruction according to a survey released by AASA. By the way, Ben had a twinkle in his eye when he said that sample size. But honestly, this one makes sense to me. If you were a superintendent, would you be in a rush to make a definitive statement right now about school? Well, cases are on the rise. So who the heck knows? September is, it might as well be seven years away. There's very little clarity into what's going to be. That's what I'm saying. What would be the point of putting it out there and then having to backtrack? Why not just say we have five different plans based on what the numbers are telling us

and we're going to implement based on what the data says. And what the health officials say, I see no reason to stick your neck out right now if you don't have to. So I, I mean, is it going to be August 1st by the time we learn about school? I mean, we're getting close. Obviously, it's a couple months away, but I'm not holding my breath. Our governor says that we are going to see in class, they're expecting in class participation to happen. They haven't said what that means yet in terms of, is it five days a week or three or two,

but they're expecting in class. I noticed this recently, haven't confirmed this, but when you return something on Amazon, which we do all the time, I feel like I'm always returning stuff because Robin buys a lot of stuff that we return. They issue like a gift card. They don't actually refund your account. Have you noticed that? Yeah, I guess they just put it towards my credit card and it acts as a credit.

I don't even think they do that. It's like it shows up as like a gift card. I think you can choose. Oh. So anyway, I was thinking, if that's the default setting, how much money does that give them? Has been lost. It's like the Starbucks gift cards that never get redeemed. Yeah.

I think you can choose. Mine credits back to my credit. card. Okay. I got to do that. Yeah. Listen to questions. What do we got? All right. For an investor who is also saving to become a first-time home buyer, what is your recommendation for capital that will eventually be needed to pay for their down payment, say one to three years for liquidity? Many people who might speak with project a higher rate of inflation in the next three years. Is your current recommendation possibly different than what it would be for more normal times? Wait a minute. Wait a minute. Earlier in the show,

we were expecting inflation is not on a lot of people's radar. Boom. This is Jeremy Siegel's granddaughter or something. So, The idea is, if you keep it in cash and there's this huge uptick in inflation and your money's not worth as much in three years, does that make sense to then put it in something riskier? I would say a much, much, much, much bigger risk is you invest it in the market, try to squeeze out a little bit more, and you're down 20% when you need that money. To me, there's only one answer here. It's not a great answer, but it's a high-yield savings account.

And high-yield these days are what, 1.2%. Imagine if you had that house-down payment money ready to go in March, and stocks fall 30%. and your down payment is due and you go, up, I don't have it anymore, then what? Plus, the thing with inflation, it also depends, does that inflation, let's say we get 15% inflation. Does that naturally translate into 15% increase in housing prices? Could be, but not necessarily. So it may not translate into making your down payment that much higher.

Listen, if we have 15% inflation over the next three years, cash account is not going to keep up. Housing prices are going to increase. That's not the ideal outcome. But a worse outcome is you have that fear in the back of your head. and so you buy stocks, and then they're down 20% when you need that money. Yeah, that's a bigger risk. And it's probably a risk that happens more often. I don't want to sell anything in my brokerage account.

However, I'm in the middle of a house renovation. Do you guys know any good way to use an investment account to generate cash flow without selling how to use asset ownership to generate cash when a need arises? So this is like borrowing against your portfolio, basically, without selling. For a home renovation, I would rather link that to my house and take a home equity line of credit or borrow against the house rather than borrowing against my investment portfolio, that personal preference, I think borrowing against the investment portfolio is probably a riskier thing to do. What do you think? I agree. Especially if you're going to put more money into your

house and effectively increase the value of it, taking some money out is kind of a net net type of thing, right? I just took out a home equity line of credit just as a huge backstop just in case. And I think the rates right now are 3% they were quoting me. And I know some banks are pulling back on it. So that's why I wanted to get in and get it. just because I was worried that maybe in the next five or six months they're not going to be as willing to give them out. But it's a 3% rate and that rate floats obviously and I'm guessing it won't go much higher since Powell's going to keep interest rates low for a while. But yeah, I think borrowing against your home is probably a better solution there.

I want to know your take on buying a car in cash versus finance with no payments in the first year and investing the extra money. Is that even worth it? I think the simpler choice is just to buy it outright but wanted your take. So you have the cash already to buy the cash. car versus financing with no payments in the first year. So you're basically making a bet on what the market is going to do in the next 12 months. I would not make that bet. I would never make that bet, not just given where we are today. This is also a take on like, what are your views on debt? Because you could say, I think a car loan right now is probably in the 4 to 5% range, something like that. So you're making that comparison to if you're taking out of whatever four or five

your car loan. It really depends on how willing you are to accept some debt and make a car payment every month. So it's more about that. Recommendations. What are you got? Okay, so I finished bubble in the sun. I'm going to double down on that one. Here's an interesting thing about that that it makes it different from today. So this was the 1920s, mid-1920s, huge real estate boom in Florida. When that thing blew up, it killed all the municipalities there. So their muni bonds were paying six or seven percent at the time. Seven out of every eight municipality in Florida defaulted on their bonds. And so you've heard of this guy Roger Babson before. He called the Great Depression, quote unquote, called it. One of the reasons that he said this is a bubble and it's going to burst is because he

had his money in Florida muni bonds that defaulted. They were paying six or seven percent. He thought they were ultra safe. So he said from then on he was much more cautious. So he thinks one of the reasons that he called the Great Depression is because he lost all of his money in the Florida real estate bubble. But this is the kind of thing where seven out of eight munis in the state defaulted. There's no way the Fed would ever let that happen today. That's like a difference between now and then. in terms of back then, there's your free markets. If you want to have your free markets, go to the 1920s and live through the Great Depression and the Florida real estate boom and bust,

where the markets just do their own thing. Like, that's the free markets that people yearn for. Have fun with that. That's the kind of thing that is just not going to happen today. There's no way the Fed would ever let that happen. Here's a movie recommendation for you. It's kind of a rom-com called Going the Distance with Justin Long and Drew Barrymore. I mean, it's kind of your typical rom-com.

It's not that cheesy, but the reason that I liked it is because the friends in it were overqualified as the rom-com friends. So it was Jason Sudecass and Charlie Day. Did you ever get into it's always sunny in Philadelphia? So we probably watched the first seven seasons of that or so. He's one of those guys where I feel like he could have been a huge comedy movie star had he not been doing that show because he's one of those guys that just anything he says or does.

He probably has three or four spots in the movies that just crushed me. It's worth it alone for just some of his scenes. But he's kind of to me like Will Ferrell or Kristen Weig or Zach Alfinackus that pretty much anything they do makes me laugh. So that's a recommendation based on the bit players in that movie. So it's a rom-com. If you don't like those, don't watch it. But which one did you like that one time?

What Women Want. So if you like that, you should like this one. Wait, what? Didn't you watch What Women Want or something? The Mel Gibson movie, did I? I think you recommended that once early in the podcast days. Oh my God, I did. That was a good movie.

Okay. So if you like that one, then you've got to watch this going the distance. It's a funny rom-com. The other thing is, though, I looked it up. The movies from 2010, doesn't anything from, like, like, say, 2008 on, feel like five years ago. Eh, it was like five years ago. Social network?

Yeah, anything. It was like five years ago. That just means I'm getting old, I guess. Yes. The Michael Lewis series finale of his podcast all about coaching, I thought was incredibly touching or moving. I don't want to spoil it, but at the end, I was blown away. It was very good.

I thought this season was better than the first one even. He's good at this. He's so good. I listened to the new Malcolm Gladwell podcast. Did you listen to that yet? Yeah, the one about the art museum and stuff. Yeah, it's pretty interesting. Here's the thing.

These are probably two of the biggest, most well-in authors in the game. They're still doing ad reads. We talked about the podcast industry recently. Aren't these two guys ones that could easily do the subscription model and get people to sign up? They choose to do the ad model. Doesn't that just show like how ingrained things are right now in the podcast world? So I feel like if anyone could have done something where they did a subscription and get people to pay for it, it would be them.

Yeah, good point. That's a good point. I started watching Ford v. Farre yesterday. It's awesome. Oh, it's on HBO. It's on my list. It's on HBO. I fell asleep because I was on those pain things.

But it was awesome. Really good. I'm going to finish that today. Somebody sent us a recommendation because we were having trouble. At least I was finding decent movies to watch. They recommended a simple favor, which was a movie pretty recent, I think, 2018, with Blake Lively and Anna Kendrick. Have you ever seen it?

It's a bizarre movie. that is kind of addicting. It was entertaining, but completely ridiculous. Yes, ridiculous is a perfect word for it, but for some reason I had to watch the end just to see where the ridiculousness went. It was totally absurd, but it filled the time. So thank you for the recommendation. Not an amazing movie, but I've certainly seen worse.

Okay. Anything else? That's it. All right. Animal Spiritspot at gmail.com, and we will talk you next week. Thank you.