Animal Spirits Podcast - The First Thing to Go During a Crisis (EP.132)

Episode Date: March 25, 2020

On this week's show we discuss hindsight bias when the crisis is over, impressive measures by other countries, turmoil in the bond markets, will we get a new generation of Depression babies, the need for fiscal stimulus 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

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

Welcome to Animal Spirits with Michael and Ben. We're going to start off today with an article by Jason Zouye from the Wall Street Journal. The Panic of 2020? Oh, I made a ton of money. And so did you. So here is the lead. It's springtime in the year 2030. You're looking back at the crash of 2020.

The devastation had dealt your portfolio on how you behaved as an investor. What will you say? If human nature is any guide, and let's face it, it is, your accounts of what happened will begin with such words and phrases as clearly, or it was obvious to me that, or everybody knew that. In the future, your memory of the crash of 2020 won't be a recollection. It will be a reconstruction built partly from what is happening now and largely from what you learn later about what hasn't happened yet. I'm describing hindsight bias, the belief after something happens that we foresaw that it would occur. You wrote something about this too, and

crazy thing that it almost happens immediately too. He's talking about it in the future, but how many investors are there today that we're talking about how how much money they've had in stocks for the last seven years. And now that we have a crash, they're all saying, well, I actually sold in January. Don't you think it's the case where- Hang on, hang on. You're saying that? I'm not saying that. Are you making that up? Yeah. No, wait. No, wait. Hold on. You're really seeing that? You're saying that people sold in January? You don't think there's a lot of people bragging about how they sold and how they've been sitting in cash and now they're ready to go. You haven't been seeing that? I have not been saying that.

Okay. But don't you think it's the case that, and you haven't heard from people who friends and family members were like, actually I sold in middle of February because I was getting so worried about this virus, don't you think it's the case where if people, let's say they did sell some that they always move it up 10% or so more they actually sold? Like, I actually sold the markets were only down 5%. And it probably was really more like 15 or 20%. Yes. So I think it's almost like immediate hindsight bias where people try to move the goalpost. for their decisions. But it's true. When this thing gets over, people are going to say, like, oh, it was obvious when this thing hit or this number hit or this point in the disease,

that's when we knew the economy we were going to turn the lights back on and the stock market was going to take off. And there is no historical playbook for this. I think we're at a point now where any extreme outcome seems equally as likely. Like the range of outcomes, you could drive a truck through it. So would you be shocked if stocks fall another 25 percent? I wouldn't. No way. Would you be shocked if stocks rally 25% over the next three months as we get past us? I wouldn't. No, nothing at this point would surprise me. That's the point about hindsight bias, especially right now, that whatever happens, it is going to look obvious in hindsight.

Right. And there are going to be probably people that take victory laps for calling this. And again, I think the people who are taking victory laps now for thinking that they called a crisis, even though this is something that no one really predicted. Again, those are the people that aren't going to get you out of it either. So they're going to be stuck. Let me ask you a question, sympathetic to the people that have been warning us for the last five years. Do they deserve a tiny bit of credit because is it possible that the reason why stocks have declined so much so quickly? Let's say that it's 80% because of the shutdown in the economy, but 20 to 30% because of where valuations were. Is that possible?

No, because the emerging markets and international stocks were much better value than U.S. stocks and they even getting killed just the same. same. Stocks across the border getting killed. I don't think you can say I was right for the wrong reasons for this because we literally shut the economy off and take a victory lap. The thing is that people, of course, nobody nailed the coronavirus. Like that goes without saying. But maybe the point is when you're cautious because of valuations and frothiness and all those sort of squishy things. Then you could just be cautious your whole career like some of these people have and every time there's a crisis say, I nailed it. That's what a lot of these people are doing. I know. I'm just trying to be a little sympathetic because...

I'm not, though. These people don't deserve any sympathy for being wrong for 10 years and then right because we led smack dab into a global pandemic. I don't... No, I do not give these people any credit for that. You're being way too kind, I think. I'm sorry, but I don't give these people a free pass for being wrong for so long. And then all of a sudden, they're right for because they got lucky. I'm not a free pass and I'm not saying I deserve guru status at all. I'm way more. in your camp. I'm just trying to play devil's advocate here. I'm in the William Bernstein camp of the reason the word guru exists is because Charlton is so hard to spell. How's that sound? Man, you are bringing it with your playoff beard. Not until the kids go back to school.

It could be a long time. We'll see. And by the way, my wife gave me a haircut the other day. Looks good. Surprising. Yeah. I mean, it's, I think. Not to brag, but I give myself a haircut every two or three days. I've been trying to talk you into growing it out to have a Larry David for the pandemic until we get to go back but you just honestly what would that look like that would be so embarrassing i'm pushing for it sorry so we're only like a week and a half into this thing it feels like eight months but it sounds like people are already starting to lose their patience and how long do you think we can actually hold out because it seems like there is a certain subset of the population that's just going to say ah eff it let's just let's go back out and we're not going to do this we're not

a sacrifice. Well, who's we? You mean you and I? The collective we. How long until policymakers obviously start getting nervous about this and people who run businesses? By the way, you have you have Kramer on in the background of your TV. I'm afraid that's what I would look like if I grew my hair out. Yeah. Oh, there we go. That's a better comparison. You can be Jim Kramer. But again, it's only been like a week and a half. I keep seeing best case scenario, life goes back to normal in July. That's a long time. Are people going to be able to, I feel like there's some parts of our country that some of the stuff that makes it so great also can be held against us in a crisis like this. Maybe I'm making too much of a leap here, but do you think our

response to this crisis and the fact that so many other countries like South Korea and Singapore and some of these other ones that we're going to talk about, Denmark, their response to this crisis has been so much better than ours, that doesn't this make you feel less certain that the U.S. is going to own the century, like we did last century? Like, after the World War II, we were set up to kind of own this thing and we've done it. And the U.S. is exceptional in many ways. But doesn't a crisis like this make you second guess that that's going to happen again? Yes. But what is Denmark's population in terms of demographics, racial voting? Like, I feel like not really knowing much that they're much more homogenous than we are.

Yeah, there's a lot, a lot of these countries are smaller and we're able to do it. I'm just saying for years now, again, this is maybe the wrong time to have this conversation, but people have talked about, like, why don't we just invest all our money in the U.S. and shun international. But when I look at what a place like South Korea has done for this, that is just so impressive to me that what they've been able to do and mobilize and pull off and their technology they've used. And I guess I'm just saying this gives me hope that the rest of the world has

in a lot of ways in some places is catching up to the U.S. and maybe can do some things much better than us. I just, I don't know how, if they don't pass some amazing form of fiscal stimulus, I don't know what's going to happen and how soon people are going to revolt. Well, in terms of the revolt, I think that's, I'm an optimist by nature, but it's impossible not to go to a dark place at certain times. And the dark place that I've been going is like, okay, what happens when people just run out of money and they need food?

Are there going to be, is there going to be social unrest? Are there going to be guns in grocery markets, God forbid? You know what I mean? I've heard a lot of talk of people saying I should probably buy a gun right now. And it's wild. And that's one of the things is taking care of those necessities. So people aren't going to stay home if they don't have food. I mean, that's obvious.

Right. And I don't want to like poo-poo this whole thing. There's a lot of great things going on. There's a lot of people stepping up, especially in medical professionals. And I think that's the thing that people aren't giving enough credit to is the fact that these people are on the front lines and putting themselves at risk. And they need everyone else to sacrifice and sit at home for another couple months so they can stay safe. Yeah, but everyone can't sit home because people need money, which is why government needs to do something immediately. Right.

That's why the people who are against fiscal stimulus right now are just awful to me. The people that are worried about hyperinflation and lower interest rates and what the Fed is doing, we need the government to step up to make sure that this thing goes over. way. They need to take care of the economy so everyone else can do their job. So what text message did you get from a college friend? Oh, so I think it's easy to, again, it's only been like 10 days at this point. So I think we still have a long way to go. But I got a text message from a friend. He was asking, I've got a lot of questions from people like from college that I haven't heard from in years asking me about the stock market, which is interesting because now it's the point that they finally start to worry about it. And he was asking me some questions about that pretty standard.

I've had a few people ask, should I stop my 401K or 4-3B contributions because things are so crazy and wait until the dust settles. And I feel like that happens in every one of these situations. I'll probably write a little bit about this, but you can guess what my answer would be. But I asked him, I said, hey, how are things going? Because he has three young kids, maybe a little older than mine. And I said, all the kids starting to go stir crazy. And that's like giving other parents that lay up one is kind of like the easy thing to do. I think the new thing for everyone in quarantine is, remember how before people would say, oh, I'm so busy.

Now people can kind of make jokes about watching their kids and homeschool and how hard it is. And he gave me a straight, honest answer to that, no, actually, it's kind of great. I get to spend more time with my family. And it's one of those things like, it's easy to make these jokes about how hard it is with kids and being around them and trying to get stuff done and working from home. But I liked hearing from someone, there's a bright side to this. And he was looking at a good, he didn't take my bait and say like, oh, it's awful. It's so hard to get work done with kids around. He just said, it's great.

I could spend more time with my kids that I haven't done in a while. And I do think this is the kind of time where you figure out how much stuff in your life just really doesn't matter. And there's so much stuff that I just pushed aside. And I think a lot of people have to in this to be efficient with their time. And so there's so much stuff that I used to read and watch and pay attention to that it's just completely out of my life at this point. And so maybe this is a good thing for getting people to be a little more efficient with

their time and understand how to spend it. And obviously, people without kids, they probably don't have to. to worry about that. You and I have talked about the difference between some of our colleagues who don't have kids and who are maybe single and how they're probably having a little bit of an easier go at it and watching Netflix and such than us trying to do with kids. But I think it can make you maybe compartmentalize your time a little better and use your time management skills better and something like this. Yeah. Let me ask you this. Do you think that we're going to see a surge in babies as well as divorces? Can I take the other side of the baby boom one? Don't you think no one

wants to touch each other right now because of their word they're going to get the virus from someone? I don't know. Do you think there's a lot of that going on right now? Maybe. I've heard that too. Don't you think anyone trying to extrapolate the long-term trends from this? It's just way too early. I've seen a lot of talk about how is this after the Great Depression, they called them the Great Depression babies that these people really short up their finances and they didn't spend money and it really scarred a generation. I mean, we've been doing this for 10 days. Do you really think it's going to change people's minds? I think it's probably more likely. Like, I don't think young people are going to say, oh, man, I should have saved more money because for most people

who have the most impact from this, like restaurant workers and service workers and people who are not making money right now, they couldn't save to begin with. So how are they ever going to save for something like this? So I honestly think the bigger outcome here is that they're going to say, well, if the government can offer us money during a recession or a pullback, why won't they always do that? Why wouldn't they do this? So I think that's going to be more of a groundswell than getting people to save more money. What do you think? Why wouldn't they do this? What do you mean this? What is this that you're referring to? I'm saying if the government is going to hand us out money and help people make it through this, I think people in the future are going to say, okay, well, why don't they do this

for every recession? Why don't they help us out when unemployment spikes for every time like this and smooth the downturn a little bit? And maybe that makes sense in some ways. And I think that would be more of a conclusion people will jump to then. I'm going to try to save more money and turn into a great depression, baby. I don't necessarily think that's going to happen. I think a lot of people are going to say, there's no way I could have ever prepared for this. So what's the point of even trying? So why is there such strong action from the Federal Reserve and hopefully the Congress to follow? Well, it's obvious. Things are really bad. And the Federal Reserve Bank of St. Louis President James Bullard predicted that employment may hit 30 percent in the second quarter with

50% drop in GDP, which is obviously, oh my gosh. And then you saw different predictions from Banks, Bank of America had 12%, JPM had 14, Goldman had 24 and Morgan had 30. And this basically tells me we're all just throwing darts. Yes. And the other thing to remember when you see these numbers this big, at that point it doesn't really matter, but these are annualized numbers. So they're looking at quarterly hits, but they're annualized. So that'd be like taking stocks are down 30% this year and then annualizing it to go the rest of the year. So that doesn't mean that that's what GDP is going to fall for the year. But again, these are all just guesses. And I guess these places have to put these out. But what's the point? They're just going to change. I mean,

are these more worthless than year-end S&P 500 targets at this point? Yeah. So the Vanguard forecast is pretty interesting. It shows a V-shaped recovery and economic and GDP growth. All right. Cool. Yeah. So Joe Davis, he's their economist. He's pretty good. He said, 17% an annualized basis. And again, that's the deepest one since the 50s. If it gets more than that, we're talking about things that happen, haven't happened since the 20s or 30s or even before then. They also said Vanguard showed their 10-year forecasts of returns, and they've gone from December 31st of 4.4% and this is global equities, 4.4% annually over 10 years to up to 6.8%. So silver lining, stocks go down, expected returns have gone up or should have gone up or should

have gone up. Let me ask you a question. And I don't believe this really at all. I'm just asking the question. Is it possible that the economic damage will be worse than the stock market damage? And it's hard to compare one to the other. But like, for instance, in 2008, what did real GDP decline? Four and a half, five percent maybe? Yeah, not that much. And the market fell like 58%. And people overreact in the stock market versus the economy, which makes a lot of sense. the stocks fall a lot more than the economy does. Is it possible that, let's say that we get 30% GDP decline on an annualized basis? By the logic of how stocks have reacted to the economy in the past, does that mean that stock should be down 90%? Is it possible that stocks only,

on I'm using air quotes, only fall 35%. This could be the type of recession or depression that we saw in like the 20s or the early 1900s, late 1800s. So the National Bureau of Economic Research which has the data going back to like 1850. And if you look at the GDP declines in some of these, there was a depression in 1920 and 21 where GDP fell 38%. After World War I and part of the pandemic in 1918 and 1919, it fell 25%. 1913, 26%. 1907, it felt 30%.

And so we haven't had these numbers. The panic of 1893 was 37%. To your point, we've talked about this in the past. The market reacts much stronger to GDP than the actual GDP numbers. And some of the, like the recession we had in 2001, one, it barely fell at all. So I agree with you. The economic, this could be the type of situation where the economy is way, way worse than the stock market because maybe the stock market can look past this a little bit and understand like it's going to end. It's not one of these

situations like the Great Depression lasted for years and years. And it was technically over by 1932. But that stuff lingered until World War II, basically. Patrick O'Shaughnessy wrote a piece about that where he called, he contrasted like winter versus an ice age. And obviously, the Great Depression was an ice age. Hopefully, this is just winter. Right. So some of the numbers could be similar to the Great Depression, but I don't think people realize how long that lingered and lasted, and that really did change people, again, because it lasted so long, and because a few years after people thought it was over in 1937, they had another 50% drawdown in stocks and another huge recession. It just feel like it

didn't end. So we talked about Denmark earlier, and Derek Thompson has been all over this one. obviously, it's a much smaller country than the U.S. They have the ability to do this. But the Danish government told private companies that if you're impacted by this, we're going to pay 75% of your salaries to avoid mass layoffs. And they're planning on doing this until June. And it's as much as 13% of their national economy. And they basically decided to, the way he described it, he says, Denmark is putting the economy into a freezer for three months. So their strategy is basically we know everything is shutting down because of this. We want to get rid of it, but we don't want to have to go through the process of laying people off and then having those laid off people

rehired. That's just going to take even longer to do. So we're just going to put everything on hold. We're going to pay for the salaries. We're going to give people 75 or 80 percent of the money they were making. And we're going to force these companies to keep them on and we're going to help them out. And then hopefully we can hit the ground running when we're out of this, which I think is, is it going to work? I don't know. But it sounds like a really good idea to me. And it's crazy to me how much second-guessing we talked about hindsight bias already in research is going to be done in this period in terms of what worked and what didn't work. And this, to me, sounds like a really interesting idea. Yeah, I mean, this makes a lot of sense. I don't

know why we're not, listen, we're not policy experts, but this seems like a sensible solution. So Art Laffer and Stephen Moore are against this type of thing. They had an op-ed in the Wall Street Journal, Obama's bad stimulus example, where they keep calling him Mr. Obama. Don't you call the next president president? I guess. So these are the two, I didn't read this. These are two of the guys that are against fiscal stimulus. Yeah. So go away. These guys need to go away. That's my stance. Here's a quote. A much simpler and more effective stimulus would be a pro-growth tax cut, such as a suspension of the payroll tax. In addition to boosting take-home pay,

it would give 27 million small businesses an incentive to hire rather than fire. It's the same shit with these guys over and over and over and over. Yeah, no small business is going to be hiring right now unless they're directly doing something to help this crisis. So, I mean, so out of touch. And you made a comment like, can billionaires go away or something? And obviously, you don't mean billionaires, but just billionaires with opinions that are so out of touch with reality.

Like you saw Gwyneth Paltrow getting dragged yesterday because she said that people should learn another language or something or what did she say? people should use this time to write a book. It's like she's viewing this as a vacation. Has she given her pandemic morning routine yet? I'm waiting for it. She's mailing her vagina-scented candles to everybody to get through this tough time. What is Mark Wahlberg doing for his morning routine during the pandemic? That's what I want to know. I can't move on until I know. Here's the other side of this, which obviously I agree with. I'm just saying, is it possible that people that are so detached from reality are able to give an objective opinion about what's best for

whole while not giving a shit about the ordinary man. And not that they don't give a shit, but maybe just they can't, they're so out of touch that they don't really realize what they're saying. Is that possible? I would take it the other way where I feel like the people, a lot of our elected officials right now are so out of touch with a common person that they don't understand that these people need money now. Guess what? In a week, they have to make rent and mortgage payments and a lot of people aren't going to be able to do that. And so I think they're so far away from that common person that when they think of the system, they're not thinking about these individuals that are going to impact the system. And so I think you have to think more micro on this

one than macro in a lot of ways. Like the 2008 thing was macro. I think this one has to be thought of as being micro. Okay. Well, very well said. And I completely agree with you because these people are worried about what inflation impacts this might have. And yeah, this is not ideal. We are facing a very, very, very, if we get to a point where 12 months from now we have inflation, that means, guess what, we won. Like, things are better. That's a great problem to have at that point. So we'll deal with it. But in the meantime, we have a very serious situation that needs to be dealt with. And whatever ramifications we have to deal with in the aftermath, that's something they still haven't passed anything. Maybe by the time this airs, we're taping this on Tuesday

morning, maybe by the time this airs, they'll have passed something. I don't know what's taking them so long. But I read something on the new proposal that people who make above a certain amount of money are going to actually have to pay it back potentially. And maybe that's something that they just write off and they're just saying that now to make people feel better in the government and then eventually they'll write it off and say, no, you don't have to? But don't you think that's the wrong solution to take to make people pay this back eventually where they would get this stimulus money and they would say, well, if I'm going to have to pay this back and my taxes or something in the future, what's the point of spending it now anyway? Yeah, not sure. So

MEP Faber posted some valuation stuff from the Lutehold group showing various metrics. tricks based on 10 year and five year and price of sales and price to earnings and all sorts of things for different market cap spectrums. And obviously, things have gotten a lot cheaper than they had been. But that's looking backwards at earnings that aren't going to materialize. So Goldman had a piece where they're projecting full year for the SP 500 at $110 a share. So that actually means that where is the S&P right now? So with the S&P at 2377, stocks can be more expensive, actually, if earnings come down more than prices. Well, and that's what happened in 2009. There was a big spike up because earnings fell so much.

And then when it corrected it, they came back down. But this is another reason why the annualized stuff doesn't work. So they're showing second quarter 2020 in annualized decline in earnings of 123%. I'm pretty sure that's impossible. I don't think they can fall more than 100%. Okay. Maybe they go negative, I guess. Is that what they're saying? They're going to be completely negative. So they are. Okay. Oh, really? They're saying second quarter. they're estimating negative earnings. Hold on. Of course an interest can go negative for a quarter. Right. Right? Yeah. I was just saying the growth rate, but I guess, yeah, I guess it can go negative. I guess, okay. Sorry. I guess Goldman had me. Hold on. Don't we assume that earnings are going to be negative?

Yeah. At this point, right? Yes. That would make decent sense. Okay. So Oswath-Damadron had a piece on just the state of the market, what's going on, macro, micro, and what a great resource that He also puts a video up, so I highly recommend anybody that has time that wants to learn about this. Joe, check this out. So he showed that globally companies have lost $26 trillion in market capitalization of the last five weeks. That is, that is a lot of money. I liked his thing here. He said the first casualty in a crisis is perspective. Love it. Which is perfect. And I totally agree. But when you're such a bottom-up valuation-centric investor as he is. is how do you begin to approach this situation? Well, he had a great table.

It was sort of a complicated table. He broke down companies by debt load, and then within that, he looked at profitability. So companies with the most amount of debt and ones that are also least profitable are getting disproportionately hit, which makes sense. So the market is doing a good job saying that companies that are potentially unable to survive are getting hit the hardest. So that makes a lot of sense. I just want to read what he wrote. He said, in one of my first post on this viral market crisis, I mentioned that the first casualty in a crisis's perspective. As you get deeper and deeper into the specifics of the crisis, you will find yourself not only getting bogged down in numbers and in despair.

I have had moments in the last few weeks when I have had to force myself to step back from the abyss, think about a post-virus world, and to reclaim the initiative as an investor. If you are a pessimist, you may view this as being a denial about what you see as an economic catastrophe that is about to unfold. but I am a natural optimist and I believe that this two shall pass. And I think that is so perfectly stated because I am a natural optimist. I always believe in the human initiative and the desire to make things better. But I'm also a realist. So I can easily see this getting a lot worse. So I understand how some people who are not a natural optimist who are natural pessimists

go to a really dark place. Like I totally, totally get that mentality. The orderly stuff he talks about how he shows yields on corporates and stuff. So he talks about again how the most high-quality companies are doing the best and the most low-quality companies are doing the worst. That's one of the reasons why picking a market bottom is so hard because when that happens, the junkiest companies typically bounce the hardest at first. And everyone goes, oh, this is a junk stock rally, dead cat bounce, do not trust this. And so when this thing does happen, there's going to be a lot of people who don't believe it

because they're going to say, all the low-quality companies are bouncing. This is just because they sold off so hard. And that's why so many people miss the bottom because that happens. happened in, I remember all of 2009 after the bottom of March, everyone was saying junk stock rally, we're holding on to our high quality companies. We're not chasing here. And before you know it, it's gone and it's away from you. Well, here's something that makes me relatively optimistic that at least a short-term bottom is here. Really? You're calling a short-term bottom. Well, I'm looking at the screen. Stocks are up. So this is not a, I'm saying short-term.

Okay, because stocks are up, what? Six percent today? It'll be gone by lunchtime, but you got to start Short term right now is like a half hour increment, right? Yes, yes. So Merrill Lynch said that this is their largest retail sell day of the entire move down. And that was yesterday. And my dad never asked me about the market like specifically. But he just said, like, are you sure we don't need to make any changes or something like that? And I would say that he is definitely in that retail mindset of people that don't really follow the market or know about it, but was feeling like a visceral reaction. So yeah, Vanguard investors on the one hand, who will never do anything. And I think Merrill Lynch is not quite Robin Hood, but somewhere in the middle. I think 30 year to 35 percent drawdown. In some other places, small cap value is down, what, 45 percent, 40 percent, some of these other places in places like international emerging markets that hadn't participated as much on the way up. I think 35 percent down is certainly a place you could see some capitulation of people going, all right, I tried, I did it. I stayed in. I'm out. I'm watching my hands of this. And I think you get to 40 or 50 percent. And that's when

people say, sell out now. I'm going to sell first, ask questions later. I definitely think that the capitulation tipping point is probably coming for those people who are going to capitulate. Yeah. All right. So we spoke about last week that open table reservations or dine in traffic at declined like 58%. It's now completely gone. It's down 100% everywhere. And there's something called dining bonds where you can buy a gift certificate for 80 cents on the dollar, whatever it is, and there's a map of restaurants all across the country. Now, of course, there's a risk that these places aren't going to be in business. But if there's a favorite restaurant that you like, that's participating. It's a great idea. Great idea. So what's the deal? You pay 80 cents on the

dollar, and then when you come back, you can spend the full dollar. Is that how it works? Yeah. So not everybody, I mean, it's not, like I said, there's a map. I zoomed it on Grand Rapids and nothing there yet been but so one of our favorite local places vitalies is our local pizza place here they started selling make at home pizza kits because they didn't want to some people are worried about even getting takeout food and having someone else prepare it for you because you could potentially push it out to them so our local place decided to do make at home pizza kits because I think there's probably people now that are worried about even doing takeout orders from places because they're worried they could get past through the food so this place

is doing that and so I think it's cool to see them get creative but I walked in there and we got some and picked up a few of the pizza kits. And just seeing this brand new restaurant that was finished like 18 months ago, just sit empty. That's got just got to be so tough for these places. I can't even imagine how stressful that is for them. So to that point, we're starting to see some economic data. Mike Bird tweeted Eurozone UK and Japan composite PMIs are horrendous, worse since or worse than the financial crisis lows. And a large portion of this month didn't even include the lockdowns now in place. So this is again, UK and Japan. I imagine it's going to be the same here. And then Wren Mac tweeted, the message from the flash PMIs in Europe and Japan, service industries are

getting clobbered more than manufacturing. Once we get through this, it'll take much longer to turn services industries back on than manufacturing, a V for manufacturing, maybe, but a you for services. So to the point about these places where it's the service industry, who would have ever thought that 10, 11, 12 years later, 2008 would be overshadowed? This is like the great depression taking away the thunder of the panic of 1907. Like no one ever talks about the panic of 1907 being this nasty thing, except for people like us who read those books and our big market nerds. But I just still can't believe that this thing is going to dwarf 2008 or overshadow it in a lot of ways, like in 50 years. It's hard to believe. More people are going to be talking about

this than 2008, right? It's hard to believe. Who's going to write the book on this, by the way? I don't want to say Michael Lewis. This seems more like a Gladwell book than a Michael Lewis book, right? Because this is like a social type thing. Yeah, because the financial market aspect of it is secondary. You know who would write a great book on this just because I was reading his book on what was it called? Darned, I can't remember. The Joan O'Sara book that I mentioned recently, a piece of the action he was writing about the history of the financial services industry and how it came to be and how it was democratized. He would destroy this. Okay. Yeah, you definitely need someone who's well versed in a number of different topics because, again, the financial

market implications of this are way down the list in terms of importance. All right, we got to talk about liquidity in the bond market. This is like one of the biggest. topics on financial Twitter and in the world. So just a few tweets on the matter and then we'll get into it. James Cromby said the spread on investment grade bonds is now higher than the spread on high-yield bonds just one month ago. Okay, so I hold in my brokerage account as almost like an in-between of my online savings account and stocks, it's not a huge amount of money for me, but I hold one of the Vanguard municipal bond ETFs. And at the lowest point, this thing was in a 17% drawdown. It's now making it back. But what we've been seeing

as the Fed comes out with their new actions is any place of the bond market that the Fed hasn't given their stamp of approval to has just gotten killed. And until the Fed says, no, we are going to be backing this up and don't worry, we've got it. These places have been getting crushed. And it started with anything outside of treasuries and then they short up mortgage-backed securities and asset back securities and those other things. And now they're finally moving on to corporates and hopefully munies at some point. But it is the losses that we're seeing in something like LQD, which is the corporate bond ETF, are insane. And then you saw this huge snapback rallying them yesterday. This is from Corey Hofstein, just an insane stat of the day. In September 2008,

during the midst of the financial crisis, LQD lost 10.5%. Month to date, it's down 20.3%. Whoa. So this is outside of the, so in the stock market, as of yesterday's lows, we were down 28% almost for the month. The worst month in 2008 was down half of that. The worst monthly return in October 2008 was 14%. This is one of those things that in some ways, obviously a lot of it has to do with panic selling and people in the need for liquidity and the fact that people just want cash. But the fact that people would be nervous about corporate bonds actually makes sense right now. Makes sense. Yeah. Makes a lot of sense. Like this isn't something that you can say like, oh, blame it on the ETFs. This is more about the underlying structure of the bonds themselves.

and the corporations that are backing them than the actual ETF market, even though there has been dislocations in the ETF market. Danny Berger at Bloomberg was tweeting, and there's charts of this that will show. Biggest investment grade fund outflows on record, like I think five times the previous, so just absolutely dwarfs anything we've ever seen before. And here's a great quote. Who is this from? Gregory Staples, who's the head of fixed income at DWS.

He said the flows into investment grade have been so steady over the past eight years that it was like the farmer coming in with a daily. handful of grain to feed the turkey in the backyard. Today, what the farmer had in his hand was an axe. So sort of like the Talib quote. This is one of those reasons why the best hedge against the stock market decline is U.S. Treasuries. It's not just bonds. It's U.S. Treasuries. Actually, it's put options. Okay. Put options. Unless the bank that issue those options go under. But isn't that the thing like, yes, there's paltry yields on these, but it still remains the best hedge that there is. And I've complained in recent weeks and months about how I'm more worried about

the bond market than the stock market because yields are so low. But this hedge is never going to go away, especially as long as the U.S. has this global reserve currency. And people are going to want that. And right now, in terms of safety, it goes cash, then treasuries, and then everything else is way, way down. So this is the stats from Barron's. Investors withdrew a record $55.9 billion from taxable bond funds on the weekend in March 18th. The next largest outflow was 15. So 56 now, 15 was the previous record. So just really incredible. And there's been some great work done on the ETF front by Eric Balchunas specifically. So I wanted just two plugs. So Ted Citey's had a podcast with James Aitken. Did you get to that, by the way?

No, my podcast listening is in a huge bear market at the moment. Yeah. Yeah. Understandable. So he was talking about the guts of the market, really the plumbing. And he was saying how what's going on with relative value strategies and risk parity and how all the stable relationships are blowing up. And he, it was a really, really good listen. Reggie Brown, who is one of the, he's a market maker, he's been like an original person in the ETF industry. He's been there forever. He said that current events are more a reflection on the fixed income market structure than it is on ETFs. If you look at what bond ETFs have done, they've brought more liquidity to the marketplace, they've driven spreads tighter to transaction large sizes. They've done their job,

but the bond market structure isn't doing a good job of reflecting in real time where bonds are trading. ETS are doing it for them. So he is obviously all in on ETFs, but I think that he's mostly right, that this is more of a bond structure thing than an ETF structure thing. Now, maybe this has exposed, I don't know, the myth that ETFs are providing fair price in, but maybe not because Eric Beltrunes, two tweets from him, he said, whoa, a $2 billion mutual fund, which I posted an NAV of $12 to $13 for weeks, even though the bond market was going to hell, all of a sudden went down 27% in two days. And then he said, whoa, part two, another fixed income mutual fund is down 40% to two days. Its NAV was 10% for weeks until Thursday when Outflow is forced

it to sell bonds face reality, NAV current 5.8. So this is almost like private investments where all of a sudden they have to be marked to market. Right, because bonds don't trade as much as stocks do. That's the problem. Right. So the ETF was actually reflecting reality in many cases, whereas the NAVU of the mutual fund, which is the real price, which is just stale. Right. ETFs are probably helping in price discovery right now, and it would probably be even harder to trade if you were just trading individual bonds or just mutual funds right now

and if ETFs didn't exist. ETFs are effectively front-running the prices in some cases, right? Yeah. So I think the truth is somewhere in the middle. Have ETFs been exposed? Certainly. but are they the problem? No. The bond market is the problem. Right. And unfortunately, this is the way the bond market, yeah, you're not going to be day trading bonds because you have to sell

them in these such huge chunks in the way that the bond market works is not the same as trading stocks. All right. Listen to our questions. Just started a new job and I have a 401K for my old job. 50% S&P, 25% international, 25% small cap. Would it be crazy to roll over my 401k into an IRA and use the cash to invest in sectors impacted by this pandemic, casinos, cruise lines, airline stocks, transportation, et-tops, et-tops, et cetera, or should I just play it safe and roll my old 401K into the new one in a few weeks? I would be weary of trying to catch a falling out, especially if you're using 401K money. If you have a fun account that you're trading with and a brokerage on the side, have at it,

but if you're taking your 401k and trying to catch the bottom in cruise lines and casinos and airlines, coming out of the crisis, you would have thought, financial stocks would have been the best performers because they got wrecked going into the crisis down 80% or something in some cases. Some of those stocks never came back. City Group, AIG, some of these stocks are still so far below where they traded before the financial crisis that you could have permanent impairment in a lot of these companies that just maybe it never comes back. And there are going to be one or two cases where you could find the steel of a lifetime? Sure, but I would have a hard time rolling over a 401K to try to take advantage of energy stocks,

airlines, or casinos. The hardest hit places are the hardest ones to catch that falling knife, I think. Yeah, I agree with Ben. 401K is really long term. It's not for play money. Now, if you want to open a play money, by all means, go ahead and have it at it. I would just say that you're not the only one trying to do this, right? A lot of people are trying to catch this knife.

But I would just say this. Here's why it's difficult, because let's say that you're right. and you catch a 20% pop, then you could like sort of overthink it and a trade turns into an investment. And then let's say like that you really nail it and you're up 40%, 70%, 80%. Then this thing like just becomes a part of you that you get married to and do you really want to be married to cruise stock? It just makes the decisions more difficult on a go forward basis. All right. I have been maintaining consistent allocations into a betterment general investing account in 9010 twice a month during all its turmoil. I was wondering if it would be a good idea to put more

money into the account now because the market is relatively low and skip some allocations in the future or continue with consistency. The market's not going anywhere. I think right now, you have to, first and foremost, you have to make sure that your personal finances are in order. And nobody knows how bad this is going to get. Let's just say that this is a nice age. Are you going to be able to get through this? And I think, like, that's the thing, Ben, you wrote a piece about how hard it is to buy, how hard is to be greedy when others are fearful, because you start questioning real things. Like, is your job going to be there? So, listen, if you are rock solid, if you have a government job, if you're a teacher and

your human capital sort of like a bond, then yeah, maybe you could afford to take more chances. But that's sort of my feeling on this. So my book recommendation for this week, for anyone who wants to understand the Great Depression period, if we're looking at something similar, is called the Great Depression a diary by Benjamin Roth, and this guy's son found his dad's diary years later and published it. And it's just an amazing book. And he was giving real-time accounts about what he was thinking about the markets and the economy and all these banks closing. And he talked about how the fact that when they got to the end of the crisis, no one had any money left. There was all these amazing deals to buy

anything you wanted, real estate, businesses, stocks. And no one had any money left because stocks just kept getting hammered the whole way down. So that's one of the things that people don't realize about some of these great buying opportunities historically is that a lot of times people can't take advantage of them because they don't have the means. So is this a generational buying opportunity? Maybe, but you have to be responsible. Let's just say that it is, okay? And you didn't go all in or whatever. All right, big deal. But let's say that you do go all in here. And this is not the generational opportunity that we thought it was. And stocks won another 35%. You just don't want to be in that position ever, ever, ever, ever.

not a hedge fund manager, you don't have to be a hero. You can make reasonable decisions. Okay. We'd be curious to know the state of Main Street heading into this bare market as compared to ones before. Better prepared or worse, feels worse due to income inequality. Loads of student debt, loads of consumer debt, anything else. On the student debt side, yes, that's tough. But I did a post recently. I'll put this on the show notes on the state of the American consumer, specifically the American borrower. And previous to this, things were actually pretty good. Yeah, I would say consumer balance sheets were in way, way worse shape heading into the last crisis because so many people were levered up to the housing industry. Technically, probably

doing a little better than going into previous crises because people have repaired stuff after the financial crisis. All right, recommendations, Ben. What do you got? All right. So I said my podcasting is in a bit of a bare market, but I did listen to the rewatchables with Bill Simmons on Castaway because I absolutely love that movie. It's harder to listen to podcast because you don't have the commute and time to go to the gym is hard. But when everyone's in bed, I go downstairs in my, I call it a workout room, but it's basically just a storage closet where I keep my bowflex. And listen to The Catsway One. And the ending of that movie always left a sour taste in my mouth. No spoilers here because the movie came out in 2000. So there's no

such thing as spoilers anymore. But he explained what the ending really meant in that movie. I still didn't get his explanation. I went back and watched it. And that movie, it changed the way I look at the movie. And now it makes a lot of sense. And I loved the theory that he gave. So if you like that movie, I rented it and watched it again because I just had to. We watched The Great Depression, which... Wait, hold on. Hold on. Can I just say one more thing on Castaway? But it's also one of my favorite movies. Like, I love that movie. But let's say I saw it a dozen times. I've only seen it in full probably once. And whenever it's on, I always watch it, but it's always the middle.

So I don't know if I've ever seen the beginning more than once. You have to look for some clues at the beginning that I was never paying attention to before and never realized. And there's ties to the beginning in the end that you never realized before. And it makes more sense. And it made me appreciate the movie more. We watched The Great Depression, which is a Gary Goldman HBO comedy special, which is one of the better ones I've seen in a while. He went through this crippling depression where he had to leave the comedy industry for like two years and move back into his parents. And he talks about it open and honestly and about how he came back and how he made it and and pulled himself out of it. It's interesting in terms of the human front, but also he's

really funny and a smart comedian. My reading is also in a bear market right now, but I have had time to read the new C.J. Box one. I think it's my 22nd one in the series. Come on. Who is it? You've never mentioned this. This is the Wyoming Game Warden one. It comes out every year in March. It's called Long Range, and I felt like I was saying hello to my old friends, Joe Pickett and his wife and his kids and Nate Romanovski. I love that book. Finally, we finished high fidelity. I'm going I doubled on on that recommendation, but I wanted to bring up something that I noticed. So in the show, the main character, Zoe Kravitz, she drinks hard liquor straight. That's like her drink, drinking a lot of bars.

Don't you think the ratio of people who drink dark brown liquors, bourbon and scotch and whiskey on TV shows and movies is way, way higher than the number of people who actually do it in real life? And shows and movies, they always make it look so cool to just drink your straight whiskey or whatever. and I just don't know many people in real life that actually do that. Excuse me. Yeah.

Okay, you're one. My drinking is in an raging bull market. Same. I never drink at home, but I'm almost out of Maraschino Cherry. So I've been having an old fashion, at least one, every single night. Yeah, I agree. Drinking has got to be in a bowl market at the moment. All right, what do you got?

All right. My recommendations. I went to The Invisible Man with Elizabeth Moss. Excellent. Did I get a pat on the back yet? calling the fact that the movie theaters are going to release all their movies early? You told me it would never happen. Kudos to you. So it was very good. Elizabeth Moss is incredible, very suspenseful, scary, just all great. Is it like a horror movie? Because my wife was worried

that it was, if it's too much like a horror movie, she wouldn't like it. Yeah, it was scary. So probably not for her. But it wasn't horror. It was suspense, but hardcore suspense. I watched the King of New York, or just King of New York. It's on Amazon Prime. I've never seen it. Christopher Walkin, Larry Fishburned, Wesley Snipes. They just did rewatchables on it with Quentin Tarantino. Oh, okay. Any good? Yes, very good.

Just classic early 90s gangster movie. It's worth watching. It's on Amazon Prime. Lastly, I am, actually two more things. The Tiger King. You've heard of that on Netflix? I tweeted last night, I'm over these crazy, insane in Netflix documentaries. I can't handle it anymore.

Okay. I'm all in. It's great. It's just these three characters, they each have different angles. And it just, it starts out one thing. And it just totally goes in opposite direction. You're like, come on. Lastly, Julian Hebron wrote a post, which is a great resource about what your options are if you are a renter and you can't make your payments. Or if you're, if you have a mortgage and you can make your payments, you could contact the bank or lender. And I don't know if you can negotiate, but there's some instructions there. Great resource for people that are struggling financially, which I, I think anyone you can negotiate with now, or you think you have a bill with, I would try. Try. If you're in financial apparel and you thinking bills aren't going to happen the next couple months, credit cards, cable company, internet, any of those places, call them and try to negotiate. The worst thing they can say is no. Yep. Okay. Animal Spiritspot at gmail.com. Ben,

are we going to do another one this week? I think we have to, right? I don't think things are going to get any more normal this week. I'm 50-50. All right. Thanks for listening.