The Compound and Friends - The Stock Market is Heartless

Episode Date: January 8, 2021

Stocks soar to record highs as an armed insurrection invades Capitol Hill and millions of Americans remain susceptible to the worst pandemic in a century. How? How is this possible?Josh's guest is Allison Schrager, an economist, senior fellow at the Manhattan Institute, contributing editor at City Journal, co-founder of LifeCycle Finance Partners, LLC and the author of the book An Economist Walks Into a Brothel. Allison writes about risk, reward, retirement systems, pensions, the economy and political policies that affect all of our lives. You can subscribe to her letter, Known Unknowns, here: https://www.allisonschrager.com/ If you enjoyed the show be sure to rate and review! Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Good evening, I'm Josh Brown, and this is the Nightly News Report. Today in Washington, a mob of far-right-wing extremists, incited by the President of the United States, broke down barriers, smashed windows, and broke into the U.S. Capitol Building with the express intent of violently overturning a free and fair election. It's the closest we've come to an armed coup attempt in our nation's history, after hundreds of years of peaceful transfers of political power every four years. Meanwhile, across the country, new doses of COVID-19 vaccines sat in freezers as state governments proved unable to distribute them to frontline workers and at-risk elderly people at the speed necessary to offset the explosion in new infections and a

death toll of almost 4,000 Americans per day, every day, every week since Thanksgiving. Elsewhere, it's been reported that a 600 million year old species of dinosaur has come back from extinction and is now rapidly killing and eating large segments of the population. There have been reports of vampire attacks on college campuses this winter, unidentified alien spacecraft massing on the edges of our solar system as though preparing for a full-on assault, media showers pelting the Earth's surface, spreading radioactive fallout, and the ozone layer's hole has seen its diameter increase by 200%. Nuclear missiles have been accidentally launched and randomly targeted at U.S. cities from coast to coast, so you're going to want to keep an eye out for that on your commute home. U.S. officials say, until further notice, puppies and pizza have been prohibited in all 50 states,

while Netflix has decided to only show full house reruns for the remainder of 2021. In science news, it turns out that coffee, water, and wine are now all deemed unfit for human consumption, according to studies. We're also getting reports that your parents never loved you, neither will your children, nor your grandchildren. In weather, it appears that twin Category 5 storms are rapidly advancing up both the eastern seaboard and the western seaboard simultaneously, and they're headed straight for a gaping fault line running through the Rocky Mountains, the result of a 12.7 earthquake that is currently swallowing up 17 Midwestern states into the ground, plunging tens of millions of Americans into the fiery pits of hell. And today on Wall Street, the Dow Jones Industrial Average rose 450 points, finishing at an all-time closing high of over 31,000. NASDAQ stocks rose 2% to new highs as volatility remained muted, and virtually every investor

saw their profits soar. We'll see you back here tomorrow evening for more of the same. Have a nice night. I mean, I exaggerate a little bit, but I'm not that far off, am I? This is the number one question I get from civilians these days. They say, Josh, I'm watching CNBC and I see the ticker scrolling by and all the stocks are up. And I look in the bottom right-hand corner at the indexes, indices, and they're all green. Meanwhile, the picture on the screen is overflowing hospitals and split screen with an armed insurrection at the Capitol building.

It's like we're a third world country on the TV. And then my 401k just goes up and up and up and up. How? How is this possible? It's the end of the world and my stocks feel fine. And not for like two days, but for like a year. The answer to that question is that the stock market isn't sentimental. The stock market is heartless.

It doesn't care how you feel, doesn't care how I feel. I want to relay some things to you that you might not know about. And this is, I think, pretty important context. One of the saddest days in our nation's history, and this is not to minimize what went on this week, but one of the truly one of the saddest days, and it's almost 60 years ago now, was November 26, 1963. JFK was assassinated. And he was one of the most beloved presidents, not only looking back, but even in that time, he was one of the most beloved presidents that the nation had ever seen. And you probably would assume that the market would have gone into a freefall after something that traumatic to the nation had happened. But that's actually not what happened. So if you were listening to

the show last week, I had Eddie Elfenbein on the show, and he knows and writes a lot about market history. Here's Eddie on what happened after JFK was killed. Quote, on Tuesday, November 26th, the Dow gained 32 points, four and a half percent. Then came Thanksgiving Day, after which the market rose further on Friday, gaining an impressive 5.5% in the week after the shooting of a popular president. So in other words, they closed the market when news of the shooting happened, and then there was a day off of the funeral, and then stocks had recovered their losses within two days. You might say, well, how could that be? It's not very complicated. As Eddie relays, the Dow continued to rise throughout December, up almost another 2%, finished the year, 1963, up 17%. And then another two years of double-digit

gains. The Dow was up 15% the next year, 11% in 1965, the year after that. And there were tax cuts after all. The Kennedy-Johnson tax cuts from 63 and 64 had more to do with the stock market's performance than the assassination. And that is one of many, many stories that we can go back and look at. Eddie talks about 1939, Hitler invaded Poland on September 1st, which launched World War II. For a lot of people, it felt like the invasion of Poland happened out of nowhere. That September was the Friday before Labor Day weekend. So the market had three days to process this. It reopened September 5th, 1939. It goes up 12.87 points.

Back then, that was a 9.5% rise. Seriously, stock market went up 10% into the onset of World War II. In the first half of September 1939, the Dow rose a near euphoric 14.6%. Pearl Harbor, 1941. There was a Sunday morning attack, December 7th, 1941. The Dow fell by less than 3% the next day, Monday, December 8th, went from 115 to 112. And then it did nothing for two months, dipped below 100 that spring, and then continued to rise throughout World War II. Now you would say the start of World War II in Europe, and then the surprise, shocking start of World War II in the Pacific Theater when we were sneak attacked by Japan. The nature of these events, you would say like, this is the kind of thing that I would expect to

see a stock market, I don't know about crash, but like be nervous about or fall. And in fact, the reaction was the exact opposite of what you would have thought intuitively. And we can go on and on. The Cuban Missile Crisis, stocks fell less than 1% that week, and then they rose 3.5% in the two days after the threat faded. And then you say like, well, what would move the market? Eddie notes that later that year, you had an actual collapse in 1962. It was when the market fell 28% because Kennedy launched

a verbal war with US Steel. So stocks were more concerned with the fate of US Steel having issues with the White House than they were in the context of the Cuban Missile Crisis, a nuclear missile crisis. The Dow fell less than 1% after the assassination of Martin Luther King and Robert Kennedy, and then subsequently rallied in the next couple of days after that. We had the Challenger explosion in 1986. That was on January 28th of 1986. The market rose 1.2% that day, kept rising the next day, rose for the next week, rose for the next month. 9-11 fell sharply. Part of that has to do with just the sheer shock of it, of course.

But also, it blew up lower Manhattan, which is the financial center, or at least it was at that time, of the United States. It couldn't open the stock exchange for a few days. Now, Eddie points out, and this is true, we were already in the middle of a bear market and a recession when that attack happened, which may have exacerbated the pessimism, the negativity that people felt toward markets. However, two months after 9-11, or let's say September 10th, right before the attack, two months later in November, stocks had regained all of their 9-11 losses

and continued to rise into the spring of 02. So if you have this context, it doesn't make the explanation sound better, like emotionally, right? We're people, we have feelings. It doesn't make more sense to us emotionally that, for example, the Dow Jones would be screaming higher this week while an armed mob broke into the Capitol. Somebody got killed. Somebody got killed. There's tear gas in the sky above our nation's capital. It was pointed out that we haven't had an attack on our nation's capital like that since during the war of 1812. So it's traumatic to see that. Even if you're a Trump person, you have to be looking at that like, oh my God, these people are crazy.

What is going on, right? This has been an open threat for weeks. Why weren't the Capitol Police ready for this? Why wasn't the National Guard in position, even if in a defensive posture? If you're looking at this, no matter where you stand politically, it's crazy. But then when you see the stock market's reaction, that's supposed to be like the beating heart of risk appetite in America. That's the pulse of how people feel about the present and future, the stock market, and it just makes no sense to you. So if you have this context, like what I just laid out to you, and there are so many other examples, by the way, which we won't get into, it's not that it makes it feel better or feel normal. It's just that you say, oh, this is how the stock market is. It's weird. It is weird. But this is the truth. This

is how it is. Peter Bukvar wrote this morning. He didn't want to do, I guess, a lot on this topic, but he basically said, quote, there should be no mystery as to why the markets didn't care about what happened in the capital yesterday, however disturbing, disgraceful, and embarrassing it was. It's because it has no bearing on the direction of the economy, earnings, and interest rates. It's that simple. End quote. Peter's right. And I'm going to take it a step further. When you see horrible shit taking place on the TV screen and everyone seems to be preoccupied with how badly things are going, you should understand that it's not necessarily the case that this is going to be influencing the prices of stocks in the marketplace. The thing that you're focused on, that you're looking at, the market is discounting the meaning of that event in real time based on the buys and sells of hundreds of millions of other people and software.

millions of other people and software. And that discounting process, it may not look intuitive, but eventually markets get to the place where everyone is aware of that thing that you're fixated on on your TV screen. And everyone has placed their bets or pulled their bets accordingly. I read somewhere that 70% of all stock trades these days are being made by computers and software. So I don't know if that's true. If it's even close to true, it goes a long way toward explaining the dispassionate action in stocks over the last, not just week, but year. It goes a long way toward explaining what feels like a massive dichotomy between the human tragedy we're living through and the investment market wonderland we're trading through. Software isn't sentimental. Software in the context of investing or the markets is

basically fulfilling an obligation to whomever programmed that software. And that obligation is profits. The stock market isn't sentimental either. It looks at tragedy as something to price in and move on from. And the stock market focuses relentlessly on what's next. The next day, the next trade, the next announcement, the next IPO, the next FDA approval, the next thing. That's what the stock market is about. There's no time to lament. There's no time to grieve. The stock market has this aloof, almost alien quality to the way it behaves that can be shocking to an outside observer who hasn't had a lot of experience with it. And the longer I'm doing this, the more I realize how little I know. And that includes

how little I think I can predict about how the market will handle a given tragedy or election or major geopolitical development. The longer I'm doing this, the less confidence I have in my ability to figure out what this alien stock market is going to do in the wake of a major event. And I think it takes a level of humility and maturity to reach that point as an investor. And I reached that point, I come closer to reaching that point with every passing day. The longer I'm doing this, the less I know. That might sound counterintuitive too, but that's how I feel. Okay. On today's episode, we're going to be talking about risk, going to be talking about reopening and how to price the risk of reopening. And we're

going to talk about the trade-offs and policies that will be important to the current environment we all face this year. And I have somebody really smart to talk about this with us. My guest this week is my friend, Alison Schrager. Alison is an economist, a senior fellow at the Manhattan Institute. She is a contributing editor at City Journal and a co-founder of Lifecycle Finance Partners LLC, which is a risk advisory firm. Alison has led retirement product innovation at Dimensional Fund Advisors, which is one of the largest asset managers in the world. And she's consulted to international organizations like the OECD

and the IMF. She's also been a regular contributor to The Economist, Reuters, Bloomberg Businessweek. You've probably come across her stuff. She's got an undergraduate degree from University of Edinburgh and a PhD in economics from Columbia. She does this really great letter called Known Unknowns, which is her casual weekly observations about whatever the topic du jour is amongst people in finance. And it's not lengthy and it doesn't weigh you down. It's a quick read. She gets right to the point and I highly recommend it. And we'll post a link to Known Unknowns in the show notes. You guys might have heard Allison's name in connection with her amazing book, which I think was a huge hit in the summer of 2019.

It was called An Economist Walks Into a Brothel. I had Allison on the YouTube channel, and we definitely talked about it on our blogs. We all loved it. Allison is one of the smartest people I know. And she's got really interesting ways of thinking about risk and reward and incentives and all of the important concepts when it comes to investing, financial planning, the economy, et cetera. So we're going to go right into that. Duncan, let's get it popping. Do the disclaimer thing, and we'll talk to Allison now.

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. Hi, Allison. How are you? Hey, great. How are you? I'm doing great. It's so good to see you virtually. When's the last time we hung out? Was it when we went to Billions? Yes. That was really fun. Thanks for taking me along. Yeah. So Allison and I went to visit with the writer's room at

Billions to talk about risk as they were preparing for probably season four or five. I don't even, who even knows anymore. We had a very nerdy conversation with them about bond markets. Yeah, it was awesome. They know their stuff. Absolutely. Shout to the Billions crew finishing up season five and working on season six. Do you feel that time and space have ceased to exist in the traditional sense? And it's really hard to tell what happened in 2020 or 2019 or 2018. Or is that just me? Yeah. I mean, I find like, you know, you sort of like are waiting for days to pass, which I never did before. And also nothing makes sense anymore. I find like, you know, you sort of like are waiting for days to pass, which I never did before.

Okay. And also nothing makes sense anymore. It's like I would have expected like the stock market to collapse today because of the Georgia election, but it's up. So who knows? Nothing makes sense. Well, why is it up? Um, probably the end of the trade war and probably a unified democratic Congress gives you a better shot at like an obscene stimulus or, or infrastructure bill. I don't know.

I probably read all the same stuff you read. I don't know. Maybe it's just, I like how optimistic markets are because if Republicans won, they probably would have been like, great, no regulation. That's right. And no more taxes. So that is a characteristic of the markets that I think has been underappreciated throughout the entirety of the last decade, where we have these big,

bad events in front of us. And everyone assumes that a certain outcome is negative. And then stocks go up. And we're all like, oh, yeah, of of course so we did that with uh with trump's election in 16 we did that with brexit we like we've done that a lot of times so i don't know i don't know if that's is that generational or i don't really know but every piece of news is good news apparently so you're doing these awesome by the way way, very readable, very easy to consume letters. When do they come out? Saturdays? Monday, every second Monday.

Okay. They're really good. Thank you. So I think what you're doing is you're just giving your take on whatever the big discussion that everyone seems to be having is in that period of time. So it's definitely longer than a tweet, but you're not putting out a white paper. You're not trying to tell everyone every thought you have on these topics. You're just giving them like, hey, here's a way to look at it that I'm thinking about. And that's very valuable

to people who are not economists. What I'm trying to do is my training is in both macro and finance. And these aren't two fields that go together any way they really should, because obviously what happens in financial markets is kind of critical to the macro economy. finance. And these aren't two fields that go together any way they really should, because obviously what happens in financial markets is kind of critical to the macro economy. So I'm trying to interpret news events from a macro finance perspective. Right. And the audience, most of the people who are reading your stuff, maybe they have training in one of those disciplines or the other, or maybe they have

training in neither. But I think it's really helpful to people. When did you start doing this? Like two years ago, three years ago. I'm on my 112th newsletter. Wow. Why did you call it Known Unknowns? Well, initially I had like Alison's Ode to the Second Moment because I felt like people knew about RISC more. But then when my book came out, everyone told me that that was too wonky and I needed something that was more accessible. It was too many words or it was, people would read that and say, what does that mean? Yeah. What's the second moment? Yeah. What is that? Right.

Because my initial idea of why I wanted to do a newsletter is I wasn't strategic. It's not even on Substack or I don't charge for it or anything is I was just like, I was writing a lot as a journalist and I had to explain everything. And I just wanted to be nerdy. I just wanted to talk about pension discount rates the way I want to talk about pension discount rates. So that's why I wanted, I wanted to build a community of people who cared about risk in a, in a financial sense. And I didn't want to feel like I had to hold back and handhold the reader all the time. Although I do like being accessible because if you don't reach people, what's the point? So I think that's why initially it was like using technical terms in the title. But I actually then changed it to unknown unknowns because it is like I think of

unknowns as uncertainty and knowns is like trying to put a risk framework under uncertainty so we can have some sense of what's going on. So that's why I did change it, but initially at a much nerdier name. All right. Well, this is better. I like this better. Probably saw a pickup in subs or people referencing the letter. So I want to talk about debt. And that was the title of a recent letter that you put out. Let's talk about debt. So let me set the stage here a little bit. Now we have a $900 billion stimulus bill for round two. And there's a little bit in here to like and to hate for just about everyone. And we'll get into the specifics later. But generally speaking,

we're going to pay for this with our new favorite method of paying for things, which is more unsecured debt and new, even larger, more exciting deficits. Is that pretty much how you see things? Yeah, that's pretty much it. And we're having the Fed buy a lot of that debt. So in a sense, we're even monetizing it. Okay. What's wrong with monetizing debt? a lot of that debt. So in a sense, we're even monetizing it. Okay. What's wrong with monetizing debt? Why is that on principle or in reality, why is that bad to have Congress-issued debt or Treasury-issued debt and the Fed just eat it like it never existed? Well, I think you can justify it now. These are extraordinary times. I think one of the reasons the stock market's gone up this year is in the spring, you know, it looked

like, you know, the treasury market might have some trouble. And if the treasury market collapsed and all this, that would have really been a disaster. So I think you can justify it now. The Fed still has a lot of credibility that they're somewhat independent. And so in an emergency, it's fine. But the thing is, if we did this as our policy all the time, all of a sudden, there's concerns about inflation. Because if we just keep issuing debt and the only people buying it are ourselves or our central bank, first of all, it completely erodes any independence of the central bank. And one big reason we haven't had inflation is people believe the central bank will do

something about it if we had some inflation. But if they're contributing to the inflation, all of a sudden, inflation becomes self-fulfilling. So the Fed loses its credibility. It erodes any sort of independence. And also, what about normal times? If they keep doing this, then all of a sudden, we don't really have a true debt market. I mean, what do these prices even mean after a while? Alison, one of the things that you hear is that, let's say the Fed were not doing what it's doing, where would the natural rate of interest rates even be? 75% of all the sovereign debt around the world, developed market sovereign debt right now is not only negative yielding, but actually negative in real terms, like inflation adjusted negative,

which is like, and this has been going on for a long time, even prior to the pandemic. So like, where would rates normally be if the Fed weren't doing all of the things that it's doing in terms of stimulus right now? I think it would be higher, but not as high as it was, say, in the 90s. You know, I don't think T-bills would be trading at 7% or 10%. it was, say, in the 90s. I don't think T-bills would be trading at 7% or 10%. We may never see that again, that level. And if we do, it means something's really wrong. Yeah. I mean, that was kind of actually, in the grand scheme of history, a little ahistorical. As long as we are a place where people think we will pay back our debts and not inflate them away, I think maybe on the higher end, it would be like 5%. So I don't think we're going back to the 90s. I think there's good reasons to believe

structurally the economy has changed for now and that the natural rate of a treasury bill is like maybe 2% or 3%, but not quite as low. I think we are lowering certainly rates more than they naturally are, but not dramatically so. I don't know if it was Richard Silla in the history of interest rates or somebody was pointing out that when you look at bond yields or interest rates in terms of empires, they look at like ancient Rome and they look at several empires. What happens is that the natural interest rate drifts lower and lower as that empire grows and becomes more creditworthy or trustworthy. But then it doesn't like do a V bottom. It's kind of like a U. And it's along that bottom for decades and decades. You could have like almost zero percent interest rates for a really, really long time. And then when it starts to turn up at the other end of the U, that's because shit is going really

wrong. Like an empire is ending. I hate to put things in such epic terms, given our own lifespans aren't going to be hundreds of years. And we don't know if this is a traditional empire, but does that make sense to you? That concept? I mean, people I think often confuse structural change with permanent. Nothing's permanent. I mean, we're not going to be the reserve currency forever. I mean, probably in our lifetimes, yeah, probably, but forever. I mean, things change.

I was talking to John Cochran, the economist at Hoover, and he's like, you know, there's no reason why TIA bills have to be the risk-free asset. I mean, German stocks could be the risk-free asset. If you think about it, even in the 70s, the idea that, you know, a single currency that had no relation to gold would be a risk-free asset seemed crazy. So, I mean, things change. They always change. Doesn't it make sense though, that the risk-free asset, the global risk-free asset would basically be backed by the most powerful military, the largest military? And the largest economy. And the largest economy. I mean, although I don't think China would ever be a global reserve currency because they interfere with their currency too much.

Okay. And we don't? Not as much. Not as much. Not as badly. For now. Okay. And that's it. That's the danger of too much financial repression is the market prices start to lose meaning.

And at that stage, you do lose that credibility from international markets. Okay. This is you. So, quote, publications such as the Atlantic Monthly and the Washington Post have hailed the arrival of a new regime where we should run up debt all the time during good times, bad times, just all the time. Because apparently the economist profession as a whole or the credible economists anyway have decided that interest rates won't ever go up and neither will inflation. This may be reasonable view for the next year, the next 10 years, but the obligations we're making will take decades to pay off. And are these people willing to put money on what the economy will look like 30 years from now, 50 years from now? If so,

I have a 50-year swap to sell them, end quote. So I take it you're not in the Stephanie Kelton cult? You're not an MM tier? Or do I have that wrong? Yeah, no, definitely not. And I think about things in terms of structural changes and don't see them as permanent. Like I said, I don't have a problem with the Fed buying bonds right now. But to do it all the time, even in good times, then you're getting into a really dangerous place. And the problem, I said, with these arguments is they can't distinguish between very specific circumstances and long run circumstances and how things change when you actually adopt it as a long term policy. Is there argument that we have just been we should have been doing this all along

and that we've and we're guilty of having done too little stimulus, especially in the wake of the great financial crisis. We would have recovered faster and there would have been more income equality, et cetera, et cetera. Like those arguments are lost on you? They're not lost. I mean, it depends how you do stimulus. The thing is, it's really hard to get stimulus right. I mean, we can't even roll out a vaccine. How are we going to like perfectly stimulate an economy in a fair, equitable way? I mean, these are hard things to do, especially when you go through a political

process. You know, like economists, even very market-driven economists aren't averse to government interference. It's more like it's really hard for the government to get these things right, but it's really easy for them to mess things up and create distortions. So, I mean, I guess whether or not I think there should have been more stimulus after the financial crisis, it depends how we did it. I mean, there probably could have been well-targeted, well-designed stimuluses that would have made the recovery faster, more equal, but would we have actually discovered what those were and passed them? I mean, that's debatable. Right. The other thing that that was a debt-driven

crisis, and this is a natural disaster and natural disaster recoveries look different. They're not balance sheet recessions or, you know, it's a very different mindset amongst people, companies, and we just recover differently from that, right? Yeah. I mean, it's supply driven rather than demand driven. I mean, the argument for stimulus is usually like, let's juice demand to get the economy back. It's sort of this Keynesian argument of people aren't spending enough because they're nervous. So if we get the economy pumping, people spend more. Right now, like we have a supply shock. So you don't want people to spend more. I mean,

that's not really what we want. But on the other hand, supply shocks, we tend to recover faster. If we could just get everyone vaccinated tomorrow, and the economy would recover very strongly on its own. We don't have a lack of demand. In fact, I think we might have a very strong recovery because household balance sheets are in such good shape. Yeah. We tell sales now are higher than where they were in 2019. Yeah. Imagine that. All right. So this was right. I was joking around the other day. I forgot who I had on. This was the recession where everyone bought a boat. And one of the hottest memes right now on social media is like, just got my stimulus check. Which stock should I buy? It's a very different situation right now than prior. So your take then is that this argument where we just continue to do stimulus and do it funded by deficits, funded by debt forever, even if we don't pay the price in terms of inflation or higher bond yields or rapidly rising bond yields in the next 10 years, it

doesn't mean we never will. And this is just debt that continuously has to be rolled and rolled and rolled again. That's where, so I think what you're, where you're seeing the risk is like one day we're going to have to do stimulus, but if we're already doing it, we can't do it. It's going to be harder to do. Is that what you're saying? Yeah. Well, it's just, it's a risky strategy. It's like everyone who works in finance understands why leverage is risky, but you have all these people who maybe studied a little bit of macro and they just all of a sudden, you know, we see this in finance all the time. People come up with these fancy, highfalutin theories of why you can take on tons and tons of leverage, and all of a sudden, it's not risky anymore because you've done something fancy.

So it just raises the risk. Like even if, I think I have a colleague at the Manhattan Institute who estimated even if interest rates increase 100 basis points, we have a lot less fiscal space. And I think it's like a modern miracle that we were able to give people checks and able to give businesses PPP because we had the fiscal space to do so when things got really bad. And what about when things get bad next time if interest rates are higher? We won't have that same insurance space that we have right now. And I think, you know, when you're in finance, as I said, you don't take on lots of leverage because you know, when that rainy day comes,

you know, you don't have any room for error. If you're always doing deficit funded stimulus, then technically there's no such thing as stimulus. Like if you're constantly stimulating. Yeah. And I mean, I'm a markets person. And I mean, what meaning do prices have anymore? And debt markets are in anything. Right. Is stimulus taking the place of tough political battles? In other words, like we can't really get anything done fiscally in recent years. It's like constant polarization. So f**k it. We'll just use the Fed and print more. Do you feel like both parties are basically like they've given up even talking to each other and now we're just going to use the Fed to do the things that maybe Congress should do to fix imbalances in the economy and the workforce,

et cetera? Yeah, absolutely. Like when Republicans are in office, you know, we do stimulus through tax cuts and where Democrats are, we do it through whatever giveaway. I mean, although, I mean, I was sort of, I said, we're talking about this later, the whole $2,000 check thing. It's like, where did that come from? Why is that a good idea? Maybe it is, but like, I never heard. Let's talk about that now. So generally speaking, you're fine with showering money on households and landlords and unemployed people, given the nature of the crisis, but you have some reservations about the way it's being targeted or not targeted. So this is you, quote, I'm open to the idea that almost every household should get

$2,000 per person. However, I have yet to hear a good economic justification for it other than the fact that unemployment insurance programs can sometimes be clunky or take a few weeks to distribute checks. The fact that people are upset and had a hard year is not a good enough reason, nor is some weird dogmatic undergraduate Keynesian understanding of how the economy works that assumes every shock must be demand-driven. You're saying things that a lot of people won't say because they're afraid of being shouted down. What's your take on the $2,000 checks, and what would you do if you could wave a wand and target it the way you would want to target it? Well, I'd make sure people who've lost their jobs have a check. I mean,

I was concerned a little while ago about the $600 checks, but I think now that we have an end in sight of the pandemic, I'm less concerned about it. So I would make sure unemployed people are getting at least something close. I said perfectly can no distortions, no bureaucratic hurdles. Everyone who lost their job is getting a check similar to what they had when they were working. I would make sure people, small business owners are getting cash to keep their businesses going. Landlords too, I think they tend to be vilified, but they also have expenses that aren't getting paid. Well, right. If you say cancel rent, I don't care about the landlords. First, a lot of landlords are mom and pops themselves. They're

not all giant corporations, publicly traded companies. And second, they owe money, which then they default on, which works its way up the chain. I think there's like an immaturity on the part of people who are saying like, who cares about the landlords? They'll survive. They might not. Yeah, we seem to have a lot of hostility to people who own anything, whether it's a small business or a building. These people often aren't wealthy and have expenses and mortgages too. So I said all these people who, you know, I think larger businesses, we've been pretty effective at

giving them cash through the Fed and through, you know, the stock market. So I would get to all those corners of the economy of people who are struggling. And I would not be shy about showering them with all the money they need. Like I'm not against spending now, but why we need to give a household where no one's lost their job and everyone is just sitting at home money, I don't understand. Well, they have an income level that they're giving money to below, right? They're not doing it based on unemployment other than the unemployment benefit. For the checks, it's just like if you make under X dollars a year, here's money, go spend it. That's the part that you're objecting to. Yeah. And I mean, it sounds like a low number if you live in New York, but considering where

median income is, it's a pretty high level. It is most households. Right. So we're in a moment right now where if you object in any way to stimulus or coronavirus relief, you're going to be shouted down pretty quickly by the mob. My take is maybe it should be that way. There is a mindset. I talk to people. I talk to a wide range of people. There is a mindset out there where they say, this is not me.

All right, let me just be clear. They say the World Health Organization, whatever the hell that is, either lied for China or just failed to protect us from the virus. The CDC failed too. Every level and layer of government failed. Our taxes pay for all these bureaucrats, all these departments, all these organizations, and they all failed. And now we're headed toward 25 million cases and 350,000 Americans dead, millions of small businesses closed, divorces, suicides, alcoholism, kids missing school, canceled weddings, canceled funerals, and people are like, limits? Limits?

How about f about you? Your failure to detect and prevent this epidemic ruined my life. So how about give me money right now? And then you could figure it out later. I need money today. Like that, that attitude is out there. And I don't know if that's 10 million people or 50 million people, but people just don't want to hear about trade-offs right now. And I kind of understand it. What's your take on that mentality? Well, I think that's fair, but I think the operative word you said is need. Like, as I said, I'm all about showering money on people who need it, who suffered a grave economic loss from this pandemic. I think that's absolutely justified. But people who didn't have- I need a new Cadillac Escalade. Yeah. Just compensate me for my distress. But I do think there is a lot of distress,

and it's too hard to sort out who's in emotional distress versus financial distress versus both when you're trying to act quickly. Yeah, but it's not an economic argument. I said we're making economic policy to give people money because they've been traumatized by a pandemic. I mean, the entire world experienced that. I mean, are we supposed to also send money to people in developing countries who are going to honestly feel an economic fallout of this and probably are going to have a lot more people die? I mean, where do you draw the line? I mean, the money is not infinite. Even though we're printing and we can get away with it in the short term, that's not a license just to give money to everyone just to pay them off for the

WHO's failures. Okay. So this is you. I thought this was really a smart way to kind of sum it up. Quote, it has become popular to say that a budget is a moral document, but it's not. Economic policies are about trade-offs and they inevitably create winners and losers, delaying consumption today or taking it from the future. And there's a lot that we don't know, as well as unintended consequences that we can't predict. Any budget reflects hard choices and guesswork. So it seems that the first round of stimulus worked really well when you look at the economic data, corporate profits. If you pull out airlines, REITs, and I'm talking about S&P 500.

You pull out airlines, you pull out REITs, you pull out travel-related industries. We really didn't have negative earnings this year for the S&P 500. We really didn't have negative earnings this year for the S&P 500. That's pretty remarkable. And a lot of that has to have to do with stimulus and increased unemployment benefits, probably going beyond where they needed to in some cases. Isn't that like a worthwhile tradeoff to get your economy? I'm not against stimulus. I'm just like, let's just make tradeoffs. And I think I'll point.

I mean, what disturbs me is the shouting down. Because there's a lot of ways to skin this cat. I think our stimulus in the spring was very effective and I think a great success. Could it have been better in some ways? Absolutely. You can always Monday morning quarterback that. But I think in general, it was very successful. I think where we fell down was not passing another one in the summer. Because I think a lot of small businesses went under unnecessarily because of that.

I agree with you. There are always trade-offs. and we should have that conversation. We should feel grateful to have that conversation and no one should ever say, nope, it's $2,000 for everyone or you're a Nazi. That's just not productive because I'm not even thinking now, we're in an emergency, tensions are high. But I mean, traditionally, after big economic shocks, you always have this rethink of a safety net or some new entitlement rolled out. And often you need to. I think I've written several times that, you know, when you have a big shock, you know, the safety net you need changes over time as the economy evolves, as things change.

And often a shock like this also accelerates change and exposes changes you didn't realize had come about as fast as you realized. exposed as changes you didn't realize had come up about as fast as you realized. So there's always like, I think it's healthy in the next coming years to rethink our safety net and to revamp it in some ways, take back in other ways, add new things. So we need to have this conversation and we need to have a productive conversation where different points of view are heard and where trade-offs are weighed. And if people just get dogmatic about it and they're like, no, we just give everyone money, then, you know, or come out with an arbitrarily high amount, then we're not having that conversation. So as we're recording this conversation, it looks as though the Senate's going to flip blue or with Kamala Harris as the tiebreaker, have a chance to start enacting some of these trade-offs in the form of maybe

higher corporate taxes. So, I mean, it is a form of a trade-off. It may not be the one that most people think will be most effective or would fit with their ideology, but it seems like that's a possibility that we start to see the ramifications of this idea that we need trade-offs. And it's too early to say, but what are your thoughts on people saying, yeah, okay, I'm all for trade-offs. How about $2,000 to every household and corporations pay more taxes? That seems to be where a lot of people are starting to get to mentally right now. Well, I think that's a short-term way to look at things. I mean, the justification for lowering the corporate tax rate wasn't like, let's give a giveaway to corporations. It was that, you know, corporations are global,

and they can be anywhere. So you don't want a corporate tax rate that's much higher than every other country. Otherwise, that's where they're going to go. It's not like there's this optimal level. And we think people are I mean, I know the justification was, but it wasn't a very good one, was that people are all of a sudden going to be more productive and all this growth is going to happen. It's like the fact is we do compete in a global economy. And as I said, giving everyone a $2,000 check, are we going to do this every year? As I said, it's just sort of a giveaway. I mean, even like the Larry Summers and Jason Furman's of the world are saying like there's no economic way to justify this. Right. I think if we end up with chronic unemployment for years to come as a result of this pandemic, like if we don't ever see the labor force approach how tight it was in 19, this might – like we might look back and say that this year was the start of UBI, universal basic income, for certain groups of people, not for everyone,

which I guess is not universal. Doesn't that make it, yeah, not universal? I mean, I think stimulus checks are not UBI. For me, UBI, as I said, it's a risk thing. Universal basic income, by definition, has to be consistent and predictable for the rest of your life and for everyone. So if you only give it to people, like if you only give people a $2,000 check when there's a complete natural disaster, that's not UBI. That's just giving someone a check because there's a disaster. Right. I want to pivot to be a Bayesian. So first of all, for the non-economists or

statisticians in my audience, we're talking about probability and computing probabilities and figuring out when new information is obtained, what that means for your previous calculation of probability. And this is like the way we have to live our lives now is the point that you were making. So this is Thomas Bayes, right? Was a mathematician. Okay. So he lived three centuries ago and I think was among the first people to start thinking this way. And you make the point, this is you, quote, I think we've all learned a lot about our feelings around risk and what we can tolerate over this past year. It has become popular to judge people for their behaviors. We've seen how one person's risk choice can impact their whole community. The fact that

the virus poses a fairly small amount of risk for most people, but catastrophic risk for others brings up pretty much every bias that behavioral economists write about. It's no wonder some people make what appear to be irrational or even dangerous choices. But I maintain one of the biggest public health failures we faced was absolutely terrible risk communication. I so agree with this. Expand on that. What do you mean by that? Well, I mean, I think they haven't, like public health authorities haven't really leveled with us about risk. I think, you know, there's this idea that, you know, we're all these like biased creatures who can't make good risk decisions. So we somehow have to be tricked

into making good decisions. And I mean, we see that. They like the word nudge, nudged into making good decisions. Sometimes that's helpful. I think it's great to automatically enroll people in a 401k into a low-fee target date fund. That's a nice nudge. It's not doing any harm. Probably causing some good. But I think when I was writing about that, it was right around Thanksgiving. And you saw these huge lines of people to get tested before they saw their families.

And the public health message was like, you shouldn't go anywhere. These tests don't make you safe. And it's sort of like, well, yeah, but they make you safer. You know, Bayesian updating is, you know, you take new information and you update your risk assessments with it. So it would be something like, all right, if you go to your grandmother's house for Thanksgiving, there's a 10% chance you're going to give her COVID. But if you take a rapid test before, it's not perfect. You might be in a window where you're not testing positive or you might get a false negative. So maybe now the risk of infection in your grandmother's 2%. So that would be like a Bayesian update. And that seems meaningful to me.

So I feel like the public health authority has been like, hey, it's really dangerous. It's not a free pass, but hey, if you're going to do it, get a test. But do you think that they even understand what you mean by that? Because I feel like most people, they just want a yes or no when they have a health question. And then if you say to somebody, well, if you wear a mask, it'll reduce the risk of transmitting. It won't be 100%. It'll be a lower percent than 100%. Say, oh, so it doesn't work? So I'm not going to wear masks.

I mean, that's where we are in this country, I feel like, in terms of numeracy, literacy. Am I too cynical? No, I mean, because I think we've sort of promised people we can give them certainty. I mean, we haven't been conditioned to think that way. And as I said, I think it would have been reasonable for public health authorities to say, hey, if you want 100% guarantee you're not going to infect your grandmother, don't go. But if you're willing to take on some reasonable risk, make sure you get a test because that

will lower the probability that you infect her. I mean, is that such an outrageous thing to tell people? Can they not handle that level of information? We seem to have been more Bayesian, at least in New York, where you and I are, about school than anything else. So it seems that they are like moving heaven and earth to make people comfortable with sending their kids to school. That seems to be like the bright red line that politicians don't want to cross anymore. Like the kids belong in

school. The parents can't work if the kids aren't in school. Nothing functions. And so we'll be a little bit more probabilistic there. Whereas things like being in a bar or going to a concert, that's just 100 hundred percent. No. Yeah. And I think that is Bayesian. I mean, in the spring I can, you know, you can justify a way to shut everything down, including schools. Cause we knew so little about this virus and it was super scary. Right. But now, as I said, we have data on schools and that kids are low likely to transmitters. So we, we have been Bayesian in that sense and that we have updated our expectations. A lot of parents are comfortable now sending their kids to school. And we also learned that crowded bars and concerts, very

risky, so that we still not do that. And I think this year, I'm very excited, just intellectually to see how this year unfolds. Because as the vaccine gets rolled out, particularly as it hits the high risk populations who jam up hospitals first, the risk is going to slowly subside. And we're going to have to constantly all be patients. I mean, I already see public health authorities being like, well, you know, you got to distance and wear masks until we've reached herd immunity. And it's like, no, the risk is progressively going to come down and we should adapt our behavior as it does. It's not like risk 100%, risk zero, it's going to really go down. Like once we have effectively all the old people and people with comorbidities vaccinated,

the odds of having an overrun hospital effectively go to zero. Yeah, I'm already ripping holes in my mask, so I'm getting ready for that moment. I think that this is a good place to tie it up. This is something that you said that I also fully agree with. Quote, and by the way, these statements are tough to make on social media because there were just so many people who were hardcore, give me all my liberty or nobody should ever leave the house again until we've treated not only COVID but the common cold. And you have to contend with both forms of that idiocy if you're going to say these things

publicly, which is really hard to do. But this is where we are right now. So you said, quote, Abhazian would say there's a middle ground, God forbid, that's my ad lib, there's a middle ground where we arm people with data and information along with reasonable data-driven restrictions, and they will make better choices. We can't let the most risk-averse among us dictate policy. This spring, we will all have to be Bayesian in our tactics. So that just sounds like common sense to me. But again, there are people on both sides that are going to have an issue with that. I don't think we can make rules, though, based on the extremes. I think we have to think this way. Yeah, I think so too. And I think honestly, I might be too optimistic, but I think most Americans feel that way. I think they feel like,

Hey, I can make a risk assessment. I mean, you drive your car every day. I mean, that's, that's a risky thing to do in a sense. So, I mean, I think people, I think one reason we're having a lot of resentment and lack of compliance is people are taking matters into their own hands and ignoring the directives they are getting. But if the directives were reasonable, maybe they'd follow them. Right. It's just tough to communicate something reasonable or numbers-based in the current environment. I feel like soundbites don't lend themselves well to – or data doesn't lend itself well necessarily to a soundbite that won't be perverted by one group or another. So maybe that's the difficulty.

Although I'm optimistic. I mean, I was doing work in the last couple of years and meeting a lot of people who do a lot of interesting stuff on, certainly in tech firms, of how to visualize uncertainty and ambiguity. So maybe next time we'll be better. All right. Well, Alison, I want to thank you so much for coming on and sharing all your thoughts on this stuff. We want people to go to Known Unknowns. You're hosted by Tiny Letter? Yes.

Right? All right. So they go to alisontrager.com, though, and they can find all your stuff, right? Yep. All right, cool. So we're going to send people over there. And when are we going to hang out?

When are we going to hang out? When are we going to be Bayesian and decide it's time to do a get together with the whole crew? It's going to be a while, right? Hey, as soon as you come into New York, I'll be here. All right, we'll do that. All right, Allison, thanks so much. And we'll talk again soon. Everybody check out the Known Unknowns at alisonchrager.com.

And we'll have her back. We'll see how Bayesian we've been, hopefully sometime this spring or summer. Thanks for listening. Check us out at thecompoundnews.com for daily investing and market insights. You can watch all of our videos at youtube.com slash thecompoundrwm. Talk to you next week.