The Compound's Post-Election Special with Callie, Ben, Michael and Josh

Summary

The Compound's Post-Election Special with Callie, Ben, Michael, and Josh Released: November 6, 2024

Overview

In the post-election special episode of The Compound and Friends, host Downtown Josh Brown is joined by Ritholtz Wealth Chief Strategist Callie Cox, Ben Carlson, and Michael Batnik to dissect the economic and market reactions following the recent election. Steering clear of political debates, the panel delves into the intricate movements within various asset classes, market sentiments, and the broader economic implications of the election results. The discussion is rich with expert insights, data-driven analysis, and engaging commentary, making it a must-listen for investors seeking to understand the post-election landscape.

---

1. Host's On-Air Experience

[00:13 - 03:21]

Josh Brown kicks off the episode by sharing his personal experience being featured live on CNBC during the election coverage. He highlights interactions with notable figures like Gary Cohn, Dan Loeb, and Lyn Martin, offering listeners an insider's view of the high-stakes environment at the New York Stock Exchange during election night.

Josh Brown [00:13]: "I had the privilege of being live on CNBC... It was a lot of high-level people from Comcast, of course, the parent company of CNBC."

Ben Carlson [03:21]: "You're welcome. As a shareholder of ICE and therefore part owner of New York Stock Exchange, I'm glad that we had the opportunity to host you, Josh."

---

2. Election Results and Market Reactions

[03:30 - 08:20]

The discussion shifts to the election results, focusing on the extent of the Republican shift across states and its implications for the economy and markets. The panel appreciates the clear and decisive nature of the election outcome, noting the low volatility and absence of prolonged disputes over ballot counting.

Ben Carlson [03:30]: "The VIX at 40."

Callie Cox [05:32]: "This was a low, low VIX election... everything was very smooth."

Josh emphasizes the market's relief at the certainty of the election outcome, which contrasts with previous elections marked by uncertainty and prolonged disputes.

Josh Brown [07:14]: "The stock market actually the S&P rallied 12% from election night in 2020 through the inauguration in January 2021... one of the third calmest pre-election periods going back to 1984."

---

3. Small Caps Surge and Sector Analysis

[08:20 - 21:17]

A significant portion of the episode is dedicated to the surprising rally of small-cap stocks, particularly within the Russell 2000 index. The panel examines the factors driving this surge, including reduced tariff impacts on local companies and notable performance from regional banks.

Callie Cox [11:17]: "18% of Russell 2000 stocks are up 10% or more today."

Ben Carlson [12:25]: "Somebody tweeted Goldman had the best relative date to the S&P since 2009."

The panel discusses the sustainability of this rally, expressing caution about its continuation towards year-end. Josh Brown highlights the potential risks tied to inflation and the Federal Reserve's possible responses, which could undermine the gains in small caps.

Josh Brown [17:08]: "We're now facing down the biggest risk now going forward is the resumption of inflation... not good for small caps."

---

4. Prediction Markets and Sentiment Shifts

[12:52 - 30:50]

The conversation delves into the accuracy and influence of prediction markets like Poly Market and Kalshi. The panel debates whether these platforms can replace traditional pollsters, given their close alignment with election outcomes.

Ben Carlson [13:33]: "We have to respect these betting markets now as though they're real markets at this point?"

Michael Batnik [14:07]: "They're not real markets. They don't have an order book... but there are people going on there expressing a view."

Josh Brown shares unexpected insights from prediction markets accurately forecasting state-by-state results, challenging his initial skepticism about their reliability.

Josh Brown [15:26]: "This either was proven to be wrong last night or was coincidentally... we don't know."

Callie Cox anticipates a future where prediction markets play a more significant role in shaping public sentiment, potentially overshadowing traditional media polling.

Callie Cox [15:59]: "They replaced Nate Silver last night... the pollsters are done."

---

5. Asset Class Movements Post-Election

[31:00 - 35:36]

The panel analyzes the dramatic moves across various asset classes following the election. Notably, financial stocks soared, with institutions like Wells Fargo and Bank of America experiencing substantial gains. Conversely, traditional safe-haven assets like gold and bonds saw declines.

Ben Carlson [31:18]: "Wells Fargo up 30%. Bank of America up 7%... these are wild moves."

Michael attributes the surge in financials to expectations of deregulation and favorable corporate policies under the new administration.

Michael Batnik [31:44]: "I think it's deregulation and the expectation that banks are going to be able to buy more shares and pay more dividends."

In contrast, gold and bonds were adversely affected due to anticipated increases in interest rates and reduced demand for safe-haven assets.

Ben Carlson [34:02]: "The dollar and treasury yield soared... banks and Bitcoin all are easy to fit to Trump's promises."

---

6. Inflation Concerns and Breakeven Rates

[36:13 - 44:42]

A critical segment of the discussion focuses on inflation expectations, as indicated by breakeven rates. Michael Batnik explains the significance of breakeven rates in assessing market sentiments about future inflation.

Michael Batnik [42:32]: "Breakevens are telling us that like, oh, okay, we're going a little overboard here. I would worry about this a little bit more. Inflation may be coming back as a risk."

Callie Cox views the current real yields on Treasury Inflation-Protected Securities (TIPS) as attractive investments amidst rising inflation concerns.

Callie Cox [43:52]: "Real yields on two, fives, and tens... I don't know, TIPS sound pretty good to me in this environment."

Josh Brown underscores the importance of TIPS as easily accessible investment vehicles for those wary of unexpected inflation.

Josh Brown [44:17]: "One of the great things about modern times is TIPS are really easy to buy for anyone because you could buy it in an ETF form."

---

7. Policy Implications and Future Outlook

[44:37 - 51:34]

The panel shifts focus to the potential policies President-elect Trump might implement, covering fiscal policy, trade, immigration, and deregulation. They discuss how these policies could impact various sectors and broader economic trends.

Michael Batnik [47:10]: "Foreign-born workers are 20% of the labor force right now... supply and demand."

Ben Carlson [50:45]: "The conclusion here is that tax has had a bigger effect on earnings than interest expenses."

Gina Martin Adams' insights from Bloomberg Intelligence are highlighted, emphasizing the significant role of corporate tax rates in influencing market performance.

Josh Brown [49:07]: "Gina Martin Adams wrote a really good piece on her thoughts around markets and how they'll digest all of Trump's policies... corporate tax rate is going to be the biggest driver."

The panel debates the potential for continued market rallies versus risks associated with aggressive policy shifts, particularly regarding deregulation and tax policies.

---

8. Historical Context and Sentiment Analysis

[51:34 - 57:54]

Josh Brown presents historical data on market returns following election days, comparing the immediate and long-term performance of the S&P 500.

Josh Brown [52:16]: "Presidential election days one month later, the S&P 500 has historically since 1950 been up 0.8%, versus up 0.7% for all other days."

Michael Batnik cautions against overinterpreting this data due to the small sample size and unique characteristics of recent elections.

Michael Batnik [54:07]: "Two of the most recent presidential election days were in 2000 and 2008... the sample size is really small."

Callie Cox predicts a surge in market sentiment numbers in January, driven by political developments, regardless of the underlying economic fundamentals.

Callie Cox [54:23]: "Sentiment numbers are going to rocket higher in January than we are the stock market."

---

9. Closing Reflections and Takeaways

[57:54 - 61:54]

In the closing segment, the panel reflects on the broader implications of the election results on investor sentiment and economic outlooks. They acknowledge the role of recency bias and hindsight bias in interpreting the election's impact, emphasizing the complexity of correlating political outcomes with market performance.

Ben Carlson [56:51]: "Look in their mirror like you should. This should have been obvious."

Michael Batnik [57:54]: "Generally the thinking is gradual, controlled improvements... this isn't what we're going to see over the next few years."

Josh Brown shares his belief that Americans prioritize combating inflation over addressing unemployment, highlighting the pervasive impact of rising prices on voter sentiment.

Josh Brown [60:00]: "I think Americans would rather have 6% unemployment than the cumulative 27% inflation that we've experienced."

The panel concludes by reiterating the importance of staying informed and adaptable in the face of evolving economic policies and market dynamics.

Josh Brown [60:22]: "Inflation probably had a higher impact on this election than... the full employment."

---

Key Quotes with Timestamps

• Josh Brown [03:30]: "This was a low, low VIX election... everything was very smooth."

• Callie Cox [11:17]: "18% of Russell 2000 stocks are up 10% or more today."

• Ben Carlson [31:18]: "Wells Fargo up 30%. Bank of America up 7%... these are wild moves."

• Michael Batnik [42:32]: "Breakevens are telling us that like, oh, okay, we're going a little overboard here. I would worry about this a little bit more. Inflation may be coming back as a risk."

• Josh Brown [44:17]: "One of the great things about modern times is TIPS are really easy to buy for anyone because you could buy it in an ETF form."

• Ben Carlson [49:06]: "A lot of the hold on every..."

• Callie Cox [54:58]: "Someone asked me if I think we're more likely to get a recession in the next four years?"

• Michael Batnik [57:54]: "Generally the thinking is gradual, controlled improvements... this isn't what we're going to see over the next few years."

---

Concluding Thoughts

The post-election special of The Compound and Friends offers a comprehensive analysis of the immediate and potential long-term economic implications of the election results. The panel adeptly navigates through complex topics such as market volatility, sector-specific rallies, inflation fears, and the influence of prediction markets. Their insights underscore the multifaceted relationship between political outcomes and market behaviors, providing listeners with a nuanced understanding of the evolving financial landscape.

Investors are encouraged to remain vigilant and adaptable, recognizing that while initial market reactions offer critical signals, the sustainability of these movements depends on a myriad of factors including policy implementations, inflation trends, and global economic conditions. As the new administration begins to shape its economic agenda, the discourse among The Compound and Friends suggests a cautious optimism tempered by realistic assessments of potential risks and challenges.

Transcript

[Downtown Josh Brown]

Hey, everybody. My name is Downtown Josh Brown and I am here with the investing Avengers. We have assembled today for our first ever compound post election special. Allow me to introduce my colleagues to you. First up, Ritholtz wealth chief strategist Callie Cox is here. Ben Carlson is here. Michael Batnik is here. And we are going to break down some of the biggest reaction stories. We're going to keep this mostly away from politics and mostly toward the economy, asset classes, reactions in markets, et cetera. And we are so excited to see how many people have joined us for the live. I would say hello to people, but I feel like we want to get straight to the content. Today's show is brought to brought to you by our sponsor, Rocket Money. Rocket Money is a personal finance app that finds and cancels your unwanted subscriptions, monitors your spending, and helps lower your bills so you can grow your savings. Rocket Money has over 5 million users, has saved a total of 500 million in canceled subscriptions. Stop wasting money on things you don't use. Cancel unwanted subscriptions by going to rocket money.com compound. All right, guys, let's start with me. Last night. Last night I had the privilege of being live on cnbc. They covered the election the entire night, I think for the first time from the New York Stock Exchange, basically. I want to show you guys some pics. They had a party. All right, so here I am with Adam Parker and Courtney Garcia, Tom Lee and of course, Scott Wapner. We had. This was like the markets desk that they would cut to when we were going to discuss like the futures or bitcoin or the dollar or whatever. What's the next picture we have? So this is us on air. I got on like three times. I feel like I did my thing. Next one. Thank you, Michael. So I wanted to show you guys this. This is the world famous boardroom. This is like where they do special events. It's kind of like a ceremonial space on the sixth floor of the New York Stock Exchange. And so they threw a big watch party. And I got to meet or say hi to, like, some really, really big names. Gary Cohn was there. I met Dan Loeb for the first time. He acted like he's never heard of me. That was interesting. I saw Mark Lasry, who I absolutely love. It was a lot of high level people from Comcast, of course, the parent company of cnbc. And I got to hang with Lyn Martin, who's the president of New York Stock, CEO of the New York Stock Exchange. And she was awesome. And I got to Explain all my theories about what would happen as we stood there watching the returns on, on the big screen. Anyway, I wanted to say thank you to everybody who tuned in last night.

[Ben Carlson]

And I wanted to say you're welcome. As a shareholder of ICE and therefore part owner of New York Soccer Exchange, I'm glad that we had the opportunity to host you, Josh. So thank you for coming.

[Downtown Josh Brown]

Yeah, no, it was, it was, it was a much appreciated invite. Michael. Thank you for making it. All right. Anyway, it was really cool to be in the. In the middle of the maelstrom, so to speak, last night. I wanted to. I wanted to just start a little bit with politics just in terms of the magnitude of what happened, because when I looked at that red, that entire red country with all the counties that went for Trump, and then you look at what happened in Congress, that was.

[Callie Cox]

The coolest new chart of all the charts. Right.

[Downtown Josh Brown]

That showed multi county view.

[Callie Cox]

Yes. That showed where things shifted. That was the newest chart I've seen.

[Michael Batnik]

That was my obsession last night. Just the interactive chart.

[Downtown Josh Brown]

All right, tell us what's going on with. Tell us what's going on with this thing. This shows the progress that Trump has made in all of the states and the shifts that we've seen. I thought this is pretty notable, tough to see on YouTube because the vertical charts.

[Ben Carlson]

Well, I think what you need to know, if you're listening or if you're watching, you can't quite make it out, is that this is from the FT and they said that all but two states shifted. And this is from 2020. From the 2020 election. All but two states. And that being Washington, and is that Utah shifted more towards Republicans. So it was. I think we'll get into all of this in a second. One of the things that the market enjoyed, I think about today is, is not just who won, but the certainty that there was no sort of disagreement or anything that could get really ugly politically or for the country. Like, we know who's the president. Let's get on with it.

[Downtown Josh Brown]

That's a really important point because there's another universe in which we're talking about counting ballots today.

[Callie Cox]

Yeah.

[Ben Carlson]

And the Vix at 40.

[Michael Batnik]

Yeah.

[Downtown Josh Brown]

You know, a lot of people are not obviously not happy with the outcome. Fewer people than I would have thought. But regardless, like. But I do think that people just like the fact that it's over, even if it didn't go their way.

[Callie Cox]

This was a low, low vix election.

[Downtown Josh Brown]

Low vix election is a good point. We went in at 20.

[Callie Cox]

No, I mean, like the volatility of this election is very low. Everything was very smooth. It happened quick. That's what I mean in terms of. There wasn't a lot of volatility coming out of the election.

[Michael Batnik]

See, I took it, I took you literally there. I was like, oh, you just said, let me drop some VIX levels on you. Yeah, no, I think you're right. And I think that's one of the reasons why we saw the stock market react so, so strongly today. But I mean, from what I saw, people were really braced for something big. I mean, obviously the headlines were tossing around all these situations about, you know, possible unrest possible, like, you know, counting for days and days and days. I mean, if you look at the vix, speaking of the vix, I mean, the short term VIX was super high relative to the normal vix, which showed that people were really bared up for.

[Ben Carlson]

Wait, what's the short term vix? I don't even know about that. Oh, we lost Cali. Oh, awesome.

[Michael Batnik]

I think it's like CBO's.

[Downtown Josh Brown]

Sorry, you were frozen. Start again. What's the short term vix?

[Michael Batnik]

Damn it. Spectrum. Okay, so the short term vix, it's, it's like the normal vix, but it focuses on three to nine days. It focuses on shorter, shorter term option demand. And there's a one day vix, by the way, that's like chaos mode and.

[Callie Cox]

That should be called the degenerate vix.

[Michael Batnik]

Yeah, I mean that, that doubled going up to election day. But yeah, the short term vix, it was funny. You could see, you could see like the normal VIX spike in mid October as the timeframe like kind of came over. Election day in the days after, and then the normal VIX came down in the short term, VIX spiked. So I mean, there was just a lot of, a lot of demand for protection.

[Downtown Josh Brown]

So what's really interesting, what's really interesting is you had a lot of people buying protection, which makes sense. Like there's obviously a recency bias. And we all remember famously in 2020, we didn't have a concession speech and we were still having court cases even past Biden's inauguration. So people were protecting themselves against that potential outcome. The thing is though, the stock market actually the S and P rallied 12% from election night in 2020 through the inauguration in January of 2021, which is number one. Number two, stock prices were pretty calm going into this. One of the stats that Sean put together for me over the 30 days leading into the election last night, we didn't have A single back to back negative day in the market and I think that's the third calmest pre election period going back to 1984. Prior to that they used to close the stock market on election day.

[Callie Cox]

We're approaching 50 new all time highs this year. It's almost at 50 now. I think today is 47 or something. Cal, you can correct me, but we're, we have something. This has been an unbelievable year for the stock market.

[Ben Carlson]

You know how we spend. We spent a lot of time debating when did the bull market start, when did the bear market end? Was it 2009? Was 2013? Let me throw a grenade into the mix. Do we need to start rethinking how we measure returns of precedents? Because let's look at today for example. The S and P is up 2 1/2 percent. The Russell is up 5.8%. Is this Joe Biden's gains?

[Downtown Josh Brown]

Because the history, I love that question.

[Ben Carlson]

The record books will give us to Joe Biden, but let's be honest, that stole it.

[Downtown Josh Brown]

He stole it.

[Ben Carlson]

Today has nothing, Today has nothing to.

[Callie Cox]

Do on election day.

[Michael Batnik]

Okay, but Josh's quote about the 12% rally between the election and January, you could argue that was from the vaccines.

[Downtown Josh Brown]

Oh, and people have. Yeah, 100%.

[Michael Batnik]

Oh yeah. I would make.

[Downtown Josh Brown]

Pfizer announced the vaccine in November. So what it was like November 20th?

[Michael Batnik]

Yeah, it was like 100 days after.

[Downtown Josh Brown]

I don't know. I think Michael raises a good point. If we're going to, I mean we all know that we're not supposed to do this anyway. But if we're going to ascribe stock market performance during a presidential term. But there's a change in control, there's a, there's an election year, you know, toward the end of that, maybe that's where it should end. Because nobody trading today is trading based on Biden's last eight weeks. Like I think that's pretty, like I think that's pretty obvious.

[Ben Carlson]

Well, they are, but for bad reason.

[Downtown Josh Brown]

Well, because they were coming to an end.

[Ben Carlson]

Right?

[Downtown Josh Brown]

Yeah. Yeah, that's interesting point. Let's put, let's put this chart up. This is just basically, this is just basically the reaction illustrated the Russell. This is, this is from the end of October. So this basically like four days. The Russell's up seven and a quarter percent, the Dow's up 4%, almost 4%. You've got a NASDAQ rally of 2%. And the S&P up 2%. I mean these gaps are huge. But again, this is coming on the Heels of a rally that's been going on all year long. And I guess the question now is like, what stops this into year end? Is the chase on small council 6% today?

[Callie Cox]

Yeah, 6%. That's got to be the biggest one day gate and since when 2020.

[Downtown Josh Brown]

It's, it's, it's gotta be 20.

[Ben Carlson]

And fourth largest gap sentiment trader tweeted like fourth largest gap up open this century.

[Callie Cox]

Bespoke said 18% of Russell 2000 stocks are up 10% or more today. One fifth of all stocks in the Russell thousand up 10% or more.

[Ben Carlson]

Let me ask you guys a question. Like why? Because what, what? The narrative around small caps and not just the narrative like the actual price action has been very much dictated by interest rates.

[Callie Cox]

I got this.

[Ben Carlson]

Okay, so why are small caps up so much? Please.

[Downtown Josh Brown]

Thanks.

[Callie Cox]

Local companies aren't paying tariffs.

[Michael Batnik]

Wait, I agree with Josh.

[Callie Cox]

Right?

[Michael Batnik]

I think it was banks.

[Callie Cox]

Oh, you think it's regional banks. Okay, yeah, yeah, yeah.

[Michael Batnik]

Banks in the S and P were up like 5%.

[Ben Carlson]

Banks are the biggest. Banks are not the biggest holding in iwm.

[Downtown Josh Brown]

No, but they're making the most outsized move. Regional banks are. They're, they're trading like biotechs that just got approval for a drug. It's crazy what's going on.

[Ben Carlson]

Financials are actually now they are the biggest after the rally. Okay.

[Downtown Josh Brown]

And look, but like if you just look at, look at financial charts like individual stocks in that group, small cap financials. We've got to, I mean these stocks have done nothing. Nothing, nothing, nothing, nothing. And then all of a sudden everybody wants to be in the same trade at the same time. I don't think there's a lot of short interest in these things. I think it's buyers now.

[Ben Carlson]

Somebody tweeted Goldman had the best relative date to the S and P since 2009. So we're going to get to banks in a minute. But I want to talk about the prediction market and the trades going into, into last night. So I think what like the market, the predictions market had it. Markets had it. Right, Right. The people who are putting their money where their mouth is, they were right. I don't know, like they could have been wrong.

[Callie Cox]

Right?

[Ben Carlson]

Like, I don't want to like ascribe gospel to the prediction markets, but that being said, we're all markets people and generally I do defer to the wisdom of the crowds and the wisdom of the prediction markets were right. And so we saw this trade going on over the last couple of weeks and it was all the same thing. It was. Chart on, please. It was the odds on the left hand side. I'm sorry, next chart please. No, the previous one. DJ Team Bitcoin trading. There we go. Thank you. On the last we have, we have the odds that Trump was going to win from Poly Market. You have DJ T another proxy for Trump's likelihood or unlikelihood of him getting the nomination. And then Bitcoin and they were all moving for the most part in lockstep. They were all telling you the same story.

[Downtown Josh Brown]

You can't deny that these three things are all doing the same thing.

[Ben Carlson]

It's the same chart. It's the same chart. And so I thought it was super interesting last night that the betting markets and we have a chart from Kalshi was so far, so far ahead of where the media was. And the genie is definitely out of the bottle on this one. There's no going back.

[Callie Cox]

My we have to do we have.

[Downtown Josh Brown]

To respect these, these betting markets now as though they're real markets at this point?

[Michael Batnik]

Yes and no. Because no, they're not real markets. They don't have an order book. And I could get really nerdy with you on that one.

[Downtown Josh Brown]

But I want, I want you to, I want you to go deeper.

[Michael Batnik]

I mean, I, I don't know all of the reaction functions but you know, it's not, you're not buying a share from somebody else. Right. For every buyer, I wouldn't imagine there's a seller. I don't know if it works that way, but I.

[Downtown Josh Brown]

Well, somebody has to, somebody has to take the other side of any bet that you make.

[Callie Cox]

Well, they're not liquid enough though, right, Kelly? That's the big.

[Michael Batnik]

They're not super liquid there, there's a lot of like wash trading going on. It's not really, when you break it down, it's not quite the same thing as the markets that we're used to. But then again, you're right. There are people going on there expressing a view. In a way, it is a market.

[Callie Cox]

They replaced Nate Silver last night though. That's my take. The pollsters are done.

[Ben Carlson]

Totally.

[Michael Batnik]

Was Nate Silver downgraded to Nate Silver?

[Callie Cox]

Yes, he got downgraded to a strong sell.

[Downtown Josh Brown]

Well, I mean, seriously, Jon Stewart opened up his reaction to the election last night by saying something I can't repeat here to the pollsters, like what do you ever want to hear from these people ever again? Honestly, at this point, honestly, they remind me of sell side analyst targets. They don't know anything.

[Ben Carlson]

Their services don't tell me Your opinion. Show me your portfolio. And the portfolio is the betting market. So Robinhood, which just. It just got legalized. Robinhood opened their prediction markets. What was it, like three weeks ago? I don't know the exact date, but they did $500 million in volume. And that's just Robinhood alone. Kalshi and Poly Market did a delay.

[Downtown Josh Brown]

I got this wrong. All right, so I got this wrong. We were talking with Jack Waynes last week on the Compounded Friends. And my take on this was like, you will have to respect these things eventually because it's people risking their real money, but it's like too nascent. And probably what you're seeing in the market action is a reflection of who's doing it. Like how many women are on Poly market trading the election? 05. How many young men? 99%, let's say. So my take on it was like, this is just reflecting who is involved with this kind of shit and it's not reflective of the whole population. That take either was proven to be wrong last night or was it coincidentally? I don't know. So we don't know.

[Ben Carlson]

It's a sample size of one. Like, because if. If Kamala won where we have said that the prediction marks were bullshit, we don't have the counterfactual.

[Callie Cox]

Yeah, there'll be a 640 in the future where Polymarker gets it wrong. And I almost go, oh, see, it was wrong.

[Downtown Josh Brown]

But.

[Ben Carlson]

But I got a question. Go ahead, Ben.

[Callie Cox]

I got a question for you guys. So the big move today was large caps and small caps up big time. The dollar was up, foreign stocks got killed, gold got killed. And what else got killed? I think. And bonds or bonds got killed because rates went up. So what of those? If we're saying one of those first order moves is an overreaction, which one is it? Because I tend to think it's rates. Oh, you think small caps. Okay.

[Downtown Josh Brown]

Gonna sell these things in a week. There's not gonna be another election. Listen, these are mixed signals to me. We're now facing down the biggest risk now going forward is the resumption of inflation or the continually high stickiness of inflation. And I don't think the Fed's going to change their playbook tomorrow with the FOMC rate decision. I think that's locked in. They already signaled it. But if we're really going to go into this tariff conversation again, inflation is now going to be front of mind for the Fed. That's a return of that. That's not good for the trade where you think rates are coming down. And I promise you it's not good for small caps, even if they don't have to deal with tariffs. We learned this over the last three years. Inflation is much worse for small cap companies and their earnings than it is for large cap companies, which were largely unaffected. So I think they're going to get out of this Russell trade fast.

[Ben Carlson]

Well, but we don't know. But we don't know what, what the implications of tariffs. You throw that into the mix. We've never seen that.

[Downtown Josh Brown]

Well, we know they're inflationary.

[Michael Batnik]

Well, we also, I mean, we saw them in 2017 and 2018 and profit margins got like, rocked by them.

[Downtown Josh Brown]

I want to tell you that tariffs are. It's a different type of inflation. It's what's called demand. It's their demand destructive. So, yes, they're inflationary, but not inflationary in a good way. Like, the economy's doing great. They actually destroy demand. We learned that in 2018.

[Ben Carlson]

But what if they raise, what if they raise demand for smaller domestic companies? That's possible.

[Downtown Josh Brown]

No, they destroy business and consumer demand. I don't mean demand for, I don't mean demand for stocks. They're demand, functionally.

[Ben Carlson]

Okay, let's show the chart on the market reaction to elections.

[Downtown Josh Brown]

So, wait, what do you guys think was the biggest overreaction?

[Michael Batnik]

I mean, I think it was bonds, but I think this also matters when it, when you're talking about timeframe, I'd say short term, I'd say it's bonds because the action was just so strong that I feel like it's got to come back, especially because it was based on a lot of speculation, for lack of a better word. These policies that are being thrown out, we don't know the timing of them. We don't know if they're even going to happen. Yes, with the unified Congress, probably will. But I mean, even with a unified Congress, it's not like everything passes easy peasy. But God, did you see the 30 year today?

[Ben Carlson]

That's. I was about to say, Callie, the long end, especially like.

[Michael Batnik]

Yeah.

[Ben Carlson]

So why would Trump's economic policies be so much better for economic growth? I think that's very much up for debate.

[Downtown Josh Brown]

Because we're gonna inflation rate again, right?

[Ben Carlson]

Of course.

[Michael Batnik]

Well, no, they're inflationary, Michael.

[Ben Carlson]

Oh, so you think it wasn't.

[Michael Batnik]

I think it's inflationary because you saw a breakevens move.

[Callie Cox]

Yeah, I think, I think there's a, there's a ceiling on bond yields, so I don't think they can go up as high as quickly as they move today. That.

[Ben Carlson]

Okay, Ben, we said that Last when the 10 year broke through 2% we said there's a lot of buyers. There's be a lot of buyers at two and a half.

[Michael Batnik]

A lot of the hold on every.

[Downtown Josh Brown]

Year on its, on its face they're inflationary. He's saying 60% tariffs across the board on China, 20% tariffs on all of our other trading partners, 100 something other countries. On its face that's an inflationary policy. They might not mind the inflation because they think this accomplishes something else, but I don't know. The tenure went crazy last night immediately because everyone understands that a red wave to Callie's point, regardless of the timing, it's a high likelihood. But you guys think this bond thing reverses and that it's. That people are too excited about stuff.

[Michael Batnik]

I think if you ask me over the next month which trade reverses, I would say bonds go beyond that. I think it would be a little bit harder to say.

[Downtown Josh Brown]

Michael, what do you think?

[Ben Carlson]

You know, I think that an overreaction and a reversal prediction are not the same thing. Right. So like, I think the bond move is an overreaction. I don't necessarily like, know it's going to like mean reverted. I don't think it's going to like come undone in the next week or two.

[Downtown Josh Brown]

None of us think the reaction in the dollar or bitcoin was the overreaction, not bitcoin.

[Ben Carlson]

For me, I think that's, that's pretty much what everybody expected.

[Michael Batnik]

Yeah, but the counterpoint to that is bitcoin is so sensitive to headlines that I don't know, it's just, it's so hard to say.

[Downtown Josh Brown]

Well, the headlines are all going to be positive for bitcoin from here on out because somebody, so I don't know, I don't know who, but somebody has gotten it into Trump's head that bitcoin might be instrumental in paying off the national debt. Some of the things that I was listening to last night and I, I'm not going to repeat who said what, but there's a genuine belief that this administration is going to buy a million bitcoin or take, take our. The United States holdings in bitcoin currently at 200,000.

[Callie Cox]

Take it from satoshi, he didn't. Satoshi doesn't deserve it anymore.

[Ben Carlson]

We have it because it's all right. We have the confiscated bitcoin.

[Downtown Josh Brown]

We have 200,000 bitcoin now because of the Silk Road confiscation. And There was some selling, but that seems to have stopped. And now the idea is if we go from 200,000 to a million, bitcoin and bitcoin can just get to $36 million per coin, we wipe out the entire national debt. This is the things that are in that scenario. Michael Saylor becomes the wealthiest person in the world and microstrategy goes to $10,000 per share. This is something somebody shared with me last night with a very, very, very straight face. And this person is hearing this from people that are in the administration. So bitcoin could become a reserve asset just like gold. It could become so mainstream that the United States government is like borrowing against it and accumulating it and doing all these things. I have no idea if any of this is feasible. I just, I think that you guys should hear this from me. You are going to be hearing these theories and ideas from Elon, from Trump, from whoever the hell he picks as his treasury secretary. This is now going to become mainstream thinking amongst Republicans, Republicans who are very much in power. I just saw what's the woman from Wyoming, Callie, the senator.

[Callie Cox]

She tweeted it today.

[Downtown Josh Brown]

What do they do though? Loomis.

[Michael Batnik]

Loomis.

[Callie Cox]

What do they do when it falls 40% in a month like it does when we have one of these crash situations?

[Downtown Josh Brown]

Keep buying. Then it can't fall. See, this is, this is the way they're thinking. I'm not saying like I agree with this. If they say we're going to accumulate up to a million, if just the.

[Ben Carlson]

Act of saying it's going up, it's going up.

[Downtown Josh Brown]

Who the is selling it? Like honestly, who would say it would almost be financial malpractice if you tell somebody that you're managing money for to sell their bitcoin if you know the government has now decided they want to build a strategic bitcoin reserve. So that's what people are. That's. These are the weird things that today I'm now hearing.

[Ben Carlson]

Coinbase was up 31%. It's got to be the biggest move in history.

[Downtown Josh Brown]

One 31 day move.

[Ben Carlson]

Speaking of one day moves, let's just, let's do this real quick. Day after election reactions, returns, we went back to the two previous elections. So the Russell 2000 is a standout today. Stocks green across the board. Bitcoin is the huge winner. Gold was an interesting move today. Clearly a risk off type of, type of move or risk. I'm sorry, I'm sorry.

[Downtown Josh Brown]

Why do you guys think that?

[Ben Carlson]

Because today was a risk on day dump Risk off assets. That's it. Consumer staples got hit today.

[Downtown Josh Brown]

It was too defensive to work today.

[Ben Carlson]

So here's what went down today. Gold, utilities and consumer staples in real estate.

[Michael Batnik]

Real estate was the worst performance.

[Ben Carlson]

Real estate too, which was kind of.

[Michael Batnik]

Weird because real estate.

[Downtown Josh Brown]

Right.

[Ben Carlson]

Well, that's a rate thing. Let me ask you this. Could we have, could we have like a really strong economy when there's a clear recession in housing? And I would say like, as crazy as it sounds, that's what we've experienced for the last year and a half. Like the economy's been chugging along with a deep freeze in the housing economy. So I had this, you would have thought was not possible.

[Callie Cox]

So I pulled up mortgage rates today and it was 7.1%. Okay, so here's my question. The Fed can lower short term rates all they want, but if long term rates stay higher like this and mortgage rates are at 7% and the spread doesn't compress, what's to stop Trump from telling the Federal Reserve or the treasury, hey, start buying mortgage backed bonds and Treasuries. I don't like these higher rates up so high. What will he try to intervene in the interest rate market and bring rates down if they don't cooperate? Well, that's.

[Michael Batnik]

So that's a conspiracy. But I thought about this too. I mean, we can go there.

[Callie Cox]

I wouldn't shock.

[Ben Carlson]

No, no, that's not a conspiracy.

[Downtown Josh Brown]

Not a conspiracy.

[Michael Batnik]

No, no, no. What, what I'm saying is. No. Okay. No, it wouldn't shock me. Of course I like thought about mortgage rates coming in here and that being a super big challenge for Trump, especially because the perception of the economy right now is, you know, everything is really expensive and mortgage rates are one of the poster childs. Right. Definitely didn't think about that alternative. I suppose it can happen, like crazier things have happened, but I mean that's going to be a big challenge for him having to thread the needle there.

[Downtown Josh Brown]

So Harris was proposing like a $25,000 check to first time home buyers or young home buyers or something. And everyone laughed because everyone said, okay, so basically every house in the country just add $25,000 onto the price. Wouldn't Trump trying to do something like that have the same effect? It's like you're going to push down mortgage rates, therefore you're going to bring out more home buyers. Guess what? The result is not going to be more affordable homes. It's just going to be a higher average home price.

[Ben Carlson]

Really hard to fix the debate because it would Unlock. Because the home buyers aren't. They're there. Would it unlock home sellers? Would it allow people to get, to get into a mortgage? That's not punitive. That's the problem. There's nobody who could sell. We need more sellers.

[Downtown Josh Brown]

Yeah, I guess like when you say the housing market's been in a deep freeze, I would just say the nuance to that is existing sale. Existing home sales have been in a deep freeze. Home builders just had one of the best 12 month stretches ever.

[Callie Cox]

But they're slowing down now. The rates have been so high for so long, they're finally slowing down. The home builders got killed today. Do you see those?

[Ben Carlson]

Home Depot to. Home depot is down 3%. I own the stock. ITB was down a decent amount. So yeah, those are obviously in the crosshair. But anyway, it was, it was a beat a bonanza on Wall street today. Yet 26% of the S&P 500 stocks making a new all time high, which is as good as it's been since the mania of late 20, early 21.

[Downtown Josh Brown]

Cali, you said this is the relief rally to end all relief rallies. What, what did, what did. First, let's get into that because I think you're exactly right.

[Michael Batnik]

Yeah. Well, I want to say, Michael, there's a thin line between excited and frantic. And I think we crossed that line today. Kind of based on what you were saying, the 20, 20, 2021 comparison. Yeah. So the S and P ended up just above 2% today. And it was the strongest day after election day, after a presidential election day since my Data started in 1950. I mean, it was a monster relief rally. And to be clear, we've seen this a lot pretty recently. I think in 22 we had a 2% relief rally right after the midterm elections. I mean, obviously in 2020 we had the vaccines a few days later. So I can't remember what happened the day after, but we saw a relief rally eventually. Yeah, it kind of goes back to what I was saying. Everybody was so braced for something really bad and then, you know, suddenly it wasn't as bad as we expected. So, boom. Relief rally. Rain in the desert right there.

[Downtown Josh Brown]

We missed this meme, but I still want to post it. This is pretty great. Back to the poly market stuff. So. So basically poly market almost perfectly. And they, you know, I think they tweeted this almost perfectly forecast not just the overall election result, but pretty much every state. Or did they get every single state.

[Ben Carlson]

But wait, not they, us. And when I say us, I don't Mean like us people, but the people. So one of the really interesting things about the environment today is just the continued declawing of mainstream media in terms of getting away from watching CNN or whatever network to look at the exit polls and what's the latest polls, because people are watching Polymarket, people are watching Cash. Same thing with Donald Trump going on Joe Rogan and not going on TV to do is meet me like.

[Downtown Josh Brown]

Or Kamala Harris skipping Joe Rogan because she wanted to do an hour and he wanted to do two hours or whatever he normally does.

[Michael Batnik]

Kamala Harris also, also also going on Call Her Daddy, which is one of the most listened to shows among millennial and Gen Z women. So it's not like she didn't play that game.

[Callie Cox]

My wife was watching NBC or something last night and I was watching Polymarket and It was like 10:45 and I told her, hey, it's over, need to watch anymore. And she's like, what are you talking about? They're still talking about, they're counting. And I said, no, trust me, it's at 90%. It's, it's a done deal. And yeah, that changed the way that I viewed the markets.

[Ben Carlson]

Yeah, yeah. So one of the biggest winners today are our banks. I'm trying to think like, is this, is this a net interest type of deal or is this less regulation and a continued health consumer? Like. But let's just throw this chart on because it was just such an extreme move. You don't see a $700 billion bank gaining 10%.

[Downtown Josh Brown]

Wells Fargo, JP Morgan is up 10 and a half percent on the day.

[Callie Cox]

It's.

[Ben Carlson]

Yeah, Wells Fargo up 30%. Wells Fargo bank of America up 7%. Like you saw these type of moves in the, in 2020. Next chart please. And you saw these type of moves in the GFC as we're whipping back and forth between down 10%, up 10%. But to have a 6% move in the XLF when we're at all time highs is wild.

[Downtown Josh Brown]

What do we think this is?

[Michael Batnik]

So I think it's deregulation and I think to take it a step further, it's the expectation that banks are going to be able to buy more shares and pay more dividends.

[Downtown Josh Brown]

Oh, okay.

[Michael Batnik]

I really, I mean, I can't imagine this is a rate play. And the reason why I say that is because, yes, obviously rates moved a lot, but we've seen a lot of rate volatility over the past year. We haven't seen moves like this.

[Downtown Josh Brown]

It'll be interesting to see which of the banks even have the appetite to do bigger buybacks, bigger dividends. I don't, I don't like, I don't know, for example, that Jamie Dimon is saying today that he wants to do anything differently than what he's been doing.

[Michael Batnik]

Well, it's hard to say, but I mean, the flip side is it's hard to say what the appetite is because they, I mean, this is a regulatory thing. Right. They have to get their dividends approved. I'm not sure if they have to get their buybacks approved, but I wouldn't be shocked. But what do you mean? This is something that they haven't had a lot of leeway on.

[Callie Cox]

I changed my answer. This is the biggest overreaction. I never would have guessed financials will be up this much.

[Ben Carlson]

So Discover, Discover, which is basically pure credit risk to the American consumer, was up 13. Was Discover up today? Discover was up 20% today. 20%. Discover Financial regional banks were up 13%. Like, these are wild moves.

[Downtown Josh Brown]

Yeah, I think, I think one of the things that we want to avoid doing is extrapolating one day because these, these moves are not likely to be repeated tomorrow. And one of the things that happens with people that jumped in on trades because the election today or even yesterday in advance, like, they get bored, they move if, if we don't get another 10% rally in JP Morgan, a lot of the people that bought it because it was up so much, they come out of the stock, and as a result, these things tend to, like, wind down. I don't, I don't think that we should look at this and say, okay, these stocks are all going to make 13% moves every day into year end. So, yeah, much of this stuff will. It maybe doesn't go back to where it was, but I think it's got to cool off.

[Michael Batnik]

Yeah. And in frantic markets, too, you have big up days and you have big down days. People just think about up, up and up, especially after that first move. But no, you see the biggest up and down days and really frantic, sometimes even bear markets.

[Downtown Josh Brown]

Yeah.

[Michael Batnik]

And it's important to catch both sides.

[Downtown Josh Brown]

Do you think there are people that just felt like they had to do something today?

[Ben Carlson]

Oh, yeah.

[Michael Batnik]

Yeah.

[Ben Carlson]

If you were waiting for the dust to settle or you were waiting for the election, you have all the clarity you needed. Like Josh, you've been hammering the point that the market loves certainty. And we have no idea how the market would have reacted if Kamala swept the way that Trump did. I'm guessing, you know, the stocks that were up, it probably would have been different baskets and who knows. But the fact that it was so decisive and that like the worst didn't come to pass in terms of contested and other, you know, really terrible shit didn't happen. The market breathed a huge sigh of relief.

[Downtown Josh Brown]

Yeah, I think you would have gotten a relief rally if she won. And I just, I don't know that it would have taken place in bitcoin.

[Ben Carlson]

No, no bitcoin. No bitcoin be down 20% if she won.

[Downtown Josh Brown]

Right. Let's do this. Dollar crude gold chart. Somebody walk me through what's going on here.

[Ben Carlson]

So this is just a reaction of these four asset classes. So on the 10 year yield, we have that index to the right hand side, just so it's cleaner. So anyway, as we already discussed, you saw the 10 year rip, you saw the dollar rip, that's the green line. You saw a crude oil balance and you saw gold, the risk off trade, or I guess the opposite of risk on, whatever that is. Risk off. You saw that dump.

[Downtown Josh Brown]

So this is an interesting instance where gold and gold and crude are diverging, which I guess happens often. But gold and bitcoin seem to have been one trade throughout the course of the summer and fall and that divergence is interesting.

[Ben Carlson]

Well, this is the great thing about markets, Josh, because the narratives change, right? I think, I think that part of the narrative that was driving gold was concerns about the deficit and probably that was bleeding into bitcoin or at least like you can plausibly make the argument, I think that bitcoin is rallying as the odds of Trump winning increased. But narratives change. Things become correlated to different pieces of news and that's where we are today.

[Callie Cox]

The deficit is probably going to get worse and gold goes the other way. That's the funny thing about it. To your point is the narratives can change. Stocks and gold, we're both up 40% over the last year and now gold reverses.

[Downtown Josh Brown]

I want to quote James McIntosh from the Wall Street Journal talking about the election reaction today. He said markets are clear about what Donald Trump plans for his return to the White House. Stocks are up. The dollar and treasury yield soared and started. Banks and bitcoin all are easy to fit to Trump's promises. Corporate tax cuts almost automatically boost stocks. Tariffs almost automatically mean a stronger currency. Bigger deficits mean higher bond yields and easier regulation helps bank stocks. And Bitcoin. Whether this knee jerk reaction proves right in the longer run is another matter. So that's really framing like, all right, so we have this reaction now. How much of it is realistic to stay with us. I want to put this dollar chart up. Callie, what's your take? This was the first thing to move last night that caught my eye. What's your take? Is this just the tariff story, or is higher potential economic growth in the mix here? What do you think is going on?

[Michael Batnik]

Well, currency markets are famously really hard to read because, of course, you have two sides to it, right? You have the dollar, and then you have everything else. And tariffs as a story in the currency market for the dollar. I mean, you have the US Potentially flexing its muscle, but then you also have other countries having to deal with affected trade there. I think that there are a lot of different stories you could throw into this. If I had to pick one, it's probably tariffs, maybe something around growth. It's so hard to say, but I think given the big move that we saw and the forces going the other way up until today, I'd probably pit it more on policy.

[Callie Cox]

It's like isolationism, right? Yeah, that makes sense to me.

[Downtown Josh Brown]

Foreign, the Mexican peso sold off, like, two and a half percent versus the dollar immediately. And I haven't heard Trump talking a lot about Mexico this time around, but, like, I just, I looked at that and I said, all right, that makes sense to me.

[Callie Cox]

So wait, so I feel like this. The whole tone of this talk so far has been like, nothing can stop this train. We're on pace for our, like, fourth year of 20%. Ish gains in the S and P. Isn't. Isn't like, just the worry that, like, man, this is so overdone and that's just the rug. Because it seems like, it does seem that there's no barriers anymore. Let's just keep going.

[Downtown Josh Brown]

22. The S&P was down 20%. It was a recent.

[Callie Cox]

Right. So, yeah, four out of five years. But I'm saying, like, we've been on a pretty darn good run, though. Like I said, we're up 20% coming into the election. So as much as people say people that the market hates uncertainty, the market was doing just fine coming into the election.

[Downtown Josh Brown]

It's such a great point. We had maximum uncertainty over the summer. We didn't even know who was going to be the Democratic nominee. Like, people forget how much uncertainty there was. And stocks held up, market never blinked.

[Ben Carlson]

Really?

[Callie Cox]

It didn't really?

[Michael Batnik]

Yeah, Yeah. I mean, this bull market has been marked by uncertainty, doubt, and skepticism.

[Downtown Josh Brown]

It's almost been, like, part of the fuel of it. Because we go through these periods of uncertainty, then there's Some sort of a resolution and the trend resumes.

[Ben Carlson]

Well, but markets need, markets need a wall of worry to climb. Where's the worry now? To Ben's point?

[Downtown Josh Brown]

Like I just told you, it has.

[Callie Cox]

To be rates, right, Kelly? Is it 5% or so? The people start going, whoa, whoa, whoa, that's way too high for the stock market on the 10 year. Is it something like that?

[Michael Batnik]

I mean, I would say it's probably around here where people are like, whoa, wait, what's going on? Does this match? I don't know if it matches. And remember we have a Fed meeting tomorrow. I mean, I was talking to, I was talking to somebody earlier today and I was like, imagine, imagine if Jay comes out tomorrow. And I don't know if he's going to do this, but imagine if he comes out and he says something like, not so great about the economy. He doesn't strike the language right. Or something. All of these narratives could just go poof into thin air.

[Downtown Josh Brown]

It'll also be interesting. He's got a term to finish out and he was of course, originally a Trump appointee. But we've also heard Trump telling reporters that he thinks he has a better instinct about where rates should be than any Fed. I mean, he said this. I'm not, I'm not, it's not an SNL skit like he said. I think, I think the, I should have a say and I know better sometimes than they do. I have good feelings about interest rates or whatever.

[Michael Batnik]

I'm kind of pumped about somebody bringing that up in the press conference because Jay is going to get so snarky about it.

[Downtown Josh Brown]

Yeah, but it's like it's now going to be part of the new reality and he's not going to have like an economic advisor that's going to like try to talk him out of it. Nobody's talking him out of anything right now.

[Callie Cox]

Minutian's not coming back.

[Downtown Josh Brown]

What's that?

[Callie Cox]

Minutian. He's not coming back.

[Downtown Josh Brown]

No way. Minutian running New York Community Bank, I think.

[Ben Carlson]

Who is going to be some of his economic advisors? God, I shudder to even ask that question.

[Callie Cox]

We, I mean, the Protege Partners guy, Scott Bessette or whatever his name is. Right. He, he's been talking. John Paulson, the one hit wonder, Greatest trade ever. He's in there.

[Downtown Josh Brown]

Yeah, there's a, there's a, there's a big list of people that would take it in a second. I saw Gary Cohn last night at the nyse and he famously came in as the economic advisor and was able to dump all his Goldman Sachs stock tax free. Good trade, which amazing trade. We think Elon is going to get appointed. And historically like traditionally you sell your stock, you take the job, you get the tax free sale. Elon might like talk his way into, I only want to sell half and like no one's going to like, who's going to stop that from happening. He might be able to get out of $80 billion worth of Tesla stock on like a, on like a selling on a regular basis like a traditional plan. And he might be able to do that tax free. And who's going to say no to him? So I don't think he's going to be treasury secretary, but certainly there's a long list of people who I think would jump at that opportunity. So let's do this thing on Breakevens. Cali, can you, can you kind of walk us through why this is something important to follow and what these charts are showing?

[Michael Batnik]

Yeah, so this is all about inflation. And when we're talking about breakevens we are talking about the difference between nominal treasury yields. So like the 10 year yield and then the yield that you can get on comparable tips. So treasury inflated inflation protected securities. That difference is basically what the bond market is baking in for the expected inflation rate over a certain period of years. And I want to show you this because the 10 year has been rallying since the middle of September. And I know that there's been a lot of talk around it. In fact like two weeks ago Michael and I were talking on what are your thoughts about how the ten year, I mean really is rallying because expectations were just so low for the economy. And one of the reasons why I was saying that was because breakevens were basically stable for weeks and now they're, they're rallying higher again. And you know, honestly as investors we want to see sustainable growth with gradual inflation. And breakevens are telling us that we had that, that you know, the growth that we were seeing, the expectations that we were hurdling in October where that kind of sustainable growth that wasn't going to spike inflation worries and now we're seeing break evens tell us that like, oh, okay, we're going a little overboard here. I would worry about this a little bit more. Inflation may be coming back as a risk. So that's what caught my eye.

[Callie Cox]

Dips look good here to me. I've always been taught 2 to 3% real yields is a really good like 3% real yields is like a screaming buy. And so we're at almost 2 1/2 percent. Real yields on twos, fives and tens. I don't know, tips sound pretty good to me in this environment.

[Michael Batnik]

And if you're worried about unexpected inflation, I mean, if you're worried about inflation coming back because everybody's going crazy and it feels like the environment of 2020, then tips are your asset.

[Downtown Josh Brown]

One of the great things about modern times is tips are really easy to buy for anyone because you could buy it in an ETF form. And it just, if somebody wants to put that on as an asset allocation piece, it takes literally seconds. They don't have to worry about maturities or any of that stuff. It's already baked into the product. I wouldn't be surprised.

[Michael Batnik]

And I can only imagine the talk about inflation is going to get worse and worse from here.

[Downtown Josh Brown]

I pulled this from, I pulled this from bank of America's chief economist. And basically they break down the four key policy issues ahead. And I wanted to share this with you guys because there's so much conversation right now about, like, the thousands of things that both candidates had been saying on their respective campaign trails. So, like, all right, now we know who the president is. We know that he sort of has a mandate to do stuff. What are the main things? It's good to not have a laundry list of 50 things. Here are the four US President key issues to focus on if Trump wins. Fiscal policy, trade, immigration and deregulation. So there's no clarity on fiscal. Until there's clarity on what the House races wind up as, which I think, as of right this moment, we don't fully know, and we know it's still really close. But the Tax Cuts and Jobs act is whether or not those tax cuts get extended by the end of next year, that's going to hinge on what happens in the House. And I think that's a big one. The second one is tariffs on China, which we already talked about. And the idea at bank of America is that that's the main thing that could derail the Fed's cutting cycle. If that gets rolling fast, that could curtail the terminal level of rates in this cutting cycle. That could actually stop that cold. Again, it's going to be a timing thing. The immigration thing is interesting. Again, this is one of those things where we don't know how far he's willing to go, what the timing is, whether or not he'll be able to get this done. I don't think it's an executive order, but really clamping down on illegal Immigration, which I think is guaranteed, and then starting to deport people. What does this mean for the labor force? What does this mean for wages? Thoughts?

[Michael Batnik]

I mean, it's supply and demand, right? Foreign born workers are 20% of the labor force right now. And remember, foreign born doesn't mean, I'm not saying illegal immigrants here. I'm just talking immigrants in general. So I mean that's a really big part and they are concentrated in certain roles. So I mean it's supply and demand. Take some supply out, then that'll push wages higher.

[Ben Carlson]

No?

[Michael Batnik]

Yeah, I would like.

[Callie Cox]

40% of construction industry is foreign labor.

[Downtown Josh Brown]

Yeah.

[Michael Batnik]

So you could see some pointed effects in industries.

[Downtown Josh Brown]

Also, one also wanted to mention here, deregulation. I don't know how to quantify this. I don't, I don't know is like more like more drilling. Sounds like the first most obvious thing that will happen. Pulling restrictions off of big tech stocks.

[Ben Carlson]

Dude, Google is up 4% today. Josh, we own the stock. Google was up 4% today. You're telling me that deregulation is not a really good thing for Google?

[Downtown Josh Brown]

Yeah, I don't know how to quantify it, but I think Lina Khan not being at the FTC as a starting point, Please continue. Yeah, but then there's the push pull. I don't think Trump's a big fan of Google, the company and I think meta there have been historically issues.

[Ben Carlson]

Well, he's not vindictive, so it should be fine.

[Downtown Josh Brown]

Yeah, it's great if there are mergers and acquisitions again and there's less of a heavy hand on regulation and capital formation. But also we're going back to this thing where he goes on Twitter and yells at CEOs. And I don't know if that's a push like, like in favor of one side or the other, but this is, we sort of have a little bit of muscle memory here. Right?

[Michael Batnik]

Yeah, I like how you highlighted, highlighted that there are trade offs too. Like this isn't just black and white. You really have to think through the reaction functions of everything.

[Downtown Josh Brown]

Okay, well, let's, let's go to this thing from Gina Martin Adams. What are, what are we, what are we saying here?

[Michael Batnik]

Yeah, can I actually chart on. John, can you put up the tax chart? Effective tax rates.

[Downtown Josh Brown]

Here we go.

[Michael Batnik]

I have two in there. So I wasn't too specific there. Okay, so Gina Martin Adams, she wrote a really good piece by the way. She's at Bloomberg Intelligence. Wrote a really good piece on, you know, her thoughts around markets and how they'll digest all of Trump's policies. She made a couple really good points on the tax side, too. And look, the corporate tax rate, I think is going to be the biggest driver of what we see in markets. I think deregulation could be a close second. I'm especially saying that after today. But if you look at stocks that have rallied a lot over the past month or so, you can fit them into these loose buckets of low tax rate and high tax rate sectors. I mean, you see on the left you have consumer discretionary materials being some of the most burdened by taxes. And on the right you see real estate and utilities being the least burdened by taxes. And there's a little bit of a rates trade here. Right. You can't fit them into neat buckets here. But what I liked that Gina pointed out was that she compared it back to what we saw in 2017, 2018, when the corporate tax rate was dropped from 28% to 21%. She noted that net income as a share of EBIT earnings before interest and taxes has been dropping as the TCJA has expired. Basically, taxes are becoming less and less of a story for earnings, but there's still a big story, as you can see, in this share of what different expenses are pushing around earnings. I mean, taxes are more of a share than interest expense, which is.

[Ben Carlson]

I can't believe interest expense didn't go up. Sorry to cut. Cut you off, Callie, but just one of the wildest things about the last couple of years is that net interest income went the opposite direction or net interest expense, I should say, went the opposite direction of what we would have predicted. Just wild.

[Michael Batnik]

Yeah.

[Downtown Josh Brown]

So wait a minute. The conclusion here is that tax has had a bigger effect on earnings than interest expenses. And like, probably if there's an extension of that corporate rate and I mean, he's talking about, he wants to take it lower to 19 or 20%. It's another tailwind for stocks. I don't know if it justifies a 6% Russell 2000 rally every day, but it's certainly something. It's not nothing.

[Michael Batnik]

I think it's a tailwind. I think it's what she's trying to show is that it's a tailwind that's a lot bigger than people think. And it's one that kind of fits neatly into this earnings calculation and these earnings expectations that we hear about from Wall street all the time, even more so than interest expense like Michael shouted out there. So, I mean, I think the corporate tax rate, long term, if we see it change, if we see it stay at about 21% that it is right now. I mean, I think this is what has one of the biggest effects long term. And that sector by sector breakdown is probably what you should be watching if you're worried about, if you're worried about, or if you're watching these changes in tax rates and tax policy.

[Downtown Josh Brown]

I want to wrap with just a look at the historical data and just some sense of year one of a new presidency, even though this is sort of not really a new presidency, but I think the thing on people's minds is like, all right, that was cool. Thanks for the rally. Now, what do we think is the most salient point of the chart, that chart kid Matt put together for us on forward returns from election days? So it looks to me, it looks to me like not that big of a difference. And I know the presidential cycle is something a lot of people focus on, but for the people listening, presidential election days one month later. The S&P 500 has historically since 1950, been up 0.8%, which sounds flattish. And one month later from any other day, that's not an election day, it's up 0.7%. So this is not a thing where there's any sort of edge or advantage just because we're within a month of an election day. On the annual return, it's a little bit different. The average annual return is 7.8. The average return is 7.8% 12 months after an election day, versus 9.1% over 12 months for all other days. So anything else worth saying there?

[Michael Batnik]

Yeah, I'm going to point out that two of the most recent presidential election days were in 2000 and 2008. So you have to watch that stat. I think this data is really important. I think it's worth looking at, especially if you're one of those investors who's like, oh, God, like, now the stock market crashes, change. Change feels uncomfortable. That's not necessarily the case. But then again, the sample size is really small and it includes some very volatile years.

[Callie Cox]

My take is I'm more certain that we're going to see sentiment numbers rocket higher in January than we are the stock market. I think sentiment numbers are going to. Yeah, I agree, because it's politically charged. We're going to see sentiment numbers in January when he takes over. They're going to go all of a sudden start going up, even if the economy hasn't changed much.

[Downtown Josh Brown]

Yeah, we know sentiment during the entirety of the Biden president was depressed. And I think some of that is a function of who actually answers those sentiment surveys. And that's been like, pretty well documented. It's kind of more like a mood ring on how people feel about the politics of the country way more than it is about how people are actually doing. And, yeah, it could flip overnight with, like, no fundamental change whatsoever. Put this. Recessions under Democrats versus Republicans.

[Callie Cox]

Oh, Matt did this for me. Someone asked me, do you think.

[Downtown Josh Brown]

I dare you to tweet this.

[Callie Cox]

Someone asked me if I think we're more likely to get a recession in the next four years? And I said, well, geez, on the one hand, we've had literally one recession for the past 15 years, and it lasted two months. So if you're playing the odds, sure, there's a higher chance. But, I mean, I think a lot of this is just cyclical. I think Republicans just happen to take over during bad times in a lot of these cases. Not like Republicans cause more recessions than Democrats.

[Downtown Josh Brown]

For the listener.

[Michael Batnik]

Yeah.

[Downtown Josh Brown]

The red line, total number of recessions started under Republicans, 18. The blue line, total number of recessions that started under Democrats, 6.

[Callie Cox]

This was surprising, but I think it's. I think it's just kind of fun with numbers.

[Ben Carlson]

Yeah, I agree there's something there. It looks like there's something, but.

[Downtown Josh Brown]

It looks like there's something, but it can't. It can't be that simple.

[Ben Carlson]

No.

[Downtown Josh Brown]

Because if it were, and anyone really believed in this, they would never elect another Republican.

[Callie Cox]

40% chance of a recession in the next four years. Market here. I said it first.

[Ben Carlson]

Boom.

[Downtown Josh Brown]

40. I admire. I admire your. I admire your courage. All right, guys, closing thoughts, and thanks so much to everyone that joined us live tonight. We really appreciate it. Michael, closing thoughts. Any? I think you're allowed to do slurs again. I'm told. Any you want to get off your chest?

[Ben Carlson]

So, to me, I learned a very valuable lesson in hindsight bias. Because when I digested the results of the election, my first thought was, well, fuck, of course. I mean, all that Ben and I and the four of us have been talking about for the last two years is how unhappy people are relative to the economy. Like, we've been screaming that the economy is okay and people don't feel like it's okay. Dumbass. Look in their mirror like you should. This should have been obvious. It should have been obvious that people would vote out the incumbent. Like, of course. And then I remember that. Wait a minute, I didn't know that yesterday. So hindsight bias for the one.

[Downtown Josh Brown]

Callie, closing thoughts.

[Michael Batnik]

Yeah, I really like that, Michael. And look, I fell into that, too. I looked at the surveys and the sentiment like you did, and yeah, I saw the difference in perception and data. I knew that there was probably something there. But I even wrote something a few weeks ago about the misery index being the lowest before a presidential election, lowest outside of 2016, since the data was collected in the 1960s. I think my takeaway and something I'm going to be watching for the next few months and definitely the next few years is this approach toward extreme policy. This is a black hole that you could go down forever. But generally the thinking is gradual, controlled improvements, gradual, controlled steps forward is the way to go. This isn't what we're going to see over the next few years, it sounds like. So is this going to be wildly good? Is it going to be wildly bad? Will it lead to a market that looks a little different than what we've seen over the past few years? That's what I want to watch for. And that's honestly what I'm a little worried about.

[Callie Cox]

Benjamin, I listened to the Jon Stewart thing, too, and his. He played some clips from 2016 and 2020 and maybe 2012 about the initial reaction the day after the election, what people were saying. And it's kind of funny to look back on what people were saying. The main takeaways were, and they were all completely wrong. Like, here's what the Republicans have to do, here's what the Democrats have to do. And they went the total opposite direction. And I think whatever people are overreacting to now is probably going to be wrong in the next two to four years.

[Downtown Josh Brown]

Okay, My biggest. So I Yesterday I said, I think she wins. So I got this one wrong. And I did the same thing Michael did. Like, I woke up today, I'm like, how stupid am I? It was so obvious he would win. But, like, I think I was reminded how much. And we learned this over the last couple of years, and we've said this a whole bunch, all of us have, how much people truly hate inflation. But it's not the economic statistic of inflation this month or this year versus last year. It's the cumulative effect and how long it stays with us. I honestly now, at this point, I believe that Americans hate inflation more than they hate high unemployment. That's what I do.

[Callie Cox]

I think they do, too. I agree.

[Downtown Josh Brown]

I might be getting, like, more. I may be going too far.

[Ben Carlson]

Come on. That's recency bias. I know you're saying, come on.

[Downtown Josh Brown]

Okay, but that's what I think. That's how I feel right now. That, like, Americans would rather have 6% unemployment than the cumulative 27% inflation that we've experienced. Cal, you look like you have something to say about this.

[Michael Batnik]

Yeah. So I think you're right. And it's because more people experience inflation. We all experience inflation because we all bribe groceries.

[Downtown Josh Brown]

We all.

[Michael Batnik]

Nailed it.

[Ben Carlson]

Nailed it.

[Michael Batnik]

But unemployment. So unemployment during the great financial crisis. 10%, which is really freaking high. 1 in 10 people. But that's still 10% of people. Not everybody feels it.

[Downtown Josh Brown]

I think if you gave the American people a choice right now, given what we've just experienced over the last five years, I think if you said, all right, I can wave a wand, 2% inflation, 6% unemployment, or whatever the hell is going on now, I think they'd say, oh, lower inflation. I'll keep my. I'll be fine.

[Ben Carlson]

Yeah.

[Downtown Josh Brown]

This is America. We don't look out for each other to the extent that we think we do. We look out for ourselves. And I think inflation probably had a higher impact on this election than. Who went on Joe Rogan's podcast. I thought that was the full employment.

[Callie Cox]

Guess what? I hate it.

[Downtown Josh Brown]

Yeah.

[Callie Cox]

I hate full employment.

[Ben Carlson]

Yeah.

[Downtown Josh Brown]

Yeah, I totally agree. And I. Look, I think the social issues about immigration and the perception of, like, crime waves in cities and, like, the cultural stuff about trans athletes, of course, like, you could interview 100 people on the street, and a lot of those people would cite the social stuff. But I think when you ask, why do people just feel like things aren't good despite how good they are? The main reason is the inflation and the cumulative effect and just the sheer amount of people, no matter what. Black, Latin American, Asian American, gay, straight. Like, everybody hates how. What? Like, how they experience the economy right now and how high the prices are. And most of these people don't have stock market assets the way Wall Streeters do. And so I really think that, like, that's my big takeaway. And I might be overstating it because of recency, but.

[Callie Cox]

And that's why 30% tariffs will lead to a Democrat in 2028. I'm kidding.

[Downtown Josh Brown]

It'll be Gavin Newsom in 2028. And we'll all point to tariffs. All right. Hey, everybody. Thanks so much for joining us. We really appreciate it. Special. Special thanks to the team for helping us put this together, the media team, the research team. Callie, Ben, Michael, thank you so much for joining me. And, guys, hey, Might not love the impact. You might not love the decision that America made last night. Good news is you have no choice. So let's all make the best of it. Let's keep investing. Let's make some money. And we will see you on our shows regular shows very soon. Good night.

[Michael Batnik]

All opinions expressed by Josh Brown, Michael Batnik and their castmates are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.