The Compound and Friends - It Turns Out the Fed Doesn’t Matter

Episode Date: December 1, 2023

On episode 120 of The Compound and Friends, Michael Batnick and Downtown Josh Brown are joined by David Kelly, Chief Global Strategist at J.P. Morgan Asset Management, to discuss: the post-pandemic economy, when economic indicators stop working, how AI saved the market, the magnificent seven, the 2024 stock market outlook, and much more! Thanks to Public for sponsoring this episode. Go to Public.com/compound to lock in 5.4% yield on your cash. Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

I learned a lot about myself. I looked at my Spotify Unwrapped. Duncan, do you have that? You wouldn't believe my Spotify. Do you have Spotify? I never check it out. They did the year-end Unwrapped where they tell you what you actually listen to. Oh, okay. No, it's not so okay.

It's not? No. I thought I was a different person than who I actually am. That's quite disturbing. Well, at least you were looking at it rather than anybody. Here's my top song my top five songs in 2023 that I listened to Flowers

by Miley Cyrus Kill Bill by SZA okay I'm cool with that Tropic Morning News by The National Calm Down by Selena Gomez

I'm just telling you this is what it is you know you don't have to tell people. I know. Mine is... And Chemical by Post Malone. There you go. Mine is absurd.

And then they get worse. You want to see the rest? Yeah. I can't even say the rest. Fast Car. That's on everyone's list. What? That's a good one.

Yeah, the Barbie song by Dua Lipa. That's cool, right? Okay. J. Cole, All My Life. Harry Styles. Okay. Tell me you at least have now been on there, right? This is from this century. Boys a Liar Part 2. century boys a liar is in my top five artists Metallica Leonard Cohen yeah Foo Fighters okay Bach and someone else like

very random like that's like three three twenties 180. And maybe Jethro Tull. Maybe The Doors. You are the strangest. Oh, no, Billy Joel was number five. I feel better about myself. All right, do I need to put this on now? Yes. So, David, you were on with Ben and I

right after SVB went down in March. So I had Sean take a listen and just give us some notes, anything worth bringing back up. You had some good stuff there. So at the time of the filming, wage growth was slower than inflation for 23 straight months. We spoke about that. And you said that the consumer crunch, and you were 100% right, would be pushed off because of the strength in the labor market.

Josh was dead wrong, per usual. Yeah. We spoke about— Happy to be wrong about that. I asked if we can have a recession with unemployment less than 4%. And you said yes, but it would be a very mild one.

And we're still in that place. It's kind of wild. Well, that's right. I mean, it's, you know, the economy is moving very, very slowly. And, or it's begun to move more slowly. And it gets more fragile. It's kind of like the difference

when you see a 60-year-old walking along the road and you see an 80-year-old walking along the road. You realize they're more fragile, but there's nothing yet that's ready to push this economy into recession. It's not quite there yet. You also said, and you were dead right about this, you said that, quote,

we don't need a recession to bring inflation down. Absolutely. Holy shit. Good call, because consensus was that you did. At the time, that was definitely not, that was out there. Yeah, I feel pretty good about that. I mean, the thing is it was so unpopular a year ago or six months ago to say,

this is really a transitory episode of inflation. Don't say that. And it was prolonged by the war in Ukraine. But that's actually exactly what it was. And we started out at 2%. We're going to end up back at 2% probably by the end in Ukraine. But that's actually exactly what it was. And we started out at 2%. We're going to end up back at 2% probably by the end of next year. David, a lot of people said, though, that we've never been able to cure 9% inflation without a recession.

True. We have a very small sample size, but still, this is the time that we did it. Like, this is the exception. Or maybe not. not you know when we say we cure i think we give policymakers a whole lot too much credit and blame the truth is the economy is capable of doing that itself this is not an inflation prone economy you know the the most important thing you could have learned about this year is this is not your grandfather's labor market okay and if you realize that this is a different labor market from the 1970s.

Meaning what? Back in the 1970s, 30% of the workforce was in a union. And we had major strikes all the time to get wage increases. Right now,

10% of the population of the workforce is in a labor union and only 6% of the private sector. And most people are absolutely out there on their own.

Yeah, they should be asking for a bigger wage increase, but they don't. And businesses are able to keep that under control. And that means you don't end up with a price-wage spiral. You end up with a price-wage slinky. Prices and wage growth are both coming down the stairs slowly. Price-wage slinky, that's good. But we did have Starbucks and Amazon

and things that didn't exist in the 70s. The 70s is like airlines and assembly lines, like autos. We did have unionization efforts. But you're saying like they never really crossed over to the point where they caused inflation. Yeah, absolutely. It's a scale different. I mean, so far this year, we've had just over 20 strikes. And last year, we had 23 major strikes.

These are strikes of more than 1,000 workers. Between 1965 and 1979, there wasn't a single year with less than 200 major strikes. Yeah, it was like Europe. Yeah, in 1974, there were 424 major strikes. Right. And so, you know, we've just seen a very pale reflection of what we had back then. Right. Okay. So you think that was a really big difference maker, the composition of the labor force?

I think that's part of it. I think another part of it that we don't talk about enough is what inequality does to inflation. Because what's happened for so many decades now is the rich have got more money and lower and middle income people have not. And the thing is, the idea is it's supposed to be a circular flow of income. You earn all this money. You're supposed to come around and buy the stuff that you just produced. But so much of this money goes to upper income households.

They're putting it all into the stock market and the bond market. But they're not buying goods and services. And so you don't end up with this huge demand for goods and services. And that, I think, has been a major factor holding down inflation for decades. I think it's reasserting itself. I saw a crazy stat speaking of inequality. Bill Gates is getting half a billion dollars in dividends this year. Yeah. It's- In dividends.

In dividends? Well, one way to think about it is if 10 people walk into a 7-Eleven tonight, the 10th person in the door will have the same income as the first nine people in the door. Okay. And that's just income inequality. And if you look at wealth inequality, if 30 people walked into a 7-Eleven, the last person in the door has got the same wealth as the first 29 combined. That is an average description of inequality in America.

It's pretty extreme. And I'm not trying to make a political point, but it is an important inflation point because that diverts a lot of income and a lot of wealth to buying financial assets as opposed to goods and services. And the only time you sort of changed that in the recent decades was when you had all this pandemic money, which was actually going to lower and middle-income people.

And you lead that horse to water. They spent it all. That's right. You can lead a horse to water, they may not drink. If you feed the horse intravenously water, they'll drink. We led the horse to GameStop. Do you think that we learned something like institutionally where if and when we have some sort of financial crisis and we need to stoke inflation, now we know how to do it.

It's direct. It's not low interest rates because that's just more bond buying. It's literally give the money to people who need to spend it, and they absolutely will. David, during the next recession, you think that's what's going to happen? No, no, no. We know now. What we know is that central banks can fix financial crises, but it takes central governments through fiscal policy to fix recessions.

But did we learn it? Like, do you think that people are like, oh, that really worked? I think economists know this, but whether that filters suit the policy. We had a real experiment though. Like we had a real time actual experiment. But wait, hang on. If in the next recession,

we send checks out and there's no pandemic, because obviously that was part of the inflation. Would the checks have caused inflation the same way? Probably not. They would have caused some inflation, not as much, but they would have caused inflation. Absolutely. I mean, it's, you know, we didn't have a particular supply problem in terms of food, but food prices went through the roof because of extra demand. And it was because of more consumption of food. It wasn't because of less supply. So my question to you is, do the politicians

say, no, last time we did that, we got 9% inflation. We're not doing that again. Or last time we did that, we fixed the recession. Or we did not doing that again. Or the last time we did that, we fixed the recession. Or we did too much of it. I think that's the— Well, the answer is we did too much of it. We simply doubled the dose. The last one was— The medicine was correct.

We just gave the economy too much of a dose. Yeah. I agree with that. Oh, you guys want to start the show? Let's do it. All right, let's do it. Three cups coming in. John, I like that sweater.

What is that? Is that like geodesic? What's the word to describe that? Stylin', my man. I love it. Coming to Friends, episode 120. Oh, man. Welcome to The Compound and Friends.

All opinions expressed by Josh Brown, Michael Batnick, and their castmates 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 any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Securities discussed in this podcast. Today's episode of The Compound and Friends is brought to you by our friends at Public. Duncan, you know what's so hot right now?

What? Cash. It's true. Literally. Hansel hot. Buying treasuries, at least if you do it direct, can be a huge pain in the butt. It's a government website. Not really up to speed with 2023, you know?

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to lock in a 5.4% yield on your cash. Episode 120. Guys, this is major for Michael and I. We are so excited. We've been geeking out about this all week. I picked out a suit and tie specifically for today. We have a very special guest with us here in our studio. Ladies and gentlemen, Dr. David Kelly, Chief Global Strategist and head of the Global Market Insight Strategy

Team for J.P. Morgan Asset Management. Are you as excited as we are? I'm very excited. I can tell. J.P. Morgan Asset Management has more than $2 trillion in AUM. I want to say more about you. First of all, you've been the chief global strategist for 16 years. Is that right? Yeah, pretty much, yes. Well, is it more?

No, the question is how global. So I started off being the chief U.S. strategist, but then we got more global, so I ended up global strategist. But it's a long time you were in that role. Most people don't last that long. Well, I've got a very good team, and I really like, to be honest, the company's been really good to me. It's just a nice atmosphere.

Absolutely. I have many friends at J.P. Morgan. 33 years at the bank. Again, that's a really long tenure in one place. They must treat you really, really nicely. That's not quite right. I've been maybe 33 years in the industry, but I joined J.P. Morgan in 2008. Oh, okay.

33 years in the industry. All right. So you're there a long time, but you're not there 33 years. Okay. Here's what I want to start with. You do this really great thing, weekly market recap. That's your team? How many people do you have on your team, research people?

We've got 30 strategists and analysts around the world. Okay. Who does that go to? I mean, I get it, but who does that go to? It goes to thousands of financial advisors and institutional investors here in the United States, but we do something similar in Europe and in Asia. Okay. So these are clients of J.P. Morgan Asset Management, and you guys are- That's right. So it's either people investing or people who are investing on behalf of other big clients. So it's usually not just average people investing. It's

usually those who advise those people. So I want to talk about what you put out during Thanksgiving week. So I thought this was really apropos of what we're going to talk about today. 60-40 portfolios are up about 12% this year after a really horrendous 2022. Maybe the worst year for 60-40 portfolios in most of our lifetimes. Is that fair to say? Okay.

Path hasn't been smooth, you note. And I think what you said was, and I agree with this, the biggest surprise in the 60-40 was U.S. large cap growth. It's just like if you told most people in January you're going to get 500 – we're going to get up to 5% interest rates, overnight rates. Most people wouldn't guess large cap equity, specifically large cap growth equity, would have done what it did. So for me, I think that's like one of the top three stories of the year. What do you think? Well, I think that's right.

I mean, there's been a lot of excitement around AI. And we've seen a lot of big companies perform very well in terms of generating cash flow. But those higher interest rates ought to have hurt growth stocks more. Yeah. And what I think it tells us is something I think we've known really for the last few years is that there are a lot of pockets of euphoria and speculation within markets. I mean, the very fact that Bitcoin isn't valued at $0.10 tells you there's a lot of speculation in markets.

And I think there's some of that at work also. I think it's difficult for portfolio managers because they try to figure out, okay, what's this really worth? And yes, this is a great story, but should it be that much more expensive than everything else in the market? If ChatGPT had not been released a year ago, would the S&P have done what it did this year? Would another story have come along to give people an excuse to buy? I think probably would have, to be honest. You do think so? I do, because I think there's a lot of money that is sitting around looking for a home.

And I think there's just a lot of investable assets in the United States and around the world. So unless things are getting demonstrably worse or more uncertain, I think markets tend to go up. And what happened this year, the most important thing that happened this year is inflation gradually came down. And that reduction, the fear about inflation in 2022 is really what killed the markets. As inflation gradually came down, I think that really allowed markets to move up.

So maybe we moved up more than we would have because of the AI thing, but we probably still should have had an up year following 2022. Okay, I feel like that's reasonable. What were some of the other big surprises this year the AI thing, but we probably still should have had an up year following 2022. Exactly. Okay. I feel like that's reasonable. What were some of the other big surprises this year off the top of your head?

One of them is just how strong the job market has been all the way to this point. Now, it's not exactly a surprise because we really didn't know what all those job openings meant. Back in March of last year, we had 12 million job openings. We had never seen anything like this. I mean, the highest number we ever got to before the pandemic was about seven and a half million. So what did those 12 million job openings mean? And we thought some of them- Like, are they even real? Well, that's the thing. We were wondering how many of them were real. But obviously,

some of them were real, because what's happened is even as the economy, you know, it's grown and slowed down. But as all that was going on, we were creating a lot of jobs month after month after month that kept income going, that kept consumer spending going. Do you think at this point that there has to be some sort of exogenous shock for the labor market to weaken? Like, is it possible that we're still waiting for interest rates to take hold and that eventually they'll filter through and companies will start laying off? Or at this point, can we say, if it hasn't happened, it's been almost two years, it's probably not going to. Like, what is going to cause companies to start laying off employees? Well, I think the pressure on certain companies is going to continue to grow.

So this is an expansion that even though it's, you know, chronologically, it's not that old, it actually is kind of old in terms of its characteristics right now. So we've had the unemployment rate below 4% since December 2021. So basically two years. And when you've got that, it means the economy is going to grow more slowly, and it makes it more vulnerable. Now, we know that this sort of quantum leap up in interest rates, it's hurting a lot of small companies. There are a lot of mom and pop businesses that thought they were okay after COVID, and actually, maybe they're not, and they can't afford the inventory. So I think we'll see some problems there. We're going to see,

obviously, some problems in commercial real estate. We are seeing some problems. But is it enough on its own to put this economy in recession? No, I don't think so. Because 68% of the economy is consumer spending. And consumers have been rock solid all year. And they continue to spend. A lot of people said, when are they going to run out of rope? When are they going to run out of their savings, their COVID era fiscal policy savings,

and then start going into increasing credit card debt. That was a big bear case. But they've been doing that all year. So you've got credit card debt up 15% year over year. And yes, technically, there may be some COVID savings, but they're all held by richer individuals of this age. It's the lower middle income households.

It's gone. It's gone. But people are racking up credit card debt. But even so, if you look at total debt service, the amount of your income

you're spending on servicing your debt, it is back to where it was before the pandemic, but that is so much lower than it was before the great financial crisis. You guys have this great chart

in Guide to the Market where you show debt as a percentage of disposable income, and if you only knew that, you would say, this looks pretty good. It's pretty healthy.

That's right. Or debt service. It's not the debt. And the key is that 70% of consumer debt is mortgages. And over 90% of those mortgages are fixed rate mortgages. So as the Fed raised interest rates, people are kind of frozen. They can't sell their house.

They can't take out a new mortgage. But they're not actually being hurt in terms of cash flow. And so people have some room to keep spending. And I think the most important thing I've learned about American consumers over the years is people don't spend to the limit of prudence. They spend to the limit of credit. And we will keep on pushing that boat out, out, and out, and out until suddenly you have a crisis. And then the consumers and the banks instantaneously realize, oops, we've all got a problem here. You talk to a typical consumer right now, not a typical investor, a typical consumer.

They will tell you that they are spending to the extent that they have to just to keep their heads above water because of what prices are. And prices are not going back down. They might stop going up at the same rate. That's what consumers are telling. Look at political polls. That's what consumers are telling. Look at political polls. That's what they are telling the media. You don't have to believe it, but like that's how they feel.

You don't see it that way? Well, that's how they feel. But the two parts, you know, when people tell me that consumers are only spending what they need, I say come to Costco. Well, that's what they say. If you look at the carts in Costco

and the stuff that people buy, it changes your mind. We don't all need air fryers. We don't need enough mustard for a generation. No, we don't. in Costco and the stuff that people buy, it changes your mind. We don't all need air fryers. We don't need enough mustard for a generation. No, we don't. So that's one thing. But the other issue I think is really important because you're right.

People feel very gloomy about the economy. Amazingly so. I mean, if you look at the – you remember the combination of unemployment and inflation? It used to be called the misery index. That is better than it's been 80% of the time in the last 50 years. But if you look at the index of consumer sentiment, it's worse than it's been 93% of the time. Because people hate high prices more than anything else, it turns out. They've had high inflation before. I mean, I think it's more – it's kind of weirder than that. I mean, what we have

is a top quartile economy with a bottom decile attitude. And I think that coming out of COVID, everybody in this country and really around the world isn't a funk. We're getting this social media feed, this cable media feed of, you need to be really angry and really scared. And I think it's doing something to people because there because the relationship that you'd normally see between this economy, which is not that bad, it's actually pretty good. Do you think it's because we have two almost octogenarians

running for the presidency and people are just sick of it? No. And there's not like a new, younger, more dynamic leader in America? Do you think that's a part of it? I think the political divide is worse than it's been for many, many years. And it's because of the,

I think in part because of the way people consume information. I agree. Social media makes everything worse. So I have three, we've been talking a lot about this, and I have three main reasons why there's a big disconnect.

I think first and foremost, it's all of the price increases. People adjust very quickly to their income adjustments, right? My real wages are up. That's great, but I'm used to it. I can't get over the fact that my burrito is now $15. I see it every day and I can't take it. It's unbelievable. I totally agree with you. That's number one. Number two is the social media part of it. Undoubtedly. There was an article today, Americans are, quote, doom spending. Here's why that's a problem. I mean, everything is painted negatively.

And then the third thing is, I think people tasted how sweet it was to be working from home. And the fact that we have to go back to work, it feels like we're going backwards and people hate going backwards. And I think those are three really powerful things when you mix them together. You might be overgeneralizing on that third thing. Which part? People going back to work? I think maybe half the people wish they didn't have to go back and half the people are like, thank God my life is back. Well, I think people were happy to go back two days a week. I don't know. I think people were happy to go back two days a week. And now people are, now it's three days a week. And now people that I know that are going back

four days a week, they're looking for another job. But I think people have – I think what we've realized, if you think about it, is that we have choices. Companies have choices. Maybe companies are trying to get everybody back to work, but the truth is there are a lot of businesses that can actually be done from home. And I don't think that's really – I think the first point you made about how people look at the price of something and say, how can you tell me inflation is coming down when do you realize what the price of this is?

And I try to explain as an economist and a financial economist, inflation isn't the level of price, it's the rate of change of price. It doesn't resonate. They don't want to hear that. No, I know that. But having said that,

there is a distinct glass half empty way in which we talk about things and we look at things. I mean, if you look at gasoline prices, the national average gasoline price, the regular unleaded right now is $3.25, which is way down from a year ago, way down from a few months ago. It's the best known price in America.

And yet I still don't see anybody really excited about something that they usually, if it was the other way, you know they'd be pretty miserable. So this goes back to the media's part of it. And they're not all to blame, but if gasoline was high, it would be nonstop on the cover every day. Gasoline prices have fell in for 60 straight days and you don't hear a pe's part of it. And they're not all to blame, but if gasoline was high, it would be nonstop on the cover every day.

Gasoline prices have fallen for 60 straight days and you don't hear a peep out of it. Exactly. Remember the egg prices went all the way up and then they came all the way back down. I don't know what it talks about. Because the media will then say prices are falling dangerously fast.

Of course. Think about the problems for egg farmers. Exactly. Can we pop this chart? I love this. Not to dunk on people. You're a strategist. You have a job to do. You're trying to understand what's happening today and extrapolate that out 12

months. And it's really hard to do. Boy, think about when we were 12 months ago. So the chart that's on the screen is, this is from Bloomberg and they're showing strategists projected return for the S&P 500 every year going back to 2000. And 2023, coming into 2023, was the only year where strategists as a whole collectively thought the S&P was going to be negative, which was very understandable if you rewind to where we were 12 months ago. That's crazy, though, like that degree of pessimism. We probably should have all looked at that and said, if anything goes right, this market is poised for a big rally. Yeah, I think so. I mean, I certainly didn't

contribute to that. But having said that, if you're investing in the stock market, do not try and make a guess over the next six months, over a year. Just think about where we're headed. Our basic theme for most of the last year has been try to look beyond the cycle. We're still working through the waves caused by the pandemic and the war in Ukraine. It's going to take a while to work, but when we get out the other side,

we're going to be back to low inflation, slow growth, yes. Low inflation, slow growth, good margins. It's 2019. Most people would take that. Well, exactly.

That's the odd thing. We've been on this rollercoaster. The thing about a rollercoaster is no matter how scary it is, you actually get off where you got on. And we got on at 2% inflation.

Most people would love to have that. Most people would love that back. I agree with you. So they cited three main reasons why this year did not transpire in the way that Shraddha just thought it would. Number one, misjudging consumer behavior. Just constant spending. We saw record Black Friday sales, record TSA traffic

last week. The post-pandemic labor market, you mentioned that we've been. The post-pandemic labor market, you mentioned that we've been below 4% for 21 straight months or whatever, since December 21. And then I think this one is really important. The long lasting effects of 2021's zero interest rates. So we've been talking about this a lot all year. Why has it taken so long for interest rates

to filter through to the economy? Well, interest rates primarily impact the housing market. But to your point, a lot of people have mortgage rates locked in from years ago. And then companies were really wise during the economy. Well, interest rates primarily impact the housing market. But to your point, a lot of people have mortgage rates locked in from years ago. And then companies were really wise during the pandemic. They gorged on debt. So we've got this chart. This is from RBC looking at the effective interest rate for S&P 500 companies.

And it is still very, very low because 90% of their debt- It's going the wrong way for the Fed. 90% of their debt is locked in long-term fixed. If you look at like net interest expense, it's gone down because companies are earning more in their cash than the debt that they've already locked in. Yeah, but you know, it gets back to,

we spent a decade with the Federal Reserve putting these super low interest rates in to try to stimulate the economy and not a peep out of it. It was the slowest recovery I've ever seen. And the same thing happened in Europe. The same thing has happened for years in Japan. When are we going to learn that monetary policy does not stimulate the economy? It'll fix a financial crisis. It won't stimulate the economy. I mean, I think we just give too much credit to these policymakers.

It's kind of like you're in this boat on these very rough rapids in a river, and you get this tiny little paddle. And you're paddling away this way, and then you paddle away that way, and you think you're moving the boat, but the river's moving the boat. And I think that the Federal Reserve has overshot both ways without having much impact on the economic goals they're trying to achieve,

and they should just stop it. But equally, you know, I don't think that what the Federal Reserve has done in tightening would or could really have slowed the economy that much. You're so right. I feel like the economy bailed out the Fed because the Fed was driving 100 miles an hour in 2022 with rates still at zero before March when they raised them. And then going 100 miles an hour, they jammed on the brakes and put 500 basis points of rate hikes into the economy. And what impact did they really have? You could say

that the economy bailed them out. The economy has been great despite their best efforts. Here's a question for you. Let's say the Fed moved more slowly. Let's say they only did 200 basis points worth of rate hikes. A, everybody would have been screaming at them for it. Not enough, but would, uh, I wouldn't have, well, I wanted to ask you CPI over the last 12 months, uh, averaging three and change percent. Over the last month, it's now like 2%. Like is that where we would be if the Fed only did 200 versus 500 basis points? I don't think the path of inflation would be much different at all.

Really? Regardless of what the Fed did. Because there's only one way they can do it. It's a revelation for us. No, but people talk about how the Fed cuts inflation. How is the Fed supposed to cut inflation? Only by cutting aggregate demand. That's the only way they can do it.

How do they, they can't do that? But if they didn't, well, we know they didn't because the economy grew. So you can't say we raised interest rates, it killed inflation, but growth was really strong. No, no, the only mechanism by which you could have done it was by slowing growth down. If you didn't slow growth down, then inflation fell. Well, not, not because of you.

So they didn't slow growth down. No, they didn't slow growth down. And that's because- Huge surprise though. Well, because when the Federal Reserve raises interest rates, if they raise interest rates a bit and then they say, oh, guess what? We're going to raise them some more. What are you going to do? You're going to borrow money now before it gets even worse. Yeah. When the Federal Reserve raises interest rates, we've got so many people sitting on cash, they all got a pay increase.

When the Federal Reserve raises interest rates, it's supposed to slow down investment spending, but so much of investment spending, things like on AI, it's really not investment spending. It's spending on salaries for R&D. It's not really that interest sensitive. Oh, that's interesting. They're not necessarily building like a cement plant. Exactly. They're just paying people. Exactly. And so it's not really affected by long-term interest rates. Over the years, the economy's got so insensitive to interest rates

that it's practically flipped on its head. It's not clear that the Fed doesn't actually stimulate the economy by raising interest rates a bit. Now, what they do is they do... I've been saying that. People have been pissed off at me. No, but you were saying it as a joke, sort of, because people- You were saying it because of the cash balances.

Yo, I said this to Jeffrey Gundlach on TV. I'm like, think about how many people are sitting with all this cash that's now giving them like a bizarre wealth effect because of the interest on that cash. Absolutely. It's the early 80s again. Absolutely.

And then if you look at the other side of the ledger, yes, the people who own these bonds got hurt. Okay, rich people got hurt. But the people holding the mortgages, they're all fixed rate mortgages. That's right. Or they have no mortgages because they're rich. Yeah, so what we found is that over the years,

the effect of interest rates in either stimulating or slowing the economy has really withered away to nothing. So it used to work. Yes, it did. Yes, it did. Yes, it did. It could have worked in a more, there are a few conditions. One is you've got to have an economy with a huge manufacturing sector,

which Henry Ford is either building a plant or not. So that's really what it's all about. It's about physical investment spending. And then the other thing that's really important is if you have a small open economy where interest rates affect your exchange rate, if you push interest rates up and your currency goes up a lot, your exports could crater

and that could have an effect. That's not here. But that's exactly, that's not here. One other thing though, shouldn't we then, if what you're saying is true, should money supply be the new thing we focus on? Does that have a bigger impact

than the absolute level of rates? But didn't that contract as well? Why do we have to, you know, it's kind of like an American medicine. I mean, usually we just, we know what we need to do to be healthy, but we always want a drug. So why do we need monetary policy to fix all these problems? I want drugs right now.

Same reason why 20 million people are on Ozempic already. Six months, 20 million people. Most things to do with health. Those are the people buying the gallons of mustard that you're referencing. But what else does the Fed have other than interest rates? Do we need to start tax evictions? No, why do they need to fix it at all? I mean, the truth is the economy is like your own body.

It will tend to heal itself. Every morning, 300 million or 325 million Americans wake up. They want to buy more stuff. They want to work more hours. They want to get ahead. When you have a recession, it's because something goes wrong. Something shocks that. But as soon as the shock dissipates, people start trying to get back to normal. The economy will try to get back to normal. Now, you could do fiscal policy. Yes, you've got a real problem.

Give people some checks. They'll spend them. But monetary policy is not really terribly productive and just distorts everything in the economy. So if you're right, why can't it be an algorithm? Just the two-year, why can't it just be the two-year? That's the overnight rate. You could have an algorithm or you could just use common sense. Just try to keep rates at, say, 2% real. So about 2% above the rate of inflation is what you should get when you save. Maybe 3% above inflation if you're going to do some long-term investing. But just keep rates at a basic level. Don't mess with the housing market.

Don't mess with the construction industry. All these asset prices getting pushed through the roof because of zero interest rates. You're just distorting financial markets. So generally speaking, I think monetary policy should be set to do no harm. Well, I like the idea of the Fed just being a less prominent player in the game. The problem is – Yeah, work on the golf game. But the problem is we have a financial crisis every five years.

Most of the time they caused it, and then they have to fix it. It's like a fireman arsonist. And in my day, when I was growing up, like people were aware of Alan Greenspan, but like it wasn't every single day, 12 of them out there giving speeches. Let's go back to when Hollywood, the military, the CIA and Freemasonry decided on the rates and Greenspan pretended to have some input.

And then it was, that was it. No, no, no, no, no. Let me distinguish between two different things. If you've got a financial crisis, like we did in the great financial crisis, then you need a central bank to step in. And it's very powerful. Why did we have that crisis? Well, yes.

I mean, come on. No, but that, well, that crisis was in part caused by low rates, but it was also caused by unregulated growth in the derivatives market and unregulated growth in mortgages. So there was a problem of regulation beforehand as a problem of low rates. But I generally agree. They tend to, you know, they build bubbles with low rates and that does cause future problems. But other things can cause financial crisis.

You know, before there ever was a Fed read, intermittent financial crisis, people lose faith. But if you, you know, the great thing about central bank is they have a money tree. And so they can always buy up bad assets so they can calm things down. But once they've calmed things down, once they've dealt with a crisis, then maybe you need a little fiscal policy to tweak things a little bit in terms of spending if there's not enough spending.

But generally, they should try to get interest rates back to a normal level so people are making good long-term investments based on a real couple of capital. What does normal mean? Are rates appropriate today? Are they too restrictive? They're a little too high. And I think the problem is they're a little too high because we're coming off a cold turkey off a period where they were way too low. In the long run, they're actually not very far off. In the long run, I'd expect, you know, 2% inflation, maybe a 4% federal funds rate, maybe a 5% 10-year treasury. There's nothing wrong with that. That would be okay.

It's just hard to superimpose that in an economy that spent 15 years with close to 0% interest rates. And that's too much of a cold turkey right now. So I think you need to have lower rates in the interim, but eventually you should just try to get back to a reasonable positive return on saving a greater positive return. Can we talk about 2024?

Yeah, sure. Okay. I want to reference one of your colleagues. I like Dubrovko Lekos a lot. He comes on my TV show on CNBC. I think he's terrific. I know you don't like him, but I want to tell you something that he said yesterday. And I just figured I'd get your take on it.

Because his outlook is the grimmest on Wall Street, according to Bloomberg, looking for negative 8% in the S&P 500 for 2024, set to drop to 4,200 by the end of the year. Global growth decelerates, household savings shrink, geopolitical risks remain high with national elections, including those in the U.S. that will add volatility. You could say that every year, but OK. They're not calling for a catastrophe on that team, but they're certainly calling for this to be an aberrant year. Most years, the market does not do that. So what are your thoughts? Well, you know, first of all, I like and respect all my colleagues.

I know that. I'm just teasing. I know. I'm just putting it on the record. Okay, good. I don't have to do that job. One of the things that I strongly believe in is talking to people about what they can, on average, get from the stock market rather than trying to give a projection in the short run. That's kind of like what we do as financial advisors. Well, yeah, and that's what – give people what they need rather than what they want. People want to know where the market's going to be in three months, just so we don't happen to know that. You know,

I think there are things that could go wrong. I am, you know, obviously there's a lot of political instability and uncertainty, but I think in general, what I see right now is the economy tracing out a soft landing. You know, I can see inflation coming down. I can see enough consumer momentum to keep us from going into recession. Global economy is pretty slow. We could get hit by some shock, of course, but I can't foresee that. That could always happen. Well, exactly. The whole point is that what you know, what I think we know is that the economy actually

does very well with the problem it sees coming. Where it has a problem is when something hits it from left field. But by definition, we can't predict that. So I am more optimistic than that. I know long-term optimistic. I think that there are political risks, geopolitical risks. But at the moment, I think the setup in the economy is pretty good. And if I'm right about inflation returning to where it was 10 years ago, I think that supports both the stock and bond markets. We also have some strategists out there who are very optimistic. Our friend Savita Subramanian at Bank of America, Deutsche Bank.

They're now all talking about S&P 5000, which is based on historical average annual returns, very reasonable. Kostin at Goldman Sachs thinks we'll get close to the previous high. Mike Wilson, who's been bearish for a while, is now constructive 4,500 for next year. So you guys are on that particular team. I think we should, let's throw this up really quickly just to set the stage.

We have this chart. So look, this is an art. It's not a science. We all know. But this is where your range of targets are. I guess it's just like a more, in general, a more optimistic tone overall. It's not screamingly optimistic. It's not euphoric. I think that's like my big takeaway. This just looks like an average year, what people are predicting. Well, that would be the best forecast. I just looks like an average year, what people are predicting. Well, that would be the best forecast. I mean, to me, to try to predict the market at the end of any given year,

it's trying to predict how many inches of snowfall you're going to get in Central Park. You can probably predict there'll be some snow. You just don't know what day it's going to fall on or exactly how much. If you say 5% to 10%, though, nobody gets mad. No matter what it does. But it's also, first of all, it's not going to be 5% to 10% year after year.

It's either higher or lower almost always. But it's not a bad basis from which to build an investment strategy. I think we're in an unusual situation in that for years and years and years, I would have said be overweight stocks because bonds are just not paying you an income. Now, we've had a bit of a rally in the bond market right now, but I think you could still say right now that bonds are pretty close to fair value. You're actually getting paid a reasonable amount for right now.

So I'd say we're pretty balanced. I still think there's an opportunity in international. I know everybody hates me for saying that because it's been a very long time. Someday. Someday. there's an opportunity in international. I know everybody hates me for saying that because it's been a very long time. Well, someday, but as the dollar resumes its decline, I think that will help international do better. But overall, I do think that people have a reason to be optimistic.

I mean, people always talk about rising tensions. I actually see some fading tensions. It seems to me to be clear that, for example, President Xi really would rather not get into a conflict with the United States. He's got enough on his plate. So if we can avoid a conflict with China, that's a big positive. We had a lot of, as we talked beforehand, we had a fair amount of industrial action earlier on this year with the UAW strike, the writer's strike, and the actor's strike. They're all back at work. There will be some other strikes.

Yeah, we went through that already. We had a worry about the debt ceiling. Well, they passed a bill to extend the debt ceiling. We worried about a government shutdown. Well, that went away too. So there are some areas where actually tensions are fading, but nobody ever talks about that, even though that's actually very important in building the market.

With all respect, I agree with most of what you said, but I will see your writer's strike being resolved, and I will raise you the 2024 presidential election. You know what I mean? That's the big one to me. And not that it's had a huge impact on stock market in the past. In 2020, it didn't matter because it was a bigger story. In 2016, it was actually a positive catalyst when it ended.

But this is like a big one. So we don't know what's coming, but what's here today is pretty remarkable. Liz Young tweeted, a diffusion index of what the NBER tracks to declare recession is at the lowest level since October 2020. Risks are out there for sure, but this data set doesn't smell anything scary at present.

So we spoke about a top quartile market or economy and a bottom decile attitude towards it. These are, not to dismiss, there are obviously people that are hurting. Of course, there always are. But in aggregate, it's hard to dispute the data. Yes, that's right. And in fact, one of the problems also is this has been a very unusual economy in the post-COVID era. So things like the yield curve have been screaming recession for a long time.

Turns out it was wrong. Also, the index of leading economic indicators has been screaming recession for a long time. But if you actually look at the mechanisms or the reasons why they do say recession, you realize, wait, this is not going to work. This old measure doesn't work on the economy in 2023. And I think that's what we've discovered. On the economy in 2023. And I think that's what we've discovered. There are examples throughout history of measures that used to be the end-all, be-all that ultimately just got thrown out.

Like just got left by the wayside of economic history. It is conceivable that some of the things we thought were really important turn out to just be now a false alarm because the economy has changed. Stocks used to yield more than bonds forever. And then one day in 1955 or whenever it was, that relationship flipped and it hasn't looked back. And everybody was saying the stock market was expensive because when those yields converge, stocks always fell. And sometimes things change and sometimes they change forever. Magnificent seven.

This is, to me, probably a top three story of the year. Number one stock market story of the year. Number one stock market story of the year. This is the comment that I made earlier. Like, did AI save the stock market story of the year. Number one stock market story of the year. This is the comment that I made earlier. Like, did AI save the stock market? I'm pretty sure that maybe it didn't save the stock market. Maybe we would have been up anyway because of how much we were down last year.

I don't think you would have had the NASDAQ up 50% though. Oh, yeah, that's true. But I wonder if people would just have got excited about something else. I mean, you know. Of course. That's the beauty of counterfactuals. We won't know.

This is you. Can I quote you? It's cool? Yes? Sure. I won't try to do your accent. Where are you from? Jersey?

This is South Dublin. Okay. The Magnificent Seven is up over 70% this year and accounts for 94% of S&P 500 year-to-date returns. The sudden progression of AI into mainstream culture has not only inspired excitement about sophistication, blah, blah, blah. 35% of S&P 500 companies mentioning AI

in Q3 2023 earnings transcripts and global private investment projected to reach $200 billion. Okay. So the VCs are investing. The publicly traded CEOs can't stop talking about AI. If you don't have an AI strategy, you might as well not even be on the conference.

It's like having a blockchain strategy in 2017. You have to say the word AI or else you get fired. So, but there's more though. There's more to it. There's actual spending. Absolutely. Okay. And I think, I mean,

there's a very big difference between this and blockchain. I was always having a really hard time. I still have a really hard time in understanding the scope of uses of blockchain technology. I'll explain it to you later. Cryptocurrencies, I think, are nonsense.

Even the use of blockchain technology outside of that, it's cool, but it's not overpowering. But the thing about AI is it's a very natural evolutionary technology. You can sort of, you know, even if you start with a small business, you add a little bit of AI, you can see how you can make things more productive. And what we have throughout the developed world right now are really tight labor markets. And so that is the perfect environment

in which AI can flourish. And as you go through industry by industry, job by job, role by role, you can see how it can add to productivity. Because it's answering a need today. Absolutely. Okay, I see that. Absolutely.

Now, some of it will not show up in actual productivity. We're just going to do the job better. We'll never actually record that fact. But I do think that it's going to have a huge impact on society, on economic growth to a smaller extent. And it is justifiably the biggest story of 2023. David, you made a chart. So when you were doing that study about the MAG-7,

that was quaint. They were up 72% year to date. So we recreated that. And that was a month ago, and November was a pretty strong month. So the MAG-7 are now up 100%. Next chart, please. 105%, actually, year to date. The rest of the S&P 500 is up 7%, which, listen, I'll take it. Up 7%? Not a terrible year. It just pales in comparison. And most investors own these stocks. Yeah. Most investors are not like- How can you avoid them?

You can't avoid them. But it's, you know, a lot of people say, am I not worried that the market is so narrow? And I say, no. I mean, what that tells you is that in the United States and actually around the world, there are plenty of cheap stocks still. If we're right on inflation coming down

and therefore interest rates coming down, then not only does most of the S&P 500 look like very fair value here, but that's also true of stocks in Europe, stocks in Japan, stocks in plenty of emerging markets. So there are lots of opportunities out there. And maybe the next leg isn't about the Magnificent Seven, but there's plenty of opportunity. The fantasy of the stock picking asset manager is that like a year like 2024, the Mag7 reverse, they bleed market cap,

and the other 493 S&P names have a rally. But you know what? It could happen. Guess what? It just did happen. It happened in 2022. Literally. point no but the point is and that's exactly the point is 2022 you have a closing of the gap but you had a closing the gap when everybody gets scared yes yeah that's the problem that that's you know a sort of a bubble of euphoria you know it's so

long as people are feeling good i I expect that dispersion of valuations will probably continue. It's when people get really scared and say, what on earth do I own here? That the things that are the most lunatic in terms of pricing, they get hit. And that's how these gaps tend to close. So, you know, I'm not necessarily praying

for a closing of the gap because I think I know what sort of environment that's going to occur. So people talk about the 105% return, as I just mentioned, but it just so happens, and this is a big reason why strategies were understandably so bearish heading into 2023. The Magnificent Seven had a 48% drawdown in 2022.

Amazon fell 56%. Meta fell 76%. Google fell 56%. Meta fell 76%. Google fell 44%. And Facebook fell 66%. Maybe I said that wrong, but something like that. So going into December 2022, the Magnificent Seven were in a 48% drawdown. So if you look over that two-year period,

if you look over the two-year period, they're barely beating the S&P 500. It's just that where you started from matters a lot. That is a great chart, by the way. We may steal that chart. You could license that. Well, here's one more. I want to talk about the understandable worry about concentration. about concentration. So I made a chart looking at the rolling 12-month return for the S&P 500

minus the S&P 500 equal weight. And the S&P 500 has outperformed by 14% over the last 12 months. And if you look at other periods of time where this happened, not so great. 1973, 1990. These all represent pretty substantial tops.

And we know what happened. Now, I'm not saying it's going to happen this time because things change and certainly things are different, but this has not historically been a wonderful thing. Well, that's right. But if you look at, let's look at some pieces of this. So first of all, look at 1999. The problem was that not only did you have an extreme market concentration in large-cap tech, but you had a huge wave of enthusiastic

investment spending. So there was an economic effect also. It wasn't just a market bubble. There was an economic bubble, which got reversed right after Y2K, which caused problems. got reversed right after Y2K, which caused problems. You know, I'll have to think a little bit back to 73 or to 1990. But, you know, I'm not necessarily willing to throw in the towel on the economy because of this. I do think that, as I said, the dispersion will probably dissipate in a bear market rather than a bull market. But if you're a long-term investor, buy good companies. I agree with that.

So I was looking at the data last night. When the S&P 500 outperformed by 14% over the previous 12 months, which is where it is right now, that's only happened 1.5% of the time. So take this definitely with a grain of salt. It's rare. It's rare. It doesn't happen a lot.

The average return one year later for the S&P 500 was negative 1.2%. We know the average return is, you know, whatever, 10, 11 year over year. And it was only positive. Well, not only, it was positive 49% of the time, which is substantially lower than the 75% of the time normally. So historically, this has not been great. You know, if we were three statisticians and we're looking at those numbers, we'd probably say case not proven. Case not proven. I agree.

We have four samples. Not good enough? How many do you want? No, no. You need 30 for a T statistic to even mean something. I wish we had 50 centuries to go through. Exactly, we don't. And that's actually one of the problems

with financial markets. You never have enough cases of something being exactly the same. We've seen this before. It's always different. And so you actually one of the problems with financial markets. You never have enough cases of something being exactly the same. We've seen this before. It's always different. And so you have to, you can never say it's a no-brainer because it's not.

That's why we all do rolling periods. That way we can exponentially multiply how many examples we have. But here's a potential risk in what's happening. So Goldman Sachs put out a report, concentration, crowding, and turnover is what they call it. And they say concentration within the typical hedge fund portfolio and crowding, and turnover is what they call it. And they say concentration

within the typical hedge fund portfolio and crowding across fund portfolios both increased during the most recent quarter. The typical hedge fund holds 70% of its long portfolio in its top 10 positions, matching the highest concentration on record outside of 2018. And I think they talk about the Magnificent Seven. Yeah, here it goes. Funds bought Megacap Tech during the quarter, lifting exposure to the Magnificent Seven to a new high. The Megacap Tech stocks account for 13% of the aggregate hedge fund long portfolio, twice their weight at the start of 2023. So these are some of the charts. I think that's potentially some of the worrisome is that people are crowding in now. And they're big index weights. These are the stocks that really matter. Yes, of course. And it means that some investors are badly positioned in terms of valuations.

And as I said, the gap usually closes in a bear market. But when I look at the market overall, is it expensive? No. So maybe you have a period where this continues for a while. And in the long run, however it sorts itself out, we're not at expensive valuations right now. And that's a big difference, for example, back to 2000. You pointed out earlier, at the end of 1999,

we had a very expensive stock market, given the underlying inflation and interest rate dynamics. If we're headed back- Yeah, it's like a 36 PE on the S&P, 90 on the NASDAQ. But more than that, it was in an economy which had genuinely higher inflation and interest rates than I think we're going to see unfold going forward. You had a Y2K spending bubble too.

You had a lot of weird things going on then too. Yeah, but it's really the valuation. Overall valuations don't look expensive. So let's talk about that. I agree. When you look at a lot of large market cap, fairly well-known stocks, just not the MAG7, you are not regularly encountering stocks trading at 30 times earnings. You just aren't.

There are a lot of big, cheap companies out there. The thing is, that really hasn't helped. John, let's do this Russell 3000 growth versus value. So Charlie Grant wrote about this in the Wall Street Journal. The stocks that AI mania left behind. Nope, previous chart, please. Yeah, one prior to this, the Wall Street Journal's chart. So on the value side, here.

This year, large companies in both indices explained the gap. The 10 biggest companies in the Russell growth index gained an average of 90% this year, obviously, NVIDIA, et cetera. And then the 10 largest value stocks, six of them are down about 20%. So Chevron, Bank of America, Merck, J&J, everyone knows the names. This disparity seems like, you're talking about unsustainable. This seems really unsustainable, but it always seems like that and it never changes.

What is all of a sudden going to happen that's going to change this dynamic and shrink that gap? But John, chart back on please. So if you zoom out a little bit, so this is over the full two-year period. Yeah, I'm going like now. But if you go back, not one year, go back two years. Growth got

annihilated in 2022. Annihilated. And now it caught up. So if you're a value manager, you get to outperform one every 10 years? Is that the takeaway? No, no. It should be better than that. You can have these long periods of, you know, it's like the rising dollar. The dollar went up and up and up. And it's

overvalued. Everybody knows it's overvalued. It's been overvalued for a long time. But what's going to cause it to turn? You know, you actually need a few things to trigger a turn and then people to believe in it. And what's going on right now, I think, is a lot of people are simply buying the growth stocks. It's not a logical thought process. It's not, I'm going to sit down with my spreadsheets and try and figure out what the real cash flows here are. Growth's going to go up and value is going to get trashed, so this is what I'm going to do.

It's career. It's survival. Well, exactly, but it gets more and more illogical. Then eventually you end up where the valuations are so out of skew that if something begins to tip this, then it can sort of build in itself. I mean, the thing I remember about 1999 was much more what happened in 2000 when you look at just how far the Nasdaq fell. Now, again, I'm not predicting a bear market like that. But these valuation gaps will close. And the bigger the gap, eventually, the more violently they'll close. I don't disagree with you, but it does feel like we're still

relatively early in the AI hype cycle. Like NVIDIA's revenue, I think it grew 100% year over year, 35% quarter over quarter, something like that. That stuff is only starting to just ramp up. Well, yes. But the other thing, we're very early in this industry. And one of the issues is going to be, yes, you're going to get great overall revenue growth. But what are your costs doing? And how much actual profit to shareholders are you going to be able to generate? And once you've done that, are you going to be able to build a fence around your cash flow so nobody else can steal your lunch here. And I will say that there are a number of tech companies which, over the years, have done a

remarkable job of building a monopoly position where maybe they shouldn't have been a monopoly position. And maybe there are companies in the AI space that can do that too. But they're sure not all going to be winners. Most of the dot-com bubble stocks were horrible losers in the end. So it's a tricky business. You're going to have to figure out which companies are really going to be able to, you're going to be able to look back 10 years from now

and say, that was a really well-managed company the whole way through, and it's just a cash machine. I was going to say, the history suggests you're not going to have five monopolies because that's not a monopoly anymore. Exactly. Rich Bernstein agrees with what you're not going to have five monopolies because that's not a monopoly anymore. Exactly.

Rich Bernstein agrees with what you're saying. His comment this week and his research, there are more than just seven great investing opportunities in the world. Let's pop this chart, John. So he says the Magnificent Seven have dominated indices to the point that some large cap growth funds no longer even qualify as diversified portfolios under the 1940 Act. This is the narrowest leadership since the technology bubble. And the chart that we have on screen now is the percentage of stocks that outperformed the index. And it looks like just 25% or so of S&P components did better than the index. But if you look at your chart,

look at 1998 and 1999. Same dynamic. And see what happened in 2000, 2001, 2000. Be careful what you wish for. Exactly. But that was a cash down though, 2000. That's exactly the point. What's interesting is that the divergences are

noteworthy when the rest of the market is rolling over. If the other 493 were rolling over and it was just the seven that were holding

everything up, that's not the case. Yeah, the 493 are lagging, but the other 493 are still up 7%. So it's not as if the market's rolling over and only a few stocks

are holding it up. That's not the case right now. Well, that's right. But if you're a long-term investor, just, you know, don't buy the case right now. Well, that's right. But if you're a long-term investor, just don't buy the overvalued. Well, none of this shit matters if you're a long-term investor. We're just having fun. Global bonds ripping.

This is Bloomberg. Global bonds are soaring at the fastest pace since the 2008 financial crisis. But they're not soaring because everybody's looking for safety, which is what went on then. They're soaring because inflation is moderating at a faster pace than maybe a lot of people thought. And it's a readjustment. This is a good story, is my point.

Absolutely. It's not just in the United States. I think inflation is going to be stickier in the UK and in Europe than it is in the United States. But even there, you can see inflation coming down. I think people are beginning to get the memo that this is not the 1970s all over again. And that's, I think, part of the reason why the other 494 stocks or 493 stocks are doing reasonably well, because it is generally a good story for the stock market, but it also is a good story for the bond market.

Can I play something for you? Sure. It is generally a good story for the stock market, but it also is a good story for the bond market. Can I play something for you? Sure. Some people say that the Fed, if they were to cut interest rates next year, would help the Democrats and therefore be seen as very political. On the other hand, some people say the Fed can't wait until after the election because the economy might need a stimulus. So do you have a view on what the Fed is likely to do? I think they're going to cut rates, and I think they're going to cut rates sooner than people expect.

I think they're going to cut rates. And I think they're going to cut rates sooner than people expect. Because what's happening is the real rate of interest, ultimately, which is what impacts the economy, keeps increasing as inflation declines. So if the Fed keeps rates in the sort of middle fives and inflation is trending below 3%, that's a very high real rate of interest. So that is Bill Ackman being interviewed by Travis Kelsey. That's a very high real rate of interest. So that is Bill Ackman being interviewed by Travis Kelsey. That's right. Do you think that that's now the reasonable consensus that we should kind of all start thinking about, that the cuts are going to happen maybe a little bit faster

than we would have thought three months ago? You know, I have a friend who is perennially late, and you know they're going to be late. And no matter whatever they say, they're going to be late. You know what? The Fed is always late. I know Jay Powell a few months ago said that, you know, if the economy is doing fine, but inflation is heading back towards 2%, we'll cut. But I bet they stall and prevaricate and just wait and wait. So they were slow to hike, they'll be slow to cut. Exactly. So I'll build in.

I do think that we'll get a rate cut next December. We might get something before then, but I'm not going to hold my breath waiting for the Fed to cut appropriately. And that's okay. At this stage, they would probably confuse people too much if they started cutting aggressively. Dave, if there was a pie chart and there was two slices of the pie to explain the stock market's rise in 2023, and the two slices were inflation coming down and the other slice of the pie was the market looking forward

to cuts in 2024, how big is each slice? I think the inflation is a much bigger slice because inflation coming down doesn't just give you a few rate cuts in 2024. It gives you a platform over the next decade in which inflation isn't higher than it was in the last decade. I mean, that's a really important point. You know, if inflation comes down to three and sticks at three, then we've got a higher inflation environment. We need to have higher interest rates. If inflation comes down to two or below two, then, hey, we're just back to where we were, in which case the Fed can be easy in the long run. That allows for lower long-term rates. So I'm much more interested in

what inflation means for long-term rates than just how quickly the penny drops. The higher for longer camp thinks that geopolitical tensions and onshoring and things that are different from last decade's dynamic will keep inflation high. If you talk to people in California, they think they're like, what are you talking about? AI is going to eliminate like half these people's jobs. This is the most disinflationary wave of technology we've seen yet. It's true. There's probably somewhere in the middle, but it's like, I feel like it's really hard to not pick a side right now.

I don't know what, what do you think? I'll pick the disinflation side, but not really because of, first of all, I don't think that near-shoring or on-shoring is really a very significant part of the inflation story at all. And I don't think the geopolitical tensions. Supply chains just costing more because we're making them domestic? Global supply chains have basically come back into balance anyway. And if we import stuff from Mexico as opposed to China, it's not going to make that much difference to our inflation story.

So that's part of it. And then on AI and inflation, I don't expect it to cause mass layoffs. Every leap forward in technology that we've ever seen since the Industrial Revolution, we all want to buy more stuff or buy more services or whatever. If you've got enough demand, you'll have full employment. But what it does do is it makes us easier to discover the best deal. I mean, right now, I have to go on Travelocity and

search around for the best flight, and maybe I'll find a better rate. But it's a little work. If I can tell my AI assistant here- Microsoft Copilot, find me the best flight. Just give me the cheapest. Where can I find the cheapest gas? Whatever makes it easier for a buyer to get that information. You're going to be on Spirit Airlines.

There's going to be a guy in front of you vomiting, literally, projectile vomiting. You'll have infants behind you and somebody with a chicken next to you. The next generation of AI will know what airline you don't want to fly on. Right. And don't put me near a bathroom. I have like a lot of conditions.

I think your intuition about inflation versus the market looking forward to constant 2024 is right. One of my big things is that even if you knew, A, the news of next year, or B, even if you were to be given some actual variables, you probably still wouldn't have a great confidence in guessing what the market would do. However, inflation is one of those things that actually matters a lot. So I looked at what happens to the stock market a year forward if inflation was higher than it was a year ago or lower than it was a year ago. And the gap was much wider than I suspected. If inflation was higher than it was a year ago, the average stock market return was 6%. And if it was lower than it was a year ago. And the gap was much wider than I suspected. If inflation was higher than it was a year ago,

the average stock market return was 6%. And if it was lower than it was a year ago, the average market return was like 12%. And the distribution of returns looks very similar. The only difference is that a lot of the left tail of negative returns gets cut off when inflation is going down year over year. So it's not guaranteed, but it's a pretty good indicator.

Well, yeah, because it says that you can have lower long-term interest rates. And when you can have lower long-term interest rates, you can have a lower earnings yield on stocks, which means a higher P-E ratio. And if we live in a world of low inflation, then asset prices can be high. We're going to hit you with a couple of more things. We're going to let you get out of here. We want to be respectful of your time, but this is just so amazing having you here, and I don't want to miss the opportunity. A lot of people are now talking about there being a private credit bubble. Anecdotally, I was at CNBC delivering Alpha.

These private credit guys were walking around like they own the joint. Star-bellied snitches. And they practically did. It seems like this is like the hot asset class. Wealth managers love talking about private credit to their clients because they appear more sophisticated. According to my inbox, there's a bubble. Yeah. Well, so maybe there isn't.

This is the chairman of UBS, Com Kelleher, who – Irish? Sounds like it. Sure sounds like it. Warned against growing risks in private credit as the market continues to boom. Quote, there is clearly an asset bubble going on in private credit. He said this at the FT Global Banking Summit on Tuesday. There are many other asset bubbles building. What it needs is just one thing to trigger.

He calls it a fiduciary crisis. This is now a $1.6 trillion industry. We've seen this movie before. You get an area of the market where a lot of loans are being made that's not a traditional bank. You find out later that a lot of people are involved that you didn't know were involved. You find out that there's a domino effect because of the way that some of these assets are being used to collateralize other assets? Is it chicken little to say this is the next market event?

Or do we not know enough yet? Or are the fears overblown? Or what do you think? What do you think generally about the topic? Well, I think it's right to be fearful about this. The problem and the thing that I always worry about when it comes to sort of credit issues is, is the market rewarding the most reckless? If you lend – if you make the loan that a more prudent person wouldn't, if you get all the business because of that and you grow your business because of that, then you can – That is the story of private credit.

Well, that's – because of that. That is the story of private credit. They're saying the banks are on the sideline. They will not make these loans. We will. And we have plenty of collateral. We have all this money behind us. Now, I should say that there is probably more space for rational private credit loans today than there would have been before the regulation

that followed the great financial crisis. But still, I do worry about it. And the longer it goes on, the bigger the risk. Does it amount to a systematic threat to the global economy? Not like the global financial crisis. Subprime was only $200 billion, and the number was scoffed at. Like, how could that really? But it's not that subprime itself.

It's everything that was stacked on top of it. All the derivatives built on top of it. But also the amount of leverage that those institutions were using. This is, the blue is the value of current global private credit assets under management, which you can see.

It doesn't look like a bubble. And the black is unused capital. So just on the surface, 1.6 trillion, but like, let's humor me. 10 years ago, under 500 million. But wait a minute.

So we were talking to- Under 500 billion. I was talking to Kamal Harvey before we started recording about private credit. And he, I don't put words in his mouth, but it doesn't say that he loves it, but he likes the idea of it better than banks making these loans.

So banks are stepping away from these loans for regulatory purposes. They're not making these loans. So banks are stepping away from these loans for regulatory purposes. They're not making these loans anymore. So there's a better asset liability match on that end. And he's like, who would you rather be making these loans? Oh, yeah. I would agree with that. A random bank or Apollo?

Who do you think is like being more stringent? Who's more systemically important? But also, who's putting together more stringent term sheets? Well, that I'm not so sure that these loans are that pristine. In fact, I think they're quite the opposite in many cases. But from my perspective, as a strategist and investor, the real question is, is this a systematic risk that could have such financial repercussions as to sink the economy and therefore affect markets overall? I don't think so. I don't think that's where we are right now.

So I think that there could be some poor outcomes maybe for investors. Yes. But not necessarily like something to – And the other thing is because of the great financial crisis – the great financial crisis didn't have to happen because even as it was unfolding around us, if the authorities had made decisions, which they ultimately made at the outset, we wouldn't have had the crisis. So what you saw with the mini banking crisis we had earlier on this year is just how quickly the Fed and Treasury and the government moved in to try to squash this thing out and to make sure that we didn't have a domino effect. We did it in a weekend. So they

spent a lot more time looking at dominoes than they ever did before. And I think that does give us a measure of protection from a macro systematic perspective. Nobody wants to preside over GFC2. Therefore, we're reacting quicker. I think it's a great place to leave it.

Did you have fun on the show today? I certainly did. You did? Okay. So this is the intermission. And then we'll do another hour and a half. We always end the show every week, David, with favorites. And we try to give the listeners, the viewers,

something that we're reading, we're watching, we're listening to, something that you're doing in your spare time maybe, what do you think people should know about? Well, I spent a lot of time running. I just did the Philadelphia Marathon two weeks ago. And I'm aging into being actually a good runner. I'm not getting any faster, but I'm getting older. And so that is helping. So what does that mean? Like the people that you're comparing your time with are falling apart at a faster rate? That's right.

So now I've just gone over the age 60 bracket. Duncan's got a runner in the family. I mean, she's not aging. She's very young. I'm also a runner. But I just don't run marathons. My wife runs marathons. Well, my two sons ran Philly with me.

We're all going to run Boston for the Dana-Farber Cancer Institute in April. Oh, that's awesome. So that's really cool. Very cool. What's your favorite running shoe? Well, they're Nike Zooms, but they actually have to be from 2020 because every year they change them just a little bit, and the 2020 ones fit me.

So did you stockpile them? You bought a bunch? I know this website. Okay. Okay. Very cool. Very cool. Michael, do you have a favorite for us this week?

All right. So you put that Fargo. I was going to say that, but I'll let that- Take it. It's all yours. So I don't know why I skipped a few seasons. Yeah. So Fargo is on FX, but also-

You ever watch the show? I watch it on Hulu. You watch Fargo? I watch the movie seasons. Yeah. So Fargo is on FX, but also- You ever watch the show? Also on, I watch it on Hulu. You watch Fargo? I watch the movie. Great movie. So incredibly, Fargo's in my top 10 movies. Incredibly, the show is thematically very, very similar to the movie. It feels the same.

It feels like the same writing, even though it's not the same writers. It just thematically, it feels very similar. And in this season, they've got Jon Hamm playing some sort of wackadoo sheriff. He has nipple rings, which isn't that important, but it's not the same writers. It just thematically feels very similar. And in this season, they've got Jon Hamm playing some sort of wackadoo sheriff. He has nipple rings, which isn't that important, but it's kind of important. I'm only two and a half episodes in, but so far, so good.

And then the other one that I would like to highlight is Godzilla on Apple, which sounds ridiculous. Like, why do we need more Godzilla? And I'm not even a huge Godzilla fan. The movies feel weird to me. I think here's why. Once you see the monster, it's sort of,

how much monster viewing can you do? Right? Like, and so it's hard in a two hour period. It's hard to do like character development and also monster development. So it's just, it just doesn't feel right.

So Apple is doing this show, which is, it's got, Kurt Russell and his son are in it. And Kurt Russell's son is playing a younger version of Kurt Russell. It goes, time travels back and forth. But there's really incredible character development and really good writing. And it's not a ton of Godzilla.

It's just like very quick clips. Just the right amount. It's just the right amount. It's very well done. Very well done. Very cool. I wanted to just mention Charlie Munger. It seems like his last interview ever.

So Charlie was on the Acquired podcast, which I feel like I'm talking about at this point every week. It's one of my favorite podcasts. They got into a room with Charlie Munger a couple of weeks ago, and he did like an hour and a half. And he did like really great stories and uh really great insights and it's just remarkable how sharp this guy stayed for a hundred years right up until the end he said so many sensible do you ever meet him yeah no i never did no okay um me either uh and

then becky quick did an interview with him two weeks ago at his house. And we're recording this on Thursday. It's going to be on CNBC at 8 o'clock Thursday night. You guys will be hearing this after it aired, but I'm sure they'll air it all weekend or you could find it in demand. Becky was like super plugged in with Warren and Charlie all these years. So I would imagine that's going to be a pretty cool television event. Let's see it. So, all right, we're going to end with that. Rest in peace, Charlie's going to be a pretty cool television event. Let's see it.

So, all right, we're going to end with that. Rest in peace, Charlie Munger, one of the greats. I want to thank our special guest today. We had so much fun. Dr. David Kelly. Everybody respects you.

Everybody reads you. You're terrific. We want you to keep going. And thank you for all the insights every week. Every time you write, I learn something new. So thank you so much. Thank you. Awesome Every time you write, I learn something new. So thank you so much.

Thank you. Awesome. Do you want to say something nice about me? You don't have to. I'm just going to give you space. This is a lot of fun. Was this cool? This is a lot of fun.

Would you come back? I'd love to do it again. Okay, what are you doing tomorrow? Just don't remember what I said this time. Okay, fair enough. No, listen. You've been very right. I'm going to tell you.

All right. You've been very right. All right. Thank you so much to David Kelly. Duncan, great job this week. I've got to tell you. All right. You've been very right. All right. Thank you so much to David Kelly. Duncan, great job this week. John, Daniel, Nicole. Sean's in the house. Sean, welcome to New York.

Rob's here. Guys, thank you for everything. To the listeners, to the viewers, thank you for all the ratings, all the reviews. We love you. We'll see you next time. All right. Was that fun? Yeah.

Yeah? Okay. Thanks. It was great. You were awesome, but we knew you were great. Well, that's it. That's that close. Bye. alright was that fun? yeah yeah? okay thanks you were awesome but we knew you were gay well that's that's that bye

bye bye bye bye bye bye bye bye

bye bye bye bye bye bye bye bye

bye bye bye