The Compound and Friends - The Roaring 2020's with Dr. Ed Yardeni, Tesla stock split, Follow the Robinhood Money

Episode Date: August 14, 2020

As World War I came to an end, the Spanish Flu pandemic of 1918 raced around the globe, infecting as many as 500 million people and killing an estimated 50 million. Shortly after it ran its course, the United States experienced one of the biggest booms in history, the Roaring 20’s. Could it happen again? Another boom decade fueled by high productivity and an onslaught of technological innovation? Dr. Ed Yardeni is the President of Yardeni Research, Inc. He’s served as a chief strategist on Wall Street as well as an economist at both the New York Fed and the Treasury. He’s been writing about the parallels and contrasts between the 1920’s and the 2020’s and I’ve asked to come on and talk to us about it. Plus, Michael Batnick returns to play What Are Your Thoughts - all of the biggest topics of this week in money and investing. Visit thereformedbroker.com for full show notes, links and resources! Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

What's up? It's JB. Last week, we did a deep dive on stock splits, and I asked the question, where did all the stock splits go? There have been less than 10 this year so far, but 40% of S&P 500 companies are now trading above $100 per share. In the late 90s, there were 20 or 30 stock splits every month. Tesla came out after the bell on Tuesday night and announced a five-for- one stock split, almost like an answer to what I was talking about. The Tesla split will happen on August 31st. The reaction in the stock was a hilarious 15% rally in one day. It ran up $180 per share and hit $15.50 on no other news stock split. So that's very 1999 ish. When you ask yourself, is this investors being stupid saying the company is now 15% more valuable because

they're just cutting more slices of the same cake that could be, or is this just traders all having the same idea about front running the kind of investors who would buy it after the split when it makes the price look more affordable? And I did air quotes when I said affordable. So post split, it'll be $310 a share. How many of the traders who bought in after the announcement are saying to themselves, I'm going to buy it because some other idiot is going to buy it after it splits. They're going to think it's cheaper. It's not so stupid because that actually has happened many times. It happened with Apple when they did the seven for one split six years ago, which we talked about. People saw, oh, wait, Apple's back at 100. I'm buying it now. I didn't want to pay 680 for it, but I'm happy to pay

110 for it or whatever. So I don't know. Maybe everyone is playing the greater fool game. I would also say if it's now that easy to add 15% to the value of your company, maybe every CEO should announce a split right now. Are there enough ass clowns in this market today to keep it going? Should Nvidia announce a split? Shopify? Microsoft? Alphabet? Amazon? Maybe we just go straight to the middleman and have SPY do a split. Save us all the aggravation. It's getting sillier by the minute. Speaking of ask clowns, JP Morgan put out a paper this week looking at whether or not retail traders, mom and pop traders, have the ability to move stocks or move the market. And they took all of the publicly available Robinhood data and replicated a famous study

of retail traders from 1991 through the year 2000. This was a study by Barber and Odeen. It's like a very well-known study where they tried to look at the behavior of people trading their own accounts. And I guess back then, they had access to a couple of data sets from a few brokerage firms. Very hard to come by this stuff. Historically, it hasn't been shared. Here's what they found, JP Morgan found about today's retail traders. This is the biggest takeaway. Today's retail traders are exactly the same in behavior as their parents were in the 1990s. There is no difference in the way they act and the stocks they buy and the reasons why they buy those stocks. It's the same thing. So the apps are different. The websites are different. The tools are different, but it's

no different in terms of like, what are they doing? So JP Morgan found that the Robinhood kids, like the traders of the previous generation, were most likely to buy stocks that have the following three traits. One, stocks that are in the news. So JP Morgan used Dow Jones Newswire headlines to quantify that. Two, they buy stocks that are experiencing abnormally high volume relative to their previous average volume. So in other words, these are the stocks that all of a sudden there's a lot of activity happening with. These are the stocks that everyone is buzzing about and that attracts more people to talk about them and by extension end up buying or selling them. And then three, Robinhood traders tend to buy stocks that have recently posted extreme returns.

This is obvious. So it's the recency bias. Big moves in the market, especially to the upside, attract a crowd of traders like a fireworks show attracts an audience on the 4th of July. So JP Morgan then asked the question, well, what happens if you buy the stocks that become held by the highest amount of Robinhood accounts. So in other words, they don't actually have dollar figure data. They can't tell you how much money Robinhood traders have put into these stocks. They can just tell you the number of accounts that own them. And I guess they use that as a proxy for popularity. So if they have the number of accounts at Robinhood that are buying a stock, then they say, well, what happens to the price?

Like do these stocks outperform, underperform? It turns out that over the following week, when a stock joins that Robinhood list of the most owned stocks, it does better than the overall market. Momentum feeding on itself. But then past a week, that effect starts to fade. right? Momentum feeding on itself. But then past a week, that effect starts to fade. And they looked one year later, and there's no discernible difference between a stock that was on the Robinhood most popular list or any other stock. So two things about this. The first is that hedge funds have already been downloading this data and trading on it. So they were either riding the wave or they were fading it, like trading against it.

But either way, this is now an already very old game. The second thing is that Robinhood has already announced they're going to take this data away from the public eye. They're going to stop sharing their data feed with RobinTrack, for example, which is one of the sites people use to see activity on the app. So I guess I hope it was fun while it lasted. I have a packed show for you today. We're going to start with Dr. Ed Yardeni laying out the possibility for a roaring 2020s decade. A lot of the key ingredients are in place for things to go absolutely bonkers when the economy reopens. Then we're going to play What

Are Your Thoughts with Batnick again. we're going to play What Are Your Thoughts with Batnick again. We're going to get into all the biggest topics on the street this week. We cover so much stuff there. But first, before we get into any of that, let's play the theme song. 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. 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. As World War I came to an end, the Spanish flu pandemic of 1918 raced around the globe, infecting as many as 500 million people and killing an estimated 50 million. Shortly after it ran its course, the United States experienced one of the biggest booms in history, the Roaring Twenties.

Dr. Ed Yardeni is the president of Yardeni Research. He served as a chief strategist on Wall Street, as an economist on both the New York Fed and the Treasury. He's been writing about the parallels and contrasts between the 1920s and the 2020s. And I've asked him to come on and talk to us about it. Ed, thanks so much for coming on the show. I really appreciate it. Thanks, Josh. Okay.

So, and I should mention also, you've got a new book this year, Fed Watching for Fun and Profit, a Primer for Investors. How's that been going? Very well. I put it on Amazon at the beginning of March, and I immediately regretted not writing a book on viruses instead. But a couple of weeks later, on March 23rd, the Fed came in with what I call QE forever. And everybody started talking about don't fight the Fed.

So the book's done extremely well because people do want to go back and kind of study what the Fed has done in the past and why they're so important. Okay. We'll link to that in the show notes for sure. So if people aren't aware of it, they can go pick that up. I didn't get my copy, so I'll have to go get a copy. So I loved what you wrote, I guess, over the weekend. You were talking about the fact that good times follow bad times.

I don't think anyone would argue that we're in anything but bad times right now, even though the price action in the stock market may not fully reflect it, or at least not yet. It's as bad of a time as I've ever seen. And I lived in New York during 9-11, and I'm no spring chicken. And I know you've seen a lot more than I have, but I don't ever remember anything like this. But I think it's an important message. And one of the things that I thought you did really well was just walk people through a very brief history of the 1920s, which came after that pandemic period. And so I want to ask you, people in their wildest dreams living through 1918 probably never could have predicted all of the advances that would have come along very shortly after that horrendous moment in time.

Do you agree with that? Absolutely. Look, we all have a tendency to believe that we live in unprecedented times. And maybe that's because many of us don't spend enough time reading history. But there is a precedent for what we're going through now. I mean, there have been global pandemics before, but, you know, one of the worst ones was the Spanish flu in 1918. And that was caused by and dramatically exacerbated probably by soldiers coming back

from the trenches. They were all sick. They were all frail. They were very vulnerable to diseases. And so whatever came together, it was all horrible. And as you said, hundreds of millions of people were infected and 50 million people died. So it it's 7.5 billion. And so far, we've had 20 million cases and 735,000 deaths around the world. So it pales by comparison. It was unprecedented times, World War I followed by the Spanish flu pandemic. And I got to believe that anybody who lived through all that had to be extremely depressed and concerned that this was the new normal, that it was going to be horrible for the foreseeable future. So, Ed, you were saying that given the population size back then and the amount of people that we think were infected, it's a 28% infection rate and a 3% death rate,

and that's percentage of all people alive. Correct. Those are enormous numbers. Right, right. Yeah. And we're much smaller numbers on a relative basis for sure. And even on an absolute basis, you know, 500 million people infected back then, 20 million so far, and 50 million people died back then and 735,000 have died so far in this pandemic. But, you know, we all feel terrible. I mean, it is a horrible time for all of us, you know, that are living through all this. But, you know, good times are followed by bad times and bad times are followed by good times.

That's what history shows. And the pandemic of 2020 should be followed by better times. And now we actually have the possibility of getting vaccines a lot sooner. Technological innovation is certainly happening in the biotech area as it is in other areas. But that's where there's a similarity with the 1920s. areas it is in other areas. But that's where there's a similarity with the 1920s. The 1920s was an extraordinary period of great technological innovation. So we have World War I, we have the pandemic, then we have a recession, which was pretty severe at the time in the early 20s, 2021. And by 22, we started coming out of it. And the rest of the decade saw all these amazing innovations,

electricity proliferated, it allowed for urbanization. Let me ask you something that I was thinking about the other day. If you lived in 1919 or 1920 during this recession, were they even calling it recession back then widely? And if you were the average person in America, did you even know? Like, were you even aware that the nation was in recession? Or did you just look at the situation in your own town, probably an agricultural community, and just say, it's not good? They didn't have social media, obviously. So they didn't have instantaneous recognition of what was going on and sometimes exaggeration of what's going on. But they knew that the economy was in a bad way.

They knew that they'd had several years of really just horrible geopolitics, horrible health, and now an economic recession. They didn't call it recessions back then. They actually still use the word depression. It's just been since World War II that economists decided to soften up the term and call it recessions. But the economy was in a bad way. A lot of soldiers came back from the trenches and had no jobs. And they were sick and they died from the virus. It was horrible. Yeah. So now all of a sudden, it doesn't seem like there's one particular spark.

I think electricity, if you had to point to one thing, maybe was the biggest reason for the boom. But why don't you walk us through some of the stuff you were writing about, autos, electricity, et cetera? Well, yeah, et cetera? Well, yeah, back then, electricity was a big deal. So it was actually improved plumbing, which allowed for urbanization. And for example, in 1920, 51% of the US population lived in cities. That's up from only 23% in 1870. And that couldn't have happened without very important improvements in urban water supply systems, sewer systems. And it couldn't have happened without electricity, allowing people to have all sorts of appliances, including lighting, of course. But it wasn't just electricity and plumbing.

It was also the cars. Henry Ford built the Model T from 1908 to 1927. It was the first car invented. It was extremely popular and allowed people to travel further than before. By the way, somewhere along the way, we also invented the traffic light because up to then, people were kind of like running each other over and crashing into each other. There are all these kind of, you know, innovations that you never think about. Well, where did this come from and when did they start?

I mean, just how about food? I mean, people used to eat stuff that they bought at just open-air markets. I don't know if it was as bad as some of these open air markets that we have now causing us some grief in, in China, but they were bad. A lot of the food was just bad, but then the refrigerated carbs came along the way refrigerators in the homes. And then we had all this processed food that maybe is. Yeah. There's a, there's a, there's a Steinbeck,

there's a Steinbeck novel, East of Eden. And I don't know if you remember, the father, toward the end of the book, he starts inventing the refrigerated train car, rail car. Yeah, it was a huge... And he's going to send vegetables and fruits from the San Joaquin Valley in California all the way to Boston so that people can eat lettuce in the winter. And that's like a huge innovation that they're working on then. Well, look, I don't know for sure that the innovations, the technologies that we know exist today and that are going to proliferate are going to be as big a deal as electricity even as just simple plumbing.

But they certainly could be. I mean, we're spending billions of dollars right now on a vaccine, and that's kind of a Manhattan project. The Manhattan project was a tremendous effort to build the atom bomb. Well, now we're spending billions of dollars to build bombs that can destroy vaccines. And we may very well come up with a technology that allows us to expedite vaccine creation next time we have another virus that we just don't have an immediate solution for. So the health care front seems to be one area where we could see a tremendous amount of progress resulting from this. So bad news kind of setting the stage for good news. But we also know about all these other

technologies. Look, it's conceivable that because of the virus, more people will decide that they don't want to, we make it de-urbanization, if there is such a word, that people decide they want to move back, more people want to move to the suburbs and to rural areas, that could obviously be a big boom for housing and appliances and furniture. So that could actually stimulate a lot of economic growth. And then cars. I mean, people are going to need more cars if they move to the burbs and to rural areas. And we are certainly on the cusp of having a radical technological change in the auto market with electric vehicles and autonomous driving vehicles. So that's a tremendous amount of potential demand for housing and autos that could create the roaring 2020s. Yeah. So I want to go back to that because one of the points that you make is how it's not just that one technology comes along

like the automobile. It's all of the things that then get layered on top of that that produce a boom. So this is you. You say when people went out and about in their Model Ts, they got hungry. Their options were few, but the first fast food chain opens its doors in 1919. That's A&W. And then White Castle comes along in 1921 with the hamburger stand. And then Howard Johnson's, which I guess would be like a diner today, 1925. So that's like one of those things,

quick service restaurant would not have come along if there weren't a need for it produced by that prior technology. You do the same thing with Montgomery Ward and Sears, the catalogs fulfilling 100,000 orders a day, which then precipitates the need for a parcel post and people who will deliver packages. So you're saying that we could see a version of that in the decade to come if we de-urbanized, for example, then all of a sudden people that were taking mass transit into the city, they're going to need a different way to get around.

And maybe that's autonomous electric vehicles, et cetera. Sure. And look, there's already discussions going on about taking some of these vacant malls or mall spaces and converting them into fulfillment centers by the online retail retailers. So we're pretty inventive. And when people get really depressed about the future, obviously there's problems that are causing that concern. And what always seems to save the day is technological innovation. Technology comes and solves problems. And it solved lots of problems in the 1920s. And again, if people are

urbanizing at a rapid pace, technology solved the problem of how do you make that comfortable for them? And how do you keep that process going? So I love this quote, and you included it here, and it's from your book in 2018, which was an autobiography of your career. But I just – I want to do the whole quote because I think it's so important. A lot of people think about economics and they think about scarcity, and you look at it the other way, and I always have to. I couldn't put it into as eloquent of a statement as this though. This is Dr. Ed Yardeni, quote, economics is about using technology to increase everyone's standard of living. Technological innovations are driven by the profits that can be earned by solving the problems posed by scarce resources. Free markets provide the profit incentives to motivate innovators to solve this problem. As they do so, consumer prices tend to fall. Driven by their innovations, the market distrib resource prices were prohibitively high. So I think that we've gotten that into our mindset as an investor class. Now, you get into all of these stats about technology capital spending.

So that spending is to answer questions and solve problems and create this abundance you're talking about. So what do these numbers mean when we read about R&D making records and we read about it as a percentage of total capital spending, et cetera? What should we think about that? What should we think about that? Well, I think it means that when we look at the capital spending numbers today, they're really not that comparable to the capital spending 10, 20, 30 years ago. Technology has become a bigger and bigger part of capital spending. So in the nominal GDP numbers, not adjusted for inflation, but in terms of what people are spending, and keep in mind that a lot of technology prices go down, they don't go up. But high tech spending on IT equipment, software, and R&D rose to a record 1.3 trillion

during the second quarter of this year. Now, that's at an annual rate, but that's the way we usually look at it. In a crisis, we're producing a record tech spend. Correct. So important. Well, it's very important. And obviously, technology companies have provided us with lots of hardware and software that has been very helpful in getting through this crisis for most of us, especially those of us who are fortunate enough to be able to work from home to use Zoom technology and the like. But the bottom line is in the second quarter that high-tech spending, including, again, equipment, software, and R&D,

accounted for 50% of total capital spending, all-time record high. And by the way, that may actually be a low ball numbers because there's a lot of industrial equipment that embodies a lot of technological innovations within the machine. So I would say that we're looking at a record amount of capital spending being attributable to technology. And technology, I think, is going to lead to more productivity, and more productivity leads to more prosperity. Productivity is really what drives inflation adjusted wages. And so I think that's another reason to think that the,

like the 1920s, the 2020s could see tremendous improvements in the standards of living. So when Americans spend 50.1% of total capital spending in nominal GDP terms. When they do that, most of that money finds its way into the US economy because there's mostly US tech giants are the recipients of that spending. To a large extent, that's absolutely correct. Yes. I mean, one of the areas where we excel is technology for sure. So that goes a long way to explaining why the S&P 500 and the NASDAQ are where they are. Absolutely. Okay. And we're very fortunate to have that technology component to our markets versus other global markets.

It's not good luck. It's just a matter of free market capitalism. We still have enough of it to create, as you mentioned in the quote of what I said in my book, is technology solves problems. And if the market is allowed to operate and create incentives for entrepreneurs to solve those problems with technology, they'll do it. And they'll get rich and make the rest of us feel much better with the technologies that they provide us. But on the other hand, that also tends to create social tension because it does exacerbate income inequality. But look, I think the 2020- When you have a Manhattan Project-esque search for a vaccine or treatments or both, there is some element of the government sparking a technological boom, for example, in biotech.

Correct. So there's a role for both to play and hopefully they'll work together. Yeah, there always has been a role. And, you know, we don't live in an economy of, obviously, of pure entrepreneurial capitalism. It's really a combination of pure entrepreneurial capitalism and crony capitalism, which is big business and big government working together. And also, let's face it, there's clearly socialism in terms of government support and subsidies for incomes. So I did a whole episode about the irony of the Trump administration presiding over the beginning of UBI.

Right. And I know there's been social security back to FDR. I understand it's not really the beginning, but it really does feel that the Treasury has created something that will be very hard to take away from my perspective. And I'm curious what you think about the extraordinary payments to taxpayers, direct deposits, the addition of federal unemployment insurance, et cetera. How are we going to pull this back? Do we have UBI now forever? Well, UBI, of course, is universal basic income. And even before the pandemic hit us and before the government provided checks and extra unemployment insurance benefits, there was

some discussion of UBI. And it's mostly by technology people wondering, you know, what's the future going to look like when everything is made by robotics and with artificial intelligence? And maybe, you know, the future is now, if you look at Japan, Japan is a country where they've kind of run out of workers because of the geriatric demographic profile there. We're all getting older around the world. We're not having enough kids, fertility rates have dropped. So that's kind of the demographic outlook for us. We're going to have fewer working age people. And it's conceivable that we may actually wind up taxing robots and people who own robots and automated systems and using those tax revenues to provide some basic income to people who just can't quite make it in this brave, brave new world. Maybe, you know,

provide them with enough income to find what what they can do on a gainful employment situation. But so you you reference Brave New World, which is Aldous Huxley, but another book comes to mind, Player Piano by Kurt Vonnegut, where he envisioned this already. I think he wrote this in the 50s, but he was talking about a society where the robots do everything. They've been trained by humans and then the humans have been put essentially in villages to sit around all day. And then you had this managerial class that runs the whole thing. I'm not sure that that's definitely the only way this could go. Another way this could go is everyone becomes an artist,

but the truth is probably somewhere in the middle. Yeah. I think what all this does is kind of forces all of us to think about where is this all going and how do we make it work out to our benefit? I think all in all, we'll put it all together in ways that unbalance, create a great deal of prosperity, as long as we don't screw it up with politics, domestic or geopolitical issues. So I want to go into now the 2020s. And why don't you tell me what you think is a similar setup, obviously the pandemic,

and then tell me what you think are some of the differences. And I want the audience to think about whether or not those differences can be overcome and we can have a boom decade. Well, I think in terms of similarities, we've sort of discussed the technological innovations now. Okay. So we have all that now. We have all that down.

It's not like this is suddenly happening. We know that there are a lot of technologies that have been developed over the past few years and are just going to really proliferate during the decade ahead. In terms of the differences, I guess the concern is really on the political side. I mean, we have had a president so far, Donald Trump, who has cut taxes and deregulated. And that's very similar to what we saw with Warren Harding and Calvin Coolidge in the 1920s. They were both believers in deregulation and low taxes. However, Trump has got really no problem with big government. Both Warren Harding and Calvin Coolidge were against a big government. But it's here to stay. I mean, that's not going away. It's going to get bigger. We have modern monetary theory, which basically

is a manifesto for how fiscal and monetary policy can be used by government to get bigger in our economy, hopefully for our benefit. But I think a big difference is government's much bigger than it was in the 1920s. And whether it's Trump getting another four years or Biden being the next president, I think government is here to stay. And free market capitalists might get pretty depressed about that. But, you know, as I said, and as we agree, it's been a mixed economy for a while. And since both you and I and our audience are interested in the stock market, it's not necessarily bearish for the stock market, this kind of outlook. So you say that Trump may have actually set the stage for bigger deficits, a universal basic income, and the fiscal and monetary access is championed by advocates of

modern monetary theory. So modern monetary theory, we're not going to go into a wormhole on that. I'm sure you have many thoughts. I know it's very controversial, but it's just this idea that deficits aren't particularly important and that we can spend a lot more money, debt-fueled money than we originally thought we could. That seems to be the takeaway by both political parties, though, of the pandemic response. Would you agree? Absolutely. the takeaway by both political parties, though, of the pandemic response. Would you agree? Absolutely. And that's a big difference between the 1920s, where conservatism was in vogue, certainly in Washington, and small government was widely embraced as the way we should go. And let, you know, the business of Americans is business, is what Calvin Coolidge said.

This time around, as you said, I think it's kind of become a standard belief on all sides of the political spectrum that the government's here to stay and it's probably going to get bigger. to get bigger. So if we do have a roaring 20s, perhaps income growth will keep pace for more Americans than the last time we had a boom, which I suppose was the housing boom or. You know, once you get into the income inequality, wealth inequality, standard of living issues, it becomes extremely political. I like to start with the data before I start out with a political opinion. And the data actually shows that since 2008, 2000, actually since the mid-1990s, inflation-adjusted real wages have been increasing about 1% per year, which is a pretty nice increase in the

standard of living. And that's been fairly well distributed. It's just what's happened and what's so visible is the rich have gotten a lot richer, but everybody else wasn't doing all that badly. And we were doing real well until we got hit by this pandemic and that just exacerbated income inequality, wealth inequality, and the political partis boom and productivity wouldn't be pretty well distributed creating prosperity for people on a more equal basis. Even if people end up doing a different job than the one that they were doing prior to the pandemic. And not all of those necessarily are writing poems and plays, which is fine if that's what you want to do. But I think, as always before, we found that technological disruption does disrupt a lot of people's lives

in terms of their jobs, but it creates a lot new and better opportunities. And I think that'll be the case again. Well, I'm certainly rooting for that to be the outcome. Dr. Ed, really appreciate you coming on the show. We're going to link to your new book and hopefully everyone will go out and buy that. And I think if people want to find your writing more frequently, you've got a way for people to subscribe to your thoughts or... Yeah, they can go on the website, your Denny.com and sign up for a four week trial. There's also a blog.

Your Denny.com. And I'm, I'm on LinkedIn quite a bit. Okay. Very cool. So we'll, we'll link to that. We'll let everyone check that out. Ed,

thanks again. I'm so glad you're, you're doing well. So glad you continue to write. I learn something every week when I read your stuff. And thanks again for coming on. Hey guys, it's downtown Josh Brown. Welcome back to an all new edition of what are your thoughts? I'm here with Michael Batnick. Michael doesn't know what I'm going to ask him. And I don't know what he's going to ask me. Play along with us in the comments below. Tell us your thoughts. Let's get into it.

All right, Mike, I'm going first. I want to talk about your post-market surprises and just this idea that you should expect the unexpected. I was curious about your thoughts when you went through the research. Did you find what you were expecting? Because while you point out that over every 10-year rolling period throughout history, you had a 95% chance at seeing a positive return, the ranges were all over the place. Is that what you expected to see? And did anything jump out at you? Yeah, I wasn't surprised at that.

I guess what surprised me was how shallow the lower bound was. I wasn't really thinking about what it was going to be, but it was negative 5% annualized for 10 years, which is- That's the worst that you saw in the research. Yeah, which is bad. That means you're down quite a bit of money, more than cut in half. But I guess I thought it would be worse than that. And the point that I was really getting at was the limits of using market history as a guide that is firmly planted or baked in cement for the future. Because worst case, we don't know what the worst case is. We know what the historical worst case is, but shit happens all the time that has never happened before. And I think you just got to be

prepared for a wide range of outcomes, which is not terribly helpful. But for example, stocks never fell 30% in five weeks. So if you were looking at history, what are the odds of that happening? You would say zero. And then it happened. We don't have enough history to really calculate odds. And then in terms of like market regimes, when you're looking at non-overlapping 10-year periods, you don't have a whole lot of history. It's not like we've got a thousand years where we say, okay, we've seen this before.

We've seen that before. Like we've seen it all. We haven't seen it all. Right. So you can't say, okay, here's what happened. The last 50 times the market fell 30% in five weeks. Right. Even then, I don't think you would be doing science.

It's still interpretation. But the reason why I think this is so helpful is because when you're building a portfolio or you're recommending a portfolio to an investor, having that information in front of them so that they understand why you're not betting on one particular outcome. So like we sit with a client and they're like, well, I'm really worried about inflation. Build me a portfolio that's going to factor in that and get rid of my bonds. Or I really think there's going to be another bear market in the fall when COVID comes back or whatever. Their reasons are fine.

But then just showing them, look, that could happen. But then here are all these other things that statistically could also happen. And we have to plan for everything. We can't place one bet and hope to get it right. Even if we get it right once, can we do that all the time? Well, I just don't know that when you're looking at market history, looking at the range of outcomes as opposed to what the average is, is a much more useful exercise, I think. That's the point that I was driving at. I totally agree. I thought it was a great post.

What do you got? All right. I want to talk about an idea that I've been kicking around that I'm going to call the investor's dilemma. And I think that everybody goes through this at some point in their life where you have people that just are always- Are you okay? I'm great. Thank you. Are you going through something?

Where you have people that are always dismissive of the next idea. And then you have people that are always chasing the hot idea. So on the one hand, you don't want to be like the investor who was just completely dismissive of the internet in 1998. You don't want to be that person. On the other hand, you definitely don't want to be the investor that bought telecom stocks in December of 1999. So how do you balance those two competing ideas, which whether it's cryptocurrency or the hot stocks today or whatever? I mean, there's always something. Can I be honest with you? There's a really simple answer.

Stop loss. You seem stunned. Why isn't that the answer? Well, because you see to yourself. I don't think that's one answer. I don't think it's a great answer. You get stopped out a million times. Right.

So I think it's the easiest answer. You say to yourself, all right, Shopify, I get it. There are 50 million small businesses in America and Canada. Forget about Europe, Asia. There are 50 million small businesses and they all want to fight back against Amazon, but they can't obviously do it. that is offering logistics, shipping, fulfillment, the shopping cart on the website, the payment gateway, the email back and forth with customers. This company is going to arm tens of millions of businesses who want to sell and have a competitive e-commerce situation compared to the big guys. This is a brilliant idea. However, it's 40 times sales, whatever. So you say to yourself, I don't want to dismiss that this company has the ability to be

enormous and extremely important in the economy of the future. So I want to be in it. But I'm aware that A, I'm overpaying like everyone else is. and B, this could be a bubble and I could be buying in the ninth inning. So how do you balance that? Well, you get long. Position sizing is another thing that you can consider. But just use a stop. And if you are the last idiot to buy it, which is going to happen to you in your life, the market will tell you. Now –

Counterpoint. You get stopped out. Then you have a harder decision. All right, now's the time to buy it. And to your point, you could do that the whole way down. No, no. You could do that the whole way up. So the counter is that all of these best stocks, I mean, forget about getting cutting half. A stop loss is useless if you set it down 50% below, but it happens multiple times though. So that's the thing. So I don't know that a stop loss is the right answer. It's an answer.

I think it's maybe better than nothing, but these things correct all the time to varying degrees. So what's the right amount? So I've been in NVIDIA since 2015, and I think I've been cut in half maybe twice, but I've seen more than a dozen, 20% drawdowns in that stock. Right. So, so, so stop losses would have killed you. The way I thought about Nvidia was that I'm going to take full risk here because I don't want to get stopped out because I had that conviction. So it wasn't a dilemma for me. It doesn't mean

that I had to have been right. Like I'm just saying in hindsight, this was one that worked. It doesn't mean that I had to have been right. I'm just saying in hindsight, this was one that worked. There were other things I wrote down that never recovered. But I think at the end of the day, that's why there's risk involved. The only reason why you could own a stock that goes up 4x or 5x is because you're willing to sit through a 50% drawdown. So the dilemma might just be a timeframe thing and a style thing. If you're a trader and you want to be in these names, I think you need a stop loss.

And if you're an investor, I think you need to say, how much risk am I willing to take? And then size your position accordingly. But I don't think there's ever like an answer. I also think people change depending on where they are in their lives and what experiences they've had. And as every investor matures, they start to realize, okay, this would be great if I own this sector and I'm right and it really works out, but the consequences would be worse if I'm wrong. So I'm just going to watch it happen. I mean, that's a

mature attitude. Maybe it's not the secret to huge returns to pass on everything, but I don't think there's anything wrong with that either. Do you? I just think it's a difficult question. I agree. Listen, I wish I had the answer. In a similar vein, I wanted to ask you about, I have this thing where I feel like the argument of fundamentals versus technicals is wrong. I think right now the real argument is technicals versus macro. And I just, I jotted down some notes about what I was thinking. I might write about this, but I was saying like everyone always compares technicals to fundamentals. But it seems to

me that if you look at technicals versus macro, most of the people who study and follow macro data and are really into all of these economic reports and the prices of currencies and oil, it just seems to me like they've been on the wrong side of the market for a really long time. I'm sure I'm overgeneralizing and that doesn't apply to everyone. But what we've seen in the last 5, 10 years, when the economic data starts slowing down, stocks start rallying. And when the economic data starts to recover, all we end up with is lower bond yields. Like these things are broken. They're not working together.

We had deflation fears in 2015, 2016. All that did was put a floor in for the price of gold. So to me, it seems like the macro stuff is almost all counterintuitive, whereas technical literally is going with where prices are headed and not trying to fade that. What's your take on macro versus technicals? Well, I think the reason why technicals get compared to fundamentals is because you're talking usually about where do I start? I want to learn about investing. Where do I start?

Nobody starts with macro. There's too much to swallow, too much to wrap your arms around. But I think that a lot of the macro people use technicals. Okay. That's a fair point. OK. That's a fair point. But the people that are coming up with an opinion on the economy and then distilling that down into an idea about what the stock market is going to do are not using technicals. But how could you do macro without looking at charts? So a technician would say the market is smart. Market knows where it's going and the trend is the trend. And then they're looking for divergences where opinions are changing and price still hasn't yet or vice versa.

The macro person is basically saying everyone in the world is an idiot if they're a contrarian. Everyone in the world is wrong and my opinion of what's about to happen in the world is right. And that's almost the opposite of technical analysis. But this is very specific. I think you're talking about the macro people that sell newsletters because that's one of the appeals. So I don't know that macro hedge funds actually think that everyone's an idiot.

I think that some of the stuff that we read from people that are selling a newsletter service are of that vein because they have to sell something. That's fair. So you're saying part of the appeal of a newsletter is somebody telling you why you're going to know something that everyone else doesn't know. Huge. Right. But a technician is not going there. A technician is basically saying, here's what's happening. We either think it's going to continue to happen or there's a divergence and we think it's about to change. All right. It's very different to me.

I want to ask you about something that I think is remarkable. This is from the vice president of Exxon. Exxon has a long history of providing a reliable and growing dividend. A large portion of our shareholder base has come to view that dividend as a source of stability in their income. And we take that very seriously. So Exxon is currently yielding around 8%. They've paid a dividend for, I think, almost 40 years. And what they're doing is they're suspending the matching program to their 401k, which matches employee contributions who

contribute at least 6% of their salary with a 7% company contribution. So they're suspending their 401k match to preserve their dividend. Thoughts? Are they lowering the dividend? I don't believe so. So I think dividends can be a trap for corporations. And you'll notice like Berkshire Hathaway never paid a dividend. And some of the best performing stocks of all time weren't, I mean, they might have had small dividends, but they weren't like, hey, we're a dividend stock, buy us for that reason. Altria, Procter & Gamble, there's some of that that are on that list. Sure. I think what happens though is you get trapped. And like you could have a revolt on your hands because there are shareholders that like set their watch by the fact that every quarter, four times a year, they're going to get this

cash payment. And here's what I would say though. I would say modern financial advisors who are building income portfolios, I think are starting to realize that they have to just focus on total return. And if you have to help a retiree fund their retirement with cash from proceeds of a sale, rather than like go all in on the highest riskiest dividends, I think it's more explicable to clients today. I think they understand the difference. And then the other thing with dividends is, obviously, we know that the tax consequences suck and really aren't helping anyone, especially when the choice is dividends versus buybacks.

But I almost feel like there is a portion of the population that are religious about it. It's like a sacred thing. What do you mean you're cutting the dividend or you're not going to pay the dividend? So I do think Exxon has a point. I mean, it's ugly to take money from employees to prioritize shareholders in a time like this, but I kind of understand it. They have to manage for their shareholders at the end of the day, but it's a trap. And I'd be interested to see if they can maintain, it's 8% right now.

I'd be interested to see if they can maintain that for much longer without some change in the dynamics of the oil industry. I bet you they can't. And last thing I would say, when I started in the industry, there was still like 15 or 20 steel stocks. Like Bethlehem Steel was still trading and Ishpat Steel and all these companies that don't exist anymore. And they were dividend stocks.

Like steel companies were similar to oil companies. They were reliably paying dividends. That's not a thing that exists anymore. So I think eventually if you're a commodity- based, even if you're a blue chip, like reality comes for you. And that doesn't seem like something that I would want to bet on that dividend, because who knows what they have to cut next to keep it going. Like what would you say if you- Or adding on more debt to keep it going. They could do that very, very inexpensively now. A lot of firms are doing that. What would you say if you were an Exxon shareholder and they said they were cutting CapEx by 30% but preserving the dividend?

You would be like, well, how are you going to pay the dividend three years from now with no new discoveries and no new production? So I'm not a fan of dividend-targeted investing. I'm fine with dividend stocks. I reinvest them in my own portfolio. Perfectly fine. But owning something just because it's a high yield, especially in a declining industry like fossil fuels, it just seems like more of a headache than it's worth as an investor. So you'd much rather take like 4% from Coke or 3% from Verizon or whatever? Yeah.

And that doesn't mean that those are – nothing is guaranteed, right? Actually, if I'm building a portfolio right now with just yield in mind, like if that's just what I'm doing, I'm probably buying the preferred shares of banks. I think they've turned the banks into quasi-regulated utilities. Their balance sheets have never been better. They'll definitely be challenged in this recession to some extent. But those preferred yields, to me, are a safer bet than an oil dividend, even in the biggest oil company in the world. One of the biggest oil companies in the world. I just buy Tesla and sell one share every day for income.

Or a fractional share. A fraction of a share. Is that a Tesla dividend? Peel off a share every quarter? It's yielding 150%. It's incredible. Awesome. I wanted to ask you about triple Qs versus Spider.

Did you see Ben on Bob Pisani's CNBC show yesterday? I did, but I had him on mute. No, I'm just kidding. It was only a phoner, so that wouldn't have worked out well. So Ben called into Bob Pisani's show, and our boy Tom Lydon was on there. And they were talking about flows this year. And it looks like it's going to be another record-breaking year for ETF flows. Not a surprise.

But this was surprising. $12 billion in net new money came into the queues while $23 billion left the SPY. That's not surprising. Well, I guess knowing investor behavior, it shouldn't be. But the queues are like the new spiders. Well, what about the other S&P ETFs? Because I think that SPY has been having outflows. Like IVV is probably past it and VOO. So I would be curious to see what the

flow is. So I think that might be an SPY specific story. What's the problem with it? Four basis points is too much? No, I think it's- People need to pay one. I think it's nine basis points. How much is it? I think it's nine basis points, which is hardly backbreaking, but what can you buy IVV for? I think four. I think VL, I think VL always three or four. So I think that's more of a, of a stage street story. So on $10 billion, that's kind of a big deal, but on, on a million dollars, probably not a big deal. No, it's, it's, it's effectively $0. So I do think, though, that the cues are becoming like a new S&P for certain investors. They just say, like, I just want the growth segment of the market and I'm

an indexer. I just I just don't want a portfolio filled with oil stocks and banks because they never do anything to the upside and they only hurt the portfolio in a down market. I think that's an attitude that people are starting to adopt. And it's all recency bias, but whatever. I understand that if you've been in the market five years, that's all you've ever seen. $117 billion into fixed income ETFs. What the hell are these people chasing? Price appreciation. On what? They're buying corporate bonds.

They're buying treasuries. They're buying treasuries at no yield. Is that a fear trade? Well, what if this is front running the Fed? Like there is monster flows into HYG relative to the total size of the fund. I think 60% of the fund, of the total assets of the fund have come in the last 12 months.

So I think a lot of this is Fed driven um so the fed the fed is buying lqd the fed is buying investment grade corporate for some reason that i can't really understand they're not they're not buying a little bit no they can't it doesn't move the needle why bother so for some reason i can't understand the fed is buying the bonds of companies that look like they're well-financed for the next hundred years. Just shut up and buy. Stop asking questions. I don't really. And then, all right. So you're not surprised at any of the flow data? Not really. What's interesting is that GLD has taken in the most assets over the last 12 months. And I did this thing while we're talking about it. So I looked at the total assets in GLD

and IAU, the two biggest gold-backed ETFs, today compared to 2011 at the peak of their price. So in 2011, if you remember – I know you remember GLD passed SPY and it was the biggest ETF in the world. So right now, GLD – I wrote a post about it that week. Did you? Oh, yeah, you did. We looked at that the other day. GLD and IAU are 35% bigger in terms of total assets than they were at the peak in 2011. However, what I missed was – and I forget who tweeted this. Maybe it was Balchunas. If you look at those two relative to the rest of the ETF market, they've shrunk because the ETF market has grown so much.

So right now, they're 2.5% of the total ETF market, they've shrunk because the ETF market has grown so much. So right now, they're 2.5% of the total ETF market. In 2011, they were 10% of the market. Wow. And the minor ETF is so tiny, it's not even worth mentioning. Last thing I want to talk about. So we're seeing a rotation. Everybody's talking about it. The beating up stocks, the reopening trade, basically. So casinos, airlines, cruises, transports, small relative to large, tech is finally pulling back the stay-at-home stocks,

Peloton, Wayfair, you know the names. Does this have legs or is this going to fizzle out in three days? Do you remember what happened in the middle of May? Oh, I remember. It didn't fizzle out, three days. Do you remember what happened in the middle of May through the middle? Oh, I remember it fizzled. It didn't fizzle out. It crashed. It crashed. Yeah. It was an amazing,

it was an amazing reversion. Yep. Yep. Like if you were smart enough to have seen it coming, I don't know. I don't. So I own Berkshire Hathaway. I,

I looked at, I saw the stock run. It was like one 89. It ran up to 200 into the, into the earnings. And now it's like 212 or whatever it is. And when you look at that company and its earnings and what's going on in their businesses, pretty much everything sucks with the exception of the fact that they're the largest shareholder. Forget about that. Let's just talk about price for a second. So if you look at small relative

to large, it's got legs. And if you look at small relative to large, it's got legs. And if you look at small value relative to large, it looks like it is really trying to bottom. Well, if you think there's a vaccine coming this fall before the election, which is what I think, then you could probably continue to make money in those stocks. But there will be scary news along the way, and there will be delays and delays in approval and all these things and they'll probably hit those stocks again. So I wouldn't be like, oh my God, I have to get into a cruise line now. And I could be wrong about that. But we've had these profit-taking moments. I will say a couple of the high-flying tech names have gotten really whacked. DocuSign, Datadog. A couple of the high-flying tech names have gotten really whacked. Like what?

DataDog. DocuSign. DataDog. Oh, no, no. Here's one I wanted to mention. Fastly. What's that? So FSLY is like one of the poster children for like this whole cloud computing thing.

Does not look healthy. Yeah, it looks terrible. It's like the worst thing I've ever seen. So maybe something has changed. It went from 20 to 120. No, I understand that. But that price action tells you there are people that are leaving that stock and never coming back. It looks terrible.

And it's on an earnings report. It's fundamental. It's not a rogue wave that came out of nowhere. It's macro. The company couldn't match the expectations. It's macro. All right. Let us know what you guys think of all the topics we discussed. As I said, we love your comments and feedback. Go ahead and

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