Prof G Markets - Harris vs. Trump: The Markets React — ft. Robert Armstrong

Episode Date: July 25, 2024

Robert Armstrong, US financial commentator for the Financial Times, joins the show to break down a question: is the election moving the markets, or is it inflation? He shares his thoughts on why small-cap companies are surging, and discusses why the Federal Reserve has good reason to cut rates in July, but likely won’t until September.  Order "The Algebra of Wealth," out now Subscribe to No Mercy / No Malice Follow the podcast across socials @profgpod: Instagram Threads X Reddit Follow Scott on Instagram Follow Ed on Instagram and X Learn more about your ad choices. Visit podcastchoices.com/adchoices

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Ready, set, grow. Go to ConstantContact.ca and start your free trial today. Go to ConstantContact.ca for your free trial. ConstantContact.ca Join Capital Group CEO Mike Gitlin on the Capital Ideas Podcast. Thank you. one of the world's most experienced active investment managers. Invest 30 minutes in an episode today. Subscribe wherever you get your podcasts. Published by Capital Client Group, Inc. Today's number, $163 million. That's how much LVMH is paying to be a top-line sponsor at the Paris Olympics. True story, Ed. The last time I was in Paris, I saw a mime, and he was masturbating, and the police showed up, but the good news, Ed, he came quietly.

Ah, that makes me happy. I don't care what happens in this show. I see it as a win. Welcome to Prop G Markets. Today, we're speaking with Robert Armstrong, U.S. financial commentator for the Financial Times, who after listening to this show will not be on again. But first, here with the news is Prop G media analyst and part-time mime, Ed Elson. Ed, what is the good word? I was watching that J.D. Vance performance at the Trump rally. He kind of reminded me of you a little bit. Me and Vance? Someone who attains levels of success they haven't earned?

Someone who's out of shape? What? Someone who's a total fucking kiss ass who can be bought yeah okay i see it i see it someone who delivers a bad joke uh and then laughs at their own joke laughs at himself that's what happened so i'm i'm being serious now i think one of the keys to having a good sense of humor you want either have to be funny that's not easy it's hard to be funny i think actually humor so. It's hard to be funny. I think actually humor. So let's go back to mating, which I always like to go back to. And you need help here, Ed, so listen carefully. The three things, this is true, that make a man attractive romantically to a woman are in reverse order three, kindness. It's important over the long term. People don't want to mate with assholes. The number one reason is your ability to signal resources. We talk a lot about this on the show, but the number two thing is intellect. And there's some nuance here, and that is the quickest way to

express intellect is humor. If you can be funny, that was what I tried to develop because it wasn't going to be, I was six foot two, 140 pounds with bad acne, so it wasn't going to be based on my devilish good looks. But this is my imitation of a woman. I'm laughing, I'm laughing, I'm naked. Oh, no, but where I was going, I'm sorry, I'm sorry, back to me. Where I was going is the easiest way to have a good sense of humor is it's hard to be funny, but what's not hard is to laugh at other people's jokes. If you laugh a lot, you're nice to be around. I always thought a great way to have a good sense of humor is just to laugh a lot at other people's jokes. If you laugh a lot, you're nice to be around. I always thought a great way

to have a good sense of humor is just to laugh a lot at other people's jokes. I think you basically just described my job description. Yeah, just to laugh at my jokes

and compare me to fucking J.D. Vance. Yeah, that's way to go. And then laugh it off. Way to go. Laugh it off. That's what I do.

Me and J.D. Let's get to the headlines. Now is the time to cry. I hope you have plenty of the wherewithal. 24 hours after entering the presidential race, Vice President Kamala Harris raised more than $81 million. That's a single-day record for fundraising in a presidential campaign, and it nearly doubles the funds she's inheriting from Biden.

Netflix memberships rose more than 16% in the second quarter from a year earlier. That's higher than expected and will be one of the last subscriber updates from the company before it stops reporting quarterly subscriber numbers next year. A faulty software update from cybersecurity firm CrowdStrike caused major technology disruptions on Microsoft-powered systems worldwide. The IT outage, which some are calling the largest in history, affected airlines, banks, and healthcare systems. And finally, just a week after the deal was announced, Google's $23 billion acquisition of Wiz has been called off.

Wiz told employees it would now target an IPO, after members of both boards thought regulators would likely block the deal. Scott, your thoughts? Well, so there's kind of one story in the seven doors this week, and that story is Vice President Kamala Harris. Basically, as far as I can tell, being coronated, she is going to be, it looks like, the nominee here. And I was thinking about it. The analogy I would use is, in November, the sun goes behind a cloud in London. And from November to May, you're like, okay, I get it. It's a good city. It's got good food and interesting people and wonderful culture. Okay, it's fine. Okay, it's a little bit depressing. Oh, God. And by February, like, I just fucking hate it here. And this is an awful place.

And how can anyone live here? And then sometime in May, the sun comes out on a brilliant day, and the whole city comes alive, and you think to yourself, this is the most beautiful, interesting city in the world. You're just so desperate for some sunshine. And that kind of describes my mood for 2024, and that is I haven't been a huge fan of Vice President Harris, but when the announcement was made, I was relieved. And in the last 48 hours, just the enthusiasm and the mania around her and the hopefulness and the way the Democratic Party and potential competitors for the spot immediately kind of fell in line and rallied behind her. And the love she's getting from Gen Z, the love she's getting from social, the record take, the 24-hour take,

it is literally for me as if the sun has come out on America and the Democratic Party. It has been, just in terms of how I feel about the world and America, it's been probably the best. And we're going to get a bunch of shit in the comments from the Trumpers. But it's been the nicest 36 hours for me personally that I've had in a while. And I think it's been great for the Democratic Party. What are your thoughts? I'm just going to rain all of you a parade now. Go for it. I'm used to that.

Wait, let's enjoy it for a moment. Okay, go ahead. Okay, thanks for that. Look, I agree the fundraising has been phenomenal, and there's just a new sense of energy in the party, 100%. But you used that word, coronate. And I think there has been a question on, are they just going to anoint Kamala as the next candidate, or are they going to hold some sort of pseudo-electoral process? Are we going to have a competition? I'll just express my view on this. For the party that has been crying out about this threat to our democracy,

some would say to a sensational degree, the idea that democracy is at stake in this election, that the Republicans are running an anti-democratic candidate. For that party to then, when given the choice, decide to just coronate their next candidate internally, to me, that is going to look to the American people at the general election, that will look at best hypocritical, at worst corrupt. I think that's a really powerful argument. I was a fan of the competition versus the coronation. Just the practical reality is the majority of the people to which she would have been competing against have backed her. They've bowed out.

So a debate would be her and Manchin and Dean Phillips. It just wouldn't be very interesting. I mean, have at it. The other thing that I would offer up, lending credence to your argument around the benefits of a competition, is I think a competition, A, if she wins it and she'd be the odds-on favorite to win that competition, would bode really well for her. Perfect. And she'd be more battle-tested. The other thing I think it would be good for is down-ballot Democrats because I think a lot of people who go in and aren't sure whether, you know, haven't done the research around local races might think, you know, I'm really impressed with Democrats. I think they might be more inclined to vote blue. I think it would be an amazing commercial that would be run across 60 million

people for four or five hours over two weeks for the Democratic Party. So I'm theoretically, and from a brand strategy standpoint, totally on board with what you're saying. But the reality is all of the competition has rallied behind her. It's sort of done. And the last 36 hours, the Harris campaign has announced that they've raised over $100 million, and it's come from, I think, 1.1 million unique donors. The groundswell support is just really encouraging and shocking right now. Yeah, I saw another stat that 60% of those donors are first-time donors. Having said that, I would like to see a more detailed analysis of how much of that money is coming. Because there have been some big-name billionaire donors as well. Soros immediately got behind. We have our billionaires. We have Reid Hoffman.

I bet, you know who I bet is going to play a big role in this is Melinda French-Gates. Oh, 100%. I think this is the season of the billionaire woman in the donor class. And I will say, I mean, it's ironic to say this. We're two white dudes on a podcast, but this- That's redundant. That's what you call two white dudes, a podcast. But this election in particular, I mean, most conversations are dominated by men. One thing that I have found striking about this election, especially all the conversations going on about the RNC, this election conversation feels particularly bro-y

in a way that I haven't really seen before. Oh, do you see that donor list? The big tech, it was like the worst gay club ever. It was like, oh my God, I wouldn't want to fuck any of these guys. The nightmare blunt rotation, yeah. Just for a quick palate cleanser, this is a true story. During the RNC convention in Milwaukee, Grindr crashed. Yeah, it is.

I mean, you got to love that, right? Let's take away their rights, but not before I meet some guy in the men's room. That's right. Marriage should be between a man and a woman, but hot, steamy butt sex should be between two men at the Milwaukee Holiday Inn. Netflix. Netflix. Umbrella Academy. uh netflix netflix umbrella academy um like i this company the thing that i think is interesting here and it's sort of a sub story but i think it's interesting i said when they launched ads

it was a bad idea i think it's totally contrary to the brand positioning of netflix and that is it's uninterrupted storytelling and i just don't think and, and their attitude was, well, why wouldn't we offer people who are willing to endorse some ads a $5 offering? I don't think it's working. I think there's evidence it's not working. And I think that the brand denigration of Netflix, my prediction is within a year or two years, Netflix is going to let their ad-supported model just flow away. They won't cancel it, but they're not going to put any money behind it. But I think deep buried within these great numbers was evidence that their ad-supported memberships are not. I mean, they say they rose 34% from last year, but I think that's off a tiny base.

It's just not, I would have thought it would doubled or tripled. Anyway, any thoughts from you, Ed? Their share of the ad market is still minuscule. I think it's like less than 1% of the TV ad market. And yeah, agreed. That 34% number seems good until you realize it's barely any ad subscribers to begin with. Having said that, they added 8 million new subscribers. That's 65% higher than what Wall Street was expecting. They expected five million. So just off of the subscriber base, Netflix is crushing it. They are winning the streaming wars. The question now is, have they won? And the stat I will leave you with is the following. Apple TV+, which has spent $20 billion on content since it launched, $20 billion. Apple TV Plus currently receives fewer views in one month than Netflix receives in one day.

As far as the streaming wars go, I believe they've won. I believe it's somewhat over. The next question now is, can they take on the streamer that no one is talking about, which is YouTube? Or TikTok. Or TikTok, yes. Both of those platforms, if you look at it numerically, YouTube is still,

if you count it as a streaming service, and I would argue you should, the most popular platform in the US today as measured by TV viewing time. Not tablets and phones and TVs put together, just TVs. People watch YouTube on TVs more than they watch Netflix. So as we've said before, YouTube is the elephant in the room here. I think it is interesting, this ad challenge that Netflix is facing, as you've mentioned, but I think the next big challenge for them is YouTube. We wrote a post, and my idea was that Netflix should partner with a cloud-based company to figure out the algorithm, and they should put a bid in for TikTok to divest it, or once it's forced to be divested, which I think it will be. And I wrote up this thing, and Ted Sarandos, the co-CEO, called me and said,

let's grab coffee. I've known Ted sort of loosely for a couple years now. And I kind of explained my thesis, and he just wasn't buying it. He's like, TikTok's this incredible free marketing tool for us, and we have so many growth prospects internationally. Why would we take that kind of risk on a market in a format we don't understand? But my idea was that they could take their massive base, arguably the biggest library in the world right now of current topical content, and start slicing it in different ways and even crowdsource, you know, take season one, episode three of The Last of Us and have added creators and see what you can do on TikTok. And I thought it would just be, I thought the idea was genius, but he wasn't, he was like, he kind of said, no, that's not, I'm much smarter than you. And you haven't had lunch with him since.

He hasn't called me back. Hasn't called me back. He's like, okay, I don't know who on my team. I don't know what 22-year-old suggested I meet with this Yahoo. Well, maybe you could solve CrowdStrike's problems. Thoughts on CrowdStrike? What this says to me is that this is not a robust industry. What do I mean by that? If McDonald's goes out of business, the fast food industry is fine. There's a bump in the road, but you can still find cheap, high-caloric food on your path to obesity. Too much? Anyways. So the fast food market or the restaurant market is a robust market. If Jamie Dimon called Janet Yellen or Chairman Powell and said, I have some rogue trader in Singapore, and he got past compliance, and somehow he lost $95

billion, and if you don't give me a hundred billion in liquidity tomorrow, that is bail us out, we have to declare bankruptcy. And the implicit threat would be global economy might come down, boss. That's the definition of an industry that is not robust. And I wonder if technology, because of essentially acquisitions and a few companies performing so well that they have access to cheap capital and can invest at a rate that others, you end up with a small number of players creating a fragile industry or an anti-robust industry. And for me, it's another reason why A, they should either be broken up or some people they'll argue there's benefits to scale. Okay, if there's benefits to scale, but it creates this sort of systemic risk, the term for that is utility, and it needs to be more thoughtfully and stringently

regulated. But for me, this is just another example of how concentrated the tech industry is and the dangers it presents. Moving on to our final headline, which is Google's acquisition of Wiz for $23 billion. We talked about this last week. It is now called off. In fact, Wiz was the one that is pulling out of the deal. Thoughts? I think it's directly related to CrowdStrike. And that is, I mean, a couple of things have happened.

One, as of today, it's no longer a fait accompli that it's going to be Trump as president. And I think, I thought this acquisition or them floating this acquisition by Alphabet as of today, it's no longer a fait accompli that it's going to be Trump as president. And I think, I thought this acquisition or them floating this acquisition by Alphabet was essentially them betting that it was more likely than not that a business-friendly, non-antitrust administration would take control of the White House, specifically the Trump administration. And I think as of this morning, now it's kind of a toss-up, and I would argue it even maybe leans a little bit to the vice president's advantage. And I may be biased here, but I think more than anything, this concentration of power that results in a cybersecurity firm essentially taking down big parts of the economy,

that is not the time to present to the FTC and the DOJ an acquisition of a cybersecurity firm. So I think their lobbyists came back to them and said, you know, while we'd love for you to pay us a lot of money to try and get this through, let's be honest, we think this is fucked. We think that we go into Congress and try and get support. And they say, well, I'm sorry, my flight was canceled. There's too much concentration of power here. We need to head the other way. So I have a story here. My firm, L2, was acquired by Gartner.

We hired a banker and said, all right, go out. I sent some letters out to people saying we've been approached. Are you interested in speaking now or forever holding your peace? And we had like seven firms sign an NDA, put together a data room. They came in, I think we ended up with four offers. And we ended up, we picked three. We picked Accenture, Corporate Executive Board, and Gartner. And really liked the guys from Accenture. I thought they were super smart. And they said to me, we've got great news. We're going to basically, we service 400 of the 500 biggest corporations in the world. We're going to position you as a central thought leader, and we're going to have you meet with all these CEOs around the world, and you're going to get

to have such an impact and so much influence. And the idea of spending the next 10 years of my life on a plane, it sounded like a fucking nightmare to me. And so I just politely said, no, this isn't the right partnership. So we're down to two, right? Corporate executive board and Gartner. And I wake up on a Monday morning and I hear the news, Gartner acquires corporate executive board. So in a matter of a week, I've gone from three bidders to one. And then I call the guys at Gartner, and I'm like, okay, you just made a $2 billion acquisition. Are you going to still want my shitty $160 million acquisition? They're like, oh yeah, no problem. We're still on board, not to worry. Two days

later, they call me and say, if it's okay, we'd like to wait and close in six months just so we can get this thing digested. And I'm like, in as polite a manner as possible, I said, go fuck yourself. You want a free option on my company, want me to stick around for six months, see how high I perform over the next two quarters, and then decide if you're going to close on the same price. I'm like, if you want to acquire us in six months, you have my number, call me and I'm going to ask for more money because we're doing really well and the firm will be more valuable in six months. But I need you to send me a letter saying that we are no longer in this due diligence period. And I basically said, I'm walking. And anyways, the CEO called me the next day and said, we'll close in the next 30 days. And I think other than all my stories, which make me look good, isn't true. I'm pretty good at open about my failures, but the, the learning here is the following in any negotiation, you have to show a willingness to walk away. You don't make it personal. You don't make a win lose.

And obviously it was much more delicate with my words, but I basically said, no, that doesn't work. We're, we're, we're exiting these discussions. Um, anyways, and I basically said, no, that doesn't work. We're exiting these discussions. Anyways, and we ended up closing and I ended up leaving 14 months later because I wanted to put a gun in my mouth every time I thought about going into work. But anyways, too much, Ed? Too much? Not a great cultural fit. Not a great cultural fit. By the way, great firm. And I think their stock has outperformed every other stock. I think their stock has literally been the NVIDIA of services. Anyways, I don't know where we are. Where am I, Ed? Bring me back to the story. What am I talking about? What am I talking? Oh,

we're talking about M&A. Yeah, we're talking about Google and Wiz, willingness to walk away. Yeah, I mean, it sounds like that's kind of what happened here with the founders of Wiz, is that they looked at the regulatory environment, they actually looked at what was possible, and they were like, yeah, we don't want for this to get shut down, or we don't want to go through, even if it does go through, we don't want to go through the process, which is going to be long and grueling and just, for lack of a better word, shitty. I will shout us out. Last week, I warned Wiz employees that they should not get their hopes up. This is why you recommended that Wiz employees sell secondary shares so they can take some money off the table. I would love to know if any WIS employees were listening

and actually went ahead and did that. If you did, let us know. And you owe us dinner, bitches. Yeah, exactly. Take us out. Take Daddy and Little Ed out for a little beef and a little strip club, as I like to call it a Tuesday night.

We'll be right back after the break with our conversation with Robert Armstrong. When you picture an online scammer, what do you see? For the longest time, we have these images of somebody sitting crouched over their computer with a hoodie on, just kind of typing away in the middle of the night. And honestly, that's not what it is anymore. That's Ian Mitchell, a banker turned fraud fighter. These days, online scams look more like crime syndicates than individual con artists. And they're making bank. Last year, scammers made off with more than $10 billion.

It's mind-blowing to see the kind of infrastructure that's been built to facilitate scamming at scale. There are hundreds, if not thousands, of scam centers all around the world. These are very savvy business people. These are organized criminal rings. And so once we understand the magnitude of this problem, we can protect people better. One challenge that fraud fighters like Ian face is that scam victims sometimes feel too ashamed to discuss what happened to them. But Ian says one of our best defenses is simple.

We need to talk to each other. We need to have those awkward conversations around what do you do if you have text messages you don't recognize? What do you do if you start getting asked to send information that's more sensitive? Even my own father fell victim to a, thank goodness, a smaller dollar scam, but he fell victim and we have these conversations all the time. So we are all at risk and we all need to work together to protect each other. Learn more about how to protect yourself at vox.com slash Zelle. And when using digital payment platforms, remember to only send money to people you know and trust.

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Out. Carpet in the bathroom. Like, why? In. Knowing what to do, when to do it, and who to hire. Start caring for your home with confidence. Download Thumbtack today. So I just want to start this interview by letting you know that we have been trying really hard to not talk about politics recently.

Me too. But sometimes the universe insists. So that's exactly where I'm headed here. It feels unavoidable at this point. Yes. It is having an effect on the markets and it's dominating the news. So we're just going to dive in and we'll try to be as apolitical as we can. But let's start with this. Biden has dropped out of the race. He has endorsed Vice President Harris as the new candidate. Give us the rundown on how

the markets are reacting to this news. Well, in fact, markets have been pretty calm. And the first reason for that is that if you look at, for example, the betting markets, Biden leaving, by the time Biden left, Biden leaving was pretty well expected. And so there wasn't a big change in the probability, the kind of betting market probability that Trump will win was around 60% and it stayed around 60%. So there wasn't a massive reshuffle. There hasn't yet been a massive reshuffling of the electoral deck. One thing that makes this question very sort of subtle and tricky is that the political events of recent weeks are overlaid on a big change in the inflation outlook. So we had Biden's very bad debate was at the end of June. And on the 11th,, I think of July, we had this wonderful June

CPI report, which was like fed clear to cut rates, inflation, very near target indeed. And so the market has been digesting that fact at the same time as it digests the political facts. So it's hard to sort out what is what. Um, so I'll give you an example. One thing that happened a week or so ago was that small American stocks went completely bananas for about a week. Small American stocks have been performing very poorly compared to big ones. And then all of a sudden, they staged a very brief, very sharp, historically sharp rally. And there is two ways to read that fact. One way to read it is Trump is a tariff guy.

Trump Vance are not very enthusiastic about big American tech companies. We want to own companies that have most of their supply chains and most of their customers in the United States. Let's own small cap stocks, which have those characteristics. That's one way to read the news. The other way to read the news is small cap stocks are very, very rate sensitive. So if you, because of the good inflation report, you think rates are going to come down, who is going to benefit most from that? Companies with more debt, which are small cap stocks, and companies that are more economically sensitive, which are small cap stocks.

So you can have a kind of political reading of this remarkable doings in one quarter of the market, or you can have an economic reading. What are some of the other dynamics going on in the market right now that are either reacting to politics, or as you point out, maybe they're not? The consensus is that the Trump trade, in capital letters, is a curve steepener trade. And what that means is that long-term rates are going to go up more than short-term rates do. And that is like Wall Street consensus. You ask your average Wall Street strategist, what's going to happen? You say Trump is a steepener. And the reason they think that is that Trump is kind of inflationary. He likes't like immigration. And under a certain economic interpretation, all of these things push prices up. You get reinflation and long-term rates respond

to that and the curve steepens. But the most important, the most important, the overarching fact here is that for all of the political turbulence, the sort of probability that Trump will be the next president doesn't seem to have changed that much. So that has kept the market moves from being anything like cataclysmic or violent. Implicit in that statement is the notion that if what looks like the coronation of Vice President Harris is the nominee if she were to win, that somehow that the markets might perceive that negatively. And my sense is that the Biden economy, and I think they've done a terrible job messaging, but I think it's hard to be anything but fairly impressed with this economy the last three and a half years, I would argue. I mean, corporate profits have gone bananas. We've got the lowest inflation and the half years, I would argue. I mean, corporate profits have gone bananas.

We've got the lowest inflation and the highest growth. I mean, we kind of figured out a Goldilocks economy here, markets touching new highs, corporate profits new highs. And I would think that the vice president winning the election would signal sort of a continuation or steady as she goes. A lot of people remember how strongly stocks went up in the early months of the first Trump administration. They had a great rally, and a lot of that had to do with the fact that Trump promised

and then delivered pretty significant corporate tax cuts. And just mechanically, if the corporate tax rate goes down, corporate earnings go up, all else being equal, stocks go up. The problem is things are very different right now. Stocks are much more expensive now than they were in 2016. Risk premiums are much more stretched than they were. Valuations are much more stretched than they were. And the tax cut has already been delivered. And you will notice that in his big interview with Bloomberg, he's not banging the table on doing the main trick he did last time, which is cutting that corporate rate. So I think your instinct is correct, actually. Just assuming that there will be a Trump rally because he is a businessman and

says businessmanny things is probably a mistake. I like what you said earlier, or I'm old enough to recognize that the cycles of the market are in fact cyclical, that there are cycles. And I feel as if we've fallen into this sort of cold comfort or this generally or this conventional wisdom that will no longer be wisdom. That is, American big tech will consistently outperform every market in the world. And it strikes me that at some point, things become too expensive, no matter how strong the underlying fundamentals are. And on the other side, things become so cheap, it's distinctive how poor the underlying fundamentals are that are a good trade. I would expect that if you look at the cycles, that there's a lot of opportunity in the Russell small cap.

It's just overdue. It feels like a spring that's been wound with non-performance for the last better part of the last decade and also i think the same is true for markets like the uk market huge gap between the us and the rest of the world in terms of how much assets cost is there a trade is there a trade there what are your thoughts um i i this is something i've thought about a lot. And the comment you have to make at the outset is that valuation is useless as a timing mechanism. Stocks don't go down because they're too expensive and they don't go up because they're too cheap. Those, as I think your spring metaphor is good, you're loading a spring or building up a kind of catalyst, but something else has to happen to release that, uh, the kind of energy in, in valuations that are too low or the, the trouble in valuations that are too high. So what is that catalyst going to be? That's point number one. Um,

point number two is that I think American assets are more, and especially big American assets, are more expensive than global assets, partly because capital just wants to get into the United States. We have the biggest, deepest, most liquid market in the world. There's a lot of global capital, excess savings, if you will, and America is its natural home. So there is a non-value-based reason that American assets have become so expensive. So I agree with you, but I think that the gap that you refer to between the values, the valuations of American assets and global assets can close some, but it's not like they're going to be at par. Because like the American dollar, American assets generally enjoy a kind of exorbitant privilege.

It reminds me of these de-dollarization conversations, like where else is capital supposed to go if not America? That is always the question. Where are you going to go? Another factor, and then this gets back to Scott's point that I think is very important to keep in mind when you're thinking about the recent US rally, and this comes back nicely to politics actually, is that something that a lot of people don't understand but that is very important is that budget deficits are very, very good for stocks. When the government is spending more money than it is taking in in tax revenue, that is pushing cash into the economy, in effect, right? And that cash has to go somewhere. And if you look at the national accounts over history, where it tends to show up is as corporate profits, right? So when the government, or you could state it even more simply this way, when the government is in deficit, somebody else has to be in surplus. That's just the accounting, right? And where does that surplus tend to show up?

Corporate balance sheets. So one thing that could change the regime is for whatever reason, inflation, resurgence, something else, the government gets serious about deficit reduction. And at first, all your deficit-hating friends will be like, yay, yay, financial sanity is coming back to the world. The government isn't spending all this money that it's borrowing, na-na-na. And then they will realize that the first effect of a serious change in the U.S. budget balance is that markets are going to go down. I want to go back to what you were saying about these Trump trades. And the idea that I'm getting from you, which I haven't really seen from anyone else, is that there are very significant other factors at play.

And I'm wondering if you think that perhaps we, as financial analysts in the media, and possibly analysts on Wall Street as well, are overestimating how much politics is influencing the markets, perhaps because it's the easiest and most exciting thing in the headlines. I think that is A, true, and B, particularly true in the case of Trump. Trump's superpower is that he gets people excited, negatively or positively. He is like an emotion pump of this incredible way. So you just think about Trump and you start to think about extreme outcomes and big ups and big lows and downs, disaster, whatever. I think if you look at the first four years,

his rhetoric is extremely strong, but the reality might be a bit milder. And I'll give you an example. Trump loves to talk about how the dollar is too strong and how, you know, he wants to tariff other countries to force them to intervene in their own currency markets, to let their currencies strengthen and, you know, all the, you know, the yen, the yuan, et cetera. The thing is, Trump also likes to think of the stock market as a measure of his performance. And if he starts fiddling around with the US dollar, he's going to start getting extremely strong messages from the stock market and from the treasury market, right? And so there is a kind, if he continues to believe that he is the man who causes the

stock market to go up and wants to continue to be that man, that puts kind of natural guide rails around him just as it would around maybe any other president. So I think, I tend to think that, for example, this idea that Trump will be hugely inflationary is maybe a little bit overblown. These policies are hard to get past and hard to execute once you pass them. Walls are hard to build. Currencies are hard to change. Tariff negotiations are hard to do. All of this, the reality will have an effect.

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think we should be focusing on going into this next fed meeting well the market the futures markets tell you that the chance of a rate cut at this meeting is very, very low. And the chance of a rate cut in September is very, very high. So we got a brilliant, I mean, brilliant inflation, CPI inflation report last time around. Sorry, can you shed some light on how brilliant that report was? Okay, so if you look at it, let me put it this way. If you look at core inflation, meaning inflation minus food and energy, and you just annualize it for the month of June, you take how fast it's growing for that month, and then you just turn it into a year of inflation.

We're a target. We've done it. We're at 2%? In a year-over-year basis, it's about 2%. Okay. We're there. And the most important thing about it was that housing, which is the kind of inflation that was refusing to go down, finally showed signs that rent and owner's equivalent rent, those are going down. That

was like the last holdout was housing inflation. That's coming down now too. And so it looks like it's happening. And historically, inflation is bumpy. It's not one of these things that tends to go down in a straight line historically. So there is room for surprises, which is precisely why the Fed won't cut rates at this meeting, is because they want to see a couple more reports like that one, that June report. But if they do, I think they have good reason to cut, partly because in the most rate-sensitive markets like housing, these high rates are already causing trouble. If we keep these rates too high for too long, that's going to spread. And that's the classic Fed mistake, and we don't want to do that.

Now, this podcast began with the discussion of politics. So there's an extremely interesting question about whether are you going to cut ahead of an election? Does that look partisan or whatever? I like to think of this in terms of incentives, the incentives of the members of the Monetary Policy Committee. So here are guys who are appointed, who are kind of hard to fire, which we could discuss later in terms of trump and the reputational damage that they will suffer especially the the chair jay powell they will suffer if they allow either allow inflation to reignite or they stay tight too long and they put the country into a recession. It's extremely bad.

People are calling you Arthur Burns for the rest of your life. I don't know if you remember Arthur Burns. He was a Fed chair. He screwed it up in the 70s. You don't want to be Arthur Burns. Their lifelong reputation is based on them getting the rate cycle correct. I don't think, consciously at least, they're going to think, oh, we would cut now, but that would look political. Or we wouldn't cut and we will cut because we want Biden to be

president or whatever. I think at a conscious level, I just psychologically, I don't buy that analysis. Now, unconsciously, we all have our biases, right? We do things for reasons we don't understand. We all have strong political opinions. Could that influence the committee? I guess. But like when they are thinking to themselves, I just think all the incentives are them to just think about the economy, think about inflation, think about employment, and make the right call.

I was really heartened to see that amongst the issues that has the most influencers, most important to young voters, I think number three or four, and this shocked me in a good way, was the deficit. Does the deficit, if and when does it matter? It matters when treasury investors say it matters. So it's like, we're playing dice with them. Because if you look at the interest expense we're paying, it's more a function in our current situation, what matters is the rate much more than the volume, right? So if treasury investors say, you know what? If you want me to buy this crap paper from the United States, you got to pay me 6%.

No, man, man, man, take it back. I 7.5%. When you and I were kids, Scott, what was it? 15% you had to pay? So that happens and suddenly it's on. The issue is exactly the one we talked to earlier. Global and domestic treasury investors are very patient with the United States because where are you going to go? Where is all the global savings going to go other than by far the biggest market in the world, which is the US treasury market? It's a question of hydraulics. Money's got to go somewhere.

The treasury market is the biggest container. What do you do with your money? What's your investment approach? Do you pick stocks index funds what do you do you should read uh dr ruth's obituary in the new york times which is very amusing so dr ruth is the great sex advice american sex advice columnist and and she she was great and um somebody asked her husband, so how's your guy's sex life? And his answer was, the shoemaker's children have no shoes. The cobbler's kids have no shoes, yeah. So I, you know, my basic approach is I get passive exposure to diversified markets. And what I should do is put the same kind of attention into my portfolio as I do into my column, but I don't. So I have, you know, I'm, I'm overweight America, but probably

not as much as other people. I have a lot of, uh, international exposure for the very reasons you point out, Scott, it's been a very painful position to have, but I just have all ETFs, all passive products. And I have, you know, an American bucket, Asia, Europe, small caps, and it's sort of spread around. But, you know, and I've had this basic portfolio. This is actually what I think explains a lot of what is going in the market. I look at these buckets in my portfolio, right? And I look at how they perform now for 15 or 20 years, as long as I've had any money to speak of, right? And there look at how they perform now for 15 or 20 years, as long as I've had any money to speak of, right? And there's been one trade and it's been the S&P 500. Everything else stinks. You

know, that has a psychological impact. I can remember back in like 2007, when for example, emerging market stocks, which are very cheap right now, had a great run, an astonishing run. And over time, over the extremely long run, different stock markets all tend to return that kind of magical number, like 7.75% a year over the extremely long run. So these big divergences in performance should close. But when this lesson has been pounded into your poor aching head for 15 years, that the thing to own is big US stocks and everything else underperforms, it's like, how do you, the psychology becomes very difficult.

Candidly, I think you're one of the best writers and commentators in finance. Say more. Go on. Give me some details and i think the thing that i think you're really good at is boiling down very complex topics and just boiling them down to very simple premises which is very hard to do in in in finance i'm wondering if you have any writing advice for our listeners. Are there any sort of skills or principles that you use? I think it always turns out badly when you start actual writing sentences and working your way towards your conclusion. I always start

working in bullet points, and I have all the bullet points. So I know where I'm going, and when I write my bullet points, as it were my outline for the piece, I make a point to use the simplest, most declarative grammatical structures I possibly can. So like a 500 or a thousand word piece might be like five or eight bullet points. You use the term boil down. That's what journalism is, reduce. It's like making sauce. As Marcella Hazan said about making pasta sauce, reduce, reduce, reduce. And it's the same principle. And what helps you do that is not pretending to be a genius. You know, people get in a lot of trouble trying to make the story they're telling neat.

It saves you a lot of bad prose to make the story they're telling neat. It saves you a lot of bad prose to just sometimes be able to say, and this is the part I don't really understand. Right. Yeah, it's refreshing. I'm confused about these things. I can see this, but this doesn't make sense. And you kind of ask your readers for help. And markets are bigger than us, right? That's the point. It's a complicated beast. And, you know, if you're not humbled by them, you're making a big mistake. Markets are bigger than us. I love that.

Robert Armstrong is the U.S. commentator for the Financial Times and writes the Unhedged newsletter. By the way, great name. Previously, he was the FT's U.S. financial editor and chief editorial writer. Before becoming a journalist, he worked in finance and studied philosophy. Robert, we really do love your writing. Thanks for your good work, and thanks for joining us here today. It's fun to talk to you guys. Thank you, Robert. Algebra of Wealth. Scott, we discussed with Robert this idea that we might be overthinking

the election's impact on the markets. And it makes me think about the importance of long-term thinking when it comes to investing. And you wrote in your book, quote, our minds don't understand time. We have heuristics and models that betray us. We overvalue the present and near future. Can you offer some advice around maintaining some stoicism as we approach this election? Occurrences in the moment, the present value or the discount rate is just incredibly high. When something happens to you, the emotional impact, the long-term impact don't foot to each other. The long-term impact is much, much less than the emotional impact it has on you at that time. My life's over. How will I recover? How will I get another job? I'll never find

someone who I love as much or who, you know, I'll never find someone who loves me. And you just find that that isn't the case. And I also, I don't like some of the framing around the election that Democrats say, you know, America is over if Trump wins. I don't believe that. I do think this is an important election. It's very, it would be very disheartening for me as an American to see someone reelected who is an election denier. I think the peaceful transfer of power is fundamental to our democracy.

So I can see why people are upset, but I don't think it would be the end of America. And at the same time, on the other side, just some of the demonization and the stark terms around America going to hell in a handbasket at the feet of these cultural elites, I don't think that's true either. The bottom line is we're all gonna be fine. Is that true? Do I believe that? I think you got to maintain... I'm falling into my own trap here. I think whatever you think about

this election, you're going to regret, you're going to be upset about potentially what happened, but you're going to be more upset about how upset you were. Try and maintain some distance. Realize that the keys to your happiness are outside likely of this election. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producers, Alison Weiss. Our executive producers are Jason Stavis and Catherine Gillan. Mia Silverio is our research lead, and Drew Burrows is our technical director. Thank you for listening to Prof G Markets from the Vox Media Podcast Network. We'll be back with a fresh take on markets on Monday. You held me In kind

Reunion As the world turns And the dove flies In love, love, love, love