The Compound and Friends - The Most Powerful Man in Washington Stays Put, How to Buy a Correction (with Tony Dwyer)

Episode Date: November 6, 2020

This week, Josh is joined by the one and only Tony Dwyer, Chief Market Strategist at Canaccord Genuity and a fixture on Wall Street for over 30 years. Tony and Josh chop it up over the initial election results, the stock market's reaction and how to think about the year-end picture now taking shape.Check out Dwyer Strategy to learn about how you can receive Tony's commentary and investment insights: https://dwyerstrategy.canaccordgenuity.com/ Be sure to leave us a rating and review, they go a long way! Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

I have good news for you. Tony Dwyer is on the show today. Tony Dwyer is like a living legend, fixture on Wall Street for 30 years, one of the best in the business, one of the sharpest guys. He's a chief investment strategist at Canaccord Genuity. And when I looked at the calendar and I said, all right, we're going to have this election week and I really want to have somebody good, somebody that can react to what markets are doing and really have insight into what that means for investors and how we want to think about the end of the year and how we want to think about the risks we're taking in our portfolio, what's changed as a result of the election and what hasn't changed. And Tony's the man.

So we're really, really excited about that. We're going to get to that in just a minute. And I don't want to ruin any of it for you. So we'll just go into that cold. But Tony's got a lot to say. Before we do that, let me talk about the YouTube channel very quickly. Put a couple of things up this week that I want to talk about. The first is we did a thank you video. The channel broke 50,000 subscribers, let's say a week and a half ago or so. We're already at 52,000. We're so appreciative of the fact that you guys come back every week and you're watching us. You're sharing it with your friends. You're hitting like, you're subscribed to the channel. It means so much. And so we did like a behind the scenes thing.

Duncan Hill, who is the mastermind behind the channel and helps us create all the content and produces and edits. He's on there. Ben Carlson's on there. Ben and Michael and myself. So it's just a chance for us to talk a little bit about how we're producing on YouTube, how we're creating, what we're doing. And I think you'll get a kick out of it.

So that's up there. And the other thing we did this week was the November edition of Big Trends Monthly. Big Trends Monthly is JC Peretz, who's a market technician and myself. And we look at each month's closing candlestick charts. So we did that this week. JC's got some really great charts. One is about gold, taking a long-term view of gold. It's been consolidating for about 10 years. JC thinks it's about to explode higher. Bitcoin's on there too. Believe it or not, Bitcoin has been trading long enough that it has monthly candlestick

charts that are worth looking at. And Bitcoin and gold have a very similar setup here. So you're not going to want to miss that. So go to youtube.com slash the compound RWM to watch both of those. If you're not subscribed already, make sure you fix that. And once again, just so appreciative to have over 50,000 subscribers. I know that's not a big channel in terms of the world. I know that there are toddlers in South Korea who are opening up birthday presents and getting a million page views or whatever. I

understand all that. But for our thing, for like common sense, rational, calm, intelligent financial advisory content, that's a lot of subs, right? So we're not doing binary options or Forex or venture capital or flip houses. We're just telling people like this, this is what it's like to live and give and receive advice in the markets today. And we're being ourselves and there's no scripts and you guys are into it. So that's, that's a lot of subs and we're going to keep going and we, we, we love you guys. All right. So as I mentioned, Tony Dwyer is the chief strategist at Canaccord Genuity. Let me just give you the lay of the land in terms of

the election, and I'm not going to spend a lot of time on this, and then we'll go right into that. The way things stand right now is it appears that Trump has one path available to hold on to the presidency, and everything's got to go perfectly. So we're looking at Pennsylvania, Georgia, North Carolina, and Nevada. He needs them all. He needs 56 electoral votes, and there's only one path. Biden has four ways to win, and he only needs six electoral votes. So what's gone on since the election is that stocks have been feeling pretty good, or at least they seem to be feeling pretty good about what the outcome is. Stocks are pricing in Biden in the White House,

Mitch McConnell and the Republicans holding on to the Senate, and the Democrats holding on to their majority in the House, although with a little bit less verve these days. And people are calling it a repudiation of the far left because they actually lost some seats. So that's where we stand. And the ramifications of that, yes, it's gridlock. Yes, it means that massive changes in the tax code are unlikely, at least for the near term. And it also means that the stimulus package will probably not be as big as it would have if the Democrats had captured the Senate. So if you're a billionaire hedge fund manager, and this is what you woke up to on Wednesday morning, you probably feel pretty good because

now there won't be any changes to your taxes or anything substantial. So you get to keep that. Nothing happening with capital gains, nothing happening with the estate tax, nothing happening with the dividend tax, the carried interest loophole for hedge funds, private equity, et cetera. That's probably not going anywhere. And corporate taxes are not going to be ratcheted up to the degree that Joe Biden has been talking about, or at least they probably won't. So if you're a billionaire, asset management CEO, or hedge fund, or you're the CEO of a major bank or brokerage firm, you woke up and you're like,

this is great. So now all of the strife and division and insanity from the White House is going to leave. And I don't have to be embarrassed to be a Republican anymore. Like I could look people in the eyes. And so that's kind of cool, right? But then my financial situation doesn't really change. And I'm just going to keep accumulating wealth at three or four times the speed of everyone else. Plus, you have endless stimulus coming from the Fed. They're not raising rates anytime soon. We'll talk about that with Tony. And you have the prospect of at least one, maybe two or three vaccines coming out and being approved. And stocks have really been consolidating for weeks now.

They haven't really gone anywhere. So you had a lot of fear priced into the market that maybe is now coming out because we're actually counting votes and nothing's on fire, at least not yet. So if that's what you woke up to on Wednesday and you're already very wealthy, you're pretty psyched. This is actually – couldn't have gone better. Couldn't have gone better. So I think that you're seeing that kind of feeling in stock prices. And my friends at Bespoke note that this week, if it ends where it looks like it'll end, is the best week post-election for stocks in 100 years. So going back to 1928, stocks have never celebrated the result of an election to the degree that they are today.

And there's a lot of notes now being passed around about what happens when there's a Democrat in the White House, but a Republican controlled Senate. It's actually the highest possible returns you can get in the stock market, and they point to Clinton and blah, blah, blah. But we're not going to dwell on that stuff. I'm sure you've heard enough of it. But what I will say, and I think this is worth saying, is be careful about who you're listening to. Because in the run-up to the election, and especially last week, there was so much pessimism and negativity and so many people talking about getting all hedged up or getting out of the market before the election. It's going to be a shit show, this and that. Yeah, it could have gone that way.

It could have been a shit show. But it also – there was a universe where it wasn't a shit show. And it just turns out that's the universe we ended up in. And I agree. There's going to be more debate and bickering and fighting and there'll be lawsuits. I'm not saying it's over. I'm not even saying we know who won. Right.

We think it's Biden, but we don't know. They're still counting. That's why they have to keep counting. I know Trump only wants them to keep counting in states where he's down and wants them to stop counting in states where he's up. But I think generally speaking, if people voted and got their ballots in on time, we should probably count them. Right. So that's what's going on right now. So we don't actually know what's going to happen.

So what I've just laid out for you is a snapshot of what Wall Street thinks is what's happening. laid out for you as a snapshot of what Wall Street thinks is what's happening. And it's been good enough for the best post-election weekly rally of all time, at least so far. So that's what's going on. All right, let's get into Tony. We'll do this disclaimer real quick. Duncan hit that. And on the other side, let's talk Fed. Let's talk stocks. Let's talk investing, buying dips, corrections, everything. It's so good. You's talk stocks. Let's talk investing, buying dips, corrections, everything. It's so good. You're going to love it. Stick around. 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. I am here with mountain man Tony Dwyer. Tony's in the Adirondacks having escaped New York City. And I'm pretty happy for you. It looks like you're arrested. Looks like you've been doing a lot of hikes and eating well and living well. Is that the case? Well, other than the eating well part, yeah, it's great. Same. All right. It's good. It's good stuff. So how busy are you like day to day talking with talking with clients around these election things? Like this is like this is something where you probably end up repeating yourself an awful lot. Right.

Kind of, Josh. And thank you for having me. It's great to be with you. Of course. Of course. You know, people were scared to death. You know, you're coming into a fall season where you got an election ahead of you. There's plenty of hate to go around on both sides. You got a COVID-19 ramp. You got a geopolitical heat up with China again. Brexit is running into trouble. Germany's shutting down. You could make a very long list of issues that the market had coming into the election. And so, yeah, I was pretty busy, but I'm grateful for it. I'd rather be busy than not busy. So what's interesting about that whole litany that you

just went through is that everyone was already aware of it. And when you look at all of those potential negatives, we talk about them all day. And then you look at fund flows and US fixed income ETFs took in, I think, $150 billion in the first 10 months of this year. So they're now over a trillion. And international bond ETFs, like the whole asset class is, I think, over 2 trillion. And a lot of that money came in recently. So to a degree, while we all agree those negatives exist, you also have to make it pretty clear that, hey, everyone's been preparing for this to be a really negative fall season. Look at the rush into ETFs that are yielding nothing. So it's kind of like the yin and the yang of it, right?

Well, it's not just the fixed income, Josh. I mean, think of the VIX. Let's just whittle it down to stuff that you guys talk about all the time on a halftime report with Pete and John. I mean, the VIX got to 40. Remember when over 20 was like a huge deal? It jumped to 40. In like three days. In three days. And then the great thing was it came right back down below it at the end of last week. And historically, that's a very good thing for the market. So when you actually put the data to it, I think the volatility as measured by the VIX or the fixed income ETF flows that you highlighted suggests that going into the election wasn't the time to get scared about stocks. Josh, you talk about it all the time. The street is loaded with people like

me that come on your show and come on shows and tell you when the market's weak. Oh, the market's weak. You got to be scared of when the market's strong. Oh, the market's breaking out. It's got to be strong. There's very little courage of conviction because we're in the media. All right. So wait. So last week, you got right. Last week you put out a note, I think on Thursday about buying into the whoosh lower and you made exactly that point, but you were looking at two things specifically. The first, you mentioned the VIX, the rate of change of the VIX, it went parabolic. And anytime you see a skyscraper in the VIX chart, um, happen in very short order, you know, that's not going to last. Nothing mean reverts lower like the VIX chart happen in very short order, you know that's not going to last. Nothing mean reverts lower like the VIX.

But the other thing that you said, this is you, quote, signs of a near-term washout, the percentage of SPX components, so these are S&P 500 stocks, trading above their 10-day moving average has dropped to below 10% for the first time since the June and September corrections. The drop to this level did not mark the exact low, but did point to stabilization. So that's a lot. When you have 90% of stocks nowhere near their 10-day or breaking through their 10-day moving average to the downside and almost nothing left in an uptrend, that's a fairly reliable signal that

the correction has gotten to where it needs to get, right? Correct. And it doesn't mean, like I said in the note, it doesn't mean that you hit your low. Yeah. It tells you that anything you lose from there, you get back in a bounce back rally. The problem is, as you know, corrections are only natural, normal and healthy until you actually get one. And then when you're getting one, it's like there's something fundamentally bad. Right. It's when they show up, people say, oh, I'm going to buy the dip. I'm going to buy the dip. I can't wait till there's a correction to put money to work.

The dip comes. It's like, no, no, no, not this kind of dip. Because this one's too fast or this one is too scary, right? This wasn't the one, this wasn't the dip that we were looking for. How important are market internals to your work? And by the way, most investors aren't operating on the timeframe that let's say a hedge fund might be. But just generally speaking, the volume of conversations you're having with clients of your firm are probably higher during corrections. So how much do you lean on looking for those types of divergences in the internals, for example, to give people a sense of this is it? It's such an important part because the

only thing that can change that quickly is the tactical backdrop or technical backdrop. It's the percentage of stocks that are going up or down. It's how the volume is progressing relative to the upside action. There's so many different themes about it that you can capitalize on. But what human nature, as you know, Josh, is extraordinarily consistent. Everybody pukes around a low and everybody spikes at a high. So in other words, you get extraordinary spikes at a high. So in other words, you get extraordinary overbought readings when you're going up and it's to the right and you get very oversold readings when you're getting hit like that. And those are two that I use. I use the VIX and you can use 10-day rate of change or the stochastic on it. And I use the percentage of stocks above the 10 and 50-day moving average because they're pretty good indicators of when you're getting washed out.

Right. Now, I think what people intuitively understand the concept of buying that dip and looking at the internals washed out and saying, okay, there's been enough pain. Maybe it's not the ultimate low, but it's low enough. I think everyone understands that intellectually, but I think the concern is that they are going to buy that dip. And even if there is a bounce, the next high is going to be a lower high than the prior and will be in a downtrend and there'll be bag holders. That's what keeps people from having the fortitude to buy the dip, not the intellectual side of it, right? Well, very few people can buy, as the note said, into the whoosh, right? It's very hard when the market's getting blitzkrieg to say, okay, I'm going to go in there with a bid.

So what typically happens is people that see the oversold condition wait for it to bounce. The problem is the bounces are so significant. Just look at the last two days, you're up 4%. The problem is the bounces are so significant. Just look at the last two days. You're up 4%. What happens is they want to buy the oversold, but it bounces so quickly. They're like, I can't buy it here. It's already up 4%. There's also an agency problem in here.

When you're managing money for someone else, and let's say it's like the last week of February this year. So the COVID headlines are still like about China and then a little bit Italy, but people don't really start getting nervous here until that last week of February. And there's a little bit of a down leg in the, I think the S and P by the end of February is down like 5% from its high. So if you charged in and bought that whoosh, which was a legit whoosh, bought that whoosh, which was a legit whoosh, and you used up your firepower there, then within three weeks, the market's 25% lower. And it's like, I did the right thing. I bought the fear, but there was a lot more where that came from. I think that's another thing that, and by the way,

I talk about this being an agency problem because it's not your own money in this example. Now you're calling the client, the client's like, hey, should we buy low? And you're like, oh, I already did, but 20% higher. So that's a question I get a lot is I downgraded the market, as you know, in January, because there were a lot of things that were bugging the crap out. I mean, one of them was you were having liquidity was drying up. It wasn't getting better. So the question I get is why didn't you buy the, when this got extreme at the end of February, why didn't you buy that versus why you did last week? And the, and the answer comes down to, I have a fundamental core thesis throughout my career, the mistakes that I've made

and there I need a spreadsheet for them. Throughout my career, the mistakes that I've made, and I need a spreadsheet for them. Throughout my career, the mistakes that I've made come from not having conviction in a backdrop. In other words, if I don't believe that the market's in a good position, meaning that the macroeconomic backdrop's in a good position, I'm not going to hold if I'm wrong right away. What do you mean by that? I have the courage and conviction of my fundamental position to create the ability to have staying power if I'm initially wrong on a trade. Okay. So you buy too early, but you still feel good about the overall picture. That'll give you what you need to not abandon that initial bullishness. Right. And in February, you didn't have a good fundamental picture. No, because it's all unprecedented. But even with fixed income, you had a global

economy that was still in sharp decline before COVID. That was throughout all of 2019. People forget. That's exactly right. In 19, we were in a manufacturing recession. Yeah. Europe and Japan were weak. Emerging markets were emerging markets. And we had a yield curve inversion last fall. Right. Six months before COVID. This is all before COVID. So our view, that's the reason I felt like an idiot. I downgraded January 20th and it went right up to new highs in early February. I felt like an idiot. I downgraded at January 20th and it went right up to new highs in early February. I felt like an idiot. But I stayed on that call because the fundamental

macroeconomic backdrop wasn't good. The opposite is true today. So to me, that's the difference on whether you buy that first drop of 5% to 10% or not. We didn't then because we needed to see the fundamental macro stuff get better. When you invert the yield curve, it doesn't go well. It can be five months or two years. And this was just not the case. So my pal JC Peretz, who's a market technician, he keeps focusing on the level that he says is the most important level in the market, which is either the Dow or the S&P. Forget the NASDAQ. The Dow or the S&P highs from January 18, January, February 2018, the onset of the trade war. So we print a high then, we get this huge correction. It's lightning fast, but it's 20%. Then we do it again in

December when it looks like the Fed is going too far with rate hikes, but from the same level. So we had a false breakout like September 2018 above that old high, and it just got ripped away from us. And now we seem to be keying off of that level once again in the Dow and the S&P. to be keying off of that level once again in the Dow and the S&P. But the trade war seems to have really exerted itself as the thing keeping the market from really breaking out and having a new leg of the bull market, just purely on price action and the events that have coincided. Am I oversimplifying that? Is there a lot more that goes into it? What's your take on that idea? On the idea that the global economy is the driver? Yeah. I think it's 100% accurate. It's doing it right now. Back then, and you guys were on it, JC was on it. When the

emerging markets are not acting well, when the global economy is slowing or actual decline, that's not good. And then you shut down credit or slow down credit through the inversion of the yield curve. And if you put those two things together, you have restricted liquidity and a synchronized global slowdown. Today, we have excess liquidity to a historic degree and a synchronized global pivot off the low. It's the opposite.

It's the opposite. Right. You remember that. I have it in big, bold letters. If this was a video, it'd be big, bold letters on the screen. What would it say? It would say excess liquidity coupled with a synchronized global recovery equals buy weakness. Okay.

So that's the backdrop now. I want to get into some election stuff. So this is, you know, as we're speaking, and of course, things can change. Contested election, kind of leading toward Biden. Senate leading toward staying red. The potential for gridlock is high. Resume leadership out of the fangs, which are companies that grow no matter what. Treasury yields and economically cyclical stocks got turned away at resistance once again. No mega stimulus plan likely to come out of this mix.

Is the market kind of playing out and reacting to that pretty much the way you would have expected? So going into it, that's a great question. Thanks, Josh. Number one, going into it, you had had two-day inappropriate ramp in the cycles relative to the mega caps on the idea that you were going to have- An inappropriate ramp. An inappropriate ramp. And actually, like we talked about earlier, the time to get more optimistic was into the whoosh on Wednesday, Thursday. It wasn't after a ramp into the election day. But it's easier to get bullish now.

Right. So what happened in our view is yesterday's action just reversed those two days. Like literally, Josh, the BKX closed within three cents yesterday on the 5% drop. Three cents, not 3%, three cents of where it closed Friday, last Friday. It's hilarious. And now let's look at today's action. As I look, what's leading? The cyclicals.

Yeah, materials, industrials. Financials. I think people have some of this election stuff wrong in that, okay, there's no fiscal stimulus to a ridiculous degree. Or not ridiculous degree. There's no excessive fiscal stimulus in a blue book. There's no $3 trillion package if Mitch McConnell is sitting there. So that's being viewed as a negative for growth. But no massive tax hikes. Yeah, but I think it's the opposite.

Let's say you get one and a half trillion out of Mitch McConnell and everybody agrees and it's a kumbaya. You know what that means? You're not pulling forward that extra growth because of that extra stimulus, which means you have it out six, nine, 12 months later. So it extends the economic trajectory. It doesn't shorten it. If you put it all in now, you're pulling forward all the growth to right now. So I wanted to ask you about that. The comps are going to be pretty tough next summer because of how powerful the stimulus was. Stimulus round one was incredible for consumers. You had people making more money not working than

when they were working. That's right. And you had a lot of activities and that didn't happen, which led to a lot of online shopping. What are these quarters going to look like in the S&P 500 next summer when we have to lap those numbers? It's not going to be easy, right? They're going to be tough comps, but you're going to have better incomes. You're still going to have some more stimulus. And the key driver of the whole thing is interest rates are so low. Can travel make up for a weakness in, let's say, durable goods or a comparative weakness in durable goods? Like next summer, what if everyone's spending money on vacations? Is that enough? I find that hard to believe based on the current sentiment.

A doctor told me if we could fix a virus with a vaccine, nobody would get the flu. Right. So this is going to be something that's going to be with us. So it's hard to it's hard to make a case on travel for vacations or business or anything else next summer yet. Will it be zero? I think I think that's also something that's very different than that first part. The decline in March, a shutdown is a very different thing. So, for example, when Germany shut down a week ago, they shut down everything but factories and schools. What? That's not a shutdown at all.

Right. That's, that's, what? Das shutdown. A shutdown to me is what it was like in the awful time of March and April, where you literally didn't go outside your house, outside of your yard, I should say. And we're not going to go back to that. Never. Right? So if you have income plus stimulus plus some kind of economic growth, even on a partial

shutdown, I think the negative comps will be, or the hard comparisons will be mitigated to some degree. Okay. So I want to ask you about this chart you sent me from Jason at Sentiment Trader. And shout out to Jason. He does great stuff. But this looks at what happens when the market rallies post-election day. So the day after the election, what tends to happen following a positive response? And we don't even know who the president is. So I don't even know if this qualifies. If yesterday qualifies as a post-election day rally, given that we don't have a result, but whatever. It was a big day. So Jason is basically saying over the last 100 years, if the stock market rallies the day after

the election, it's been higher three months later in every single instance, except for one. And the average gain in those periods is like four and a half percent. If the market is down after an election, the average gain is more like less than 1%. So we had the big post-election day rally, if that counts. But this is the part that I want to ask you about. I found it really interesting. You know, there are so many narratives about whether or not Biden will be bad for business and if he's a Trojan horse to sneak in the Green New Deal or Trump would have been better for business. The lone instance of a post-election day rally where stocks were lower three months later was Ronald Reagan in 1980.

If you ask people on the street who was the most pro-business president ever, they tell you Reagan. And in fact, stocks were down 5% one year after Reagan's election victory for the 1980 election. So I guess my point is maybe we shouldn't focus so much on the rhetoric about who's going to be good for business, who's going to be bad, what sectors, cause it really doesn't work out symmetrically or neatly at all. And I know you've seen a bunch of elections, so.

Right. Right. Well, fortunately I'm old, actually it'd be bad if I wasn't old cause I wouldn't be alive. So anyway, um, the stat is that the market is up a median 4.4%, like you said, when the next day, the day after election is positive, but it's also the same in reverse. And to your point, when the next day after the election is down, it's a median loss of just under 1%. Okay, median loss. loss of just under 1%. So that 1980 occurrence, let's talk about that for a second. What was in the backdrop at that point? You had double digit inflation and interest rates. And double digit unemployment or close, right? 10%? Close. I don't know exactly the numbers, but it was a disaster economically in the backdrop. Right. This is a disaster, but it's more of an acute disaster. We're not going through a secular battle with inflation right now.

There was no QE. There was no zero Fed for the rest of time. It was basically, we're trying to fix high unemployment and historically high interest rates. It's such a dip, but I think that had a lot more to do with the down 5% after Reagan than after the election was like. Absolutely. And this is always the case. We look back at Barack Obama becoming president with the Dow at 7,000. Well, of course he had great returns during his presidency. The stock market started off down 50%. You give any president, give Hoover that. But even better than that, what happened after he came in?

The Fed threw QE 1, 2, and 3 with an operation twist in there. Plus QE from all over the world in case we took a break. All right. So that's a thing that I think maybe people spend too much time focused on. a thing that I think maybe people spend too much time focused on. The proclivities of a president are not going to be the driving force for the long run returns of stocks. They will help or hurt, but let's talk about what will. So I'm going to quote you. This is what you said in the wake of the election. And I think it's the single most important point of all the shit that I read, wake of the election. And I think it's the single most important point of all the shit that I read,

which is a lot of shit, but I think you really nailed it. And I forwarded this today to a couple of people. This is Tony Dwyer. The most powerful person in Washington is still the Fed chair. While there can be further financial market uncertainty until the final results of the 2020 election are in, the most powerful person in the world remains Fed Chair Jerome Powell. Ultimately, the Fed has been clear that it's not raising rates for the foreseeable future due to disinflationary pressures, which suggests the positive impact the Fed has had on money available to fund future growth should remain in place. And then you make your point here. Remember, a significant and sustainable

period of economic retrenchment comes when there is a need for money to fund forward growth, but very little access to it. The opposite is true today. So tell us why you're so sure that that's really the big takeaway of this week. Well, first, I'm just proud of the fact that I was able to use the word retrenchment in a sense. You did that very well. That's pretty good for me. I threw that in there. Secondarily, we don't have to guess, Josh. A lot of people look at the Fed almost from an academic framework. As you know, I'm not bright enough to do that. I use practical stuff. When the Fed backstopped corporate credit,

they've got, I believe in all their facilities, the ability to buy $700 billion of corporate credit as a backstop to the corporate credit market, right? From right now or in the total program? At all. The policies they put in place. So they bought, today they bought $45 billion and my credit friends don't even keep track of it because they haven't bought any recently. Right. Right? So they've not even had to buy any. So we've raised – the corporate credit market has raised almost a trillion dollars just since March.

That's the – So let's – can you explain that? Can you explain that? Because I don't think people understand the magnitude of that. Can you explain that? Because I don't think people understand the magnitude of that. If you didn't know anything about what the Fed was going to do and you saw that unemployment was about to go from like 3% to 20% overnight, you would assume massive waves upon waves of bankruptcies everywhere from personal bankruptcies to publicly traded companies. And that actually did not happen. The Fed took high yield companies. So companies that had low credit ratings to begin with have been able to

raise over $800 billion in the markets because of the Fed's involvement, which has staved off that wave of bankruptcies that you would normally expect in any other recession we've ever had. So that's a, that to me, that's a huge difference this time around. Let's put it in very common terms, right? Main street terms. Let's say you, you've got a job and you don't have any extra income from your job in the holiday season, right? Also can't use a credit card. That means you're not going to be able to spend anything, right? Also can't use a credit card. That means you're not going to be able to spend anything, right? You don't have any extra income and you don't have any other way to get money to buy your kids or significant others gifts. So you don't buy them. And that's

obviously no growth. What the Fed did by backstopping the corporate credit market is all the pension plans and investors, they wanted to get return and interest return, right? So when they backstopped the corporate credit market, all the companies that needed to stay in business were able to do so because these investors bought their bonds. Right. Because they had nothing else to buy. They need instruments with yield. The Fed is in that market. And so these companies that would have ordinarily been bankrupt, instead, they remain solvent and they can ride this thing out. And I know that's by design. Now he has access to a credit card and he's got 20 grand on his credit card at 15 percent. Right. What the Fed did and then the demand for these bonds did is all of a sudden you were able to refinance that 15 percent debt. You got more money out. So now you're taking 30 grand, but it's at 4 percent. So basically it meant you could get much more money at a much cheaper interest rate. So there's something that people aren't

too familiar with. It's called the household debt service ratio. It's if you add up all the costs of running your household against what you make. And the biggest component, one of the biggest variables in that measurement is interest expense. So not only Josh- Like credit cards and mortgages. Yeah. So not only did they get issue debt at a historically low interest rate, they did it in a record amount. So it doesn't even cost them that much. It costs them actually less to take out debt now than it did in April. In other words –

And they're in worse shape. And the companies are in much worse shape. They could issue even more debt. They're in worse shape and the companies are in much worse shape. They could issue even more debt. That's the whole point that I think people really need to understand is that I used, which is you have a significant and sustainable shutdown in economic activity and markets when there is a need for money with no or limited access to it. There's no companies I've talked to that don't have access to money.

As long as you're not drilling for oil, you should, you should. And even in that case, you might actually have no problem. So, so what are the ramifications of that? Because my partner, Ben Carlson was saying the other day, let's say we get into a recession five years from now. There's like, everyone has, will have an institutional memory of the fact that we did this and it worked. So how could they – how will they avoid doing the same thing again the next time we're about to tip into a recession? Is this now the new way we fight recession, literally liquefying everything in sight and lending to anyone? Like is that the new playbook? And what does that mean for valuations?

It's been the playbook in the last three recessions. Now, they didn't do QE, but I remember Alan Greenspan, I think Greenspan in 1998 said, you'll never see these interest rates level again at 3%. And I'm sitting here thinking, did he mean on an uptick? So yes, it's different because we have quantitative easing now. But back then, you just hit a ridiculously low level of rate, allowed everybody to refi and extend their maturity. So basically, the answer to your question- Right, but now the Fed is literally buying bonds.

Right, there's no way- Corporate bonds. You cannot fix debt with exponentially more debt. Let me explain why. Historically, what happens in each cycle is we keep adding to the debt level, right? And because of that debt level, we take out the debt and we buy stuff. And that stuff appreciates in value, like your home value appreciates in value. The only reason that I can afford my house in northern New Jersey now is because the

interest rate is so much lower that I can afford the bigger mortgage, right? Because the price of the house went up, by definition, I have to have a much lower interest rate or I can't afford it. Because the cost of that house is so much higher now, so much more debt has come out. It's a self-fulfilling prophecy. Nobody will be able to buy it if that cost of debt isn't even lower. So each cycle, this huge amount of debt that the

monetization, like you said, makes it so that rates can't go up much the next cycle because it shuts the engine down. Right. So the terminal level of rates for the next up cycle continues to decline. In the 90s, seven percent interest rates were considered fairly low and 7% interest rates are now unimaginable. Unimaginable. Right. Okay. So are we going to go back to this playbook in the future because we have no choice? Is the Fed buying the bonds of investment-grade companies in the next recession?

Like are we going to repeat this playbook where we flood people's bank accounts with money? Or is this just very special, very one time because of the nature of this recession? So last year we put out a piece that was pretty controversial. It was called a generational change in how the Fed fears inflation. It used to be that they feared higher inflation. And what they found is the extraordinary amount of debt is a deflationary factor, right? Yeah. And all those hawks are aged out. They're all 90 years old now. There's no way. When they did that, they gave us the playbook. When they started talking about

these new tools that they actually put in place in June, they changed the playbook. So, Josh, I don't know. You cannot ever get out of it. There's no, there's so much debt. How do you reflate your way out of that? Remember what we said? Let's say the economy grew enough to pay back the debt. Where do you think interest rates would be on that? Right.

You wouldn't be able to borrow at prevailing rates if we had grown into it. Let's say last cycle, you got interest rates to go up. Where'd they get up to? The real rate got up all the way up to 1.5%, right? You got the 10, you're up to about 3%, right? Now we've added trillions of dollars to the balance sheet. You can't grow your way into that. You never get there because you couldn't afford the extra trillions on the balance sheet at 3%.

So now your next peak has got to be lower because it'll shut down the economy sooner. It's a circular motion. We just saw it. We just saw it. So in the winter of 18, the end of the year, that was the peak for the cycle. Where'd we get to? Two and a half percent interest rates? Yeah. That's it. You saw it. We're back at zero. Trillions of dollars more in debt. Right. And everything's bigger now.

So the disinflationary argument also, in addition to that, is that it's the only thing keeping the wheels on. Congress is funding itself at very low cost because of prevailing rates. There's no possible way they'd be able to do what they're doing otherwise. How do you get out of that? You can't. You just can't. I can't come up. I'm just kind of, I'm not laughing about it, but it's like, I can't come up with a scenario. So then the next question is how- We owe the money to ourselves though. I think a very key distinction, like when you watch late night comedians, they make these jokes about China,, how like China's our landlord, blah, blah, blah. China's been selling treasuries. We owe this money to ourselves. Exactly. So they've been doing it for a long time to your point. And you know who the biggest player in treasuries is? It's not China. It's not Saudi

Arabia. It's our own pension plans, right? It's a math equation. And I don't want to go too deep in the weeds here, but if your pension plan and you need to earn 7% now to pay your benefits to your beneficiaries that have retired. So what it means is every year you have to make 7% to be funded, to be able to pay your beneficiaries. If you're 60% fixed income now, which is so many of them, how can you do that when the highest risk category of fixed income and corporate high yield is three and a half percent? Right. So that's why they have to be 10% Snowflake and Adobe and Zoom video. That's the barbell. So I want to ask you about year end. And let's assume that the election falls the way it looks like it's going to fall with major lawsuits in every state,

et cetera, et cetera. But let's assume the markets have put that mystery behind them. And the markets are now focused on year end 2021. Will there be performance chasing this year? Will the buybacks and dividends that got suspended in the first half of this year, will they come back in December? What are you hearing and what are you thinking about? Because we're already first week in November. I don't think the buybacks to the same degree because the financials aren't going to be allowed to buy back their stocks. Okay. And they're a big part of the buyback equation. It's some of the big mega cap names, plus the financials are big beneficiaries of buybacks and that those got suspended. However, I think that's going to be a big theme in 2021.

The return of shareholder capital return. And especially potentially in the banks, where the government has told them they can't do dividends and buybacks because of loan loss provisions that proved to be too high, just like at the fall of 2009 and into 2010. Well, those loan loss provisions weren't tested because we don't know if the banks were reserving too much because we never got a chance to find out. The government stepped in and just gave everyone money. We really don't know if this was a stress test or not. Right.

But what do we do know is they don't need to – it's probably not as high. They're already telling us in this third quarter that it's not as high as they had feared. So maybe it gets worse next year, but I think that's going to be the big there. I think the one thing we didn't really touch on in the election is the true importance of it from my framework is the results in the House, not just the White House and the Senate. The House, I thought, was very important because it was a repudiation of the

extreme left, just like not a landslide on an incumbent president is a repudiation of the far right. So what you did is neutralize the tail risk, and you're left with the most important factor and the most powerful factor in the world, which is the Federal Reserve, coupled with that recovery. So it basically, Josh, opens the door, taking, neutralizing those extreme risks, open the door to focus on what we know. It's always, you know, people focus on what if. How many people have you been on CNBC with and had them give you a what if? Like all the great Biden analysis on tax hikes.

Well, that's in the fire pit. great Biden analysis on tax hikes. Well, that's it. That's in the fire pit. Yeah. Oh, six months ago, we were talking about President Elizabeth Warren. Like if she were the nominee, I think Trump would have won 45 states based on what we're seeing this week, right? So I agree with you. That repudiation. So then what is the takeaway? Did the clean energy stocks get ahead of themselves? Are we too bearish on the oil patch? Are we too bearish on banks? I think we're too bearish, just period. In that we expected a move towards socialism, a move toward higher extreme taxes, penalizing the wealthy. And there's no question we need to help those in need.

Anybody in our business that doesn't offer to do that, I think it's totally inappropriate. We all do it in our own ways. The bottom line is there are people in need and they have to be taken care of. And I think we'll do that with some degree of a fiscal stimulus package. Yeah. So let's end with that. Do you guys have an expectation there? Or do you personally have an expectation that something will happen by year end? Or does this really have to wait till the inauguration? I think it'll happen by year end. I think, again, who's the person that wouldn't change her mind? Nancy Pelosi. They're now talking about replacing her as the head of the house.

So what you've done is you've neutralized the hate. I mean, what a great thing for a country in our markets is to potentially neutralize the hate on both sides so we can focus on getting better. And what gets us better? Really cheap money. That's the best possible thing we could have ended on. And I couldn't agree more. I think what both parties have in common is they like this idea of being able to spend

and not necessarily having to find a revenue source to offset it. And they've both been doing it for a while now. Tony, I'm going to send people over to dwyerstrategy.canaccordgenuity.com. You can just go Dwyer Strategy and it'll take you there. Dwyerstrategy.com will work great. That's even better. All right. We'll link to that in the show notes. Everybody will check out, uh, Tony's site. You've been doing it a long time. I think you're the best out there. Just want to say thank you so much for coming on, um, sharing all your, uh, insight with, uh, with the compound audience. We love you. We're going to have you back. Buddy. I got to tell you what you've done for, for financial TV and how you portray yourself

and how you're out there advocating for the average investor, I think is second to none. My friend Jim Cramer has done that for education in finance. And it's not about right or wrong. It's about trying to help people with their investment process and having a practical application of all this crap we hear all day long from people like you and me. And I think it's extraordinary. Keep up the good work. You the man. All right. Stay safe. We'll talk to you 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 the compound RWM. Talk to you next week.