The Compound and Friends - Live from MarketWatch

Episode Date: September 23, 2022

On episode 63 of The Compound and Friends, Joy Wiltermuth, Michael Batnick and Downtown Josh Brown discuss Future Proof, the housing landscape, Jay Powell and the Fed, the yield curve, recession fears, and much more! This episode was recorded in front of a live audience at MarketWatch's Best New Ideas in Money Festival on 9/22/22. Thanks to our friends at Groundfloor for sponsoring this episode. Groundfloor is an award-winning wealth-tech platform offering high-yield, short-term, real estate debt investments directly to the general public. Learn more at: https://groundfloor.us/ Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com 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/disclosures/ Inclusion of advertisements by podcast sponsors 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: https://abnormalreturns.us5.list-manage.com/track/click?u=f8843b0fc6f0ed7d35e67dcf5&id=33b07916d1&e=4e0f612ef0. Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi, everyone. I'm downtown Josh Brown. No, you're not also that. You're your own thing. Hi, I'm Michael. All right, guys, we have a very special episode today. We are going to leave the studio and do a live version of The Compound and Friends with our friends at MarketWatch. We'll be sitting with Joy Wiltermuth, who covers markets and housing and interest rates and all sorts of other things for MarketWatch.

And we will be appearing at this event shortly after Ray, do you know Ray Dalio appeared there? Did he? Yeah. And I think, and Carl Icahn. And they had a lot of good speakers, our friend Perth. And we are not the closing event, but we're toward the end of the festival. We're like the penultimate.

We're the penultimate event at the, anyway, we're going to have a lot of fun. We're actually about to head over there right now. Wanted to give a quick shout out to our sponsor before we do. Ground floor. Good. You're doing great. Thank you. Is an award-winning wealth tech platform offering high yield, short-term real estate debt investments directly to the general public. They have 200,000 people on the platform, $800 million in investments. Check them out at groundfloor.com. Everybody visit our sponsor, groundfloor.com. We will see you at the MarketWatch Festival of Big Ideas.

What is it called? All right. Goodbye. We'll see you later. Welcome to The Compound and Friends. All opinions expressed by me, Michael Batnick, and our castmates are solely our 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. We are very excited to be here. We are MarketWatch fans. We read a lot of the content at MarketWatch. And when they asked us, would you like to come do something at the festival, the first thing we could think of is let's do the podcast. So the podcast is called The Compound and Friends. This is a special edition. It's episode 63.

We started in the summer of 2021. And the whole idea was let's stop with the Zooms. Let's stop with the Google Meets. Let's actually get people who care about markets and investing in trading into a room together. And let's try to talk to each other. And so far, so good. Would you say, like, overall, the format, people seem to like it? They love it.

OK, what's going on? Is the market crashing while I'm talking? OK. All right. Anyway, this is episode 63. And for those listening who are not here, we are live at the MarketWatch Best New Ideas in Money Festival. Did anyone hear any good ideas recently besides sell? Are there any other good ideas?

And in a surprise twist, Michael and I are actually going to be turning the hosting of today's episode over to Joy, and we're going to basically do the show inside out. episode over to Joy, and we're going to basically do the show inside out. So Joy, you're going to take it away and lead us through this, and we'll see where we go. So you guys are in the hot seat this time. Sort of, but we're going to put you right back in the hot seat. Well, we'll see about it, how it goes. Okay. So the first thing I want to talk about and hear more about is that I'm reading you're the cool kids of finance. You just had the festival that you did. Oh, cool kids. The cool kids.

Okay. Josh is almost 50. I don't know about kids. The cool guys. Maybe the cool guys of finance. Yeah. But tell me about it. You know, I wasn't there. Was it like shamanistic?

Yeah, so somebody was saying it's like Burning Man for finance. Yeah. So then I said, earning man. So the idea was like doubling down on what I was talking about before. I think people working in finance have been living through this kind of dispersion. Everyone's working on their own. They're working in an office above a garage or in their dining room or in their basement. And every once in a while, it's nice to see each other.

So even if we're all spread out, there should be a reason for people to get together. So the idea was, let's give people a really good reason to get back together. Let's assemble some really great panels and speakers. And then let's make the setting something desirable, something that's not the Intercontinental Hotel, which is what a lot of financial advisor conferences are. So the risk was the weather. Thankfully, the weather didn't let us down. And the feedback seems to be pretty good. We had 2,200 people registered and about 1,000 were financial advisors. So it was a lot, but mission accomplished so far. In terms of content and learning and all that good stuff, everything that an advisor

wants to know is widely available on the internet or podcasts or whatever. The reason why financial advisors choose to leave their families and go to a conference is to meet people and to network. And that's always the best part every single time. Unfortunately, there's never like a dedicated, I mean, it's like a happy hour, right? At the end of the day, whatever, fine. But oftentimes you're with your friends, you're in the backstage or you're sitting or you're standing and you're whispering. And we just said, why not just lean into the best part of it, which is the networking. And so it wasn't that we were like issuing like the content, like we were certainly taking care of that as well, but it was all outdoors.

It was nothing but meeting people and it went by and it was like a blur. It was like four days. It was four days. You can talk about Tesla. It felt like four minutes. It went really quickly. And you had art? There were a thousand.

Tons. There were a thousand conferences a year pre-pandemic that people went to to obtain continuing education credits. So if you work as a financial planner, for example, or you're a CFA charterholder, you have like an annual requirement of earning these credits. So the whole premise of so many conferences, regional events, financial planners events, is that, oh, people can come here and earn credits in a regional. And there's nothing wrong with that. But we learned a lot during the pandemic. What we learned during the pandemic is that a lot of things don't need to be done in person.

And so if you're throwing an event in the year of our Lord 2022, and the premise is people will come to earn CE credits, you're probably going to have a rude awakening. So why will people come, to Mike's point, is really one reason. Exchanging ideas with your peers and colleagues and learning from people and sharing the experience. And, Joy, you mentioned, like, can we talk about Tesla for four days?

We didn't talk about Tesla for one minute. Yeah. Like, the word community has become, become like grossly cliche and overused. But I think the financial advisor community is generally tight-knit and people are there to meet each other, meet new friends, see your old friends. It's been a long time. Yeah. Like it's been a long time since we all got together.

And I don't think I spoke about the stock market maybe once or twice other than being on stage talking about it. Yeah. Yeah. This is my first time going anywhere for work for three years. Okay. Literally.

I mean, outside, traveling. New York City, not a bad place to go? Not bad to come back. Okay. So what were people talking about? What are they worried about? Are they worried about

like a housing market correction crash? What was the number one thing people were asking? So we had a thousand financial advisors there and the median age or the average age of an F of an FA was 35 years old.

Yeah. That's ridiculous. When you understand how old our industry is on average. So Jeff Gundlach did like an hour on stage and scared the shit out of everyone. Scared the shit out of everyone. And then like some kid. He was very doomy. Some kid like asked a question

through the app, like the Slido app and was like, what advice do you have for a 35-year-old financial advisor? And he said something like, good luck.

That sounds like when I got out of journalism school. Wait, what did he say? Oh, he said, God bless. But to that, again,

just to beat this dead horse one more time, we were there on Tuesday after the CPI report and the market was down, the Dow was down a thousand points. Yeah. Nobody gave a shit. Not that we, of course we, we give lots of shits, but on that particular day, like nobody was talking about it. Right.

So they, they talked about it later when they got home. Okay. I suppose. Shall we talk about housing? Yeah. Can we? Please. I mean, what do you, what do you, what is everybody saying?

Are they worried in New York? What are you worried about here? You should be, you should be worried. If you're worried about housing, you're can we? Please. I mean, what is everybody saying? Are they worried in New York? What are you worried about here? You should be. If you're worried about housing, you're worried about the right thing. That's the thing. So forget about just the home price or the value of your home. There's a huge multiplier effect from housing that I think people appreciate, but maybe don't understand the extent of how big it is. It's been estimated anywhere from 15% to 18% of the US economy has something to do with housing. So not just the buying and selling of the value of the house, which is obviously large dollar amounts, but lending, supplies, renovation, legal work, building materials. It's really important to the economy. I mean, not to overstate it. It's like

probably close to a fifth of the economy. And to the economy. I mean, not to overstate it. It's like probably close to a fifth of the economy. And to the banks. And to all the financial institutions as well. So if you're worried about housing, you're probably worried about the right thing. But one of the points that we try to make with people who have lived through the housing, the actual housing crash, is that the fundamentals of the housing market are extremely different this time around. We know empirically average FICO scores are much higher. We know the loans are much higher quality. We know we don't have this whole layer of shady mortgage lenders in the mix. There's been a lot done on regulation to keep that from happening. We know incomes are high.

We know the labor market is tight. We know people's personal balance sheets are better than they were then. So you really don't, oh, and scarcity of homes is probably the thing that the only saving grace of 6.5% mortgages is that you've got an inventory that's so tight that so far we've seen it go from three months to six months. That doesn't magically go to five years worth of inventory on the market. It would be very tough to see that happen. Let's walk through some charts to put some meat on the bones of what Josh was saying. John, we have these? What are we looking at here? Is this the, okay, there we are. Perfect. All right. So this chart comes from Bill McBride, and what it's showing is the year-over-year change

in new home sales versus recessions. Now, you almost have to put an asterisk, not almost, you have to put an asterisk next to everything post-COVID, because never in the history of economics or our society have we turned the economy off and then turned it back on again. Okay. With that said, every time you have had a 20% decline in new home sales, a recession was not far behind that. And we just got data this morning from Redfin showing that luxury home sales had their biggest decline on record. Not just luxury home sales, non-luxury

home sales are almost the biggest decline. Again, the asterisk here is that look at the level at which they're coming from. So, of course, with the enormous spike that we saw in 2020, of course, you're going to see some weakness. You keep hearing the same word over and over again, and I think you should, which is normalization. That's like this chart in a nutshell. It's not that what's going on now is aberrant. Home prices falling while rates go up is actually fairly standard. The aberration was two years ago when real estate became the national pastime. And I think the top of the market truly

was the SNL skit where they had Zillow almost like pornography. It was a great skit. And I think they really put their finger on what the zeitgeist was. There was nothing else to do except look at how much better your neighbor's house was and fantasize about, because we were all trapped inside these four walls. So that was the aberration. This is the return to normal or the normalization. And unfortunately, we don't really ever get back to normal. It's always a pendulum that swings too far in both directions. John, next chart, please. So this is some of the luxury markets that have been particularly hitting. You probably can't see it. It's really small. But what we're showing is

Oakland, San Jose, Miami, San Diego, Seattle, all the biggest markets. And the home sales, the homes sold year over year, it's down 64%. I mean, these are crashing. And the reason is very obvious, right? The bid-ask spread between buyers and sellers is massive because sellers are obviously anchored. Oh shit, I can't believe I missed 2021's window. They're anchored to a price that's not real anymore. And the buyers are like, well, I'm not paying. First of all, I can't afford to pay that rate, right? Obviously, like with 6% mortgages, I can't afford it pay that rate, right? Obviously, like with the 6% mortgage, I can't afford it. You're on smoke and dust or something.

Like, so the gap is enormous. So at the same time where you have a 64% decline in homes sold, you still have the median sales price. Now, these are luxury homes in Oakland at $3 million, in San Jose at $4.9 million. So again, yes, the sales are slowing down, but we're about to be like an ice age of housing. Joy, don't you think one of these has to give, though?

Like, if you take Miami, the number of homes sold. These are luxury, by the way. Yeah. So the number of Miami mansions or, you know, super lux condos sold is down 55%, but the price is still up 27% year over year. Right. If you want to clear that market, like, something has to give. And it's probably not going to be a flood of new buyers. It's probably going to have to be price.

Well, and the other thing, too, you know, just mentioning going back to the 35 is the average age. So we're talking about these numbers and who's paying $3 million for a house in Miami. So, again, about finance in general, these are the numbers. But who can afford that house even back then? Again, maybe it's inventory in the hands of a few. Well, with a 30-year below 3%, it was maybe somewhat for a certain cohort. But we just saw 30-year mortgage rates double year over year. That has never happened, like literally ever. It has never happened. Now, the good news, to the extent that there is good news in the housing market, is that most people that want to own a home already have a mortgage. I was talking to Logan

Modishami, who's a housing expert, and he estimated that there's like 80 million homeowners, something along those lines, and there's four to five million people that are looking for a house. So maybe the math is wrong there, but at any given time, more than 80% of people that want to be in a home or are already in a home. So the massive impact of mortgage markets is not hurting everybody. Obviously, if you're a new home buyer, it's catastrophic. But Joy, you were talking about in the doc, what's the difference between this and the previous housing bubble? Because you see Case-Shiller housing prices are at beyond that all-time high. They went vertical. The difference is that mortgage originations by credit score, John, chart on, please,

are fabulous. Now, assuming that the rating agencies aren't playing games, these are very, very, very qualified buyers. So wait, let's slow down and give people an idea of what this is. So the light blue bars are credit scores of 760 and above. Yes. And that is representing billions of dollars worth of mortgages. So if you, how far does this go back? So in 03, leading up to the housing bubble. You could see that going low, trending downward for years. There are no subprime buyers right now, virtually.

So people with credit scores below 620 was a decent chunk of buyers. The next cohort, so the bottom rung, these people are high earners and they can service the debt. And that is shown in the next chart. John, please chart on. Again, this is the same thing. It's just a little bit cleaner. You're looking at the credit score at origination of the 50th percentile right now for mortgage origination is, call it like 770 or something. In 05 and 06, it was low 700. So the quality of the borrower, there's no houses that are underwater. It is absolutely catastrophic for new buyers. I'm not trying to minimize it. But people that bought a home in the previous 24 months are absolutely fine. Leave this up.

Like, Joy, wouldn't you say that there are people who would look at this chart as a negative? Because basically, half of the housing market is only going to people with the best credit scores. And how do you, like, what does this do to society if this continues this way for a really long time? Nobody else gets a shot to become a trustworthy borrower. Absolutely. Building wealth. You know, number one stepping stone in this country is property, owning property, generational wealth.

And there's definitely a significant part of the credit scores is leaving a lot of people out. So does that sort of destabilize everything? Well, the ugly part of this chart that is not shown is that the other side of this are renters. And renters are being hit with 19% increases and above in rent. So people that can afford a home obviously are okay. But to your point... Well, and sometimes competing against institutional landlords as well, right?

Like I was covering housing right after 08, and you saw them raising funds, and some of them public funds that they've turned out. And in some cities, it's more exaggerated than other cities. But imagine you want to put 20% down, you know, to get a fair shake on your mortgage, or best shake on your mortgage a year ago, but you're competing against somebody who's old cash or they've got financing from Wall Street

at 3%, lower than whatever your mortgage rate is going to be. So that's another huge dynamic that we didn't have in the 08 crash. So I guess the pro and con of that is that did help stabilize some of these really hard hit markets is like just having somebody come in, no contingency, no delay, we'll just take it. But then the negative is they don't leave and they make some money and they want to stick around. But I think it's a small part of the market, right? Like the private equity. So nationally, iBuyers, which got a lot of, not just iBuyers, institutional buyers, I should say, the BlackRock's of the world, which got a lot of attention and a lot of hate. It's very, very small, but it's ramping up.

So the hate will grow for sure. But regionally, like in certain cities, they're big players. So if you are in that city, you don't care about the national number. Like you're being priced out. And so it's not great. And I just think that the housing market is going to just sort of seize up because even people that are not affected by mortgage rates, all cash buyers for the luxury homes, they're not buying these houses right now because they see that home prices have to and probably

should come down and are coming down. One of the things about inflation in general, I was talking to an older guy who was saying, who remembers the early 80s. And he said, you know, my parents' generation, who were already old during that inflation, people said, wow, that must have been such a nightmare. He says, the reality is, if you already bought your home and you already put your kids through college, arguably, you're in a place in life where you can hunker down and lower expenses much more easily than everyone else. At the same time, you're probably the generation that has the most money in savings, and you're making the most in

interest. So it's not that anybody roots for high inflation, but there is a generation in this country where the big expenses of their life are already beyond them. And they do have a lot of cash. And they have historically been afraid to invest it. Now they don't have to invest it. They can earn a high yield. And they really don't have these kinds of massive purchases to sweat over how they're going to finance them.

So I think the way that we're going to be talking about things like mortgages and inflation, and it's going to be very different for very different people. It's not one of these things that impacts all of us equally. So what do you want your listeners, podcasts, to get away, to hear from you guys, learn from you guys? You know, when I'm thinking about finance, you mentioned the conferences. It's a lot of, and I've been going for a number of years, it's a lot of the same looking guy went to Ivy League school, Wall Street, this chart and look at that. But we are trying to reach more people. They've got

questions about finance. They want to know how to build wealth. What is your big goal, objective with this podcast? There's a big difference between what we're doing with the podcast, which is we're talking to our friends. First of all, we're having fun. We're trying to entertain the audience and educate them, of course. But doing like current market commentary, which is what we're talking about, is very, very different than financial advice and building wealth long term. Like what we're talking about really doesn't matter to somebody who's 27 years old and has decades ahead of them. You should not be necessarily worried in terms of your portfolio about what

is going to happen in the next 12 months because you are thinking so much further past that. It's so funny. Arguably, the environment from 2017 through 2020, through 2021, through 2020 through 2021 works against younger investors. So even though it's been framed as like this amazing liberating moment where everybody got a Robinhood account and learned how to trade and learn how to invest, it works against younger, newer investors in so many different ways. One of the first ways in which it does that is it presents investing as entertainment or sport. And if done properly, obviously it's not. The second thing it does is it gives people really unrealistic return expectations. The third thing it does is it teaches you all of the wrong lessons about risk-taking and security selection.

election. So there was, I remember a moment talking to Michael in 21, where it's like, what the stocks that were leading the market were also the most popular brands with consumers. So you would see like DraftKings being the best performing stock, and that would be followed by Tesla, and that would be followed by Peloton. And so what are all these stocks have in common is a first time investor who just started knows all of these companies and knows these brands better than any other. That's not how it's supposed to work. It's not how historically it's ever worked, but it did work really well in most of 2020 and 2021.

It was very intuitive. It's like, what's my favorite company? Apple. Okay, just buy it. And you wouldn't have to worry about valuation. So that period of time, I think, it did some good, but it did a lot of damage. Well, the other bad thing that happens about those periods of time is you know that it ends badly. And when it ends badly, oftentimes young people can feel very disenchanted that the market is rigged. And I'm not saying that they're never coming back, but you understand that sentiment of people feeling burned like their first time out. And so I think one of the other things that we try and do

with this podcast is provide content and clarity. And sometimes I've never been more confused, because you've got this parade of bad news all over the place. The stock market sure seems to think a recession is coming. The bond market thinks a recession is coming. And then you look at the consumer and you look at things like actual data, and we're not there yet. So it kind of seems like there's a slow motion recession that everybody knows is coming, but it has failed to show up in the data yet.

And certain areas like housing, obviously, is maybe flashing a bright red failed to show up in the data yet. And certain areas like housing, obviously, is maybe flashing a bright red. But John, chart on, please. If you look at transitions into delinquency of things like student loan, we can maybe take out of this because of the moratorium. But auto loans, credit card loans, mortgages, people are paying their bills. And it's not to say that they're not being impacted by inflation. Of course they are. You're just not seeing the sort of things that you would expect to see before recession. You're not really seeing credit spreads blow out. You're seeing a lot of the stock market is anticipating recession.

How much of this people paying their bills thing can be attributed to the fact that a lot of people got raises? Not like people I know. that a lot of people got raises. Not like people I know, like empirically, people in America are being paid more, being appreciated more by employers. State and local governments are paying more as well. Like a lot of the labor force is just being treated differently now than they were pre-pandemic. And not just rich people. In terms of comp. Wage gains, I was going to say. I think maybe you were going to say that. Wage gains in the bottom decile are better than in the top decile. So between that, between stimulus checks, we spoke about this a lot last year that the consumer was never better prepared if a recession were to pass.

And same thing with the corporation. And so not only are you not seeing it in consumers yet, I'm not saying it's not going to show up. I do think we're probably going through a recession. But you're also not seeing it yet in earnings. We keep seeing record earnings and record retail sales and not just nominal, real as well. And so it's sort of weird that the data just does not seem to be cooperating

with the prevailing narrative. And it might show up. It probably will, right? You're seeing warnings for FedEx, but then you say, hey, wait a minute. For every FedEx and Walmart that are warning, you see Ralph Lauren and Cody and companies in the consumer sector

that are saying, Visa, they don't see anything. They don't see any sign of stress. And so there's just so many cross messages that it's really, really confusing. Confusing. I was going to say, try to go get a lipstick at Sephora in New York City and Times Square. They're out. And it's not like something small. That's some of it's like fifty five dollars

or two. It's not a small thing. I have like a controversial opinion that I don't think you can have a recession without job loss. We're still we still have job growth. So you could feel recessionary. And on an industry by industry basis, you can have a regional recession. You could have an industry-specific recession. It's not really a recession. It's just a slowdown. Like, relax. Everyone's so dramatic. But I really don't think you could. You can't have a recession if people still have their jobs and have no problem getting their next job. So I don't care what the NBER says or two quarters of contracting. If people don't get fired, then it's not a recession. So I know that's controversial, but like—

Are you kidding? What? That's not controversial. You can't have a recession with jobs at 4%. Of course you can. Well, if you're political and you're anti-Joe Biden, you're saying it's already a recession. You can't have a recession with full employment. I agree with that.

We might get one. I agree with that. So we got initial jobless claims today, and they're not taking higher yet. If we do get into a recession, obviously people get laid off. That's what a recession is. People lose their jobs. No one here, though. No one here.

But again, getting back to the health of the consumer, John, one more chart, please. This is third-party collections. The consumer is in good shape. Listen, I know what the newspapers are saying. Wait, what is it? And I see the headlines. What's the headline? What we're looking at is percent of consumers with collection from third parties.

Right? People will knock on your door and say, you owe us money. $900 is what, the average? But if you look at the percent on the left axis, the percent of consumers with collection, nobody is behind on their bills. I want to say nobody. I mean, just the data. I know there are people out there, unfortunately.

But the data is saying that the consumer is in good shape. Right. That's the next shoe to drop. Fine. So what are the cracks that we have to look for? Are there cracks? It's not consumer credit maybe yet. But what are you watching?

Well, don't watch employment because that'll be where you see it last, right? So as much as we can emphatically say that if employment holds up, you can't have a recession, it's one of the last most laggy of all of the indicators. So that's not the place to look. I think the highest frequency economic data and probably the leading edge is credit card and debit card spending. So if you had to pick one thing to keep an eye on. And Amex has a headline this week that they're hiring 1,500 people. I know it's frustrating.

People are like, can we just have the recession already? I've been worrying about it for a year. Can we just make it official? I mean, we could say there are pockets of the economy that undoubtedly aren't in a recession. Right? Housing is in a recession. And there are some areas of tech that are in a recession. But it's not, the economy is not one thing.

I think if you are in the business of selling digital tokens to the public. You're in a recession right now. Like, that's your own personal recession. Like, all of these little things don't add up to mean it's an overall recession. And I think that's what frustrates people. People don't like any economic narrative that doesn't align with what they personally feel in their own life. They hate it so much. And as a result, they pick and choose what to believe in as a result of, does it align with how I personally feel? And I forget which economist said this, but

they say that a recession is when your neighbor loses his job and a depression is when you lose yours. Like there is a lot of truth to that mentality. And so when you listen to people and their point of view, try to like picture in your mind where they're coming from. So it sounds like a lot of uncertainty, the data, the economic data, where are we going in recession here, there, your neighbor or not me. When is it going to be me? But you're down. If you're in the stock market, you're probably most likely down this year. And also, if you're in bonds, you're also down.

If you're in anything other than oil refineries, you're down. So what do you do, though? So the stock market, I think, is adding to the confusion. Because the stock market looks so bad. Every stock that worked in 2021, I mean, I was looking earlier today, like Stitch Fix and Peloton are like literally down 95%. Are those in the Dow? Stitch Fix had a market cap of 11 billion. It's under 500 million. I think Peloton went from like 50 billion to three. So the stock market is also confirming what people suspect is that we're going through a recession.

However, the stock market is maybe just normalizing. Normalizing off of the fact that interest rates were at 0% for a decade, and that maybe, just maybe, $100 billion companies should not sell for 75 times sales. And so you're seeing this multiple compression. You're not seeing earnings slow down, but you're looking at the price. And the price is telling you that things are getting much worse,

when in reality, the economy, again, is not, yes, yet worsening, at least significantly. We just were talking about Netflix today. Netflix was $700 a share. It was selling 60 times earnings, and everybody wanted to own it. Now it's $235. It's selling at 20 times earnings. Nobody wants to even talk about it. NVIDIA went from an $800 billion market cap to $300. It lost $500 billion worth of market cap that probably it shouldn't have had in the first place. Well, so what do you think? I know you talked about earnings on a prior podcast, but expectations.

Do you think it's going to be ugly quarter ahead or are we going to be surprised? Expectations are in the toilet. Ryan Dietrich tweeted today that the average AAII bear, like the bull bear thing from the American Association of Individual Investors, is above 60% are bears for only the fifth time in history. People are super, super bears. It's like the most obvious way to be, though, right now. How could you be bullish? How could you be bullish? Like, how could you?

What are you, an idiot? How could you be bullish? And so, but however, like I said, tongue in cheek, but usually, and again, like the pandemic, like forget usually, right? The pandemic like ruined everything. But historically, when everyone is expecting a recession, a bear market, especially when you're already in one, the forward prospects for better returns usually transpire, even

if there is oftentimes more pain to go. We have a colleague, Ben Carlson, who writes at A Wealth of Common Sense. And there's so much talk about recession yesterday that I kind of had to like go back and all right, let's say it is. And a quarter from now, we go back and we say, yes, the actual recession could be officially dated to September of 2022. Okay. It's very conceivable. I'm not fighting that. Vanguard's chief economist says 65% chance of recession. He's not writing for clicks. He doesn't give a shit. He's not on Twitter.

So reasonable people are now saying two-third chance of recession. OK, great. So what does that really mean, though, for investors? So here are the numbers. The average stock market correction, drawdown, whatever you want to call it, during recession, back to World War II, how bad do you think it is? Take a guess. And if you know the answer, this doesn't work. 30%. I don't know. 30. Look at you. Give her a raise. It's 31%. So that's the average. So it could be worse, of course, but it also could be

better. And that's every recession back to World War II. But more important to Michael's point is what happens after. So let's assume either we're on the cusp of a recession or we're in it. First of all, we're already down 20%, the S&P. So we're not starting from zero. We're already on the way toward a negative 30% return, let's say. Coming out of recession, one year, three year, five year, 10 year number, the one year is 21% return, which for any other one year period does not look anywhere near as good. So coming out of the recession is like being a coiled spring. The three year number is 48%, right? The five-year numbers are double. And 10 years after every recession, on average, after 10 years, you're up 256%. So what are the implications of

me saying it's a recession or not saying it's a recession, or maybe it's a recession? The stakes are very low at this point in time. We're not at record highs. Stocks are not at record valuations. We are all in this room highly aware and acutely sensitive to all of the problems currently plaguing us. And yes, of course, they could get worse. But the stock market is doing its job. The NASDAQ's down 30% from its highs. We know.

It knows. Things might get bad. And no disrespect to anyone that spoke here this week or that speaks anywhere publicly, this recitation of the litany of all the negatives takes very little effort. I could do it too. I could get on stage and say, here's how bad everything is. OK, we get it. But I think to survive in this industry, you have to be able to do both. You have to be able to say, yes, there are risks, and I want to build a portfolio that acknowledges what those risks are. But why am I even doing this if I think it's all risk?

There's got to be some benefit to why people are willing to take these risks. And that's harder to do than just listing all the bad stuff. So let's talk about something really bad. Crypto. Bad for who? Bad for if you were invested. Good for if you're selling the naming rights to a stadium. Bad for me.

I bought too much. You did. Michael. But do you agree or disagree? Nassim Tilly, he was recently the Black Swan author. He recently called on CNBC. He said lowering interest rates, they overshot, the Fed overshot, right? Yeah.

And he said that creating bubbles, hedge funds that wouldn't have existed before have existed. And now we've got to normalize. But he called things like Bitcoin creating tumors, a tumor. He called it a tumor. Yeah. That's very aggressive. I'm not like Bitcoin guy. I understand that there will be technologies that end up becoming really important that I will not be the visionary that sees it coming. And I accept that crypto might be one of those. There's no proof of it, but I accept that that could happen. But that's about as negative as I get I'm not sure like there are people who their entire livelihood is in building things for

digital assets and I think to like say to those people you're you're a tumor I think it's like very I understand his point I'm just this is very harsh I guess I agree with him I'm only kidding so maybe he was picking on crypto a little bit, but you know, it was pretty easy to make money in the market, whatever you were invested in. There were bubbles everywhere. There were bubbles everywhere. It's undeniable. And in real time, somebody that knows nothing about a financial market, they know that when the dumbest kid in their neighborhood makes $7 million by accident, that it's a bubble. Like, you don't have to be a financial expert to know that there shouldn't be 12-year-olds trading baseball cards for millions of dollars. Like, that's not sustainable. It wasn't just crypto.

I was joking on the podcast Animal Spirits with Ben today that in 2021, Dennis Schroeder, who's like a very average basketball player, probably below average, turned down an $84 million contract offer in 2021. In 2022, he agreed to a $2 million contract. So to the extent that there was speculation and nonsense, and there was a lot of nonsense, it was everywhere. It wasn't just crypto. It wasn't just SPACs. It was sports. It was everything. So what about the guys that got the contracts and agreed to be paid in crypto? What that that was we were like that wasn't that wasn't as big as uh as maybe people were led to believe i think it's the mayor of new york is being paid in bitcoin he got what he got he got a paycheck in bitcoin no i think that's like still what he stopped i don't know does anyone know

it was a paycheck and then he only reads the headlines he only reads the headlines it was just all right okay okay so it's kind of made up it was a small. See, he only reads the headlines. He only reads the headlines. It was just a paycheck. Okay. Okay, so it was kind of made up. It was a small thing. Which is weird because nightclubs don't take Bitcoin. So I don't even know what that was all about. Listen, there's a guy on the Nets who was very early to crypto.

Dinwiddie? Dinwiddie. I think there's a lot of cross-pollination between professional athletes and venture capitalists now, maybe more so than ever. And I think a lot of them are influenced by the venture capital ideal of taking risks and building things. So I think on balance, it's positive. But did some people take it too far? Yeah. What else is, you know, what is what? Like,

this is what happens in financial markets. At peak popularity, people get carried away. So hopefully we're seeing some version of that now to the downside. You guys want to talk about the office, real estate, commercial real estate? Yes. Okay. So you got, you're back to the office. You're adamant about it. We're back. I'm one day, I'm about it. I'm one day a week-ish. Every company's figuring it out. If you're a banker and that's your job, making loans on office buildings, you're not making them. Maybe a couple,

but not much. And you've got stuff coming due. Are you worried about that? Are you worried about cracks in commercial real estate? It was residential real estate and some commercial real estate in 08. But are you worried about that? Also, our lives change. I don't know what percentage of the New York City real estate is on 10-year leases. So I don't know how that is manifesting itself. Because we're

stuck on a lease. We would have loved to get out of it, but we can't. We signed it in 2018 or whenever we did. So we were stuck. But Josh and I were talking the other day, paradoxically, will a recession be bullish for commercial real estate in cities across America? Because if people are worried about losing their job, they're going back to work. So I kind of believe that. I said it tongue in cheek, but then as I was saying it, I was like, actually, that sounds right. In an environment like 2021, by the way, 1,035 IPOs in a year, which is a record. And the dollar amount is a record also. And there were all sorts of other ancillary records being set for how many deals were more than a billion and how many were more than five billion. So add to that M&A, add to that

crypto. Last year was an environment in which you could stick up a middle finger to your boss if you worked in finance and the money was coming in. So like a lot of people were like, hey, you know what? Actually, I'm going to be in the Hamptons this summer. So this is just where I do my job from now. And all of our clients are out here, too. And if you don't, same thing, Miami, same thing. Like this is just this is where I work from now. and if you don't, same thing, Miami, same thing. Like this is just, this is where I work from now. You don't like it, I'll go to Barclays. You could do that last year.

In a recession, it's sing for your supper again and you want FaceTime with the boss and you want to be in the peripheral vision of the executives and you don't want to be on the list of 10% of people that lose a seven-figure salary. No one else is replacing that salary for you. So paradoxically, I was looking at a commercial real estate REIT in New York, office space REIT. The best thing that could happen for this company, assuming their own balance sheet is OK, is a recession, especially in finance, because then all of a sudden, you'll see the buildings

fill up with employees very quickly. I feel like Airbnb is a leading indicator for finance because Airbnb, the stock, uh, because they're like, if you looked at, um, their number of extended stays for like 28 days and longer, it was like obviously hockey stick in 2021. And I don't know if that's coming down, but I know the stock prices. So what about outside finance? It's obviously New York City, office buildings, getting back to the office, but also companies figured, and you guys thought about it, your lease, do we do it? Do we not? Do we negotiate? Do we get a better lease? Do we get better terms? Oh, there's no renegotiating. But big companies also figured out, hey, maybe we don't need our real estate. Maybe we're in

the Midwest and we've got a broker-dealer arm, but I can hire people and train them up for two months. That's been going on for a long time. Yeah. Goldman started building operations in New Jersey and then that wasn't far enough. So they went to Salt Lake City. This is decades in the making. It was always trending in this direction where client-facing personnel would need to be in cosmopolitan cities and desirable locations because everything is lunch and dinner and what country club you belong to and what gym you work out at. But you don't need 100% of your employees in that situation. So I think we've had some version of that. And maybe what the pandemic did was just accelerate a pre-existing trend. And even our firm, we're 54 people and more than half are located outside of New York.

And not because like deliberately we said, let's go do that. It's just, it's the nature of the world that we live in. It's just, you want talent, you want the best people. It really shouldn't matter where, what neighborhood they want to live in or what part of the country they want to live in, in today's day and age, right? So that's, that's just where things are. Well, and so maybe, you know, at the detriment for San Francisco and New York, in some case, you do have more opportunity in the middle of the flyover states or whatever, you know, for companies, and maybe that's good for the country. We'll see. Like, do people, do people like, these people that went from, people that went from Northern California to Boise, Idaho, do they wake up one day and like, wait, where am I?

No offense. Right? Like, so I don't, I was reading about Wall Street South, which is Miami. So the Brickell neighborhood, which now effectively is going to belong to Ken Griffin. They are not setting things up in such a way that they could change their mind. Like there are huge firms that have relocated permanently to Miami, to Nashville, Alliance Bernstein, Nashville. They are never, ever coming back. Nashville, Alliance Bernstein Nashville, they are never, ever coming back. So I don't know how much of this reverses and how much of this is just, yeah, back in the day, people used to work in New York or in San Francisco, and now they don't. And that's just like a thing that happens. I mean, it certainly has happened throughout history, so it could happen again. So what else, thinking about just like in the next six months,

where's a safe spot to be? Where's a good spot to be, an interesting spot to be in markets? The short end of the curve? Short end of the curve. Well, let me put it to you this way. A year, if we had this event, did you have this last year? It's the first year? Okay. If we had this event last year, we would be up here. I would be 10 pounds lighter. And we would say, one year treasury is yielding five basis points, effectively called zero. And the S&P 500 forward PE multiple is like 23 or 24. Okay. Fast forward a year, right? PE multiple for the S&P 500 is down by a quarter. Done a lot of work this year.

Earnings have not fallen apart, but multiples have. So that's one. Two, you could earn 4% on your cash right now. All right? A two-year treasury is 4. One year. 4.12. One year. One year is 4.

So think about how radically different the environment is from one year ago today to now. So let me ask you the question, Joy. Which is the more desirable investing environment? That one or this one? Well, people always want to make more money, right? Finish the thought. Come on. Come on. They don't want to lose it either. Finish the thought. Come on. They don't want to lose it either. What is the more desirable?

If you're an investor, you have a big cartoon bag of cash with a dollar sign on it. You show up now versus last year. You want to get the bargains. That's what everybody in 08, when they had a pile of cash, the people who won, which weren't individual investors, read generally. They had the pile of cash. They bought houses they bought up Cheap mortgage bonds that had a 5% coupon on them They loved that all day long for the next 10 years and they did great and they beat out their competition if they had money If they had liquidity at the time they made a gazillion. So here okay. So here's the here's the mental exercise then

Why doesn't it feel that way? Like, why aren't we all so fired up right now? Wait a minute. The market is selling for a quarter less than it was on an earnings basis. And that's the 60 part of my portfolio. The 40 part, I have free money, no risk, 4%. Why are we all sitting in the dark? No. Why are we all so unhappy? If you remember last year at this time, people were skateboarding down the street. People were

never more excited about the markets. And that's the paradox. And that's what makes investing. I don't care how long you're doing this, what firm you work for, or how little you know. For everyone, this universal thing is, it's always going to feel the best at the worst possible time. And it's always going to feel the worst at the best possible time. Morgan Housel said it better. He said every past- No, he didn't say it better. He said it differently. He said every past- What are you DMing with him right now?

Every previous crash feels like a risk and every crash in real time feels like a... What did I say? You're messing me up. Is that Twitter? Stop. Are you multitasking us? Texting my wife.

You know where I was going with that. Yeah, no. You get it. Okay. Okay, so nobody gets too excited about a treasury bond even if it's 4% and that's what they were like... Just couldn't scrape out of any other part of the market.

Listen, you were building a 60-40 portfolio last year. And when you described the benefit of the 40 to the client as an advisor, you had to like wink. It'd be like, this gives us optionality. You know, like this will come in handy. I don't know when. You ain't going to make any money on it, but it'll come in handy. It did, right? The 40, it did, unless you were in long duration bonds, a whole other conversation. But you don't have to do that anymore. Now, there is a function,

there is a purpose to a 60-40 portfolio on both sides of the aisle. And it has been a really long time since anyone's been able to say that, like 11 years. Finally, we have opportunity. It's been a long time. So back to Ryan Dietrich's stat about the bears being over 60%. The five previous times that happens, not a giant sample, but whatever. The average return for the S&P 500 one year later was 33%. So the quote that I butchered, I'll try it one more time. Every past crash feels like an opportunity, and every current crash feels like a crisis, right? We look back, oh my God, I could have bought Amazon 40%. You can do it right now.

Yeah. You can do it right now. 40%, right. It's all, as much as you want. And I don't want it. And I still don't want it. I still think it's going lower. I own it and I think it's going lower. You can get a better entry, but you get a better entry, but you get what I'm saying. Yes, absolutely. So hold tight. It's going to be all right. Not yet, not yet. Don't buy yet.

Anyway, so 30 minutes, buy and hold. Now, just appreciate the moment that you're in. It doesn't feel great, but the opportunities are presenting themselves now. You won't know it. You won't have proof of it. I mean, in 2021, if you missed 21, you definitely said to yourself, I will buy the next pullback. I will.

And here it is. You guys want to try to do questions? Yeah, why not? That's different. You haven't done it before. Do you guys have any questions? There's a hand back there in the dark. Is that Tim Cook?

Say who you are, where you're from. Hi, my name is Charles Henderson. Hi, Josh. I follow you regularly as a member of the committee and the other network, CNBC. Oh, okay. We deal off with Scott all the time. I think it was a few days ago you talked about a rip-off-your-face kind of a rally going into the... Spoiler.

We didn't have it. Unfortunately, we didn't. Didn't work. into the spoiler we didn't have it we unfortunately we didn't so i'm sorry so and you've been relatively bearish i guess in many respects and we you know those people that should have sold that didn't sell and here we are i thought i thought going into the fed meeting he was going to be very powell would be very hawkish um so jerome powell Powell, Jerome Powell is the guy that, Jerome Powell is like the guy that missed all of his homework assignments the whole year. And then as a treat for the teacher, the last day of school, he comes in and he's written a rock opera and he's going to perform it. Like it's, it's really. Josh is really mad at Jerome Powell because he thought stocks were

going to rally yesterday. He's very upset. No, no, no. My basic premise was that he was going to be really hawkish, but everyone knew that he would. He even outdid that. And by raising the terminal rate and forcing every Wall Street bank to change their assumptions to, oh, wait, 4.5 is not Q1, it's Q4, like it's now. That, to me, was where I said, all right, there ain't going to be no rally. Like, this is a totally different situation than I would have expected. But generally speaking, a bear market rally is an awesome rally if you can catch it. But if you anticipate it too frequently and they don't develop, it doesn't help you either. Yeah, so tightening into a slowdown

is an interesting strategy. Well, what did Ray Dalio say? You guys were here yesterday? Whatever he said is better than what I'm going to say. I think Ray's got a 20% decline, and he's probably not the only one. We just did that. But I guess, and you recently were recommending,

I think, short bonds, one of the ETFs, the SHY or whatever. That's what I would be doing right now. With money that you're unsure of, you think about a one to three year treasury yielding anything north of three and a half. And you know for sure you're getting your principal back. So if you know nothing else, you know you're getting your principal back and a little bit of income while you wait. If you don't have a better idea right now or if you are in a situation where you know you have a major purchase coming up and you just need the cash or you're not sure about your job, like if you're at that level of uncertainty, I think looking at T-bills, looking at one to three-year treasuries, it's not going to be great returns and you're going to kick yourself if the market recovers. But that's what I would personally do with money that I knew I needed in the short term. When do you think the turnaround is coming then?

Do you have any idea? Or do you think we're going to go down another 10%? April. Are we going to go to 32? Michael thinks April 24th. of 32? Michael thinks April 24th. I really, I don't feel very strongly that I would have an answer that's based on anything. So it's just, thank God it's not, nobody pays me to do that. It's not what I do. I'd be very bad at it. I think I could tell you that when it does happen, one of the things that a lot of people don't understand, but I have learned, when it does happen, it doesn't necessarily need to be accompanied by a

reason. There won't necessarily be an article in the journal or a remark from a Fed head that was like the reason. So that's what makes it even more difficult is there's not a catalyst for a bottom. A bottom happens and then a week later, we all look back and say, oh, yeah, I know why that happened. I'll give you a really great example. There was no reason why the market bottomed in early March of 2009. It's only until six months later that you could go back and you could look at all the articles that came out that day, and then you could seize upon this thing where, oh, actually, the day the market bottomed was the day they repealed FASB 157, which enabled them to not have to mark assets to market. And that was the reason why the market bottomed, because the banks could stop taking losses. They didn't have to mark anymore. And they could just let things work out.

That's a really great story. Nobody was telling that story the day of. It wouldn't occur to anyone. But that actually did end up being the event that coincided with the market bottom. Think about how obscure that is, right? None of the stimulus, none of the rescue, none of the bailouts, none of that put the bottom in. An accounting change? That's right. So when will it bottom? Not only do I not know, I can't even tell you what the reason will be. I can't even tell you that. So thank you very much.

I was glad to be very helpful there. Let's do a virtual. Do we have a, go ahead. First. I just want to say that somebody who listens to this is going to write Jerome Powell's high school rock opera. And I'm really into it.

I want to hear it. Please, please send that to me. We have a question from Steve Wu online, who's wondering if you have a 2022 year end target for the S&P 500. And if you think this is the right time to start dollar cost averaging, putting money to work, or should we just sit on the sideline for now? The answer to the second thing is yes. Now is a good time. The better time to have started would have been 20 years ago, but today will be okay too.

We don't do price targets. Speak for yourself. We laugh at price targets. 3,900. 3,900? Okay. We utilize price targets as like a part of our sense of humor. So we don't take them seriously.

Okay. Who else? I have a question over here. Yeah. Yell it or just wait for the mic? Coming. She's coming. Simon Zeiss, Capco.

With everybody using goals-based financial planning now, what's the new differentiator for wealth managers? What's the thing that you guys can do differently that nobody else is doing? Podcasts. Next question. I think one of the things that our clients appreciate about working with us, as opposed to another RIA, let's say, for example, who would also build a portfolio based on their

goals, I think they appreciate that there's really never a day where something's going on in the markets and they don't know how we think about it. And that sounds like a trivial thing until you remember most financial advisors in America still work at an insurance company or a wire house. That is the vast majority of people in our industry. They're not empowered to say anything. It's not in their best interest personally to say anything. So if you are a client of that advisor, you want to know how your advisor thinks about, name it, Powell, this, that, the other thing, Ukraine, you have to call the lady or call the gentleman and ask, hey, I saw this really scary thing.

What do you think? Our clients don't have to wonder what we think. Our insights or perspectives or whatever you want to call it are on display in almost any medium you could think of, whether it's a podcast, a video, TV appearance, radio appearance, live appearance, YouTube video, blog posts, comments in an article. Our opinions are out there. In times like these, I think clients get a lot of value out of that. times like these, I think clients get a lot of value out of that. Another thing I think that we were at the vanguard of and is now catching on very rapidly is direct and custom indexing. And I think that's probably a $2 to $3 trillion opportunity. When you consider that ETFs are $10 trillion, you get an idea of the size and scope of what that opportunity might be. And it's probably the first or second inning.

We can dial a portfolio very deliberately to a client's actual life and experience and needs versus just here are seven indexes and let's hope that they're good enough. And that is a new frontier. And I think we were somewhat early to it, but we are putting a lot of time and energy into that solution for our high net worth clients. Okay, guys. Thanks. We're out of time.

That was good. Okay. Thank you, guys. Thanks, everybody.