Animal Spirits Podcast - The Dead Cat Bounce? (EP.134)

Episode Date: April 1, 2020

On this week's show we discuss avoiding politics during a crisis, unintended consequences from the shutdown, the spike in national debt, why economics is so confusing, bottoms vs dead cat bounces, when to rebalance and 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 brought to you by our friends at Y Charts. Y Charts has just added over the last couple of weeks the ability to track the coronavirus cases. You can do it by country, you can do it by state, you can do it by city. And for some people, they probably don't even want to see this stuff. I don't know about you, but I've been tracking this stuff as well as I can. I check this stuff all the time. I feel like that just I'm the person who needs to constantly read and check up with this stuff. So I've been watching this and we put a chart together that shows China cases versus U.S. cases and then we put New York and Michigan on here because unfortunately our two states are two of the worst that are being hit at the moment.

It looks like New York has nearly 50% of the cases that we know about in the country right now, I guess 40%. Do you think it's possible you will not be going back into the city for the rest of 2020? Is that on your mind right now? I think that's a really high possibility. I'm not there yet. That sounds bad. New York is bad right now. Maybe that means they come out of it first, but here's the other thing, based on this chart, the China one has obviously leveled off and they seem to getting back to business. How low are those reported numbers for what they actually were? There's no way those numbers are correct.

Yeah, so there was a lot of this sort of chart being passed around talking about what an epic failure, I guess mostly on the part of the administration. And put that to the side for a second. And the real question is, are these numbers even accurate? And I would have to believe that they're probably way understated in China. Not making this any better at all, obviously. No, yeah, that doesn't give us any free pass for what happened here. But the China stuff is there's no way that's accurate. And they've either been underreporting or there was a couple months where this was going on and they didn't know about it in time or something. But that doesn't seem to make sense that we've passed them. So anyway, I like the fact that Y charts added this and the ability to add these new functions like this. Go to Y charts, tell them Animal Spirit sent you and get 20% off your. for 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 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 positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. I guess before we start, it's worth just mentioning and thanking everybody on the front line who is putting their life at risk from health workers and essential workers. I can't imagine what that's like. Thank God.

I can't. Every time I see one of the tweets from a doctor or a video of them on Twitter, I almost get a little choked up. I can't even imagine what that's like. They showed a doctor coming home the other day and he could. didn't hug his little son because... Yeah, that was rough. Those ones are just crazy, and I can't even imagine how heightened that is right now.

So my wife works in a hospital, and she's not necessarily treating these patients. She works in another department, but every day she goes to the hospital, it's really scary. And when she comes home, I can't imagine what it's like to be on the front line, but just having to deal with that, it's really, really scary to think about just being close to being infected in there. And I can't imagine what some of those people on the very front line are going through. we never talk politics on the show for good reason and we're going to try and stay apolitical as possible. I just want to share two charts that I saw over the weekend. One chart shows Democrats versus Republicans and the chart shows extremely concerned about a coronavirus outbreak

state by state. And there is such a stark contrast between Democrats in one state versus Republicans in the same state. And I guess the example here is why. Washington. And it looks like, as of the most recent reading, about 60% of Democrats are extremely concerned, whereas roughly 22% of Republicans are extremely concerned. And I don't know what else to say other than that this is such a shame that we're seeing this. And it's obviously coming from the top because there was a New York Times map of America showing which states and cities have told residents to stay at home. And again, it's a stark contrast between red and blue. So just harrowing stuff that we're seeing.

And it's not going to get better. It's only to get worse. The divide is only growing. And what's really going on, the debate over the last few days that I've been seeing, is what's more costly? Letting people go back to work, potentially spreading this virus and air quotes only old people die versus absolutely crushing the economy, putting it on a complete standstill. What is more damaging in the long run? course, like everything else, this has really become a political issue. I don't understand how this happened. I do understand, but I don't understand how an issue like

this cannot. This should be the unifying thing for us that brings us together. I don't know how your opinion on this could be driven by politics. It's maddening in a lot of ways. And I guess it's just a factor of what we've, the way we've set up in our news sources. And I would like to say, since we're an anti-survey podcast, that maybe this extremely concerned survey is just worded weirdly. But if you look at the graph, pretty black and white. It is, I don't know how you wouldn't take something like this seriously and completely put your politics out of it. It's difficult for me. And it just shows how hard it is to not have these human factors come into play with something like this, where people are so biased about certain things that they let it cloud their

entire life. And then, of course, this trickles into how people view the markets in their portfolio and what they should or shouldn't do. This stuff obviously colors a lot of things in people's lives that it shouldn't. And it shows why people make poor decisions a lot of times because they let politics trump everything else instead of common sense. I mean, obviously, this is probably going to make things worse for a lot of people until it comes to their front door maybe and they realize what's really going on here. But it's pretty sad that that, yeah. Well, it's depressing because as the cases mount, and as the economic malaise just continues, it's just going to get worse and worse.

And I'm really fearful. I am of the opinion that we should stay at home as long as possible, that the government should intervene as much as possible on the fiscal and monetary side. So that's my personal opinion. I'm worried that as the weather gets better, people are not going to stay home. They're just not going to do it. Right. And I think all that's going to do is prolong this thing.

So we're going to be in this middle ground of should we stop, should we start, and we're going to have these fits and starts, I think, for a while. I don't know, all summer. They keep pushing back. They haven't technically announced that our school is done for the year yet. They said they're going to make an announcement this week. Obviously, it is. I don't know what is going to happen with some of that stuff, because what if we still get to August? And in the fall, there's a second wave of this thing. Did you see the video on Twitter about people's cell phones that were being tracked in Florida on a beach of Florida and where they went after they left? No, how are they doing that? I don't know what company it was, but they were basically tracking cell phone traffic. And just people going from Florida to the rest of the country, which was just really grim. Oh, so it was actually people on vacation and taking it with them and spreading it. So Matthew Klein wrote an article in Barron's, don't reopen the economy, don't let it crash, put it on ice.

And this is very similar to what's going on in Denmark. He said, we should temporarily break the link between income earned and output produced by having the government pay for all the transactions we would have done had there been no virus. And I guess what's really going on, and I don't want to say that this is political because I think to some people, of course it is. But I think on the one hand, people genuinely feel that by staying home, we are preventing the worst case scenario, which is a just death everywhere and output sinking and the receipts collected by the government of the deficit is exploding. On the other hand, there's people who say, but by not going back to work, you are throwing us into a depression. How can't you see that? Don't you see what you're doing? So I think there are legitimate points on both sides, but unfortunately, again, it gets political so quickly.

Mark Benioff, who's the CEO at Salesforce, put out on Twitter yesterday his eight-point plan for how to get things back. And he talked about a national lockdown and travel ban and trying to increase testing. But I like this one the best I thought in terms of like the private sector. He said, let's do a 90-day CEO no layoff pledge. And you know how they did the, what was the Buffett giving pledge where all the billionaires said, give at least half of my money away to charity, wouldn't it be great if a lot of the CEOs are the biggest companies said this? For three months, we're not laying anyone off. People might see their pay cut and things might be hard and the companies might have to cut back. But if we had

a few, like Jamie Diamond and a few of these Bezos or whoever, be great. If you of those people did that and then everyone else had to jump on the train, I think that would make people feel a lot better. Like peer pressure or social conformity? Yeah, because obviously that's one of the reasons that people are talking about this depression stuff because they're seeing it. More people are seeing the unemployment stuff that are getting sick at the moment. Three and a half million people got laid off or filed for unemployment last week. So I think that's one of the things that people need some help with. And obviously they've done it a little bit with the fiscal rescue package. But I think that's part in. And I think I can't tell if this is a good thing or a bad

thing. But I've been more impressed with the response from the private sector than the public sector throughout all this. So they talked about in the telegraph that the government in the UK announced that Amazon is sending at-home coronavirus antibiotic testing kits that you can use with a finger prick, which I'm hoping it's not Elizabeth Holmes that is administering this. And I would hope that Amazon gets that through here too. I don't know. Why do you think that they did it in the UK before it came to the U.S.? No idea.

Anyway, so I've been fairly impressed with the reaction from private sector. I guess Apple has been helping with a supply chain to get health care stuff up to people. You see new stuff every day with the testing and potential for vaccines that people are working on. And so I think the response to the private sector has been great. And obviously, this shows, though, that we can't just rely on the private sector for this. There has to be an overarching plan from the government that needs to step in and help us make it through this. So when the crisis started, there was a few stories about how, since China was the first one in, that they were saying Apple is screwed because their supply chain is so reliant on China.

and it's just interesting to see the risk shift through this crisis because at that point people thought, well, Apple is so reliant on them. Maybe they need to rethink their business model going forward in their supply chain. And now China's coming out and they're saying that all Chinese plants may be able to start operating again and start producing Apple's iPhones. And they may be the first one out of this. And now it's looking like that's actually a benefit to Apple because other companies supply chains are being shut down in other countries. And I just think it's interesting to watch the domino's fall and have the risk shift so quickly like this, where it's just every business almost is hit in this thing. And it doesn't really matter. And so Apple was maybe behind the eight ball at the beginning. And now that that one has slowly changed, it just shows how risk just changes form through this stuff so, so so quickly. Well, speaking of that, there was a really interesting chart. I forget who tweeted this. So we'll link to us in the show notes. Weekly deaths in the U.S. down by 7,000 to 10,000 for the week.

ending March 7th, 2020. Silver lining with people changing their behaviors during COVID-19 is there's less people dying. This is a crazy chart. It just shows every year the deaths are pretty, and this goes back to 2015, and there's just been a sharp drop-off. And the outcomes from this whole, this is basically a human experiment, right? We've never done anything like this before, where the majority of the world in the economy is just shutting down. And the unintended consequences and in different decision trees that come off of this are just going to be insane to watch. I guess they were saying, I heard somewhere that when China shut down, there was such a lift of air pollution, that that could have saved lives just from them not going out because

the air pollution wasn't as bad as it usually is. This is sort of similar, again, very grim. After 9-11, traffic-related deaths, I think, spiked because people were afraid of flying. Right. And I think the difference was more people died from car accidents than actually died in 9-11 on the airplane, something like that. So yes, the changes in behavior from this are crazy. And this one isn't nearly as important, obviously, but think about something like oil. And oil has been crashing because the Saudis and Russians are fighting with OPEC over supply and demand

issues. But the mileage driven right now has to be down just, don't you think oil would have crashed to these prices anyway, possibly? I think they said it's in the teens now. And no one's driving anywhere. We were talking about I have a car lease and guess what? I'm not going to have to worry about my mileage this year because there's no way I'm coming close because you don't have to drive anywhere. We haven't been leaving the house really to get anything. Yes. So another conversation that is going to be in the public along with what's worse for the economy and for civilization in terms of staying home or going back to work. Another conversation is the national debt and what's going on. And Neil Irwin wrote a piece.

The national debt is about to soar. Without a rescue, it would probably soar even more. So he said, in forecast prepared just before the outbreak became severe, the Congressional Budget Office projected a $1.1 trillion deficit this fiscal year or 4.9% of GDP. And one of the lead analysts from Moody's now expects it to be closer to like 10 or 12%. So these numbers would exceed the previous post-World War II record, which was in 09, of course, at 9.8%. And I think this is key. Neil Irwin said, if the national debt were to rise by two trillion compared with what had been forecast and the government paid for it by issuing 30-year bonds at current rates, the debt service would be about $29 billion a year, a trivial amount in a $20 trillion economy. So this is the absolute definition of denominator blindness. Right. What's the 10-year Treasury at now? 80 basis points or something. The 30 years probably at 1%-ish. If we need to borrow now is the time. But don't you think after all of this as we add all this debt? And I'm thinking, I mean, there could be phase two, phase three, phase four of these fiscal rescue plans. I don't even want to call them stimulus plans anymore because that's not what they are, their rescue plans. Don't you think if we don't get a little above-average inflation from this, they should just throw away every economics book in history? Because

because they're useless. Everything I've ever learned, I got a minor in economics in college. And everything I ever learned was if they lower interest rates and if the government racks up debt, inflation is bound to come. And if it doesn't come after this, I don't know what you do as an economist anymore, what you even say. So Winston Churchill once said about Russia that it's a riddle wrapped in a mystery inside an enigma. I think you can make the same about inflation. We just don't know. Maybe this shows why this is our world war of our generation in some ways because we've now quoted Churchill more than we've quoted Buffett, I think, during this crisis. Yes. That's how you know it's bad. All right. So James McIntosh wrote an article

after coronavirus, we will have to reckon with debt. And he wrote, moral hazard is dead. Central banks have printed record amounts of money to save financiers and allow indebted governments to keep spending. Inflation is inevitable. And I was reading that. I was getting a little twitch because I was like, wait a minute. This again, we just experienced. this exact conversation for the last 10 years. And then, of course, the next paragraph was, if all that sounds familiar, it's because those were the views of buyers of gold and other inflation protection in 2009. They were wrong then, but they're at it again. And this time they might be right. So I think, again, to the point we just made about inflation, we just

don't know. But there was a chart showing the amount of money in circulation. Did you see this floating around? John Paul Coning, week-to-week percent change in U.S. currency in circulation. and this is the most that we've seen since December 1999. But I think one thing that we can say is that it's not necessarily the amount of money in circulation. Isn't it more the velocity at which it's spent? And right now, again, this could change in a few months. But right now, people aren't spending money.

Right. I was thinking the other day about some things in my personal life that have changed. I haven't used my wallet in like four weeks. There's been no need for me to even take my wallet out. So any movement of money is obviously being done by the Fed and by people moving in financial markets. But I just can't imagine that people are going to be complaining if we get inflation after this because that, again, shows that we won finally and things are better now. So there was a chart shared by John Paul Koenig showing the week-to-week percent change in

U.S. currency in circulation, which is by far at the highest it's been since 1999. And I think we've learned over the past few years that the amount of money in circulation, is not necessarily what causes inflation. It is more the velocity, the rate at which money is turned over and sped throughout the economy. And I don't think that we're in any danger of that just yet. I mean, to state the obvious, now I guess people are more worried like what's going to come out the other side of this. But I don't understand how inflation could be a worry today. I understand that it might be in the future. But one of the biggest inputs to inflation is energy. And you've probably noticed that oil is basically free. There's a chart showing the 24-month average retail

price of gas, and that has absolutely crashed. It's now below $2 in the U.S. Here's the other way I'm looking at this U.S. paper money thing. It says it's the largest increase since December 1999. People have been predicting hyperinflation for 10 years now since the last crash, and that was obviously a ridiculous prediction, and it's been debucked a lot. The other prediction people were making is that the U.S. is going to lose its status as a global reserve currency and the dollar is going to crash. Guess what? These crises show that maybe the U.S. dollar is stronger than ever. And maybe that's one of the worst predictions that people have been making is that the U.S. is going to lose its status. And that's another reason why it's okay

for us to print money and borrow all this money because guess what? The dollar is king still. Okay. And if that's still the case and we have the ability to borrow money at such lower interest rates, it's almost the government's job to do that at this time. it's one of my least favorite replies that you get on Twitter. And there's a lot of them these days. Like something about Rome. Right. Like that is an instant mute. Yes. I agree. But I just think anything I learned about economics in college is just proven to be wrong at every turn. And obviously it's because theory and textbooks do not translate in the real world, obviously. But even some of the simplest rates between interest rates and inflation and debt, that stuff is just proven to be

useless, less than useless. It doesn't seem to matter. You know what they don't teach in the textbooks, the financial textbooks, at least when I was in college? Never read about the dead cat bounce. Not once. Did I jinx it? Did I make it better or worse? So I wrote a little history of dead cat bounces because last week, I think you shared the stat that we had the largest three-day bounce since 1931. People were saying, this is a bad sign. And I got a lot of feedback on the dead cat bounce piece. And it's never right to try to judge the sentiment from social media. and email replies to a blog because that's just, all that shows is people who like to give feedback on this stuff. It's like people who leave Yelp reviews. You never can tell that the quality of a

restaurant by Yelp reviews, I don't think. Anyway, everything I heard 95% of it was, yes, this is a dead cat bounce. We are going into a Great Depression. This is going to get worse. Stocks are going to fall 50 or 60% and this is going to be horrible. Now, I think there's a good chance. That's right. I said in my gut, I don't think we've seen the bottom yet and things could potentially get worse as this thing continues to get worse on its own. I don't know that, though, just because I feel like, well, maybe Stuxid could fall further. I would never say with a 100% certainty that I'm there. I'm maybe 51% there. I have no clue. I'm just shocked at how certain so many people are that this is a great depression. This is going to change things forever. And the markets are going to

get killed and start stocking up on guns and ammo and canned food. I think a lot of people are going to be just really angry if stocks only go down to 35 or 40 percent and don't get that really nasty Great Depression-esque fall. And then what do you do? If that doesn't happen, even if stocks just stay here for a while and just don't go down, but they don't shoot back to all-time highs, I don't know what that crowd does at that point. Are they going to hold out forever? I think you made a good point in your post that either a dead cat bounce or the actual lows can have an explosive move higher, and it's hard to know which is which, like stating the obvious. And I think that trying to gauge sentiment on Twitter is just such a joke. People that

say that they're reading the tea leaves, give me a break. You're seeing what you want to see. Reading any tea leaves. So have you noticed that bowls and bears, it seems, are using this weird sentiment reverse psychology where you have bowls. I don't really know that there are like rampant balls. But you have some people who are saying, everyone thinks we test the lows. And then you have bears saying everyone thinks the lows are in. Obviously, both things can't be true. It's just, you're just seeing what you want to see and taking the other side to, I don't know, confirm your views or whatever. I prefer reverse, reverse psychology. And I don't know what that means. But someone asked me like, oh, so you wrote about the dead cat bounce. Does that mean you're

bearish? It's like, no, I don't ever think of myself as being bullish or bearish. I try to be realistic and say, this is what's happened historically. And we're only, we're only, going to know these things with the benefit of hindsight. And so you're going to get a bounce. And from now, it stocks are up again today. Like, what if we bounce another 10 or 15 percent? What are people going to say then? Like, okay, just wait. The other legs coming. And if we fall another 10 percent, they're going to say, see, that was a dead cat bounce. And you just never know. So even in the, I looked at the 2000 to 2002 one, stocks bottomed in October of 2002 and rose 20 percent. But then they fell 15 percent and didn't quite hit that bottom again. And then they

took off until 2007 for like a four or five year bear market. And it's just, it's just so impossible to know these things. And people who are certain one way or another is just, that's what boggles my mind is that I don't know how you can be certain about anything right now. Yes. There was a good article from James Stewart in the New York Times. I became a disciplined investor over 40 years. The virus broke me in 40 days. And I thought this is a great quote. And we've read about this a bazillion times in terms of avoiding the all in, all out mentality. like if you need to relieve a little bit of pressure and you're whatever, 60, 40, and you need to go 55, 45, 45, or whatever it is, just a, that's a much better move than say, get me out, I need to get out.

And this is a good quote in terms of people selling into a serious decline. That's where people really get hurt. Once you're out, the emotional leverage works against you. Either the market drops further, which confirms your fear, or it goes up and you don't want to buy after you just sold. Then it gets further and further away from you. People don't realize how hard it is to get back in. He also talked about how he said he started investing in 1982, so he's been at this for a long

time. And I think a lot of people like to poke fun at young investors saying, ha ha, this is your first time you've ever been through this. Sometimes experience doesn't help. He says, listen to this. He says, I'm paralyzed. I've owned stocks for nearly 40 years. I've lived through survived and even prospered through four crashes. So I should be prepared. Yet looking back at the last few weeks, I recognize that I've violated most of my time tested rules. Whipsawed between optimism and despair as the bad news mounted and my daily life was upended. I've let emotions influence my decisions. I'm doing it again this morning. So even if you've lived through a crash before, nothing can prepare you for the next crash. So there's this difference between

expertise and experience where just because you've experienced something doesn't mean that you can't completely let go of your time tested rules and principles. And I think you wrote about this with Druckenmiller, right, in your book, that he messed around with dot com stocks and the tech crisis and what did you learn from it? Well, nothing. I learned that I was just, I let my emotions get the best of me, basically, and that can happen to anyone. I wrote a post called Experiences Overrated, and I didn't mean to be disrespectful because I think that in some cases, certainly it helps. But I just meant that in the case of certain market conditions, your experience doesn't

matter because not every crisis or frenzy is the same. It's different every time. Every single crisis is completely different. You know what's different about this crisis? So Dave Portnoy of Barstall Sports is now trading. And I just saw, he just tweeted, I tried to buy, turns out I sold 40K out the window. And you know what? I did that. Remember one time I went to buy calls and I bought puts instead? And I was like, all right, I guess I'm bearish now. Happens to the best of us. The sports talk right now is getting

really bad. I mean, they've gone through the Jordan versus LeBron debate for weeks now. I think they're all doing their favorite lists of like best cereal or something. I said, why can't we have all the people from ESPN turn work for CNBC for a while or Bloomberg? Can't you imagine Stephen A. Smith and Kramer going at it about stocks for a while? One of the only silver linings, and this is barely silver, is that because there's no sports, they've been playing old games. So on NBA TV yesterday, it was the 94 Eastern Conference semifinals where the Knicks beat the Bulls. And they were showing the celebrities in the crowd. And it was vintage Tom Cruise with Nicole Kidman. Bill Murray was there. Rick Moranis was there. Haven't seen that guy in 20 years.

Okay. The Bill Murray thing. My kids have been watching Space Jam a little on Netflix. Bill Murray is in that for some reason. He must have been buddies with Jordan. That's possibly the worst movie ever made. I'd never watched Space Jam before. Have you seen it before? Yeah, when it first came out. Okay. That's an awful movie. I mean, really, really, obviously, Jordan's not a good actor, but he's really bad. And the movie itself, the ratio of having a good soundtrack to a bad movie has to be as high as you can get for that movie.

Anyway, okay, Michael Santoli wrote a piece for CNBC about 60-40 portfolios, and our very own Michael Batnik was quoted in this. So tell me what the data you found on this, because I hadn't seen this one before. Honestly, I didn't even look. I just put a spreadsheet together and sent it to him. So I don't know. What are the numbers show? You didn't see this? Oh, you just gave him a little data and he picked it out himself. Yes, yes, yes. Okay. So he said, so this 60-40 portfolio has fallen 20%. And each time that's happened since 1945, it's been three times. So August of 74, September of 2002 and January of 2009, which would make sense because those are the biggest crashes. So

after those three major crashes, which are the times that a 60, 40 portfolio went down 20%, it took between 10 and 20 months for the portfolio to recover back to peak level, which is pretty on par with you would get for a recovery for an all-stock portfolio, I guess. Maybe a little quicker. You know what data Michael didn't ask me for? What's that? Japan. Very convenient. Oh, shocking. Anyway, but I guess I've never looked at the recovery period of a more diversified portfolio, which is probably more important than the stock side of things. But obviously, the stock portion of the portfolio is something that everyone's paying attention to these days. So that's probably all that matters.

And I think that data like this, which is something that we've written about, we believe in, it can only go so far. You know what I mean? Like, if you're giving advice or trying to take your own advice, you can't just be like, oh, okay, I got between 10 and 20 months. And because you know why? A, you don't know how bad it's going to get. And B, who's to say that it's going to hold true this time? What if it's 40 months? What if it's never? It says, too, that the average return over the next five years was 12% a year annually after it had fallen 20%. And our colleague, Nick Majuli, who writes that of dollars and data, said, okay, here's your choices based on when stocks bottom. Of course, we don't know when that is. And that's the big thing for people is just that they

think this is going to take forever. And stocks are going to continue to go down. And that's the problem is the bottom is ever coming. Stocks are going to bottom at some point. And either you believe that they're never going to reach their peak again, which is fine. If that's where you think, then why are you investing in the stock market in the first place? Just what's the point? But the other thing is, the other thing you believe is it's going to take a lot longer to get back there. So one of the other has to be true. So either returns are going to be way higher by the time we get back to the peak if it takes the three or four years to get back there, if that's how long it's going to take. And then at that point, you can kind of calculate what the returns are going to be.

If it takes three or four years to recover, you know what the returns are because you know what the losses are. So you're either banking on when stocks bottom, you're banking on it's going to be longer or it's just never going to hit the peak again. And we're going to be Japan, which seems to be like a lot of people on sentiment Twitter seem to think. But that's the thing. So you have to think about this thing intelligently that eventually stocks are going to have a really big bounce. And it's going to stick. And when we do get back to all-time highs, whenever that's that's going to be, the returns to get there are going to be pretty juicy. Correct? Yeah. It happens every time. I know this time is different, but it's going to happen this time too.

That's maybe one of the things I'm relatively certain about. And again, if not, then the point of investing is kind of pointless if stocks never recover. Because if that's the case, then there are really big problems on our hands that go beyond investing. Yeah. All right. So Barron's did a piece on the Great Rebalance talking about, I guess, dry powder. money coming out of bonds and into stocks. And I don't necessarily know that that's enough to buoy the market, even though they're talking about some pretty big numbers here. So J.P. Morgan sees a positive demand swing for equities to $3.71 trillion over the remainder of the year from negative $2.85 billion in the first quarter. I mean, that's a big giant number. I don't know how

they calculate that. So they talked about how balanced funds will have to rebalance and pensions and sovereign wealth funds and financial advisors will be rebalancing from bonds to stocks, that theoretically could happen. It doesn't have to happen. That doesn't mean everyone's going to be having that trigger finger to pull the trigger and do it. So yes, that sounds good in theory. I think that's tougher to put into reality in terms of not everyone is going to do that. And there are going to be other people who say, not only am I not rebalancing, but I'm selling everything. That seems tough to try to quantify to me that rebalancing. But again, I think that's something that that didn't exist in some of these past crashes where you have people who are invested in

target date funds, and they have no choice there. They're rebalancing because Vanguard and Fidelity and Troll price and whoever they're invested with are automatically rebalancing those portfolios for them. So maybe there is a little something to this. It's probably on the margin, but it's there. How about this? I think that the fact that there is automatic buying in terms of a 401k every two weeks, the fact that we can rebalance with the push of a button. I think things like that will make it so that we don't fall 90%. You know what I mean? I think it will put some floor under the market. I just don't know if the floor is 35%. I mean, I don't think it is. How about that? So we've gotten a ton of questions from people about

when's the best time to rebalance and how do I do this? And you did a deep dive into this. And you said a 6040 U.S. portfolio right now would be 54-46 based on the start of the year. and you looked at different monthly intervals for rebalancing, and it looks to me like you found, and this is something that we've researched in the past, there is no right answer. Is that a good summary of your findings? Pretty much. I mean, I think we did this like maybe five years ago or something, but found that, so Corey Hofstein writes all the time about timing luck. And what he's mostly talking about are trend models where you're either in or out or into a certain and degree. But like, that has way more specification risk than a rebalance does. Because again,

this is at the margin stuff. You're not making these big giant decisions. So I looked at calendar rebalances. In other words, if you would balance every January, a portfolio that rebounces every February. And then I did, what if you rebounce using tolerance spans, whether it's plus 2% or plus 5% away from your initial target? Or what if you were more opportunistic, where every time stocks fell 10% you bought more than 20%. And I basically found that, yeah, in certain cases, cases, especially in the Great Depression, there was a wide, wide range of outcomes. But put that 90% decline to the side, over the last however many years it's been since then, we haven't really seen much dispersion. So the bottom line is it doesn't really matter. It just matters

that you do rebalance at all. And why does it matter that you rebalance? Well, I guess technically it doesn't because your return should be higher if you never rebalance, but then your risk is way higher. So you rebalance just to get back to your comfort zone. And so that is the thing. And then in terms of like over-rebalancing, there's nothing wrong with over-rebalancing in a falling market. I looked at a strategy that started rebalancing every month in 07 to the bottom in 2009. And it came out just slightly, slightly behind of just a random rebound. So it wasn't like it didn't punish you. You were down 1.8%.

But the real best strategy for went to rebounds in this market environment is near the bottom. And I say that tugging cheek, but that's just the answer. If you rebounce at the bottom, you come out ahead. And unfortunately, the timing luck thing matters in a lot of other. stuff too. So a lot of retirees are figuring this out now that the sequence of return risk is unfortunately like a timing luck thing where you retire into the teeth of a bare market. And that's really tough for your withdrawal rates and your spending rules. So that's why you have to have these backup plans in place and understand the ability to take money from somewhere else. So you're not selling

stocks when they just got absolutely slaughtered. And so unfortunately, the luck component is so much more of the investing game than people care to realize that it comes with your retirement planning as well. All right. So sticking with us for a second, Vanguard did a piece on what they're seeing inside of their accounts. And here's some data. Of the 22 trading days since the inflection point, 16 were among the highest U.S. household trading days since they began tracking in 2011. However, the majority of households making trades, about seven out of 10, move money into equities. so they're buying a dip, and 8% of Vanguard U.S. households made a trade, but half of those only made one trade. More than 90% of Vanguard U.S. self-directed investors have stayed the course. And then

finally, they broke it down by account type and defined contribution of 401Ks, basically. People really didn't do anything at all. So we look at this and we say, see, see how well the individual investor mom and pop is behaving? True. But there is a ton of sample bias here because I think, last week on the podcast, Ben, we were saying how clients at Merrill Lynch had their highest daily volume ever. And somebody said like the bottom is in. And it turns out that it was. So I don't necessarily know that looking at Vanguard and saying people are behaving themselves is the correct conclusion. You could say that Vanguard investors are behaving themselves, which is what you would expect. Yeah, but I think a lot of people didn't expect this. A lot of people said during the

next crash, all these passive index free riders are going to bail and they're going to panic. And that hasn't happened yet. Okay, fine, but it's never going to happen on Vanguard. You know what a lot of people told me, though? I tweeted out this information and a lot of people said, actually, this is bad news because that means we have another leg to go or when these people capitulate. They're like, all the selling is not, if they're still holding on, that means all the selling is not done.

And that's the kind of mindset you get into during a bear market is that there's always another leg lower. And again, I think that there probably is another leg lower. But if you get stuck in that mindset, you're never going to get out of it. It's never going to happen for you. you're going to be stuck forever. And I think this is going to be another crisis period. It's unfortunate that a lot of people are going to have their brains broken by that they're going to be sitting in cash for the next, however long the next recovery is. And again, the recovery is going

to happen at some point. I don't know when. I don't know how long it's going to be. I don't know how great it's going to be. Maybe this thing, maybe this is more of an L recovery and we stay low for a while and then we shoot up eventually. It's not going to be a V. Who knows? It's going to happen. I have faith in the human spirit and all that. And again, if not, why invest in the first place. But there's all these people that are always going to be waiting for another leg lower. Everything they're going to look at is, well, it didn't get as bad at the Great Depression, so there's still more to go. And I think that mindset is just going to be very deadly to investors in the coming months. Well, Jeffrey Kleintop over at Schwab wrote something that actually

was to defend individual investor. He said, as a global stock market plunge accelerated last week, equity ETFs took in $9 billion. Predominantly, these flows have been into the broad unlevered ETFs, which tend to be favored by long-term individual investors. So I don't know that you're going to see this capitulation that people are looking for where you just see like, I mean, listen, maybe we'll get there. I have no idea. But you're right. There's going to be people who never turn unless we see this massive apocalypse. And the crazy thing is like you think about a time like the tech bubble. I looked into this one too. And this was in that book Bull by Maggie Mayhar, which I think is one of the better historical books that I've read about the market that doesn't get

mentioned very often. And she talked about how you had all this influx of people who came into the bull market in the 1990s. And I think equity ownership went from something like 30% to 50% from the start and end of the decade. So we had all these new people. Remember all the people who became day traders and quit their job and they were trading IPOs and becoming crazy. As of late March 2003, this is from her book. The net redemption since the beginning of 2002 were tiny compared to with total assets. The net outflows from mutual funds in the 12 months ending, 30th, 2003, amounted to 3.6% of the sexist assets. So even after that, huge ramp up in new investors who had never been invested in the stock market before, it was less than 4% that really

bailed. So this idea that mom and pop are always the bagholders and always the one who panic and they sell at the bottom and they buy at the top is just not the case always. Or maybe it's not the case anymore because I've thrown this setup before. But in one of Bogle's books, he says that in the 73-74 crash, there was outflows, I think for like 22 consecutive quarters. Yeah, I think things have just become so much more institutionalized with 401Ks and IRAs and target date funds, in financial advisors, that this stuff, unless the whole professional and institutional crowd panics, they're not the ones doing the panic selling. The ones who are panic selling and maybe they panicked early when it was time to do it

in the right way. The people are panicking and selling a lot are hedge funds in algorithmic trading firms and professionals. It's not really mom and pop that much. Those people aren't pushing around the market. Bill Ackman was panic buying. He caught some flack for going on TV. I don't know. I don't have enough bandwidth right now to care about who's right or wrong in the Bill Atman thing.

I just, I don't care. So I'm sorry. I don't have enough bandwidth to have an opinion about that right now. Survey of the Week, Texas Manufacturing Outlook Survey. So this plunged to the worst level since 2008. And I went through the report a little bit. And there was one question, how is COVID-19 impacting dementia? man for your products or services, and what do you expect going forward in 2020?

And 68% said negative effect. 18% said no effect. I wonder what 18% is. How could it have no effect? Because I would think that it's either binary. So 15% said positive effect. So you would think that it's either bad or good. Like, how could it have no effect?

So here's what I'm thinking of. There was a chart somebody showed businesses where activity rose the most. Guns and ammo, of course, massive increase. fitness exercise equipment, blood and plasma donation, adult entertainment, imported foods, pharmacy. So you would think that it's either things are getting really bad or things are getting a lot better. What could be no effect? Again, it's a survey. So grocery stores aren't going to be impact. I mean, I guess maybe they're an increase. No, no, no. They're way up. So grocery stores had a 200% increase. Okay. I like how adult entertainment had a almost a 10% increase here

too. I don't know. This is another thing why we don't trust surveys all the time because people just don't know. They don't know what the impact is going to be. A lot of people that they have no clue. These are business owners. I don't know. They don't know. It's a survey. What's not going to change? Cigarette usage. I don't know. How's that? I can remain unch. You're right. I have no clue. Let's move on to some listener questions. And we skipped a lot of stuff in the doc, so it looks like we'll be going to have enough for another Friday show. Let's assume you were near 100% cash throughout 2020 or even bet only long TLT or its equivalent, which is long bonds. Would you be looking at the market differently without the scar tissue of the first quarter. You'd be feeling

better about your portfolio. I don't know if you look at the market differently. Again, I think this is a case where cash is a gateway drug to just sitting in it forever. If you nailed this, good for you and you get a pat on the back. But I don't know if that really makes it any easier going forward because it might make it harder to invest for some people. It'll be harder to get back in. It also might make you overconfidence. I don't know. I guess this is probably situationally dependent based on the personality. Young investor, first market crash, buying hold investor. I invest in what I knew and based on the successful run in certain companies. I'm heavily allocated towards tech. I can now only invest in ETFs in closed-end funds or open-end

funds. And I'm trying to find the best way to approach adding more to my portfolio while keeping fees low and minimizing tech to be more diversified. Any suggestions on how I should put more money in the market now? Looking at a way to be less focused on growth in tech names in a more diversified way. I guess invest in the stuff that no one else wants to right now, which would be value stocks. Maybe we can, in one of the future segments, we can talk about how badly small cap value and stuff like that has gotten killed. But that's maybe one of the more surprising areas of the market for some people is the fact that value was getting crushed before the crisis for years. And now during the crisis, value has continued to get crushed by growth, which I think is

probably shocking to some people. I guess the easiest way to diversify is total market fund, though, right? Even though that is still a little tech heavy. Yeah. There's a lot of easy ways to get diversified these days in any sort of index fund, I suppose. Thoughts and opinions, how much the underlying economy is to blame on the stock market drawdown. For example, low interest rates, inflation, strong dollar, lack of savings, money, printing. At the end of 18, before the Fed got involved, it seemed like the economy was headed towards the recession. It didn't seem that way to me. And it didn't seem that way to anybody, really. Economist, strategists, I don't think anybody saw a recession on the horizon in terms of

specifically related to the economy. Here's the analogy no one is used yet and just thought of it. So in the early 80s, the Fed pushed interest rates up to 20% because inflation was so high. Paul Volcker sent us into a recession on purpose. He put the U.S. economy into a recession, which is essentially what we were doing now. Now it might be more closer to depression than recession. But that's something that happened that he pushed us into recession. And stocks were trading at like eight or nine times earnings in the early 80s and still fell 27 percent in 1980s. in 1982. So that's one of these instances where it didn't matter what the underlying economy and market valuations looked like. They pushed us into a recession and whatever happened from there happened. It wouldn't have mattered how the economy was structured going into this. I think this was going to be painful no matter what happened because we literally flipped a switch and the economy shut off. Anyone's saying that like this is worse because interest rates were low and what the Fed was doing and the Fed was out of ammo?

No, the Fed would have done this same stuff no matter what interest rates were. What you could potentially say is that stocks are down more because they were expensive. I don't know if I necessarily believe that. No, I've got a post that's going to debunk all this. It doesn't make any sense because value stocks have fallen more than growth stocks. So if you're using valuations to guide your actions before this, you've gotten hurt even more than the market. And the same thing with international stocks and emerging markets.

They're down just as much. So that is nothing to do with valuations. That's just markets are falling because the economy. economy was shut down. Okay. Last one, and then we'll move on to some recommendations. People refer to the market all the time. I'd be interested in both yours and Ben's definition of it.

I've defined it as a collection of all investor emotions at a point in time. Thoughts, what does it mean to you? I don't want to overthink this. When I think about markets, I mean... You think about the down and I think about the S&P. The first thing that pops into my head is the stock market. Pure and simple, just a stock market. Obviously, there's many, many, many more markets.

currencies are even bigger or bonds. But I just, I don't know, I guess I think of the S&P. When someone says, how did the market do today? They mean how did the U.S. stock market do. For us, that's maybe in other countries as different, but for us, and for a lot of people that's still the Dow, whether that's right or wrong. Actually, last one. Quarantine Life calls for some new kids book recommendations from you guys. Ben, anything new? I guess we got an Elmo Easter book sent to us the other day from one of the grandparents. My daughter has been really into the pig and elephant book series lately. She's probably got six or seven of the pig and elephant one. She's learning how to read pretty good. She's in kindergarten. And they're very short sentences

and big words on the pages. So she's been enjoying those. We've been reading a pig and elephant book every night, which are not bad. Okay. I think I mentioned this one time. Kobe loves the No David books. You ever read those, Ben? No. They're pretty cute. There's a Dr. Seuss book. This is weird. It's a Dr. Seuss book, but it's not by Dr. Seuss. Do you know what I'm talking about? I got nothing there. Nope. It's like Dr. Seuss owns the rights. I don't know. It's by Helen Palmer.

It's called A Fish Out of Water. You ever read this one? No. A fish out of water. Highly recommend. Kobe goes nuts for it. Okay. Recommendations.

What do you got? How far into Ozark are you? I finished. You finished it already? I'm only three and a half episodes in. Okay. So after I finished and some jackass on Twitter ruined it for me, I made a joke that Ozark was even better on the rewatch.

That's your fault. I blame that on you. Some jerk ruined it for me And I muted him I wish I could block him So nobody go into that tweet To see the response I couldn't find it

But anyway Wasn't that on the very first day It came out? Yeah, that's why I was joking But someone had already watched the whole thing I think he might have responded a day or two later Okay But anyhow

I thought that it was The best season yet And here's my take on Ozark I thought season one was great But after watching it was like I don't really need another season Like I'm fall, I'm good And then I thought season two

was even better than season one. So I was looking more forward to season three than I was to season two. And did you realize that it's been 18 months since the last season? Yeah, it's been a long time. And now it's going to be like three years

until the next one. So I thought that this was the best season. I just wonder if it's recency bias because I really like season two as well. So far, again, I'm only three or four episodes in. I think this show is neck and neck with succession in terms of I do not have my phone on me

when I'm watching this show. Me too. I think it's absolutely, I love it. I think it's one of the best shows on TV right now. And so far from where we are, I'm really into season three. It just, it picked up, the same thing as succession. It picked up wherever it left off and it just kept going and getting better. The story and the writing and the characters.

Like, the characters are perfect. They're so well cast. Like, Ruth is amazing. I think Ruth is my favorite character. She is such a good actress. And her attitude that she has is, I like the new brother-in-law character, Ben. And, yeah, I'm into it. Yeah, excellent.

I started the new Westworld. I thought Westworld season two was awful. It was, like, painful to watch, even though I liked the first season. But I'm watching this because Jesse Pinkman is on it now from Breaking Bad, and they moved into the futuristic world. And it's kind of interesting to watch their thoughts on what the future is in terms of technology. It's still kind of hard to watch and boring, but at times, but I'm into West World again for season three, I guess. I'm out. And finally, I've been listening to the Peter Attia podcast to get all my coronavirus stuff from medical professionals.

if you're really into this stuff and want to get down to the nitty-gritty and details, he's been a great follow, I think, for this stuff. This is one of the things where I can't look away and I have to pay attention to this stuff. So if you're really interested in it, I would listen to his podcast called The Drive. Okay, not to belabor the point, because we've spoken about this now. There's a third week in a row. But you and I were talking about the Tiger King and how it is definitely being overrated, at least I think, in my opinion.

and I'm one of the ones overrating it due to the fact that we're at home and we have pretty much nothing to do. People are giving it a premium right now. Yes. Because there's nothing else to do. Yes. It was good. I mean, talking about the characters.

Oh, my God. Yes. It felt like a reality TV show. Did you finish or did you stop? I guess I watched five episodes. I didn't finish. I don't know. I might.

I kind of lost interest. But anyway, okay, we're still going two shows a week for the foreseeable future. And if we go into a great depression like everyone on Twitter is recommending, I guess we'll go to three shows a week if that happens. Thanks for our producer, Masu Passy, who's been working hard, I think, doing a lot of other podcasts, too, for getting this together. Send us an email, Animal SpiritsPod at gmail.com. Ask us a question. Give us a rec. Give us a review, and we'll talk to you on Friday.

Oh, you just asked for a wreck and the review. Sure. Come on. What else do people have to do right now? Give us a review on iTunes. See you Friday. You know,