The Compound and Friends - Heroes of the New Bear Market: What Are Your Thoughts?

Episode Date: April 8, 2020

On an all new What Are Your Thoughts - Michael Batnick and Downtown Josh Brown discuss: * Are there any Crisis Stars being created on Wall Street during this bear market? * Human behavior in a bear market has not changed much * Why this won't be the next Great Depression * Michael thinks he's one of those "business call from a Peloton" guys * Why America needs Major League Baseball to come back * ETF trading volume is not indicative of the "death of passive" Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey guys, it's downtown Josh Brown. We are sort of live from the compound play our favorite game. What are your thoughts? I'm here with Michael Batnick as always. Michael doesn't know what I'm going to ask him. I don't know what he's going to ask me. Let's see what's going on. Welcome to the compound show podcast. Each week, we let you in on some of the best conversations we're having about markets, investing, and life. Just a quick reminder, the hosts of this show are employees of Ritholtz Wealth Management. All opinions expressed are solely their own opinions and do not reflect

the opinion of Ritholtz Wealth. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Okay, here we go. All right, Mike, I'm going to go first. Are there any crisis stars? Well, besides you, I feel like every one of these crashes, we've gotten like these new celebrity people that called it in advance. But this one was so exogenous and so sudden that I feel like nobody really had time to position themselves as the man or the woman who saw it coming. I think the closest to that is maybe Muhammad Almad al-aryan but only because he he said don't buy the dip he didn't he didn't predict the pandemic um i don't know what are your thoughts

i think ben hunt comes to mind okay because he was so aggressively like guys pay attention pay attention and i was i'll admit that i was laughing a little bit. I wasn't publicly shaming because that's not my style. But when I was reading, I was like, wow, this guy is really out there. And it turned out that he was 100% right. I remember one tweet in particular, he was talking about how the stadiums are going to be empty. And this was like, it feels like four years ago now. It was probably four weeks ago. I'm thinking like, this guy is warped. And so I think that he comes to mind as a voice that was right.

He was very aggressive, very early in yelling at investors to pay attention to the virus and our lack of response. He was like all over the political thing. Maybe he could correct me if I'm wrong, but it seems to me like his focus was more on the reality side of things than on the investing specifically. Okay. Bill Ackman kind of is trying to position himself as the man who is sort of coming. Like he – Not going so well. It's not going well.

People aren't falling into line. He's not going to be the new Rubini or the new John Paulson. Was the day that he was on. Was that was he on March 23rd at the bottom? He was close to the low. There are people that are blaming him for causing the low, which I don't agree with. I don't agree with that either. But but yes, I was. So importantly, he was not in February screaming from the rooftops, this is about to hit the market. What he did instead was he came out after a 20% decline and talked about how many hedges he had put on after the fact, which I'm not saying he didn't. Well, he turned – I think it turned a $27 million hedge into like $2 billion.

So I mean his investment results have been pretty phenomenal. What about Dr. Fauci and some of the other medical people? Yeah, no, but forget that, of course. Oh, you mean investing? Yeah. Like the breakout stars of this are Chris and Andrew Cuomo, Dr. Fauci, the woman with the scarves maybe. I don't know her name, so probably not. But I'm saying just on Wall Street, so there are going to be crisis stars, people that saw it coming or reacted fastest. And then there are going to be the stars who accurately tell you,

okay, the worst is now over. Get in. And I think there are a lot of people vying for that title right now. Yes. Yeah, of course. Okay. Okay. What do you got? So I just did a post this morning about why this is not going to be another Great Depression. Wanted to get your take on the takes. Okay. Well, I agree with you. What would you say is your main point? Why you don't think it's a depression? So many points to make.

But I think just structurally speaking, the federal government had absolutely no idea what they were doing at the onset of the depression. And even when we were clearly in one, Hoover refused to even acknowledge it. Correct. He spoke a lot about self-reliance and the community should lift people up and rich people should help the needy. So there was no relief from the federal government. The Social Security Act, which was the birth of unemployment, wasn't passed until 1935. So we were completely flying blind. And then in terms of the federal government, Hoover was trying to balance a budget, which is like right now it's just incomprehensible.

The federal government had no idea what they were doing. They were completely just flying blind, totally clueless. So from back then just for a million million reasons it's not going to happen now i think things can get very very bad so i'm not trying to minimize what's happening i just think that to throw out oh just to throw out casually the great depression is i don't i think that there's three things either people are trying to scare people that don't know better um they really believe it they don't know history or they're just not being serious when they say it. They just say it offhand without realizing the ramifications of what depression actually was. So I think those are all good points. I did a post last week, three reasons it's not 1929. And I think like a lot of the things that you're thinking about, I'm thinking about.

The first thing that I pointed out is that in 29, the Fed was nowhere near as powerful and as experienced as it is now almost 100 years later. People have to remember the Fed was a five or seven-year-old institution in 29 and just was not where it is today in terms of its influence and didn't even know what its power was really at that time. They reacted really, really quickly this time, and they're using the words infinite and unlimited, and that's exactly what they should be saying. Rather than putting dollar figures on these programs,

they're basically saying, no, you don't understand. We're not going to let things go to zero. We are going to stand and buy what we have to buy. Hold on one sec. Sorry to interrupt. John Kenneth Galbraith in his book, The Great Crash, 1929, wrote the Federal Reserve Board in those times was a body of startling incompetence. And say what you will about the Fed. I know some people don't like them, whatever. They're taking aggressive action. And think about how quickly the monetary response was where Congress previously, like you can't get anything done.

You have to credit where credit is due. They got things done. Yeah. The second thing, the second thing is that we don't, we still, to this day, don't really know what was the spark that caused the crash of 1929. Like we don't have an agreed upon answer. And that's with 90 years of research looking into it. The foremost scholar on the Great Depression and the economic situation it caused is Ben Bernanke. And I think even he would say like, we know there were overvalued stocks. We know that there was a bubble in terms of like the mentality of investors in the 20s. But we don't know what deliberately or what directly caused the crash that day. Whereas today, everyone like my my 10 year old could explain to you why the economy is shut down and why no one's making money in the stock market crash. Everyone

agrees what the cause is of this so that when it debates, we'll all agree that it's getting better. So that's two. And then the last one, I think the way we buy stocks these days. So people who get laid off are not going to keep contributing to a 401k. Fine. I'll stipulate that. But we still have 100 million participants in 401k plans. And the ones who are still working and earning a paycheck, every two weeks, they go and buy stocks. And that didn't exist during the Great Depression. There were no forced buyers with retirement accounts who literally had to put risk on. So I agree with you. So let me ask you a question. So what sort of floor does that put under the market? Because is that floor... The difference between 60% and 90%, I forget what the numbers were. Ben and I were talking about this. To go from 60% to 90%, I think it's another 60% drop. So what floor does

that put under the market? Because it's not 35% floor as we just saw. Is it a 60% floor? All right. That's a great question. I think if you look at the nature of the V-shaped recoveries we've been having for the last 10 years, that is directly attributable to corporate buybacks and to this 401k juggernaut. Between 401ks and IRAs, it's $5.7 trillion America had invested as of the start of this year. And you look at what happened at the end of March, beginning of April, that seems to have put a floor into the market. It was a rebound. It was America's pension plans, 401k accounts, managed accounts, insurance company portfolios, trillions of dollars that wound up owning too much bonds, too little equity relative to their target weight. And this is one of the few cases where it was actively telegraphed in advance. Like every market commentator saw this coming

at the end of March and it actually happened. Now, you could say that was actually just like what's self-fulfilling prophecy. All right, whatever, it still happened. So I don't know what kind of floor it ultimately puts. I'm not saying the market shouldn't go down 50% from its high. I'm just saying we have a forced buying mechanism now that did not exist in the early 1930s. All right, let's move on. I want to ask you about this new thing I'm hearing. Maybe this is somewhat related. People are being like, they're looking at the trading volume in SPY and they're saying, ha ha ha, so much for passive investors. But they're not looking at VOO, which is Vanguard's equivalent. So like SPY had 14 straight days of $50 billion worth of trading, which is incredible.

And I agree that people are being way more active than passive these days. But that's not a signal that passive investors all of a sudden fell apart. If you don't look at the Vanguard equivalent or even the iShares equivalent, you don't have the full picture. What do you think? So Eric Balchun has tweeted. We'll throw this up. Tale of two worlds. Our allocators versus traders ETF low indices show the biggest gap on record in Q1.

The allocator side, which to your point, Josh, is Vanguard, Schwab, iShares, core ETFs. So a net $41 billion. So it was the biggest gap, I believe. What's the iShares? Its. So a net $41 billion. So it was the biggest gap, I believe. What's the iShares? It's IVV. Right. So I guess on the trader side would be SPY. I don't know what else they're measuring, but we'll throw this in the notes. Right. So when you see huge volatility and buying and selling an SPY, that's the ETF that hedge funds use to get exposure or short the market because it has the most liquidity. That's the ETF that hedge funds use to get exposure or short the market because it has the most liquidity. That's not a signal of what most retail or individual investors or financial advisors are doing.

Okay. So it looks like the S&P is now, I don't know what it is today, about 20% off the bottom. Was that the low? I feel like you ask me that every time. I don't think so. So I think that the enormity of what's going on in the economy keeps us suppressed. And I just wouldn't be surprised if we retest that low. I hope we don't. Dude, I'm not rooting for it. I know. I hope we don't. Dude, I'm not rooting for it.

I know. But I just made contributions. I just made a 401k contribution this week. I made a contribution to my liftoff account this week. It's okay if my next one is at a lower price. So I know that's a cop out. If you're looking for somebody who's going to tell you where the exact bottom is in advance, I would be the worst person to tell you that because I feel like I get more pessimistic the lower the price goes. And I usually feel better the higher it goes. So don't rely on me for that shit. By the way, isn't it – well,

nobody is, I hope. Isn't it interesting that just the way that you adapt to this and how your mood is affected by the Dow and the S&P, even though it makes no sense in the world. But yesterday, the market was up like 8%. It was the 32nd best day ever. And I didn't even blink. I was like, oh, no big deal. The down days, as we already know, the down days feel so much worse. Wait, wait, wait, wait, wait. Can I say one thing though? It actually I think it does make sense for you to feel better on a day like yesterday, because not only was the S&P up seven percent more important than that. The reason the reason is that Governor Cuomo actually had some like signs of hope. Yes. In his press conference. So it's like, it does make sense. You should feel better. So I just want to read you just five quick things from this book, The Great Depression, A Diary, because people tend to want to ascribe a reason every single day why

the market is doing what it's doing. Why is it going up? Why is it going down? Nobody knows. I think that this is such a good reminder of just stop trying to figure out what's going on every day. Now, is the bottom in? Again, who knows? My personal inclination is, and I don't think I'm smarter than the market, but I do seem to think that the market is, I mean, the economy is going to continue to get much worse. So I guess the million dollar question is, is a 35% decline enough? Did we already front run the bad news that's going to keep coming? We don't know. But I just want to read these quick things. So this is from August 1932. This was the bottom, August 1932. The stock market continues upward for two weeks now in the face of unfavorable semi-annual reports and predictions

are again made freely that we have turned the corner. Second, this is from a few days later. In the last 30 days, the stock market has given one of the most strenuous rallies in its history. Even the New York Times yesterday devoted considerable front page space to it. There is no tangible explanation for this by way of industrial revival, and yet there's plenty of optimism and feeling that this fall will see a turn period. Number three, again, August, so just two weeks later, the speculative interest of the public seems as strong as ever in spite of their experience of 1929. Most of them seem determined

to recover part of their losses. Both commodity prices and the bond market are also moving up. In the meanwhile, there is no visible sign of improvement in business or industry. And on the contrary, it seems to be getting worse. September 1st, so just a month after the bottom, nobody seems to know even why the stock market went up because business has gotten worse instead of better. And lastly, this was in September. So far in the last two years, the stock market has made eight fake starts upwards and then eventually come back to record lows. So, so much richness in there. And I think one thing that we can compare this to 1929 or any other period is that the behavior of people is a constant, even though everything, the stories, the characters, the companies, the conditions, everything changes, but the people stay the same.

Yeah. So I think it's widely accepted that stocks bottom in advance of the economy. I think everyone agrees with that. But they false bottom several times also, and you don't know which one is the real one. I actually posted something from Bank of America, Merrill Lynch today. And they went back and looked at every recession back to like the 1860s and whatever would represent the stock market at that time. And it's pretty consistent that the stock market bottoms an average of five or six months before the economic data does. Granted, like economic data in the 1800s is not what it is now. But still, you're right.

The constant is human behavior. We keep seeking out a bottom and then one day it actually is. But it's pretty reliable. The other thing that I thought was noteworthy is that, so you ask, is 35% enough in the S&P? There is a very high correlation between not the depth of how bad the economy gets, but the duration in months that the recession runs on for, which makes perfect sense. And that's the chart that I posted today at the Reform Broker blog. So if you think about it that way, the longer that this period of time of contraction goes on for, that will dictate how bad the market has to get in terms of how low it has to go. So assuming that history holds constant, you're right. Like that's the way to think about it.

Hold on. One last thing before we move on from this. It is interesting that the cognitive dissonance that goes on and I do this all the time where on the one hand, you'll say we know the market is forward looking. But when the market goes up on bad news even though we know that happens it still puts my brain into a pretzel well i i think take your own advice don't try to understand it day to day because but that's but that's but that's the inexplicable but that's what biases are you can't avoid them true all right let's pivot did you whoa i'm i'm i sorry. I have to go.

Now you have my attention. Did you fucking call me from a Peloton the other day? Did you do that? Did I? I think you did. Probably. It's part of my routine. It's part of my routine now.

Okay. So this is an intervention. You are not in shape enough to the point where you're one of those people that can do a Peloton business call and pull it off. You were like, Josh, did you read whatever you told me? And it didn't occur. I figured maybe he's walking his dog and the wind is blowing. No, you tried to pull off a Peloton call. I did.

And I know that because Chris said the same thing. Chris is like, yo, Mike's calling me from his Peloton. Is he kidding? It's a great time to make phone calls. Let me help you. You're not one of those guys. All right, fine. You're not Justin Costelli.

Don't fucking call me from a Peloton ever. You could take like a five-minute break to call me. And I won't do the same back. I know you never ride a Peloton. No, you know that for sure. I ride ride real bike sure because i'm a grown i'm a grown-up okay so i leave my toys in the yard all right that's enough all right all right go ahead aside from me calling you on the peloton what is the best part about

working from home all right so i want to give the the answer, like the correct answer, which is being around the kids and my wife and spending time at home. And I think that is kind of a silver lining is like we really have gotten close. But I honestly would have to say the ability to just at one o'clock be like, I have nothing scheduled till three. I'm going out on my bike. I'm going to go ride 10 miles. Or I'm going to watch an episode of Tiger King. Like just in the middle of the day, being able to take a real break from work, I think is pretty cool in a way that we can't do in the city. Like obviously. So that for me.

What about you? Agreed. I mean, you have babies at home. It's got to be extra special for you. It is. Yeah. I was thinking like, man, it goes so fast. So I definitely feel lucky to be able to work from home, to be able to spend time with them when I have a break. I don't want to say it's great because I know people have –

It is what it is. Yeah. One of the things I was thinking about is like it is what it is. Yeah. One of the things I was thinking about is like, it is what it is. Like you have to find silver lining no matter what, and just recognize how lucky we are versus there are people who have the same experience we do right now staying at home. But then one of their family members wakes up at 5am to go to a hospital and work there all day. So I think, I think I'm good. Like if this continued for another six months, like I don't think I'm the type of person where I would go absolutely insane because people adapt so quickly. And I know this is such a ridiculous comparison.

But the book by Viktor Frankl, Man's Search for Meaning, like those people adapted to being in concentration camps. This is – it's just in the human spirit to adapt to things. So this is obviously not even close to that bad, but I'm already good. Well, to your point, though, in that book, like Frankel's message is that you find your reason for staying alive. And it turns out your reason is that you worry about what's going to happen to other people if you go. And I think a lot of people are finding that reason in their lives right now.

Sometimes just giving money to a food bank. Sometimes it's like calling relatives they never speak to. But people are finding a selfless purpose every day. So for us, obviously, it's keeping the firm going and being in touch with clients and making sure our employees have what they need. But I feel like people do find their purpose in these moments. Obviously, this is nowhere near the extent of what is described in that book. But I think the thread kind of carries through. All right. This is my last one. I was saying the other day that what America needs right now is for baseball to return. I know you're NFL, NBA guy, and so am I. That hat, by the way.

What? I mean, do I need to say it? No, it's not. Representing the fam. I don't want to do my hair today. It's not the team. It's the hat. The flatness.

I mean, come on. You're just not down with the culture. What do you think about baseball coming back? Do you agree with me that if we had something to watch on TV every night besides the death rate, it would be a really great morale booster? Like that's my whole concept. And it looks like they're going to try it. What do you think? I don't know.

I'm so out of touch with baseball. Yeah, but wouldn't you watch? All right, that's the question. No, I don't think I would. Let's say there was a game on every night. You wouldn't care? Baseball? I don't know. I'm so out of touch with baseball. Yeah, but wouldn't you watch? That's the question. No, I don't think I would. Let's say there was a game on every night. You wouldn't care? Baseball? I don't think so. Can I tell you something, though?

I think you'll have a take on this. So believe it or not, I don't know how this happened. I've never seen Seinfeld. Like, I've seen an episode. I know what the show is. What's going on now? You've never seen Seinfeld? I've never seen a full season i've never like

i've probably seen i don't know a dozen episodes randomly maybe okay all right so i'm watching i'm trying to catch up on like cultural references from the last 30 years can i tell you something is it as good as you thought the show is very good i mean i'm not breaking any ground here it's a tough binge though like because it's this it's it's the same thing over and over it's not like binge watching breaking bad for instance where there's like a it's this it's it's the same thing over and over it's not like binge watching breaking bad for instance where there's like a story like it's it's it's a hard binge so the show is obviously very good but i don't know all right i'm not i'm not gonna reply i'm gonna let the comments uh i'm gonna let the comments take care of that let us know what you think about michael seinfeld take which is one of the worst things i've ever heard i'm on a lot of

people's lawns right now I know wait what do you mean the worst take that's a pretty bad take dude which part I guess you know what actually what you don't realize is how foundational Seinfeld is to all the things that you actually love I'm trying to catch up

like none of the things that you think are great in terms of comedy movies TV like almost none of that would exist if it weren't for Seinfeld. And I think maybe that's hard for you to wrap your head around because you weren't watching as they aired and you don't know what the world was like prior. Right. So I understand. You're a little bit younger. I understand that.

All right. Still horrible. Let us know what your thoughts are on any of these topics. We love your feedback. Make sure you're subscribed to the channel. I know we went a little long today, but there's so much going on. We really appreciate you guys taking us through 30,000 subscribers already. It's only going to grow.

Thank you for being a part of that. We will be back. I promise. Thanks for listening. Check us out at thecompoundnews.com for daily investing and market insights. You can watch all of our videos at youtube.com slash the compound RWM. Talk to you next week.