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- [00:10]
A
Welcome to Ask the Compound live from Miami. The show where you ask the questions, we provide the answers. We have a couple of guests coming on today. One is already with us. Mr. Barry Ritholtz. Duncan is back from Japan.
- [00:21]
B
Hey, everyone.
- [00:21]
C
How was Japan?
- [00:22]
B
It was amazing.
- [00:23]
C
I can imagine.
- [00:24]
B
Actually, I brought Ben something that I don't know if he wants to wear it or not.
- [00:28]
C
Oh, that is a must.
- [00:29]
B
I brought you. It says invincible in Japanese.
- [00:31]
A
I'll wear that that on my run tomorrow if you want a headband on the beach. All right. First, a sponsor. Today's show is sponsored by Betterment. Every RA knows attention. You don't want to turn people away. You don't want to require high minimums. You want to help clients who are just getting started. Because that's where the long term relationships begin. But here's the truth. Those simple accounts, they take a lot of work. Account opening, trading, rebalancing. Before long, your staff and back office are underwater trying to stay afloat. That's why established RIAs are turning to Betterment Advisor Solutions. It's a platform built for segmenting yearbook and streamlining those smaller and simpler accounts. The onboarding experience is automated and paperless. The portfolio management is streamlined and tax efficient. Client experience is consistent and exceptional. Nicole almost just walked into the shot. Explore what segmentation can do for you and your firm today. Lower your operational lift, but keep your standard of service high. All with Betterment Advisor Solutions, your biggest regret will be not doing it sooner. Learn more@betterment.com advisors. All right, the show today, I put in questions of my own because I want to talk markets because there's a lot of weird stuff. I noticed that while we are at. So, Duncan, you can read the questions and I'm going to tee Barry up because I just wanted to talk markets. Michael and I didn't get a chance to talk markets on Animal Spirits today because we were talking other stuff.
- [01:36]
B
Yeah, cool. Yeah, I was watching things happening from Japan.
- [01:38]
A
Barry's had no prep. We're just going to talk markets.
- [01:40]
B
I had questions, so, yeah, you're answering some of them here. All right, so up first today, we got one from Ben. It seems like everyone more or less assumes the financial markets will cause another taco moment from Trump here on the war. And this oil spike will be transitory. What's the risk if that doesn't happen and this thing drags on? Are investors becoming too complacent? Are we at risk of some sort of Minsky moment?
- [02:03]
A
So we were at dinner last night, a nice Peruvian place. And halfway through dinner, Caleb Silver from Investopedia leans over to a bunch of us and he says, guys, look at the futures of market. Oil just spiked almost 30%. Futures are down 2%. Stocks in Japan are down almost 7%. And three people on the table all at the same time go, holy shit, what's going on here? And then the market opens today and things slowly but surely come back. So we're having these moments that like scare people. And obviously oil is up a lot already. It's up 60% this year or something. So I guess the question is maybe I'm thinking too many levels deep here of this overreaction, this underreaction. I guess my question for you is just, are you surprised by what's going on? We're seeing all this movement and then things settle down once advisors digest this stuff and people are not willing to panic just yet.
- [02:50]
C
So the old line is always, it's not the news, it's the reaction to the news. And if you've been watching the market since the am I allowed to call it a war? Since the bang, bang, shoot, shoot, planes, ships, guns thingy in Iran started not a war, the markets have gapped down just about every day and climbed back. Some days they climbed back to positive. Some days they just work most of the panic reaction off. To me, that's very telling, that all right, there's a war in Iran, oil prices are going to go up 100 bucks. This will up to 100 and over. This is bad for the rest of the world. But truth be told, the US is energy independent. We're exporting natural gas and oil overseas. Not to be selfish, but from a domestic perspective, this isn't that bad for us.
- [03:48]
A
It does seem like in the past people would have used this, I think excuse for a 10 or 15% correction easily. And now it just won't happen.
- [03:54]
C
Think about it. Not only is the US energy independent, but when you look at the family, the household budget, energy as a percentage of that budget in the 70s was 12%. So when oil prices doubled, that was really big. Now energy is something like 7% or 6% of the household.
- [04:12]
A
Duncan's fully hedged because he drives a Tesla.
- [04:14]
B
It's true.
- [04:15]
C
Well, but you're paying for electricity and if oil prices go up, natural gas prices, they won't go up as much, but they tend to get put any excuse to raise prices.
- [04:25]
B
If I owned a home, I would have a heat pump by now.
- [04:28]
C
Geothermal heat pump.
- [04:29]
B
Yeah, there you go.
- [04:30]
A
So, but even you said it like the rest of the world, I mean, emerging market stocks are down 9%. The EFA is down 7%. So it's not like that's just a regular run of the mill correction. It's not even anything bad yet. So I just think people, I guess it's almost a good thing that the markets are like, all right, let's just wait before we freak out completely and see what happens here.
- [04:50]
C
You know, we've had this conversation every time I'm on, but I'll repeat it. The future is inherently unknown and unknowable. And all you could do is lay out, here's the best case scenario, here's the worst case scenario, here are the things in the middle where we're likely to end up most of the time. And so as long as you recognize now, sometimes, you know, if you can think about it, it's probably not a black swan. So the thought that, hey, this can spiral out of control in a way that we haven't thought of, the US is going to exhaust all its missiles and drones and then China invades Taiwan, like that is a non zero possibility. Is it likely? I don't think so, but I'm not a geopolitical strategist. What the hell do I know? Maybe it happens. But it's always, what are the range of possibilities? If we stop thinking in binary terms, which is what usually that panic open, sell off is and start thinking of what's likely to happen, what's the range? You end up with something a little more reasonable. And I think this is all hindsight bias, but that's what I think. The market effect is gapping down and then, you know, settling in. So where are we now? Where the NASDAQ is slightly positive at quarter to three. The S& P is barely down. And I want to say the dow is down 1 1/2% earlier, it's down 60, 70 bips. That's pretty.
- [06:15]
A
Corrections should be outlawed. We're in the sun like this.
- [06:17]
C
That's.
- [06:18]
A
I think that's fair. All right, Duncan, do another question.
- [06:19]
B
I have a question for you guys. What do you think will be higher or will have gained the most a year from now? Energy stocks, tech stocks, or gold from current levels?
- [06:28]
C
Yeah, that's tough. That's a tough question. I'm gonna punt that to Ben.
- [06:33]
A
I mean, if it was like, if you say it's software stocks, it seems like that would be like X.
- [06:37]
B
Okay, just say tech.
- [06:38]
A
Yeah, I think that'd probably be the easiest one, don't you?
- [06:41]
B
Okay, yeah, I was just Curious, you
- [06:43]
A
could say, like, you know, gold is the one that's going the craziest because of crazy things keep happening. Read the next question.
- [06:49]
C
Wait, before we move by gold, my question is I always like to take a contrarian stance. How much of all the geopolitical mayhem, the tariff stuff, the Trump just like whatever is causing volatility and mayhem, how much of that is already priced in? I'm more inclined to say I don't know where gold is going to be next week or next month, but two
- [07:15]
A
years from now, it's been on a mammoth run.
- [07:18]
C
Unless something really goes off the rails, I think, I think the path of least resistance is plateau or lower, not doubling from here. But again, I'm not a geopolitical strategist. I don't know.
- [07:30]
A
It's had a great decade.
- [07:32]
C
It really has.
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B
So short gold. Yeah, I'm just kidding.
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C
Short silver.
- [07:35]
A
I kept the questions short for you, Duncan.
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B
There we go. Okay, up next are the financial markets now the only rule of law that matters in a profit, greedy world?
- [07:43]
A
All right, so I think you can make the case that the financial markets have kind of taken the place of Congress in a lot of ways to impose bad decisions. So this happened in Liberation Day. The stock market sold off, bond yields started rising. And that's when the way I said, all right, we're not doing the tariffs that we're saying, and I think that's what they're trying to even they're saying Iran is saying like we're going to do the straight of Hormuz until they have to do something because oil prices are going to skyrocket, you're going to get four or five dollar gallon gas and people are going to hate that. And it seems like the financial markets are the thing that as long as like you don't mess with us and you let our profits run, we're fine, do whatever you want. But if you start messing with our profits, you're going to slap on the wrist.
- [08:23]
C
So I think people think about these things sometimes in the wrong way. You know, the US is what we 3, 4% of the global population, 20% of the global economy, and 58, almost 60% of the global market cap. That doesn't make any sense until you stop and think what is it that has made the United States such a good place to do business? And it's always been the sanctity of contracts, respect for property rights and the rule of law. And we could argue about how much that's been undercut recently, but still all of that will be here.
- [09:06]
A
I heard an interview with Steve Eisenhower today. He said that's bullshit. He said the rule of law stuff doesn't matter as long as you leave our profits alone.
- [09:12]
B
Sure.
- [09:13]
A
Mess on our profits and our growth, then we get mad. They say the market is like amoral. It doesn't care about that stuff at all. It just cares about making money. If you make money. If you mess that up, that's we're going to get mad. Otherwise, whatever, we don't care.
- [09:24]
C
Was that Steve Eastman or Steve Leisman?
- [09:25]
A
Steve Isman, yeah, Steve Isman.
- [09:27]
C
I don't like to be on the other side of Steve Eisman, but I
- [09:30]
A
just thought it was interesting. He's like, markets are amoral. They don't make a judgment.
- [09:33]
C
That is absolutely true.
- [09:34]
A
They don't make a judgment decision on this stuff. They just like profits and that's the only thing that matters.
- [09:39]
C
So during the financial crisis we put a whole bunch of rules in that you had Reg FD come along in the 2000s and then you had all of the new rules on banking and this and that arguably, oh, this is going to crimp everybody's profits. And the market has done nothing but go straight up since the end of the financial crisis and those new rules went into effect. So yes, markets are amoral because it's just an unthinking interface between buyers and sellers, between supply and demand. It's not casting moral judgments. It's how much demand is there for this stock. If there's more demand than, than there is supply, the stock will go up until the demand supply.
- [10:22]
A
But it is interesting that people, a lot of leaders now look to like what are the markets saying? That's how I know this is a good or a bad idea.
- [10:28]
C
I guess when Congress abdicates its responsibilities, then the next check on executive power is arguably the market. And that's where the whole TACO acronym came about. Cause if any, just for people that
- [10:40]
B
don't know, it's Trump always chickens out.
- [10:42]
C
Well, which, which I think is an exaggeration. Cuz the reality is as a president in both the first term and the second term, he has always, he's not exactly self critical but he has always used the stock market as a way to say hey, I'm doing great, am
- [11:01]
A
I doing good market. Yeah, you're right.
- [11:02]
C
And anytime there was a pullback during the Obama administration, he was always see this guy ain't good. The market's going down. So maybe Taco is an exaggeration. But ultimately if the market's down 15, 20, 25%. You will get a change of policy from Trump pretty rapidly.
- [11:20]
A
Well, let's talk about what it means for the economy. Duncan, to the next one.
- [11:22]
B
Okay, up next we got how bad would things have to get for us to have to actually worry about a recession this year?
- [11:29]
A
As we looked at polymarket odds and it went from in the last week or so, it's gone from 20% recession odds to like 35% or something.
- [11:35]
C
That was Ed Yardeni's number this morning. 35.
- [11:38]
A
It should be 40 because everyone always says 40. But that's, that's like the worry for a lot of people is like, you know, the 70s, that's what it was. If we have a sustained, sustained oil price hike, that energy shock, that's the thing that leads to bad economic outcomes. So my question is, yeah, everyone thinks this is just gonna be transitory. They'll back off. But how long would this actually have to last to have an actual economic impact that put us into recession? It'd have to be a long time, right?
- [12:03]
C
So last year when some of the volatility started, I wrote something where I said, I don't really see a recession in the first half of this year. It's hard to imagine the second half of 2025 seeing a recession. There would have to be a series of ongoing errors from the administration to lead to a recession. Now here it is 12 months later. Five of the past nine months have seen negative numbers in the labor market, the non farm payrolls, and now you had a government shutdown in the middle of that and you had some crazy weather so you could squish some of that back. But the more radical decision making, more policy, that seems to be a little bit either extreme or out there. Like as terrible as the war in Iraq was, and as much as we were lied to for a year leading up to the war, at least there was a sense of, I don't buy any of that nonsense I'm hearing, but at least they're selling the war to the public. This was, let's blow up those guys. Nobody had any idea this was.
- [13:11]
A
At the very least, consumer sentiment is just going to tank with $4 a gallon gas.
- [13:15]
C
Consumer sentiment has been in the tank for 10 years.
- [13:18]
A
Yeah, but that's the thing. And it hasn't mattered, right?
- [13:20]
C
Hasn't made a difference. I can't hear what you're saying because what you're doing is speaking so loudly. So every time consumers say, we feel terrible, excuse us while we go online and buy all this stuff. The sentiment becomes irrelevant. So each one of these events is just another straw on the camel's back and it increases the odds of a recession. Clearly if oil stays over $100, that's going to, that's going to affect Japan, that's going to affect Germany, it's going
- [13:52]
A
to affect more energy export.
- [13:54]
B
Is it bullish for renewable energy and EV stocks?
- [13:57]
C
So outside of the United States, the rest of the world has four fully embraced. And in fact there's just a Bloomberg article that said despite the administration, solar and wind power is booming in the United States. So, so the fact that the administration thinks that it's a hoax, climate change is a hoax. The rest of the world hasn't. We're a little less dependent on oil than we were five years ago when we're probably going to be less dependent on oil.
- [14:24]
A
But everything we've thrown at this, at this economy and market has been taken. Every hit to the chin has been like people just keep spending.
- [14:32]
B
Sounds like famous last words.
- [14:33]
A
It is eventually it is. But that's what keep happening. And that almost has to be your baseline now that like guilty until proven innocent or innocent until proven guilty. Right.
- [14:41]
C
So Locksman Athushan at ecri, the Economic Cycle Research Institute, one of the things he's always said that's so interesting is you could throw anything at a healthy economy. You can knock it over, it'll stumble, but it just keeps going. When the economy is unhealthy, it doesn't take much of a hit to tip it into a recession. So that's true.
- [15:05]
A
You can't die jumping out of a six inch window.
- [15:07]
C
That's true.
- [15:08]
A
But if your six floors up, then
- [15:09]
C
there's a different story. So what we've seen is this was a robust market and robust economy coming into the new administration in January of 2025. The market and the economy has absorbed all manner of hits, all manner of. I don't want to get partisan. So let's say ill considered.
- [15:30]
A
Well just everything, everything this decade and it's been fine.
- [15:33]
C
Right. Everything we've thrown at it now to, to bring Lakshman into this, the more damage you do. It's like a fighter plane, you know, during World War II. And at a certain point you're going to hit that crucial spot and that'll just be one bullet hole too many. So the labor market kind of the canary in the coal mine, the counter to that is how much of this is being driven by AI? How much of this is.
- [15:59]
A
Yeah, we got a weak labor market. AI is here to take. To take its place. And it's a perfect handoff. And you can make that narrative.
- [16:06]
C
But, you know, right now, I don't see a recession today, tomorrow, next month. Does anyone want to make a bet whether or not we're in a recession? Fourth quarter of 2026. I think that is pretty close to 50. 50 at this point.
- [16:21]
A
No way.
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C
No way you want to make a bet.
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A
The betting markets have it at 30%.
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B
Is that today?
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C
That's today. So if you want to. If you think so. I'm saying they're mispricing the risk.
- [16:35]
A
All right.
- [16:36]
C
And it's not 100%. It's closer to 50.50q4. If we see more and more mistakes, the question is it's not a snapshot, it's a moving picture.
- [16:45]
A
5050 is a grand appetch. All right, one more question because. And we're going to make him do a one word answer here because we got to get to the pool. Okay, One word answer.
- [16:53]
B
Okay. With oil prices spiking, are rate cuts off the table for the time being?
- [16:59]
C
Oh, for sure. Yes.
- [17:00]
A
Okay.
- [17:00]
C
You're not going to see any rate cuts. Any.
- [17:02]
A
You get out of here. Blair, get in here.
- [17:04]
B
Thanks so much, Barry.
- [17:04]
C
Mic drop.
- [17:05]
B
Oh, my God.
- [17:07]
A
Thank you.
- [17:07]
C
Thank you.
- [17:08]
B
Thanks, Barry.
- [17:09]
A
Blair, welcome.
- [17:11]
D
Thank you for having me. Love your headband.
- [17:15]
B
Yeah, I'm liking it, actually. It looks better than I thought. I thought it was going to be funny. You actually look kind of cool. So. Yeah, don't be mad at me. And it says invincible.
- [17:23]
A
Give it to some. Don't get mad at me. All right, we got some questions for Blair.
- [17:26]
B
All right, up first, my family has liquid net worth of $2.1 million, 1.9 million in stocks, all in SPY and VX US $200,000 cash. An additional $375,000 in home equity. Our household income is around $250,000 and we have no debt other than our mortgage. We are 43 and 39 with two kids in elementary school. I absolutely dread logging on in the morning and want to quit my job and take a 10 to 12 month break or find a new job with a better work life balance. Should I just suck it up and keep grinding? At what point does it make sense to slow down in life? And that's from Jay.
- [18:04]
A
So there's like the emotional side of this one, but also the number side from financial planning. And it's interesting, we've gotten a handful of these midlife crisis questions in recent weeks. Like, I actually have done really well, like these People for where they're on their stage in life. They've done really well for themselves, obviously. Like they've got a very good nest egg. They probably could just let it ride and be okay. But like, how do you, how do you approach this from a financial planning perspective of making them feel like it's okay to do this decision or alternatively, maybe you shouldn't do this. Like, how do you approach that question?
- [18:35]
D
One of the things I say all the time is you can do anything different for a short period of time. So this 10 month time horizon, 10 months of not saving and potentially dwindling down your cash reserves is not going to make or break a financial plan. Sounds like these people are good savers. They've accumulated quite a bit in investments.
- [18:55]
A
They have good financial habits already.
- [18:56]
D
Exactly. So I would say think about how much you spend on a monthly basis. It sounds like they already have a good cash reserve. Maybe save up a little bit more in preparation and go for it.
- [19:10]
A
Yeah, you're right. So take like six or 12 months, build up the cash a little higher and then you have like your Runway, figure out your expenses that you're going to run on and then give it a try. Essentially because you're right. It's not like they're saying, this is it. I'm retiring at 42 and this money has to last me forever.
- [19:24]
D
It's not without risk. You don't know what job you're going to be able to get on the other side. You don't know if it's going to take you longer than expected. So just double all of your assumptions and, and go for it because it sounds horrible. I dread logging in every day. I mean, I really want this person to have a break and to be able to come back fresh for the next part of their career.
- [19:43]
A
Yes. And it does seem like their resources are good enough where they, they, yes, they have a chance to do that even if it ends up being 24 months or something and then they get a little worried. But yeah, I.
- [19:53]
D
And they can cut back on discretionary spending too.
- [19:55]
A
During that time, their savings rate is obviously going to be very high.
- [19:59]
B
The good news is I feel like in the post Covid world, companies have cared a lot more about work life balance. So maybe they can find a company that values that a little more. And I feel hopeful that they'll find
- [20:09]
D
something or maybe even a career change. I'm not sure what the reason for the dread is, but that's no way to live life.
- [20:14]
B
Yeah.
- [20:15]
C
No.
- [20:15]
A
The amount of time you spend at the office, around your colleagues or whatever to dread waking up every morning to go, yeah, that's soul sucking.
- [20:22]
B
Yoah.
- [20:23]
A
But the thing is that's why a lot of people do the fire route, because they hate the job they work at.
- [20:27]
B
Right, Right.
- [20:27]
A
So yeah, find something even if it pays less that you're not. So you're not so miserable at all.
- [20:33]
B
Right, I agree. Up next, we got one from Mark. I've been a long term investor in Berkshire Hathaway and it's now 37% of my portfolio. I also have a substantial investment in Prologis from stock compensation carried interest representing about 29% of my investment portfolio. Having concentrated 66% of my investments in two companies. I'm sure you're screaming at me to diversify, right? As a CPA I always struggle to diversify because with stock compensation you have to pay taxes as a cost of diversifying versus compounding those dollars. Also, I recently retired and I'm heavily in equities. I've justified that by thinking of my investment in Berkshire as partly a cash allocation given the cash they hold on their balance sheet. Do you buy this argument?
- [21:17]
A
It's actually kind of surprising to me that a CPA has this much risk in their portfolio. You usually think that they are risk managers and obviously the reason for it is the tax piece. They did not want to pay taxes, they want to keep compounding. So that's the part. But also is it.
- [21:32]
B
It's Berkshire. I just said it like it's word of the rings. Berkshire.
- [21:35]
A
I would say Shire too. I think so. He's. So Berkshire has, you know, 300 billion in cash or something. No, I don't.
- [21:43]
D
It's not cash.
- [21:44]
A
Well, no, I do not think that you can. I do not buy this argument that you can look at, look through to the cash on their balance sheet as part of yours because you have no ability to tap that liquidity. And that's the point of having cash. And diversification with bonds or cash like things is that you have the ability to. That doesn't dampen your volatility. The stock, that stock can still fall regardless of high the cash level is.
- [22:04]
D
It's still going to have stock like volatility. Now it is a diversified company of companies. So you could make the case there that it's not like owning one company. But no, you cannot look through to the cash as far as concentration is concerned. I actually have a draft in my blog post that is titled the Tyranny of Capital Gains and it's about this paralysis that people get when they have a lot of unrealized capital gains in their portfolio. It's all the time and it's just like an Iraq. If you're going to spend this money ever, you owe tax, you already owe that tax. Delaying that tax does not change the fact that you owe the tax. Maybe you want to do a little bit of thoughtful tax planning on a year to year basis so that you don't pay 37% every single year.
- [22:46]
A
You don't have to rip the band aid off and sell it all immediately.
- [22:49]
D
Exactly. So you do need to diversify. If you ever want to suspend any of these dollars, you're going to have to sell the stock. Take a look at your tax, you know the brackets where your income is going to fall. Do a little planning and if you're charitable at all, highly appreciated stock is a great thing to give away to charity. So consider opening a donor advised fund. You can throw the shares in there. You don't have to give away to charity if you didn't already want to, just for tax planning purposes. But you might as well do it and you might as well diversify because there will be another bear market. I don't know when, I don't know what will cause it. I don't know how long it will last or how deep it will be. But you'll probably be regretting the fact that you knew. You already know you have an issue here. So just start attacking it.
- [23:32]
A
Yeah. And guess what? If this, if these stocks crashed and your game wasn't as big, it would make you feel better by selling them because you're not paying as good in taxes. Like Bill Sweet always says, if you have taxes, it means you won the game of investing. It's a good thing. And you're right. And, and it sounds like Mark is doing this on his own so he could talk to an advisor. There are ways that advisors can help create plans to, like you said, slowly but surely offload this risk. Because 2/3 of your money in two stocks in retirement with most of your money being in equities, it's just wait, it's, it's an unnecessary risk to take.
- [24:02]
D
It's too big of a risk.
- [24:03]
A
It is absolutely. Regardless of how they perform, even a
- [24:06]
B
fund, even a company of companies like Berkshire.
- [24:10]
A
Yeah.
- [24:10]
D
Duncan is still slightly less risk because it has multiple companies under one company that is still going to act like a stock despite how much cash they have on their balance.
- [24:17]
A
How much cash does oatley up Duncan? Because Duncan's got 2/3 of his I have no idea. Worth in Oatley stuff.
- [24:21]
B
No, no. One third. I'm just kidding.
- [24:24]
A
All right. If you have a question for us, Remember, email us askthecompoundshowmail.com this is our first time ever doing this live.
- [24:31]
B
Yeah, it was hard. It's very loud. I didn't know myself think so. It was difficult.
- [24:36]
A
And we pulled in Barry and Blair because they're here and we appreciate it.
- [24:38]
B
We should say thanks to Sean, Cliff, Roger Sodak, Jason, Chris, Giancarlo.
- [24:43]
A
I'm sure they're in the chat.
- [24:44]
B
I'm sure they're in there. So thank you.
- [24:46]
A
And again, ask the compound. Showmail.com subscribe to Blair's blog at thebell Curve.
- [24:53]
C
All right, B, E, L. And we'll
- [24:55]
A
see you next time.
- [24:55]
B
Thanks, everyone.