The Compound and Friends - Investor's Guide To The Election (Linette Lopez and Bill Sweet), Snowflake Hot Take, Shorting Nikola (Michael Batnick)

Episode Date: September 18, 2020

This week Josh talks to Business Insider columnist Linette Lopez about what happens to the stock market if Trump loses and doesn't leave. And is Joe Biden so terrible for investors? Tax expert and Ritholtz Wealth CFO Bill Sweet weighs in. Plus, Josh's take on the explosive Snowflake IPO and a round of What Are Your Thoughts with Michael Batnick. The Compound Show goes up every Friday morning, subscribe wherever you get your favorite podcasts! Leave us a rating and review, it goes a long way! Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey, it's JB. Did you guys see the Snowflake IPO this week? It truly was a snowflake in the natural sense of the word, totally unique. There's nothing like its first day pop and its valuation really anywhere in the world. Snowflake is essentially a data warehousing business that speeds up the usage of information you have in the cloud by 10 times the current standard. And they make that information, that data much more usable, shareable, and collaborative. Not only can you work with your own data, but APIs are plugged in. You can work with third-party data. One company can collaborate with another company and they can produce all of these insights that help them make their businesses work better.

And it's just this incredible story. The CEO had built ServiceNow from $100 million to a more than billion-dollar revenue company and they brought him on board. And Berkshire Hathaway took a stake in the company. Um, and you know, Berkshire Hathaway took a stake in the company. The company sold them shares directly, which might be the first time I've ever seen a technology company do that or Berkshire do that with a tech company. And then they also bought more from a selling shareholder. So they were involved to the tune of almost $600 million. Top shelf bankers brought it public.

A lot of great venture capitalists have been involved in this one. And people, when it came public on Wednesday, just went absolutely wild for it. So Snowflake is an exciting business, of course. It's in a high growth area of the global economy. But I think investors might have lost their minds on this one. In February, it was worth $12 billion, which also sounded like a lot. On its first day trading Wednesday, it popped 110% or so from its IPO price and ended up with a value of $70 billion. So only in America can you go from $12 billion to $70 billion in six months. In the first half of 2020, Snowflake's revenue doubled to $242 million, but they lost $171 million in the same period.

Last year, they lost almost $360 million. this is one of the hottest companies on earth, so much so that they were able to lose over half a billion dollars and still garner a $70 billion market cap. So it really is a snowflake. That valuation, $70 billion, just to give you some context, would put it into the S&P 100 list immediately, but it won't get into the S&P 100 because it's not profitable. Snowflake is now valued, now worth more on the market than Goldman Sachs, TJX companies, Deere, Colgate-Palmolive, Sherwin-Williams, FedEx, Northrop Grumman, US Bank Corp. This is a business that began with somebody writing these guys a $5 million check in 2012. And they named it Snowflake because the three founders of the company like to go skiing. So having an internet-based economy where this sort of thing is even possible is quite miraculous. These guys were basically

engineers sitting at Oracle talking to customers, and they recognized this need for faster and more efficient data usage. And eight years later, boom, they have one of the largest companies in America. And I'm not going to say this to justify its present valuation or valuations for innovative stocks in general. But when you see things like this happening, it's hard to understand why there are people out there still using benchmarks and valuation techniques like the ones we used to use in the 1970s or the 1980s to value companies. Building a company like this in the 1980s would have been impossible, which is why there's so much enthusiasm and optimism

for growth companies these days, because miracles are happening in the business world every day. So when you find yourself valuing stocks on things like book value, it's almost comical because nobody gives a shit. Nobody cares about that anymore. It's not the 1970s where you do a billion dollars in revenue, but it costs you $950 million to do it because you have to build a cement plant or whatever. build a cement plant or whatever. So that stuff does not matter in the current marketplace, in the version of reality that we live in, where with all of these companies competing for investor capital, investor capital is not flowing toward companies where book value is something that anyone cares about. It doesn't capture any of the things that matter to modern investors. It doesn't capture the intangibles like brand value. You think about

how important brand is to Silicon Valley giants, to entertainment companies, streaming video companies. None of that is in there. It's not a factor. It doesn't capture network effects. Like I don't think Google, Alphabet, or Facebook have a line item on the balance sheet related to the value of having a network, but it's the only thing that matters. That's literally how the company makes money. They don't make money because they have all these blast furnaces to roll out steel rods. But you still have a wide swath of the market where people are building these models on things like book to market, etc. And it's not that that can't work or it'll never work again. It's just not what investors are doing when they choose to allocate money. And they haven't been for a very long time.

You want to try to avoid drawing market-wide inferences from the type of activity in Silicon Valley that leads to an IPO like Snowflake. And this is where I wanted to go with this. In February of 2015, Fortune magazine ran its now infamous unicorn cover. It's a picture of a unicorn. And they said, like the caption, they said, at least 80 tech startups are now worth over a billion dollars. So they're talking about private companies that had a private market value of over a billion dollars. And people were shocked by that. That's only five years ago. I don't think anyone would be shocked if you put that cover out now and people would say, yeah, I get it. There's a lot of money in the private markets. Venture

funds have done well. They have more money to invest. Totally makes sense. In 15, people were like, they were clutching their pearls. And now a lot of those billion dollar unicorns have been bought out for big money, or they've gone public for even bigger money. Some of those companies are worth tens of billions of dollars today. And I remember being on all these TV segments and the premise was maybe now is the time to get out of the stock market because look how frothy things are, or like, look how frothy the valuations of tech companies are, whatever it is. Had you done so, it would have been a big shame because since that cover came out in February 2015, the NASDAQ 100 is up a staggering 185%, up almost 200% in five years. The NASDAQ went from 4,000 when that unicorn cover came out to 12,000 five years later. So if you manage money for

people and you miss out on a bull market like that, like they're just not in the NASDAQ, you can never recover. You can't replace those gains. Even though we all can agree that those gains aren't permanent and that there will be corrections and bear markets, you can't replace the gains that other investors have made that you've cost the people that you work with if they have no exposure whatsoever, or worse, if you're out there telling retail investors to short stocks. You're basically out of business if you've spent the last five years talking people out of investing because of frothy valuations in Silicon Valley. So if your investment process revolves around

like tossing blades of grass into the air and looking at bullshit things like magazine covers or hemline indicators or whatever, I don't know what to tell you at this point. So it's not that we don't want to take notice of like bubblicious activity and just be like, yeah, this is crazy. Yeah, it's crazy.

Snowflake is crazy. But like, you're investing based on that? You call yourself a professional, you son of a bitch? Like, that's how you're allocating client money based on magazine covers? What are we doing here? So a lot of the guys, it's almost all guys, a lot of the guys who have been talking people out of investing over concerns about deviation from classical valuation metrics or IPO spectacles like the one we saw this week, my colleague Ben would phrase it that they are experts on an earlier version of the world. And their knowledge base just does not apply to the economy that we're in right now. And before you have a chance to do this, let me preempt you. For the people who like

to trot out that this time it's different, that stupid taunt, I would just point out that of course it's different this time. It's always different. Every time. It's never the same. It's always different every time. It's never the same. There are always radical differences between one era to the next. And that is not a green light to go do the stupidest, most reckless thing you could do with your portfolio and buy the highest valuation stocks because you will get hurt doing that. Or if that's exclusively what you're doing, like just because I point out that the economy works differently now and that different attributes of corporations are valued differently

than they were in the smokestack economy of the 1950s, 60s, just because I point that out doesn't mean don't worry about valuation or don't worry about business models. No one is suggesting that. Definitely not your boy. So there are people who will still get crushed in things like WeWork. There will still be spectacles of disastrous losses. There always will be. That part doesn't change because greed always gets carried away. Maybe Snowflake was the end.

We'll say. We'll say. A lot of people Maybe Snowflake was the end. We'll say, we'll say a lot of people saying Snowflake was the end. We're saying that the Uber IPO was the end in 2019, right? So same people, same people, oh, get out of the market because Uber is so overvalued. All right. How'd that work out? How you living? But then there are also people, just as there will be blowups, there are people who will make zillions of dollars by ignoring the pessimists, taking appropriate amounts of risk, having some better than everyone because there are always going to be these guys who assume every time a stock goes up, it's a mistake or every bull market is a bubble. You can't do anything about that. Well, you can do one thing. you can do one thing. You can take pessimism with a grain of salt, just as you would take excessive optimism with a grain of salt. And you can stay in the game in a rational way.

That being said, Snowflake is hilarious. I looked this up. Snowflake and CVS now have the same exact market capitalization. CVS has 300,000 employees. Snowflake has 1,400 employees. So I think it's safe to say we're not in Kansas anymore and we'll leave it there. On today's show, we're going to get a little bit political to discuss the impending election, what it might mean for the stock market, and what you should be doing as an investor to prepare for the various outcomes that are possible. And actually, there are more than two outcomes this time out. So whether it's a and we're not going to get political like I give a shit who you vote

for. You guys know I'm not like that's not my that's not my shtick. I don't care what your political beliefs are. We're just we're just going to talk about the facts. So whether it's a Trump victory or a Biden victory, there are ramifications for everything from corporate taxes to capital gains taxes to inherited wealth and estates. There's a lot at stake here. And to add to this stew of uncertainty, there's a very high likelihood that we won't even know who the next president is for weeks after election night. And we all know that going in. There's a recent survey

of institutional investors that found that the election is a more concerning issue than the pandemic is at this point. So professional investors are currently more worried about what happens November 3rd than they are about the course that the virus takes, which to me seems like madness, but we're talking about Wall Street. So I guess madness is par for the course. And that's how the pros feel. So we can't avoid this topic. The good news is I have two great guests. My first guest today is my pal Lynette Lopez. We're going to get into what happens if Biden wins, but Trump decides he's not leaving. I don't think, you know, I don't think anyone thinks that that's out of the realm of possibilities. Or what happens if the race is so close that neither candidate concedes and the whole thing has to be thrown into the Supreme Court, which is the outcome that I personally expect. Then we have Bill Sweet, who is an investment tax expert, and he's the CFO at my firm, Ritholtz Wealth Management. Bill is going to talk about some of the Biden tax proposals and what high net worth investors and financial advisors should be thinking about now before

this whole shitstorm even gets started. After that, Michael Batnick comes back. We're going to play a brand new round of what are your thoughts. Batnick and I talk about Nikola, the average performance of a stock versus the index, the NFL, so much more. So stick around. Duncan's going to play the music and then we're going to dive right in. Hit that intro, kid. Welcome to the Compound Show with Downtown Josh Brown. Josh is the CEO of Ritholtz Wealth Management. All opinions expressed by Josh or any podcast guest are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. 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. Hey, guys, I am here with a very good friend of mine and an amazing writer.

Her name is Lynette Lopez. You know her as a columnist at Business Insider, who focuses her writing on US politics and economics, as well as international markets. Lynette joins us from the People's Republic of Williamsburg, Brooklyn. Shout out to Brooklyn. LL, thank you so much for coming on to talk about a topic that I think could be a little bit scary for a lot of people. What happens if Donald Trump loses the election and doesn't leave? What happens to the investment markets, the dollar, the bond markets, etc.? So let me set the stage very quickly, just to give people a quick idea of where we stand. We're 45 days from the election, which will happen November 3rd. The polls, as we're recording this,

are predicting a Biden victory currently, insofar as we can trust the polls. Natixis, which is a trillion dollar asset manager, polled dozens of chief strategists, money managers, chief economist types from all over Wall Street this week. 78% of them are predicting a Biden victory. But everyone knows this time out, it's doubtful we're going to go to sleep on election night knowing who the next president is. And when I close my eyes and I try to picture Donald Trump picking up the telephone, calling Joe Biden and conceding or wishing him well, I just I cannot picture it. Can you picture that, Lynette? It's hard for me to picture as well. And I was at Trump headquarters on election night in 2016, where they served $13 domestic draft, and you

could only pay for it in cash. So the grift was already on then. The grift, it seems, remains on. The campaign is spending a lot of money on Trump's legal issues. And you can expect that Trump will face many legal issues getting out of office and that he will want to avoid those issues. He will have a very uncomfortable life, likely, after being president of the United States. So he wants to avoid it. The best way to do it, even if he loses, is to avoid it the best way to do it even if he loses is to capitalize on the weirdness of this election which is the fact that there are probably going to be hundreds of thousands and if not millions of votes that are cast and not counted by election night you know votes that are absentee votes mail-in ballots pollsters county by county are will probably after a certain

number of the votes are in day of the election, they'll probably be able to tell which way a county or a state will swing. But if I'm the Trump campaign, what I want to do is insist that every single ballot be counted, is contest certain ballots from certain places. Both campaigns have an army of lawyers. And like I said, Trump's lawyers have already been active. They've already been suing local stations in Wisconsin. And the Republican Party just this week, they tried to delay ballots, absentee ballots and mail-in ballots in Wisconsin, in order to add the Green Party presidential nominee to the ballot. So, okay, so they want to muddy the waters even before the waters are there to be muddied. UBS' fixed income strategist recently said, quote,

this year's election is likely to be the most litigated in history. And he notes that plaintiffs have already filed 192 lawsuits in 41 states across the nation arising from changes to voting procedures in the wake of the pandemic. So the peculiarities of voting in a pandemic are bad enough, but that provides so much opportunity to just discount everything and say everything was done incorrectly. Absolutely. And you can bet that the Trump campaign is going to capitalize on that if it seems like Joe Biden is pulling ahead. He needs a massive win if they want to avoid that outcome. He needs to just wipe the floor with Donald Trump. Do you think it would even matter? Let's say you had a landslide election, which I guess is possible. I don't think most people are predicting it, but who the hell knows? Would it even matter in terms of getting a concession

the night of the election? I doubt it a concession the night of the election? I doubt it. Oh, the night of the election? No, I don't expect a concession the night of the election. But the question for markets is how long and drawn out that process will be because what markets hate is uncertainty. And the greatest uncertainty in the world is the United States going to remain a democracy with, as Jamie Dimon says, the widest, deepest, most transparent capital markets in the world? type capitalism, where guys at Kodak somehow end up with a contract to do like, you know, vaccine stuff. And there's like, you know, I mean, the markets are weird. So the cronyism is weird.

The markets are weird. The Trumps like to take things and the people around them like to take things too. And so this is a very big question for markets. The markets have looked past a lot of that for obvious reasons. The tax cuts being a big factor in the willingness of investor. I wrote something that at the time I wrote it, I thought it was really good. It turns out it was really bad. I wrote that the rule of law and the perception of the rule of law has been historically really important for stock valuations. And I wrote that probably in 16 or 17, when it became apparent that there were going to be some new ways of looking at rules. And I ended up being wrong. All the multiples across the stock market have gone up. And even you think about Apple

going from 15 times earnings to 40 times earnings, like the perception of there being wrongdoing in DC and that it being accepted based on which party people are in really has not been injurious in terms of what multiples people have been willing to pay for stocks so far. I mean, there are no consequences for anything it seems in this administration. And the stock market seems fine with that. I just don't like the idea of chaos. Right. So I want to get into 2000 because that's the last time we had an extremely contested election. So George W. Bush runs against Al Gore.

The thing is that neither of them are an incumbent, right? Clinton's gone and they're both trying to first become president, which means they don't have the powers that an incumbent like Trump is sitting on. The whole thing hinges on Florida, which requires a recount and then eventually goes to the Supreme Court. Gore didn't concede for six weeks, December 12th. The S&P 500 falls 6% in the first two weeks of the dispute. At its low point, it gets down about 8.5%, which is not great but not terrible. The Dow fell 5%. The NASDAQ fell 5.5% initially and then got much worse.

The NASDAQ fell 5.5% initially and then got much worse. But ultimately, by the middle of December, the whole thing seems to be wrapped up. And people still call W a thief, but the legal challenge at least had ended. Six weeks for me feels like this time it could be forever when you consider how much shit happens every day. And here's the question. Will Joe Biden concede the question, will Joe Biden concede? If you're Joe Biden, yeah, if you're Joe Biden, and you know that the Trump campaign is already engaged in dirty tricks, and you already know that, you know, the governor of Florida is an extremely loyal Trump surrogate.

And there is a lot of voting chicanery going on in Florida already. If you know that, then why would the Biden campaign concede? Biden would. If it's very close, he probably wouldn't. Why would he? Yeah. And it looks like Biden will probably win the popular vote. Hillary won the popular vote. Biden will probably win the popular vote. Sort of gore. Sort of gore. So this is my father, a Dominican immigrant always says, you think you have a democracy, but that is bullshit in this country. You do not have it. So, you know, why would Biden concede?

Considering and considering everything that's on the line, which is what I just said, you know, the transparency of markets, upholding of American democracy. Why would Joe Biden concede? So I think right now my viewers who are my listeners who are Republicans or Trump supporters or they hate Biden or whatever. Yeah. Sorry, guys. Sorry. No, they're probably happy that you brought that possibility. They're probably happy that you brought that possibility up, that if Biden wins, maybe he doesn't concede. And I actually agree with you. There's almost no reason for him to because he knows that they wouldn't. But I just I want to throw this throw this out to you. knows that they wouldn't. But I just I want to throw this throw this out to you. I think that Trump is doing more to cast dispersions on the legitimacy of the election than Biden is. I don't think anyone would disagree with that. Yeah, I mean, he told people in North Carolina to vote

twice. Right. And now he's saying that mail in ballots should not be allowed except his own that he sends to Florida. Of course, this is This is a Trump quote. This is not me characterizing. This is what he said. Quote, it will end up being a rigged election or they will never come out with an outcome. Like if they use mail-in ballots, he'll say, he said, quote, they'll have to do it again. And nobody wants that. And I don't want that. He's already talking about a reelection election. And then he said numerous times, the only way I could lose is if it's rigged. Those are his words. So that's not Bill Maher. That's literally Donald Trump. And he knows that a lot of his voters, they'll just play ball. If

he says rigged, they'll say rigged. So I think the markets will not love the idea. Forget about a recount or a delay. They won't love the idea of the president, the incumbent president, just being like, forget it. The whole thing was a scam. We're not going by that. Yeah. And, you know, nobody knows what's going to happen when it goes to the Supreme Court.

Do you really think the market wants to hinge on a Supreme court decision? There were three elections in the 1800s that were resolved in the, in, in the Senate and the house. And I, I don't think that things were as volatile over, over these three elections. Like I,

I don't even, I don't even remember which presidents were involved. Rutherford B Hayes was involved in in the last one so you really have an experience no one who was alive has experienced what might happen this time around if it ends up in Congress and the Supreme Court I don't think I don't know I think sometimes we

underestimate how crappy the United States was after the Civil War it was a pretty bad time. Like talk about the growth of monopolistic companies and industries. Like this is the birth of the truck. You know, you've got like the, the South creating basically a totally different way of structuring their government and society from the North and North being like, we just don't want to fight you on it anymore.

Let's just go with it. Um, you know, the clan, I think sometimes we underestimate how much, I mean, we were just going out West killing Indians. I think sometimes we underestimate how shitty that time was, but, um, yeah, I don't, I don't think we're going to see anything like this in recent memory. And, and for the world and for global markets, we'll definitely never have seen anything like this since the United States became a superpower, since it had the most important economy in the world. And I think that for those observing U.S.-China relations and for people wondering what the U.S.'s next role is going to be in the world. And this is going to make us question our competence. Does this strengthen the yuan

as a potential someday reserve currency if we've got this unbelievable political volatility here? Does it make China look better or not really? No, I'm against these US looks bad, China looks better theses. I think that the virus actually was a perfect example of people saying, well, the US looks bad, China is going to look so much better now. I mean, the second people started saying that about Trump's mishandling of the coronavirus, China started sending faulty equipment around the world and like enacting wolf warrior diplomacy. And while its economy has stabilized, they still have major challenges from the virus that they're, you know, they still have to deal with and the challenges that they had before they have to deal with. Because Lynette, you know, there's a conspiracy theory on the right that

whatever Russia is doing on Trump's behalf, China is probably doing on Biden's behalf. I'm not in a position to know whether or not that's worth listening to or not. But I assume you've heard that stuff. Yeah, that's nonsensical. I mean, I've heard people on the far right say that we should cozy up to Russia in order to combat China. They try to say that China is out for China. China is not out for Joe Biden or Donald Trump. They recognize that both, and Joe Biden's China people, his international relations people, are also fairly hawkish. They have changed from when basically Obama assigned Joe Biden

to be in charge of China relations and to create a relationship with Xi Jinping. I think Biden's thoughts on Xi have shifted, certainly from that point. And he's definitely joined basically the US consensus that Xi is a problem, that the CCP has become more violent, more autocratic, and that our technology is like really not safe with them. I think that I think that they, Biden has made that evolution as well. And I think the Chinese recognize that regardless of who is president, they will have to deal with a more aggressive United States. So David Koston at Goldman Sachs is telling clients that there is a higher implied volatility than there normally would be

going into an election for the November 20th strike. So for S&P options that would expire two weeks after the election, let's say. And he's actually telling Goldman clients they should be using the December strike, which is essentially end of year because of how long this could go on for. So does that duration sound right to you as like a period of how long this could go on for. So does that duration sound right to you as like a period of time that we could be dealing with the aftermath of this election? Who knows? I don't know. I mean, Inauguration Day, according to the Constitution, Trump is out.

Right. And if we don't have another successor, then it's, you know, I guess Nancy Pelosi. So maybe that is a good strike day. I don't know. But there's really no way of knowing how long this could go on. The question is, how do you create certainty in markets at a time when the United States is in full-blown chaos. Right. I want to pivot to Biden. So I think there's, it's hard for me to tell, maybe you have a better read on this. It's hard for me to tell how quote unquote scared the investor class is and the business leadership is of Joe Biden. Part of me feels as though most wealthy households and the investor class in general would be fine with him, but they would hate his tax policy. And let's assume he enacts even 10% of it. I want to go through what some of these things are and just get your take on what do you think they're most afraid of. So Biden has basically said he wants to repeal the Tax Cuts and Jobs Act, which was passed at the end of 17.

For those earning $400,000, he wants the individual reductions to just go away. And then he wants to restore top marginal income tax to 39.6. It's 37 now. And he wants to phase out certain deductions. Making over $400,000 seems to be where the rubber meets the road for a lot of that stuff. Then he wants to take capital gains, which currently 23.8% today for those making over a million dollars and put them at ordinary income rates, which sounds like it would be a pretty big deal for most investors. He wants to eliminate step-up basis for inherited assets and tax those gains.

So what they call the death tax, he wants to tax those estates at the point of death. And then just the last one, corporate income tax, it's 21% today. He wants it back up at 28%, which would still be lower than where it was prior to the Trump cuts. But still, percentage-wise, it's like a 35% or a 40% jump from one year to the next. Should that really be terrifying for the stock market, considering how profitable the largest corporations in America are right now? I mean, I don't think any of this is terrifying. I think that what investors should be wondering is, does Joe Biden consider economic inequality one of the reasons why our economy seems to be growing more slowly? slowly. Does Joe Biden think that fixing economic inequality is one of the most important things to do as we get out of this K-shaped depression that we're in? I think it's more like these are

policies that I think, I mean, the capital gains one, if I were an investor, I would be most concerned about because that one seems like kind of a blast from the past compared to the rest of them. The other ones have been policies that have been thrown around by Republicans and Democrats in various shades for the last three, you know, two decades, maybe. the thrust of this administration to fix economic inequality and to play around with that in in terms of um regulatory policy um going after monopolies for example like does joe biden think that going after the tech companies in a serious way, not in a bill bar way, in a serious way, is the way that we fix some of our ills by letting, you know. He doesn't speak that way. He doesn't he doesn't seem to he doesn't seem to want to dismantle Facebook as badly as as many other. I mean, he might just be keeping his mouth shut because he's still running. Does he does he want to kill the pharmacy benefit manager?

Does he want to change the way our health care systems work and our hospital system? To me, those questions are – and I get people are worried about their taxes immediately. But to fundamentally change the economy, do we have a president who has the perspective that business and corporate America in general have gotten too selfish, too big, and that they need to reorient the way that they distribute capital? It doesn't seem like he's too wild about that stuff. So here's what JP Morgan had to say about why the market might be too pessimistic about a Biden presidency. They're saying that he might be more friendly than a lot of people are currently predicting because just starting from scratch, he's in the political center and always has been. And then there are these potential benefits from infrastructure, which I know it's been infrastructure week for four years. It is. It is infrastructure week. Yeah.

A softening of tariff rhetoric. I would rephrase that and say enough with the tariffs probably. Enough. Enough already. Higher wages, which obviously on their surface might not seem investor friendly, but probably are in the long run. If more people are spending more money. Considering the design of our economy. Yeah, this is way higher wages. You know, the missing ingredient of our economy right now is our consumption.

You know, so so under Democratic presidents in living memory, stocks have done pretty well. They did great under Clinton. They did great under Obama. And Biden is not necessarily to the left of either of them. And he probably looks more like a continuation of Obama minus maybe some of the more social issues on the left if he can withstand the pull toward the left of the party. But I just don't understand why investors automatically assume, oh, it's a Democrat. There are some slight tax increases that he's talking about that all of a sudden this is going to be terrible for stocks. Historically, that's been a bad call, right? Historically, that has been a bad call, but if I'm CNBC, so it must be right. historically that has been a bad call, but like it's on CNBC, so it must be right. You know? Oh, stop that. Stop that. I mean, talking heads in general, in the financial industrial complex, it's generally like an echo chamber of people who think alike talking about the same ideas and thinking about them the same way. And a lot of industries get trapped in that. And Wall Street is a reflection of the people that

are in it. The people that are afraid of those tax increases and make a mountain out of that molehill and corporations who, you know, corporate CEOs who have a vested interest in not seeing their taxes increased. This is, it's an echo chamber of people who all have the same interest. What if you told jamie diamond your taxes are going to go up corporate tax is going to go up individual taxes to go up but the tariff stuff is over don't you think jp morgan would say fine like the policy of the of the bank wouldn't say anything but don't you think jamie diamond in his head would say okay that's a push i think jamie diamond in his his head is definitely okay with that outcome.

The tariff stuff, people ignore that 2019 was the worst year for manufacturing since the financial crisis. It was terrible. And we act like it doesn't mean anything. It just doesn't, for most Americans, it didn't necessarily hit the consumer. But, you know, this stuff matters to American industry. Yeah. I think the banks know that.

I think the banks would prefer a return to normalcy, a return to stability, and a return to the rule of law in the sense that the Trump administration and Robert Lighthizer, the trade negotiator, they wanted to return to a world where countries basically hash everything out man to man and the strongest man wins. What I think markets would prefer to return to and the way we did it this way with versatility

is a rule of law. If this, then that. And we hash it out in the open at the WTO. So there's some certainty about what the outcomes will be. And it's not just four guys in a room with their translators hashing it out. And then all of us have to deal with the outcome or the lack of outcomes and the spin that comes from that. What do you say to a Trump supporter who's an investor who says, I understand all your arguments about the rule of law and the emoluments clause being violated and all this stuff, but look at the US stock market since Trump was elected versus Europe, where they have all these precious conventions that we're so worried about hanging on to. Maybe it's better that we had a businessman. Look how much my 401k

went up. Not what do you say to him? What do you think when you hear that? I think, who do you think owns America? Do you own America with your 401k? You're happy and you own America. So we did a great job. Look at the rest of this place. We all have a piece of this country. So just because you're doing well and the rest of it is in chaos does not mean we have the right situation going here. The economy is in tatters. People are sick everywhere. I'm glad that your 401k is well, but the president of the United States does not serve you. He serves the country as a whole. You do not own America. This place does not belong to you alone. So just because you happen to be on the right side of this trade for the moment, doesn't mean that the person who is in charge of this place is doing a good job. It just so happens that in every horrible historic event, just about even in some of the worst ones, there are a few people who are doing okay.

But just because that's the case, doesn't mean that we're in a historical moment that's going to do good for the wider part of society. So the Dow Jones is like 29,000 right now. If it were 19,000, would we even be having this conversation about the election or would it be such a joke the landslide uh that that would be happening like like if because given the pandemic which i think um the independents clearly side against donald trump's treatment of the pandemic right yeah so he's basically running on the economy plus like some scare tactic stuff around the protests which we're not going to get into today. But that's his campaign, right?

Yeah. Now, if the Dow was taken away from him and we were at down 19,000 instead of 29,000, which is 100% a conceivable thing that could have happened as a result of this pandemic. It didn't, but it could have. This election would be one of the biggest landslides in history, would it not? I don't know, because I don't know. Like, what is the breaking point of a Trump supporter? He keeps them. It's 40% or whatever it is. He keeps them. The swing voters,

if there were any real swing voters left, this would be a landslide. The Trump curious, left this would be a this would be a landslide the trump curious as they called them in the in the 2016 election the people were like what have i got to lose and it's like well look around honey um i don't know there's something about donald trump that makes people forget what this country is supposed to do which is create uh opportunities for the most people to access happiness and opportunity at one time. It's a very Enlightenment social construct, not a nationalistic, romantic, this is our place, and so we do things our way, and it belongs to us place. That's not what this is. There's something about Trump that makes people forget that. That makes people forget, you know,

that we're supposed to have transparent markets, that we're supposed to have rules in trading, that we're supposed to, like, you know, there's something about him that makes people forget that. So do I think if the stock market was getting crushed, there would be no contest in this election? I don't know. You know, I don't know.

Right. The question is how we deal with chaos. How do we deal with chaos? We're about to see if we come out of this, a stronger democracy, one in which people really feel like their voices were heard and that there was something, there were fair outcomes. And I hope, I hope we can do that. I hope that's something we can achieve. I hope that at the end of all of this, there is not a large swath of Americans who feel cheated. Where are you watching the election results come in

or non-results come in this year? I don't know, man. I don't think I can, no one can be at Trump headquarters again. Yeah, I think we're all gonna, I think we all have to watch from our homes. That was one of the most interesting nights of my life. But I'm sober now, so we won't talk about it.

Lynette, where do you want people to find your stuff? I think you're just an amazing columnist and you know I read all your stuff and we often talk about it. Business Insider, that's where my stuff is. You can head to my author page, Lynette Lopez, spelled with an I, not with a Y. I'm on NPR's Marketplace. You can catch me on MSNBC from time to time, ranting about these things. And I'm sorry, I don't have more answers. I don't think

anyone has more answers. So what we'll do is we'll have you back in that chaos and we'll reassess and we'll see what's going on for investors and for everyone else. Sound good? Thank you, Josh. Hey, I'm here with Bill Sweet, William Sweet, if you will. Bill Sweet is the CFO of Ritholtz Wealth Management. Bill is a certified financial planner and an investment tax expert. And I wanted to get Bill's take on some of the ways in which the tax situation could change if Joe Biden ends up winning and the Democrats make enough of a show, I suppose, in the Senate race to be influential there. I'll just start by saying right now,

the consensus is that the Democrats hold the House. The polls look as though Biden will win the White House. But again, the polls in 2016 were saying that Trump would lose. So we really don't know how people vote versus how they tell people they'll vote. And the Senate, there are 10 races that are in play. Only one of them has an incumbent Democrat. I don't think that many people believe the Senate will flip, but it is possible as well. So that being said, Biden has laid out his tax plan, and it looks like 80% of the increase in taxes that he's proposing will come directly from people making over $400,000 a year or people making over a million dollars a year, depending on which proposal. But it looks like it's a top 1% issue to fund this

increase in taxes. So I want to go through some of these things with you individually, Bill, just to kind of get your take because you're talking to clients, wealth management clients every day. And this is something that I think a lot of people are starting to prepare for or at least mentally prepare for. So let's just start with investment taxes. Capital gains, I don't think there's anything in here about dividends specifically, but capital gains, if Biden gets his way, will go up quite a bit for wealthy investors. Yeah. And that does bring this sort of time

management strategy here that there's an election in November, potential administration change, change in Congress in January. And I think it will take time for all that to play out. I mean, don't keep in mind that even if there is a change, it's still, I believe it's politically pretty toxic to go messing around with income tax rates in the middle of a global epidemic, in the middle of a recession that's probably caused by that epidemic. But all that said, it doesn't actually require any action from a potential President Biden or a Democratic Senate to change the tax code. It's set to revert back to 2016 and prior levels due to the TCGA expiring in the tax year 2025.

So my thesis here is that we are- Let's back up. Let's back up. TCGA, JA, the Tax Cuts and Jobs Act, which was enacted by Trump and the Republicans in late 17 took effect in 18. So that's going to sunset either way, the way things stand now. Yeah. And I'm kind of planning on an action in Congress. I think increasingly we're in this era of political polarization. But I guess my point is that we don't have to predict that tax rates are going to change next year or two years from now. My thesis, and I talk to clients about this, we're living in an era of artificially low income tax rates. US federal deficit spending has doubled here in the last three years.

If you look at the 35 most developed countries, we're the fourth lowest total tax rate in terms of percentage of GDP. Denmark, the highest at 52, we're less than half of that at 26. And so you don't have to predict a blue wave coming to do the math and realize that taxes are likely going up and it's likely going to be the folks that are receiving the most income that are going to pay the most income tax in the future, just like it's always been. All right. So back to capital gains tax, as it stands right now, what are capital gains rates and what is the proposal? Yeah. So capital gains rates are as low as 0%, but as high as 23.8% on folks that have held assets for more than a year. And the Biden administration is proposing,

as you mentioned, a different tax rate to apply to folks at different income tax levels. That exists now. Not everybody pays the 24%. As you've talked about in the past, a couple earning less than $100,000 actually has less, like a 0% capital gains rate. So it is targeting folks that are in the higher income tax rates. And the proposal, I've seen a bunch of proposals, but one specifically, I think the most punitive and the one that the article that we're discussing today talks about is that those are going to revert to ordinary income tax rates. And that could be as high as 40%. And so that would effectively be doubling the income tax rate on capital assets for

folks earning above that income threshold. Okay. for folks earning above that income threshold. Okay. And if you have a million dollar plus portfolio and you're in a situation where you're making over a million dollars in income, is that the level for 40%? Yeah. I believe it's roughly $400,000 of income. So where the- Oh, 400,000. Okay. Yep. Roughly. So it's based on income. It's not based on assets. That's sort of Bernie Sanders, that really kooky stuff seems to have been flushed down the toilet.

Yeah, Biden doesn't want it. Biden is not, he's one of the Democrats that got through the primary without resorting to a wealth tax, like an explicit wealth tax. So this is about how much you're making, determining what you'll pay on things like capital gains. So if you're talking to someone and they say, well, I have a business and I was thinking of selling it, or I have appreciated shares of Microsoft because I've worked there for 10 years and I'm thinking about selling it. Am I better off doing it now versus after the election? What's the answer to that person? So I think there's still time just to

be completely honest about it. I think there is a sense of urgency that we talk to our clients about, about things like estate planning, because I do think that that, that, that clock could turn much quicker, but, but I think there is still time just because even if, even if we do see an election change here in the fall and we'll know like by the, before the year's out with more than a month's notice, almost two months, what direction things are going to go in. Maybe, maybe we'll know. That's a good point actually. But in theory, assuming that we have election results within November 15th and we're not in a 2000 era Supreme Court, we're waiting for the courts to decide what's going on. I think there is some time to make those investment decisions. And I think this is the right answer, as boring and

unsatisfying as it is, it depends on the plan. Can somebody afford to pay income tax, even at 23%, let's say, tax rate, which is still pretty high on a million dollars of gains or more? Can they afford to do that? Does it make sense to do that? A lot of the discussions we've been having, Josh, recently are relating to concentration because we have had this five or 10 year run up on stocks and we're close to, we're still within spitting distance of all time highs. So clients that we've brought into the firm recently with, let's say Apple stock or Netflix or Tesla stock, we are having these conversations today. And I just got off the phone call yesterday with a client that we did make a recommendation, but it wasn't based on what the political winds would do. It's more based on

the plan. I think that's always going to be the right answer. And it's unlikely that Biden would enact an increase in the capital gains tax rate that's retroactive to 2020 anyway. I would think that's a very strong possibility. I would never say never. And then it does take two to tango. I think that's the thing just to keep an eye on. You mentioned the Senate flipping. There still is a 60 vote majority required for any bill to pass that involves anything outside of this funky budget. Right. They may not have it. They may not have it anymore. And I think that the case for tax rates potentially changing or something to happen, I think it's actually a little bit counterintuitive in respect. Let's say we do see this blue wave and let's say we do that, see that come in. I think that will result in potentially GOP, and not to talk politics too

much, but it's probably the source of the conversation here, that they might return to this era of fiscal responsibility. That may happen. And we might see them sort of toe the line on some of these matters. And I think that will probably be the case where if you do see a slight majority in the Senate, or even if you don't see the 60 vote margin, which I think is probably in the lowest percentile of probability, that you will see the GOP dig in. They won't have the votes to move the tax policy because it requires Congress to act. And that's the key thing to remember. Well, yeah, they're already digging their heels in on stimulus.

And that's the key thing to remember. Well, yeah, they're already digging their heels in on stimulus. They don't seem to want to – they want to keep that very narrow versus the first round of stimulus. So you might be right. Let's talk about corporate tax rates. And I think 2017, the entirety of the year, stocks had been running up into that with that expectation. I think you had a 27% return on the S&P 500 into the end of 17. And then in 2018, it was like sell the news once it actually happened.

But where are corporate tax rates now? And what is Biden proposing to do? Yeah, the top marginal rate today is 21% on your typical C corporation. And two thirds of the TCGA, which we discussed past, the benefit, the financial benefit went to corporate entities. And that was part of a decades long pledge to get that to happen. I agree with your thesis on kind of what happened. And you saw corporate profits increase exponentially, not just because of the economy continuing to stabilize, but that lower tax rate made a difference. However, my opinion, that's more of a trend. Which also helped fuel a huge wave of buybacks. Massive, right. Because of just the incentives that are in the policy.

But that was more of a trend. I mean, if we go back 20, 30 years pre-Reagan, you see this sort of ticking down to the corporate tax rate, not just because of President Trump, not just because of the Mitch McConnell Senate, but really that was more of a trend. And so even the Biden administration, whether this is good or bad, I think is generally a good thing. They're not planning on reverting back to the 35% rate that was in place prior to the TCGA. I think it's a median. I think the proposal is 28% of something of that nature. I think there is an argument to be made about competitiveness. If you look across the globe, 21% actually is the OECD average. And so while US income taxes broadly, including individuals, are on the low end, like I said, fourth lowest amongst developed countries, the corporate tax rate is more or less in line today with global competitiveness.

I think, again, there is a case to be made in the era of COVID when we are looking for business, we are looking for ways to go with the economy. I don't see a lot of hunger to increase that corporate tax rate outside of that it's red meat. It's red meat for the democratic base. Well, because they don't just want to raise the tax rate and then use that to pay down the deficit. They want to raise the tax rate and use that to fund additional spending for the lowest income households. And so you could make the case that while the immediate impact of a higher corporate tax rate in the first quarter or two would be a market negative. If you get that money starting to circulate in the economy, which I think is more productive than buybacks, it actually ends

up being a net positive for the earnings of US-based corporations. You just have to give it a little bit of time for that to happen. So that is a potential plus that initially will look like a minus. Would you say that's fair? I would agree. Yes. And again, I think there'll be some time, but I think given the fragile state of the economy, again, I'm basing this on nothing other than feel. How politically toxic is it to go to American economies that are corporations that are suffering and decide to raise income taxes? I think that's a really tough sell at this specific moment. Yeah. Part of me feels that if you're worried about getting back to some semblance

of full employment, that's probably not the best way to get there. But of course, the money for things like stimulus, it has to come from somewhere. And just continuing to expand deficit spending probably has a limit somewhere. Yeah. Although some would say it doesn't. Can I throw a curveball at you? Please. So do you consider tariffs, income tax, is that a tax on the American consumer or no? I think it's a tax on certain sectors of certain business and industry sectors for sure.

Sure. So just a 2019 Federal Reserve study took a look at the 2018 tariffs that came in right around the time of the TCGA. They found excluding all other factors, washers and dryers, which is something the vast majority of American homeowners own, the price has increased by about 12%. And so there is a direct connection to that in consumer prices. And if you consider that 12% increase of tax, which I'm kind of a Reagan era Republican, I do. Americans spent about $2.9 trillion on durable goods last year. So a 12% increase equates to about $350 billion of higher prices that are paid in the form of consumer goods. That money goes somewhere, obviously, but if corporations are having to import those,

and which is primarily we're an import economy, that's a large number. And so that's the other kind of interesting factor here in the dynamicism of a potential sea change here is that we do see this return to free trade. I think that that could offset some of what, again, is baked into the tax code changing here in the next three to four years, especially if we do see a change in the administration's policies. There are a lot of multinational corporations that if you said to them, corporate tax rates going from 21% to 28%, however, the tariffs are over, they wouldn't look at that as a bad trade. Yep. I would agree. And I guess just to discuss the impact of the tax changes, I mean, we're

looking at about $200 billion less federal revenue from 2015 to 2019. So in contrast, I mean, we saw a drastically larger economy. We did see a 15% to 20% economic growth in that time period. So that's something that has to be factored in. But I don't ignore that analysis in my calculus, but it's not optically there. It's something that might be a little more nuanced and something that your average taxpayer that's sitting on, let's say, hypothetically, So right now, 12.4% in combined payroll taxes paid by both the employee and the employer come for the first $137,700 that an employee earns. And Biden wants to raise that and take 12.4% up to the $400,001. What does that do for professional services businesses,

technology businesses in terms of their hiring decisions? Because that sounds very expensive. Yeah. And a lot of people talk about this sort of flat tax concept. We have debates about income tax. And it's true that less than half of American households actually pay a net income tax to the United States government, meaning that the remaining 50%, which is that's stereotypically those professional service folks that you're talking about, they're bearing all the share, but everybody pays, everybody who's employed pays a payroll tax. And you mentioned that, that 12.4% is a flat tax that applies across the board, but unlike income tax, which hits the high income tax earners obviously higher, that's that 12.4% is a flat tax that applies across the board. But unlike income tax, which hits the high income tax earners, obviously higher, that's regressive. And so raising that cap, in my opinion,

is inevitable. That is a large jump to go from 137 to 400, because you're right, effectively, for folks that are hiring, that's a 12% tax, or 6% compared by the employee-employer combination on each side. And that would, I'm sure, more than increase that federal revenue by about 10%. That's not a small number. And it does target folks who can't afford to pay it. So I think there's a debate there. But yeah, I think that would affect folks that are in that higher income tax range without a doubt and would affect those higher decisions. But it is an interesting proposal to potentially broaden the tax base. And because most people don't pay attention to payroll taxes quite in the way that they do to income taxes, I do think that's an interesting proposal. And given that it looks like Social Security

Trust Fund will be insolvent 2034, so we have about 15 years to 14 years to plan on this, that's probably the way it's going to go. The only other benefit, the only other option there is to increase retirement age, hypothetically from 62, let's say to 65 or to decrease benefits. And I think those two things are probably non-starters. Yeah. Or we may have to do some combination of all of them someday. I want to go to, so according to MarketWatch, IRS audits are way down. And we know this is part of the general thrust of deregulating and keeping the government off people's backs. So the IRS audited 1.73 million returns in fiscal 2010, according to this MarketWatch article. And then last year, they only did about

$770,000. Biden has Larry Summers as one of his campaign advisors who has said he thinks the IRS could pull in an extra $535 billion if it just went back to the audit rates of 10 years ago, and it starts focusing on the top 1% of 1%, which is frankly where a lot of the levers are to pull for taxes. Is that something that concerns the investor class or doesn't yet, but should? It's interesting. ProPublica has put a lot of good journalism out there in the last five years about that specific matter, just how the IRS has been targeted. I think politically, although they're guilty, certainly some prior commissioners, certainly of politicization, some of the IRS

functions specifically in nonprofits. But ultimately, that's how it's happened, is that budget cuts have resulted in a decrease relative to inflation of roughly about 20% here in the last 10 years. And investigations of folks who are getting examined has decreased. It looks like in 2011, people that earned more than a half million dollars a year, about 8% of them were examined. In 2017, that number was 2.5%. And so the IRS simply does not have the resources to chase folks around. And increasingly that's decreasing relative because ultimately I think there is some political pressure at play there. As far as whether the IRS is going to get funded

in another administration and Congress controls these laws, Congress controls these rules. It's still so hysterically low, 2%. To even see that number double, we're still well below historical audit rates. So I don't know that that's an increase, a risk that I would consider to be blunt. Okay. And just on income tax itself, to wrap things up, what do you see as being the ramifications there? Assuming Biden gets his way. Yeah. I think you'll see, you could potentially see a rush. I mean, that's kind of the thing that you could see. A lot of deferred gains, specifically in technology, companies have done really well. I think there will be a reaction.

So if we think back to, let's say, late 2016, we saw a lot of overnight moves in the market, right? Because we were expecting a Clinton administration. That's where the 70% probability was. And you saw a lot of overreaction there, like literally overnight. It happened within hours, I remember, and then some stability. So I think that that's probably the way it'll play out. But I think what's interesting is in this case, in this timeframe, the opposite is true where we won't know. I mean, we could see a different result than we're

expecting. I think it really does depend on all that. But I do think that tax rates do influence behavior, but I think it'll happen in the short term. And that eventually, and probably in case of a week, although who knows, market cycles are so accelerated these days relative to the world that I grew up in, and I know you did too, that there will be an overreaction, but then there'll be a stabilization and things will probably resume on their prior trend. So only in very rare cases does somebody need to do something immediately. I think the most valuable thing, especially as it concerns estate planning, is just start thinking about what you might want to do and putting some things on paper. I don't think anyone needs to pull the trigger on a sale 45 days out before an election. It would be a big mistake. I think you hit on the key point. The estate number, that's, I think, the thing that is most targetable. I think it's the most politically popular. Today, the estate exemption is $11.2 million on death. For a couple, that's $22 million. That number will revert with the TCGA,

assuming that Congress doesn't extend it to 5.6. Meaning the estate tax will impact millionaires, but in the $5 million range, not just in the $11 million range. Bingo. And the states have a lot to play too. But I think that's actually the low-hanging fruit, that if we do see a political sea change, that's probably the first thing. I was going to say, that's the easiest thing Biden can do, because who does that even concern? 700,000 households, 500,000 households, if that. Yeah. And it's relatively easy to plan around too, as you and I know, for folks that do have the wherewithal to plan around it. But yeah, I think that's the most politically popular thing.

If you're raising taxes, especially on middle-class Americans, and depending on where your zip code is, somebody earning $400,000 can consider themselves a middle-class family, depending on the cost of living. That if you're targeting people that, like I said, are passing away with $11 million or more, that's a pretty politically easy target. And I think that's the thing. Those are the conversations we've had with clients here is to plan on that happening, put something in place that's flexible now. Right. If they eliminate step up cost basis. So in other words, we're talking to a million dollar household. It's a husband and wife that are in their seventies. They pass away. If, if, if the, the errors don't have the ability to step the cost basis up on

assets to now versus having to owe taxes on what the assets were originally purchased for, that can have a huge impact on the inheritors and what their tax situation becomes. So I think Biden is talking about rolling that step up basis ability back. Is that right? Yeah, that's one of the proposals that's on the table. I think it's low probability. Yeah, that's one of the proposals that's on the table. I think it's low probability. So yeah, I guess just the point there is that, yeah, I think for anybody that's sitting on large capital gains that could be potentially impacted by this, taxes will go up. I don't know if it'll be in 2021. I don't know if it'll wait till 2025. But we are living in a low income tax environment. And we are seeing federal spending well in excess of federal income. So those three things don't square. And so planning on that happening, whether it's this year, next year, with a competent financial planner, with a competent tax team, I think now's the time to, again, thinking about that. I'm not convinced it's the time to start executing. Bill, you're the man. You're doing a great job. Where do you want people to

read other thoughts that you may have on the subject? At Bill Sweet on Twitter? Is that the easiest way? Yep. As you know, I got a month old baby, so I'm not tweeting a whole lot these days. But as we sort of ramp up here- You're better off. Yeah. This is obviously in the crux of what we do.

This is in our wheelhouse. And yeah, that's the best place to find us as well as your site, Barry's site, and the rest of our good folks. And yeah, that's the best place to find us as well as your site, Barry's site, and the rest of our good folks. Awesome. Thank you very much. Good luck with the one-month-old baby. And we'll talk later. Thanks very much, Josh. All right. Bye, Bill. Thanks. What's up? What's up, my friends? It's Downtown Josh Brown. I'm here with Michael Batnick as usual. We are here to play our favorite game, What Are Your Thoughts? As we do every Tuesday. Michael has no idea what I'm going to ask him about.

And I don't know what he wants to ask me about. Play along in the comments below. We love your feedback and pithy remarks. Let's get right into it right after the break. All right. Michael, great to see you as always. I like your, I like your headphones. Are you ready to land the plane of some sort or can't find the AirPods? What's the

story? Just changing it up. Changing it up. All right. Change is good. I wanted to ask you about the post that you wrote about most stocks suck. And the thing that jumped out at me, this is your quote, basically saying that most stocks do worse And the thing that jumped out at me, this is your quote, basically saying that most stocks do worse than the stock market. If you were throwing darts at the S&P 500 over the last year, you were eight times more likely to hit a stock with a max decline of over 60% than you were to hit a stock with a max decline of less than 20%. And for context, the market only declined in total by 33%. So most stocks did way worse than the overall market. I think we understand some of the dynamics behind why that's the case, given how large the large stocks are.

But was that surprising to you in the course of your research? Not necessarily. I mean, what I said was that this is not unique, the fact that most stocks are underperforming the benchmark. I think it's usually two-thirds of the time. I'm sorry, two-thirds of all stocks underperform the index. And I saw an interesting stat recently. Over two-thirds of all stocks underperform the index on an annual basis? On an annual basis, I believe.

Right. Okay. I saw an interesting stat from Invesco showing that the likelihood of outperforming if you're just buying and holding a random stock actually decreases with time. So there's like a 49% chance of underperforming over one year. And that drops over three years, over five years, which makes sense. Is that skewed by the fact that a lot of stocks just disappear, either because they get acquired or they go bankrupt? Does that have something to do with why the longer you hold a stock, the more likely that stock is to underperform? So you have both things going on. So anyway, I was able to pull up this max drawdown very easily on Y charts. And basically, I was able to show that this part shocked me. Only 10 stocks had a maximum decline of less than 20%. Only how many? 10.

Only 10 over the past year. 10 stocks in the S&P 500. Only 10 stocks. Costco, Walmart, Clorox, Hormel Foods, Dollar General, Verizon, Eli Lilly, Vertex, Norden, LifeLock, and Citrix. These things were like rocks. Just an absolute rock. Unbelievable if you were in those names. Now, I guess this is also skewed by the fact that what are the stocks that fell 70%, 80%?

It was the names that were directly in the eye of the storm. The energy companies, I don't know if any airlines fell 80%, but it was the junk for sure. So now you say to yourself, the allure of stock picking is that, forget about just this year alone, is that you're going to end up in an Nvidia or an Apple and you're never going to sell it and you're going to eat all the declines. And that works out really great, of course, in hindsight. But think about how many stocks you held individually, which I guess if you did that alongside an index portfolio, right, which is what I've always done. Think about how many of those stocks don't become NVIDIA, don't become Apple.

And you look over 10 years and yeah, you've done okay, but they just didn't keep pace with the index. That's the experience that you would have had with what percentage of stocks? Two thirds? So the two thirds number that I'm recalling is for the S&P 500. I believe that's roughly it. The 49% was looking at the MSCI All Country World Index. Okay. So it's not an anti stock picking or a pro-stock picking argument. I think it's just a good idea to set your expectations that- It's a pro-risk management argument that most stocks suck and never come back. A lot of these stocks have declines to where they never recover. So if you know that in advance,

then maybe have some sort of sell discipline. Don't hold a stock that's going to fall 70% to state the obvious. Okay. I love it. What do you got? All right. Sticking with the tech stuff, some of these data points are just insane. This is from Nekarasi via Barron's. Option volume in single stocks averaged a record 18.4 million contracts a day in August,

which was up 80% from the average monthly vol in September. I'm sorry, in 2019. In September, it's already 24 million. And this was probably last week. So it has gone absolutely bananas. There was a ridiculous survey showing that 43% of all traders using leverage, which obviously that's not true, but here is a crazy chart showing the fun flows for the Qs versus TQQQ. And TQQQ is the triple lever version of the NASDAQ 100. The triple, triple Qs. Oh my God. So the triple, triple queues.

Oh, my God. So last week during the decline, there was a pretty hefty outflow from the queues. Not surprisingly. OK. Look at the flows into the triple queues. Aggressive. So money is rushing out of the queues and rushing into the triple queues. The levered version.

Oh, that's outrageous. That's like it's a caricature of a bubble. I mean, literally. So here's one more thing. Bank of America, Merrill Lynch put out a survey this morning, the evolution of global fund manager survey, the most crowded trade. And not surprisingly, US tech and growth was the number one. I think 59 percent of managers were long previously, and now it's up to 80 percent. So it's safe to say that expectations

in the space are fairly high. You know, we so so Al Michaels is is like a major. Did not see did not see this coming. Al Michaels, who's the the host of uh i guess sunday night football for for nbc one of the greatest sports commentators of all time um i i've i've met him throughout the years he's come on the show i went out to the super bowl and and uh we we did some cnbc with him and he's like a like an avid trader and he every time he sees me he tells me what his positions are. He's in all these triple leverage. And I keep going, dude, those things are f***ed up. Like they have negative leverage when they go down and they reset each day.

He's like, Josh, all I do is make money. He's like, I hear you. And I appreciate those words of caution. But I'm triple long tech. I'm triple long NASDAQ, whatever. And I keep making money. So. But I'm trip along tech. I'm trip along NASDAQ, whatever. And I keep making money. So what do you want me to tell you? Al Michaels uses leverage?

Al Michaels uses triple ETFs. And he loves them. He loves them. Will not part with them. Wait, hold on. Hold on. Before you go in, one more stat from Statimate Trader. OK. Last week.

So people are like, well, when you see these, these, this option data, you don't really know if they're, they're buying to open or like it's, it's very murky. He said to about Tunis,

they were having a chat last week, over 60% of volume was under 11 contracts. 50% of that was buying calls to open. And the premiums were two X all prior extremes over the last 20 years. So it's safe to say that humans are behind it. Okay. Yeah, clearly. And this dovetails with a journal article that I put on Blast this week about how you think about options as a percentage of the stock market, right? So three years ago, the amount of options contracts traded was only 40% of the total volume of stocks traded. And in August, it broke a record. It hit 120%.

So look at this chart. Same exact thing you're talking about. Right. So now, so you say to yourself, like, let me get this straight. More people are trading or not more people. People are trading more options contracts on single stocks than they're trading the stocks themselves. It's not that that's automatically a negative, but it's definitely a sign that that gambling is more prevalent than investing right now. And it doesn't you don't need a stock market crash to wipe that out

because I know it's a lot more calls than puts. It's a lot more bullish bets than bearish bets. Fine. But it's probably not massive dollar amounts. And people just saying, look, I have – Not true. Last one. If I have $3,000 and I want to buy Fastly going into the earnings, like am I going to buy 10 shares of Fastly or am I going to give myself the upside of that earnings trade using options?

And I understand if I'm buying calls out of the money calls and I don't have a long window until expiration, it's like an all or nothing bet, but it's three grand. Yeah, okay. That makes sense. That makes total sense. However, I think sentiment trader said that retail activity was $40 billion worth of premium bought. $40 billion. That's a ton. So it won't all get wiped out, but quite a bit of it will. Also, if premiums are 2x what they used to be, then you probably hit the buy button and you're like, you see that you're already down 15%. You're like, wait, what the hell's going on? Okay. So we think that this is affecting valuations in the tech stocks involved long-term or just on a day-to-day basis. Like, do we really think that there are stocks that are worth more than they should be strictly because of how much options activity is taking place. I really don't buy that argument, but I know a lot of people think it's real.

I definitely think there's an element of that. Just look at Apple's valuation we spoke about a few weeks ago. And you think options trades- It's not just options. It's hard to separate this. It's hard to untangle the web. I think that there's a lot of feedback going on. But yeah, I do think that they're... Previously, I would have said, no, that's ridiculous. But now it's so pervasive that I do think there's some of that going on. Okay. I want to switch gears here. We got to talk about this Nikola thing. I'm not following it. All right. Well, let me set the stage. Basically, this is a company that came public as more of a business plan

than an actual business. And the idea was they were going to build fuel cell propelled, uh, trucks, like semi truck, big, not, not like pickup trucks, but like real, like 18 wheelers without gas, semi trucks, semi trucks. And right. So it's hot hydrogen fuel cells, which is like a 30 year old technology that for whatever reason, no one's actually been able to figure out how to get these things onto the road. But if you could, you're basically fueling the truck with water. It's like it would be the plot in a James Bond movie that like somebody wants to topple the oil market by inventing water-propelled trucks.

Fine, whatever it is. So he comes public via SPAC, which you know, for me, is always a red flag. I'm not saying they're all scams. I'm just saying like most of them are. He's this guy, Trevor Milton, extraordinarily promotional, like very much like trying to be the next Elon Musk. And even the name of it seems scammy. So Tesla's last name was taken. So they use his first name nicola it's like what what what if a third company comes along what was nicola tes tesla's middle name seymour so all right that's the name my company so it just it all seems like bullshit to me i did a podcast about

spax and what i was saying about uh nicola is like if tesla didn't exist, would this be a public company? No f***ing way. Of course not. Not a chance. But they actually managed to get this huge deal with GM. I think they gave GM $2 billion worth of stock, and they hired GM to actually build the trucks because they clearly don't have the ability to build this stuff themselves. have the ability to build this stuff themselves. Now you have this short seller, activist short seller, Hindenburg Research, which, I mean, the guy does incredibly in-depth work, basically came out and said, this is a fraud, laid out all these points why. And I just want you to react to this. The number one point that resonated with me, and I don't do forensic deep dives into stocks,

with me and I'm not, I don't do forensic, you know, deep dives into stocks, but they put out this promotional video of the truck itself, but it doesn't actually work. They pushed the truck down a big hill. So it's a video of the Nikola hydrogen fuel cell semi-truck rolling down the street. And the short seller's like, like guys we know the truck is not moving under its own propulsion you pushed it down a hill for the video and the ceo refuted this whole report but he didn't refute that he's like no the truck doesn't work it sounds like a parody like something you would see on snl finance version do you understand that mary bara at gm uh committed to a massive production deal i thought they backed out no they didn't back out but one of the things that hindenburg is saying which is

true is that gm is not taking financial huge financial risk here they were like given shares uh like it's called an investment but basically they're getting work from this company this company's like rather than us build our own hydrogen fuel cells gms are better so we're going to just put the nicola skin over a gm truck so it's actually a gm conducted appropriate diligence on two billion dollar nicola dlc on Barr says, okay, that's my forensic accounting. I'm sold. Well, the stock went up 40% on that news and it's since lost almost all of that. It's down 7% pre-market.

And it was down, I think, 30% the end of last week after the short seller put out the report. What's the market cap of this thing? $2 trillion? $90 trillion. So now the SEC is going to investigate from both ends. $12.5 billion. Right. So now the company went to the SEC and said, this guy's manipulating our stock price.

The short seller is like, I'd love to talk to the SEC. So now if you're a shareholder in this disaster situation, you have to like, I guess, sit there and wait. But here's what I was thinking. And Bethany Frankel touched on this when she was talking about Tesla. So Hindenburg says this company's a fraud. But I've always looked at this kind of stuff as like a Schrodinger's cat situation, where like the philosophical concept where you put the cat in the box, you close up the box, is the cat dead or alive? Well, we really don't know unless we open the box. So it's both dead and alive, right? Until you open the box and see.

If this guy, Trevor Milton, can raise money continually, he might get to the point where he has a fuel cell truck. So yes, it's true that he's making these outrageous claims that aren't backed up. And that's probably not legal. But it doesn't mean that this company can't continue until they get to the point. And the best example of that is what Tesla has done over 10 years. They fake it until they make it. But look at this revenue growth. And now they make it.

Look at this revenue growth. Look at this revenue growth. Oh, yeah. Startling. They went from a penny to two pennies in sales. It's terrific. Look, I would just say my last thing on this. The reason why the CEO has to fight back and can't just be like, we know we have a real product, say whatever you want, is because this whole business model is based on belief.

If they can't raise money, continually raise money from investors, there's no chance they'll ever build a truck. So he actually has to keep the stock price elevated in the way that Tesla was able to do to have a product. So I hate belief-based business models. And here's the last question that I would put to you is like, if you're buying these types of stocks, you almost have to accept the fact that there are going to be skeptics that come along and just light them up periodically. And you have to swallow that volatility, no? If you're a believer, yeah, that's the game. It's part of what goes along with it.

What do you got? Let's talk about the reopening. Last week, Carl Cantania tweeted this chart about the reopening. I don't know who this is from. Goldman. Oh, it's from Goldman. In week 19 of the Measuring the Reopening of America series, we shift from a four to a five after several weeks of little to no improvement as lodging, retail, and box office all show meaningful progress over Labor Day weekend. So you see this chart.

It was plateauing and then boom, a breakup. what are the inputs in this chart i don't know exactly okay um it looks like a rainbow cookie well it's measuring the reopening you don't need to know the details tell me i'm just curious credit card i can credit card uh i'm guessing other shit all right so basically they're saying the economy is 72 percent reopened that's that seems right to me i mean i'm just based on what i see with my own eyes in real life i don't i don't know is that is that a way to it so how should we think about this like the the further this goes the further the further this goes into the green the more we want to own stocks that are associated with a reopening economy.

I would buy that. Yeah, I think so. Hotel stocks. I'm in Shake Shack personally. This is the worst company in the sector for the pandemic economy. Looks good. They have almost no drive-thrus. I got lit up in this stock.

It was like a hundred bucks and it went to 30. Now it's 70. So there's no way that stock is working unless this chart that you're showing me about the reopening is somewhat accurate because they can't survive on app delivery. It's just not, the company's not built. It has no drive-thrus.

They're just not built for that. So I think Starbucks is similar. Starbucks got decimated in the pandemic because of how important commuter, business commuters are, how important travel is, all their stores in airports and in tourist destinations. So those stocks are now percolating. So I guess I would buy this. They're looking a lot better. So are the casinos, the cruises, airlines. I think it's fair to say that most stuff has reopened in a modified way. And it's just probably not as good.

The Wall Street Journal does a podcast. They call it The Journal. It's actually pretty good. The episodes are 15 minutes, which I fucking love. They interviewed this woman who owns seven Irish bars in Chicago. And she's like, six of my seven bars are open. One of them just doesn't make doesn't make sense to reopen based on where it's located. And she's like, normally, I would have 350 employees working. I have 130 employees. And it is what it is. We're open for business. So, you know, so it's like, it's like, there's just a percentage that's just not going to open until we're fully reopened no matter what. And I think that applies to a lot of businesses

on, on main street. I want to ask you about the NFL. Did you, did you sit in front of a red zone on Sunday? I did. You watching the games? I did. Do you miss, do you miss the, the audience? No, I thought it was pretty effective because when you're watching football, aside from like the punts really. And, uh, I guess Hail Marys, you don't really see the crowd anyway. And I think level at the field. Yeah.

So I think they're going to figure out the, the crowd noise was a bit awkward that they were pumping in, but I think that they're going to get there. I thought it worked really well. I was thinking instead of crowd noise, what, awkward that they were pumping in, but I think that they're going to get there. I thought it worked really well. I was thinking instead of crowd noise, what about like a laugh track? When the Giants are playing. When the running back on the line just dropped the ball at the end of the game, if they put a laugh track over it.

Yeah. I was watching the Giant game last night. I was supposed to watch it with my son. That was like the big thing we were waiting for. And he's in three different fantasy football leagues at this point. He played Fortnite instead. He's just, I was very weird.

So I watched it by myself. I don't know. It was good. It was good to see the games back. I didn't love the crowd noise, but I'm okay that they're doing it. I get why they're doing it. It's interesting that some stadiums have no crowd at all.

And then if you watched KC play, they got 17,000 people into the stands. I think the Jags too. I don't know how that works. Maybe the states in the South and the Midwest don't care as much. And the coastal states are still petrified. I don't know. I think it's good that it's back. And I said this about baseball.

I do think the real economy is watching football. And I think if they have an outbreak and they just plow through, it's another good sign that we're capable of doing that now rather than just closing everything down again. So I think this is just like one more example of that. So I was happy to see it. You got anything else? Yesterday, Darren Revell tweeted,

New Jersey sports betting handle for August is $668 million, breaking the all-time state multi-sports betting handle record by 70 million, which was Nevada in March 2019. Okay, breaking the record doesn't seem that impressive because a lot of this stuff is legal for the first time. 70 million, which was Nevada in March, 2019. Okay. Breaking the record doesn't seem that impressive because a lot of this stuff is legal for the first time. True. But it's a huge, it was a huge number.

How do you square these massive numbers of- And by the way, hold on. August was really just basketball and who bets on baseball? Real junkies. Well, it was playoff basketball. How do you square these massive numbers for sports betting with the fact that the ratings for sports are just not that great? That's a good point. Maybe it's just the hardcore people watching and they would bet anyway.

Anyway, the numbers in September are going to demolish August. Well, because now it's football. I'm saying. College football. Okay. for well because now it's football so i'm saying all right college and college football okay there is backlash going on in the remote work stuff there's uh people who can work remotely or people that have to go to the office getting pissed off of the people that can be remote there's people without children that are pissed at parents that are getting special accommodations. Bloomberg had a chart showing the Americans with higher incomes are more likely to telework in August.

If you made less than $25,000, you're going to work. There's a 90% chance that you're going to work. If you make $200,000 or above, there's only a 30% chance that you're going to work in August. Yeah. This is like a continuation of something that's been happening for a long time, which is that the knowledge economy is very much its own world. And if you were pissed off about income inequality and wealth inequality before the pandemic- This is gasoline.

Yeah. You're really going to hate what the other side of this, or I guess the current side of this looks like. Well, I was going to say, we're still in it. I'm curious to see what happens when the economy is fully reopened and people are still like, nah, I'm good staying home. And companies are like, well, no, get your ass back to work. So there's going to be, I mean, that's going to be very messy. I don't think there's a playbook yet for that. I have two friends who work on wall street and they're, one of them's in a sales role. The other one's in a trader role and they're both being pressured to start a plan to start reporting back, but they're not being told officially. We expect you back, but they're starting to hear that chirping.

And the problem is like everyone that lives on Long Island, there's no real way to get into Manhattan other than the train on a reliable basis, unless you want to get on the road at five o'clock in the morning and spend $100 a day in parking. So they're not getting on the train and they're just like, the guy telling me he wants me back is himself not coming in. So I don't know how soon people are reporting back. In a personal anecdote, I have surrendered. I now have office space, as you know, in the town next to mine, because I can't imagine being on the Long Island Railroad. And by the way, even if I went into the city to do what? Sit by myself in a room with a mask on?

Nobody wants to hang out with me. There's no meetings. There's no events for me to attend. So I really, I don't think the backlash is going to really do anything. I think we're going to be status quo like this for a while. What do you mean it's not going to do anything? It's not going to force anyone to do anything that they're not already doing. People are not going in to their offices. But what if companies leave those people behind? They say, okay, you don't want to come in?

That's fine. Work somewhere else. That could be. But I don't think there's any evidence that it's happening yet. No, no, no. No. When the economy reopens, that will, that will happen. What does reopen look like? What if companies decide, you know what, this is great. We don't have to provide space for 50 people. We could have 25 people come in a few days a week and the other 25 come in a few days a week and we save on electricity and we like, don't, don't kid yourself. It all comes down to money in the end.

So there will be, there will be roles that don't have to report back to the office. I'm guessing probably senior roles and roles that do have to go maybe lower level people. And there is going to just, that is just going to plant the seeds for resentment. I think, I don't think that this is going away. There is going to just that is just going to plant the seeds for resentment. I think I don't think that this is going away. I definitely before the pandemic, I had I had a bunch of friends who had jobs where they never had to show up anywhere. A lot of them were sales jobs, like pharmaceutical stuff. Like they had their territory, who they had to go see. And they never had to, like, commute on the train five days a week like I was doing. Yeah, but that's that. I definitely hated their I definitely hated their guts.

And I think that young people specifically are disadvantaged if they can't be in the office and showing their boss what they're capable of and all the office politics stuff. Like I think that they're going to be – they're going to have a tough time. You're right. That is actually a big deal because I think a lot of the way young people advance just in general in all different types of work. It's personality. It's being there, being reliable, being in someone's face all the time, having them see you jump on grenades. Like that's how I always did it.

So I think that's right. I think that's a really good point. But we want to know what you guys think. Leave us your feedback below on any of the topics that we mentioned. Be nice. Say nice things to us. If you like the show, go ahead and subscribe. Tell your friends about us.

Give us a like and we really appreciate it. We will be back next Tuesday. Thanks for listening. Check us out at thecompoundnews.com for daily investing and market insights. TheCompoundRWM.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.