The Compound and Friends - The Trillion Dollar Question

Episode Date: October 27, 2023

On episode 115 of The Compound and Friends, Michael Batnick and Downtown Josh Brown are joined by Rick Brink (Senior Vice President and Market Strategist at Alliance Bernstein) to discuss: inflation, what constitutes a recession, monetary policy, going long duration, the biggest risks to the market, and much more! This episode is brought to you by Public. Visit Public.com/compound to learn more about how to lock in a historic 5.5% yield on your cash. Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. 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/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Man in the chair, how do I sound? Sound good. You know what man in the chair is? I don't think so. So like in all the superhero movies, there's like the guy that's back at headquarters who's the man in the chair, who's like helping the superhero.

So in Spider-Man, it's the kid he goes to high school with. You know what I mean? And he's like the man in the chair. I was picturing Inspector Gadget, the guy with the cat. No, that's the villain. That's different. The villain always pets a cat. Every superhero has a man in the chair who's like looking at the computer and telling him like, make a left.

No, make a right. You know? Right. Oh, you know who's a good man in the chair? Seth Green in The Italian Man. Was it Seth Green? Yeah, I think so. Italian Man?

Italian Job. No, he was the Italian man in the chair. Rick, were you at... Are these my headphones? Were you at Impact yesterday? I was not. I was not. So, I've never been.

It's basically, it's a gun show for financial advisors. It's not actual guns, and I've never been to a gun show, but it's what I'd imagine a gun show would look like. It's probably gun shows with, like, logos for the investment firms. I'm sure. Sure. That's quite a metaphor you chose.

It's a trade show. It's like a gun show. There's no guns, and I've never been to a gun show. It's what I would imagine a gun show would be like. You could have done better with the metaphor is all I'm saying. You know where Rick actually was? Can we tell people? Is it on ESPN?

Is it the one thing or the other thing? ESPN. Oh, you were at the Nuggets game? Dude, Rick was in Mongolia coming in third in an international weightlifting competition.

What? Is this a joke? No, powerlifting. Let's beat him up right now. Actually, that's more like what people that know me would say. Is that a joke?

No, no, no. Wait, you're a powerlifter? Let's get you closer to the mic. How much? Wait. Okay. So is power lifting and dead lifting, is dead lifting a type of power lifting? Explain.

It's one of the lifts in power lifting. It's squat, bench, and dead lift. Yeah. Squat, bench. Can you tell us about that? How much do you bench? So in our world, it's funny. Like if you ask someone how much they bench, they sort of look at you funny because so

much of your total comes from squat and deadlift. Probably the best- Stop clearing your throat. How much did you bench? About 300 pounds. Not bad. And you're not a big man. I weigh in at 145 in competition. Holy shit.

300 pounds. Wait, wait. So can you tell us about the comp? Why is it in Mongolia? And is this the first time you've competed in this? So life is funny. The world is funny. Lots of stuff changed during COVID. One of them was I was a marathoner and, but I have two young daughters and I, and one of the markers of longevity risk is bone density.

And I'm like, I got to get under a barbell. And so I started training. Oh, like what does that mean? So just start doing bench press, doing anything, right? I was just running and this is pre-COVID. Okay. And so then COVID hits. You can't do anything for three months. I get a rack in my house. I start training. And then a friend of mine says to me, who's a surgeon,

but also happens to be a six foot seven, 290 pound Polish guy who did Highlands games. And he says, wait a second, you lift how much? There's gotta be a small and old guy bench press competition you can can get into because that seems like decent weight for a small old guy. And so while I'm laughing, I'm Googling. And then when you Google bench press, you get powerlifting. And it's a long story after that. But finally, I said, you know, my legs were always my strongest body part.

But I'd never done a squat or a deadlift in my life. were always my strongest body part, maybe, but I'd never done a squat or a deadlift in my life. And so I found a guy, um, you know, about an hour and a half for me. That was a really well-known power lifter and world champion. And he agreed to take a 50 something year old guy who'd never done a squat or a bench, a deadlift on to try to teach him. And I don't know, it was just sort of duck and water stuff. I won my first U SS. championship. I finished third in U.S. championships a year later. I won my first one two years after that. I won my second the next year in May Team USA. But there are age brackets, right? That's correct. So I compete in what's called M2, which is 50 to 59-year-olds. People ask me, you know, they'll always ask the amounts that you do.

So probably the easiest way to do it is we do it in multiple forms. So it trues up across weight classes because not everybody's run around 145 after the diet. So I squat about triple my body weight and I deadlift a little over three and a half times my body weight. Wow. For the bench. You're like a superhero, literally a superhero. I tell myself that every morning.

No, because most people are not doing anything triple their body weight. Like- Sure, you're like an ant. You're definitely, you're like Ant-Man. You haven't seen me in an all-you-can-eat buffet, but okay, yeah. No, that's right. So, yeah, thank you.

But wait, so for the competition, is it like the number of or is it max weight? It's the max total. So you'll get three attempts at each, right? So basically, it's you walk out, you do your first squat. And there are three judges around you. Each one gives you a light, white or red. White is good, red is not. What are they looking at?

Your form? They're looking at technique. They're looking at depth. So squat, you know, you go into a gym, you see guys do a squat, and they call that a squat, but they descend about two inches, and they come back up. Stop following me around, bro. No, no, it's just I got rid of the video. Can I show you my form?

You know what? Every time somebody asks me that, it doesn't go well. And so they make sure you go hip-swept to go below parallel. They make sure you're locking out your knees, all that, it doesn't go well. And so they make sure you go, hips have to go below parallel. They make sure you're locking out your knees, all that, you're following commands. Actually, the biggest difference between the two is the bench press. Like, you see guys in a gym, and the bar comes flying down. It bangs off. Their body comes half off and twisting around, and it looks like some weird dance on meth.

And then you finish the press. In a powerlifting competition, you have to pause locked out at the top. And then you have to come down to the chest and pause again. So the bar has to stop. And then someone gives you a press command, usually after about two seconds. And then your whole body has to stay flat. Heels have to stay flat. It has to be an actual press into another lockout.

So of all three lifts, the one that people see the biggest decline in is the difference between bro pressing and competition bench pressing. But you get three attempts at each. And presumably, if you get the first one, you'll move up the weight on the second attempt and you'll move it up for the third attempt. Your best good lift for squat, for bench, and for dead is added together in the total wins. And at the world championships, they also give medals for each of the individual lifts. And you came in third place? I came in third.

Amazing. Out of how many? Out of two. Okay. No, come on. There were inside of the sort of 59, 66, 74. I don't know if you add all that group sort of together, it's like 20, two dozen people.

Okay. Because it's hard to get to Worlds. You have to win your national championship. I was going to ask you, where do the competitors from the other countries come from? What countries are these? Are these like Eastern Europe or it's like everywhere? Scandinavia. That's right.

Scandinavia is big. There are 44 countries at Masters Worlds. And it runs the gamut. There's the usuals. There's Great Britain. There's Canada. There's France is great in powerlifting. Germany. So you have a lot of Europeans, but Japan fields a team. Mongolia had a team. Africa, Libya fielded a really good team this year. So yeah, it's sort of the usual suspects that you would, you would expect to see Eastern Europe. Definitely compare notes with the athletes from around the world about how they train for this. Like, is there an understanding, is there like a common ground to the sport or

not necessarily? Yeah. There's, that's a great question because there's a few things. One is the common ground is that you're, you're somewhere out in the middle of, you know, wherever you are do showing up every day to train. Yeah. That's the biggest unifying factor. No matter where you come from. You talk to a guy from Finland or out in the hinterlands of wherever. Lifting is lifting.

And he's lifting. And he's in his garage. Maybe he set something up or maybe he's in a really large powerlifting gym or maybe it's something makeshift. And the biggest thing for me, this being my first Worlds, was everybody's – it's a competition. It's pretty tense as it's going on. You're not sitting around talking sports or anything. But as it finishes, what makes it really interesting is the dialogue you have after. And then it's this – it becomes more fraternity-like and everybody's talking about it.

Well, the pressure's off. You competed already. And we can just chit-chat about it. What sports did you play growing up to have strong legs? I think I've always kind of had stronger legs, but it wasn't. Strangely enough, I didn't play anything that should have generated really strong legs. I was a Midwestern kid, so I played everything. I played baseball. I played basketball.

I was a short basketball player. I played tennis. I ran cross-country and track. I mean, if there was anything that was probably the thing I did more than anything, it was, it was track and cross country. Um, and then when I got out, you know, you get out of school, you go to college, you get a job and everything fades away. And it was right around before the, right before the financial crisis, right after when one of my dreams was to do a triathlon and I hadn't run since high school. And so you start training. And I did that. And I had gotten a hamstring injury. This was the first inkling I ever had that I had stronger quads is I went to a sports place on the Upper West. And these guys worked with professional

athletes, Olympians. And they said, OK, we're going to do a strength assessment. And we finish up. And he says, OK, so first of all, you have the quad strength of an NFL linebacker. We know this because we work with, and I'll leave the professional team out. And so of course I'm puffed up now. And then the second thing he says is, but your hamstring strength is average. And we worked with Olympic sprinters that were blowing out their hamstrings in the nineties. And it was because of an imbalance in strength ratio or the strength ratio is unbalanced. So it's not surprising that you have hamstring injury,

and that's why you're in seeing, it's because you've got a huge imbalance. And I said, okay, well, I can live with that. And they said, but your adductor strength, you have the adductor strength of a five-year-old. What's adductor? It's this muscle on the inside right over here. Okay.

Right, so you're pulling, and it's, and so abduct, take away, abduct, bring it in. And so your adductors are huge in a lot of power lifting movements that you do. And, and my adductor strength was horrific, you know? And so the biggest thing was I had stronger quads from just life, from genetics, I don't know. And then the rest of this stuff was, was bringing up the rear. By the way, just for the listener, we actually are going to be talking about markets today. They're probably like, what the f**k are you guys talking about?

We're talking about selling barbells. This is fascinating to me. And would you do this again? Like, because I know it's not easy to get to Mongolia. And then you have to like, you don't just like walk off the plane like you landed in Vegas. Like you have to like get acclimated to where you are, what you're going to eat, etc.

It's, I mean, it's a, it's a real haul. It's well, they, the good news is they change locations. It's supposed to rotate continents. So, so next year it's in, in, um, in Africa. Um, and so, um, you know, and so in theory, you make your way around and eventually I'll get home court. So, uh, last year it was in Canada. So in theory I would have been more, you know, I commit it's tough. It's tough. How long do you have to, how long do you have to make the decision

if you're going to compete for the next one? Can you start training like three months before? No, you train, you train year round. It's just the way that your programming works is you start trying to peak, you know, so things start getting more intense. The number of reps shorten, it's becomes more single lift specific.

So your, your, your central nervous system plays such a big role that you're trying to prime it into the lifting. And so I know I'm going to do it. So I'm registered for nationals. I'm wearing a hoodie. You probably can't tell, but I put up 30 pounds with each dumbbell. Michael does the bar. All right, let's get out of the way. It's an important man. Time is money. What show is it, John? Compound and Friends, episode 115. Welcome to The Compound and Friends.

All opinions expressed by Josh Brown, Michael Batnick, and their castmates are solely their own opinions and do not reflect the opinion of Redholz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Redholz Wealth Management may maintain positions in the securities discussed in this podcast. Before we begin today's show, let's talk about cash. Some people call it fiat, greenbacks, USD. U.S. treasury yields are currently hitting some of the highest levels in over two decades. However, buying treasuries, at least like on the treasury, it's a huge pain in the butt. Like the government website was built in 1947.

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Ladies and gentlemen, welcome to the very best investment podcast in the world. My name is Downtown Josh Brown. Here with my co-host as always, Michael Batnick. Michael, say hello to the folks. Hello, hello. Did you miss pressing those buttons? It's been a couple of weeks. Yeah, I did.

All right. John is here. Duncan is here. Nicole is here. Rob is here. Sean is somewhere in the dock. And we have a very special guest today. Very excited to introduce you all to Rick Brink. Rick is a senior vice president and market strategist in the client group at

Alliance Bernstein. Alliance Bernstein is an asset management firm with about $690 billion in assets under management. And Rick has the adductors of a five-year-old. Did I do that right? I have the adductors of a five-year-old. Did I do that right? I have the adductors of a five-year-old and no buttons, apparently, on my side of the table. All right. I don't want you to be physically intimidated by the strength on this side of the table. All right. Here's where I want to start. First things first.

Alliance Bernstein, not a lot of people know the firm's history. It was two firms that merged. It was Alliance and it was Bernstein. Bernstein. Two firms that merged. It was Alliance and it was Bernstein. Bernstein. And I think Bernstein was known as a value investing shop started by Sanford Bernstein.

Am I saying that right? Okay. And then Alliance was growth and corporate bonds? Yeah, that's right. And it was sort of yield-hungry taxable. And then on the Bernstein side with the private wealth, you had more of a muni, you know, plain vanilla muni side. Okay. And then they merged in 2000 and the rest is history. And I was in Nashville a couple of weeks ago

and I saw that big, beautiful glass tower. Is that occupied yet? Are the AB people there? It is, yeah. And a lot of New Yorkers went down to Nashville to live. They did. To work at Alliance Bernstein. They did.

Okay. Not many firms can pull that off because people, especially on wall street or like, well, I'm not leaving my life here. I'll just switch firms. Alliance Bernstein seems to have gotten a lot of people to buy in, to move, move south. It's pretty impressive. Yeah. You know, I, I, I agree with that. I mean, you know, because you're, you're making a leap, right? You go to Nashville. It's not like you're running across the street to 25 other financial firms. That's right. If you decide to make a change. So, so you're making a, you know, because you're making a leap, right? You go to Nashville, it's not like you're running across the street to 25 other financial firms. That's right.

If you decide to make a change. So you're making a call. If you have kids, you're uprooting your kids. Your school decisions. Might as well be in Mongolia. You might as well be in Mongolia. Oh, the stories about Mongolia. So, yeah, I think the biggest thing was, the biggest thing, honestly, is trying to port culture.

Yeah. Right? You get a brand new building. It's got, you know, got new building smell. You know, you got it. You're dangerously close to Broadway. But you have to try to port the culture. And you don't get all of the folks that go down.

There are going to be folks that simply can't make that. So then there's the filling and there's the, you know, sort of bringing people up to speed. So, um, I was pleasantly, I won't say surprised, but it was a really pleasant thing that, that, you know, enough people were able to make the move. Um, and so now we effectively, I, uh, you know, when I'm visiting headquarters, I'm here and I'm in Nashville. Okay. All right. Very cool. Very cool. Shout out to Alliance Bernstein. So I want to talk about, I know what you want to talk about. And the good news is we both want to talk about the same thing. I think the biggest story of the fall is what's going on with yields. And I know this is something that you've been writing about. You've been speaking about. People are probably asking you

all the time. But just to back up, I think we should start with the GDP report that we got today. And then tomorrow we're going to get a PCE inflation report. Give us like the, give us maybe the 30,000 foot view and then we'll, we'll drill down from there. Look, it's just strong. It's strong and strength of the consumer. Like there's a lot of things you can talk about. You just talk about the headline number. Yeah. And it continues to this whole year. If you think about where we started, hard landing, recession, just think about where that was. The Fed's – That was consensus. That was the March Fed number.

If you look at the Fed's median dot and you compare it to September, it quintupled. Yeah. The GDP number quintupled. Yeah. Right? And the consensus was for contraction. Yeah. And it was all about – but the thing was, you know, it was sort of – this was my issue with it though, is it was hung on the premise that high rates cause breaks.

Okay. Say more. So what was the inherent – The economy can't withstand more than 2% interest rates. Yeah. Right. So you push higher, it pushes through to cost it, you know, then that filters through to consumptive power and then eventually yada, yada, yada.

But, but the thing was, there wasn't anything actually cracking and, and, and the indicator that look, there's a lot of things we can look at, but one of the things that to me is always going to be a big deal is the household paycheck proxy, right? I mean, what is a recession? If they were talking about a recession, what's a recession? Well, first of all, it isn't called for years. That two consecutive quarters to me is a joke. So NBER calls it years later and they have all these things that they look at. But if you get down to the heart of it, the candy-coated center of it all, it's a reduction in consumptive power. That's the center of it. Never happened. So where was it? And the household paycheck proxy, the reason that I love it is that people will look at jobs or they will look at wages. But the thing is, is that what I want to know

is I want to know the number of jobs times the average hourly number of hours worked times how much you're paying per hour, because we're really looking in aggregate. So it's consumptive power. You get another job, that's consumptive power. You get another 20 minutes on your work week, that's consumptive power. You make 15 cents more an hour, that's consumptive power. And we focus on one or the other. We say, hey, wages haven't reached inflation yet. Well, yeah, but how many jobs have we been adding? What's the aggregate consumptive power of the nation, even if nobody gets a raise, but

a gajillion more folks have that same wage. Yeah, you add 300,000 new jobs a month, but the rate of wages for each of those workers is not going up as much as it was. So what? But it's still 300,000 people times that number of dollars. So actually, they work with something called FTEs, full-time equivalents. Because if you get a certain number of cents per hour, that's the equivalent of full-time worker. You get a certain number of minutes per week, that's the equivalent of a full-time worker. You get a certain number of minutes per week, that's a full-time worker. You get an actual job that is legitimately, literally a full-time worker.

So the 4.9% real GDP number on an annualized basis that we saw today, I saw somebody tweet that like, that's $16 trillion. I don't think the number's right, but it's whatever. That's like roughly equal to the economies of a list of a dozen countries. I mean, so, you know,

so we want to talk about how so many people got this wrong. A hundred percent of economists saw a recession coming. A hundred percent likelihood of a recession coming. You know who got this pretty damn right? The Atlanta Fed GDP tracker. Like credit to them. The numbers that they were coming out with,

people like, what the, how? Well, they were pretty, pretty close. This is the New York times this week. Um, economists spent 2021 expecting inflation to prove transitory. Didn't happen. They spent much of 2022 underestimating inflation, staying power. They spent early 2023 predicting the federal reserves rate increases would plunge the economy into a recession. None of these forecasts have panned out. And it goes on from there. And, you know, I think like we can all look back and diagnose why. Why wasn't it transitory?

Like why wasn't it just base rate effect or base effects or supply chains? Like we can go backwards, but I almost feel like there's a better question to be answered, which is maybe we are just thinking about the whole idea of is it a recession coming or not incorrectly. Maybe from an investing standpoint, it almost should be completely disregarded

unless you think there's a huge impact on earnings in a mild recession. Like we should almost only be asking ourselves, is a crash likely? Because you might have had a recession in Silicon Valley last year. If you look at startup valuations, if you look at the tech layoffs, they probably had their own recession in California. Somebody in Oklahoma didn't feel it. It's still recession-like conditions. But so what? Who cares?

It doesn't show up in the national statistics. But for the NASDAQ, there's a 35% decline in the NASDAQ. It looked like a recession. It felt like a recession. Maybe that's just the way the economy is now. If there was a recession and GDP contracted 3%, the stock market would be cut in half. But you need a financial crash for it to,

my point is we can quibble over statistics. Is it two quarters of contracted growth? Is it unemployment at 4.1% instead of four? Like we can do that. Well, what about a better question? I don't know if it helps investors. Does monetary policy not work the way that we think it does or the way that it used to, especially when so much of corporate debt is long-term fixed. And when, when so many

homeowners already locked in a mortgage, like what is the transition transmission mechanism for higher rates impacting? Yeah. We're going to talk about the, the higher credit card rates impacting, yeah, we're going to talk about the higher credit card rates and rates for small businesses, but there's a lot of the economy that's insulated from higher rates. Yeah. Well, there's a few things. Well, first, I didn't know we were going to talk about religion on this call, but that would mean the Fed monetary policy and its effectiveness. But I mean, so there's a few things. If you don't mind, I'm going to go sort of. Yeah. So one, I was also caught up in the inflation being transitory thing. But I will say this in defense, maybe because I was in that camp. But when it came to inflation, this is all like brand new territory.

Unless somebody had Omicron, Delta, and Russia, Ukraine on their bingo card and tracked that through the inflation that it produced, you know, component by component, that's a tough one to make the call on. I agree. So I- You were saying transitory before a European country got invaded. Yeah. And remember just even the variants and how, so I had an ace in the hole. So because I live in Colorado now, the community I'm in is littered with doctors from UC Health. And one of them was an infectious diseases doctor. So during COVID, I had the ace in the hole of being able to talk with this person

about what was going on. And the thing about the variants is it had ultimately a direct feed-through mechanism to the economy because there was a protocol for what happened if you caught it. Yeah. Right, so remember when we made our way all the way to, what, Omicron,

and it was the most contagious, but the least because it's upper respiratory. So it wouldn't kill you off, basically. That's the one that everyone got right after they got vaccinated. It was December 22. Yeah, that's right. It's not 21. Yeah, yeah, yeah. December 21.

So December stuck in my head. But the thing is, is that what was the protocol then? Because it wasn't going to kill you, but what was the rule then on COVID if you caught it? You're out of work for two weeks, right? You sat out for two weeks. So now think of the ripple effects when you have this incredibly contagious virus. And when you get it, you're fine. I mean, you're watching ESPN at home, right?

Pat McAfee's great, but you're not going in. If you're in Asia, you had factories shutting down. Yeah. Right. And so I think it's, you know, you had port when the port closings are not port closings when the port started getting overrun because they were only built to sustain a certain increase in, in goods coming in, into dock on a year over year basis. All of a sudden it's overwhelmed because you get a Peloton and you get a Peloton and you get a Peloton. Right. So I think we weren't just structurally set up for it. So that's what I think that is.

And as it rolled through, we just had, and then you throw Russia, Ukraine, and you were like, ding, goods, ding, food and energy, ding, services, right? And shelter, of course, is ringing the tote because we've got the- The bullwhip effect, people call this. Yeah, well, and it's, but it's almost like whack-a-mole.

Yeah. Because no, the Russia, Ukraine wasn't related to the, right, it was just like all of a sudden, bing. You know, and so for me, that was just right. Food prices, natural gas prices, electricity. Now you get food, you're right. Right, right. You got the grain, all that stuff.

Even now it's going on. We're trying to get, you know, boats or ships through the Black Sea. So that I think I give, and again, I'm in the camp, so I guess I'm giving myself a pass. But I give a pass because, you know, when's the last time we had a Russian land grab and a once-in-a-century pandemic? And the answer is we haven't, right?

Because we were even in it back after World War I. So that's that one. As far as getting growth wrong, that's the one I take most exception with for the reasons I said earlier. I had an issue with that. And I completely agree with the idea, though, of what is a recession exactly? What defines if a recession is bad? So first of all, if the MBER is going to take four years

to tell me it was a recession, then the tree fell in the woods and nobody heard it. Yeah. Right, so the only rule of thumb we have is the two consecutive quarters of negative GDP and people rely on that. But again, riddle me this, would you prefer negative 0.1 in two consecutive quarters

or negative 10 in one? It's a joke. No, it's when people lose their jobs. But the problem is that we want in real time, we want to hear, yes, it's a recession. No, it's not. We don't want to wait for the NBER to weigh in two quarters from now because we want to know everything. That's the nature of the world now.

But my point, it's been 500 basis points of rate hikes and the economy is accelerating. Just you wait. So, well, Josh was in credit crunch camp in March. I still am. I still am. I think it's just delayed. It's okay. The trick was... And by the way, you were right.

The inflation was transitory. It just took a long time. Well, I will point out that transitory just means impermanent. Stop it. It's not transitory. You're moving the goalposts. It's transitorying right now. It is transitory. Impermanent.

I claim impermanence. Okay. I like that better. I mean, look. So, as far as credit, okay, this is probably its own podcast, but credit is still a business. So, I think there's two things that, and again, this is a whole… Are you about to sell us private credit right now?

I, well, it is. I may or may not have an application right underneath my chair that I want to run in. No, look, I think we will and should talk about banking credit contraction. Let's talk about it right now. But by the same token, and yes, I do think that there is a credit transition happening and private credit probably steps into that void. But the thing I would just to say on this thread though, is I don't buy into the idea of recession. I only talk, I only think in terms of some level of reduction in consumptive power, whether that triggers a reduction or not. You just don't believe in recessions. I don't believe in how we define it. So what's the point? Yeah. That's what I'm saying. The same

thing. I'm saying the same thing. If you're an investor and somebody says a recession is coming, my answer is, yeah, no shit. Number one. Number two, if you can't tell me how severe it's going to be, or it's not being accompanied by a crisis and how long it lasts, then I don't really care. And guess what? And what's the duration?

Right. Don't you want better? If it is really bad, then the Fed will act immediately. And so paradoxically, you might get like, oh my God, like COVID. The recession is going to be so bad. Contractions, like we haven't seen since the Great Depression. And then we have the best year in the stock market in a long time. Yeah.

Well, we've had some amazing years in the stock market for the last handful of years. And none of it's based on organic growth potential. So, I mean, that's- What do you mean? Well, so, okay. So, let's go back to 2014. So, we have our, you know, taper tantrum fund in May of 2013. Bernanke comes out and delivers his, you know, every- This guy tried so hard to thread the needle, if you go back to that speech. Did not work. Right? And in the end, he sounded like the flight attendant in an airplane who's like, look, everything's fine,

the turbulence, everything's fine, but just out of curiosity, does anybody know how to fly a plane? Right? True, true. And we didn't. And the market eats itself, right? And then it calms down.

And then 2014 to 2016 was a sort of period of tightening. But there was, if you choose one day, and there's one day in November of 2014, 15, and 16 where the S&P is largely at the same level. So despite the vol, you kind of treaded water for about two years. That day in November 2016, when it hit that number, was the day of the presidential election. Yeah. So what happens after that?

We have the expectation and ultimate implementation of tax cuts. Okay, that's not organic growth. That's net earnings. Then 2019, the Fed pulls a doozy and reverses on its expectations of tightening within three meetings. I'm going to go up. I'm going to say, I'm going to cut. And then they do. 2019 earnings growth was a pittance. Yeah. But the S&P apparently was fine. Yeah. You got a 30% rally in 2019 after that about faced by the Fed. 2017, you got a 30% rally. after that about phase by the Fed.

2017, you got a 30% rally. Those are two years where the S&P went up by a third. And both of those were artificial stimulus coming from some source, fiscal and then monetary. I threw up my hands after that. And I said, because already the GFC had the greatest combination of fiscal monetary of all time, right? And so that goes by.

And I started talking about this, the new world order, life on the other side of all the stimulus and everything time, right? And so that goes by. And I started talking about this, the new world order, life on the other side of all the stimulus and everything else, right? And then we get the 2016-2019 combination, market rips and rolls. And I threw up my hands and I created a new chapter of this presentation. I said, that is it. That is it. There is absolutely no way we can get the fiscal monetary impulse we're going to need to drive markets higher. It would take something extraordinary. And it's COVID. And it's COVID. Yeah. Right. And then you get the biggest combination punch fiscal and monetary of all time in human history. Since the Spaniards went down to South America and stole all the silver,

right? I mean, that's just absolutely extraordinary. Yeah. So it always has to be a deus ex machina unless you're going to get – unless we're going to go back to the days of like 4% or 5% GDP growth being normal, which I don't think we are. There's always got to be a trick. Somebody – there's always – by the way, quick Bernanke because you mentioned him. The most surreal thing I've ever experienced in my life. I'm at MSNBC in 2018. I'm doing like Stephanie Rule's show at 6 in the morning. And I go into the – they go just have a seat in my life. I'm at MSNBC in 2018. I'm doing like Stephanie rules show at six in the morning. And I go into the group, they go, just have a seat in the green room. We'll call you when we're ready for you. I swear to God, this is true. I walk in the green room with my coffee

and it's Tim Geithner, Ben Bernanke, Paulson, Hank Paulson, all sharing a three-man couch. It's like a tableau. And I go, wait, I swear to God. Can I take a picture? No, it's all three of them there. And they're in makeup and suits. They're going to do a segment, the 10-year anniversary of the financial crisis, 2018. So I turn the corner.

I walk in the room. I go, holy fucking shit. And then I asked for a picture and they all said no. True story. All right. Here's what I want to- Can I call you a helicopter? Yes.

Yeah, can I call you a helicopter, Ben? Here's where I want to go with this. So the first half of the year, the stock market caught on that we're not in a recession. The last six weeks, the bond market caught on. I thought the bond market was supposed to be the smart money. Yeah. It took, it took six months of a realization for the 10 year, 30 year to like wake up and start steepening. Do you see it that way? Or am I missing something? No, I think there's a little bit of, I think there's that. I think, I think it's a cocktail, Josh, to be honest. There's

several things in play here. We sort of described the stock side of it as resolution and resistance. And then the more recent chapter is normalization. So resolution was the idea that we had our known unknowns to start the year. Let's remember how that came in. We had regional banking followed by debt ceiling. All that's in the overhang. We get those into the rear view market rips. At that point, in my way of thinking, the S&P had finally gotten to where beyond where I thought it would get the previous summer when I was talking about relative value in the equity market. It's almost like they dissociated. So the equity market made its journey. And as far as I'm concerned, the major part of that journey ended in the summer of this year. In the end, it's about inflation, right?

In the end, it's about how you feel inflation is going to track and bring itself down. But then we get all these other sort of stuff. Then we start talking about the fiscal deficit, how it's growing. People start to back away from it. We get the downgrade. It's just Japanese yield curve control. Foreign sellers of U.S. treasuries. And no longer owning. And then you have net long shorts in 10-year treasuries at the highest in

many, many years. It's sort of like double where it was a couple of years ago. So you have several things in there. And we've actually seen that a few times the last couple of years where you have short, you have enough shorts in the treasury and you see the yields popping up. And then you get a short cover in the same way. You get a short squeeze in yields the same way you get in the equity market. And then you see the yields come popping down. Who's doing that? Is that global macro hedge funds? Who's shorting treasuries in real life? Well, Ackman nailed it. Besides Ackman and people on Twitter. Yeah. Well, so you're going to have all kinds of hedge fund managers, momentum related managers. I mean, you're going to have active managers doing it too. but that's a hugely negative carry. They can't keep that trade on for long if it's directionally not working.

But I think, so Ackman supposedly made 200 million, but he spent a hundred million in carry to make that 200 million. So even if you're right immediately, it's an expensive carry. So it seems to me like that kind of a short squeeze is the most likely outcome when you get that many people shorting treasuries. That's a great point. That's a painful short. Yeah. Right?

I mean, again, a lot of my career in fixed income markets, that's a painful short for somebody to put on. You become the payer, right? So what are we talking about? The Fed has now come out and they've authoritatively, we double dog claim and declare that we are keeping rates higher for longer. And now the market finally capitulates. That's usually where you get a lot of, you know, a lot of nasty in the markets is the markets, the Fed and the markets will disagree a lot. A lot of times the markets are right when it comes to the Fed. They think the Fed's not going to go

as much as they say they will. And they're usually right. But when they're wrong and the market has to come around the Fed's way of thinking, that's when it kind of goes ugly, right? And so I think the Fed has been pushing this narrative for a while because the monster under the bed, and again, this is inflation to me, the monster under the bed is inflation expectations. It's not actually inflation, it's inflation expectations. Inflation expectations are this time bomb that's ticking because if I really truly believe that prices are going up, then I'm going to go buy today and then it becomes a self-fulfilling prophecy. That's the risk of it being entrenched. And so the way that I- Are you seeing that?

Huh? Are you seeing that? No, because inflation expectations have stayed anchored. And now we see consumer inflation in the form of BEIs, and you see consumer inflation expectations coming down a pace with actual inflation. Isn't this good? It's good. I think it's really good. Look how excited I am. I'm not even talking about power lifts. So we have a strong economy with inflation coming down? So there's a really weird dynamic. Here, you go. No, no, go ahead because I'm getting warmed up.

This is great. The audience hears from him all the time. Say more. No, let me tee it up. Yeah, please. So there's an odd dynamic going on where, tell me if you think this is right or wrong. Do you think that Wall Street is outperforming Main Street?

And where I'm going with this is, I said that there's a lack of transmission mechanism for interest rates to hit people. So if you look at the effective interest rate for the S&P 500, because so much of it is long-term fixed, it's below 4%. It's nothing.

But Torsten Slock put out this chart. There's 33 million small businesses in the United States. What's the effective interest rate? This is what they're paying. So the blended interest rate in their debt is well below market levels because, again, they borrowed money in 20 and 21. This is what S&P 500 corporations are paying. S&P 500 companies. So it's sub 4%. Small businesses, of which there are 33 million of them, that's the real economy, uh, is paying 10% interest rate on short-term loans. So they're very much impacted by that. And then of course you have people that are in houses versus people that are out of houses. And there are just the people that are like, it's, it's, it's the, the, the, the investment

grade bar versus the high yield bar. John, next, next chart, please. The small business one. So do you, do you think that it's fair to say that if you were to describe the economy, you would say just one word strong strong. Oversimplification, strong. This is NFIB, actual interest paid on short-term loans. This is like a bakery. Yeah. So I would describe the economy as strong and I would describe the average consumer as maybe anxious. And do you think that the spread on interest rates and who's it impacting, who's it not? The credit card borrower, the auto loan borrower. Like, would you say that Wall Street

is outperforming Main Street? Yeah, well, but I'm going to bifurcate Main Street into lower income earners. Yeah, that's a big difference. So, I mean, because you're ticking on, say, I heard you said auto loans, you mentioned credit cards, that disproportionately pushes,

skews from an expense profile. That disproportionately skews to low income. It's a bigger part of their monthly spend. And so like auto delinquent, so of course it's the delinquency that that article is on subprime borrowers. The auto loans with subprime borrowers, right? And so it hits this multi-decade at 6.11, but lost in the shuffle of that text is six months earlier. It was 5.93, right? So now we're quibbling over what 18 basis points. But the thing is, if you get, look, if you get really high car prices used or new, and then you have really cost of financing, and then you have to go get a car because you got to hoof it. You don't want to hoof it to work. Okay. You're going to pay a lot.

And if you go out on a limb to make that happen, because you need that car, it's almost a fait accompli that you're going to see default rates rise you need that car, it's almost a fait accompli that you're going to see default rates rise because of that. So this is the chart you're talking about. This is subprime, right? Subprime borrowers. So the percentage of total balance that's in 688 delinquency. And this is, now it's not, it's higher than it was in 2019, but only just barely. But the thing is, if you look at prime borrowers, nothing, no stress whatsoever. See, that's, that's, there it is, right? So that's what I'm, that's why, that's why I wanted to be really

careful here on the income docile that we're talking about. Now, classically speaking, there is a ripple mechanism, right? It's supposed to make its way through and we can sort of connect the dots till eventually it reaches the middle income person. But right now, who's disproportionately impacted by credit card rates pushing up by 50% in a relatively short period of time? Not rich people. Right. They don't have credit card rates pushing up by 50% in a relatively short period of time. Not rich people. Right. Not it's, I mean, they don't have credit card balances painted off in full. I wanted to ask you about that. The old timers would tell you would tell me people that were rich in the eighties, like lifestyles of the rich and famous came out in like 1983. Like there was a huge boom for wealthy people in the early 80s because they could take no risk and their bank accounts were booming with interest.

And that actually fueled the wealth effect that gave up – I would argue gave us the roaring 80s. When you travel internationally right now and you want to go to Italy and every five-star resort is booked with Americans, are higher interest rates perversely keeping the expansion going by fueling the top 20 percent of households and their continued proclivity to spend? Oh, wow. The Fed is not counting on that, but that's what I see with my own two eyes. I'm sure I could find the data that confirms it too. I'm really good at that. I appreciate that. But anyone that I talk to, like, I mean, we talk to investors, obviously. It's not representative of the whole country.

These people are spending more, not less. And the Fed seems to be fueling some of that spending because people are making tons of money on cash. It's crazy, but it's true. Yeah. Okay. So, wow. Very weird.

It's very weird. Okay. So, first of all, the 80s, you're triggering me. Fair. That's – the 80s – I think you and I are the same generation. You might be a little bit older than me. It's – I mean, I am an M2 power lifter if I haven't mentioned that on this podcast.

Not to brag. Not to brag. But – As a power lifter, you I haven't mentioned that on this podcast. Not to brag. Not to brag, but... As a power lifter, you should answer all of our questions. Right. Look, I mean, in the 80s, our whole world is born, right?

So 1983 is also the birth of the digital age. Yeah. Deng Xiaoping's four modernization speech, December 79, here comes China. The oldest baby boomer turns 35 in 1981, enters their peak earning years. And you have huge female participation in the workforce. And then all of that is married to the 18 to 20% Fed funds rate peak

from six foot seven-inch Paul Volcker. Which then spends the next 20 years coming down. Declining. Yeah, yeah. So you get this massive, over that 20 year span from like 81, 82 to right before the tech bubble, the S&P was 18% a year for nearly two decades.

Bonds were 11% a year. Our whole industry is formed on the back of that. The amount that a financial professional makes versus the rest of the field goes up 12X in that time, right? It's massive. And it sets in play a whole lot of stuff, and you're hitting on some of them. But even here, what are we talking about? Who's paying the interest rate that we're focused on today? It's the U.S. Treasury. The people who used to be able to afford it. But I mean, in terms of from a return perspective, it's the U.S. Treasury is paying this. Yeah. So if, I mean, this is, now this is getting deep, right? Now we, this is-

But we're paying it to our, this thing where we owe this much money, we're paying it to ourselves. As a left pocket, right pocket. The Chinese are not buying treasury bonds. Like, wake up, that's so, that's from a Bill Maher monologue 12 years ago, how the, you know, the Chinese own America. None of that's taking place. We are buying the treasuries.

Do I have that wrong? So, well, I mean, look, what I would say is this. The bigger thing to me is regardless of who's buying it, if I'm thinking about that, eventually our government has to pay it. Yes. Um, it's an obligation. Sure. Then I want to focus in on what's the level of real yield, right? So ultimately it's kind of, so if I assume my tax revenues are going to go up by inflation and all that stuff. And so I'm really concerned about the real yield that I have to pay. This is a new phenomenon for the U S government to have to

pay meaningfully positive real yields. Um, iffully positive real yields if we sort of stay around. Because right now, 10-year treasury, if you look off of BEIs and you're popping around a 5% 10-year treasury, that's about a two and a half real yield. That's what inflation is, two and a half. Yeah, baked into the BEIs over time. That's the crazy runaway, is that up until, look, before COVID, most of the developed world in the short end of the curve was paying negative real yields. You can run debt to the moon.

Because imagine what that means. If someone is paying or buying a bond and earning negative real yields in an inflation-adjusted space, they are paying a government to rent a lockbox to put their cash in to keep it safe. You can run any kind of deficit. They did that in Europe for five years.

You actually, there's a chart we have that showed England lowering its real level of debt as its debt issuance climbed because it was negative real yields that they were paying and therefore receiving. All right. Now it's not that. Now it's expensive. Now is where the rubber meets the road. And the deficit now blows out because it's not negative real yields anymore.

But do federal finances matter? Well, wait a minute. Add to that the cost of living increase, that Social Security, the biggest cost of living increase, I think, in history. Is that right? Percentage-wise?

Yeah. Well, I know it's the one I saw was biggest in decades, but yeah. Biggest since the 70s, probably. Yeah. Okay. But these are now real dollars. And I don't know where to go from here other than this is now a topic

that many, many people care about for the first time in a long time. So how much debt is too much debt? So federal finances, obviously we could talk, I can't, but people could talk for years and they have been decades about, how does it not, I don't know. I don't really know all about that shit.

But what I do know is that everything's upside down where net interest expense for large corporations is actually going down because their cash piles, they're getting paid more on the cash that they have on hand versus the interest expense on the money that they borrowed five years ago. It is f***ing weird. Even two years ago, COVID, right? Two years ago. I mean, that's like high yield, the high yield market. People talk about, you know, potential default rates and everything else, but they forget that during COVID, a lot of those guys cycled it back over again.

And so you have a pretty small amount that's even coming to in the next two years. Refinance lower, push maturities out. Interest rates go to the moon and net interest expense for companies goes down. Theoretically, yeah. No, literally, that's what's happening. Yeah. Well, I mean, as they keep taking on new, then it rebalances, but that's right. That's exactly right.

So when do these higher interest rates start to impact consumer spending? Like what would be, does it have to be a trigger? Is it just time? Is it just people running out of money? No, we're not doing another vacation, but we've been saying this for two years. And I'm not saying that there's no risk. Of course, that is the risk. It just seems like we've been having this conversation for a long time now. It is, but it's who, right? So who is it impacting already? So if we were talking about lower income borrowers, if my credit card payment just went up by X amount, that's a problem. There was a Bloomberg article, the one that was talking about that, the one on subprime, it had the, you know, you love Bloomberg. They have the article, Nancy is a hairdresser from,

you know, such and such. We taught the reporters. They just make these people up. It's like, so Nancy had a, you know, a slightly used Honda whatever, and it was repossessed. They don't get into detail about why it got repossessed because that probably turns her into a villain. But it has been impacting people. It's the who that it's impacting. And the question is actually sort of how does it broaden out? But then that takes me back to it. Okay. So do you think it's going to hurt the auto workers union? Do you think that higher credit card bill is going to hurt the auto

workers union? Cause there's some other press that relates to Fain and their negotiations with Ford, which is now going to settle. We've got Stellantis. We've got what's happening there. Like, look at the package that Ford is negotiating. That's why I come back to the household paycheck proxy. I remember being at my first nationals in Daytona and we're walking around and there were four fast food joints on every corner and each one was offering a signing bonus and they were offering 18 bucks an hour just to come and work. So if you were, let's, so if we're going to compare profiles, we also have to compare the income profiles, right? So where was I five years ago and what was I earning

and what am I earning now? And so what is my actual net impact financially? And I'm talking about the fast food guy. Yeah, so yes, I'm a subprime borrower. My credit card APR just went from 18% to 23%. And my next car that I lease is going to be way more expensive than my last lease. However, I'm working more hours than ever. There are 10 million open jobs in this country.

I can get a new job with my eyes closed. I can ask for a raise tomorrow. So you're right. The totality of that probably falls on the side of us not seeing this consumer-driven recession happening. But also real wages at the lower end are increasing as well. So yeah, obviously they're being impacted by higher rates, but their real wages are much higher.

That's what I mean. It's like, again, the guy making the fries five years ago makes more. A lot more five years ago makes more. A lot more. Significantly more. Hey, let's do your chart on the bond vigilantes. This is interesting to me. Ed Yardeni came up with this bond vigilante term like 40 years ago. Like if governments aren't disciplined, eventually the market will discipline them in the form of bond buyers refusing to show up and or selling off their bonds.

And this is always like the threat. And we did see it in real life in Europe last decade. Like we saw Greece being unable to sell bonds. And all right, what are we saying here with long-term rates, which are now at 2007, 2006, 2007 levels. And it happened like overnight. And this is a huge story in the market this year and it's not over. So walk us through what you're showing us in this slide and why it matters for investors. Yeah. And, and first, by the way, you know, the bond vigilantes versus now to your point, if, if we say that that time was a story of fiscal prudence and punishing that,

right now, today is less about that and more about a trade. Yeah, I agree. And so it's kind of a different motivation. But I mean, look, the thing here is, up until now, the biggest conversation that happens amongst portfolio constructors is, how big is my cash holding? How much am I holding cash? And the reason is because the yields are high and I don't have any risk and why not play around? So my first question for myself actually is, okay, when yields go up 100 basis points on the 10-year within a few months, does that change behavior if now I've closed the spread

and now I'm about 50 bps between, you know, your cash and what you can get pushed out the curb. And even now though, if you, if you turn on a CNBC or a Bloomberg, there's still a lean into cash because why not? And I can play it safe. And it's overnight and you're not taking the risk duration risk with a six month T-bill. And here's, here's the thing that, that I've, you know'm sort of shouting from the rooftops is I think that's a huge mistake. You're saying take duration now and lock it in. So if you are a market timer of great skill, right? Like Michael.

Right. Exactly. Except for Michael, most of us can't turn around and say, okay, this is where it turns. This is where yields start to fall. This is where shorts start getting taken off. This is where money starts to pile in. This is where momentum trades push them along. Where the Fed starts changing its rhetoric. This is where the Fed comes out and finally admits, well, that's like the whole, I've described the Fed sidebar to my sidebar, is I've described the Fed like the Avengers Endgame movie. So, you know, every time

you ask Powell about anything related to cutting or changing the threshold of acceptable inflation, he sort of balks and throws it off and keeps talking. It's sort of like, to me, there's that scene in the second to last of the big set of Avenger movies where Iron Man is talking to Doctor Strange. Doctor Strange gives up the time stone. He says, the reason I gave it up is because I looked at 14 million possible scenarios and only one do we win, right? Okay, fast forward. They're having a big battle on the field.

Iron Man comes up to Doctor Strange, which seems weird. You'd think he'd be killing bad guys. But he walks up to Doctor Strange. He says, hey, you told us one out of 14 million we win, yeah? Tell me this is the one. Doctor Strange looks at Iron Man. He says, if I tell you what's going to happen, it's not going to happen. And to me, the Fed is saying, if I tell you what's going to happen, it's not going to happen.

Yeah, because if we say we're ready to cut, you guys are going to throw another party in the stock market. They think we're on the one yard line. Let us finish the job. If we give you any indication that we're going to kneel or whatever, we'll undo everything.

They don't want to be a part. I mean, they are. They can't escape it. They don't want to be more of a participant in the behavior of others, especially if it thwarts all of this fiscal tightening that they've already brought about. And frankly, do you want to be the second Fed to theoretically blow it with inflation and go down in history? Nobody wants that. So you're going to make an error, right? I mean, so, but the thing is, okay, so fine.

So now we get these yields up here really high and we're talking about market timing, whatever. Here's the thing about cash. Cash doesn't generate capital gains. Cash doesn't generate capital gains. As yields fall, all you're going to do is roll into falling yields. If I have a 10-year treasury and it has an eight-year duration and yields fall by 200 in the next two years, that's 16 plus the five per year. That's 21% in the treasury. But cash feels good. But cash feels safe. It feels good. It hugs you at night. It's like, but the thing is cash doesn't pay you capital gains. Right. And so that there will only ever make the overnight rate in a money market fund. You have no upside on bond bonds

rallying. So if you're doing that, Josh, if you, if you're doing that, you have to believe you better believe that the base level of rates is going to hold. Because if it doesn't, that's the dumbest trade in your career. I fight with my wife about this all the time. Josh is all cash. No, I want duration. I want to be right now in seven to 10-year treasuries. I can't believe your wife is winning that argument. That is embarrassing. No offense. She's like, all I know, you idiot, is that you bought these treasury ETFs that went down.

Josh bought SHY and she's in money market funds and she thinks he's an idiot. She's like, my thing is the same price every day. All you ever do is lose us money every single day. And I'm like, no, you don't understand. How great is this? The payments are going up though. The payments are going up. She's like, my payment's going up too.

It's like, I can't explain how bonds work to her. And I look worse because of the price action anyway. So I know that right now is the time to add to duration each month. I can't time the market. Guess what? The 10-year is down quite a bit today. Yeah, no shit. I was down quite a bit today.

Hey, just to put a bow on the conversation that we had earlier about so much of the gains accruing – not so much of the gains. we had earlier about so much of the gains accruing, not so much of the gains, that the bottom decile of earners is actually doing really well, despite what the media would have, despite what social media might have you believe. So this is from the Economic Policy Institute. Real wage growth at the 10th percentile, when was this? I just want to, okay. So in March of this year, real wage growth at the 10th percentile was exceptionally strong, even in the face of high inflation. Between 2019 and 2022, hourly wage growth was strongest at the bottom of the wage distribution. The 10th percentile real hourly wage grew 9% over the three-year period. So is everything perfect? No, of course not.

I don't think anybody's suggesting that. But these are the facts. These are the facts. This is showing the wage gap between the lowest, the lower middle, middle, upper middle, and at the highest end. Now, who cares about the highest end? But it's happening at the lowest end as well. And we could have replicated that chart by using industries and going hospitality and leisure. Yeah. That's where those workers are. And so that's exactly, that's, I mean, Fry, I like Fry guy, but you know, it's the same,

it's, that's the idea. And so I keep looking at the household paycheck proxy. And yes, you should break it down into deciles, but the consumptive power is strong. Now, I want to shoehorn back into this thing about yields because equities made their run from summer of last year to summer of this year. We talked about that way back when. That comes up a lot. of this year. We talked about that way back when. That comes up a lot. Name the last time that we had really legitimate bond yields that we could get into and it was leading into the GFC, right?

I mean, there are people that have gone their whole, I got guys on my team that would have been in third grade, second grade, right? The last time that you could take a bite of that apple, right? The last time that you could take a bite of that apple, right? And so unless we believe, unless you believe that inflation is going to hold at that level, which therefore demands a real yield that has to be commensurate to that level of inflation, then the whole damn thing cracks. And so that's why it keeps coming back to inflation. And, and, and treasury yields are so high that it's not just treasury yields that it's changing the calculus on. It's the same thing for high yield bonds. Yeah. So high yield, usually if you have, if you have nine plus percent, nine, nine and a half plus percent yields in,

or eight and a half, nine, nine and a half, anywhere up there. What investment grade corporates. In high yield bonds. High yield. If you get yields at that level, almost universally, historically, and sorry everybody for the finger puppets, but it's because treasury yields are low because something bad has happened and spreads have blown out and there might be a liquidity premium on top of that. This is the classic profile of eight and a half, nine, nine and a half percent high yield yield to worst. It looks like this. Spreads are not blowing out. Spreads are not blowing out. You have more of your, more of your yield coming from treasuries. Yeah. Inside of junk bonds. Yeah. It's just a thin layer on top. So I was listening to Patrick Ashonis' podcast with Aswath Damodaran, and he

had a great quote. He said, when experts and markets diverge, it's the experts who are usually wrong. And so you could take that back to a hundred percent chance of a recession next year. And if you looked at credit spreads, which are a pretty decent indicator, maybe concurrent of what's happening in the, in the economy, there's no, there's no stress in the credit market. And the thing is, is that look, there's going to be like the, the snooty bond guy, but most people couldn't tell you what a credit spread means. Right?

So, so you see a, you know, a foreign change handle on a credit for on a high yield credit spread and you're like, okay, well that seems really, really low. Well, why does it seem really low? If you're feeling particularly spiteful and you sit across the table, you don't explain it. You ask them to explain to you why that's so low. And the thing is, is that if you have a foreign change credit spread and you look out over a four year default window, that suggests over 5% per year defaults. You know how far back you got to go to get an annualized five plus percent default rate. You got to go back to the late nineties into the early two thousands. You seem, you seem more confident in the returns in the bond market going forward

than in the stock market. Do I have that right? Absolutely. You have it. Okay. So when people ask you this question, what do I want to overweight or Or however they ask you, what's the best bet, you know, given the environment? Without timing the market, like what are you giving them in the way of an answer to that? You want to own the 20 pound. That's right. That's right. You want to, if you're going to give me, I always, like we live in this world where, you know, you and I were joking about this.

There's so many people that are, you know, in the media and on TV that we'll talk about. This is what I think oil is going to do by next Tuesday at 3 p.m. All right. So you're not going to answer that question. No, no. I just want to answer it over a longer window if that's cool. Yes. And so for me, I would have high yield as an equity derail.

It would be part of my equity portfolio. Because we were just talking about this the other day. No, Ben and I were talking about this. So, all right, so here's the thing. In 2017, this entire last cycle, it didn't really make sense to own high yield with rates at five, absolute rates like 5%. Like, give me, like, come on.

High junk bonds at 5%, no thank you. Then you could say today, well, why do I need to own high yield giving me 9% when I could just hide out in cash giving me 5.5%? Now we know why, we just spoke about this. But you could also say, well, why do I need to take equity, like, why do I need to take equity market risk when I can get 9% in high yield? And even if we do go into a recession, obviously junk bonds do poorly in a recession, right? They won't get cut in half with stocks, though.

They act like stocks more than treasuries do, of course, but at least you've got the 9% to buffer you. Well, and here's, yes, and here's an interesting tidbit about high yield that I think is, if people knew this, they'd be far more interested in high yield. I don't care what the starting yield is. I don't care where spreads are. None of it matters. If you go back in history and you take high yield yield to worst at any point in time, going back to the 80s when the index was created, and then you look forward five years to the average annual return in the five years that followed, they're almost a deadlock every single time.

Really? Oh, yeah. I got the chart. I mean, it's like you can do it as consecutive data points. We have one that I had brought along that's like right before the stuff hits a fan in the financial crisis, right after it takes place. Here's before this. What happens if defaults are much higher than history suggests? Right. So this is where it gets into, all right, so let's take, um, all right. So let's say that starting a high yield yield to worst right now, let's, let's round it up to 10.

Just like FTX bonds as an example. Just as an example, just random, just random thing. So when you get to yields that are high, the higher the yields are, the more that it's supposed to reflect the default environment that's expected to come. So you're right. What you'd have to run into is a period where the default experience is far greater than you would have expected. But that's what you actually saw right before the global financial crisis, is that the yield to worst, as I recall, was, I don't know, 7.5%. The forward five-year average annual was 7.5%.

Because it's not enough to get defaults. They have to sustain. And there has to be a driver of it. Right. So people, people forget that, you know, in, in 2000, you look at 2008 and 2009 high yields return behavior was the exact opposite of what you would have sort of expected it to be because the market had already priced in defaults before they took place. And then the year that they took place, the yields were already extraordinary. So you had like 56% returns in 2009 or whatever it was. I know you're not giving investment advice,

but in my opinion, I would think about the, if I were to own junk bonds, that would come out of my equity sleeve. I wouldn't be like, hmm, should I cash or high? Like those are very different instruments. No, like what if that's a better risk-adjusted barbell, like 30% short-term treasury, shorter term treasuries. And instead of, instead of 70% equities, what if it's like 50% equities and then the remainder in high yields?

Yeah. We were talking about this the other day. So like what's going to outperform for the next five, 10 years? Obviously we don't know, but would it be cash and junk bonds or stocks and bonds? Just like a regular 60,-40 like my hat suggests. Well, so first – oh, I didn't even see that hat. It's spicy, right? Yeah, that's actually – half the conferences I speak at is what do I think the future of 60-40 is. We're going to hook you up. I know you're not a fan of 60-40 from here, right?

But, well – Equity valuations are high. I like the hat. I definitely like the hat. Okay. right? But let's, well, equity valuations. I like the hat. I definitely like the hat. It's look, I, I, um, I think that's an, I want to, I want to true up those two comparisons. All right. So you're giving me bonds and stocks in one, but you're giving me cash and high yield in the other. Then why don't you give me bonds with the high yield too? Bonds with the high

yield. Give me treasuries with high yield. Give me treasuries with equities. That's what I was asking. I'll take it. I'll take B, but of course I'll take B. So let me put it this way. If you, if you look at, at, um, firms forecast, you know, there are 10, I'll take B. Let me put it this way. If you look at firms' forecasts, their 10,000 Monte Carlo simulation, here's what the equity S&P is going to average the next 10 years. Almost all of them have something around a five handle. Let's push it from five to seven. What did we just talk about the yield to worst on high yield is? By the way, if something breaks enough to cause defaults that are that meaningful, then I shudder to think what your equities are going to do. Yeah, well, that's my point.

You're going to get a – you're going down in both. You're going down less in high-yield bonds. Now, if you use those high-yield bonds as a replacement for treasuries, you're a schmuck. If you use them as partially an equity substitute, you might have a better risk-adjusted return over the next three years. You might have a better absolute return. You might have a better absolute return too. I mean, that would be the 60-40 that I would actually use over the next five years

would be treasuries and high yield. If somebody forced me to do a two-asset 60-40, I'd go full freight treasuries and I'd go high yield for that reason. But 10 years ago, the 60-40 was challenged because obviously 10 years ago, we didn't know that the S&P would do 13% a year or whatever it did.

We knew what bonds were going to do, 2% or whatever they did. Now, at least we're not so reliant on the stocks to do the heavy lifting. We know we're going to get five-ish, whatever, you know, where you are on the curve in terms of credit and duration. You know that bonds are going to give you something now.

That is the trillion dollar question. So the trillion dollar question is for how long? So right now, let's round to 5% on the 10-year treasury. I agree with you completely. So that's why the up-down of this trade to me is so interesting is because what's the worst case scenario? Presuming the treasury doesn't default. I mean, that the government doesn't default.

So in terms of price declines? How things happen, right? It's paper, right? So I either hold a 5% yielding instrument for 10 years, or given the shape of the curve, I can choose a whole bunch of stuff and get close to that number, right? But let's say I want 10 years of 5%. I want to take the insurance policy out that I will get a 5% coupon for 10 years, right? It's not a negative to me. I want to lock it in, right? I think a lot of people do. So I locked that 5% in. That's how I feel right now. And so if I'm wrong and there's something

in the economy that keeps structural inflation higher, that then forces a higher real yield and keeps the 10-year yield that high for that long, okay, nor harm, nor foul. I made my 5% for 10 years. And I pretty much tied up with the cash market, give or take. Dude, I put this on LinkedIn yesterday. You would not believe. I had 400 responses. People lost their minds. All I said, very innocuously. And you said LinkedIn was the nice place.

Welcome back. Well, not since I got involved there. Now it's another toxic waste dump online. So I'm like, me personally, not advice for anyone else. This is right after the 10 year treasury yield fell back below 5%. So yesterday. So I said, I will buy as many 10 year treasury bonds with an above 5% yield as they will sell to me until I run out of money. Me personally, you got to see the responses. It's insanity. He's like, oh, so sell all your stocks? No, I didn't say that. Oh, so nobody needs to ever take more risk than five? Nope, didn't say that either. People are just like apoplectic about the fact that there is this thing that you can do that's not stocks because we're so used to that not existing for so long.

And so I'm writing back to people because I'm an idiot. I'm like, dude, I'm a majority shareholder in an RIA. My whole life is tied up in the stock market. No matter what I do, that's going to set my comp forever. So I'm talking about me, not you, not a 20-year-old, not a hypothetical 70-year-old, just me. I don't care if the yield goes to 6%. That's my risk. I miss, I miss out. It goes to 6%. Well, stocks are a big ticket item. Yeah. I mean, well, he's got plenty of stocks. It's fine. How many, how many times has Reddit birthed the bond meme? Yeah, no, right. So it's like, you know, nobody's coming out like a treasury walks into

a bar. It's not, I mean, that's not the thing that people focus on. It's not the thing they learn. Yes. And so that's why the bond market has always been fertile ground for me because so many people don't study it. Yeah. It's, I mean, look. In fairness, there's been nothing to study for 12 years. That's completely fair.

You know what? That's completely fair. What's the point? What's the point? And that's why 60-40 was a problem for me because again, I operate in real yield space. You want to hear something funny though? The 60-40, a problem for me because, again, I operate in real yield space. You want to hear something funny, though? The 60-40, the 40 was supposed to be the stability until last year. But if you look at it, I mean, just look at the chart of over the years, starting back in the 80s, because that's when it takes off, right?

Yeah. Nobody would – go pre-COVID when so much of the developed yield curves were negative real yields. Nobody in their right mind would say, I have a portfolio design idea I'd like to bring to you. Let me just flesh this out with you. 40% is going into something with negative real yields. It does sound like you're doing better. Keep going. It's like, I got 40% negative real yields.

I think this is going to work out really well for the NBEN investor. Of course they wouldn't. You birth it when you have a 15 handle, 14, 15 handle in the trendier treasury. That's where you give birth to two things that can stand side by side return-wise. We get there, it should be 46. So let me push back.

What should have been the 40 in 2000? Let's go back to 2015. What should have been the 40? Well. Because that didn't work out well. Whatever it was. Well, so let me finish this thread, which is, and I'll come back to it. It's the, because that's a whole different thing because now I I'm getting into factors and that's the answer to your question.

First things first is as when yields come down, if you look, if you look from the eighties to the nineties, go through the tech bubble and all of that stuff, and you follow the big downturns and you look at what bonds did alongside stocks, you see the declining ability to offset as yields fall. It means you don't get the push. You get the worst of both worlds. Either your yields are too low when things are okay, or when they're crap, the capital gain push from the yield decline is too low because it was too low.

Look at, go back and look at COVID. There was an article about how 60-40 worked in COVID, and I wanted to vomit because you have to look at what the bonds did along. The stocks did this. The bonds didn't come to the rescue, right? All right. So we paid the price. Last year, bonds went down 17%.

Stocks went down 18%. We had no hedge benefit whatsoever, no diversification benefit. So but like what could you have done prior, not predicting the pandemic, but if you were worried about bonds having essentially total risk in front of you and very little offset, what would the 60-40 portfolio would have been? But even in hindsight, if Rick just going back, maybe it's gold, gold, no, going back to the Ben Carlson thing, uh, in 2015, and I'm not, I'm not like an alt basher or anything, but what alts would have helped a 60-40 portfolio from 2013 through 2022?

Yeah, so when I talk about an alternate 60-40, they're actually, you can do it without alts because the way that I've talked about, now COVID's a little weird because it sort of screwed up a lot of things because of the nature of COVID. But the way that I've talked about it is people tend to think of bonds

being on the full end of the counter-cyclical spectrum and stocks live on the far side of the pro-cyclical spectrum. But it's not true. There's long-duration stocks. There's quality. There's high-density. So there's this spectrum of reaction. It's a fair over-generalization.

It's a fair over-generalization, right? Is it, yeah, okay, so these are more pro-cyclical, but there's a reason why one doesn't act like the other every time to the same degree. And so the thing that I've argued for a while is why does, why does U S large cap quality persistently versus U S large cap stocks? Why does it persistently generate down captures that are 15 to 20 points below the equity down market? Why does it persistently get you more of the up market of the S and P 500 versus the down market? That seems like we were were talking about this with Jeremy Grantham. It's just, these are boring stocks that nobody wants to own.

No, it's survivorship bias. No, no, no, no, no. These are the stocks that live the longest. No, no, it's the sector, they're consumer staples. They're boring. I think it's, I think it's both. I think this is, God, we could talk about this forever. It's, this deserves like a pint in a pub.

It's, is all of this is, I think that counter-cyclical behavior is the thing that's tough to source because forever there's a million risk assets that are procyclical, but you had that one short list of high grade bonds and maybe there were some currencies you could play around in yen, Swiss franc, whatever, right? That's all you had. It's a short list. Gold lived on both lists because it couldn't make up its mind, but that's basically the

deal. Yeah. Okay. What if you could frack countercyclical behavior out of equities? Frack? We're fracking? What? No, options.

What if embedded inside of a factor? What if embedded inside of a quality factor? If you regressed it, what if you were to find that there's counter cyclical elements inside of that? And you could. Are you about to pitch private credit again? No, no. This is like quality, like quality and equity, right? It's, it's, it's, it's, what's the driver of why it doesn't have the same up and down? Why does it persistently generate this behavior?

Now, whether or not it's actually a true behavior, people believe it. No, it is. It is. It is. Well, so you mentioned something that it's boring. I used to stand in front of audiences. I'd say, okay, you got a buck in the S&P 500. You know the market's going to go down. You can sell the S&P, but you have to buy another equity. What do you buy? And the same list would always come out. Dividend.

High dividend yielding. I want low vol. Pawn shops. Pawn shops. Yeah, of course. Not a high dividend, a stable dividend. It's like, so- Stability stocks. So, sorry, dividend growth, right? Yeah, of course. Not a high dividend, a stable dividend. It's like, so- Stability stocks. So, sorry, dividend growth, right?

So I want low vol, I want div growth, I want consumer staples more generally, I want quality more broadly. Alcohol. Right, sure. I mean, because- Tobacco. I became really good at mixology during COVID

for the record when I just used to be a beer drinker. But- I'm still drinking like it's COVID. I was drinking like that before I came in here. but, um, I'm still, I'm still drinking like it's a COVID. I was, I was drinking like that before I came in here. So, um, no, I'm kidding. Um, so all of that's the go-to that everybody goes to. It's like in case of emergency break glass, and that's where you see ETF flows and those factors rise. Um, and so whether it's actually true or flows make it so at this point is kind of hard to, you know. So you're saying rather than accepting bonds yielding zero,

a better 60-40 would have been just overweight high quality? More 60? More 60? It would have been low octane 60. That's right. It would have been low octane 60. Low octane 60. I feel like I rest my case.

And I would have had some high yield bonds in there too, for the record. It would have been more sexy. The key to making that portfolio work is you have to lose your password to where you log in and see it. Can we talk about the stock market today for a second? I made this chart. So Microsoft gave up all of its gains

from the post-earnings pop. Apple closed at the lowest levels in a 50% drawdown since back in May. So S&P was down 1.2% today. The equal weight was only down 18 basis points. John, throw up this chart that I made. So over the last two days, it's two days, who cares? But I do think it's interesting. The equal weight outperformed the cap weighted over the last two days. The third largest two-day gain of equal weight versus S&P going back to the beginning of 2022.

Rick, comment on the last two days of the market. I'm just still listening. It was just a two-day change. It was interesting. Now, look, well, so we've had this thread in our capital markets outlook for a few quarters now. It's sort of the 10 versus the four. I mean, Magnificent Seven's like a coin term,

but we're just sort of doing 10 versus the 490. And we've talked a lot about the equal weighted. If we spread it out beyond two days, the 490 has woefully underperformed the rest of the guy. It's actually the biggest gap in history between the top 10 stocks versus the other four. There has never, ever been a gap this big. We played around with putting something like that in chart form. It was, so it's sort of starting point and what's being punished, right?

And so it's almost like you want to, I haven't even looked at the market. They'd have been calls to calls to calls. But it's like, if you went in and said, okay, well, who got hammered then? If the equal weighted paid you off today on a relative basis, what got hammered? It's probably going to be the similar suspects, right? That we've been seeing drive back and forth.

Yeah. So they have to give up market cap for those other stocks to go up. It becomes a univariate story, right? So this is the median forward PE of the top seven versus the rest of the market. And the gap's very, very wide.. And the gaps very, very wide. Oh, yeah.

Very, very wide. So relative value versus relative gap. Should they be aligned? But people forget that there are multiple ways for that to correct. That could correct through the rest of the market catching up and having like a furious Russell 3000 rally to end the year where it's not just the S&P, but everything, or correct the way it's correcting this week. Small caps are like kind of okay. And they're crushing the FANG stocks after great earnings reports. And that's a catch down, but it still represents a closing of that gap. Meanwhile, do you know that the Russell 2000 is

at the October 2022 levels? We're going to end on this. Let me phrase this right. What's the biggest tail risk in the market? We've got a graphic here. John, can you get this up? This is a hilarious premise. So basically, this thing will change based on whatever the headlines are in the news. This is a joke. What's the biggest surprise that you can never see coming? None of these are surprises. Of course. I want to read them for the audience. Uh, you sovereign debt funding was like,

uh, July through October of 2011. Just give people an idea. And then it was us fiscal cliff. And then it was a hard landing in China in 2014 when they were resetting the Yuan, then geopolitical crisis, then another China,

then Trump, et cetera, et cetera, et cetera. After coronavirus, the next thing was inflation slash hawkish central banks. That seemed to, and this is a survey, Bank of America portfolio manager survey, but this is what they say is the quote unquote biggest tail risk. But over the last 10 years, nothing has been answered as long as inflation and rightfully so.

So let me ask you, see the future for us. What's the biggest tail risk that none of us see coming? Because it's not one of these. That none of you see coming? I mean, it's a joke of a question because obviously that's what a tail risk is. No, but what's the big risk out there that you think we're not paying enough attention to if we're so worried about inflation right now? Well, this is the one that always scares me because it's so hard to handicap. It's geopolitical risk. But that's ever-present. Is there one in particular?

Well, so it's a cocktail for me now. Mongolia. Right, so it's Mongolia. I mean, the pollution there is outlandish. It's all of it, right? It's just sort of a brewing cocktail. It doesn't have a point where it blows off. I don't know the length of the fuse, like the old cartoon bombs and how, you know, it's

lit. You can hear it, but you don't know how long it is. I don't know that, but I've got, I have Israel, Hamas. I've got Middle East now pushing in. I've got, you know, sort of frontier, you know, Hezbollah. Others are trying to get into it. Russia and China sort of on the same side of this. They're pushing this together. Now there's, we still have Russia, we still have Russia, Ukraine. We're looking at South Korea being part of it. We're looking at Iran being part of pushing that,

this sort of growing kind of an axis. If you're asking me like legitimately what scares me over time, it's that, you know, this isn't like when we were kids, right? When we were kids, it was the eighties and this was all sort of slowly moving into the back burner. That's what allowed for Top Gun and Rocky and all the other movies. This is like the opposite side of it where the evil empire reforms again. Yeah. Right. And so the axis is like China, like China, Russia, Iran, Turkey. Right. Like how do you price that? What do you do? But like, but how, but, but let me put it this way. Let me talk about the guys I wouldn't include.

Okay. Why am I going to worry about, what is it about inflation I'm scared of right now? You know what the rolling three-month core or headline inflation number was? It was two and change. I'm so glad you said that, but the market is transfixed by this.

And whatever the bond yields do on any given day, that basically tells you, you don't even have to look at the stock market. You already know. So we are like caught in this, in this push and pull with the bond market. And by the way, that two and change handle still includes shelter, which is light from a distant star. Like that's not current pricing. No, they're going off a year ago. So it's, so it's like, it, that does that scare me?? Like can we get that list back? Can we do that? Yeah.

So the message from Rick is worry about geopolitics more than inflation. Like that's what you would tell people. So are we afraid that growth is going to disappear because too many people have jobs and decent – Right. What's the list? Is there a liquidity crunch that we're afraid of? Is there, do we have too much leverage in the system? I don't, you know. I said that way. It's like, wait, your biggest concern is everyone who wants a job has one.

And of course it sounds crazy. I'm just trying to go down. Like, that's what I was saying. I mean, honestly, I'm trying to look down the list and say, there's like, oh, you're talking about recession, right? There's a slowdown in the economy. There's a worse slowdown in the economy. There's a, something falls through the floor. Is there something on that list that is so Richter scale bad that that's the thing that keeps us awake at night as portfolio constructors? Well, so, so to me, uh, the premise of identifying the biggest tail risk is ludicrous because tail risk is obviously an unknown. By definition, you can't.

If I had to say like what is the biggest risk to the stock market, not tomorrow, but like a persistent risk that might persist is if rates are really higher for longer and investor preferences continue to migrate towards cash, then there will be a persistent re-rating of stocks lower, of multiples lower. Yeah. When you said tail, so I would, I sort of take that differently. When I think of tails, I think, what's the thing that's far out on the tail in probability? Because it's usually a probability distribution that gives me that tail. A meteor. So I'm so like, right. So my- Now, electoral chaos next fall. That's tail, but- That's why I'm putting that all in the geopolitical bucket because it's like, I have a, it's a recipe of like 12 different ingredients right now that any one of which could be nothing or they could be something,

but I fear there's a lot more than the other stuff. You're certainly never going to identify the tail risk. So, you know, obviously the way to combat that is just put together a portfolio that can withstand right tails, which obviously nobody cares about. That's great. Or left tails and everything in between. Yeah, and be willing to give up the right tail to defend the left tail. What's the most positive thing about this moment in time for investors

from all of your experience? What do you think maybe we're underappreciating? Sorry, say that from the first part again. The most positive thing about the current environment. And maybe that's just real yields or- I'll answer and you can think about your answer. Starting valuations. I'll give you 15 can think about your answer. Starting valuations. I'll give you 15 seconds to think about it.

Wait, you're going to give his answer? No, I'm giving him my answer while he can not be put on the spot. This is courteous. I'm giving him 20 seconds to formulate an answer. So the question is, what's the best thing about the market right now? The fact that we can withstand 20% cumulative price increases and digest 500 basis points of increased interest rates. That's a good answer. The economy not falling apart, but more specifically, the stock market hanging in there just fine. Companies figuring out what to do with their costs, what to do with their people.

And we're fine. We're muddling along. Is the market in a rip-worn bull market? Wouldn't you expect it to be? Given the Fed hiking cycle, like, oh, it's only the big seven. Who f***ing cares? The market's fine. Yeah.

Personally, I think you went first. You can steal my answer, but that, we'll table that. So go ahead. Because that's right. Okay, so what's the best thing about the market? That it hasn't died. We are, we are bothered. The market is bothered by four plus percent GDP.

Yeah, yeah. That we have, you know, incredibly low employment, that the market continues to rip, that the Fed has taken rates up and it hasn't broken. It's, we are, and, and we find negativity in strength right now. That's the, that's the best thing about the market is we find negativity and strength because what it says to us is, oh my God, the Fed is going to go another four months before they cut. It's relatively all good. Right.

It's relatively. Why do we need cuts? Five percent had been an acceptable treasury yield in past bull markets. And if it weakens what happens to rates? I mean look if you get the weakening that you want and inflation comes down like it looks then what comes commensurate? Remember they were saying like the Fed is out of bullets. Nobody's saying that anymore. The Fed's got 500 bullets in the chamber.

Didn't anybody ever, you know, like look back at Volcker? It's like, that's one of the cool things about financial, about, you know, monetary policy history, right? Is the story of William McChesney Martin, who ascends to the head of the Fed back in the 50s. And then he's the longest serving head of the Fed. He gets booted. And part of the 70s inflation was Nixon's choice for Burns.

He puts McChesney Martin Jr. out and he brings Burns in. Part of the thing is that. And it continues through. And then you get like Miller, the shortest serving head, the one that didn't come from academia or finance. And then inflation keeps rising and in strides Paul Volcker. And he's like, you don't know how to fix this? Oh, I know how to fix this. How's rates at 18 to 20 percent? I'm going to keep my finger on the button and you stop me when it stops you from spending. Yeah. Right? Yeah.

That's because you can only, that's why there's ZERP, but there's no like infinite up, right? We have a ZERP and then we have stuff we can do beyond ZERP to take it effectively negative. Right. But we can push rates as high as we need to go. but we can push rates as high as we need to go. But again, we're, we're looking. So after all of that, if, if the feds and others view is correct for the year, then what we're saying is, is that we're on fire because ultimate GDP this year was two one. Yeah. That was on fire. Yeah. That was the emergency. I don't think it's two nine over the last year. No, listen, good news is good news. I'm sorry. It's I mean, good news is...

But that's why when we talk about tail risks, I'm like, what am I going to give you from that list? You know, bond yields are too high. So we had Tom Lee on last week, and he's, you know, been known to be bullish every once in a while. But Tom said, like, most of these negatives have a habit of becoming positives as they reverse.

So it's not like there's no bad news or they're all – the negatives do exist. But as they ameliorate, they go from being negative to positive in many cases, inflation being an example of that. That's the one I was just going to say, Josh. So let's say that what we believe and others believe is actually accurate and inflation is coming down, that if I take shelter inflation away, that the number is significantly lower, that goods inflation has been actually negative here more recently. That's right. That if I take shelter out of services, I mean, there's a reason why now we have Super Core and all this other stuff, right?

Because we're trying to separate it and get down to the things that are driving inflation. What if inflation is actually coming down at a reasonable rate? What if shelter does make its way out as anticipated? What if what's baked into the numbers actually plays itself out? Then the question is what, what, what kind of a market are we talking about? The risk is to the upside. I knew it. No, I'm bonds. Hey, here's what kind of market you're talking about. Positive real yields for risk off capital and treasuries.

You got S&P mid caps trading 13 times earnings. S&P small caps, 12 times earnings. Absent a major credit event, what are you so negative about? I like the setup. Here's my crazy stat. This is, so the whole bang in 4% withdrawal rate, right? That many financial advisors use, right? Take out 4% inflation adjusted.

Okay. Have you ever solved like what's the math required to actually make that work? So, so let's put it in real space. How much does the portfolio have to earn? Have to earn like clockwork to make the math work. Now I'm going to, I'm going to do this in real space. I'm going to pretend a world with no inflation. So I don't have to think about it for a second.

Right? So it's just 4% a year. I need to earn 1.35% per year like clockwork and the math will work that I can withdraw for 30 years to allow that 4%. Okay. So let's keep that in mind. What did I say the real yield was on a 10-year treasury right now? Two and a half. Financial advisors were tripping over themselves in 2019 trying to figure out how to build a combination portfolio of stocks and bonds that with a high likelihood and the risk of drawdowns, it could kill your portfolio because in decumulation, you're spending down in paired

assets. How can I trip through that forest and get somebody to the other side? You could right now, right now put this podcast on pause and run out the door and build a laddered tips portfolio and lock in retirement to work and make money left over. That's 4% withdrawal rate here. Solved. Done. It's already over. And by the way, no counterparty risk. Nothing.

It's a tip. It's inflation adjustment. You don't have to deal with BEIs. It's actual inflation adjustment. Duncan, we're going to edit this out so that none of our prospective clients hear that because what we do here is extremely intricate and a lot more thoughtful. Rick, did you have fun on the show today? I had a ton of fun. We had the best time having you here.

We end the show every week with something called favorites where we just basically ask you, like, what you're reading, what you're listening to, what TV shows you're watching, or what's something that our listeners slash viewers should check out that you've enjoyed. And you could pull this from, you know, anywhere, a book, a movie, whatever you got. Yeah. I, you know, because of Mongolia, Mongolia shows up a lot in this, in this, in this talk. Not a lot, but I will say that I tend to pilot books. My wife deals with the fact that I find books that I like and I have gigantic piles. And never read them? So I'm going back later on, pulling it out, reading it. So as I alluded to earlier, I'm sort of obsessed with the way our market took shape as the 70s transitioned into the 80s.

And so that period is a big deal for me. And there's a book called A Piece of the Action. A great book. Michael loves that book. Joe Nocera. Joe Nocera, yeah, great book. And so I've had that sitting in a pile forever. And I finally pulled it out to start reading it because it's basically, it begins with 1958 and credit cards making their way out, but it's sort of how we democratized capital access, if you will. Yeah. And with that- Money market funds. Money market funds, mutual funds, credit cards.

All of that sort of comes out and how that sort of changes the playing field. And now all of a sudden, you know, people are investing. And now you get to a level of excess. Now in the book, he actually has a revised forward where it's written later. And he sort of laments sort of post-crisis stuff that went down and how it went a little bit too far. Um, but I just, I really, I'm a big fan of economic and financial history and I spent a lot of time reading it and that particular period of note. And so that book to me is, is a lot of fun to read. A piece of the action by Joe Nocera. You got a favorite for us? I've got a book too. So yesterday I was on the Amtrak down to Philly.

And I didn't realize it's like an hour 15 from the city. What a joy. You took the Acela? I took the Acela home. Huge waste of money. Is it? Why? What's the difference?

I'll tell you right now. So I sat business class down to Philly, which was $110 worth every penny. Because the seats are—it's great seats. And you've got the reclining tray table, I guess. Retractable. Yeah, whatever. And it comes all the way into your lap. So it's just very comfortable. The Asello is $210 and you're in a four seater, which is, I was like, wait, what the hell? That's no good. So my toes were touching this guy's toes. Oh, I get off the train. It was, dude, you would have, you would have. And he probably had his shoes off. It was awful.

I would have Ubered the rest of the way. So the move is business class on the regular train. But anyhow, so when I got to Philly, I'm like, oh, I'm here already? That's wild. So I was reading. So my friend Morgan Housel has a book coming out, and the book is called Same As Ever.

Same As Ever or Same As Always? Same As Ever. A Guide to What Never Changes. And so Morgan's first book, The Psychology of Money, sold 4 million copies. It's like- I think it's the biggest selling financial book of the whole generation. Oh, easily. Easily. It could be a top 10 of all time. Since the Intelligent Investor, I'm guessing. Anyway, so there's a lot of pressure for a second book, right? Like everyone knows how Sapiens, what was the second book? Yuval Harari's second book did horribly. Sapiens 2, Electric Boogaloo. No, it was Homo Deus. I don't know. Whatever it was. I didn't read that shit. I read the first one. Anyway,

Morgan, same as ever, is so f***ing good that I was distraught that I was reading the book. I almost wanted to put the book down because I didn't have a pen. And I wanted to highlight so much of it. And so I texted Morgan, dude, your book is so good. I almost have to put it down because I don't have a pen to mark it up. So pre-order it. Shout out to Morgan.

The book is incredible. Same as ever, A Guide to What Never Changes. We got to bring Morgan back on the show too. He's coming out. It's such a good book. So I'm very, very happy for him. I just remembered. It's Sapiens 2, The Dark Knight Rises.

Oh, yeah. All right. I went to the Sphere in Vegas last week. Dude, are you a U2 fan? I am. Okay. I am. This is my 10th U2 show.

I figured it out. Really? Uh-huh. My first U2 show was Joshua Tree. I was 10 years old. I went to pretty much every tour. I took Sprinkles to the Vertigo tour when she was like six months pregnant with my daughter.

Like I've been at every major YouTube thing, but I haven't seen them in a long time. And they're like better than ever. But forget about just the band, the spectacle. This is one of the few things in my life where the hype doesn't do justice to the actual experience. So the sphere you started seeing like on Instagram, like video starting to come out. And you're like, all right, that looks kind of cool.

When you're in the middle of that and you feel like the seats are moving and they have got it so that all the pixels on the screen are – it's almost like hypnotic. And I have to tell you, they just added more dates. They're going to run through February. I might be going again. I was just looking at it last night. I really think that if you – you don't have to love you too. If you want to be able to say to yourself, when this new technology came along, I was among the first people to go see it. And that's like not important to everyone.

But like, this is definitely a breakthrough. if we go in December, we'll go? I just looked it up. If we go to this event in early December, there's a show on December 6th.

All right, let's do it. So I wanted to, I wanted to shout out, my friend Joe Fahmy took me and what an amazing experience. And when they did With or Without You,

Joe and I held hands. Can I just say one thing? The whole audience comes together as like – because everyone's looking at each other like, holy shit, can you believe this? Like everyone in the building is seeing it for the first time. Nobody's like over it, right? And that's it. I could do this for a long time. I saw Billy Joel over the weekend.

Where was he at this year? Yeah, I was at the Garden. And I felt old. And he's old. He's it. I could do this for a long time. I saw Billy Joel over the weekend. Where was he at this year? Yeah, I was at the Garland. And I felt old. And he's old. He's old. He's 69. He brought... No, he's not.

Yeah. Turning 70. Billy Joel? He's older than that. Oh, 74. Maybe 74 turning 75. So, first of all, he has a six or seven-year-old daughter,

which whole other story. But I... When River of Dreams came on, like to me, that's still the new song. That's is from 1993. He stopped making music. And I remember when, and I remember at the time being like, I don't like Billy Joel's new stuff. And I was only eight years old at the time, but it made me feel old. I, uh, so Billy Joel, I saw last time I saw him at him at the Garden, I had seen him before in, with Elton John performing.

And he'd sort of disavowed almost his hits. Remember, he was a composer and he did all that stuff. And last time I saw him at the Garden a handful of years ago, he was engaging with the audience. He was back in it. He was letting pick between songs. Then he'd tell a story about the song. There's nothing quite like Billy Joel at the Garden. But if I may, it's not my favorite

concert story of the garden for me personally. So what is about, uh, since forever ago, uh, my then girlfriend wanted to get me tickets to see, I'm a big Elton John fan. Okay. Want to get me tickets to Elton John. He's playing one night only at the garden, which true to Elton John was actually like a two or three night thing. But, um, so, but then she's, she's taken me to the garden as we start, you know, you send those escalators and you realize how it's going from Penn up and you, you break the clouds, right. And you're still moving up. And then she explains to me, she says, you know, I wanted to buy them myself, but I had to go to work. I wanted my dad to do it. My dad couldn't get the internet to work. And so, uh, so I just want you to know,

it's a thought that counts, right? So we go up, up, up, up. So just here, a little trivia point for you. The last row of the garden is like half seats. 400 section. It's like half seats. Yeah. And we were right in front of that, right? So we're sitting with a few other people that got there early. We got there early.

And so at some point, two guys walk in front of us on the little, you know, sort of walking area below, concourse area below. And this couple sitting in front of us, they say, do you guys want to sit on the floor? And so they're like, yeah. And they go down. And I said, oh, maybe there was a ticket mix up. And so they're trying to make it right. And these two guys that had the half seats behind us are like, no, no, that's something that he got from Billy Joel, where they keep seats and they give it to people that are young, hip when it's going to be out there, you know, bring them down. And so, so my girlfriend says, now I'm indignant because this is, this is like, you know, 20, 25 years.

I'm like, I'm, I'm young, I'm hip. And so, um, my girlfriend says, do you'm indignant because this is, this is like, you know, 20, 25 years. I'm like, I'm, I'm young, I'm hip. And so, um, my girlfriend says, do you want me to go after them? I said, no, I don't want you to go up and they don't want me. I don't want that. So, um, they come back around a little while later and they pass by for a second time, keep walking. Then one of them stops after about 10 feet and he comes back and he points at my girlfriend and I, and he says, are you two? And, and like, yeah. And he's like, come here. And so my then-girlfriend basically tramples humans to get down there, right? And we walk down. And he says, yeah, I saw there was like six of you in the row.

I thought maybe you were all together. And so we're walking and talking. And I'm telling him, look, I'm so grateful because I'm a big Elton John fan. And this is a birthday gift. So I really appreciate it. And we get to the steps to walk down. He's like, well, Rick, happy birthday. Seats one and two front row. Oh my God. Yeah. So Billy does that because he doesn't want to look out from the stage and see the richest people in

the building sitting in their chair, not clapping, not being involved in the show. So it's actually really smart when you think about it probably leads to a better performance from the stage to have people that are just grateful to be in the first row. Very cool story. Rick, we had the best time with you today. Where can people get more of your insights? They go to AllianceBernstein.com. Is there a client?

Anything that goes out? I should probably ask David, but you tell me. On the main website, I think the easiest way is there's contacts. There's some series that I lead, but if you go there, it'll probably get you to all that stuff. You've been incredible today. We thank you so much for all your insights, truly. And thank you for making the trip here right after the powerlifting competition.

It's quite a one-two punch. You excited to get home? I am. Well, I had five days home before I shot myself over here. So I was used to it. All right. Very cool. That's been Rick Brink

of Alliance Bernstein, ladies and gentlemen. Thank you so much for joining us. Great job this week. Duncan, John, Nicole, the whole media team, we appreciate it.

Hey, guys, thanks so much for listening. Have a great week. We will see you soon. All right. Take us out. So that was the warm-up. So we just want to try

to get the butterflies out a little bit. Okay, good, good. Okay. Because I thought I could do it better the second time. I think you're ready. Yeah.