The Compound and Friends - JP Morgan Destroys the Bears: What Are Your Thoughts? (with Josh and Michael)

Episode Date: November 14, 2019

Welcome to the latest edition of What Are Your Thoughts - Michael Batnick and Downtown Josh Brown break down the biggest topics of the moment. On this episode:  * JP Morgan calls out permabears. * Should investors be concerned about the national debt? * Does Google want to be a bank? * Selling performance vs selling opinions. * Stock-based compensation. * Opinion vs price. * Disney +, first impressions. 1-click play or subscribe on your favorite podcast app   Subscribe to the mini podcast on iTunes or Spotify    Enable our Alexa skill here - "Alexa, play the Compound show!"   Talk to us about your portfolio or financial plan here:  http://ritholtzwealth.com/   Obviously nothing on this channel should be considered as personalized financial advice just for you or a solicitation to buy or sell any securities. Please see this 3,000 word terms & conditions disclaimer: https://thereformedbroker.com/terms-and-conditions/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi, it's Downtown Josh Brown. I'm here with Michael Batnick. Hey guys. We're about to play our favorite game. What are your thoughts? Michael doesn't know what I'm going to ask him about, and I don't know what he's going to ask me about. Stick around. Let's see what's happening. All right. Nope. Nope. I have the first. You're going first?

I'm starting. All right. Go. All right. Did you see this post from JP Morgan, the Armageddonists? No. Oh, yes. I saw a chart from it. Okay. So here's the lead.

While recessions and bear markets are a fact of life, something peculiar happened after the global financial crisis. The rise of the Armageddonists, which refers to the market watchers, forecasters, and money managers whose apocalyptic comments spread like wildfire in print and online financial news. This is the gulliest thing I've ever seen. You don't really see this from places like J.P. Morgan. And we're at all-time highs.

It's like 17 years into this bull market. This looks like a blog post that Barry Ritholtz would have done. Is this a little toppy or what? Duncan, you're going to pop that chart up, right? I mean, this might not age well. Well, yeah. And they went after like some really big, like gun locks in there. They named names. But do you think that the people on this list are sort of like the people that got stuck in the forest and didn't know that World War II ended like 30 years ago?

No, I think it's a great illustration of the recency bias and how everyone, no matter how skilled or smart or experienced they are, at some point falls prey to it. Why recency? Because we had not even come out of the crisis and people were already calling for the next one. And I totally understand that. In 2011, in 2011, I was like super bearish. In 2010, I was buying FAZ. Remember that? What? Triple short. Bears. Banks. Banks. Yeah. Right at the bottom.

So I don't make, I try not to make fun of people because I'm sure I do the same thing all the time. I'm super bullish right now. Why wouldn't I be? 14.5% annual returns for 10 years. Wrong camera. right now. Why wouldn't I be? 14.5% annual returns for 10 years. Wrong camera. I'm just saying, I think it's, I'm just surprised like JP Morgan asset management. It was aggressive. All right, what do you got? It was super aggressive. I got an interesting question from a prospective client of one of our advisors, I think two days ago, over the phone. And I thought I gave a good answer, but I wanted to hear how you would have answered this.

So he said, I completely understand that the market and the economy are not the same thing. I also understand that overall levels of debt grow with the economy, commensurate. But? But the national debt as of the end of 2018 is $22 trillion. It's a hundred and- That's a big number. It's 106% of the US economy. And it's the biggest of all time.

And he's like, so in the short term, I understand markets are going to do whatever they want. But what about as a long-term risk that that somehow blows up? Yeah. So here's what I said. I made two points. The first point I made- Wait, so you want to hear what I said or you want me to agree with what you said?

Well, I want to hear if you would have answered this differently. Go ahead. So the first point I made was that most of that debt we owe to ourselves. And actually, China has been a net seller of US treasuries for like six years now. And owing money to yourself is not as scary as owing money to creditors. But then the other thing, and I didn't have the data, but I just, I kind of, I had a rough idea. What are you peeking at? I'm peeking at something that I think is important.

From 1940 to 2018, government debt to GDP in the United States averaged 62%. So he kind of has a point. What's it today? I just told you, 106%. The all-time high, though, was 118% in 1946. Looks cheap. And the record low was 31% in 1981.

So my point was that forward stock returns aren't predicated on all-time record highs and lows of total indebtedness because we've seen good outcomes and bad outcomes on different debt levels. What would you have said? Disclaimer, I'm not a financial advisor, so this might not be a good answer. Okay. Fair enough. Come on. No, what would you have said? No, that would be my answer. What? What I said? No, come on. You would have said, come on, just shut up, bye. I mean, listen, there are always things to be worried about. You agree, though, that that's like a legit long-term concern for everyone, not just investors. Yeah. I mean, that's what Ray Dalio has been talking about calling for 1937 since 2011.

Because of total indebtedness? Yeah, that's what everybody's worried about. That's what all the billionaires are worried about. I understand. I don't think it's an unreasonable worry. But what can you do about it? I don't think that it should dictate how- By the way, that's debt to GDP.

I don't think that that should dictate how you invest today. Okay. And then the other thing that subsequently I should have talked about, Japan is 250% debt to GDP. I mean, you should always build a portfolio that's mindful of the risks involved in the market, right? Then this is just one of the risks. Okay. Google Finance. So Google is partnering with Citigroup and was it like a Stanford checking union to get into checking accounts? Yeah. Checking accounts are a shitty business. Well, so Apple just did it with Goldman Sachs. Well, they did a credit card. Checking accounts specifically are a shitty business. Nobody really makes money on

them. Hold on. Here's a question. Is this a trend that is going in one direction? In other words, the giant technology companies disrupting finance. In 2015... Wait, hold on. One last point. It almost feels like... So, Stars

sold their rights to Netflix for $25 million in 2000, whatever. And it basically, it let, it let them in. That was a Trojan horse. But now banks are just like, are they forced to let these tech companies in? Like, what do you think is going on with these businesses in the future of this? In 2015, um, Google announced a service where, um, Google users, like anyone that has a Gmail account basically, could compare quotes for various insurance products.

And within like nine months, they shut it down because nobody was asking for it and it wasn't really profitable. In 2011, Google launched Google Wallet. I know that there are a lot of people that maybe have stored their credit cards on Google. They still have, I think, 40 million users. They have a decent amount. No, they have a lot of users. But like, is that disrupting anyone?

Visa, MasterCard, American Express, all these stocks are making record highs. So I don't know that it's like a competition. I think people are storing their MasterCard and Visa in Google for use, which arguably is great for the credit card company. So what Google looks like they're doing, according to the reporting of the Wall Street Journal, is they're partnering with banks rather than trying to displace them. Which they can't right now.

Why would you want to? I guess, like, Google sells at 17 times earnings. They want to be a bank and sell at eight times earnings? Like, I don't even understand, like, why people would say that Google wants to be a bank. Google wants to be more tightly integrated into its users' lives. Are we going to see ads when we go online? I'm not. I bank with HSBC. So I'm not going to see Google ads. But I don't think it's all that meaningful. Why do you bank with HSBC? I need to know.

I don't think it's like all that meaningful. Why do you bank with HSBC? I need to know. Because my old office had an HSBC on the corner and my house where I live has an HSBC a few blocks away. There you have it. It was just easy. There you have it. All right.

And that's, by the way, that's how like 99% of people choose who they're going to bank with. Okay. You said something really interesting. We had Ben Hunt come in this week. If you haven't watched that video yet, went up yesterday. It was so good. And I think you were kind of making the point like Ben's opinions since he left the hedge fund he was working at seemed to be more volatile and louder.

And like there is a difference between selling an opinion versus working in finance. And I think when you work in the industry, your opinions in general will be less volatile and- Publicly. Well, publicly, right. The things that you put out in public, because you're not selling the opinion, you're selling your services. I thought that was really an interesting comment.

You see a lot of that. Well, I doubt that his personality has changed. I mean, he's not a young man. So I just think that now he's, to your point, he's selling his opinions. Right. And you have to be heard. Right.

And listen, that's his business. I think that he was much more even-keeled in person than he is online, which probably goes for a lot of people. Well, right.

That's the other component of it. He's selling his opinions online. Yeah. So I understand why he gets flamed a little bit, but I don't think that he's, like, unaware of what he's doing. I think he expects it. of what he's doing.

I think he expects it. I think he, wait, if you're going to be like a quote unquote public intellectual and your product is your opinion. You got to be there for the heat. You got to be there for the heat. You got to know that

that's like part of the reason why you're able to get an audience. And he is. Seems like it. And he is. Okay, what do you got? So stick with that. So Jamie Dimon.

All right, listen, this is a very complicated topic, right? It is. Seems like it. And he is. Okay, what do you got? So sticking with that. So Jamie Dimon. All right, listen, this is a very complicated topic, right? It is. Let's figure it out in two minutes. Yeah, somebody said to me last night, well, and this, you know, it's a point that JP Morgan did $240 billion in earnings since he became CEO. He captured 0.004% of it. Is that reasonable? I don't know.

Referring to his pay package. It just seems like him getting over $1 billion worth of JP Morgan stock, it seems a bit excessive. And I don't know how you legislate this. I'm not saying that $700 million is appropriate. I don't know. But you think that, I mean... No, it's totally excessive. But compared to what? Well, I know. That's the world we, I know that's the world we're in. That's the world we're in. And that's the going rate for the top bank CEO in the world. You want them or you don't want them?

Because someone will give them that. You know, in other words, you know how we talk about the going rate is. I mean, that is. Do we think LeBron? Do we think LeBron is worth what the Lakers did that deal for? There is one LeBron James in the world. There are. There are at least- There's one Jamie Dimon.

No, there's not. Why? Who's as good? I don't know. I don't know. But come on. LeBron James is a world-class athlete. There are one of them.

Do you know how many large US bank CEOs are still running large banks and were prior to the crisis? Zero. He did a great job. How do we know that it wasn't his- Zero. How do we know that it wasn't his lieutenants and were prior to the crisis? Zero. He did a great job. How do we know that it wasn't his lieutenants and employees that also are responsible? Of course it is. But we agree, of course it is. It's not one person doing everything.

So I don't want to pick on Jamie Dimon. Jamie Dimon would tell you that. I just think that CEO pay in general has gotten so, so, so out of control. There was a great book a few years ago called The CEO Pay Machine. Barry had the author on his podcast. It's just gotten, it has become totally outrageous. I'm not disagreeing. The average CEO is making hundreds of times, in S&P 500, the average CEO is making hundreds of times what the average mid-level or low-level employee at the company they run. We all agree that that number has multiplied exponentially since the 1960s and 70s. I'm just pointing out, that's now the world we live in.

And if the board at JPMorgan Chase wanted to push back, who's to say Wells Fargo wouldn't just say, you know what, we're trying to orchestrate a turnaround. It would look incredible if we could recruit Jamie Dimon. I get it. So that's the world. I'm not saying like he's worth every dollar. I'm saying it's a relative world. All right.

This is what I want to ask you about. And I have to read this very quick. This is from the Bank of America Merrill Lynch fund manager survey. Ah, surveys. All right. Recession concerns vanish. Net 6% of those polled expect a stronger global economy in the next year, up 43 percentage points.

That's so weird. What changed? From last month. What changed? It's the biggest month-on-month jump on record. So the only thing that changed is price. Stock market hit a record high. And a lot of markets around the world started hitting highs too. Biggest month on month jump on record. So the only thing that changed is price. Stock market hit a record high.

And a lot of markets around the world started hitting highs too. So in late summer, we were talking about inverting yield curve and recession. It's either next month or in six months, but it's happening. You have a question for me? Well, that would argue for technicals being better than economic opinions if you're going to pay attention to something. Because it seems to me that— That's a big statement. The economic opinions are following price.

Well, of course they are. What do you mean, of course they are? I'd rather follow price and economic opinions. Okay, so that's what I'm saying. Okay. Isn't that a great argument for that concept? Price over economic opinions? Yes.

Because we don't think price follows economic opinions, do we? Of course not. Right. So if you're going to pay a lot of attention to something, I would just focus on what people are doing, not what people are saying. That's like my big takeaway. Profound. Okay.

Hey, let us know what you think. No, wait. No, wait. No, wait. We have more? I'm ending. Okay. I have the last one.

Did you download and explore Disney Plus last night? Yes. Did you watch The Mandalorian? No. I watched. I have my last one. Did you download and explore Disney Plus last night? Yes. Did you watch The Mandalorian? No, I watched Frozen. No, I literally did. The Mandalorian? Is it good? Quite good.

Okay. Let me watch that and then we'll talk about it. Just one episode at a time. They're not doing the Netflix binge thing. I'm fine with that. I like it. That's how I watch TV. I like it.

All right. Let us know what your thoughts are. Leave us a comment. Make sure you're subscribed to the channel and we will talk to you soon. I'm fine with that. I like it. I like it. That's how I watch TV. I like it. I like it. All right. Let us know what your thoughts are. Leave us a comment. Make sure you're subscribed to the channel, and we will talk to you soon.