D (2:38)

Yeah, absolutely. We try and think about the world in terms of probabilities, war game out, different scenarios. What's the best case scenario? What's the worst case scenario? What's the fat part of the curve, the middle that's most likely to happen? And you know, when we look at all this mayhem, kind of the Best case scenario is, hey, these are negotiating tactics and take him seriously, but not literally goes the old expression. And that, that's. If that turns out to be the case, then we'll look back at this the way we look back at the Flash crash and some other very short Brexit and what happened with Greece as sort of a short term blip. The worst case scenario was not a.

B (3:22)

Short term blip, Barry. Like Britain is still living through Brexit.

D (3:25)

I'm talking about as an American, but and specifically the Brexit threat, the Greece issue, the Greece debt crisis, Brexit, we're still dealing with the effects and certainly the people in the UK have buyer's remorse.

B (3:41)

Let me just stop you there and ask Emily what you think about this idea of in the best case possible scenario, let's say that Donald Trump has some kind of come to Jesus moment. There's like an intervention from Scott Besant and others and he's like, oh, you know what, never mind. Let's just go back to the status quo ante and get rid of all of the tariffs. Like, even if we managed to go back all the way to where we were, you know, three weeks ago, how much damage, how much permanent damage has been caused?

A (4:13)

A lot of permanent damage has been caused because trust in the United States has been weakened considerably. Our allies, our closest trading partners, Mexico, Canada, the eu, the uk, We've been mean to them, we've levied tariffs on them. I mean, there is still a 10 minimum. There are these aluminum and steel tariffs too that are, are going to cost. There's tariffs everywhere. And beyond that, Even we had J.D. vance a month ago in Munich saying, you know, basically giving the middle finger to the EU and to the whole world order. That has kept the US Economy flourishing, kept the global economy flourishing. Even if we go back to status quo, it's still status woe, I think.

B (4:59)

Because I like that. That's good.

A (5:01)

It's just this, this trust has really been broken. And we'll get into like what's happening with the dollar and what's happening with, with bonds, but it's pretty ugly. And you know what I've been thinking all week has been because I've been having to write about tariffs like all economics reporters right now. And looking back at 2018, 2019, he did not dissimilar things then. And there was disruption then, some of which we've never recovered from. Like as farmers in the Midwest, their market has been reduced by something like 10 percentage points, like billions of dollars in soybeans they don't sell into China anymore because China permanently moved away from them. That had real consequences. There was manufacturing slump. No one remembers this because Covid happened. All of our memories wiped, you know, but this, it didn't end well then. It's not going to end well now. There's no going back.

C (5:50)

There's also some irony to this in that it's probably increasing China's soft power. And given that China was Trump's primary target, it's made China seem like they're a far more reliable trading partner than we are. And that's a, that's going to be difficult to put that toothpaste back in the tube.

B (6:06)

There was a headline in Handelsplat, the German newspaper, saying that Europe was talking about doing a deal where they would put 0% tariffs on Chinese EVs.

D (6:19)

Wow.

B (6:19)

You know, like, it was like, what?

A (6:21)

It's wild.

B (6:22)

This was an unthinkable headline just two weeks ago. So, okay, so, and I, I want, firstly I just want to underscore and reiterate and say what Emily said is exactly right, that what we are seeing here is kind of the economic other shoe dropping to what we saw in Munich with J.D. vance. And like, you know, Munich was a big fuck you to Europe and this is another big fuck you to Europe. And at that point everyone's like, okay, now we've got the message and you can't undo that message. But Barry, I just want to sort of like make it even worse here. You're saying that's the best case scenario. What's the worst case scenario?

D (7:02)

So before I go to the worst case scenario, let me just push back a little bit. You know, we all have a tendency to be stuck in the here and now. It's very difficult to look through this mess to the other side. Forget the midterm elections, which historically have worked to the benefit of the party out of the White House. You can already see what's happening in the 2028 elections with people and candidates saying, you need to elect somebody that the Europeans and our allies can trust who can reform Pax Americana that can bring us back to where we've been and all of the benefits we've enjoyed of the post war economy where we were economic, military and political leaders. So the politics of this, the partisan politics, the next cycle are really fascinating. The worst case scenario is that so much damage is done that that exact Pax Americana we're talking about where the US set up rules for finance and currency and trade and intellectual property and contract law and Enforcement and go down the list that has made America the wealthiest country in the world. The worst case scenario is Trump has rolled the dice and it comes up snake eyes. And what does that look like? First and foremost, and you see this in the bond market is all of our outside creditors stop financing us. Second, the exorbitant privilege we enjoy of having the US Dollar as the world's reserve currency, the currency that all trades is operated in, goes away. And they put together a basket of the euro and the yen and the yuan and who knows what else. And so the thing that has helped raise the standard of living around the world, but especially in the United States, when that goes away, just look at post empire Britain to see what happens when a great power fumbles its responsibility and, and ends up just another country on the globe stage.

B (9:21)

I will tell you what happens as someone you know, who's vaguely familiar with post war British history. No, is, is that you wind up basically bust. You know, Britain was effectively bankrupt in the 1970s and kind of needed an IMF bailout. And you know, we were a third world country. It was a terrible, terrible time.

D (9:40)

That's the risk. The worst case scenario is all of these amazing advantages that we accrued by not only being the good guys in World War II, but coming to the rescue of democracy in the free world and then spending billions and billions of dollars to rebuild everything we bomb from Japan to Germany to Europe, all the soft power, all the goodwill we've accumulated. It's shocking to think about how much damage is being done even in the best case scenario. So I agree with Emily. There's a mark that this is going to leave even if we manage to put Humpty Dumpty back together again.

B (10:23)

And I just want to point out that what you are talking about here, Barry, is really important just for isolationist, protectionist Americans as well. Like you're talking about. Well, the politicians are going to want to reclaim America's place in the world. And there are definitely Americans who care about America's place in the world and there are definitely Americans who don't. But one of the things which I think has gone underappreciated amidst all of the noise here is that for basically more than 50 years, America's greatest export has been debt. We have been able to borrow money at extremely attractive rates because of that exorbitant privilege that you are talking about. And when I say we, I don't just mean the US Government, I mean US corporations, US individuals. If you are in the housing market, if you are A corporate, if you are a sovereign, whatever you are, you have had astonishing ability to issue debt into the markets at very attractive rates. You have been able to get lovely returns on that debt. Like that has been a great investment for you. The mirror image of the trade deficit that Trump hates is this thing called the capital account surplus. Right? The capital surplus is the rest of the world financing America and pouring money into America. And we take that money and we invest that money and we get a return on that money. And that is why America has outperformed every other rich country in the world for decades. And this idea that we want to get rid of the trade deficit basically means we want to get rid of the capital account surplus. We don't want the rest of the world to fund us anymore. It's like, what the fuck? Of course we want there.

D (12:05)

So, so two really important things you said that I have to emphasize one, that what you ended with is, wait, we print paper and give it to you and you give us cars and iPhones and stuff. That sounds like a great fucking deal, number one. But secondly, and this is really the unspoken tragedy of what we've been witnessing, inflation rates have come down. The past two prints have been great. Bond yields were starting to head lower, mortgage rates were starting to head lower, and you know, the frozen housing market, which there's not only a shortage of homes that we've built, but just too many people with golden mortgage handcuffs that lock them in so there's no supply. That was all unwinding and getting better. And now I don't want to, I don't want to spoil this with, with sharing a number, but we've seen yields spike up the most since 1982. The 30 year treasury practically kissed 5% that sent mortgage rates back over 7%. And that seems to be very in opposite of what a real estate developer like the President pays attention to. I think that should be making him very nervous.

C (13:22)

Okay, my, my Occam's Razor theory about this is that Trump is largely economically illiterate. And so when he does this here we have tariffs and now they're disappearing and then they're back again today. It's, it's because that's what entertainers do, you know, keeping people guessing. And it's just a terrible way to run the economy. What do you think is behind it in his mind?

D (13:42)

So that's a tough question. Michael Hiltzik at the LA Times today floated. Here are the four theories about what's going on. First, we've never had markets swing back and forth based on the whims of one person. At least I can say he is consistent because he has been a fan of tariffs his whole adult life. The most beautiful word in the dictionary, call me tariff man, all that stuff. Maybe we should take him literally. Not seriously, but it's kind of hard to see, you know, the rumor was. Or I don't even think it's a rumor. I think it's truth. In his first presidency, Jared Kushner went out and said, let me find some economist somewhere that believes tariffs are a good thing. And after going through 99.9% of economists in academic professors and unable to find anybody who would say, no, no, Tafts are great. They found the one guy, he was.

B (14:35)

Under a rock somewhere. And they were like, what is this thing under a rock? He's like, my name is Peter Navarro.

C (14:41)

It's even dumber than that. Jared was looking for some resources on China because he didn't really know anything about it. And he liked the title of Navarro's book, which was Death to China.

D (14:52)

And when you think about, listen, I'm not the world's biggest Larry Summer fan, but Summers just said something the other day, and it was just so insightful. He was speaking in the UK and he said, how many people in the room paid more than $10,000 for tuition? No hands go up. You guys get free tuition. Is that predatory pricing? Is that dumping? No, you've made a choice. And more free tuition, more kids going to college is a great thing. So we get to buy solar from China at a deeply subsidized price, reducing global warming, helping fight climate change. Why is buying stuff at a really low price with our paper that we print, why is this a bad thing? It seems like it's a good thing if you understand global trade and economics.

B (15:43)

And the other thing which you need to understand is that every single U.S. government in certainly our lifetimes and going back significantly longer than that, has been bound by treaty obligations that were signed by previous governments. There's this basic sort of rule of law thing going on here where if the US Agrees to do something, then it does it. And that is what underlies all of the real fears about things like debt defaults, is because it doesn't matter if the money was borrowed by a Republican or a Democrat. That obligation is an obligation on the sovereign, and the sovereign has to service that debt. And all governments understand this. And all governments understand that when they sign something, it is binding on future government. Trump doesn't even consider himself to be bound by things he himself signed the US Mexico, Canada agreement. He just tore that thing up. He's like, I signed it. This is the force of law. You know what? I'm just going to ignore it and tear it up. And no, if you don't consider yourself bound by agreements signed by previous governments or even agreements signed by yourself, then there is absolutely no reason why anyone should trust the US on anything. And if you don't have that trust, you can't get any financing, you can't get any investment, you can't get any growth.

A (17:02)

I don't think the Trump administration, I mean, you didn't ask me, but Trump voters, I don't want to speak for them, but they're really angry and they don't care and they just want to burn it down. They want to burn it down. They don't, you know, and they have a point, a little bit, a little point, which is like, the global economy has worked well, but not for a lot of people. We talk about those people all the time, like the lowest earners in the. In the country people in certain areas of the country, the jobs aren't as good as they once were. It's great, you can buy cheap stuff at Walmart, but it's no fun if you're, like, on disability, and that's all you can do is buy cheap stuff at Walmart. So people are like, oh, your precious economy that helped you, fancy Harvard, Ivy League people is going bad. Like, why would we even care? I'm not quite sure why very rich people feel like that who have benefited from the global economy. Someone else needs to explain that to me, but I think it has to do.

D (17:55)

I can explain that, too.

A (17:56)

Appealing to certain people that are.

D (17:58)

Okay, so. So first, you know, there are two very different issues. One is wealth and income inequality, and the other issue is the vicissitudes of global trade policy. And so that's. Hold that aside. There are legitimate problems and they need to be dealt with. But, you know, when a room needs to be repainted, you don't burn the whole house down unless you feel that there's no hope and nothing will ever change. And that's the danger of the sort of performative, extremist, demagogic rhetoric that we've seen over the past 30, 40 years. But nobody is better at it than the current president. And so you end up with very tribal, very partisan thought process. One of the things about the very wealthy, not just dealing with them as clients, but professionally, knowing a lot of them, is I was shocked at how. 0809, when everything froze, radicalized a number of people I knew who were billionaires and Santa millionaires. They started buying up farmland in Montana and Maine and, like, just to get away from the roving murder gangs that were coming. And I want to live off the grid and buy some firearms. And, you know, the two. I love this. The two most important commodities are bottled water and lead, preferably in a.38 caliber. And I heard a lot of that shit post financial crisis. And then the monetary decade that sent stocks up 14% a year for the best decade in a long, long time, sort of ameliorated that worst thing. But there's definitely this degree of paranoia that comes with too much money. I don't know how much money is too much money, but just go through Twitter and look at the crazy rantings of billionaires, both pro and con, what the president's doing, and it's like, oh, that seems a little. Gee, I guess I have no. Cliff Asness said something so delightful the other day, referring to a few people who were screaming. He's like, you know what the best part about having some money? I don't have to kowtow to anybody, and I don't have to be performative on Twitter. I say what I want, let the chips fall where they may. I'm paraphrasing, but Asness is one of these guys that very logical, very rigorous, doesn't get sucked into the mayhem, at least not the way other people have, and said, what's the point of being a billionaire if you have to kiss all this ass? Haven't you graduated from that? And so some of it is just purely performative, and some of it is. Is paranoia, and some of it is just people flexing power and influence that they didn't realize they had when they were speaking softly and logically.

B (21:05)

Barry, can I use this opportunity to segue into markets? Because we do need to govern markets. And you just mentioned Cliff Asness, who is a quant trader and what we have seen in the stock market. And I want to get to the important markets in a minute, but let's start with the one which isn't important, which is the stock market. What we have seen in the stock market is absolutely ludicrously insane degrees of volatility. And I just want to run down this list that I threw into Axios markets on Friday, because it's worth just going down the list. Thursday, April 3, was the first day after the tariffs were announced. We had a 5% loss in the stock market. That was the Quietest day in the stock market that we've had since then. The following day there was a 6% drop. The following day there was this reverse flash crash where stocks went up 8.5% on this headline from Kefin Hassett that was false but turned out to be true. The following day they went down 6.8%. The following day they went up 9.5%. The following day they went down 6.3%. This is super, super insane volatility like we only see in periods of extreme crisis. And as your book quite reasonably says, like it's a very good idea in general to tune out volatility. But since you mentioned Cliff and since you mentioned like the quant trades, my question for you is like how much of this is kind of algorithms are going to algorithm.

D (22:38)

So I think two things are happening with the wild market volatility. The first, and I think this is to reference back to Occam's razor. Nobody expected this sort of wild over the top tariffs. And so what the market was saying, right. And I'm always cautious about reading my own narrative into with hindsight bias, but I think it's a pretty fair statement to say markets expected a certain degree of corporate revenue and profits, a certain degree of economic activity and they thought there would be some tariffs, but modest and a negotiating tool. 47 was basically doing what 45 had done in his prior term. But suddenly the market says, oh shit, this is serious. There goes one 1.5%, 2% of GDP consumer spending there. Anything that goes up in price means they have that much less discretionary cash to spend. Businesses are freezing, hey, how can we build a factory, how can we hire people if we don't know what the hell the tariffs are going to be, the import costs are going to be. So everybody kind of froze the market sell off was saying we are now expecting lower economic activity, lower. And you see it in oil prices, lower consumption and much lower revenue and prices. So that kind of makes sense. The thing that I think is kind of fascinating is the largest one day gain on the NASDAQ you mentioned we closed the day was that last Wednesday plus 12.5% on the NASDAQ. The previous biggest one day percentage gain for the QQQS, the NASDAQ 100 was January 3, 2001. It was over 14%. And think back to January 2001. There was still a long way to go before we got to March 03 and the ultimate bottom was made. But since I brought up Greece and the European debt crisis, go back to 2011, minus 4.8% flat minus 6.7 plus 4.7, minus 4.4, plus 4.6 plus half a point, plus 2.2, minus 1 plus 0.1, minus 4.5. Ben Carlson pulled those numbers. When you see that sort of up and down craziness, it's telling you that there is some new information that the market hasn't digested yet. The collective expectation of future revenue and profits hasn't been reflected in price. And this surprise is really problematic. Last thought on this, Think about how the Fed communicates with the market. Hey, in a couple of months we're going to be raising rates. Hey, next month we're probably going to raising rates. Hey. The data series we look at are this, this and this. We prefer PCE to cpi, but here's what we're looking at. Hey, this is the week we're raising rates. They hold their meeting, they have a press conference, here's why we raise rates. The transcript gets released, you know, a month or two later, right? Transparent, functional, communicative, professional. Now compare that with Liberation Day where it's, you know, kaboom. Performative tariffs. And the market said, what the fuck is going on? Just look at the difference between the White House communications and the Fed communications to understand why we're seeing this insane volatility spike. If this would have not been big footed had we sort of eased into it. Even if you disagree with the tariff, the way they were implemented was just so heavy handed and just so amateurish and the market is showing you why.

B (26:28)

There's this book that came out in 2020 and we were all a little bit distracted in 2020 and I think it kind of didn't get quite the recognition that it deserved. It was Mervyn King, he used to run the bank of England and John Kay, the economist put out this book called Radical Uncertainty. And there's this longstanding distinction in economics between risk and uncertainty where risk is something where you can sort of quantify it and you can like say there's a dispersant probability of this and a dispersant probability of that. And then uncertainty is like, I don't have the information needed to work out what the probability of various different outcomes are. And then there is this new world where there's this thing called radical Uncertainty where not only can you not put a probability on what the outcomes are, you don't even know what the possible outcomes are. The set of possible outcomes is unknowable, it's known, unknown. And on top of that you have A whole bunch of unknown unknowns. And that world of radical uncertainty is a world where the stock market cannot do a discounted cash flow analysis on future profits or future earnings or whatever because they have no idea what the world is going to be tomorrow. And that is a world where you can't say, oh well, what the stock market is saying is that something, something, something, because they don't know, because no one knows anything. And we're in this world now of no one knows anything.

C (27:47)

Well, in political science there's a framing device that says things happen because you're looking at a first image, a second image or a third image. And the third image is international relations, state actors, how they operate with each other. The second is state level decisions that are really policy based. And the first image is always just an individual. And in most policy analysis, the individual explanation is the least significant one. But I think we are in a totally different environment now. That goes back to what Barry was saying about the one guy problem.

A (28:21)

One guy.

D (28:22)

How do you deal with the whims of a single person? Consumer sentiment, Capex surveys, CFO surveys, they're meaningless. We used to do that to get a sense of a soft measure of the economic feelings, vibes in the country. Now it's like what did he have for breakfast? Okay, let's figure out what, what happens, what happens next?

B (28:45)

I would love to have the, you know, the Donald Trump breakfast indicator. You know, like what happens when the.

D (28:50)

CBC used to have the briefcase indicator with Alan Greenspan, how thick or thin the briefcase was. Was, by the way, it never worked. But. But yeah. What if he had tie?

B (29:00)

Is he wearing all of this? Kind of.

C (29:02)

How many Diet Cokes has he had? What was his last golf game?

D (29:05)

French toast. Great. If he had oatmeal, we're all buckle yourself in, it's going to be a bumpy ride.

B (29:11)

But Barry, let's get onto the really meaty markets, the one that matters. Well, let me ask you what matters more, the dollar or the bond market?

D (29:19)

Well, they're so tightly interrelated it's hard to pick one or the other. Normally, you know the famous James Carville quote about the bond market. Normally the bond market is the adult supervision. Right. There used to be things known as bond vigilantes and when they were unhappy with the government policy, they would let you know and rates would go higher. Right now we have taken for granted the dollar as the reserve currency. And that's a mistake to do, I suspect a big part of the bond sell off. And remember, yields and bonds are move inversely when you sell bonds, the yield moves up. I think a big part of what we've been seeing has been repatriation of capital that was in dollars back into home country currency. Right? So you don't even need the Chinese to sell their bonds, they just have to not buy bonds and that is going to send yields higher. But what we've seen when you have stocks sell off, historically money rotates into the riskless trade of US Treasuries. When you see stocks and bonds selling off and we're not seeing the Fed raising rates, so just in a non rate rising regime when they both sell off, that tells me people are bringing their cash home. They're selling dollars by selling bonds and stocks and taking their Yen Euro 1 and what else back home in their own currency. Sorry to be a bummer.

A (30:58)

I mean I think we've been bumming this whole.

B (31:01)

There's not, there's not a lot of like rays of sunshine in this week's podcast. I apologize for that. But yeah, so I think Barry, like there is a weird paradox here, right, which is that we have a flight to quality, but there's no quality anywhere.

D (31:16)

It's a flight to safety, but we're not getting the flight to safety.

B (31:19)

There's a flight to safety, but yeah, there's no safety in treasury bonds, there's no safety in the dollar. But then if you're taking your dollars out and putting it into, I don't know, the Japanese market, that's going down as well. Everything everywhere is going down. What we are really seeing is just risk premiums on every single asset on the planet going up. Which means that the value that every single asset on the planet has been repriced with a higher risk premium and therefore it's worth less today. And you don't even need a huge amount of capital flight in order to cause that repricing. My, I mean one of my theories that, you know, I was talking to the great Dave Raleigh at Loomis Sales about this is that we are going to see years and years of capital flows out of the United States. Like what we are talking about, if you're talking about like large European institutional investors, that kind of thing, they do not make these decisions decisions over the course of a week. There are portfolio committees, there are asset allocation committees, there are board meetings. There's a million different things need to happen before you make a long term decision to say like we had 35% exposure to the US stock market and we want to bring that down to like 25 or 20%. But people will be making those decisions. They'll be like, we don't want to be overweight the United States anymore. And that long, slow, sort of large flow of capital out of the US in contradistinction to the flow of capital into the US that we've considered to be completely normal for the past 80 years. What we are seeing in the dollar right now could just be the beginning of a very long and much, much bigger trend. And the dollar could be much, much weaker over time.

D (33:09)

That's the worst case scenario.

A (33:23)

Can we just start talking to Barry about at this point, what I'm caring about, which is all the money I have in the stock market through my 401.

B (33:30)

It's not really money, it's just. It's just paper. And if no one.

A (33:33)

I really hate when you talk like that. It's like, can you not.

D (33:36)

It's a mark on a computer record.

A (33:38)

Like, I need to eat live support people. I mean, like, what, what should people just start buying? Like, international stocks and like, there is no safety.

B (33:48)

There's nothing to buy. There are nowhere to hide, Emily.

A (33:52)

There's nowhere to hide. I want to retire.

D (33:55)

I got to agree with Felix on this. When you have a global trade war started out of left field, look, there are legitimate issues, right? China is frequently a bad actor. They steal people's intellectual property. They hack companies and take their data and their. Their plans. It's always amusing when they roll out a fighter plane based on stolen plans from Northrop Grumman or whatever it is. They're a bad player and we need to deal with them. But they're also so integrated into the global economy, and this is the tragedy. We had them kind of in a difficult place where they were ripe for negotiation and some concessions. Their economy had been slumping. You know, they have been moving a billion people from the farms to the cities. When China isn't growing at 5, 6, 7%, there's real danger of political unrest, social unrest. And so there was an opportunity, call it the art of the deal, to cut a really good trade agreement. Had we begun this on, you know, frenemies terms, not firing a shot across their bow and declaring economic warfare on the whole globe. And so, you know, there are two issues here. One is, what are the end goals of the tariffs? And two is, is this the best methodology to achieve those goals? We have lots of issues internally. We have lots of legitimate issues with China. The question is, is this any way to achieve that?

B (35:40)

Is this any way to run the supermarket no, it's not.

D (35:43)

That seems to be the market's response.

B (35:46)

But, Barry, what we are trying to do here is pivot elegantly to your book. Okay.

D (35:54)

And you got my attention.

B (35:56)

Correct me if I'm wrong, but if there's one message that people should take from your book, it's like, don't make any kind of investment decisions in the middle of a crisis.

D (36:09)

Absolutely. I mean, stop and think about it. There's a quote in the book that I love from Bill Bernstein. He's a neurologist who became an investor, and he said, your entire investment success is dependent upon you controlling your limbic system. That's the amygdala and all the dopamine receptors in the brain responsible for fight or flight. If you fail to control your limbic system, you will die poor. That's, like, quite a heady statement. And so when the market's down 5, 6, 7% a few days in a row, when it's up 12% in a day, that gets our fight or flight response really stimulated.

B (36:52)

And I can tell you that just if you listen to the last 35 minutes of this podcast, like, our limbic systems are on fire right now. Our hair is on fire right now. And it is totally rational and reasonable for our hair to be on fire. And we have all the reasons in the world for our hair to be on fire. But you just need to have a little bit of awareness that your hair is on fire. And when your hair is on fire is a really bad time to make decisions.

D (37:16)

The, you know, the subtext to don't make emotional decisions, the rational, intelligent part, is and bring a lot of humility to the table. Because as the first part of the book discusses, nobody knows what's going to happen. It's obvious no one anticipated what Trump was going to do with tariffs. Despite him talking about it for four years, we were still surprised. And stop and think about how much of what we listen to watch read is just rank speculation, opinion. Just, you know, just the worst sort of, I don't know what's going to happen, but here's what I think is going on. How about stop pontificating and just say, we don't know what's going to happen. And so in order to survive this, you need a portfolio. I don't want to put on my, you know, advisor hat, but your portfolio has to be robust enough to survive this sort of nonsense or Brexit and Grexit or even the financial crisis. And that means being diversified, owning the world, even when the entire world Feels like it's going down the crapper. To be fair, the US is getting shellacked. Europe looks not so bad by comparison, especially after underperforming, you know, for the past five, 10 years. So when you think about, you know, I like to say the time to read the instructions on the seat back in front of you is on the tarmac when you're waiting for your time to take off at 30,000ft and the left engine is flamed out. That's probably not the best time to try and make a calm, rational decision.

B (38:57)

And I'll just add that we are at the end of a very long bull market. Everyone has been talking about how stretched valuations have been in the United States for a while, especially in the stock market. And prices, you know, valuations were high a year ago, and valuations today are basically where they were a year ago. So, like, on the one hand that means they have further to the fall, but on the other hand that means you're still actually not poor compared to.

D (39:24)

That's exactly.

A (39:25)

Also, everything is happening in our minds, right? Like, we're all sitting in our homes with our nice backgrounds. You know, we had our nice coffees this morning.

B (39:35)

That was expensive coffee, but.

A (39:36)

It was expensive, but worth it. We'll have lovely weekends, I'm sure. I'm sure you have nice travel plans coming up, as one does. Like, we have our families and our loved ones still employed at the moment. It's not that bad, right? I mean, it's just there's that a lot of bad news, a lot of panic, a lot of, as you said, paper wealth disappearing every minute of the day. It really makes you nervous.

C (40:01)

But I would say it's not that bad for us. But if you were planning on retiring in the next couple of years, that's the biggest challenge.

A (40:08)

Yeah, that's different. I heard Barry on, on Marketplace this morning saying, like, if you're going to retire in the next, like six months or next month, you are in a bad place.

B (40:17)

This is the one place where Emily and Elizabeth and Barry all think one thing and I am, I am on the other side of this.

A (40:25)

But yeah, let's get into this.

B (40:26)

Should we get, should we like do a little, a little nerdy detour into, into retirement math?

C (40:32)

It's three gets to one. Let's do it.

B (40:34)

And the idea of it really matters where the markets are on the day you retire, rather than like two years previously or two years subsequently.

D (40:45)

100%.

B (40:45)

This is what you believe and this is what Emily believes. And I'm not sure I believe this. And the reason I don't believe this is that I don't think that the day you retire is a particularly important day. I think that the day you retire is. Sure, it's the day that you stop paying into your retirement accounts and they start, you know, becoming a source of income rather than just a sort of. Sort of, you know, future spending. But, you know, you're taking out 0.3%, perhaps, of your retirement account each month to, you know, spend money. And you have the other 99.7% that is sensibly invested in the diversified portfolio of yada, Yada, yada. And 99.7% of a diversified portfolio is still basically the same thing, and it will just keep on doing that. And when the portfolio is high, you feel a bit richer, and maybe you take out a bit more in nominal terms, when it goes down, you feel a bit poorer, maybe you take out a little bit less. But ultimately you are, you know, you have this money and you can spend it. And I don't think it makes a huge difference, like, oh, if you retire right now, this would be bad. But I know everyone disagrees with me on this one.

A (41:57)

Barry has numbers, I think.

D (41:59)

Yeah, this is called the sequence of returns problem. And you could just, Felix, map this out on an Excel spreadsheet and you'll see the impact. Plus 10%, minus 10%, plus 7%, minus 2%. Like, just randomly pick a bunch of years and then put them in different orders. And there's a huge difference. If in your first year, you're like, 20, 24 plus 25%. Because, remember, as you draw money down, that money doesn't compound. And, you know, Bill Sharp is called. Nobel Laureate Bill Sharp has called this the thorniest problem in all the finance. 4% is what we use as a rule of thumb. But is that really the right number? If inflation is high, if the markets are low, if all these factors happen, it affects your standard of living because, A, you're taking less money, but B, the market down 15% and you take out 3 or 4% that year. So now it's not just 4%, it's 4% from down 15%. That never has the ability to compound. But just run the numbers or Google it, you'll see sequence of returns.

B (43:10)

Oh, I buy the math, I buy the arithmetic. I'm not quibbling with the arithmetic. I'm just quibbling with this idea that by convention, you know, year one is the year you retire. Why is year one not five years before the year you retire or five.

A (43:26)

Years after because you start drawing down, that's number one.

D (43:29)

And number two, the other caveat to this is longevity. It's not merely, all right, I'm taking 0.3% a month instead of 0.4% a month or whatever the numbers are. It's hey, if I have a few million dollars and I retire at 65 and my parents live to their 80s or 90s, hey, I have a 25, 30 year horizon. And if the first couple of years of my retirement are 2000, 2001, 2002, there's a genuine chance that I'm going to outlive my money. That's where the sequence of returns is so challenging. Because by the time you get to the end, the person who retired into +24, +10, +5 will have done better than the person who retired into minus 15, minus 20. It's the starting point of the drawdown. Cost. Whatever you take out at a discount at a market sell off no longer compounds going forward.

B (44:27)

And I do think that this is the one place where financial advisors can really help is things like if the market is down a lot when you are 61 and retiring, you have a decision to make, which is, when do I start drawing Social Security? And normally you want to delay it as much as possible because actuarially speaking, that increases your total Social Security income. But maybe if you want to keep that money invested so it can have the opportunity to go back up, then there are reasons not to. These are things which you need to sort of talk through with someone objective, right?

D (44:59)

It's complicated. The numbers are complicated. We have no idea what inflation is going to be. We have no idea what market returns are going to be. And so you're making a best guess based on historical data. And that historical data kind of assumes that the future will look like the past, going to look like the past. And what we learned last week is, hey, maybe the future isn't going to look like the past.

B (45:22)

And by the way, I wrote a big cover story for wired magazine in 2009 called the Formula that Broke Wall Street.

D (45:29)

Gaussian Coppola. I remembered that piece vividly. That was a groundbreaking. Not to blow smoke up your ass, Felix, I think that's the most influential thing you wrote. And I can't tell you how many people on trading desk said to me, hey, have you seen this? This is dead on. So the fact that you did not give me a heads up about this, the fact that I remembered Gaussian Coppola was like, holy Shit, this is really something that people are talking about. And that was a big deal.

A (45:58)

You're going to explain what it is, right? It's not like a movie directed by Francis Ford.

D (46:02)

That's a whole other hour.

B (46:03)

Well, so, no, I'm not going to explain what the Gaussian copula function is. But what I will say is that the big, deep intuition behind the Gaussian copula, which was this formula that blew up Wall street, was precisely this assumption that the future will resemble the past. And what happened? We wound up in a world where house prices across America all went down at the same time, which had never happened in the history of America. The future did not resemble the past. It was completely different.

D (46:32)

The Great Depression is the only analog you can come up with.

B (46:35)

And everyone blew up. And so, yeah, you cannot assume that the future will resemble the past. But as a working assumption, it's kind of the best we've got.

D (46:43)

You know, the quote in the book that I love comes from Paul Graham, and I'm actually going to pull it up because I don't want to mangle it. But when he talks about experts, one of the things that is so fascinating is experts are experts in the way the world used to be. And if you think about it, if you think about that line, anybody who's talking about the future, anybody who's talking about the markets, anybody who's talking about all these things, it's because they developed a previous expertise in a previous world. And you have to be really cautious when you extrapolate that expertise forward. We've seen that from a bunch of people over the past couple of years. And it really is how people get into trouble. Again, back to the idea. We all need to be a little more humble and have a little more humility about how we think about the future. Wall street in particular, which is such a, you know, fake it till you make it kind of place. When they used to do training programs, you would join a big house. The first week was modern portfolio theory and asset allocation, and the next 51 weeks was sales training. Here's how to close. I just saw Glengarry Glen Ross. Here's how to close the good leads and here's how to project confidence and all this stuff. So you end up with this false bravado that just permeates the whole industry. And you really need to kind of say, there's a lot of stuff I don't know and I need to be aware of my blind spots and understand exactly how little I know about the future. P.S. this goes back to Socrates and Aristotle. None of this is new. The only thing I know is that I know nothing that's 3,000 years old.

A (48:27)

Can I say, even though I would agree that I know nothing, I do feel like the past does explain the present because we can go back to 2020, we can look at what happened to the economy in 2020, and we could say maybe that wasn't a goof. Maybe there's a commonality running through the story here that people gave someone a pass for that maybe, maybe we should have paid more attention to in the past election. I'm just saying the last time unemployment was really high, the last time the treasury markets went nuts was the last time we had President Trump in office. I'm not blaming President Trump for the pandemic. I'm just saying maybe we have a precedent. Coincidentally, the same people are in charge.

B (49:09)

I have my own personal theory that we might actually not have had the pandemic if Hillary Clinton had been president. But that is a whole other theory.

D (49:18)

At the very least, you could say we might have had a better outcome if we were more serious.

A (49:22)

Yes.

D (49:23)

About prevention and vaccines and less focused on bleach and Ivermectin.

B (49:27)

Let me ask you about the one thing that really has changed out of all recognition in the past five years, which is the behavior of individual investors that you and I are both old enough to remember. When people like Carl Richards would come out and talk about the behavior gap and say, like the biggest mistake that individual investors make is that when stock markets plunge, they panic and sell. And now we are living in a world where individual investors, whenever stock markets plunge, they pour in and buy aggressively with huge amounts of money. And if you look at the data from Fidelity and Wealthfront and Interactive Brokers and all of these places, the individual investors are, every time it goes down, they just buy and they buy everything in sight and no one is panicking and no one is selling. It seems to me to be a very different reaction function than we are historically used to. And I'm interested in what you make of it.

D (50:25)

So I'm a little older than you. I have a little more gray hair than you. So I have a vivid recollection of not just the pandemic, but the financial crisis and the dot com implosion. And I even remember 87, I was in grad school and seeing how that year played out. And so a lot of this is simply muscle memory and recency effect when you rewarded for buying the dip. And let's be blunt, since March 09, it's over 15 years. Every time you BTFD'd, you were rewarded for it. Sometimes it took a few months, but usually it was pretty quickly. When you look at the market sell off and from October 07 into March 09, it took a while for people to realize, oh, this isn't working anymore. And to break that habit, especially in 2000, if you look at how wild and volatile the markets were 2001, 02, right up to the launch of the Iraq war in 03, like that by the fucking dip worked great until it stopped. And so until people get spanked, until their muscle memory is broken and oh, this doesn't work. Hey, it's been working for 15 years. Why are we going to stop now? Well, down 10, 15%, it feels like it's still working. Down 25, 30%. Those dip buyers are, with very few exceptions, are going to go away.

B (52:10)

On which note, we should have a numbers round. Elizabeth, do you have a number?

C (52:14)

My number is 20 and that's percent. And that's the amount more of egg dyeing kits people bought this year as opposed to last year.

B (52:23)

Wait, more egg buying kits?

C (52:25)

This is coming from pos, you know, the company that sells little colored tablets. And this is in spite of egg prices and Internet trends of people now dyeing potatoes and onions instead of eggs. Although I ran the, you know, do you want to do an Easter onion hunt? By my kid? And he was not particularly enthusiastic about it. And then this was in a Time story. And the theory was that sometimes when people are in volatile political and economic environment, they prefer things that are nostalgic for them and remind them of happier times. So that may be why people are biting the bullet and buying eggs and dying them.

B (53:00)

I have a related number, which is 18,000, which is the number of chicks that family, farm and home sold in the first quarter of this year. You know, if you want to start raising chickens, you have to start by buying chicks. And you can buy chicks at family farm, home or tractor supply, whatever. That 18,000 chicks that they sold in Q1, that's Q1, 20, 25. What was the number in Q1? 2024, 1,700.

A (53:29)

They went up like a tariff.

D (53:31)

I live in a tony suburban neighborhood and not five blocks from my house, there is a sign. Eggs for sale. People are literally raising chickens to sell their eggs. I am thrilled. I can't hear their early morning.

B (53:48)

As long as they don't have a rooster, it's fine. Emily, what's your number?

A (53:52)

80%. 80% of Chinese film box office revenue now comes from domestic Chinese movies, and that's up from 60% before 2020. I didn't realize this, but the Chinese movie industry is going strong domestically. I remember back in the day, like Titanic was really big in China. And even more recently, Marvel Endgame Made just raked in cash from China. But that's no longer as big of a thing. They have their own industry, they crank out their own blockbusters. They have like a $2 billion movie now that people are going to see. I can't pronounce the name of, so I'm not going to try. I just became interested in this because, you know, as part of the trade war, China is, you know, putting more limits on American films in Hollywood. And it's been really bad for Hollywood. Like our poor Hollywood is not doing very well.

B (54:39)

Those actors making $20 million a movie, they might have to cut that to.

A (54:43)

Like, there's a lot of other people working on the movies. But I think ultimately it'll be good for the movies because when China was a major market and it's still a major market, when it was really big, like there would be a lot of movies made and they would sort of soften them politically to make them work in China. So maybe this is like going to make movies better.

B (55:03)

The politics of the Top Gun movie was so vague because they needed to make sure they could sell it into every single market.

A (55:09)

Yes. So maybe that trend is falling by the wayside thanks to the end of globalization.

B (55:14)

So, Barry, what is your number?

D (55:16)

So I pulled three numbers. We already talked about treasury yields, we already talked about one day gains in NASDAQ. That leaves me with 31%. And I apologize for talking my book.

B (55:27)

We encourage you to talk your book.

D (55:29)

Okay, so there's a study I discuss in the book. 31% of people who panic, sell into market corrections and crashes, never return back to equities. And so when you stop and think about all of these horrific scenarios that are scaring the shit out of everybody, sometimes with good cause. When we look back at 08,09 and people panic. Sold in January, February, March, 09, almost one in three of those people say, ah, this equity thing isn't for me. And they then proceed to miss one of the greatest decades in stock market history, the 2010s. It's really a shocking number. And I can't tell you how many people, how many emails we got. Hey, I followed you out of equities in 08, but when you jumped back in in 09, I thought you were crazy. And now it's 2012, 2013, 2014. I don't know what to do. And the answer is you have to scale in emotionally as opposed to just. It's better mathematically to lump sum by two out of three times. The lump sum is the winner. But people just get panicked out. They can't admit error and they just damage their long term retirement prospects, portfolio prospects. It's a shocking academic data point.

B (56:49)

Barry, we are going to have you back and start talking about some real talk about who should be investing in the market, who should not be investing in the market and all of that kind of stuff. But not this week because we have to talk about leaf blowers that is going to be in the Slate. Plus, this is it for the main show. This has been spectacular. Thanks so much Barry Ritholtz for coming on. Thanks to Merritt J. Jacob and Ben Richmond and Shayna Roth and Jessamine Molly and the whole Slate crew for putting this thing together. And we will be back next week with even more Slate money.