The Compound and Friends - Josh Brown, Michael Batnick, Cullen Roche

Episode Date: April 22, 2020

Why Credit Card Losses Could Explode: What Are Your Thoughts? On an all new What Are Your Thoughts, Josh Brown and Michael Batnick tackle all the biggest topics of the moment. In this edition: * Five US stocks are now bigger than the entire developed world's stock markets combined, how can this be? * What are the investor takeaways from the massive crash in oil prices? * Did an oil ETF popular with retail traders contribute to negative oil prices this week? * Are people more comfortable about ordering in food as a break from cooking at home now? * How long would you stay in your home, no matter what the government says? * Watching old NBA games * Reactions to ESPN's The Last Dance What Does The Fed Actually Do? Michael Batnick talks with Cullen Roche about what the federal reserve actually does, what their critics get right, and how their actions today compare with what they did during the Great Financial Crisis. Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

What's up, what's up, guys? It's downtown Josh Brown. I'm here with Michael Batnick as always. It's Tuesday, so we're going to play our favorite game, What Are Your Thoughts? Michael doesn't know what I'm going to ask him about. I don't know what he's going to ask me about. Stick around. Let's see what's happening. Welcome to the Compound Show podcast. Each week, we let you in on some of the best conversations we're having about markets, investing, and life. Just a quick reminder, the hosts of this show are employees of Ritholtz Wealth Management. All opinions expressed are solely their own opinions and do not reflect

the opinion of Ritholtz Wealth. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Okay, here we go. Okay, first of all, love the shirt, Michael. I still believe too. I don't know why. These days, I'd be happy for any basketball. I want to ask you about something that you wrote about. The top five stocks in the United States are now bigger within the S&P 500 than they've been since the 1970s. You have a couple of charts, one of which is a horrendous chart crime. We'll throw this one up, showing that the five largest stocks in the S&P 500 are now as big as the bottom 350. And you've done this before, and they get bigger and bigger, and the rest of the index gets smaller and smaller. What are we to make of this situation? Because didn't everyone say, wait till the bear market and those big stocks would get slaughtered? Now it's the opposite.

You know, Amazon, Microsoft, and Apple are still all above a trillion dollars, believe it or not. Right. This isn't what was supposed to happen. We had a bear market. These were supposed to be the stocks that got killed the most. No? So I was thinking about this. Things that seem unsustainable are both the best and the worst investments. Like betting against things that seem unsustainable, the housing market, for example,

in 07-09 turned out to be the best investment ever for certain people that were able to execute it. Obviously, it wasn't easy because it went on for a long time. And that's the nature of things that seem unsustainable is that they continue to go on. They're also the worst investments. Imagine betting against tech from that chart that I threw up in 2000. That was July 2018. And that was already very late in the cycle of the FANG stocks. You say imagine betting against tech. That's like there's trillions of dollars de facto betting against tech when they're overweighting the rest of the market and underweighting tech as a smart beta strategy. They're not saying I want to bet against tech, but they are.

But implicitly or explicitly, that's what they're doing by not being in line with the tech stocks. And this is not the indexes. There was an article in Barron's maybe two years ago. Active managers are what set prices and active managers were actually overweight relative to the benchmark, these stocks. and active managers were actually overweight relative to the benchmark, these stocks. Yeah. Well, I mean, at a certain point, I feel like active managers had to be overweight, these stocks, because of how much they had been outperforming by. Well, if you're a value manager, you can't really do that. Well, so here's what's interesting. There are a lot of value benchmarks and indices that had

stocks like Microsoft and apple in them for almost the entire run up never would own amazon never would own amazon although remember there was a there was an article uh there was a quote like amazon is now value stock and we scoffed up this is the top well guess what it wasn't not even close so james mcintosh at the journal is saying microsoft is now worth as much as the foSE 100, which is the biggest stocks in London. The gap is closing. And this does seem unsustainable. I mean, this is crazy. Wait, and the top five stocks are now worth as much as the entire or almost the entire developed world stock markets ex-US. Is that true? How could that be?

It's true. And think about what those stocks are. So these are the top holdings in that index. It's basically, it's all of the developed markets outside of the United States, 22 of the 23 developed market countries, Nestle. So it's Europe and Japan and Hong Kong. Roche, Holdings, Novartis, Toyota, AstraZeneca, HSBC, ASML, SAP, AIA Group, and Novo Nordisk. So these are giants.

So we have five companies that are worth all of those combined. No, no, no. Those are just the top 10. Those are just the top 10 Holdings. And all of those combined plus everything else. Plus another 1,002 stocks with a median market cap of $5 billion. All right. Let me say one thing about this.

If you were to tell me that any one of these giant five companies only does one thing, I would say, like we just make cars. I would say, okay, that doesn't make any sense. But they're all conglomerates. They all do many, many, many things. Amazon does everything from enable the conversation you and I are having right now in its cloud to bringing groceries to people and very soon medicine. And it's not like it's one company in one very narrow industry.

And I can go through the rest of that list too. There's reasons why this happened, but this is another manifestation of the winner-take-all economy. This is at the corporate level, not at the individual level. Right. Okay. What do you got? You wrote a post recently about credit card delinquencies and how you're worried about that might be the next wave. Yeah. Explain. Well, you're worried about that might be the next wave. Yeah.

Explain. Well, everyone's worried about it. It's not like my unique insight, because if you listen to any of the large bank conference calls last week when they reported earnings, all of them are now raising their loan loss reserves. Banks start raising their loan loss reserves in anticipation of having to take major charges. And you take major charges when basically you've lent money to people that stop paying, can't pay, will maybe pay later. So some of it is accounting, but the reality is, and this is the main point I was trying to make, if you're someone who's lost your job as

22 million Americans have in the last four weeks, what is the easiest thing to stop paying? You're probably going to continue to pay for your phone because that's like literally your only lifeline to the outside world. And it's what you spend most of your day doing is things on your phone. You're definitely going to keep paying for your car for as long as you can, because you'll never be able to drive to a job interview again if you don't have one outside of, let's say, New York City. And the credit card bill, it's like, you know what? I just I don't have the $1,500 for it this month. I don't know what to tell you. I'm not paying it.

Let them call me. Let them harass me. I can't pay it. So there call me, let them harass me. I can't pay it. So there's a thing called Maslow's hierarchy. It's like, what do people need first? Food, shelter, you know, and that, so I just think about like this hierarchy of debt payment, and I feel like credit cards are just going to get absolutely nailed in this crisis. Now there are people saying, puff shit, you're charging me 21% APR with interest rates at zero. You deserve what's coming. I understand that. But I look at American Express. I look at

Discover. I look at Capital One. These are three credit card issuers that are on the hook for their customers' purchases. And we'll see what happens. There was a stat that 8% of customers pay for 75% of bank overdraft fees. And I imagine something similar applies to who pays credit card interest. Wait, the 8% are like the delinquent payers that run up all the charges and owe them back? 8% of people, when they go to get money, 8% of the people account for 75% of all overdraft fees. Oh, I think 8% sounds low. I would have guessed that would have been higher then. Well, I think the other thing,

in addition to all of these delinquent credit card balances that are going to exist, the other the other shoe that's dropping at the same time is nobody spending any money on anything like outside of the supermarket and maybe some takeout meals, which we'll get to later. People aren't buying gas, which was a very reliable thing that credit card companies made money from. They're not taking trips. So I feel like credit card issuers acutely feel every ounce of the pain that's happening in the economy right now. Yeah. All right. I want to talk to you about oil.

Slow your roll. It's my turn. Cooking versus takeout. Sorry, I got excited there. Cooking versus takeout. So I noticed this weekend, we live in the same town. I don't know if you noticed anything. I noticed more and more people sitting in the parking lots of restaurants and delis and bagel stores and pizzerias now bringing food home. Whereas like for the first month of this, I knew a lot of people who were like, I would never get anything other than from a package at a supermarket. So I feel like people are starting to loosen up and maybe that's going to help a lot of these places.

What do you think? Are you doing the same thing? We are getting a ton of delivery and we're mostly cooking. So like we got La Piazza the other night. Robin said it was crazy. So backs up your point. Although that was Friday after Passover. So maybe that was the issue.

You would know better than I. Yeah. So you're mostly like most of your meals are still you in the kitchen cooking or Robin cooking? No, I cook. Yeah. So I'm doing the cooking and we order in on the weekends. So I'm cooking a lot too. I get delivery though.

I'm so sick of it. I get delivery. You get delivery groceries? No. And when I'm cooking a lot too. I get delivery though. I'm so sick of it. I get delivery. You get delivery groceries? No, and when I'm ordering in. I don't drive to go get it. Okay, gotcha. And they just leave it outside your front door. You leave a tip on the phone with them, I hope.

Right. So I think that there are some places in town doing really good business right now and maybe getting more takeout orders than they ever have before. No, it's interesting. I'm not suggesting. Robin said that Town Bagel is now selling Lysol wipes and home cleaning supplies. Dude, you do what you got to do. All right, what do you got?

Okay, I want to talk about oil, energy, and I mean, I have no idea what's going on. Why? Is something going on with oil this week? Specifically, USO. So USO assets absolutely are exploding. Let's tell people what USO is. So USO is the ETF that is trying to track the spot price of oil. And it can't because nothing can. Of course.

It never has, by the way. It never has. And they've been very clear about that. It's not like they were like duping people. But if you look at this chart that we'll throw up, assets went from a low of about $1 billion like, I don't know, a few weeks ago, up to $3 billion. So the price has crashed and the assets are going parabolic. And you look on, Nate Garasi tweeted a chart of Robinhood users that are buying this stuff like crazy. And when you talk about the dumb money that people like to throw around with

retail money, I don't think it's the average person. I think it's the average retail trader. Part of me feels like that's true. But I guess I wonder, why are people doing this? Do they think oil is at a dip, buy the dip? No, it's very simple. You have to say to yourself, or this is what people said to themselves, well, oil can't go to zero. It went negative. And I don't understand the mechanics of the oil market. I don't even know what that means. But it's very simple. You think oil can't go negative. Well, here you go.

The problem with all of these ETFs that back commodities is the role. So they have futures for one month, and the month is coming to an end, the options and futures expire, and they have to then go out and roll into a new contract. And all the professional traders over – this is going on for more than 10 years – have learned how to game these roles, which is a direct cost to these products. So this ETF has to be moving the market. I think they own 30% of May contracts. Is that right? That's what I read, the same thing that you read.

If that's true, then they can have an outsized impact on short-term price movement for the commodity. That article that you shared speculated that the exchanges need to shut this product down because it's a systemic risk, which is wild. Yeah. Well, Boutune has just tweeted breaking news that they're going to halt creations. Creations is like how you when new people are putting new money into an etf creation mechanism is how they make new shares to satisfy that demand they're going to stop so uh it sounds like they're not going to let any new money come in while this situation look nobody should be doing this if there's no new shares created is this thing going to be like

a closed-end fund where it's going to trade at extreme premiums and discounts i don't know when i hear people like trading these things my attitude is always can you just fucking stop what do you do like what do you know do you know more than like people that talk to the sultans and the king of saudi arabia like what what are you doing counterpoint that's number one and no and number two the construction of these products is inherently flawed. They're not meant to ape the long-term price move of oil. It's like a day trading vehicle to begin with. So you have a view on oil that's 24 hours long? Are you high?

All right, counterpoint. Counterpoint. It's fun. And so if people are just gambling with a few dollars, let them live. Fine. Fine. Okay. I have no problem with that. Not nobody. I'm sure there's some lunatics that are doing- There's $4 billion in this thing. You think that's all gamblers? Yes. Get out of here. I think there's some people being very irresponsible, taking too big of a position,

but I think by and large, it's people that are just having fun. So our attitude in terms of people ask us all the time and ask our advisors when we do presentations on our portfolios, do you own commodities? And the answer is yes, through the equities. And if there's a big commodity boom, that will be reflected in the stock market. Because, look, in the mid 2000s, oil companies were almost 20% of the S&P. And people were making a fortune in natural gas and oil. So a stock portfolio reflected that you didn't need to take physical delivery of barrels of oil to get exposure. And you didn't need to screw around with futures contracts. So the same could be said for gold. Like you, if there's a boom, and if gold goes to 5000,

think about there are probably 50 publicly traded gold equities that could become large weights in the S&P. Gold's different. Gold's different. Everything's different. I'm just making the point that commodity booms end up being reflected. Steel, whatever you want to say, end up being reflected in the stock market. So sometimes the factor will have exposure. All right. I'm done with that. Civil unrest. I don't think that there are these mass protests

that the media, and I blame like the liberal media for pumping this thing up actually. So they're showing like these guys with, these guys with, I don't know anything about guns. They look like really serious guns standing on the steps of city halls in places like Harrisburg and Detroit and having these protests about having to stay stay in.

And they want the economy to reopen. I think there's like 15 people and the news makes it look like it's thousands of people and it really just isn't. And I'm going to say something that is actually surprising to me. I want to hear what you think. I actually think these protesters, while they're obviously going to kill themselves and it's not smart what they want, they do have a point. Wait, what do you mean they're obviously going to kill themselves? Well, if they run around without masks and just like go back to the way things were, they're going to get sick or they go back to the way things were they're gonna get sick or they're gonna make other people sick uh but because i want to ask you what if the government

said what if trump is the opposite of this but what if he took this line and he said you know what economy shut down till december would you listen would you just stay home like we just do whatever they tell you no matter what me uh yeah you who else am i who else am i doing the show with would you listen they said six more uh eight more months of this stay home till the end of the year would you just be like okay that's what they said well no because you're going to listen to other sources of information like if if if the virus just dries up and they're like too bad i don't think i would listen and i don't think the country would listen right but how do you determine if the virus uh dried up like how do you determine okay now it safe, absent either the governor of your state or the White House?

Data. But are you qualified to decide which data is important to listen to and which isn't? If everybody agrees that there have been zero new cases over the last 30 days, I would listen to that. Zero new cases. What about like a sustained low level of new cases every day? Because that's what it looks like New York State is headed for. I think at some point there is an entire core hood of the nation, particularly those on the lower income scale, that are not going to listen. So I agree with you. And then when do you join them? We're the lucky ones. We're in a position to stay home indefinitely. It doesn't really affect our financial lives all that much.

So it doesn't affect us. But for a lot of the country, they don't have that luxury of staying home and not earning a living. Yeah, so I totally agree with that. And so that's why when I see these news reports of people that are angry that they have to stay home, my gut instinct is to be like, ha ha, they don't know science. That's not really what's going on. These people are in massive economic pain. And I am now coming around to this idea that, not that they're right,

but that we need to pay more attention to the frustration. Yeah, and that's why Congress needs to do a lot more on the fiscal side to get these people to the future. Testing. Testing side. Okay, that too. All right.

What do you got? What are you doing? I don't know. I don't know. Specifically? When the kids go to sleep, or I don't know. So my kids go to sleep early, so I have a whole night. What are you doing on your downtime, for lack of a better word?

Well, the weather sucks. So ordinarily, what I would be doing is sitting outside or riding my bike. But it's like 40 degrees every day, windy, and then a little bit of rain. So what are you watching? Are you reading anything? Yeah, I'm reading big books, like 700 page books. I'm reading novels. I'm reading escapist stuff. I'm not reading about the stock market. I'm not reading about economic history. Like it's enough already. My reading isn't a bear market, big time.

Oh, so my reading is finally in a bull market because I'm not as busy in like physical encounters with people. So I have meetings, I have phone calls all day, scheduled kind of stuff, talk to clients, talk to our advisors. I meet for entertainment. I meet for entertainment.

Do you watch any TV? Yeah, we're, uh, yeah, I'm, I plowed my way through like Narcos. Mexico is one of my favorite shows of this year.

Season two. It's amazing. So I'm, I'm probably like watching the same stuff. Everyone else's, uh, tiger cake. I mean, what, what else. It's amazing. So I'm probably watching the same stuff everyone else is. Tiger King. I mean, what else? There's no sports.

I want them to bring back baseball, but there's nothing. So I'm re-watching movies. You know what I watched yesterday? I watched The Last Emperor. Ever see that? No. Ridiculous.

I saw it when I was 10 years old and then never thought about it again. It's a true story. It's Bernardoardo bertolucci it won like 10 oscars it's it's it's like mind-blowingly good so i'm like trying to watch stuff like that that totally just takes me away from the news um let me let me let me pivot to this uh this is the last thing the last dance let me pivot to this uh this is the last thing the last dance um did you watch first two episodes yes i did do you feel that uh do you feel that like younger generations are gonna see this stuff and and be excited by it i watched with my son and he fell asleep twice yeah but he's so young he's 10 and he plays basketball on a travel team i feel like i don't know he's sitting there the

whole time being like lebron's better i'm like you're missing the point they would be no lebron it's um the pippin stuff was kind of interesting um so the the documentary that i've seen the most is the dream team one and i feel like this is going to be the next one that it's gonna be on nba tv over and over and over. And this is one of the bright spots of the quarantine for me. So I've been watching so much NBA TV and old Nick games and stuff because that was like my heyday. And the 92-93 Knicks Bulls with Xavier McDaniel was like just a little bit before my time. So I remember the Charles Smith game the next year, but I was seven years old, seven and eight years old.

So this is like nostalgia overload for me. So I listened to- Are you fast forwarding through this stuff? Or are you like watching it like it's a live game? No, I just have it on in the background. So like Zach Lowe did a podcast with Jeff Angundy and Patrick Ewing and one with Jackie McMullin and one with Steve Carr. I'm sorry. No, Woj did one with Patrick Ewing and Jeff with Jackie McMullin and one with Steve Carr. I'm sorry. No, Woj did one with Patrick Ewing and Jeff Van Gundy.

This is so great. Zach Lowe did one with Mike Breen. So this is fantastic for me. I'm all over it. So you have time now to watch these old games? Yeah. So last night on ESPN, they were running a game of the Colts versus the Patriots. And it was John Madden and Al Michaels in the booth.

Like, you'll never see that again. They showed Aaron Rodgers, his first game against when Brett Favre returned on the Vikings. Like, these are games that you would never have watched ever. So I think that this is like the one silver lining for me on the sports side is I'm loving this. They probably thought that that content would never really have value again. They never thought that they would actually need it. They use clips of it for documentaries, but now they have these entire games they can reshow and there's an audience for it. I think I'm saying the honest, but with Jordan, there was no moments of weakness. He lost that first year, he came back to the magic, but whatever. Besides for that,

there are no blemishes on his record. There was never a doubt ever ever ever that he was just going to win always and for young people take a look at his highlight like his layup highlight package it's just he could fly like nobody else and it's just his real twin was like nothing we've ever ever ever seen before i was totally unaware of this whole storyline with jerry kraus and phil jackson and that triangle of envy um i like i i was like somewhat aware but like not really the details about jordan versus his team and so all the stuff with lebron now like we've we've seen this before you know like we've seen teams have have to get things done for the superstars. Well, now it's the opposite because now the players have all the power.

Back then, the fact that Reinstorf was okay with Jerry Kraus behaving that way, it's like you have the best player in the world. What are you doing alienating your players? It was totally bizarre. Other than on the Knicks, none of that would happen now at any NBA team with a superstar. I'm here with Cullen Roche, founder of Oregon Financial Group. Today, we're going to talk about the disdain that some market participants have for the Federal Reserve. We're going to talk about where they're wrong and where they might be right.

Stick around. Cullen, so you are taking this prepping thing very seriously. You've got a nice crossbow behind you. I'm ready to go. I'm ready for anything that comes at me. All right. So you've been on this side for a long time. I started reading you probably like in 2010. And you

navigated the world of quantitative easing through the great financial crisis, probably as well as anybody. And at the time, there were a lot of people screaming about how monetary policy was going to cause not just inflation, but hyperinflation. And you were on the other side from the very beginning. So what did those people misunderstand about the very nature of quantitative easing and open market operations in general? Yeah, I was kind of lucky, actually.

It was interesting back then. And I have a couple of friends who live in Japan, worked at Nomura for what was the equivalent of the Soma desk at Nomura. So Nomura is one of the primary dealer equivalents in Japan. And when quantitative easing first started, I had no idea what this thing was going to do. I kind of was trying to understand it from a first principles perspective. So I could be like, okay, how does this thing work? And what is it going to do? How is it going to filter through the financial markets? And I talked to my buddy over there and they've been doing QE for 15 years by

this point. And he was like, Cullen, everything that I'm reading in the American press in the research notes is completely wrong. This thing doesn't do what people think it does. It basically will be the equivalent of an asset swap and it will be somewhat marginally deflationary. So the way that he always described it to me was that what really happens is the central bank creates money. They technically print money and they unprint the bond. And what happens is basically instead of the private sector having more money, they now have or instead of the private sector having more more money in total. What they've done is they've swapped a bond for cash. And now the private sector actually has a similarly safe financial asset and lower income.

So his argument was always that what's going to happen here is people have more money technically, but they have a safe asset. The Fed has unprinted the T-bond and they've taken that extra income out of the private sector. So this thing doesn't do what people think it does. It doesn't actually it's not printing money. It's not creating a lot of inflation. It's swapping an asset that is equally safe, but reducing the income, which actually is likely to drive interest rates down a little bit and drive inflation down a little bit. So we've seen the amount of money in circulation. This is a great chart that we're going to throw up.

The amount of money in circulation has more than doubled since the GFC. And if that doesn't cause inflation, what the hell does? I feel like, like, does anybody know what causes inflation? I know what the textbooks say. does. I feel like, like, does anybody know what causes inflation? I know what the textbooks say. Inflation is so much more complex than we've kind of all been taught in the sort of basic monetarist sense that, you know, more money chases fewer goods and that creates inflation. And I think we've seen through QE and the last 10 years that you can print money technically, but if you're doing it at the same time that you're unprinting a T-bond and that's, you know, this is the thing that I think gets a lot of people.

The Fed's balance sheet is not in the real economy. They're not out there using their balance sheet to go to Walmart and compete for goods and services. They take these assets off the private sector's hands and they're basically putting them, they might as well be burying them in the backyard. I mean, they're just out. They're gone from the private sector economy. And so the private sector's composition of financial assets has changed, but it hasn't necessarily increased. And that's the one big thing with the Fed that people miss is that the Fed doesn't actually necessarily increase the quantity of net financial assets in the private sector. That really can only be done through either an endogenous increase through things like new share issuance or new financial asset issuance, new loans from banks or the government.

The government can run a great big deficit and create net financial assets. Or the government. The government can run a great big deficit and create net financial assets. But the central bank is not the entity that really produces the net financial assets. So, OK, what is the Fed and the Treasury doing now versus what they did back then? Yeah, this is pretty different. So in 2008, I actually was largely against the bailouts. I was pretty vocally against all the bank bailouts, the GM bailout, I remember the cash for clunkers program, like all this stuff. I kind of thought it was nonsense. My view basically then was this was an asset bubble.

We reap what we sow and we kind of need to go through this pricing adjustment to recalibrate the economy to some degree. And this one's just so different to me because this is more like an act of God. And the government is basically responding with all of these shutdowns, basically mandating a closure of the economy. And so it's different in the sense that I think that the programs that they're implementing, either whether it's the Fed's programs or the congressional program, the $1,200 checks and the increase in unemployment benefits, to me, it makes a lot more sense, mainly because this sort of act of God with a mandated shutdown warrants some sort of government response. And I think the thing that really pisses a lot of people off is that Congress was very slow to act. And in the meantime that

they were slow to act, the Fed really picked up the slack. And so the- How so? Well, they have so much leniency and flexibility with the way that they can operate. I mean, they were ramping up all these programs while Congress was kind of twiddling their thumbs. The Fed was just ramping up program after program after program. And that's I mean, that's the thing that makes the Fed so controversial is that the you know, the Section 13 three disclosure in the Federal Reserve Act, which is the exact exigent circumstances clause. It's so open ended that they can virtually do anything through the banking system with that

power. And so are they are they are they breaking the law as Gunlock and some others have suggested? No, no, no. This was very I mean, I remember when this was all litigated after the financial crisis, because the same people said all that stuff after the GFC. They said the Fed has too much power. We need to shut them down to some degree. And the Dodd-Frank rule actually it put kind of clamps on the Section 13-3 clause. 13-3 clause. And so, for instance, the Treasury now has to validate, they have to sign off basically on all of the programs that the Fed does. So, I mean, Jerome Powell had to get a unanimous vote basically from the rest of the board. And then he has to go to the Secretary of the Treasury and say, hey, this is what we want to do. Will you sign off on this? So, and say, hey, this is what we want to do. Will you sign off on this? So this was all litigated back in 2013. Basically, the Fed changed the 13-3 clause. And it's still so open-ended that

you really, it's hard to decipher whether or not the Fed is even coming close to doing anything illegal because the rule is so open-ended. So what are some of the biggest gripes that you have with people who loathe the Fed? I think the big one that bothers me right now is this narrative going around, and it became really popular after the CNBC interview with the Warrens owner. He said that you could basically cram down equity without hurting the workers. And this is just, it's total bunk. I mean, that's just not how it works. Like I remember the GM bankruptcy in 2008, GM fired 35,000 people. So this is what people miss is that the process on getting to bankruptcy is extraordinarily

damaging for a firm and mainly the labor class, because what's happening is the equity holders are basically they're using the workers as their shield to protect the equity as the equity declines in value. So they're they're protecting the liability side of the balance sheet. They're firing workers all along the way. So GM fires 35,000 people in 2008. Then they get their bail out in February 2009, and they restructure. And by restructure, they fired 10,000 more. So by the end of all this, yeah, the equity has been crammed down, but the labor class gets crammed down, too. And there's really no way to avoid hurting the labor class without also hurting the equity class. Not that they're one in the same, but they're interconnected in a firm in ways that makes it just virtually impossible to help one without helping the other. So what are some of the points that the other side, meaning the people that loathe the Fed,

what are some of the points they make that you actually say, you know what, that's valid? I think the junk bond thing is a valid critique. For instance, they were given the power to buy like HYG, which is one of these high yield ETFs. And that to me, operationally, it makes no sense because what they're going in and doing basically is they're buying the bonds on the secondary market. It doesn't fund the companies. It doesn't help the underlying

bonds in any way. It's basically just trying to boost the asset prices. And so that is a very valid critique. If you're going to try to help these firms, you really need to go to the source. You need to give them money like they did through the small business loan program that just got tapped out this morning. That thing was giving money directly to small businesses. That's a great way to implement this policy if you're trying to. Anything else? great way to implement this policy if you're trying to. Anything else? I think that helping asset managers is controversial in that you see a lot of these hedge fund guys and there were reports that a lot of like venture capital firms were tapping

these loan programs. And that stuff to me is also controversial because these are firms that like you and I, we can work from anywhere. Asset managers can basically work from anywhere. And if you were bailing out, for instance, equity managers, every time the market went down 30% or 20%, I mean, we'd be getting bailouts once, it just, to me, that part of the program also doesn't make a lot of sense. So there's some fair critiques of this, but for the most part, I think that, I think for the most part, the programs are good. They're trying to basically build a bridge for, you know, three to six months, hoping that the virus kind of goes away and that we can kind of get back to normal during the mandated shutdown.

goes away and that we can kind of get back to normal during the mandated shutdown. So how responsible really is the Federal Reserve for two big issues? One are inflating assets, and the big one is directly causing inequality. And Chamath tweeted this chart going around, which is showing U.S. private sector financial assets as a percentage of GDP. And what he said was inequality and anti-capitalism in one chart. The Fed for the last 25 years have used their tools and money to preserve equity and credit prices at all costs. As a result, when economies contract, average people get hurt. Capitalists and progressives should both puke this chart. What do you say to this?

What do you say to this? I mean, the big problem with that chart is that chart basically just shows what any long-term trend in a developed economy is going to look like. I mean, literally every single developed economy will have over the long term a chart where the quantity of financial assets outpaces GDP. The quantity of financial assets outpaces GDP, mainly because as you start getting a more and more developed financial economy, you just start getting more and more financial assets. You start getting things that are more sophisticated, like insurance policies or options contracts and all these different types of financial assets that they aren't necessarily bad, but they they're built and structured to protect the financial system itself in various ways. And so I don't know. There's definitely a problem of inequality in the country. But I don't think that that chart is definite or is necessarily the thing that actually shows the problem. That just kind of shows what a developed economy financial system is going to look like over any long term trend. a developed economy financial system is going to look like over any long-term trend. Yeah.

I mean, do you understand why people's inclination is to blame the Fed? Honestly, I think a lot of it just comes down to politics. I think people do not like the government intervening in the markets. And the Fed is just a great, big, divisive entity that is consistently intervening in the financial markets. And people don't like that. Oh, that's a great place to leave it. Colin, thank you so much. Thanks for listening. Check us out at thecompoundnews.com for daily investing and market insights. You can watch all of our videos at youtube.com slash the compound RWM. Talk to you next week.