The Compound and Friends - Too much money, nowhere to put it (with Joe Terranova and U of Oregon Prof Tim Duy)

Episode Date: October 9, 2020

On this week’s episode of The Compound Show, we’re looking at how the political landscape might impact the economy and the stock market. First, Josh talks economic stimulus and the Fed with Professor Tim Duy of the University of Oregon. Next, Josh catches up with Joe Terranova, of CNBC and Virtus Investment Partners, to discuss the supply and demand imbalance in the stock market and approaches to investing. Thanks for listening and be sure to leave a rating and review! Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey, it's downtown. Listen, I don't really understand what the president's strategy is around shutting down stimulus talks with the Democrats until after the election is over is all about. It doesn't seem like a winning position for him. It's a weird closing argument, but that's where we are. And it could change. But as of right now, I'm just – I'm shocked by it. And I hope there's a backtrack and some sort of a deal. The direct deposits and enhanced unemployment benefit checks that went out over the spring and summer were a huge home run for the economy. Saved a lot of families from personal bankruptcies, losing their homes and their cars, falling behind on debt payments, and on and on. We've only gained back half the jobs we lost from the shutdowns. There's a long way to go. And for the most part, the people who haven't yet returned to the workforce are the people who are the most financially vulnerable to begin with. Employment for people with college degrees and white-collar jobs is pretty much back to where it was before the pandemic. And there are a few exceptions, travel industry, hospitality,

entertainment. Okay, fine. But outside of that, the top half of the country is pretty okay, all things considered. Look what we've been through. For the bottom 20% of workers by income, however, it's still a disaster. There is no better form of economic stimulus we can do for everyone, for everyone, than to put the money directly into the hands of the people who need to spend it immediately. The multiplier effect on the first round of stimulus cash was exactly what was needed to jumpstart the economy. And now we need to keep it going. This is obvious stuff. The first round of stimulus worked.

It did everything that we wanted it to do for those families and for the economy. But it's not enough and it's got to come back. So you love Trump. You hate Trump. I don't give a shit. What the Treasury Secretary did in that moment was exactly what was needed. Exactly what was needed. So here seems to be the sticking point.

The Democrats want more money in the stimulus package. They want it to be bigger and they want to allocate some of it to states that have the largest cities and were, as a result, the most hard hit. And they want to see money go to things like increased testing and more funding of disease control research and personal protective equipment. And they just they want it to be more like a blanket kind of stimulus that gets to a lot of places. And the Republicans want to do a smaller dollar figure. And they're not interested in having that money go to hard hit cities like New York and other places where they don't think they have voters. OK, I got it. That's fine. You can look at that and you could say, OK, this is political.

It's not really about what's best for the economy. It's ideological. I put that aside. You still have to do something for the people directly, Democrats and Republicans, right? Everyone is suffering at that income level. So you can't have 14 million people unemployed through no fault of their own and no sense of when they're going to be hired again. And all of the uncertainty that comes along with that, you can't have that and then point to the stock market and say, everything's fine. It's not fine. It's very not fine. So going into this week, Nancy Pelosi and Steve Mnuchin were supposedly getting closer and closer to something that the president could sign. And then with a tweet, a tweet, Trump's like, forget it.

We're going to shut down stimulus talks until after I win the election. And I haven't really seen anyone make a cogent case for how that stance helps him. I really don't understand it. But that's where we are. And of course, this could change. In the meantime, the Federal Reserve Chairman Jay Powell came out this week, and I'm paraphrasing here, but he was basically like, it's up to Congress at this point. I've done everything I can do. And that's probably true. to Congress at this point. I've done everything I can do. And that's probably true. Unless they're going to start getting very creative, the Fed is not set up to do much more beyond what it's done. So we're going to talk to Professor Tim Dye of the University of Oregon about what's happening with the stimulus talks, what the Fed is trying to get across when Powell speaks to Congress,

what the Fed is trying to get across when Powell speaks to Congress and where we go from here. And Tim is crazy good at explaining these things. So I'm really excited for you to hear from him on that. Then I have my buddy, Joe Terranova of Virtus Investment Partners. Joe is the chief market strategist there. He's a managing partner. You probably know him from CNBC. there. He's a managing partner. You probably know him from CNBC. He's one of the sharpest market commentators I know. Joe's like a big brother to me in many ways. If you're not a fan of Long Island accents, that might be a tough one for you to listen to between Joe and I. But Joe's got this really big idea about the supply-demand imbalance in the investment markets today. So there's too much money and there's not enough stuff for investors to invest in. And what effect that's having on prices and valuations and the way people are allocating capital. So Joe is the man and we'll do that

after Tim. And then just before I forget, we played another round of what are your thoughts on the YouTube channel this week. Go to youtube.com slash the compound RWM to watch. We get in some stuff about Dave Portnoy from Barstool. My partner Barry interviewed Dave for Bloomberg this week. We talk about the most expensive stocks in the market and how they've actually delivered some stuff about the boom in solar energy, why the financial sector is missing some of the most important financial stocks like PayPal, Square, Visa, MasterCard. There's so much in the show this week. So make sure you're subscribed to the channel and you actually get an email, like a heads up as soon as we post something new or when we're going to do the live premiere every

Tuesday night of what are your thoughts, you'll get the heads up in advance. You can be there for the live chat and the live chat is, is so much fun. Mike jumps in, I jump in and we mix it up with you guys. So make sure you check out the YouTube channel, subscribe to the channel and, uh, and you'll see us back with a new What Are Your Thoughts every Tuesday night. Okay. We're going to talk to Tim Dye now about stimulus. Then we're going to hear from Terranova. Stick around.

It's going to be an awesome episode. Duncan, do the music. Welcome to The Compound Show with downtown Josh Brown. Josh is the CEO of Ritholtz Wealth Management. All opinions expressed by Josh or any podcast guest are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. All opinions expressed by Josh or any podcast guest are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. So Tim, you did this really great blog post last night, right after Trump sent a tweet, basically announcing the end

of negotiations for the new stimulus package. So let me just set this up. Trump basically said, I've directed my people to stop talking with Nancy Pelosi. We're not interested in tackling stimulus until after I win the election, and then we'll do it. And then he kind of reversed himself overnight after the stock market had a little mini panic attack. But your post basically looks at like why. And I think you do a really good job of laying out what the rationale might have been and what some of the factors were in getting him to tweet something like that. But basically, in getting him to tweet something like that. But basically, you call it a foolish maneuver.

Intuitively, it is a foolish maneuver. But what are you thinking there? At face value, this looks ridiculous. We've been talking for months about how the U.S. economy is probably would be very, the economy would be very helped by additional fiscal stimulus. So there doesn't seem to be any question about that. We can make an argument about whether or not the economy will stall out without more fiscal stimulus. But most of us agree that we'd accelerate the recovery if we had more fiscal stimulus. And you would think that would be good for your presidential election.

You'd want to run into the election season on the backs of a fairly strong economy. And so I would tell you, you know, July, June, this is pretty much a no-brainer. We should just extend some of these policies and move forward. But we didn't do that, right? We kind of dragged our heels in figuring out what the policy was going to be. And we thought, again, with the polls slipping, that maybe this was the time for a deal.

President Trump had treated during his hospital stay that, you know, let's get it done. And then suddenly walks away from it. Yeah. Tim, wouldn't the most intuitive thing on earth be for Trump to be Santa Claus? Oh, of course. This is such a no brainer, but apparently not. No, no, no. It was clearly, particularly, you know, a month or two ago, right? You know, there is an argument right now that now you're in the last four weeks of the election season, the last three weeks.

Is it going to make a difference, right? And that might have been on the calculus of some senators' minds, right? So Republican senators that were resisting a package might have been thinking, well, now we're down to the last four weeks. Can we really change any minds by doing this? Because realistically, are we going to get the checks out by then? Right. It might even be a mechanical argument. Like we don't even know if we can get the direct deposits and the checks done even if we get it approved today because the last round, it wasn't like snap your fingers. Right, right. And so, you know, I think that would have been one argument. I don't know that Trump thought through all of that. I think from the bigger picture, you want to go into the election, though, on a win rather than a loss. And now he's going in on another loss.

Okay. So Pelosi speculated that this all might have to do with some steroids that the president's taking. But you have a little bit more of a prosaic take. One of the things you talk about is McConnell maybe going to Trump and saying, look, what do you really want most right now? Do you want your Supreme Court nominee to get through the process or do you want to do around the stimulus? Because I can't do both. There might be something to that. And there might be. And so one of the things I've noticed and pointed out over the last couple of months is that Trump has seemed to want to make a deal and probably would have signed off on whatever the Democrats wanted.

I think that as long as the deal was made, it was going to happen. It seems to have been the Senate that was really holding things up. And McConnell in particular, didn't seem like he was interested in really moving a package. So the Democrats had voted on this months ago and offered something, and then the Republicans dragged their heels on it in the Senate. So my speculation is McConnell really never had the votes for a package that could be done without most of the Democrats. There was just resistance within his own party. And he wasn't willing to do it. He wasn't willing to make the deal and had to tell Trump, look, I can make this deal. I don't

know if the political capital is worth it. And I got to do this ACB thing. So does Donald Trump still have a card to play in that they've been extremely creative about doing things that you would have thought required Congress and then just kind of doing them anyway. And of course, what comes to mind is launching a trade war by calling it a matter of national defense. So they basically were able to circumvent the Republicans in Congress by doing that. Could he do some sort of an emergency order or something where he can at least get the $1,200 payments out, direct deposit, and possibly extend unemployment benefits without having to cater to the Democrats' desire for kind of blanket spending at the state level

and all of the things that he says he's against? Yeah, it's not obvious to me that he's going to be able to pull that rabbit out of the hat again, like he did with extending the unemployment benefits. I mean, there could be something comes up. But right now he seems to be sort of negotiating with himself, right? He closed off the deals with the Democrats, and now he's trying to tweet, oh, let's do these little deals that Pelosi hadn't wanted to do before. So it's not evident to me that he can do that. Also, there's the timing issue.

How many weeks is it going to take to get that out? And remember, we tried to do, it seems like we tried to do this a couple of weeks ago with Medicare, right? Remember he promised to send out these credit cards for whatever, $300. And I haven't heard anything about that since then. Okay.

So now you're in this situation where Jerome Powell comes out this week and he basically, without saying I throw in the towel, he's basically saying like, we have done a lot, but nothing that we do with interest rates is really going to reach the people that need to be reached. And fiscal has to kick in here. So I think he was like pretty clear about that. And they've been working very closely together, the treasury and the fed, maybe more so than, than ever, but he, he is basically seems like he's reached the point where he's, he's thrown the ball into Congress's court and said, you, you figure it out from here. Um, is that your read on the situation? Yes. I mean, it's pretty clear that the Fed is incredibly worried about the inequality issues

that arise from a recession, that they're worried that the burden of this particular recession is falling most heavily on lower income Americans and persons of color. And as a consequence, they're looking around and saying, we don't really have tools to deal with this. We really need fiscal stimulus to address these issues. And that fiscal stimulus just isn't coming. So it's not clear that they can really get at the issues they really want to with the tools they have available. And that seems to be where this is shaping up. Right. So the Fed tried this Main Street facility and it doesn't seem like there were any takers.

I think it's $100 billion or some insane number and no one wants it. Yeah. What the hell is going on there? Well, you know, the Fed's not set up to do that, right? That's not what the Fed does. The Fed lends to Main Street. Or excuse me, the Fed lends to Wall Street. To the banks.

Yeah. And, you know, I think the Main Street lending program was really a PR effort on the part of the Fed is that they had to do something that looked like they were helping Main Street. And so they came up with this program that they don't have no real expertise in, have never done before, set terms that are obviously too tight or too, you know. And, again, it's not clear that they're reaching the audience they need to reach. I mean, the businesses that need help now, right, they need help now in the form of grants, not loans. If they can't make it now, they're not going to be able to pay off a loan later on, I think, for most of these firms. So, you know, it's just not a setup to me. That's to me what they need.

They need more PPP money, which comes from Congress. money, which comes from Congress. Yeah. The Fed has been talking a lot more about inequality and concerns about minorities having access to borrow and things that historically we really haven't been that explicit on. Is that the future? Is the Fed now almost like thinking about doing social work or acting on social issues that they see in the economy? What's your take on that? Yeah. So I think what's happened over the past couple of years with the Fed Listens events, in particular in the strategy review, is the Fed has become much more sensitive to the fact that the economic outcomes from a macroeconomic level are not shared equally, and they might be having an impact on that by being excessively tight on monetary policy, by not letting unemployment fall lower when there's no threat of inflation. And so they're definitely incorporating that concept into their decision-making process.

It's not clear how much more they can do other than that. process, it's not clear how much more they can do other than that. They might be able to do some issues on the lending side, basically banking regulation, making sure banks are treating their clients with an equal hand. But I don't know to what extent they're going to be able to do a lot more other than really holding interest rates at a level that's consistent with real full employment, which is not necessarily what their estimates of full employment have been in the past. So the Fed has made it very clear that they're not worried at all about inflation. The remarks this week from Powell were basically like, I don't see the risk of doing too much at this point. Talking about fiscal stimulus.

He's basically saying it would be hard for Congress to go overboard. And that's notable. And he doesn't seem to be worried about exceeding the Fed's inflation target. They never have. They've never been able to. And even if they did, they're now signaling that they'll be tolerant of inflation going above target for a period of time. So the takeaway from that, from my standpoint, and I want to see what you think, inflation might be worse for the wealthy than it will be for the average American. The average American certainly may have to face rising rents, but has a better shot at wage growth in a rising inflation environment than they do right now. Whereas the wealthy really are going to pay for

that in the form of what that does to their fixed income investments. And if they're in real estate, what that does to their building costs and things of that nature. What do you think about that idea? That's an interesting way to think about it. There's a lot going on there, right? Sure. But one issue is that should you hold the economy fairly hot, right? Keep it on the front burner and keep a lot of pressure on the labor market, that that was really having a big impact, I think, on lower income workers. We saw that in 2018, 2019. And you're right. If we can keep that environment, even at the cost of a little bit more inflation, I think that will on net benefit those workers. Now, you do have to realize that there's other costs involved somewhere on the line.

So to the extent that housing gets out of hand, that can harm lower income workers, certainly medical care costs, education costs. All of those are sort of built in. But I think, you know, you're right, is that maybe, you know, if you have 2.25 percent inflation, is that really changing anybody's decision making process? And if it's not really changing anybody's decision making process, then, you know, I don't know that that, you know, it's it's anything but a net benefit for lower income groups. Obviously, if we get to higher inflation, that would be much more interesting from that perspective. You get to 3%, 4%, 5% inflation, but we're not even talking about anything like that. We're talking about fairly low inflation, which I do think if the Fed was successful at it, it would keep the heat under the labor market.

And that would probably have, I think, the same impact we saw in 2018, 2019, which the Fed liked and would like to recreate. So in the meanwhile, the pace of the recovery, at least in the jobs market, seems to be decelerating, which I think everyone expected at some point. which I think everyone expected at some point, how long can we realistically have 14 million, 13, 15 million people unemployed before something breaks, before the recovery goes into reverse? Can we have another six months of this? I think, actually, I think most likely the economy is on a sustained upward trend. It's really just the pace of that trend that we're talking about, that you're not going to suddenly go in reverse. And I know Paul talks about those dynamics

where they feed upon each other in negative ways. I don't think that's the right way to think about the economy. One way to think about this is, on the downside, one job loss doesn't generate more than one more job loss, right? Because if it did, you'd always spiral to zero, right?

There's some stability that would have been generated on the downside. And once you've reached that equilibrium, you start marching your way back up. So I don't think that we're out of that environment right now. You know, if you look at housing, you look at the rebound in manufacturing, you look at auto sales, you know, there's really no sign that you should be thinking, oh, my goodness, this is going to turn around sometime soon. there's really no sign that you should be thinking, oh my goodness, this is going to turn around sometime soon.

Even in order to do a real shock to the economy like we saw, you'd have to shut everything down like we did in March and April. I don't think that's going to happen again. No, they won't do it. They'll never do that again. No, that's never going to happen again. So I think really the issue is how fast are we going from here? The other issue that's holding up regardless of what the Fed does or what fiscal policy does arguably is, you know, we've got a sector of the economy that's damaged right now. Anything with leisure and hospitality just isn't

going to work. Travel, anything like that's not going to work. So you're only going to be able to stimulate so much on that end of the story. Could you picture the Fed going back to the drawing board and saying, okay, the Main Street lending program was a bust, but we still have those funds available that we haven't used. What if they started doing grants on a sector by sector basis to address these labor market imbalances and address the... So in other words, if you do a blanket stimulus, there's absolutely no reason to do a stimulus for auto dealerships. They're going to be fine. Boat manufacturers, they're going to be fine.

You really need to – the airlines will be addressed by Congress. But what if you did something for the leisure segment? What if you did something for hotels? Is that possible? I know it's never happened before. The Fed doesn't want to do that because that's essentially creating grants, right? So what the Fed needs to do is create loans that are very low interest rate, maybe for decades, right? Zero interest rate for decades is one way to do it, right?

With a high probability default, right? Politically, people would flip out because then the Fed is picking winners and losers. It's it's creating zombie company. You know, although you could picture all the Twitter shit like people would go nuts. where maybe it's targeted. You know, I don't do PPP shaming, right? I think everybody had an opportunity to take PPP money, should take PPP money. And then the Fed doesn't have to get into these issues of the zombie corporations or doing fiscal policy. So that's why I really like the Congress to do it.

I don't know if the Fed were willing to take those chances. But in theory, right, they could reset these lending programs to make them considerably easier and accept a high risk of default, which is basically saying we're going to create a bunch of grants, not loans. So we're not quite there yet, whether even considering that or at least talking about it out loud, but it doesn't seem like it. Yeah. So the last thing I want to ask you is about the potential for president Joe Biden and Biden working with the fed. So it seems that $400,000 in annual income is where the rubber meets the road. And that's where the Democrats want to tell you, you are a wealthy person and therefore we're raising your taxes and some things are going to change.

And whether or not he wins and whether or not he can get all of that done is a separate conversation. But let's say hypothetically he does win and he is able to raise taxes and address – Powell mentioned debt and the deficit yesterday. I think he's obligated to. Nobody seems that concerned about it right at the moment. But I feel like a higher tax but low interest rate situation, it reminds me of the Clinton years, doesn't it? That's what, in theory, they're trying to set up, right? Is that, okay,

we'll keep interest rates low. We'll redirect spending essentially by taxing the rich a little bit more and then using that to support social policy. So they're probably not going to run some major surplus like we saw in the Clinton years. But that's this kind of story that they're setting up. And the way that that works is that the wealthier have lower marginal propensity to consume. So they're just saving that money anyway. So if we transfer it down to parts of the economy or use it ourselves, we're actually going to create much more economic activity. That's a story that they're going to tell. So Biden wants to work on things like social mobility. And if you give a $3,000 child tax

credit and then you pay for early child care so people that wouldn't be in the workforce can get up and go out and work because someone's watching their kid. If you do some stuff like that, I think the Democrats look at that as the economy will be just as good, but it'll be a little bit more equitably split and the government is going to do more of the splitting. Right. That's the intention. And this is the way to encapsulate it. I don't know if that's a great strategy, by the way. I'm not sure they should rush to a tax hike as much as they should rush to the spending part of it. We obviously haven't been able to generate a problem with high deficits yet, so it's not clear that we need to rush into the tax hike issue. It's basically, we'd be better

off to really, I think, work on what is the basket of public goods that we really should be providing to that, and then figure out the tax system that supports that basket of public goods that we really should be providing to that and then figure out the tax system that supports that basket of public goods. Right. So it sounds like they want to do the income tax hike and then they also want to do the estate tax change, which basically, you know, it'll be called the death tax and the Republicans will go nuts and understandably. But that's a, I think that's a big feature of, of what he's proposing also. Right. Right. And that's, that gets this whole issue of, right. It's a long, there's a long history of concern about what this unearned transfer of wealth, right. To, to, to other generations. How does that concentrate wealth

in, in, in society and? And what are the deleterious effects of that? That's a long tradition dating back centuries of concern about that. So do you have students back in your classroom this fall? Well, classroom, Zoom room. Yes, we're teaching monetary theory this term. Okay, but they're not in person yet? No, they're not in person. So we opted, our administrators opted just to go straight to Zoom and not take any chances, uh, with, with having to cancel, um, midterm. And I think that was the right decision. Um, uh, and you don't, and you don't have to lecture in a mask. So that's, that's nice.

That is nice. I think it's a lot safer for everyone. It's not really, I think, optimal, but it's a situation that we're all kind of faced with right now. No doubt. Well, I want you to stay safe, stay healthy. Thank you so much for joining us and providing your insights. And I want everyone to go to Tim Dye's FedWatch. The URL is blogs.uoregon.edu backslash TimDyeFedWatch. Probably easier to just search for it on Google.

That's D-U-Y. It's the spelling of Tim's last name. Can people subscribe there or they just got to hit the blog? Yeah, so there's a link there to subscribe. Trust me, you want to get Tim's stuff and you want to get it as soon as he publishes it because it's always good. And I learned so much from reading your blog. So thanks again, Tim. Hey guys, it's Josh Brown. I am here with a very good friend of mine, Mr. Joseph Terranova. Terranova is, as you know, one of the best guys on CNBC on a regular basis.

I think, how long have you been on CNBC? 15 years? I've been on CNBC now about 15 years, Josh. And let me tell you, this is a tremendous professional accomplishment that I have finally gotten on the compound. Well, we love to have you. Joe started doing CNBC right at a junior high, I guess. So it's a long time. But Joe is the chief market strategist at Virtus, which is a gigantic asset manager, publicly traded. I think you guys are like over 100 billion in assets. Is that right? 118 billion, but who's counting? Okay. And you're also a senior managing director. So you're a big deal there.

And I wanted to just get into like market stuff with you because I feel like of all the people I talk markets with, you have insights that are different from most because you started as a trader. And I think you have a better feel for like what people are actually buying and selling and why as opposed to what's the economy doing or any of that stuff. So I love having these conversations with you. or any of that stuff. So I love having these conversations with you. And you have this big idea, which I happen to agree with, which is that there's too much money chasing too few assets. And even though we've had an IPO boom and there are a lot of new stocks that you can invest in and a lot of new places to put money, it's not enough. So why don't you walk me through that? Sure. Well, there's $90 trillion worth of global liquidity that is searching for a home currently. And Josh, if you think about it,

I think one of the main catalysts and significant tailwinds for the capital markets and investors is the fact is that there is a dramatic supply demand imbalance for investable assets. So if I think back 15 years ago, my memory served me well to understand that we were trying to introduce commodities as an asset class, which I'm sure you remember. It didn't go well, Joe. No, very disappointing in terms of both performance and liquidity. We also tried to introduce hedge funds as an asset class. That didn't go well. So thinking about that and then understanding, I think the statistic is that the availability of publicly traded firms is 45% less than it was 15 years ago. I know Credit Suisse did a study that basically said from 96 to 2016, it's basically 50% less. So you have this ever dwindling-

All right. So wait a minute. So 25 years ago, you had 7,300 publicly traded companies, and now it's more like 3,600. We did some work on this, and it turns out most of the companies that we think are missing were actually microcap and penny stock. I don't know that we have a huge shortage of companies, but definitely there are less stocks to invest in. Yeah. That makes me think that probably supports this kind of over-concentration that we have within the construct of the S&P 500, where all the money seems to be gravitating towards these mega cap growth names. But there clearly, I think you would agree with this, there clearly is an absence of new supply for all this capital that's chasing yield. But think to yourself for a second in terms of not introducing

new investable assets, but also think about what we have introduced. Think about the speculative fervor. And I'm not making any fundamental assertion as it relates to cannabis or Bitcoin, or even more recently, these SPACs, but just look at the speculative fervor surrounding it, right? So there's obviously this rising demand coming from somewhere. Some have suggested it's the single greatest wealth transformation in the history of financial services. I'll leave that up to you to confirm or not confirm. Certainly, investing has no boundaries. It's global in its nature. There's a global population that's rising in terms of wealth, needs to invest.

You've got 75 to 80 million millennials that are now realizing the importance of investing. And behind that, you have 75 to 80 million Gen Z that need to invest. So you can't tell me that there is not a dramatic supply-demanded balance that kind of acts and underpins the markets and in conjunction with $90 trillion worth of global liquidity that has to go somewhere. So at the same time that there's this huge demand for investable asset. So by investable assets, let's define the term. It's something that people can buy that either they think appreciates in value or that's got a stream, that's got a cash flow attached to it that can be securitized, paid out in the form of a dividend or whatever.

So at the same time you have all this money chasing things that will offer a return, you also have this uptick in technological capability. Now you have companies that are doing – there's a company called Rally that's doing collectible cars as a new asset class. collectible cars as a new asset class. So now you can buy a share of a Lamborghini. So if you don't have $700,000 to buy a car like that, you have $70,000, you can buy a tenth of it and you can trade your share. You have the same thing going on in the art market. You have people buying paintings, buying pieces of paintings, buying securitized portfolios of paintings. buying paintings, buying pieces of paintings, buying securitized portfolios of paintings. You've got royalty products where you can buy the rights to songs and have dividends paid out to you. So you have this explosion in – I guess it's fintech or invest tech, but it's – at its core, what's going on is people are either, they're bored with just stocks.

There's nothing going on in treasury bonds. And so they're looking for anything that's got a cash flow attached to it. And I mean, they're finding it and they're not necessarily only finding it in the stock market. Yeah. You're also seeing the future earnings of professional athletes that are being securitized now. And what's interesting is you've had all this money, which I think is even going to accelerate this phenomenon. But all the money that has poured into aggregate bond funds, just think about that money, which is absolutely staggering. I think in those funds, Josh, I think it's about 37% treasury. So any move higher in yield, where exactly are those investors going to be going?

You're saying like bond funds that track the Barclays aggregate, which- Correct. I don't know. What could you even earn on that portfolio in current incomes of 1%? Maybe. But I think the bigger question is, where do you go if you choose to invest in a different direction? Okay. So now you have gold and silver making multi-year highs. Gold on a nominal basis is close to its all-time high from the early 80s.

And to me, this is an expression of – it's not an expression of fear or people buying for the election. It's just what else do I do? And the money supply is so huge. Maybe there's a little bit of inflation concern in that price. But for me, it's just like, what else do I invest in? Well, it's about alpha generation. And it's about the solutions that you think about as an investor when you look forward over the coming decade and you realize, listen, the expectations for returns, there's no way you can carry the same type of enthusiasm

that you have held over the prior decades. You just can't do it. So what's the solution? Where are the alpha generation opportunities? Certainly, I think the personal finance behavior is where you begin. You have to tamper down your personal behavior. You have to lower your expectations, which I've heard you talk about and I think is great financial advice. But I also think for the very first time, there's been this paradigm shift in 2020 where you have to, and we've been communicating this extensively at Virtus, you have to look for those solutions outside the United States. Yeah, gold and silver, that's going to offer you mid-single digits in your portfolio, some type of exposure for what I call the perception of inflation, but it's really

the reality of deflation. So these alpha generation opportunities clearly to me are going to come in the next decade beyond the United States, and that's where I would have a primary focus. Not a lot of people know this, but China, the Chinese stock market is up like 15, 20% this year. The S&P 500 is up two or 3%. So emerging markets are now heavily weighted in China. So EM as an asset class has actually worked this year. And so that's something that I think people, actually work this year. And so that's something that I think people, like they don't even pay attention anymore. People have just been so burnt out on international investing because it's just been so long since it's outperformed. There's nothing to write home about in European stocks. Japanese stocks are actually negative on the year. But are people going to rediscover the

fact that you can own some of these countries at 12, 13 times earnings with 3% dividend yields? Or is it just always going to be handicapped by the fact that there's no interest? Well, first of all, from a rebalancing capacity, number one, that makes sense. But secondarily, I think the script has been written here in the United States as we look at the prior decade and understand what historically low private sector borrowing costs, easy monetary policy in combination with technology, which has now become the dominant share of the US economy. We're an asset light economy. We export software and services. We do it better than anyone else in the world. No offense to Israel, but they're the second

leading exporter of technology internationally. So we really don't have much competition. So you take that script and you look around the world and say, okay, where can I replicate that? Not really in Europe, not really in Japan. Yes, in the emerging markets, you can. The emerging markets are beginning to grow in terms of technology being a lion's share of their economy. And I think that's important to understand. Yeah. So when you look at China, you see how big technology has gotten within the index there. And then you look at even Latin America. Latin America has tech giants. They're mostly involved in e-commerce and payments. But MercadoLibre is an enormous market cap, which is, I think it's Brazilian, but their business spans all of Latin

America. And then they have a PayPal. I forget what it's called, but it's becoming a giant stock. So it's not as though the United States is the only place to go for technology stocks. It's just that there's so much unfamiliarity on the part of US investors about these companies or how important they are in their home country. So maybe that's an argument for a fund approach. If you're getting international exposure, maybe you're just better off having someone else doing that work for you. Oh, I absolutely believe outsourcing is the opportunity, but I also think a lot of the blame needs to fall upon Wall Street research. There seems to be every year this consensus research report that's put out that's binary in its nature and it's okay. We are going to, or we are not going to invest in the United States

and outside of the United States. That's not how it works. It's not binary in its nature. So I'm critical of Wall Street research in that sense. I think we need to really begin to modernize it and present much better solutions for investors in what we're writing. I think there's also an intermediary problem. All right, Let's say you're running a billion-dollar book of business at Morgan Stanley, right? And you're building portfolios for clients. If you overweight the US stock market and underweight the rest of the world, and the rest of the world now performs the US, which hasn't happened in a decade, but we'll see. I don't even think that you're getting any credit for it from clients. But if you underweight the US and the US outperforms as it has been, you're going to have clients like, why do I own so much international bullshit? You're causing me to underperform by putting me in Europe and Japan. What are you doing? So I think the intermediary,

the broker or the financial advisor, it's almost like an asymmetric risk reward for being overweight international. Like they won't look great if it works, but they'll look really bad if it doesn't. And I think that leads to why so many portfolios are so overweight US stocks. And by the way, it's been the right call. I mean, that approach has worked. It's been the right call for the prior decade. You think back to the lost decade and think about the outperformance that occurred in the emerging markets. But listen, you're a steward of capital, as I like to say, for billions of dollars. The question that I would ask you is, really, isn't the conversation is that the advisor should be talking with the client about how this performance bias is just ill-served and kind of getting the client to whatever the goal and the outcome might be?

Because that's what you're talking about. There's an inherent performance bias. The advisor is not doing anything special other than looking at where the market's been performing over a 12 or 36-month period, and he's chasing that. classes, it's because if you're an advisor and you're sitting across from a multimillion dollar household and you're going to show them a prospective portfolio recommendation, you're not going to show them a portfolio that just underperformed for the last three years and say, trust me, these asset classes are due. You're going to show them a portfolio that has the top funds based on the last five years performance and you're going to overweight the asset classes that have just done the best because that's going to make your portfolio look competitive with the Vanguard 500. persist for one year, two years, three years, all of a sudden you have your typical advisor is putting new money, new clients into portfolios that are based on what already worked.

And it's really hard to break out of that paradigm because if you show somebody, if you say to somebody, this portfolio would have underperformed the S&P by 40% over the last five years, the client look at you like, well, why are you putting me into it? Because I don't think they think in terms of expected returns. I think they want to be in winning funds and winning asset classes. And they want to do what just worked because it seems like it's going to work forever. Well, that makes me think about the upcoming election. And I will tell you with a high degree of confidence, and you know me well, I'm not into what potential political outcomes might or might not be. I'm not going to speculate on that, but I will tell you this. There has been a significant communication that in fact,

if there is a blue wave, that it is overall negative for the capital markets. And I think you have to be very careful with that. Yes, there's a potential negative tax consequence. At this point, everyone, including my three little children, know that already. We've communicated that. But the other side of that- How is that not in the market at this point? Come on. Correct. We've got it. But here's the other side of that. And I think it's very important, and it plays to this performance bias, and it plays to the communication about having assets that are domiciled in the United States being your primary allocation. What if we introduce

globalization? Think about that for a second. We now reintroduce globalization and all these tariffs go, bye-bye, nowhere to be found. So is now the entire investment community in this one glorious moment going to be giving consideration for assets that are actually domiciled out of the United States? Because you can't tell me in that environment that they're not going to enjoy a favorable tailwind. So I think that's a looming dynamic that investors need to give consideration to. And it's not something that's going to just emanate over the next three to six months. It's something that's going to emanate for the duration of a potentially upcoming administration for a blue wave. To your point, all of these historical periods that featured overseas stocks outperforming U.S.

stocks had one thing in common, a weaker dollar and stronger currencies in the countries whose stocks worked. So if you think there's a blue wave and you think the Democrats are serious about doing massive fiscal stimulus, which it seems like they are, that sounds like a weak dollar situation. And of course, the converse of a weak dollar is a strong euro or a strong yen or, you know, and then you're in a situation where, oh, we're in a weak dollar period, which isn't necessarily a positive or a negative. It just is. But those are the types of environments where you see foreign stocks outperform. And one of the best examples you just gave was the lost decade for U.S. stocks. So if you're in the S&P 500

from 2000 through 2009, you had nothing to show for it. You were flat. But if you own Europe, you did better. If you owned EM, you did really well. And that was an environment where nobody wanted dollars. I give the example, Gisele Bundchen was demanding to be paid for her modeling gigs in euros. Jay-Z did a video and he flashed a wad of euros, not USD. So that kind of environment, if we're just going to do massive fiscal projects and we're going to completely disregard the deficit, which is what we've been doing. Maybe that's the opportunity. And then to your point, if global trade unfreezes, you could definitely see people get interested in owning things overseas. I also have concern, I don't know if you share this, that we seem to place too much of an

emphasis. We extrapolate too much on who holds the Oval Office and what party is it, in fact, that aligns with the president. If you go back and you study since World War II, the 13 presidents, it's very complicated to find that there's one particular party that's better for the stock market or not. I think there's four presidents that have enjoyed triple digit gains for the S&P 500. And each of those four presidents obviously enjoyed multiple terms, but it's President Obama, President Clinton, President Eisenhower, and President Reagan, two Democrats, two Republicans. So you tell me which party is better and are we placing too

much of an emphasis on this looming election? Yeah, I think what's interesting is that when you look at the presidents who have had the best stock market performance, sometimes it's actually in spite of their policies. And oftentimes you can go back and deconstruct so many other things about those eras that were way more important than who the president is. And Eisenhower is a great example. He comes in, we still have this booming money supply left over from all the spending during World War II. And all of that energy of the troops coming home and starting

lives for themselves and starting families and building the interstate highway system. And so like how much of that was Eisenhower just being in the right place versus anything that he in particular did? You could say the same thing about Obama. He comes in. The Fed has interest rates at zero already dealing with the financial crisis. The stock market has been cut in half. So it would be almost impossible to have a situation where the stock market doesn't do well, at least in Obama's first term.

So I think we give them too much blame when things go wrong and we give them too much credit when things go right. And a lot of times they're just there at a specific time and this is what's going on. They can maybe make it a little bit better, a little bit worse. I think we agree like tariffs were not a great idea. And we can agree that tons of regulation, like if I don't think Biden's thinking this way, but if he were to come in and start re-regulating all of the things that Donald Trump deregulated,

probably the stock market wouldn't love that. So they can make it a little bit better or worse, but I don't think they have the power to wave a wand and say, go up. No, and I don't think they have the power to change strategies within the capital markets either. Many have talked about that there's going to be this dramatic mean reversion in terms of the outperformance of growth relative to value. growth is 40% of the S&P and growth really is what the U.S. economy is. So I'm a little suspicious that whoever comes in,

whatever legislation they might enact is going to give this significant tailwind to value and all investors should rush towards it. It would be nice if that happened only because I love rooting for an underdog and I'm so tired of like the same market all the time. And the same things losing and the same things winning. I think I get bored of commenting on it and watching it.

Although it hasn't been bad for portfolios. But what's interesting about the value conversation, theoretically, coming out of a recession, small caps should be outperforming right now, and they're not. Values should be doing better because people do a flight to quality or favor dividends or whatever. But neither of those things is taking place. And that flies in the face of the history of what we normally look like coming out of a recession, coming into a recovery. So maybe it's just late, but it's coming. I don't know. There's a lot of money betting that way and has been betting that way a long time. Yeah. If you go back to 1980, to your point,

I think there's been eight 20% declines and small caps have been the leading equity size class in each one of those recoveries. I've been talking a lot in the communications that I have through Virtus about finding value opportunities first in the debt market, looking at high yield solutions, because I think the great financial crisis taught us that's generally where you're going to see the outperformance. Just look at financial institutions. Financial institutions for four and a half years, the outperformance was in the debt market, not the equity markets. Because the natural behavior for these companies, Josh, in a very stressed and strained environment is to hoard cash and focusing on fortifying the balance sheet would lend itself to allocations toward the debt market. But that's a complicated

conversation, as you know, to have with people. But you look at the debt market, you say, where's the value? All right, I'll pitch you some ideas. Movie theater debt. How much do you want? Right. Exactly. Cruise line bonds. Are you interested? Right. So like that's a market that probably professionals should keep to themselves and ordinary investors should steer clear of trying to figure that stuff out. I totally agree with you. All right. So what kind of conversations are you having right now with, I know you talk to a lot of financial advisors who are users of Virtus products and services. What are they, like, what are you hearing from people? There's this word, have you ever heard of it? It's called inflation. Is that it?

I mean, it's, it's, it's the first question you get on any call is, how do I protect myself looking forward against inflation? And you know the interesting thing- Where do they see inflation besides healthcare premiums? Exactly. And if you think about the three conditions that existed prior to 2020, where there was any form of inflation, it was in urban real estate pricing. It was in educational costs, and it was in healthcare costs. And you can't tell, in each one of those- Private colleges, private insurance, and luxury apartments. Right. But the conversation is always centered around, how is it exactly I can protect myself

against inflation? And as you know, if you study the history of the capital markets, the best hedge against inflation is exposure to equities. Yeah, REITs and stocks. Just like bonds are the ultimate hedge against a deflationary muted growth environment. We've borne witness to that over the last 10 years. Well, Joe, these are your numbers and you can understand why everyone's asking you about inflation. This is what you say. To date, there has been 2.9 trillion worth of fiscal stimulus, the equivalent of 15% of US GDP. And then you say the Fed has grown its balance sheet by 70%

in 2020 to 7.1 trillion, which represents 33.5% of GDP, and then your 90 trillion number in terms of global liquidity. So not only has that taken place in a very compressed period of time, but it's also not going anywhere. The Fed is not even dreaming at night about shrinking its balance sheet. So that's why people have such high expectations for inflation showing up. Now, for me, I think you can make the case there's inflation in housing now, but it's not in wages. You still have huge numbers of unemployed and underemployed, and you won't have a tight labor market anytime soon. So it's hard to picture inflation just like all of a sudden knocking on the door and showing up.

It's not even gradually showing up yet. No. Well, as long as what's knocking on the door and ringing your bell is the delivery from Amazon Fresh, there it is that you understand that the real challenge for all of us is understanding the disruption from technology, which basically takes pricing power. Which is disinflationary. It takes pricing power. And if Josh is the goods producer, I'm taking pricing power away from you. And if Joe is the goods consumer, I'm placing it in my hands. And that's why we have such a strong consumer right now, because of these disruptions of technology.

And I'll be critical of policymakers in Washington, D.C. I think the Federal Reserve gets it. I interviewed in a fireside chat, Kevin Walsh, in the middle of July. He was on the Federal Reserve Board back in the great financial crisis. And he emphasized exactly what you're saying with deflationary pressures. But I don't think politicians understand the real challenge of this country is the disruption of technology and what it's doing to middle income jobs and what it's doing to select industries and how it is exactly we have to combat it. So the solution, the answer to that is this continued overly accommodative monetary policy from the Federal Reserve.

That's how we fight it. So you could make the case though that it's also how we fund more of it. Because if money is free, then you have endless venture capital funding forever and more and more disruption. So it's not really clear how we fight it or if we just get used to it and uh if money's still free 10 years from now can you imagine the level of disruption in every industry well to your to your point and it's so fascinating to think about this you know the challenges of the energy industry i hear you talking about it all the time and you're you're

correct in your observations but why do those challenges exist? Because the Federal Reserve and their easy monetary conditions, they basically financed and funded the wells that produced the energy independence that the United States enjoys right now. Right. So you can have energy independence, but an industry that can barely make money. Right. Right. So it's not like anyone made that choice, like tacitly made that choice. It's just that's what happened. All right. So, Joe, how do you want people to follow more of your stuff? We're certainly going to be at Virtus collectively communicating a lot more as we approach the end of the year, just to kind of highlight what I believe is the strength of

our affiliates and our portfolio managers and the intellectual capital. But as you know, and hopefully you'll invite me back, we'll get to discuss this further, but I have created an index. It's called the Terranova US Quality Momentum Index. It's been published. It's being published live. Where do we find it? Is it on the terminal? It's on Bloomberg. Ticker symbol is VTUSQM. Virtus in late November will be launching an ETF that tracks the performance of the index. And it supports my investment philosophy.

And you began this conversation talking about my prior experience as a trader. What was important, Josh, is I got to observe the behaviors of so many other traders. So I learned what not to do. And to me, that's the single greatest educational lesson. That's the single greatest educational lesson. So it supports my investment philosophy. It's a strategy that combines quality and momentum. I don't think enough attention is being paid to the technical contribution as represented by momentum. And then there's also the fundamental factors that I believe are very important as it relates to debt to equity, return on equity and sales growth over the prior 36 months. So we combined the two of those factors into one. And I think we offer a solution that investors will be able to educate themselves. It's 500 S&P stocks that we narrow down to a high conviction list of only 125. These are your best 125 stocks to own. And what I like about that is- How are they weighted in the index?

Equally weighted. So it's an equally weighted index and it offers an opportunity because there's less stocks for investors to really educate themselves on these stocks and get a better understanding. So I'm excited about the product. As I said, it's my investment philosophy. You know, I believe in high conviction, high confidence investments. And certainly I think that's what the index represents. So when the ETF comes out next month, we'll have you back on and we'll talk about how advisors are using it, how investors are using it, what went into the construction of the index itself, and where it fits in a portfolio. We'll do that whole conversation. I can't wait. All right. So follow Joe, look for the Terranova

Index. I love the idea of emphasizing factors that are the things that he's personally seen as being successful throughout his investing career and then quantifying it, which is really cool. So we'll get more into that next time. Joe, thanks so much for joining us. Really appreciate it. Josh, I love it. I'll talk to you in a month or so. Thank you. All right. for daily investing and market insights. You can watch all of our videos at youtube.com slash the compound RWM. Talk to you next week.