The Prof G Pod with Scott Galloway - Markets, Meme Stocks, and Inflation — with Liz Ann Sonders

Episode Date: November 11, 2021

Liz Ann Sonders, the Chief Investment Strategist at Charles Schwab, joins Scott to discuss the stock market as it relates to the US’s current economic cycle, meme stock investors, and stimulus spending. Liz Ann also shares how to think about inflation — specifically how the US has not entered a 1970s stagflation scenario. Follow her on Twitter, @LizAnnSonders Scott opens with his thoughts on Section 230, and shares possible ways to reform the law.  Related Reading: Facebook … What To Do? Algebra of Happiness: check out Scott’s PBS special, which aired this week! Learn more about your ad choices. Visit podcastchoices.com/adchoices

Join Capital Group CEO Mike Gitlin on the Capital Ideas Podcast. In unscripted conversations with investment professionals, you'll hear real stories about successes and lessons learned, informed by decades of experience. It's your look inside one of the world's most experienced active investment managers. Invest 30 minutes in an episode today. Subscribe wherever you get your podcasts. Published by Capital Client Group, Inc. Support for PropG comes from NerdWallet.

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cards, savings accounts, mortgage rates, and more. NerdWallet, finance smarter. NerdWallet Compare Incorporated. NMLS 1617539. Episode 115, the atomic number from Oscovium. I had a Russian girlfriend, and before sex, she would demand that I divulge corporate secrets. Was that a red flag? Go, go, go! Welcome to the 115th episode of The Prop G-Pod. In today's episode, we speak with Lizanne Saunders, the Chief Investment Strategist at Charles Schwab. We discuss with Lizanne the state of play regarding the markets, meme stocks, and inflation.

We also hear her general advice to investors, specifically how you should never try to time the market. We reached out to Lizanne because I really enjoy listening to her. I find her measured and thoughtful and in general, just I find so many pundits around finance and stocks, myself included, are prone to sort of the extreme and trying to make news as opposed to just being more measured. And I think she threads the needle by taking stands, but at the same time being reasonable and saying, you know, giving both sides of the different issues. Anyways, anyways, wasn't that a compelling intro? What's happening? Today, we're going to talk about Section 230, specifically how we provide social media companies with a shield of immunity to skirt regulations that are desperately needed. Section 230, which was enacted in 1996, protects content that is online and

provided by someone else. It means my team is not liable or we're not liable for any content from the comments posted on our No Mercy, No Malice newsletter site. It means Yelp isn't liable for the content of its user reviews and that Facebook can pretty much do whatever the fuck it wants and continues to do whatever it wants. But, oh, the metaverse is going to work. We'll just be able to be holograms in the future. In 1996, and some things have changed a bit, just 16% of Americans had access to the internet via a computer tethered to a phone cord. True story. I started a company called Aardvark, one of my first e-commerce companies that was a pet supplies company. I've had dogs my whole life. I love dogs. And I thought, okay, I want to start the Williams-Sonoma of pet supplies. By the way, I think it's okay in a decent business strategy.

I've never had a business plan. They make no sense to me. Anyone who has time to write a business plan, in my view, is probably not an entrepreneur. But anyways, I thought it's okay to be the Virgin Airlines of an industry. It's okay to be the Tiffany of something. And I always thought that Red Envelope, an e-commerce company I started, would be sort of a hip, more urban, more kind of sensual version of Tiffany. And I always thought the vision for Aardvark would be the William Sonoma Pet Supplies. And my observation after having dogs and being really into my dogs is that the distribution channel, the retail channel, was

kind of bifurcated into large, big box retail, PetSmart, Petco, that was fairly uninspiring, or small mom and pop pet stores that just smelled funny. And I thought, well, where's the Williams-Sonoma? Where's the Sephora of pets? So the dog decided to start the Sephora for dogs, and I started Aardvark. I put about $800,000 of my own money into the company. My partner, much more talented than me, andplin, built the website, did the fulfillment out of his garage. And within about two months, we were selling, I think about $3,000 or $5,000 a day, which made us one of the 50 biggest e-commerce sites, no joke, in the world. Then Patopia and Pets.com decided they wanted a high-end

offering, approached us. We played them off each other. We got $6 million offer, I think, from, it was Patopia, which seemed like a lot of money at the time. I wanted all stock. My partner, much smarter than me, said, let's take half in cash. I'm like, are you crazy? It's the internet.

It's the internet, Ian. But I did listen. We took $3 million in cash, $3 million in stock. You know how the story ends. Within about 15 months, the stock was worth zero. But it's still, I think on an IRR basis, we sold it 14 months after we started at $3 million on an $800,000 investment. I think on an IRR investment, in terms of the companies I've

started, it's probably my best startup. But that's not what I'm here to talk about. The reason I bring it up is that where we sold most of our product was with a deal with the AOL marketplace, which was the only place where people would actually take out their credit card because everyone was worried that the internet, if you put your credit card on the internet, Ukrainian crime gangs are going to, you know, come and take your children. So nobody wanted, everyone wanted a safe, walled garden. You've got mail that was AOL.

I wonder if Coinbase is the AOL of today and that ultimately it'll break down and it'll just be more like Uniswap or Binance, whatever the hell it's called. But anyways, one in six people had access to the internet in 1996 when 230 was written. It was a fence protecting a garden plot of green shoots and untilled soil, right? They needed, they were called nascent companies back then.

Today, those green shoots have grown into the Amazon jungle with giant 40-foot pythons and jaguars that hunt those little crocodiles. Everyone has seen that video on TikTok. That shit is gangster. I would not want to run up against an Amazonian jaguar. That shit, those guys are elegant, strong, and they appear to be hungry all the time.

Social media didn't exist in 1996, and now it's worth roughly $2 trillion. Facebook has almost 3 billion users on its platform. So in between the time this legislation was crafted and now this entire category has emerged called social media that has garnered the population of the Southern Hemisphere plus India. 57% of the world population uses social media. This expansion has produced enormous stakeholder value. Good thing. People can connect across borders and other traditional barriers. Once marginalized people are forming communities, new voices speak truth to power. That is straight out of the Facebook PR team. And a lot of that is true.

A lot of that is true. There's a lot of good things that come from social media. However, however, didn't you know that was coming? The externalities have grown as fast as these businesses' revenues, largely because of Section 230 and the idolatry of innovators and the fact that less than 8% of our elected officials have any background in technology or engineering, our sort of obsession with money and thinking that young people that know how to become billionaires

must be really good people concerned with us that are concerned about our welfare are going to take care of us when we're older. Spoiler alert, they're not. Society has endured tremendous costs, both economic and non-economic. Social media now has the resources and reach to play by the same rules as other powerful media, and it's time to build a new fence that reflects the current realities and what we know about these firms. The other week, I had lunch with a mentor of mine, a guy named Jeff Bukas, who is the CEO and chairman of Time Warner. He ran HBO in the 90s

and 2000s, and then ascended the corporate ladder to become the CEO of Time Warner. He ran HBO in the 90s and 2000s and then ascended the corporate ladder to become the CEO of Time Warner, overseeing not just HBO, but CNN, Warner Brothers, AOL, and Time Warner Cable. And some, Jeff understands media and stakeholder value really well, really, really well. The thing I really appreciate about Jeff was he was always very focused on shareholder value. So when he didn't feel like he was getting the multiple for Time Warner Cable, he spun it out because he saw it would be accretive to shareholders because it was being priced not as a cable company that was getting higher multiples. Anyways, Jeff struck a chord with me during our lunch when he noted that when it comes to reforming Section 230, it's the algorithmic

amplification and the personalized feeds that should be exposed to liability. And then people started arguing with me, especially these First Amendment lawyers who kind of have the nuance and the demeanor of the, I don't know, the Taliban, immediately said, well, what's an algorithm? And there's no difference between platforms and publishing. So I took that as a challenge and trying to learn a little bit more about 230. And here we are. Now, to just get rid of it, which I was advocating for in a very simple, not very thoughtful way, is probably not the way to go either because it would clog the courts. It would be chaos. You could potentially destroy a lot of shareholder value. And I do think these companies create a lot of shareholder value and jobs. And that's a good thing. Supporters of the law correctly highlight that it draws a

bright line, easy for courts to interpret. It is, and that is what elegant legislation looks like. And it is elegant because it's easy to interpret. Essentially, they're not liable for almost anything. Now, there are some carve-outs. For example, if I posted the movie Dune on Facebook, Facebook is liable for other people's or for IP violations. If I posted information around sex trafficking, Facebook is liable for other people's or for IP violations. If I posted information around sex trafficking, Facebook is liable for that. There are carve-outs. So a reform 230 may not be able to achieve the current level of surgical clarity, but it should narrow the gray areas of factual dispute. There are a number of bills in Congress attempting to address this, which is encouraging.

Declaring algorithms outside the scope of 230 is not a realistic solution. All online content is delivered using some sort of algorithm. Even a purely chronological feed is still based on an algorithm. One approach is to carve out simple algorithms, including chronological ranking for more sophisticated and potentially more manipulative schemes. Platforms could focus their moderation efforts on the fraction of posts that are amplified into millions of feeds. So it might be some form of personalization times amplification. But the most dangerous content, however, isn't necessarily widely distributed, but rather funneled alongside other dangerous content to create, in essence, new content.

The feed, the Justice Against Malicious Algorithms Act, that's a mouthful, that slips right off the tongue. Let's say that again. The Justice Against Malicious Algorithms Act targets the personalization of content specifically. That gets at what makes social media unique and uniquely dangerous. Personalization is the result of conduct by the social media platform. If that's harmful, it should be subject to liability, or specifically, the platform should be subject to liability. Some opponents of Section 230 reform would put the burden on the users. Give us privacy controls, make platforms publish their algorithm, and hey, have at it, but caveat emptor. That just won't work.

People wouldn't be bothered to put on seatbelts until we pass laws requiring it. And there's no profit motive for car companies to make seatbelts that are uncomfortable and inconvenient. What's required is the will to take collective action here, just throwing up our arms and listening to the First Amendment Taliban or to the lobbyists from these organizations that just want everything, create a lot of muck and confusion and want to keep everything just as it is. We have to act. The Commonwealth needs to act through force of law.

In 1996, when Section 230 was passed, it provided prudent protection for saplings, but that was a different age. We have the tools to create change. Do we have the will? There's breakups, there's antitrust, there's regulation, there's perp walks, and there's also more carve-outs and a better interpretation and a modification of 230 that includes carve-outs for certain content that is elevated and personalized. We have the tools. Do we have the will? Stay with us. We'll be right back to discuss the current state of the markets with Lizanne Saunders, the Chief Investment Strategist at Charles Schwab. The Capital Ideas Podcast now features a series hosted by Capital Group CEO, Mike Gitlin.

Through the words and experiences of investment professionals, you'll discover what differentiates their investment approach, what learnings have shifted their career trajectories, and how do they find their next great idea? Invest 30 minutes in an episode today. Subscribe wherever you get your podcasts. Published by Capital Client Group, Inc. Support for this show comes from Constant Contact. You know what's not easy? Marketing.

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Go to ConstantContact.ca and start your free trial today. Go to ConstantContact.ca and start your free trial today. Go to ConstantContact.ca for your free trial. ConstantContact.ca. Welcome back. Here's our conversation with Lizanne Saunders, the Chief Investment Strategist at Charles Schwab. So Lizanne, where does this podcast find you? Naples, Florida, where I am now a resident, although I spend about seven months a year here.

The rest of the time is generally on Nantucket. I would love to get your sense, if you can, give us a bird's eye view of the markets, where you think we are right now, and just general thoughts around key themes in the state of the market as it relates to valuation. And then I'll follow up with a question on inflation. Sure. So to say that this has been a unique cycle in the past couple of years is the ultimate

understatement. And I won't rehash everything that's happened since the pandemic. But I think in particular, what makes this market cycle unique is the double-battered nature of the stimulus back at the March-April period of time, both on the monetary side and the fiscal side. And basically, when you have an entire global economy shut down and you pump that much stimulus into the system, it has to find a home. And absent having a home inside the economy, it found its way into asset prices, including the stock market, but also real estate. And in addition, we have brought in a whole new cohort of investors that have not only helped buoy the market, but have also been the explanation for some of the unique trends we have seen, particularly this year, some of the segments where speculative froth has been most robust. To some degree, more recently,

they seem to be coming back in vogue again, whether it's the meme stocks or non-profitable tech or even SPACs, clearly crypto. And I think that's a force in play for the past year plus that truly does distinguish this from other periods. And that's the toughie, because I'm 35 years in this business and understand the power of flows and investor sentiment, but trying to gauge the psyche of this cohort without the benefit of history in terms of the emotional drivers is, I think, particularly tricky. So I think sentiment is really frothy again right now. The good news is market breadth is healthier, and that tends to be an offset. But to me, that represents one of the larger concerns for the market is just the complacency inherent in some of this speculation. I mean, I'll put forward some theses and you tell me where I've got it right or pushback.

We overdid the stimulus. Trillions of dollars have ended up in consumers' pockets. There have been some companies that have gone away or reshaped. So you have fewer elephants fighting over or awarded with when the rains have returned, massive foliage. Everyone seems to be blowing away their earnings. It feels like we're in uncharted territory where instead of clearing the brush out and controlled burns and letting things fall to the natural level, we'd bail out everything, put too much money in consumers' pockets. I just feel like, and again, maybe I'm a boomer, this doesn't end well, that when we finally have a lightning strike, we're going to have the mother of all forest fires here. What are your thoughts? So for the most part, I agree with you. I think

in terms of the question of whether this was too much stimulus, either on the fiscal side or the monetary side, my gut is very much where yours is, but that ultimately is sort of the counterfactual of all time, because there's no way to go back and say, well, if we hadn't done X on the fiscal side or X on the monetary side, we'd be in much better shape. You know, the adherence to the size of the stimulus would say we could have been even worse, but again, the ultimate counterfactual. So maybe we won't ever have a definitive answer to that. But I think you do have to start to think about what is the end game here in terms of just how massive this has been with the tool of the Fed's

balance sheet being used at least as aggressively as what historically was the only tool they used, which was the Fed funds rate, that's still being pinned at zero. When I get the question, what keeps you up at night? It's very much what you suggested. And with any cycle, especially when you have extremes of sentiment or extremes of valuation, you know in your heart it doesn't end well. The problem is trying to pinpoint whether it just falls under its own weight, there's some sort of catalyst, or for a while, could we continue along the path we've been going on this year, which is for all the talk of the resilience of the market and how stable it's been in the face of all of these uncertainties and risks,

is that just using the S&P as an example, yes, up 20% or so year to date, limited maximum drawdown of only a little more than 5% at its worst point this year, concentrated in September. But 92% of the S&P has had at least a 10% correction at some point this year. And the average across the entire index is minus 18%. So that's near bear market. For the NASDAQ, it's even more remarkable. It's almost 90% of the NASDAQ, but the average maximum drawdown is 39%. So we've had serious corrections via this process of rotation. It's just because of the nature of sectoral rotations and finding strength when there's weakness, the offset has been such that the indexes have had limited declines, but the

churn under the surface is maybe a better reflection of some of what's going on. That's a pretty benign way to go through a corrective process, and I don't think that lasts forever, but it could last a while longer. Isn't it just that all the gains are being crowded into a smaller number of companies, but those companies have such disproportionate weight in an index that it masks that a lot of companies aren't doing as well. Isn't it just the big winners are so big? Some of that, but then in the case of other indexes, in fact, for all the cheering of the recent confirmation of the Dow Transports relative to the overall Dow Industrials, a lot of folks didn't realize that what drove the Dow transports to kind of confirm that Dow theory signal was Avis, which had its strength because

it's become a meme stock. So there's a ton of funky stuff going in the market, but I think that there is still that natural kind of tendency to just buy the SPYs, just buy an index fund, get exposure to the market. And with that comes concentration. We're not quite as concentrated in terms of things like the big five as we were about a year ago when the market first hit all-time highs in early September of 2020. The big five was about 25% of the S&P on a cap-weighted basis. Now it's about 22%. And the collective multiple of the big five is about half of what it was circa 2000. That's not to suggest there's no risk, nothing to see here, evaluations are fine, but

I think there are some differences in the current environment that distinguish from the 99-2000. There's plenty of similarities, but I think that there are some notable differences too. In fact, most importantly probably is what was happening into the peak in 2000 was obviously speculative excess to a similar degree as what we're seeing now. But it was that speculative excess was concentrated in the big leadership names in the market versus some of these more non-traditional areas

where a lot of that speculative excess is concentrated now. But the market's expensive. There's no question about it. It's just valuation is a terrible short-term market timing tool. It doesn't tell you anything about what the market's going to do, say, in the next year. I'd love to know what is a good market timing tool. I think market and timing are oxymorons.

I've never been- They certainly are. Nothing is a good market timing tool. In fact, that's why investors shouldn't do it. Yeah, agreed. You brought up meme stocks. And my colleague, Aswath Damodaran, is sort of my Yoda around everything to do with pricing and valuation. And he says that stocks move because of fundamentals, because of technicals, and then there's this third thing, kind of a movement, or meme stocks. I'm a boomer. I don't think that endures, that eventually we return to fundamentals. And yet, GameStop and AMC, I look at AMC, and to be blunt, I just think it's a shitty business. I think the notion that we're going to go back to theaters in the same volume that we did pre-pandemic is a collective hallucination.

And then I look at a retailer, the idea of my kids going into a GameStop is just sort of comical at this point, but they have endured their value, or at least for a year. Does the whole meme thing, this crowd squeeze, whatever you want to call it, is it a new class or a new force in the market? Or will we look back and go, remember that, and it just went away? I don't know that it's a new class. I think it's a new force, but I think it's going to be a series of fill in the blanks in terms of where the interest finds itself. I think maybe consistent given one of the driving forces of that cohort and in names like that is social media and its power, time horizons are extremely short.

And I think interest tends to jump around. And you saw that earlier this year when you had, I think it was AMC that had a maximum drawdown of near 90% in that kind of February, April, May period of time. Surprisingly, to the extent you call that a micro or mini bubble, as I've been calling them, it found its way to inflation again before you had then another 50 percent drawdown. So this does end at some point. How long it lasts and whether it peters out or some crescendo moment, your guess is as good as mine. So you brought up this new class of investors

coming to the market. And again, I say this and it's literally ages me as I say it, but I look at Robinhood and my understanding is 80 to 95% of day traders lose money. And you have an entire generation of investors that have never seen capital destruction or a real bear market. And they come into the market, they trade, and they think that they're trading because of the

incredible upward momentum of the market. They conflate trading with skill. And my sense is this just is a recipe for disaster. That Robinhood, great, we've brought in new people into the market. Great, they're learning about the markets. But in terms of wealth creation and destruction, and I've been wrong, it just feels like a disaster to be encouraging and have a business model incorporated into an entire new generation of investors that says you need to trade more. What are your thoughts? Well, first of all, I think what you said in the very beginning harkens back to whoever said it initially, but it was a thousand years ago, figuratively, that, you know, don't confuse brains with a bull market. And that's essentially how you started the question here. I agree with you. And I think already the Robin Hoods of the world realize that the gamification, absent any true kind of literacy component, education component, disclosure component, I'm biased, obviously. And I'm at a firm that for 50 years has had as one of its sort of pillars is financial literacy and education for investors. And I absolutely worry because there is this brand new cohort and they're not investors as we think of that in terms

of what the definition is. And they're not even traders in a traditional sense of what day traders are, but it's kind of get rich quick. I'm not even sure it's the let's stick it to the man, which had been one of the narratives around the early burst of things like the meme stocks. And let's, you know, in the case of GameStop, let's stick it to Melvin Capital. I also think that there's a thread that ties in some of what's happened with the meme stocks.

And it's a thread of leverage combined with concentration. As we now know, after the fact, GameStop, that fund owned 160% of the float on the short side. And you had a concentration issue that was woven through the Archegos implosion. wonder whether there's a thread through some of this that on the surface, we see these as one-off events. But when the end of this cycle comes, whether we're going to look and say, boy, there was more interconnectivity here than we thought. So I also, I'm trying as I get older, be a little bit more empathetic and recognize that my gag reflex is oftentimes around supporting my own investment strategy. And when I lecture young people on maintaining the strategy that will keep me wealthy, continue to buy good companies that I already own. And I look back to 2008 where we let these companies fall to their natural levels instead of artificially pumping them up with massive stimulus. And I got to buy Apple at 13 bucks a share. I got to buy Amazon

at 100 bucks a share. We haven't afforded that opportunity to young people. We've basically, my sense has bailed out everything. So if I'm a young person, I kind of think, well, fuck this. I'm going to invent my own asset classes and I'm going to create my own volatility because boss, you already got yours and you talking about that I shouldn't be trading is a nice narrative for you. But I want to have access to the same upside and asymmetric opportunities that you had. And so they've created, and tell me if you think this was incorrect, but they've created their own asset classes, meme stocks, and even more so crypto. And I'm just curious to get your sense of the role that crypto, if any, should play in an investment portfolio. What are your general thoughts on crypto as an asset class and as it relates to kind of portfolio and investment

strategy? I don't know that I would yet consider it an asset class akin to traditional asset classes like equities or fixed income or even real estate, nor would I consider it within the alternatives category, including things like venture and private equity. I think at this point, it's a speculative thing to hold within portfolios or trade within portfolios, but you have to understand that it is still highly speculative. It is not really a currency. I do have some sympathy with the view that it's more of a cult than a currency. And that's not to say that there isn't long-term value in the technology underlying blockchain or that we're not in some sort of

push toward DeFi. Certainly, their adherence to the concept of DeFi in terms of the inequality of our current structure of the banking system. I get all of that. But that doesn't mean you're not talking about unrealistic gains in something like crypto that goes well beyond what we could possibly think of as fundamentals. I don't know that I consider it a store of value. It's certainly not a means of exchange, and nor do I think it's the second coming in terms of replacement for fiat currencies, certainly not the U.S. dollar. But with anything that's highly speculative, you know, it's hard to put percentages on it. But in general, we've been saying, be careful if you're talking about more than a couple percent in a portfolio and make sure that you apply a rebalancing strategy akin to what

the strategy of rebalancing that we should apply across the spectrum of what we own in a portfolio. We'll be right back. Hey, it's Scott Galloway. And on our podcast, Pivot, we are bringing you a special series about the basics of artificial intelligence. We're answering all your questions. What should you use it for? What tools are right for you? And what privacy issues should you ultimately watch out for?

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Friday, Cyber Monday, and beyond. Make every moment count with Klaviyo. Learn more at klaviyo.com slash BFCM. So I was at a conference yesterday and they asked me my view on inflation. And I said, there's never been a topic. You get a little bit of success. What is it, the Dunning-Kruger effect? You get a little bit of success and credibility in one field, and you immediately feel like, oh, I've been awarded an honorary doctorate in epidemiology and economics. And I'm finally confident enough to say, I have no idea.

I can make a reasonable argument for why inflation is structural and why it is cyclical. You are an expert here. What's your view on inflation? term stagflation as my own definition of what I think is going on, largely because if you're a purist with regard to what that definition meant and why it was born out of the 1970s, it was inclusive of a significant deterioration in the unemployment rate, a high and rising unemployment rate. And that's clearly a distinction versus this environment. If you more simplistically define stagflation as just a period of slowing growth and rising inflation, then yes, we're in that kind of environment. I think really what has happened and maybe the better descriptor for where we are right now is we've gone from pro-cyclical inflation to counter-cyclical inflation. So pro-cyclical pro cyclical inflation is when for whatever

reason you see a surge in demand that pushes prices up. That can then transition to counter cyclical inflation where prices go up high enough that it actually acts as a constraint on economic growth, either on the demand side or the supply side. So I think counter cyclical inflation is a better descriptor for the environment we're in right now. I think there are secular forces at play. If you're a believer as I am, that globalization was one of, though not certainly the only force in the past 20 years that moved us from what had been largely an inflationary backdrop to more of a disinflationary or deflationary backdrop, globalization was that. And adding to that just-in-time inventory management, and now clearly we seem to be moving away from globalization toward deglobalization from just-in-time to just-in-case, more locally-based sources of production while also trying to boost inventories, that whole just-in-case argument.

And I think that that's secular in nature. The base effects, I think, are very cyclical. In fact, at some point, maybe pretty soon, the base effects will start to work in favor of the percentage increase numbers. Because much like in the spring, when we first started to see the spike in the inflation data, it was in large part mathematically due to the plunge in same data a year ago. of starting to look a little bit better, unless we're truly, unless we've truly launched into that kind of wage price spiral environment of the 1970s. To me, the real key to whether inflation becomes more systemic, becomes more persistent, whether we're laying the groundwork for 1970s style environment is actually about psychology. I talk about psychology and sentiment all the time as it relates to the market. Quite frankly, the economy is driven by psychology,

hence the terminology around animal spirits. I think inflation is not just something we measure through indexes like PPI, CPI, PCE, but it's also a mindset. And it's when the mindset changes, which doesn't happen at some moment in time, and the power changes, the perceived power, the psyche changes, and workers feel beholden to persistently ask for higher comp and companies persistently have the power, feel the power to pass those higher prices on. And therein lies the spiral aspect. That's the tricky part because there's no one metric where you say, okay, if this gets to, you know, 8.6%, that has historically been the point where the mindset has changed.

The one thing I've been saying when people say, well, is there anything you might look for to get a sense of whether we're truly shifting to a more secular perspective of inflationary backdrop would be the correlation between bond yields and stock prices, which from the mid-60s to the mid to late 90s was persistently negative. So bond yields went up, stock prices went down and vice versa, which meant that because bond yields and stock prices move inversely, it meant that the prices of bonds and stocks were correlated. That was an environment where the diversification of having both stocks and bonds was not as beneficial as for the last 20 years. We recently dipped back into negative territory in terms of bond yield, stock price correlation. We popped back into positive territory. But if that were to move

back into negative territory and stay there for a reasonably sustained period of time, to me, that might be the market's message that we are truly shifting to an environment that is more an inflation backdrop, psychologically and otherwise. So I look at, I mean, it feels like there's good reasons to believe it's here and good reasons to think that it'll go away. I look at the supply chain, I get the sense the supply chain will go worked out. At some point, those ships will get, the cargo will be de-cargoed. When I think about technology, I'm involved in an education startup. I just look at how much money we and others are raising. And I think about how much money we're going to spend. And we're going to all compete against each other and charge ridiculously low prices. We're going to

sell, we're going to give a dollar of goods away for 60 cents. Rent the runway is losing a dollar for every dollar they make, which seems to me to be the massive amount of investment creates more deflationary pressure. And then I look at the other side, I look at wages. I'm on the board of a retail company and it's a good thing. The wage pressure is like nothing I've ever seen in my lifetime at the front level. But it feels as if that ultimately technology, if you think about software eating the world, that ultimately it's deflationary. And that it just feels like that force is everywhere pulling down prices. Which force in your mind is greater, the printing press and some of the supply chain and some of the labor issues are the deflationary forces

of technology? Well, I think shorter term, I think clearly the inflationary forces and supply chain bottlenecks have been big drivers. In fact, I think bigger drivers of kind of pandemic-related impact of not just the surge in demand, both during the lockdown period and in the aftermath of it, shifted toward goods in the absence of the ability to spend on services. And of course, fueled by the $5 trillion of direct fiscal stimulus, also the seeds of what surprisingly has been just a gangbusters profit margin story. Now, I don't think that that persists.

I think we're probably at or near peak profit margins because I think companies are going to have to ramp up production. And I agree with you on technology spending. Even during periods in the last four or five years where we saw a significant hit to CapEx, especially around the period of the onset of the trade war via tariffs, technology-related capital spending stayed robust.

And now it's being applied to just about every industry. And if you aren't spending on efficiency and technology, you're not spending your way into relative oblivion. And I agree with you. I think that's largely a disinflationary force. The other longer-term force, though, that I think is not getting the attention it deserves is what's going on in China. And I think bigger picture here, not just the short-term impact of their zero COVID policy, the energy crisis that is hitting them in different ways, but as significantly as in other parts, and the fact that they'll shut down production or kind of constrain power usage in order to ride through this period. But the real question about what is the shift in focus by Xi Jinping?

This is, I think, more than just trying to tackle segments of the economy where debt growth has gotten out of hand, but really just change their thinking on who they want to be as a global power away from let's just be the global manufacturing of low cost goods that we export to the developed world, but try to really set up their own internal kind of power center. And it's interesting what they're doing with regard to keeping their currency fairly strong. And you think about how powerful a deflationary force China has been in the last couple of decades. And if that ship has figuratively sailed, I think you very easily check the box for what had been a disinflationary force is no longer.

So if you believe markets are cyclical, is it possible that the U.S. tech trade or maybe just the U.S. equity trade has played out? Should we be thinking about other regions? I think it's always fraught with peril to approach something like the equity market or U.S. equities in a sort of get in, get out, all or nothing, this is the end. I think that, first of all, I've always said that investing should never be about a moment in time, should always be a process over time. I think that the market is rich from a valuation perspective. I think there's real nuttiness in terms of some of the speculative excess, but in terms of when it's over and what that's defined

by, your guess is as good as mine. And my inability to know the answer to that, the cloudiness of my crystal ball, shouldn't matter. And it's not what drives investment success. But in terms of portfolio strategies, say you think that, okay, the market is frothy, or it is fully valued at a minimum, and maybe even frothy.

But at the same time, and maybe you can't have it both ways. At the same time, there's incredible, what feels like asymmetric upside opportunity in fintech or edtech. There is incredible innovation out there that will make a lot of people a lot of money. Is there any rebalancing that should be going on right now? Oh, yeah. I mean, that's such a brilliant strategy in general, just because it forces us to do what we know we're supposed to, which is effectively buy low, sell high, or add low, trim high. When left to our own devices, we often do the complete opposite. So it's such a brilliant strategy in general. I think in an environment

like this, especially given the rapidity with which we're seeing sector rotations, sub-asset class rotations, one of the things we've been suggesting, particularly this year, is if you can handle it in terms of the impact of turnover, tax implications associated maybe with higher turnover, is consider portfolio or volatility-based rebalancing, especially if your rebalancing strategy has historically been calendar-based, maybe on a quarterly basis or on an annual basis. Don't let it just be calendar-based, but let it be portfolio-based. And even if you take sort of a core and explore strategy and the explore component has some of these riskier asset classes or non-traditional segments of the market. No one ever went broke taking profits

along the way while also adding to areas that go through these periods of underperformance. It's really boring to talk about, especially in these days of soundbites and attention to the get-rich-quick or the shiny new object. But to me, it's one of the most brilliant disciplines out there and I think can be employed. Rebalance it, the most brilliant. Yeah, and be employed with more specificity in an environment like this where you tie it to moves at the sector level,

moves at the individual security level. How do you do that thoughtfully? Do you use a robo-advisor? Say someone says, Liz Hanson says it's a brilliant strategy. Inherently built into robo-advice is periodic rebalancing. For an investor that's do-it-yourself, trading on their own or making asset allocation decisions on their own, then it's employing various tools and software that you can establish certain parameters. And I would say, be really careful. And I would apply the same thing to things like a stop loss point where you have to be mindful of typical volatility bands. You don't want to tighten a rebalancing trigger or a stop-loss point too tight so that

you're just ramping turnover without the benefit to performance. So there's some combination of both art and science, and there's no one, here's what you should do that is applicable to all investors. It disciplines the hardest part. When I look at it, I always like to look back on the year. And this has been an amazing year. And it's much better to be lucky than good. And we've all been pretty lucky this year, most of us. And I look back at my biggest mistake from an investment standpoint this year, and this is a really good problem, is that I let the tail wag the dog. And that is, I had several stocks just rocket, just absolutely rocket. And I'll use one as an example. I'm a huge fan of lemonade. I like the total adjustable market. I like their

approach. I like the leadership team, the AI. I just love the story. Everything just, all the lines lined up. And I was fortunate enough to get in. The thing rocketed to $180 a share. What was your entry point? 23 or 28. So six months, you know, five, 700% gain. And you know what I did at this end? I'm like, oh, I got to wait until I have capital gains. You know, rather than say, okay, because, and now, by the way, it's still an incredible company. I think it's back to 60 or 70. But to let tax strategy, it's like when General Electric decided they were a tax avoidance company as opposed to making jet engines. It just, I thought that was my mistake, was I knew that it's a great company, but even great companies get overvalued.

I knew that it was, that would have been a great time to sell, but I'm like, I got to wait till I get to the 12-month mark. Well, I think you applied the right terminology of the tail wagging the dog or the tax tail wagging the dog. Certainly, if you are making moves in your portfolio based on prospective tax policy, which I know a lot of folks did under the assumption that the social spending bill would be loaded with massive tax increases. And as we watch the ugly process of the sausage being made, it turns out that, hey, we might not be rates, letting that kind of solely dictate certainly a rebalancing strategy, I think there has to be a balance. I agree with you. Lizanne Saunders is the chief investment strategist at Charles Schwab. She focuses on market and economic analysis as well as investor education for individual investors. Lizanne is regularly recognized as one of the most influential people in the world of finance. She joins us from her home in Naples, Florida. Would not have guessed that. Would not have guessed Naples, Lizanne. Thanks so much. Stay safe. Thank you so much. okay so our half hour national special on pbs's tell me more with kelly corrigan airs this week

kelly corrigan and pbs have this show called tell me more where they basically just interview you i love this because it's all about me i get to talk about my favorite subject the dog filming this was really a wonderful experience. It felt like therapy. It forced me to reflect on the last time I cried and I opened up about my mom, specifically how being with her at the end of her life helped me reconsider what matters.

I talked a lot about what was meaningful for me and what shaped my life. And it's, anyways, thanks to PBS. I think PBS is probably the only media organization in the world that I would never say no to. It played such a big role in my childhood. I think it's such a fantastic organization. Their attention to detail and quality,

their concern for kids. I just think PBS is a gift. Anyways, Tell Me More with Kelly Corrigan airs this week on PBS. Our producers are Caroline Chagrin and Drew Burrows. Claire Miller is our assistant producer. As a reminder, I answer your questions on the pod every Monday. That's right. Every Monday, we take a stab at answering your questions about various business trends, big tech, entrepreneurship, career pivots, and whatever else is on your mind. Please visit officehours.propertymedia.com to submit your question. Again, that's officehours.propertymedia.com

to submit a question. If you like what you heard, please follow, download, and subscribe. Thank you for listening to the Property Pod from the Vox Media Podcast Network. We will catch you next week on Monday and Thursday. Testing, one, two, three. Oh my gosh, I'm glad that wasn't a stroke. And just a frog in my throat. Oh, there's a stroke again. Anyways, it's coming. It's finally here, Lizanne. Support for the show comes from Alex Partners. Did you know that almost 90% of executives see potential for growth from digital disruption? With 37% seeing significant or extremely high positive impact on revenue growth.

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