The Compound and Friends - The Beginning of Universal Basic Income, What Are Your Thoughts with Michael Batnick

Episode Date: July 17, 2020

On this week's episode of The Compound Show, Josh discusses the Covid-19 economy and why Universal Basic Income (UBI) might be the inevitable and necessary solution. Next, Michael Batnick joins Josh for an all new round of What Are Your Thoughts. They discuss gold vs the S&P, Elon Musk vs Warren Buffett, and much more! Subscribe to the podcast and be sure to leave us a rating and review on iTunes, Spotify, or Google. Ratings help a lot! Thanks! Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey guys, it's JB. On today's show, we are in an emergency situation and we must act now to prevent the ruin of millions of lives. Only fiscal policy can address this. I'll explain exactly what's going on and what I think needs to be done about it. thoughts with Michael Batnick. We look at stocks underperforming gold, Elon Musk getting richer than Warren Buffett, whether or not the S&P 500 index committee has to add Tesla, and how big of a weighting will it be? So much more, so much to get to. Play the music. Let's get into it. Welcome to The Compound Show with downtown Josh Brown. Josh is the CEO of Ritholtz Wealth Management. All opinions expressed by Josh or any podcast guest are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for investment decisions.

Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Okay. All right. Okay. All right. What if I told you that many years from now, we would look back at the Trump administration as the beginning of universal basic income for the American people? Not the Andrew Yang administration, the Trump administration. Are you surprised by that? Well, it's already in the works. We have this very peculiar set of circumstances of having the worst pandemic in 100 years occurring right in the

middle of an election year. And that is what's about to bring this about. Let's get into initial jobless claims. So we learned today, initial jobless claims are higher than expected. 1.3 million people told their state's government that they are newly unemployed. That's higher than what economists were expecting. The estimate was 1.24 million. But that 1.3 million also matches the previous week's total. So 1.3 million people lost their job in the last week. And what that means is the economic recovery off the lows is now stalling out. Another 900,000 and change people

filed for the federal relief package, which is called Pandemic Unemployment Assistance, PUA. I've heard people starting to say PUA, which I don't love. So we'll say PUA. Let's talk about the 1.3 million newly unemployed first. So where did they come from? The three states with the highest levels of new unemployment claims, don't fall out of your chair, Florida, Georgia, and California. I wonder why. These are the states where the reopening of the economy is now in retreat. These are the rollback states. So those are the states with the most new unemployment claims this week. All very easy to have foreseen. Not a shock to anyone. So here's where we stand right now. At the end of May, we had almost 23 million people filing for unemployment.

That unemployment number fell to 17 million, which is a really good start off the bottom. But now we're seeing a reversal in momentum in the weekly initial jobless claims data. And then there's this other mysterious thing going on with the PUA benefit, the federal benefit, where that number is actually growing month over month in terms of the amount of people applying for it. It went from 9 million in late May to over 14 million by the end of June, which is a 50% growth rate in a month of people applying for federal pandemic unemployment assistance, 50% growth in a month. So why is that not being reflected in the BLS data, in the official unemployment data, which comes from the states and is reported the first Friday of each new month for the prior

month? Where's the mismatch? One of these has to be wrong, right? So if we assume that the BLS calculation is off or this federal assistance data is off, or there's some sort of a lag, I would just basically say like either way, the true state of the labor market is being obscured. There are a lot of reasons. There's a lagging reporting effect. There's just the regular seasonality. There's seasonality in the BLS unemployment numbers. There's no seasonality in this federal program because it's brand new. We just invented it. Then there were reporting issues. Who's getting what data to the agencies? When are they doing it? And then you have staffing issues at

unemployment offices. Don't forget, these offices are not accustomed to having 10,000 people come in one day or call in on the 800 number in one day. Okay. So a lot of this is just aberrant because of the moment that we're in, which leads me to tell you, whatever the official numbers say is going on, I would just guess it's probably between 10 and 20% worse than you think. And if that turns out to be an overshot of pessimism, probably not the worst posture to have, right? You'd rather assume things are worse and then they're not than the other way around. Okay. So that's the situation we're in. So then the question is, what do we do about it? What is the answer? What are the answers? what is the answer? What are the answers? I'm going to tell you one thing that we know for sure.

We know this. If you offer relief and assistance to people who actually need it, they're going to spend it. We know this. All of the data tells us this is the case. There will be a higher multiplier effect on that money than there would be for, say, more tax cuts for wealthy people, more tax cuts for corporations. We know that if you give people who are struggling additional cash, they will spend it. And not only will they spend it, they'll spend almost all of it locally in the real economy. They'll spend it all here. So a tax cut for an upper middle class household, and I'm going to go out on a limb. I'm going to assume most of my listeners are upper middle class or above. Guys who are investors, you're financial advisors. So I'm just going to assume that. If I give you a tax cut, I don't think that that money gets spent as quickly or with as much

frequency. I think the money I give you is going to end up going toward paying your mortgage debt early, right? Making an extra payment, lowering your mortgage debt, or you're going to put it into an asset allocation portfolio, right? I think if I give you another tax cut and by you, me, colloquially, we're going to buy treasury bond ETFs. So we're going to give the money to iShares and Vanguard. We're not going to spend it. We know that. There's no multiplier effect for the economy happening by giving more money to a rich household in the form of them paying less taxes, let's say, because they're going to put it in a money market fund. They're going to park it in their bank and the bank is going to park it in treasuries or they're going to buy treasury bond ETFs directly. That's what's going to happen. One of the best things we did as part of the pandemic response was to give direct deposits to people below a certain income level to keep them going this summer. I think it worked. I think it was one of the best policies of the myriad policies that the Fed, Treasury,

Congress, of all the things they did, direct deposits into people's bank accounts was one of the best things, maybe the best thing. It probably saved a lot of families in every region of the country, Democrats and Republicans. It probably saved a lot of families from complete destruction. I would also argue that money definitely helped save the stock market. Look at Walmart, look at Home Depot, look at Target, even Amazon, look at the uptick in spending, not just from stores to e-commerce, but just overall. Look at the rebound in consumer activity for all of these companies. You can make the case that, well, people just changed over. They would have normally spent that money on a vacation, but now they're stuck at home. So they're redoing the flooring on their first floor.

Okay, fine. But still, putting money directly into the bank accounts of people who actually need to spend money greatly benefited some of the largest market cap stocks in the stock market. Look at the banks who have not so far had to deal with a massive rise in personal bankruptcies or a massive wave in credit card charge offs. They haven't had to deal with it yet. We heard from the banks this week. They say things are looking a little bit shaky. We saw JP Morgan. We saw Wells Fargo. Both shove another $9 or $10 billion into what's called loan loss reserves column. So they are getting ready for a wave of credit card charge-offs and commercial loans gone bad and personal bankruptcies.

They're getting ready, but it really hasn't happened yet. I think the direct payments have helped that to not be the case. And that's why the large bank stocks, JP Morgan's a $300 billion market cap. You don't want that stock cratering. Believe me. Believe me. Now look at Google and Facebook. They have ad businesses and those ad businesses are enormous. They're probably a lot more economically sensitive than you might think because they're so big. It's no longer the

case that you could have a shrinking advertising pie, but Google is fine because they're taking more share. They are the share. Google and Facebook are the market. It's an oligopoly. So I think Treasury and Congress, by putting this money with people and keeping the consumer afloat, have benefited Google and Facebook. And that's important. I'm talking about trillion-dollar market cap stocks. that's what's keeping the stock market levitating. So I would say the Treasury and Congress saved them all from a radically retrenching consumer, which is what you normally get in any other recession, and we might get later on in this recession. So the question is, how do we keep the consumer from completely retrenching from now

forward? How long can we keep the plate spinning and the balls in the air before a vaccine allows us to open the economy all the way up? Well, we know that monetary stimulus from the Fed is going to continue unabated. They told us nothing's going to change. They are going to continue to buy assets in the open market. Rates aren't going up. So we know that's going to continue. We also know there's going to be another round of fiscal stimulus. And that's what I want to address today. How much stimulus and then equally important, what kind? Fiscal multipliers are unknown. Very, very hard to understand. If you put a dollar into this versus putting a dollar into that, how much of a multiplier effect are you going to get for those dollars? I don't think that there are concrete black and white

answers. I also think that there are two issues we're facing. If we're going to do stimulus, what are we trying to address? The first is the output gap and the second is the personal income gap. Which do we want to tackle? But I want to focus on the output gap today, which is defined as the difference between what our economy will produce now versus what its potential would be under optimal policies. In other words, if we do nothing, how much will our economy underperform its potential by? And that's what they call the output gap. So the Committee for Responsible Budget is projecting an output gap of $750 billion over the next six months unless policies change. That's almost $4 trillion over the next five years and over $5 trillion in the next 10 years. So they're basically saying we will underperform our true economic potential by more than $5 trillion in the next decade if we don't make changes now. So if we're going to do stimulus, it's not enough to just come up with an amount. It doesn't help if the money ends up

in iShares muni bond ETFs. So the Congressional Budget Office looked at fiscal multipliers 10 years ago when they were talking about expanding unemployment benefits during the last recession. And in their study, this is what they found. They say each dollar of expanded unemployment benefits would produce between 70 cents and $1.90 of economic activity. Each dollar of fiscal stimulus spent on something like payroll tax relief would produce between 40 cents and $1.30. tax relief would produce between 40 cents and $1.30. So not as effective. Then they said direct aid to states would produce 40 cents to $1.20, even less effective. And then expanded social security benefits would only produce an estimated 30 cents to 90 cents. And that makes sense. If you expand social security benefits, you're getting back less than a dollar of a dollar spent.

So expanded unemployment benefits is the winner and by a lot. So if you just put politics and electoral concerns aside, if you say, forget all of that, I'm not going to target stimulus dollars just to get a certain demographic to come out and vote for me, right? Forget that. If your number one priority purely is just how do I restart the economy most effectively? Where do I get the most bang for my buck? If you saw these numbers, you would rationally conclude the best place to apply fiscal stimulus with the highest chance of seeing these dollars multiply would be supporting families and unemployed heads of household. It just so happens, this is also the most human course of action to take. If you've got to give the money to where you think it's going to go, where it's going to

be most effective, and you also want to do the right thing, you have a very easy choice because they are one in the same. You have to give the money to the people who need it most and are most likely to spend it locally right now. The median household income in America is $63,000. 40% of the people who lost their jobs in March, that first wave of the pandemic layoffs, 40% of those people were making less than $40,000 a year. You know who they are? Bartenders, waiters, hotel personnel, drivers, car rental agents. Stimulus money sent directly to them as opposed to their employers or a Wall Street bank, if you send stimulus money directly to them, they're going to spend it immediately. The societal cost of these people's lives being destroyed through no fault of their own,

I promise you, will be much higher in the years to come. So why wouldn't you continually direct money if you're trying to stimulate the economy to where it'll be used first and best? There was a paper that came out in May where the Federal Reserve Bank of San Francisco looked at the fiscal response dollars being used for COVID-19 right now. And they have found that those dollars are reducing the output gap at a ratio of one for one, which means they're very effective. Spend a dollar, get a dollar back. This is because the money's going to the right places so far. Again, I think we've done a good job so far. Direct payments to individuals account for 23% of the deficit that we're recurring as we respond to the pandemic.

But again, that 23% of the deficit, we're getting those dollars back in the form of GDP if it's truly a one-to-one ratio. And if you think it's better, if you think those dollars are multiplying at a higher rate than one-to-one, and by the way, the CBO believes that they should be, then it's obvious we should keep these programs going. And slowly, over time, the economy adjusts. It grows accustomed to this becoming the norm. becoming the norm. And then without using the term universal basic income, which I know a lot of people hate, and I understand that, without even using UBI as a term, that's what this basically becomes. It's de facto UBI. We're doing it already. Now, you can go the other way. So you could tell

me the 16 or 17 million people who have lost their jobs and have not yet regained them don't matter for consumption, don't matter for the economy. You could tell me that. Okay, fine. But if you disagree with that, then I think you recognize this is the best course of action. This week, there was an open letter written by over 150 prominent economists to lawmakers begging them to address this problem in their next round of policymaking. The economists are asking that the stimulus and the direct payments to households become permanent until the crisis ends. So I'm just going to read you the opening paragraph. Quote, we urge policymakers to use all the tools at their disposal to avoid further preventable harm to people and the economy, including recurring direct stimulus payments lasting

until the economy recovers. The widespread uncertainty created by the COVID-19 pandemic and recession calls for a multifaceted response that includes automatic ongoing programs and policies, including more direct cash payments to families, extended and enhanced unemployment benefits, substantial aid to state and local governments, stronger SNAP benefits, robust childcare funding, and more. These programs and policies will hasten the economic recovery far more effectively if they stay in place until economic conditions warrant their phase out. Direct cash payments are an essential tool that will boost economic security,

drive consumer spending, hasten the recovery, and promote certainty at all levels of government and the economy for as long as necessary. Okay, End quote. So now this is where people would typically say, but Josh, how can we afford to pay for it? Well, we pay for it by not digging ourselves into a crater so deep and so wide that it takes a generation or more to climb out of it. That's how we pay for it. We pay for it by keeping consumers consuming and avoiding the alternative, which is millions of permanently unemployed people who had done nothing wrong and all of the attendant damage that gets done to the next generation, their families. And when you frame it that way, how can we afford not to pay for it when the costs in the future will be so much higher? I'm going to pay for it either way.

I'm going to pay for it either way. And I think the thing that these economists are saying, and by the way, these are people from Colorado State University, Yale, American University, Brookings Institution, GW, University of Illinois, Miami, Indiana. It's like every major school, it appears, has a signatory, a professor on this list of signatories. So the thing about making these things permanent until the crisis ends, I get it's a little bit slippery because the longer you keep people on these direct payments, the harder it will be to take them off, which is why I say we might in the future look back at this moment as the moment where UBI became inevitable, where it actually started.

But the permanence argument is important. We know from all of the behavioral academic literature that if you give somebody money and classify it as a bonus, there's a higher likelihood they'll bank it. They won't spend it. They're not going to materially change their lifestyle based on something that they perceive as being one-time. Here's a one-time dividend. Here's a one-time tax rebate. Here's a one-time bonus. Great job this year. Contrast that with when you give people a raise. You give people a raise, there's a higher likelihood that they're going to increase the cost of their lifestyle, right? So giving people some sense, we're not taking this away from you.

Live your life. Go out and spend this money. Support your family, pay your bills, and continue searching for a new job. And we will backstop you until such time as you find a new job. Doing that is going to be more effective than playing games with people's psychology and hoping that they'll pick up the slack. They won't. If people think, all right, I got my eight weeks of assistance. Now it's time to really retrench. They're going to slash everything they can from their budget. The suffering will be incredible. It'll be widespread every region of the country. And it's unnecessary. It's unnecessary. We have the tools to do this. We discovered that we have the tools to do this. We should do this. Okay. I want to

get into what are your thoughts. Michael Batnick and I cover so many topics. It's so good. You're going to love it. So stick around for that. Thank you guys for tuning in. Really appreciate the uptick in listenership for this podcast. Having so much fun doing it for you each week. Tell your friends, go ahead and leave us a rating, leave us a review. It really helps a lot. Okay. Here's me and Mike playing What Are Your Thoughts? Hello and welcome to an all-new edition of What Are Your Thoughts? I'm your co-host, downtown Josh Brown. I'm here with my co-host, Michael Batnick.

Michael has no idea what I want to talk about today, and I don't know what he's going to ask me about. It's our favorite game. Play along with us in the comments below. Let's get into it. Okay, Mike, I'm going to go first because that's just the kind of guy I am. Take a guess. Which is outperforming which on a three-year time frame?

GLD or SPY? SPY. SPY? By how much do you think? All right. So right now it's July 2020. So we're going back three years. Yeah. So 17.

I don't know. 15%, 15, 20%. Yeah. I was really surprised by this. Actually, actually, GLD is outperforming SPY on a three-year, not that it's important in the real world, but in the investment world. It's kind of like a very notable. I think it's 48 versus 36.

So we got 46 for gold, 36 for stocks. Okay, so those are the two ETFs, without getting into futures and all that stuff. So I was surprised by this. Gold miners haven't done nearly as well. You know what? Over five years, it's even way closer than I would have thought. It's almost neck and neck now, right?

So over five years, stocks are up 65. This is total return for the S&P. Gold's up 52. Wow. Gold's up 52 over five years? Yeah. So as an annualized return, that's pretty good. You. Gold's up 52 over five years. Yeah. So like as an annualized return, that's like pretty good. And you know, it's interesting since inception.

So GLD goes back to, what was this? 03, I think. No, I'm sorry. 04. 280 for gold, 260 for stocks. Since inception. Right. Now through NASDAQ.

Yeah. I thought inception was earlier. Anyhow, what are you getting at? I was surprised by that. I think – so gold is now at the highest level it's been since the summer of 2011 or the spring of 2011. So I do think it's a new bull market for gold. I don't think that it's another head fake, like obviously. But bigger picture – Wait, what's obvious? You're saying it's obviously not a head fake? How is that obvious?

No. Well, if it's at a new high, it can't – I'm not saying it has to break through, but it's $50 away. It's like it literally rallied to here from $1,100. Right. Like it's not like all of those rallies from $1,100 to $1,300. So it went from a high of $1,911 in 2011 to a low of $1,046 in 2015, back up to $1,800. Okay. So two notable things about that. When it was at that high in 2011, it had a lot more assets under management.

It was the biggest ETF in the world. Yeah. It was bigger than SPY for a moment. And that was actually a great sell. So that was the top. Yeah. So I don't think that people talk nearly as much about gold now heading back toward these highs as they did in 2010 and 2011, when it was like literally there was a gold ticker sitting on CNBC above the Dow. It was every day the discussion was gold. Part of me feels like this rally has been so stealth because a lot of the people who would traditionally be talking about it are off in crypto land. We're talking about the virus, which has dominated everything. By the way,

peak assets in 2011 were $70 billion. Right now it's poking there. It's $69.6. So it's right there. It's getting close. Okay. So I feel like it's just not as big of a topic conversation because of the virus. And then also you have technology stocks that are up like 400% in six months. And those are really the things that people are most excited about. When gold was peaking in 2011, it was the only thing working. There wasn't anything else. So I think that's probably what's going on in the context of when gold was ripping. It was double the recession. It was euro blow up. It was the US credit getting downgraded. That's right. The debt ceiling fight. So I think this one is interesting. This one looks more like a bet on inflation

than it looks like what was going on in 2011 when they were talking about like the destruction of the dollar and you know there's a lot of like obama uh fear um so i i think this time it's more like look the fed is printing like 12 trillion dollars it's very obvious the cost of things will go up and by the way hold on but gold's been rallying before you know before this before the fed started COVID stuff. It started in the fall. I also think that lumber is up. Copper is up. What's going on with, hold on, I don't understand. So I get the lumber thing. People are redoing homes, Home Depot and Lowe's are at all time highs, like projects all over the place. Why is copper, which is in theory the most economically sensitive commodity, why is that going so far up?

China. China. So China is engineering a stock bull market. Like you can dislike the fact that they are trying to do that or they're able to do that. They did that in 2015 and it popped. Oh, yeah. They're going to do it this time. They're doing it again.

Margin rates, margin balances are ticking up in Chinese brokerage accounts again. China is the most similar to the United States in terms of the leadership of the market. They have like 20 gigantic technology companies. China, we're getting very far away from gold versus SPY. But the copper story feeds into the economic recovery in Asia, I think. If you ask me what's behind it, that's my guess. All right. That's all I got on that. Okay. So you sent me a post from GMO talking about emerging market stocks. And they brought up a couple of points that I want to talk about. They said they gave five reasons why emerging markets are more resilient today than in prior

periods. And the long and the short of it was index construction. And it's kind of funny because one of the knocks on EM is that it's like 40% China. They're actually saying that's a positive. And two of the reasons are they say the weight of vulnerable countries in the index is significantly reduced. And what they mean by that is economies that are highly dependent on foreign savings and therefore more exposed to external outflows. So that's gone way down. And then number two, and I thought this was really interesting, the move from cyclical stocks to tech and consumer. So previously, you thought that EM was like sort of a levered bet on commodities. And that used to be the case. Energy and materials in 2010 or 2011 was 30%

of the index. Now it's down to 13. Tech, which was 15, is now a third. And 26% of the index is China consumer sectors. So the entire makeup is totally different. This is the difficulty in comparing asset classes like stock sectors or stock indexes or even country markets across different timeframes. Because people get used to this shorthand where they say, oh, iron ore and oil prices are going up, then I want to be long EM. So like when you used to think of EM, you would think of Pemex, like the big Mexican oil company and the Brazilian oil companies, which dominated the index and PetroChina. Like that's what you would think in your head. And you would say, oh, cool. There's a rally in commodities. Let me get long EM.

The story has changed so substantially and the index construction along with it that I think a lot of previous data on the EM asset class, like you could throw it out the window. It's not all banks and oil companies anymore. And I was about to make this point in the earlier question, but like China actually did something very wise and forward thinking. They blocked U.S. technology companies and nurtured their own homegrown. And now their homegrown companies are bigger than technology companies in Europe or anywhere else. Like they didn't let Facebook come in, which is why Weibo was able to take off and WeChat and all of these homegrown services that are now a billion people. They let Baidu become the Google of China rather than Google become

the Google of China. And we can go down the list, Alibaba and JD.com instead of Amazon and eBay. So I think they did this very intelligently. And now they're at the point where they don't even care about access to US markets. This came out the other day. Ant Financial, which was formerly a part of Alibaba, it's basically an enormous fintech company that handles everything from money market funds to payments. Ant Financial is going to do a $200 billion IPO out of the gates, $200 billion. And they're going to do it on the Hong Kong exchange. In other words, they're not even talking to New York or London. This is unheard of. Even five years ago, you could never have done an IPO of that size without involving

Goldman Sachs and JP Morgan and this one and that one. So if you think about the fees involved, I mean, you could be talking about $50 to $100 million in fees, not going to Wall Street because they're going to do it there. So that's what EM looks like today. And it's a totally different ballgame than even five or 10 years ago. I agree with you. What do you got? I want to talk about the futility of sector bets. I think me, you and Ben were talking about how stupid this was. We were looking at the bank sector. I disagree with you, by the way. All right. So let's get into that. I think we were looking at the S&P 500 financial industry,

like the sector. And I think it's made no progress since 2006. What was the relative to the S&P? We were looking at tech stocks relative to banks and relative to energy. Oh, right, right, right. A ratio of tech versus financials. But I was making the point, so many of the fastest growing financial companies are not even in the XLF. They're in the tech sector. Visa and MasterCard and PayPal. Consumer discretionary, I think. Oh, wait. Is it tech? No, it might be tech. You're right.

I'm sorry. No, Visa and MasterCard are in tech stocks according to the S&P classifications. XLK. How stupid is that? So what do you mean tech versus financial? Visa. It's very arbitrary. Visa and MasterCard are the third and fourth biggest holding in tech.

Of course, they did a reconstitution. So Facebook and Google are now in communications. But PayPal is a top 10. So PayPal, Visa, MasterCard, like those should be financials. That's my point. So when people are like, oh, do you like the financials here? Well, which ones? Okay.

And how are you going to – you think XLF is giving you exposure to the real financial economy? Venmo is not even in there. That's how people spend money now. Well, it's giving you – for some reason, I think American Express is in XLF. But you get Berkshire. You get all the big giant banks. So you are getting financials. I mean I think –

You're getting insurance. You're getting insurance and you're getting traditional marble lobby and stone column banks. But is that the economy? Yeah, you're getting the broker-dealers. Is that the financial economy? IRL? No. I think that you're absolutely right.

You're definitely not getting the future of these industries. But if you're doing sector analysis, I don't think that's broken. I think you're right and wrong. Okay, hold on. Walmart and Target are in two different sectors. Really? Yeah, Target's a staple. Walmart is a staple. Walmart, hold on. Walmart and Target are in two different sectors. Really? Yeah, Walmart's a staple. Walmart's a staple.

Walmart's a staple. Walmart's a staple. What the f*** is that? Okay, fine. But if you're just looking at the sectors, they still do tell the story of what's going on, even though you're right. Okay. Amazon's not a tech stock, yet the fastest growing part of its business is cloud services. But Amazon is considered consumer discretionary because I bought a book there in 1997.

I don't like this idea of playing sectors. I understand like sometimes when you just want exposure to 50 stocks in an index, it is the smartest way to do it. But like you're really missing the forest for the trees

when you're looking at XLF versus XLK and saying, wow, tech is so much more important to the economy than finance. It's not reality. It's a committee. It's not a complete picture, but I think it does a good enough job. I wanted to get that off my chest, Michael. Okay. I hear you. All right. So this is tough. Elon Musk now has a bigger net worth than Warren Buffett. That's a tough pill to swallow. I knew you were going to say that. I almost picked it myself, but I had a feeling this was going to come up.

I mean, what do you even say? First of all, it already reversed overnight. It already reversed overnight. Forget about it. But just in general, like what – Here's the top ten as of right this second via bloomberg's billionaires index which is hilarious bezos number one gates two um gates is like the the only guy that's been in the top three for most of the last 20 years bernard arnold which is uh lvmh so champagne and louis vuitton um zuckerberg four bomber five um mukesh ambani which is i think

the only one from india i i think he's like steel or something um but they're close larry page is seven very close to bomber those two could probably oscillate every day go back and forth uh buffett is now eight do you think sergey is nine. Elon is 10. Do we think that Tesla is the first mega cap stock in a long, long time that we can say with a very high degree of confidence, like 98% chance that this thing right now is a bubble? Of course it's a bubble, but that doesn't mean it won't keep going up. I'm not saying that- Hold on. I'm not saying that you could time it or or whatever i'm just saying when's the last time that we said okay this giant gigantic mega cap company is so obviously a bubble and so clearly doesn't make any sense at all maybe this is like maybe this is the first

time in like 15 or 20. I don't know. What would have to happen for this to make a little bit of economic sense? What would Tesla have to do in the future for this to make sense? I thought Ford or GM just goes away. Somebody gigantic in the auto industry has to sell itself and just consolidate. Because they're all going to still fight for market share for the foreseeable future. in the auto industry has to like sell itself and just consolidate. Like I, because they're all going to still fight for market share for the foreseeable future. And if Corona virus didn't wipe any,

any of their competitors out, it's going to be ugly. And I understand that, like, I think Tesla has done an extraordinary job at the number one thing that matters right now in the, in the modern economy, which is building a brand.

That's like, that's like, I almost feel like if you can build a brand, you could fix every other problem that you have. So he's done it and they're not going away. And the financial question – the questions about their financials, like I'm not saying that I am an expert in Tesla's accounting. I just don't think it matters. Forget about that.

I'm not even talking about their financials. I'm just talking about the stock price and the market cap addition has gotten so nonsensical. If you had to put a number on what is the probability that this stock falls 50% or more over the next 12 months, would you say there's a 40% chance, a 70% chance? Oh, I would say there's like a 20% chance just because I understand the enthusiasm for people that will just run right in and buy it on every dip. And the people that have missed out on the whole run, how motivated they'll be to come in and buy it back. So you think that it could take a while for the enthusiasm to wane? Look, I'm around a long time.

There have been similar situations but not as extreme. And not this size. And not the size. And not the size. Not the size. Right. Well, that's what I mean by extreme. Where companies just looked completely invincible at a certain point, but it never lasts. By the way, you know who one of the 10 richest people of all time in world history was? Henry Ford. At the peak of his wealth, he was worth $199 billion, according to one study, in today's dollars. So I'm just saying that was an automaker in a prior age. And he's on a list, by the way, just to give you some perspective. The other people on the list are Genghis Khan, and obviously

Rockefeller and that whole crowd and then like Joseph Stalin. And Elon Musk. Well, Elon Musk is not even close to that list. But here's something Larry McDonald is saying. He's calling this the greatest front run ever. He thinks it's 100 percent based on people front running S&P inclusion. If they report earnings on July 22nd and they're profitable for a third consecutive quarter, et cetera, et cetera.

He's saying that S&P, the committee, which we were just mocking for their sector weights, will have no choice but to include the company at a $300 billion market cap. It's bigger than almost every other stock in the S&P. So his post was called Inclusion Games. And he's basically said, let me read you this one thing. This is a study done by the New York Fed looking at stocks that have been included in the S&P 500. And they're saying the pre-inclusion changes in firm characteristics are substantial. For our sample, on average, the increase in market cap in the two years

preceding inclusion adjusted for changes in the aggregate market level is 56%. So the stocks that can get included are always momentum stocks, and they always way outperform the market, which I think we know Tesla has done. But then they point out the total increase of earnings per share in the fiscal year before inclusion is about 57%. So the way Larry's framing it is there's heavy incentive for companies to juice earnings ahead of inclusion. So to Larry's point, is Tesla doing things now, putting expenses off till later in order to get over the goal line and get the stock into that index because of all the forced buying it'll bring in. Other people have done it. It wouldn't be totally shocking. And I don't think the committee can ignore it. So I know they have the right to kind of like use their own judgment,

but they can't just be like, no. Do you agree with that? I don't know what the exact rules are. I know that they can use discretion when adding. If a company meets the criteria, I don't know that they can rules are. I know that they can use discretion when adding. If a company meets the criteria, I don't know that they can reject it. I'm not sure. To be included in the index, company must meet eight primary criteria having to do with market cap, liquidity, financial liability. So if it meets all of that, can they still say no? They say that they can. I say then you have a fake index that doesn't reflect the US stock market. If the company meets those criteria and S&P is like, no, then what is the S&P 500?

There's a lot of giant companies that aren't in yet because of the earning stuff. They wouldn't be in the top 10. That's what makes this so glaring. What is Zoom now? 70 billion? I have no idea. It's a lot. Yeah.

But they want companies that have sustained profitability, which I agree with. All right. What do you got? We're getting there. When was the last time you got triggered emotionally, either positively or negatively, by somebody else's stock market opinion or economic opinion? It happened. I remember exactly when it happened because I was in bed getting angry, wondering why I was doing this to myself.

Who was it? I'm not going to name names, but I don't remember. No, no, no. You don't have to name the name. Somebody said something about a stock that you disagreed with or the economy. I forget what it was. I think it was – I don't even remember. It was probably a year ago.

It happens to me very, very infrequently. I came to a realization the other day. I was thinking about this. There's literally nothing that anyone on earth could say about their take on the pandemic economy, the Fed, the level of the stock market, the valuation of an individual stock. I really don't think there's a single thing that anyone could say that I would give a shit about at all. I wouldn't, like, I really don't care. You're untriggerable? Yes, you are.

Well, no, about stocks, about the market. Here's the best word I've come up with to describe where I am with other people's opinions. I'm dispassionate. Like, if someone's like, you, dude, I bumped into this guy at the beach club the other day, by the way, this is my nightmare. Like having to talk market stuff with somebody I've never met before. And they're, and then being

like mad at something I said, he's like, Oh, I heard what you said about whatever it was like arguing with me. I'm like, all right, maybe you're right. Get the fuck out of here. Leave me alone. Like you could be right. I'm not in love with my own opinions. And by the way, I might agree with you tomorrow. I might change my mind. What are you so worked up about? What's wrong with you? If I'm wrong and if I'm an idiot, then just take the other side. It's very simple. I'll lose money. You'll make money. So I know that on the internet, there's this whole cottage industry of people being furious about other people's opinions. It's getting harder and harder for me to understand it. What's the difference if somebody doesn't agree with you? I don't know.

I'm very happy. My outrage is in secular decline. I used to get worked up, but I think I'm with you. Yeah. Maybe somebody will say something about a stock I own that'll make me mad at some point. I just can't imagine. Probably not. All right. That's all I got. What about you? All right. Last thing. So you started a podcast, which this video will be included in. You've done three so far, maybe? They come out on Friday morning. How's that been so far? So it's just you. It's just you riffing for like 15, 20 minutes, which is incredibly difficult. Might not sound hard, but try it. It's very difficult riffing for like 15, 20 minutes, which is incredibly difficult. Might not

sound hard, but try it. It's very difficult. How are you enjoying it? I love it because it forces me to really think about what I think. And that's why I started the blog or that's what I get the most out of doing the blog. It's the same thing with the podcast. It's like I have this opinion, but I have to really research it to make sure that it's really my opinion. And then a lot of times in the process of researching what I want to talk about, there'll be some nuance introduced that will maybe cause me to change my mind about something. And I love surprising myself, just looking at the data versus what my initial impression is. So that's the process for coming up with what I want to discuss at the top of the podcast.

And I feel like as an investor, I'm getting a lot out of it. Do you listen back to it? No, I hate the sound of my voice. I sound like the older guy in the Beastie Boys. I sound like Adam Yauk sometimes. And I hate it. I listen to my podcast only because there's Ben. So I'm not just listening to myself. I also would find that very, very difficult. And there's been, so it's not, I'm not just listening to myself. I also would find that very, very difficult. I also find it difficult because I hear myself literally two days ago and I disagree with myself two days later. But if it was just one, you know, just solo, I wouldn't be able to listen. Well, one of the things to balance is to have an opinion that's strong enough that it's, that's worth people listening to, but not so strong that you can't change your mind.

And it's hard to do that. It's hard to do that. But if you don't do that, I feel like you're letting down the people who are paying attention to what you're saying. Like you have to give yourself an out to say, okay, this is why I thought what I thought. But this is what's changed my mind. If you're just like, look, here's how it is.

I'm an expert on how the world works. You could probably do that for a few weeks and people will love listening to it because they love certainty, but you're in the long run, not helping anybody. What are your thoughts on the topics Michael and I discussed today? We'd love your feedback.

Always helps us make for a better show. We always get a lot out of hearing what you guys think about these topics. So go ahead and leave us that feedback. Subscribe to the channel if you have not already. Congratulations to Michael and Ben. Their podcast, Animal Spirits, has hit 5 million, million lifetime downloads, which is a major achievement in podcasting, any vertical. So congrats to you guys. Make sure you're following the Animal Spirits podcast as well. We will be back very soon.

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 thecompoundrwm. Talk to you next week.