Podcast Summary: The Compound and Friends – Episode: "Buy the Election, Sell the Inauguration"

Release Date: November 15, 2024

Hosts: Downtown Josh Brown, Michael Batnick
Guest: Adam Parker, Founder and CEO of Trivariate Research

1. Election Market Predictions and Polymarket Insights

The episode kicks off with a discussion on the accuracy and impact of prediction markets like Polymarket during election seasons. Josh Brown and Michael Batnick reminisce about tracking election outcomes using different indicators, such as currency markets and Polymarket probabilities.

• Josh Brown [00:00]: "Polymarkers, Mexico dollar cross... Mexico was looking at pesos to tell me who was going to win the election."

• Adam Parker [03:01]: "You could go from 23 to 99 for the popular vote."

Adam Parker highlights how Polymarket allows users to "gamble on everything," emphasizing its growing influence in future elections. The hosts analyze past election data, noting significant inflection points like debates and unexpected events that swayed market predictions.

Michael Batnick anticipates that "in the midterms Poly market is going to be way more cited than people like Nate Silver" [01:14], underscoring the increasing reliance on such platforms for election forecasting.

2. Stock Market Valuation Debate

A significant portion of the conversation centers around whether the current stock market is overvalued. They reference David Einhorn's assertion that it's "the most expensive stock market that we have seen since the founding of Greenlight" [11:11], which Josh Brown disputes by citing traditional valuation metrics.

• Josh Brown [11:27]: "I totally disagree with that. On standard metrics like the median stock, free cash flow yield... I don't see it that way."

The discussion delves into historical valuation standards and how modern metrics may differ, questioning whether traditional approaches to assessing market value remain relevant.

3. Value vs. Growth Investing in the Modern Era

The hosts explore the shifting dynamics between value and growth investing. They argue that the traditional value investing approach, which relies heavily on fundamental deep research, may no longer be as effective.

• Josh Brown [12:03]: "I just measure stuff, right?... It's very true. Tried and tested that valuations related to margin."

Adam Parker adds that "the deep value, so the cheapest 20% of the market is in the fourth percentile. So almost never been cheaper and for good reason. Investors don't want it." [14:41]

This segment highlights the challenges value investors face today, as the market increasingly favors growth stocks with high margins and consistent earnings.

4. Institutional Investor Sentiment and Market Trends

Adam Parker shares insights from his research, indicating that institutional investors may be using outdated investment playbooks, neglecting the evolving market landscape.

• Adam Parker [22:25]: "It could also still be expensive and valuations do matter."

Josh Brown discusses "the mega large cap companies that trade below 10 times forward earnings," noting their scarcity and questionable value.

The conversation underscores the importance of understanding modern investment metrics and adapting strategies accordingly to navigate a market dominated by high-growth, high-margin companies.

5. Money Market Funds and Cash Flows

The hosts touch upon the unprecedented growth in money market funds, which have surpassed $7 trillion for the first time.

• Adam Parker [48:20]: "US money market funds for the first time ever crossing $7 trillion."

Josh Brown expresses concerns about the backing of these funds and the potential risks associated with such massive inflows.

• Josh Brown [49:16]: "I see that today too... what backs that and where is it? If people freak out, like, it's... it could make you nervous."

The discussion reflects apprehensions about the stability and underlying assets of money market funds amidst their rapid growth.

6. Consumer Sentiment and Its Impact on Markets

Michael Batnick critiques the reliability of consumer sentiment polls, arguing they often reflect mood swings influenced by media rather than actual economic indicators.

• Michael Batnick [52:07]: "This is what you're getting. You're not getting people's assessment of how things are going financially. You're getting their mood swing based on what they saw on Fox News or MSNBC."

Josh Brown shares personal anecdotes illustrating how sentiment can be misleading and fail to predict market movements accurately.

7. Potential Market Risks: Fed Policies and Immigration

The episode delves into potential risks that could affect the market, focusing on Federal Reserve policies and immigration plans.

• Michael Batnick [57:34]: Discusses Trump's immigration plans and their potential economic toll, quoting the New York Times on the possible influx of "13.3 million people living in the United States in some version of illegal status."

Josh Brown downplays the immediate impact on large-cap equities but acknowledges the downstream effects on small businesses and wage inflation.

• Josh Brown [59:53]: "It's more that downstream. If wage inflation goes up for small businesses, then they're more impaired to spend, their confidence goes down."

They also discuss the likelihood of Fed rate cuts and how unexpected policy shifts could introduce new uncertainties into the market.

8. Technological Advances in Healthcare and Productivity

A forward-looking segment explores how AI and technological innovations can significantly enhance labor productivity and corporate margins.

• Josh Brown [59:53]: "Companies like McKesson or Sancora... they should get better at predictive analytics... that's a good stock."

Michael Batnick emphasizes the transformative potential of AI in various industries, hinting at substantial future market gains.

• Michael Batnick [63:07]: "They're going to have their earnings season at some point this year where companies are actually going to talk about the victories from implementing all the AI in 2023."

The conversation underscores optimism about technology driving future economic growth and corporate profitability.

9. Closing Remarks and Personal Insights

As the episode winds down, the hosts share personal interests and recommend engaging content:

• Josh Brown [67:18]: Recommends the book "Factfulness" by Hans Rosling, highlighting its positive outlook on global progress.

• Michael Batnick [66:35]: Praises the TV show "The Penguin" for its quality storytelling and production.

They conclude by promoting their respective platforms and inviting listeners to connect, emphasizing the collaborative and informative nature of their podcast.

Notable Quotes:

• Josh Brown [11:27]: “I totally disagree with that. On standard metrics like the median stock, free cash flow yield... I don't see it that way.”

• Adam Parker [14:41]: “The deep value, so the cheapest 20% of the market is in the fourth percentile. So almost never been cheaper and for good reason. Investors don't want it.”

• Michael Batnick [52:07]: “This is what you're getting. You're not getting people's assessment of how things are going financially. You're getting their mood swing based on what they saw on Fox News or MSNBC.”

• Josh Brown [59:53]: “It's more that downstream. If wage inflation goes up for small businesses, then they're more impaired to spend, their confidence goes down.”

• Josh Brown [67:18]: “Factfulness” by Hans Rosling.”

Conclusion:

In this episode of The Compound and Friends, the hosts and guest Adam Parker provide a multifaceted analysis of the current economic and investment landscape. They critically examine the reliability of prediction markets, debate stock market valuations, explore the evolving dynamics between value and growth investing, and discuss potential market risks and opportunities driven by technological advancements. Personal anecdotes and expert insights create a rich, engaging narrative that offers valuable perspectives for both seasoned investors and newcomers alike.