ETF Edge - The ABC's of ESG

Episode Date: April 4, 2022

CNBC's Bob Pisani spoke with Mona Naqvi, Global Head of ESG Capital Markets Strategy at S&P Global and Larry Swedroe, Chief Research Officer at Buckingham Strategic Wealth – and author of the new book “Your Essential Guide to Sustainable Investing.” They discussed the ABC’s of ESG; what works and what doesn’t work when it comes to ESG investing, what mental and financial hurdles the world of ESG might be facing and how investors can look beyond those hurdles as they strive to go for the green. In the ‘Markets 102’ portion of the podcast, Bob continues the conversation with Larry Swedroe from Buckingham Strategic Wealth. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge Podcast is sponsored by InvescoQQQ, Supporting the Innovators Changing the World, Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange traded funds, you're in the right place every week. We're bringing you interviews, market analysis, and breaking down what it all means for investors. I'm your host, Bob Pisani. Today on the show, we'll delve into the ABCs of ESG, environmental, social, and governance. We've got two of the best in the business here to tell us what works and what does it work. What mental and financial hurdles the world of ESG might be facing

and how investors can look beyond those hurdles as they strive to go for the green. Here's my conversation with Mona Knoxphy. She's the global head of ESG Capital Market Strategy at S&P Global and Larry Swedro, Chief Research Officer at Buckingham's Strategic Wealth, author of the new book, Your Essential Guide to Sustainable Investing. Let me just turn to you, Mona, talk a little bit about what's going on. Larry's got a book out. We're going to get him back here in a moment here, talking about what's sustainable and what's not, NESG investing. I think the broader question is overall here, what is the main stumbling block that coming up with an agreement for everyone about what the standards are?

Larry points out in his book, there's actually seven rating agencies around ESG, including S&P Global. And the question is, the standards are all different from each one. Is there any hope at all to get some of the agreement? on this? You know what, Bob? This is the million dollar question. What is the single magic definition of ESG? But in my view, a lot of that is a little misguided because there's just a lot of choice out there and a lot of different folks with different opinions and interpretations.

We need to do more to distinguish between ESG products and ESG data. I don't think anybody would disagree that from a product standpoint, we need more clarity and transparency into precisely what a fund or an ETF is claiming to do. That's fine. That's about marketing. But the data that goes underneath it, that's ultimately an opinion, just like any cell-side research opinion, and we wouldn't expect all of those to necessarily align. But Larry makes a very good point.

I've had this discussion with him before. When you do bond ratings, for example, there's three major bond rating agencies, S&P is one of them. And generally, the standards on which they agree on rating bonds are pretty close. ESG though is completely different. So in theory, the rating agencies on bonds come pretty close. Triple B and things like that. But it's very different with ESG.

I know there are some international attempts to standardize this with some of these international organizations. Is that what it's going to take? Or could Gary Gensler step in and say, and he's been critical? He said, I don't like the fact that we can't agree on what constitutes ESG. I mean, there's a lot to unpack there. You're absolutely right.

There are moves and initiatives by regulators to try and bring about more standardization in terms of the disclosure from companies. and that's something we all welcome, because at the moment there's a lot of patchy, missing information, and so all the different data providers have different approaches, whether they model or whether they engage companies to try and fill those gaps,

you're going to put in different inputs, you're going to get different outputs at the end of the day. But I would say that even with consistent disclosures, we need to remember that this is an opinion about the relative importance of different types of sustainability issues from a risk perspective, from an impact perspective, and it's ultimately an opinion on the overall performance. I'm not a rating, I'm not a, a rating,

credit rating analyst, I should say. I'm not supposed to speak on behalf of my sister division S&P global ratings, but I will say that when it comes to a credit rating, it's a more straightforward measure of an issuer's ability to repay its debt. When you're talking about ESG, we're talking about at least three different metrics, lots of different underlying sustainability criteria. There's a thousand or more data points that go into it. It's really about your own unique perspective about the most important, relative important ones to different industries depending on your own expert judgment and philosophy. And that's what we do at S&P.

Let me bring in Larry again here. Now Larry, in your book, you point out that ESG is maturing, and Mona and I've just had a brief discussion about this, but the stumbling block remains, the inconsistent standards for judging ESG. And as you pointed out, there's seven ESG rating agency. So riff off of what Mona was just saying, I don't know if you heard it, but what is your conclusion? Can we come up with a set of standards everyone can agree on? I think it's certainly possible.

The SEC and the accounting standard boards would be the most likely people. But the problem is everyone's opinion about what is good or more important. It can be very different, as Mona may have alluded to. For example, how do you weight in a score the E, the E, the S, and the G? MSCI may put a 50 percent weighting on the E and Moody. S&P might put a 30% or whatever. And one person's good is another person's bad when it comes to ESG.

So I don't think it'll ever really likely be resolved. And as I picked up on Mona's last comments, what it really comes down to is your own unique perspective, what's important to you, and then you should design your ESG strategy around your own particular values. And that's become much easy. to do today with direct indexing, if you will, the ability to create separate accounts.

So is it, should we just give up on doing this? It seems like they're not. It seems like there are international efforts to create a standard. I'm going to hit you up on Gensler very certainly because he's made it very clear. He's unhappy here. No matter what Gary said, what Larry says there, which makes sense, we still seem to want some kind of agreement on what we're talking about. We absolutely do. And if you think about it, the power in traditional financial data. We need standards around the 10-K report, what companies put out there in their public disclosures. We need standardization in terms of the metrics that we use. But that still doesn't mean that your own individual ingredient or secret source recipe that you put together to come up with your own cell-side

opinion on the, be it the creditworthiness in the case of credit ratings or be it the ESG performance in the case of ESG scores. This is an opinion at the end of the day, just like any other cell-side research opinion. But I would also say that the thing about having consistent standards, it's useful, but we need to separate again between the product labels. We need to make sure that products are marketed correctly, but we need to recognize that the data going into those products could be used and applied in different ways. It all depends on how it gets applied. On one end of the spectrum, you have folks that are interested in ESG because they want to remove undesirable investment exposures. Others care about the impacts, and others care about mitigates.

risk. It's all valid. It depends on how it gets applied. And Larry, isn't one of the problems here is we're dealing with some metrics that are qualitative. So, for example, how much carbon am I emitting into the atmosphere? And others metrics are very, some metrics are quantitative, like how much am I admitting? And others are just qualitative, like, you know, how is the corporation relating to the community or, you know, how are they doing on on a diversity score. That makes this a little harder. Some of this is a little fuzzy, right?

Some of it, this is qualitative. Here's a great example, Bob. Take the question of who is doing the most to contribute to climate change, the benefits of it. And you would say it would be the companies who have the most green patents. And the industry, I believe that is creating the most green patents is the very energy industry, which everyone is blasting.

And so do you want to reward people for creating these new patents that will make the world much more efficient and greener in its use of energy? Well, you have to have a best in sector type of scoring rather than saying energy companies are bad in general. So the issues are really complex here. That's why I think personally it's going to be very difficult to create one standard, but certainly the SEC could do it and mandate that companies, for example, be consistent in reporting like they must report scope one, scope two, and scope three emissions, which currently is not a standard. Yeah, let me move on and go to the next major topic, because we can stay on this all day. I know you had something to say, but I'll give you a chance in a minute. The other major issue I want to ask you, Larry, about does ESG outperform?

How do highly rated ESG stocks or funds or ETS? How do they stack up against the overall market? This is really a very important and an interesting and complex question. So I always begin by looking at what economic theory has to say, and the answer is very simple from two perspectives. First, you would have a behavioral or a taste-based preference situation where if you have tens of trillions of dollars flowing into ESG companies with good scores, that drives their valuations up, and then you should have lower expected returns. And if you screen out companies, the bad sin stocks, then they'll have lower PEs and higher expected returns. And that's exactly what the evidence showed right up until about 2017, about a 2 to 3% premium for the Brown or the SIN stocks. But the last five years, we've seen a huge spike in the cash inflows into good ESG stocks, driving their valuations way up, creating a short-term greenium, if you will.

And that has at least offset in some studies showing even that green outperform. Once we reach a new equilibrium, which is hard to know when that will be, I think we're still early in the stages here. So it could be that green will outperform for a while longer, but afterwards we should see green underperform. And the other story is the risk-based one. Brown stocks are certainly subject to more risk, environmental spills consumer, boycotts, frauds, all kinds of things. And that should create a risk premium. So this makes a lot of sense. So ESG is popular.

People buy EST-related stocks. You know how these EST-EFs are doing. You're involved in some of them. But the earnings aren't changing. It's only just evaluations because they're driving the prices up. And his point is you now have a premium here or a greenium. Greenium. I love that phrase, Larry.

I want to use that. Greenium, a premium here, a green premium. And so the valuations are higher as a result. So here's the thing. We can't just paint all ESG products with the same brush. You always need to look at the stated investment objective. As you know, Bob, we have ESG indices at SMP that aim to target the risk and return profile of the benchmark. So in some cases, that sort of obfuscates the need for a trade-off inherently. So there's lots of different ways you can design these products. But I like Larry's point about the economics of this. And for me, there are really three key reasons why it can be a little bit confusing between this fuzzy. the feel-good ESG factor and something that is fundamentally about risk and opportunity from a financial materiality standpoint. The first is intangible assets, right? We now know that the biggest drivers of corporate value are their reputation, loyalty. In the age of information, a company's reputation can change overnight, and that seems to have more of an impact on its

stock price than the underlying physical capital it has. The second is externalities. We know that, well, any student of economics knows that not all prices of goods and services in the economy are necessarily reflecting the true overall cost or benefit to society. So when you put these two together, what we end up with is a need for companies to maintain a social license to operate. That plus different time horizons in the mix, because ultimately that's really the difference between risk and impact, what time horizon are you taking, what may feel like a feel-good ethical issue for 20, 30 years down the line is actually just a matter of time horizon around your theory of change, which way you believe the economy is going to go, and how can you

reconcile all of these things in a resilient portfolio. It's an amazing amount that you packed in there, but a lot of this has to do with how you feel and your personal beliefs. I hate to bring this up, but I want to go back to the outperformance question. And Larry, I want to bring up the 2017 Norway study. Now, this study found that Norway has a $1 trillion pension fund. It's one of the biggest in the world, and they excluded sin stocks like tobacco and weapons. And as a result of that, they had lower returns, which you can see here, excluding stocks on ethical grounds reduced returns 1.1 percent, divesting tobacco, 1.2 percent, avoiding weapons, decreased returns, 0.8 percent. Now, Larry, this was a few years ago,

and maybe it'll be, it's different now, but here is the downside of excluding certain sectors. They underperform because they excluded so-called sin stocks. Yeah, well, two points here. One, that study did end in 17, which is just when we had this hockey stick of cash inflows, really begin. So I think if you looked at the numbers today, you might find a different answer, but it's all because of the last four or five years of returns as we move to this new equilibrium. So you can have this greenium going on, even though ex ante brown stocks or sin stocks should be expected to outperform. But let me add one other really important point, which is this. The outperformance of this, in stocks is really fully explained by their exposures to what we now know are common factors

that explain returns. And they tend to be companies that are cheaper, value-oriented, more profitable, and more efficient in their use of investments. And if you think about that, here's the interesting thing. The highest returning stocks industries in history, both in the U.S. and the U.K., are neither health care nor technology, which I think most people would think, but they've actually been the sin stocks of tobacco and alcohol. And you could put gambling up there as well. So it's these factor exposures,

which leads you with one really good thing. If you can tilt your portfolio to good scoring ESG companies and then make sure you also have exposure to the factors that have higher expected reporting, In the long term, you can have your cake needed to get above market returns and with reduced risk, and you can live your values. And when you talk about factors, I want to make sure everybody understands this term. The academic literature in the last 40 or 50 years has indicated that several factors really make add alpha. They are size, smaller, generally over bigger, and value generally over growth.

and small cap value in theory over all of those. So your point is that these are value stocks. The SIN stocks are essentially value stocks, and that can account for why their outperformance has occurred. Is that what you're trying to say, correct? Value and profitability, so you don't want to have value trap stocks, which we've learned from the academic literature there. So if you buy companies that are cheap,

and are profitable. Think of them as the kind of stocks Warren Buffett buys, and then add your layer of ESG screening and only buy the good ones, have good scores. You can, I think, have your cake and eat it too. And that's what we talk about in the book, how to live your values and achieve your financial goals. I want you to jump in, but I just want to ask you one thing, Larry.

You know, you talk a lot about the attraction of ESG investing. break it down to the three categories. There's a financial return, which is the performance, what I was asking you about. There's a societal return, which does it have an impact on society? And then there's the personal return, what we're just talking about. Will it make me feel different? And you know that investors in companies with higher sustainable ratings are generally willing to accept lower returns as the cost of expressing their values. I thought that was a very profound point. Can you just elaborate on that for a moment? Yeah, clearly you get to feel good. You're changing the world. And very importantly, as we have a whole chapter in the book dedicated to it, you're actually driving corporate behavior and getting them to behave like better corporate citizens because companies are recognizing they're being penalized if they have bad scores with higher cost of capital. They have lower PEs, higher cost of debt. And that makes them or puts them at a competitive

disadvantage so they're changing their behavior. They also have learned that companies that have good ESG scores have higher employee satisfaction. And the literature also shows that companies with higher employee satisfaction tend to be more profitable. So that's another push. So we have this whole chapter in the book dedicated to showing people how their behaviors and living their values is actually driving corporate behavior to make them all better corporate and world citizen. So you know what I would say, though, Larry, I completely agree with your three-pronged approach. But when you look over more expansive time horizons, the three of them are really not all that different. ESG and sustainability, just like any other aspect of your financial decision-making,

is a parameter of personal preference that must be balanced against other priorities in the construction of the portfolio. So one person may have one view, another may have another. But the challenge is that because reputation and loyalty and brand value are such important drivers of a company's valuation today, in actual fact, those preferences, when scaled up at a societal level, actually do end up having the capacity to make certain companies more or less financially profitable in the long run. So again, just taking out longer term time horizon might actually help to reconcile some of those three points you raise.

I completely agree. And that does to my point that by... investing sustainably, you're actually driving companies because to change their operations to be more ESG-friendly because they need those good scores to get those lower costs of capital, get their employees to be more satisfied, then they become more productive, and it's a win-win for everybody. So I hate to be philosophical, Larry, but are ESG investors really impacting the world? I mean, are they making any difference? Is there anything to this at all?

Yes, it's absolutely true. There are a whole bunch of studies we cite more than five dozen studies in our book. I think there's probably about a dozen on this one issue now, and they all are finding the same things, that ESG investors are clearly driving corporate behavior in the way Mona has stated. So the benefits here. I want to make it clear here because there's a message in your book about the benefits. I mean, obviously, it encourages more investment in green firms,

but you also noted that companies seeking lower cost of capital want higher ESG ratings. So the cost of capital, for those of you who don't follow all these financial terms, is a company's calculation of the minimum return would be necessary to justify undertaking a project, like building a new factory. So tell us why does ESG help lower cost of capital? does it? Yeah, well, it does through what you could call or the economists call a taste or a preference-based approach. If a lot of investors have a taste for good ESG scoring companies, that cash flows in. That drives two things. One, it drives their bond yields down, and it drives so that lowers their

cost. And number two, it drives their PE ratios up. So they have to give away less earnings to raise a dollar more of capital. And that makes them put them at a competitive advantage to those with low ESG scores. And then their employees and the people that are trying to attract want to work for companies that are good corporate citizens. So they're able to attract better talent,

have lower turnover costs, and more productive workers because they're happy and feel committed to their company because they work for a good corporate citizen. It's a real virtuous. circle here, that people can really feel good that they are definitely impacted the world. And you can see it even, as I said, with the energy companies. I mean, they want to get better scores, and, you know, so they're creating all these green patents to make the world, you know,

greener place. What about the pushback here from parts of some political sectors who say we're attempting to impose standards on corporations? There was a significant pushback. against Gensler's proposal on climate change, just a proposed rule, essentially asking people to be more specific about what they're doing about climate change. There's been significant pushback against that. It's just a proposed rule right now. What's the answer? Is the answer simply corporations are doing what the public wants them to do, or are people like Gary Gensler trying to create a political agenda with the SEC?

Well, to me, it's just simply a matter of full disclosure. And so, for example, I think all companies should be required to report on their scope one, two, and three emissions. And for our listeners, scope one is direct inputs into your products. Scope two is the supply chain that goes into it. And scope three is like Amazon's trucks driving around, polluting the air to deliver products that somebody else made. And so I think I'm fully supportive of what Gents is trying to do in terms of reporting as opposed to requiring companies to take certain actions.

You want full disclosure, and that alone should drive behavior for the reasons Mona and I have both stated. Yeah. Well, you know what? I completely agree with that. I think we need more transparency. We also need more clarity. It's not just about the data that comes from the companies. It's about the investment products, the funds, the ETFs that folks are putting their money in.

They need to look beyond just the title and look at the prospectus, understand the investment objective, make sure that they know precisely what they're putting their money into, and I think a lot of the confusion around whether ESG is more about risks or impact will be clarified that way. I would just add this important point, because you have a lot of what's called greenwashing going on, Bob. So here you need good disclosure and transparency because a lot of funds are just tagging an ESG label on, and the research shows they're not really becoming more green. in their scores. Right.

So your point, Larry, is there's a lot of incentives now to become ESG compliant. I meant you mentioned in the book that higher ranking companies, higher ranking in ESG scores, had better risk management. They have a lower likelihood of extreme events like environmental disasters. So there seems to be a lot of incentives for ESG now. Yeah, and so that's why I said you can have your cake and eat it too. You may pay a penalty to some degree if you screen out bad scoring stocks, and the way to overcome that penalty is to factor adjust.

But at the very least, you're also significantly reducing the tail risks that can happen from bad reputation, environmental spills, lawsuits, consumer boycotts, all those kinds of things. So from a risk-adjuster return perspective, there may not be much, if any, penalty, even if you don't tilt to the factors. Completely agree with that, Larry. And you know, one thing I would just add as well is that we are talking about unprecedented macroeconomic shifts in the global economy, the likes of which we've never seen before, climate change, social disruption, whatever it may be. And a lot of our financial tools and data that we've been using the past century just need to be modernized and brought up to date. And a lot of what ESG is trying to achieve is its alternative insights that can help inform a more sustainable or efficient allocation of capital.

And that's really at the end of the day what this is all about. transparency and that clarity. Well, that was, thank you for that summary. That was excellent. We've got a little long, folks, but when you have two people like this, you kind of just let them have a little discussion amongst themselves. I hope we've tried to clear some things up.

I know we don't have an agreement on what ESG is, but I assure you, they're going to be, they're moving closer, and I'm sure a year from now we'll have a little bit more complete understanding, even if it's not 100%. And as Mona says, maybe we don't want 100% agreement on what ESG is. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs.

This is the market's 102 portion of the podcast. Today we'll be continuing the conversation with Larry Swedro from Buckingham, Strategic Wealth. Larry, thanks for sticking around. We have spent a half an hour, the three of us, talking about ESG. I want to change the topic just a little bit because you're one of the great experts on academic research, particularly academic research in the stock and bond market. We've been friends for many years, and I often follow your blogs and your comments. One of the things that has been very prevalent in the last few years that we have covered is viewers are really interested in chasing thematic ETFs, particularly technology thematic ETFs, anything related to any kind of investing in tech stocks, anything related to investing in whatever the new hot topic is, whether it's cybersecurity,

or any other kind of stocks. You've had some thoughts on this in the past, and to summarize, I think you've been reminding people that chasing fads are not a good idea. Can you sort of summarize what the problem is with buying into thematic tech ETFs? Yeah, well, first we'll begin by offering this insight, that Wall Street is great at creating demand for products

for which there should be no demand, but they can generate profits through high- in marketing. So that's an important, I hope, lesson that people walk away from. But here's what the research shows specifically to highlight why I believe, you know, what I opened with is the correct way to think about these things. So Wall Street senses some theme and they create a product because they think it's hot in the news and it will attract inflows. And what the research shows is the following. All these thematic ETFs tend to be very

volatile stocks with market betas well above one. The average, one study found, was that they were more than 20% more volatile than the market. And on top of that, they had a large amount

of what's called idiosyncratic risk that you can't diversify away. So that's creating high volatility and large amounts of unique risks that you should be able to diversify away. On top of that, they tend to be on the wrong side of the factors that academic research has found to be higher expected returns. So they tend to be companies that are not very profitable and they tend to be very expensive because the cashes float in for the popularity. reason you cited. So they tend to be very

growthy, negative exposure to the value of fact, and they tend to be negative exposure to profitability. And of course, the result of that is over the long term, you're likely to get very poor returns. And if you want to think about it, when you're buying these stocks, you want to ask who's on the other side of these trades, Bob? And it happens to be the sophisticated quants, the head hedge funds who buy the cheap value stocks that are more profitable and bet against the naive

investors who are betting on these thematic ETS. Good. Thank you. That's an excellent summary of the problems here. Let me move on to another hot topic, or at least was last year, special purpose acquisition companies or SPACs. We saw a spur to them last year. The SEC under Gary Gensler issued a warning to these companies, A lot of them were making forward-looking statements that were uncomfortable with. They were uncomfortable with. SPACs performed terribly last year. Is there a similar situation here where people piled into these and they underperformed for the reasons you mentioned for some of these other ones, for some of the thematic tech ETFs?

What's the story with SPACS? My own personal view is SPAC should be outlawed. because they are just so abused by the originators with incredibly high embedded costs that the average investor is just not likely to fully understand. And so the people who make money out of these are the people who put up the early money and then bail out when the SPAC gets funded and they take it public. And then you get the SPAC sponsor diluting all the investors by roughly 20 percent, taking that. that capital and that leads the very poor returns. SPACs are lousy investments for the long term, in my opinion, they should be avoided by any retail investor. And that's what the research has found. That's why Gensler's come out against them because the average investor is just being

ripped off, literally being ripped off. Yeah. Let me move on to another topic. I'm hitting you up on the academic research and all this. People are a bit worried about the fact that we've had a yield curve inversion. A yield curve inversion occurs when the yield on shorter dated maturity, like a two-year, are higher than longer-dated maturities like the 10-year. That actually is happening right now. The yield on the two-year is slightly higher, a few basis points higher than the yield on the 10-year. People are concerned about this because in the past, this has been, at times, a signal of a stock market correction or in some cases even a recession. What, if it is a anything, does the academic literature indicate about this?

Yeah, well, the logic is simple. If you have higher rates in the short term than in the longer term, that must mean you're expecting less growth longer term, right? Because you'll have, because you'd have less demand for capital, and people wouldn't be barring as much less economic growth. And so it has been a signal there. However, I think this time we're looking at something that's quite different, which is dangerous words. But let me point out that the literature is ambiguous here because it depends

upon what part of the yield curve you're looking at. As you pointed out, Bob, the twos to tens are negative, you know, slope in the curve with a higher yield for the two year. But if you look at the more traditional three months or one month versus, say, the 10 year, the curve is actually historically fairly steep about the historical average because we've got 25 basis points in one month and the 10 year at about 250. That's actually a bit higher even, I think, than the historical average. And what that's telling us is current conditions are very loose and monetary policy. The Fed may be behind the curve. I would worry about inflation. I would worry only about a recession. I would worry only about a recession. coming caused by monetary policy when monetary policy is tight, which would lead to a contraction

in the economy. But to get there, you have to have real interest rates well above inflation. And today, with inflation running at 7, you know, we're nowhere near there. And so the Fed has to drive rates up much more than anyone's currently expected to get there, and have that kind of negative impact. Personally, I think the Fed has made a tragic error has been way too loose, too long, and now is going to have to tighten much more.

I think finally, one of the governors has spoken up and has pushed for saying we need rates to be at 3 to 4% to get above our inflation target, and that could lead to the kind of recession. But that's a 23 or 24 maybe. Yeah. I think the important thing here is the way you break the back of inflation is you get demand destruction. Right now, there's no demand destruction going on. Yeah, because real rates are negative. Why wouldn't you borrow at 2% when inflation's running at 8? That's the problem. The Fed, I think, has made a big error here. Yeah. I made a point a few weeks ago, Carvana, which sells cars, came out with their earnings report, and they said, used car prices were 30% higher year over year, and they made a point.

made an interesting comment, they said some people are now walking away because the prices are too high. Now, there's a early warning sign. This is not yet happening with housing. It's not yet generally happening with new car prices. It's not happening with travel. I've been in Florida, Key West, Miami Beach. I was in Phoenix over the weekend. I can tell you the hotel prices are through the roof. And there's no sign of demand destruction there. But don't you think that's going to happen this summer? Somebody's going to push back against $5 a gallon gasoline and say, you know, I think I'll pass on this trip. And that's what will help. Certainly there's the old saying, Bob, that high prices are the cure for high prices, right? People you eventually get demand. But I don't see that happening

because we still have a very strong economy. You still have massive amounts of fiscal and monetary stimulus there still playing out. You have an incredibly tight labor market with unemployment approaching record lows. So I think you're likely to see lots of wage pressures and companies under pressure from that side. I think we don't get a slower economy until the Fed drives rates above their target long-term inflation. So I think that would be more likely to happen in 23 or 24. I'm hoping the Fed gets it right and speeds up the process and start. And I think the real test will come and we've never had any period like we're about to see. So this creates a lot of risk. We're going to be removing $80 billion a dollars a month from the Fed's balance sheet,

which means they're going to be withdrawing that from the money supply. And that's going to shrink the money supply. And then you could get bond yields go much higher. Which interesting is whether we see the long end also go up. And if it does, you may not have a negative yield curve. That in curve. People ask me about the Fed shrinking the money supply or their balance sheet all the time and how much influence it has on the stock market. The thing that I tell everyone is since 2010, from 2010 to 2021, the S&P's average 15% gain a year. The long-term average is closer to 10%. Now, what accounts for that 5% outperformance? You've got to be, it's certainly reasonable to expect that the Fed adding so much liquidity was a factor in driving,

up that additional 5%. And if you believe that, then the Fed withdrawing liquidity should be a factor in subnormal returns, meaning below 10%, not necessarily negative. Would you agree with that? Yeah, Bob, if you walk

through that mechanism, the Fed pushing interest rates down to zero created that Tina. There is no alternative to stocks, so it drove valuations up, and lots of people who would have kept money and safe bonds if they were yielding two or three or four percent, you know,

move to stocks, dividend-paying stocks, real estate, MLPs, anything with yield. If the Fed pushes rates back up to those levels, you could see the reverse of that, as you pointed out, and you get higher discounted rates to the cash flow, and all these high P.E. stocks, you know, could come crashing down. I think there was at least the risk that we could see, repeat of 2000 to 2002 where the value stocks which are trading cheap hold up reasonably well because their peas are only around 10 but the growth stocks are the ones that get hit and their pees could come crashing down so you know could have a bifurmicated market we'll see if that comes true it's just a risk I

don't make such forecast we'll see if you know values underperform for a very long time we'll see if that makes a comeback folks I know we've gone a little bit long, but I don't get a guy like Larry Swedro on that often, and we've been friends for many years, and I very much value his opinion on the state of academic research. So Larry Swedro, thank you for joining us. Everybody, Larry Swaydro is the chief research officer at Buckingham, Strategic Wealth. And remember his new book, your essential guide to sustainable investing on sale this week at Amazon and bookstores. Larry, thank you very much for joining us. And thank you, everyone, for listening to the ETF Edge podcast.

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