The transcript from this week’s, MiB: Liz Ann Sonders, Schwab Chief Investment Strategist, is below.

You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, SpotifyYouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.

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This is Masters in Business with Barry Ritholtz on Bloomberg Radio

Barry Ritholtz: This week on the podcast, what can I say? I have the delightful Liz Ann Sonders on. She is the chief investment strategist and member of the firm’s Investment Committee at Schwab. The firm has eight and a half trillion dollars on its platform. We’ve been working with Schwab for a long time. Liz Ann was one of the earliest guests on the show, and we reminisce a little bit about that, that first appearance. I don’t know what else to say about her. She, she’s so insightful and so knowledgeable and has such a wonderful perch overseeing, you know, eight and a half trillion dollars of both individual mom and pop investors, advisors. They’re the biggest platform as a custodian for advisors. My disclosure, my firm also uses them, and she just sees the world from a place that not a lot of people in the industry get to do. Not only do they have a giant research team, but she gets to see fun flows.

She gets to see a huge amount of activity from the inside, and she, on a regular basis, speaks to investors, speaks to advisors, speaks to institutions. She is as much in the mix, in the thick of what’s going on in the world of investing as anybody. And that combination of her unique perch and perspective and her deep experience, a as either a fund manager or a strategist for the past 38 years unparalleled in the world of investing. I, I, I found this conversation to simply be delightful. And I think you will also, with no further ado, Charles Schwab’s, Liz Ann Sounders. I listened to the first conversation we had. It’s like the second year I was doing this. It was 2015. You were great. I was awful.

Liz Ann Sonders: That was not the first time we met. I remember that conversation nine years ago, but that was not the first time we met.

Barry Ritholtz: The first time we met was my first time doing television. I remember that in a tiny little room around a round table with Larry Cudlow. And I’ll, I’ll never forget, banging down two diet Cokes, walking out the door to go to the men’s room, and the producer grabs me, let’s go. We’re we’re live. And that was it. I sat there for an hour with my back teeth floating and that I, I remember a friend said, you’re fidgety. Don’t move around. Don’t just pick a spot to look. And the spot was your front teeth, which are perfect and white and still perfect and white. Well, and I know why. Well, now I know why.

Liz Ann Sonders: In between that time that we first sat down and did this. And then, this is a
couple years ago now. We live in Naples, Florida, and it was the night before Thanksgiving. We walked out of a restaurant and I just walked off the curb the wrong way. Oh, and the first thing to hit the pavement,

Barry Ritholtz: Your teeth!

Liz Ann Sonders: My teeth.

Barry Ritholtz: So those are not…

Liz Ann Sonders: Now parts of it. It shipped the part of the right front tooth and the tooth
next to it. And fortunately my sister’s next door neighbor was a dentist. And he went in Thanksgiving morning and really, and fixed it. Yeah.

Barry Ritholtz: You know, I t-boned a car. I was the t-bonee — right in front of my dentist’s office. And when I called the next morning, say, Hey, I chipped my front tooth, I need it fixed. They, they said, oh, you too. There was a bad accident in front of here. Yeah, that was me. My, my wife was really upset. I totaled her car at like five miles an hour. An SUV plowed into us.

Liz Ann Sonders:  Totaled, totaled with five miles an hour.

Barry Ritholtz:  So I was making a left. The person behind me thought I was going straight
and tried to pass me on the left. Oh yeah. So literally I made a left, right into them. And it’s funny ’cause that was a pandemic purchase, a very inexpensive 2017 Panama four s, which everybody walked away. I mean, we were a little banged up, but, you know, a giant SUV just crunched us. And what’s terrible is when you see the car afterwards and you see the driver’s door, like, holy cow, how did I just Walk

Ann Sonders: How did I walk away from thsat

Barry Ritholtz: That was like, geez, whenever people say you don’t need to buy a new car, it’s like, I want the latest greatest With airbags

Liz Ann Sonders: with 177 airbags, seat seat

Barry Ritholtz: Seat belt Tensioners. By the way, the airbag come down. You can’t see. It was so
disorienting. ’cause I’m trying to turn the wheel and wheel wouldn’t

Liz Ann Sonders:  I can’t imagine driving in a car without a seatbelt on. You know, be, before we started this, Barry, we were talking about our age and baby boomers. When, when I was brought home from the hospital in 1964, it was in my mom’s lap.

Barry Ritholtz: I’ll tell you, I’ll take that a step further. My dad had this giant, I’m, I’m trying to, it was it an Impala? And we used to lie on the rear deck. Oh yeah. Under the back window. Oh yeah. Like if, if there’s an accident, you’re a projectile right out the windshield

Liz Ann Sonders:  We had a station wagon. We’d go from northern New Jersey to
Brooklyn to visit grandparents and sleeping bags would be laid out in the, the back.

Barry Ritholtz:  And now you can’t take a kid home from the hospital without the right. Not
just a car seat has to be the right kind

Liz Ann Sonders: I’m not saying what was going on back in the sixties was the right thing.

00:05:46 [Speaker Changed] It, it toughened you up. You go through a few windshields, you know, you
learn to dust yourself.
00:05:50 [Speaker Changed] Fortunately, haven’t had that. Right.
00:05:52 [Speaker Changed] Alright, let’s get serious. So everybody knows you as the Chief investment
strategist at Schwab, but let’s roll back to the, to the early part of your career. You get a BA in economics
and poli sci from the University of Delaware. What was the original career plan?
00:06:10 [Speaker Changed] I didn’t have one. None. Well, not in college, no. In fact, what started as
that double major ultimately morphed into the official degree being in international relations. But to be perfectly honest, i I I, I just decided to, to study a couple different areas that were very broad brush because I, I didn’t know what I wanted to do when I graduated

00:06:32 [Speaker Changed] International relations. So you go to the Kennedy School and then become a diplomat.

00:06:36 [Speaker Changed] What is, you know, I, I, I thought about going to graduate school right away for political science. I looked into American University and then I thought to myself, I don’t know what I wanna do yet. So all I knew throughout the latter part of my undergraduate years is that I wanted to live and work in New York City. That was the dream without a lot of specific, did you grow up born in Bay Ridge, Brooklyn, then early part of childhood in Morristown, New Jersey, then outside of Philadelphia and Westchester, Pennsylvania. Then of course went to Delaware and then New York City for 12 years. And then Connecticut raised our kids in Darien, Connecticut. And now I’m based in Naples, Florida.

00:07:17 [Speaker Changed] Right. Do you have the little golf cart and your puttering?

00:07:20 [Speaker Changed] No golf cart. Not quite there yet, but a Vespa.

00:07:22 [Speaker Changed] Okay. Yeah. Oh, that’s fun. So, so you come outta college, how did you end up at Avatar Associates working with Marty’s wife?

00:07:30 [Speaker Changed] So I, I interviewed a across the spectrum of industries, and they were all interviews for grunt positions, entry level positions. But I, I had interviews at a few Wall Street firms, both large and small. I think I interviewed at a marketing firm and ad agency because I, I didn’t know what I wanted to do, but I had some familiarity with Marty because in college, one of the, the courses that I took a requirement was, in addition to reading the Wall Street Journal, every day was understanding what had happened in the, the world of financial markets throughout the week. And I had a professor give me a little sort of hint. He said, Hey, just watch Wall Street week on PBS on Lewis Friday. Kaiser Lewis Ru Kaiser at eight 30 to nine o’clock. Then, you know, you go out and you start your, your weekend. And I did, and Marty was on that show really from its inception in the early 1970s.

00:08:20 [Speaker Changed] Was the original finance show. That was before there was three or four
different, that’s financial news networks. And

00:08:27 [Speaker Changed] It was mostly millions of, of viewers every week. It was that era’s version of must see TV on the subject of, of the market. So I had some familiarity, but in advance of the interview, I also did more research on Marty on his side of the organization, which was the mutual fund, hedge fund investment newsletter side. And then the avatar side that I ultimately joined, which was the institutional money management firm at Barry. As a reminder back in 1986, the process of doing research on a person or a firm, there was

00:08:59 [Speaker Changed] No, you didn’t just Google ’em?

00:09:01 [Speaker Changed] No, there was no Google, there were no computers. There was no internet. So I was in the library with the microfiche machine. I remember that machine and literally turning the crank and reading newspaper articles. So I had some background and had two interviews. And honestly, just the voice inside my head said, this feels right.

00:09:21 [Speaker Changed] You are there for 13 years, 1986 to nine, nine to nine nine. That was the
great bull market. Yep. Tell us a little bit what it was like during that period and then we’ll talk about
what it was like working with Marty’s y the late great Marty’s y.
00:09:37 [Speaker Changed] So again, I was on the avatar side of this y avatar broader organization,
which was institutional money management, managing money for a lot of large corporate plans and
foundations and endowments. And I was a portfolio manager, so I was doing bottom up research and
picking stocks. But it was with, with the context of the top down analysis that, that Marty brought to the
picture, I learned throughout that 13 years. And, and part of the reason why I took advantage of an
opportunity that presented itself to move over to us trust was I was much more interested in and
fascinated by the top down and not the bottom up. I, I didn’t love picking stocks. It, it just, it wasn’t
where my passion was. So my, my observations were more keen on what Marty and his models were
doing in the context of the big picture and monetary policy analysis and investor sentiment and
behavior. And that was where I really found my passion was in that top down analysis.
00:10:42 [Speaker Changed] So, so let’s talk a little bit about Marty’s swag. One of that era’s most
famous investors and traders, the technical crew know him for the zweig thrust indicator. He created
the put call ratio. Yeah. But he’s also the guy who coined the phrase, don’t fight the Fed, the Fed. Tell us a little bit what it was like to work with Marty’s wife.

00:11:07 [Speaker Changed] I adored Marty, you know, rest in peace. He was quirky. He could have a temper, but never about the big stuff. It was more about the little stuff. If he couldn’t find his pencil and, you know, he would toss a phone, but he was really sort of warm and fuzzy, but had that, he was always sort of anxious and nervous. And a lot of people who just observed him from afar took it as well. He is just, he’s just bearish all the time. It wasn’t the case. I mean, he was essentially market timer, for a lack of a a better word. He wasn’t tactical asset allocator.

00:11:43 [Speaker Changed] And one of the more rare successful market times

00:11:47 [Speaker Changed] Unbelievably successful. And it had to do with the discipline of the models that he used and how he segmented economic liquidity, investor liquidity, and then technicals and and breath conditions and understood how they melded together. And they, you know, there, it wasn’t the history of, of working for him wasn’t without some periods that he didn’t quite nail. But, but the big ones he really nailed.

00:12:12 [Speaker Changed] When I was early in my career, I read the book Winning on Wall Street,
which I think came out in like 95 or 96.

00:12:19 [Speaker Changed] Well, the original one came out earlier than that, but there were, there
were additions that, okay, that followed that. But it’s still a must read. A and,
00:12:27 [Speaker Changed] And my takeaway from that is market timing is one part science, where
you’re crunching numbers and looking at history, but you can’t get away from one part art where after
you’re watching the markets for decades like him, there’s a an intuitive feel where just something starts
to smell wrong. Correct. And when the data lines up and your spidey sense starts to tingle, and he never
quite said it that way, but I very much got the sense that all the data was there to buttress the fact that,
hey, I’ve been watching markets for 50 years and something wicked this way comes
00:13:08 [Speaker Changed] The, the gut instinct was extraordinary. It was always, again, in the context
of the models that he was very disciplined about. But there was that just added little piece and certainly
came into play with regard to what essentially was his crash call.
00:13:24 [Speaker Changed] So let’s talk about that. So he, he’s a regular on Wall Street Week with Louis
Ru Kaiser. I could still see the dollar sign in the street, the s for the street, the s the street in the, in the
logo, the Friday before Black Monday. He goes on Ru Kaiser, what does he say?
00:13:42 [Speaker Changed] The structure of the show with Lou would come out and he would do 10
minutes or so of a, a monologue. And it was really brilliant writing. He wrote them all himself. There,
there was humor, there was great intelligence on what had happened in the market. There was really
important reminders around what matters and what doesn’t. And he was just sort of a calming force
and influence, especially during tumultuous times. But then he would walk over to the table where at
the table was Lou and the three regular panelists that were on that evening. And there was 21, 2, 3
panelists on an ongoing basis. And he would have a conversation with each panelist, and then all four
would go over to the sofa area and interview the special guest for that night. So this was the middle part
of the show where he was talking to the panelists and Marty was his typical, and I think Lou said, boy,
you sound a little troubled, do you think we have a bear market? And Marty basically said, no, I think the
market’s gonna crash. And, and then he went further to talk about the, the nature of what it would look
like, the, the probability that it would happen. But then there would be a retest. But then once you had
the retest, the decent chance that you’d be off to the races again, pretty
00:15:02 [Speaker Changed] Much exactly what
00:15:03 [Speaker Changed] Happened. Exactly what happened.
00:15:04 [Speaker Changed] Like not just, oh, the market’s gonna lose some points on Monday. He laid
out like the next six months and it’s exactly what happened.
00:15:11 [Speaker Changed] And it had to do with the interest rate backdrop at the time and tighter
monetary conditions. But also the spidey sense, to your point around the, the innovation of the time of
portfolio insurance and, and felt that that was sort of unwinding and wasn’t going to represent the
insurance that a lot of people thought. And, you know, he was on, on that the hedge fund side of the,
the dual organization. So could be, could swing for the fences a bit more than, than we could on the
institutional side. And, and I don’t remember the exact percentages, but was very aggressively long
heading into the, what the pre crash peak was in August. And then started aggressively both selling and
moving to the short side of things, heading right into the weekend before the, the crash. And we did
something similar on the institutional side, not the same extreme, but close to, fully invested to very,
very low equity exposures.
00:16:12 [Speaker Changed] And people may not remember 1987 was at least up and through
September was a robust year in the market. We were up like 30 or 40%, like a really substantial gain.
And despite the 22.7% crash, I think we finished the year like up 1%, something
00:16:32 [Speaker Changed] Like one, I think it was 1.8%. And you know what Barry, I’m glad you
mentioned that. So indulge me if you would Sure. On a tangent here, one of the things that I have never
done, and no one at Schwab has ever asked me to do, is what I think is the silly exercise of things like
year end price targets right Now, in part that’s a way for institutional strategists to be measured against
one another. And the sort of narrative embedded in that, I suppose might matter to institutions, but our
eight plus trillion dollars of client assets are for the most part individual investors. Right? 1987 is a
perfect example of that. If I, at the beginning of the year had said the market is going to be up less than
2%, that might have sent the impression that it was gonna be kind of a boring year and could have
patted myself on the back at the end of the year. But the path that the market took to start at the year
and then ended up 1.8% was nothing resembling what one might infer if you had just heard the year end
price target of essentially a flat market.
00:17:39 [Speaker Changed] So I, I love the mental exercise that Wes Gray of Alpha Architect does. Hey,
if you knew with perfect clarity, if that bird landed on your shoulder and told you here’s where equity
prices are gonna be in 10 years, position your portfolio for that. He says even God would get fired as a
portfolio manager. ’cause the drawdowns right, can be so vicious. And what do you mean you’re fully
invested? The market is down, you know, 30, 40%, you didn’t see this coming.
00:18:13 [Speaker Changed] When markets are going up, the benchmark is either an index like the s and
p 500 or you know, someone you know that’s making even more money than you are. But it’s amazing
how quickly the benchmark turns into cash or a positive return when markets are going down.
00:18:30 [Speaker Changed] So let’s talk a little bit about a day in the life of a chief investment strategist
at an $8 trillion firm. I have to assume every day is a little different.
00:18:39 [Speaker Changed] I was gonna say depends on the day. So
00:18:41 [Speaker Changed] Take us through a typical day. What’s it like? Well,
00:18:44 [Speaker Changed] There is probably nothing typical a about a day, but on the rare occasion
where I have a decent block of time where I am not on camera or traveling, I do a lot of research. I
remember when my daughter was in middle school and she’s 24 years old analysis, and she’s the
youngest, it was a long time ago, the school had a career day and I was asked to come in as one of the
representatives to have kids rotate through the classroom they assigned you to and talk about what you
do, particularly for a job like mine. The directive from the principal was try to get the seventh graders to
understand what you do. So I I started by saying, well, basically I read, write and talk. So that’s what I
spend my typical day doing is some form of reading, writing, and talking. And the, the, the reading part
is the digestion of just a, a, you know, fire hose of information and proprietary research, internal Schwab
research, all the research that I get from the variety of research sources that we, we have analyzing
data, analyzing every economic report that comes in, everything happening in the market on a day-to-
day basis, even though I don’t take a trading approach just looking at technicals and, and breast
statistics and leadership and factor analysis, et cetera, et cetera.
00:20:00 And then I, I spent a lot of time both literally and figuratively on the road talking to our clients,
both their retail clients as well as advisor services. Now in this post covid I environment, it’s, it’s not
quite as much as used to be the case in terms of travel to do in-person events. It’s maybe 60% back in
that direction. But we’ve all adopted to the use of,
00:20:24 [Speaker Changed] Isn’t that a better balance? Doesn’t it seem
00:20:25 [Speaker Changed] Like it’s a better balance and it’s sufficient, right? I used to, I used to go over
to Asia once or twice a year to see many of our clients that are based over there. And the trips would
involve some combination of Hong Kong, Shanghai, Beijing, maybe Singapore. And I would do a
breakfast event, a lunch event, a dinner event. The dinner events might have up to 150, 200 people
smaller other events. But at the end of a trip it was, you know, a brutal travel trip, right? I might have
interacted in some form with several hundred clients. I now do a quarterly webcast for those same
clients. And there have been webcasts on which we’ve had more than 5,000 wow clients. So there is an
efficiency to to, to continue to weave that in.
00:21:11 [Speaker Changed] There’s no substitute for the face-to-face, but sometimes it’s like, do I really
need to go here? Right. To meet with 30 people. Right. It just seems so, so some of the takeaway from a
little bit of zoom, a little bit of webcasts have become, hey, we, we can be more efficient and more
productive. Absolutely. All these tools existed 10 years ago. The pandemic seems to have forced
adoption accelerated, right?
00:21:38 [Speaker Changed] Absolutely. Absolutely. And then as you and I sit here having this
conversation, a relatively new component of my day-to-day activity is I now co-host a, a podcast.
00:21:50 [Speaker Changed] I know that. Yeah. So how, how are you enjoying that?
00:21:52 [Speaker Changed] Love it. Absolutely love it. So we launched it, I think it was November of last
year. I co-host it with my colleague Kathy Jones, who was our chief fixed income strategist. So she’s my
counterpart on the fixed income side of things where my bias is on the equity side of things. And we
have just very open, honest conversations, sort of, you’re a fly on the wall hearing what we would talk
about. It’s very unscripted about what’s going on in the markets. And we talk about the fed and
economic data and what’s ahead for the week. And we typically also have guests both internal and
00:22:26 [Speaker Changed] External. Weekly. You’re doing it weekly?
00:22:27 [Speaker Changed] We’re doing it weekly. It, it drops on Fridays, it’s audio only. So we can have
external guests, internal guests, every, any people can be wherever they are. And a wide range of guests
that we have had. We, we had Claudia Sam, we had Al Rabel talking about commercial real estate. We
had Dali lens of real estate fame talking about residential real estate. We’ve had internal guests like our
own Mike Townsend talking about what’s going on in Washington. So that’s been an absolute blast.
00:22:58 [Speaker Changed] Isn’t this, not to toot my own horn, but isn’t this just such a pleasant
format? Absolutely love it. It’s not three minutes. Right? There’s no camera in your face. You know, the
world is not black and white and investing especially has so many shades of gray. And to develop really
have a decent explanation as to what’s going on. Five minutes really is doesn tight to doesn’t cut to
right. It really is. So to, to go into that Sounds great. And I, I love that description of what you do is
reading, writing, and talking is really is great. I wanted to ask you something. You mentioned all of the
internal Schwab clients. You have advisors, you have individual clients, like I would love to be let loose
on that data Yeah. To see what they do, right. In response to markets. How do you look at the behavior
of whether it’s professional or institutional or just mom and pop traders? Do you guys monitor that and
say, oh, absolutely. Here’s the sentiment. It looks like people are starting to get really panicky.
00:24:08 [Speaker Changed] We do. And there are a variety of forms that we disseminate that type of
information out into the public sphere, which is not something I do formally. There, there are groups
that put that together. But I, I have access to the information and, and you’re right, particularly as it
relates to the sentiment side of things. I have been a sentiment watcher for my 38 years in this business,
learning a lot about the power of sentiment from Marty’s wag. But I think it’s important to look at both
attitudinal measures of sentiment and behavioral measures of, of sentiment and behavioral measures
with eight plus trillion dollars of client assets.
00:24:44 [Speaker Changed] Someone’s gonna be acting out when they shouldn’t.
00:24:46 [Speaker Changed] It’s, it’s probably a, a pretty good eye into the sort of psyche and behavior
of individual investors. So it, it is absolutely something that I incorporate in the analysis in addition to
broader metrics that go beyond just Schwab things like fund flows and obviously the put call ratio and
other ways to measure the behavior of investors. But it’s in conjunction with those more attitudinal
measures. And that comes from sources like a a I I, American Association of Individual Investors. But
frankly, a lot of the attitudinal measures of sentiment I pick up just from talking to our clients being on
the road. That’s where the spidey sense, the right the gut feel comes in. And now being very active on
social media too. Particularly Twitter slash x by the way, I am not active on either Instagram or
Facebook. However, a very troubling huge rash of imposters on those platforms of me not just trying to
get followers.
00:25:47 [Speaker Changed] Yeah, I was kind of surprised you were, you’re
00:25:49 [Speaker Changed] Pitching, pitching things like you’re
00:25:51 [Speaker Changed] A big bitcoin advocate
00:25:52 [Speaker Changed] Instagram, apparently. That is not me by the way.
00:25:56 [Speaker Changed] Not not on Facebook, not on
00:25:57 [Speaker Changed] Instagram. I’m not on, I’m not active on Facebook. I’m not, and I’ve had a
rash of imposters on Twitter as well. I was
00:26:03 [Speaker Changed] About to say, you know, Elon Musk is touting grok as their ai and I would
never subscribe to that until they were able to demonstrate, hey, grok has gotten rid of all the spam
bots and it’s gotten rid of all the, like, I’m constantly reporting fake berries. I’m sure you have people
reporting. It’s constant. It’s constant. And how could constant they not, it’s so easy to identify. Well, if AI
can’t do that, then AI is worthless.
00:26:32 [Speaker Changed] It is. And it it drives me crazy that, eh,
00:26:36 [Speaker Changed] It’s going away. Anyway, Twitter circle
00:26:37 [Speaker Changed] That somebody will think it’s me, right? And it’s somebody, it’s an account
with, you know, seven followers
00:26:45 [Speaker Changed] And, and nine
00:26:46 [Speaker Changed] Not, not that, not that I’m, I’m, you know, Taylor Swift, but I have
00:26:51 [Speaker Changed] To be fair, your call on Dogecoin using the handle, Liz an Saunders’s 9 7 3 1
4 6 9 Oh well good for her. Was pretty well timed. Good
00:27:02 [Speaker Changed] For her. Good for her or him or it or whatever. It
00:27:05 [Speaker Changed] It’s a North Korean
00:27:06 [Speaker Changed] Yeah. Stand factory. So for, for people who might not have been following
the actual me, it’s at Lizanne Saunders. There’s, there’s no e at the end of Ann. There’s Saunders is not
spelled with a z There’s no numbers added to it. There’s, it drives me crazy, but,
00:27:24 [Speaker Changed] And it’s, it should be one of those things that are just so easy to fix and he is
otherwise distracted.
00:27:33 [Speaker Changed] So, so it is something that, that I to Yeah. That
00:27:35 [Speaker Changed] That’s pretty. And I remember when you first, when we, when we spoke
last time, 2015, I
00:27:41 [Speaker Changed] Think I had
00:27:42 [Speaker Changed] Just started,
00:27:43 [Speaker Changed] Just joined Twitter Yeah. In
00:27:45 [Speaker Changed] 2015. And now for people who don’t follow Liz Ann Saunders, but you
should and I retweet you on a regular basis. Thank you. You put up some really nice charts, some good
tables. Everything is databased, everything is fact oriented. It’s none of the stuff that I see from you. And
this is why I appreciate your feed is, you know, I really think the market has another leg up here about
10, 15%. Then we get a pull. There’s none of that crap.
00:28:09 [Speaker Changed] There’s none of that. It’s just because I, you know why I don’t know. I can’t
do that. That’s right. And by the way, nobody, nobody can knows Right. Nobody can do that. It’s not
what we know that matters. Meaning about the future, what the market’s going to do. It’s what we do
along the way. Right. It’s, it’s as simple as that.
00:28:24 [Speaker Changed] It it’s a little bit of a stoic philosophy. You can’t control the world. Yeah. All
you can control is your reaction behavior to what happens, your behavior. Yep. And that’s very
challenging for people to accept. Oh,
00:28:36 [Speaker Changed] Fear and greed are really, really powerful emotions. Yes. And especially as it
relates to our money. ’cause we care a lot about our money.
00:28:45 [Speaker Changed] So let’s talk about fear and greed. Let’s talk about 2022 and 2023. 22 is a
tough year. We sure was. We had double digit declines in, in fixed income and equities. I think the s and
p was down about almost 20%. The NASDAQ was down about 30%. What was 2022 like for you, dealing
with a lot of clients and investors concerned about what was going on.
00:29:12 [Speaker Changed] You know, one of the most interesting things about 2022 was to, to tie this
into the sentiment conversation that we just had and, and the differential times between behavioral
measures of sentiment and attitudinal measures of sentiment. I’m sure you remember the, the first big
whoosh down into June of 2022 that yes, at the time was the hope for, okay, maybe this is the washout
point in part because some sentiment measures were at extremes. A a i i, I don’t remember whether it
was exactly around the low of June, but sometime in that spring, early summer period, the percentage
of of bears in the weekly A A I I survey went to a record high and commensurately the percentage of
bulls went to a record low, but it wasn’t matched by the behavioral measures. In fact, A A I I, in addition
to their weekly, are you bullish? Are you bearish? Are you neutral survey they also track the equity
exposure of their same members.
00:30:09 [Speaker Changed] That’s my favorite data point of
00:30:10 [Speaker Changed] Theirs. And at the time where you had record high bearishness record low
bullishness, the equity exposure was only slightly off an all time high. So that was a classic example of
what they, what they’re saying and what they’re doing are sort of diametrically opposed. Fast forward to
the October 20, 22 period, there was a little more of that across the spectrum. Washout, the puke phase
as I like to call it, using, you know, a very technical term. That was also a period where because the
magnificent seven or the grade eight, you know that the small handful of tech,
00:30:46 [Speaker Changed] Now
00:30:47 [Speaker Changed] It’s the was four. Now right now it’s getting shrunk that those stocks were
dragging performance down. But what was interesting about the October low was what was going on
under the surface. So the indexes at the October low had taken out their June low, but under the
surface you were seeing much improved breadth, you know, positive divergence to use technical term.
And that was a more compelling point in the market. Again, the message from us wasn’t, the bottom is
in, but the message was this looks more compelling than what was happening in June because you had
that sort of double wash out in sentiment. And you had that under the surface improvement in, in
breadth where even though, you know, the generals were retreating, there were more soldiers kind of
approaching the front line
00:31:36 [Speaker Changed] And, and the October, 2022 lows were slightly below the June lows. Right.
And so the technicians will say that’s a a a double bottom. But I recall seeing some people say, uhoh, oh,
we’re gonna start a whole new leg down over here. And it’s, it’s hard to see that with sentiment that
negative.
00:31:56 [Speaker Changed] Not only that, but again, the fact that breath under the surface was con
improving was
00:32:00 [Speaker Changed] Constructive. Yeah. And you know, same thing at my firm. We’re not
market timers, we’re not traders in my personal account. I went out and bought a bunch of QQQ calls
and spider calls just to play around and Russell 2000 calls, spiders did well, Russells did nothing. Yeah.
And the QS crushed it over the next year. But that has to be a challenging period. What sort of calls and,
and do get panicky conversations with investors.
00:32:29 [Speaker Changed] You know, one of the, one of the differentiations that, that I’ve observed
over my many years at Schwab is during some of the really tumultuous eras, 2022 may be not as
significant as the covid decline or certainly the global financial crisis is there is a pretty direct correlation
between the ability with this withstand volatility and tough market environments with whether you sort
of have a disciplined strategic asset allocation plan, right. Versus more of the day traders, the wing it
kind. That’s where you see the bigger emotional swings versus our clients that have taken that what we
sometimes call an advised approach where they, they’ve got that long term plan, they have a financial
plan, they’ve got a strategic asset allocation structure that is tied to everything personally about them.
That they, they have the disciplines around diversification, periodic rebalancing, and they tend to ride
through the tougher times much better than the kind of wing IT type investors.
00:33:35 [Speaker Changed] So let’s flip it on its head 2023 s and P 500 up almost 25%. The Nasdaq up
more than double that. What do you do with people who suddenly become uber bullish and hey, this is,
this is a new something. We have to be in it to win it. How do you deal
00:33:53 [Speaker Changed] With that? Well, a, a year, like last year, the breed summit was so dominant
by such a small handful of names, it got less extreme as the, as the year concluded. But at around the
midpoint of last year, you not only had the magnificent seven accounting for more than all the
performance, but you had a record low percentage of the index outperforming the index itself.
00:34:17 [Speaker Changed] 145 stocks did better than 25%, 144 stocks in the s and p 500 if I’m
remembering correctly. Right. Outperforming index
00:34:27 [Speaker Changed] Itself. Well there, there’s lots of ways to which is low to look at that. So at,
at, at the low point of last year, even today, if you look at the percentage of the s and p that has
outperformed the index over the past 12 months, it’s only 12%. That’s close to an all time low. If
00:34:44 [Speaker Changed] You, so wait, gimme those numbers again. 12,
00:34:46 [Speaker Changed] 12% of the overall s and p 500,
00:34:49 [Speaker Changed] So you’re talking 60 stocks right.
00:34:52 [Speaker Changed] Have outperformed the s and p over the prior 12 months. Now if you start
to shorten that 12 months, it gets better. So right now it’s around 40% of the index has outperformed
the index over the past month.
00:35:05 [Speaker Changed] Really? Yes. That’s much broader. Much broader. ’cause all we hear is
people saying the market is narrowing, this is how bulls end, it’s just seven.
00:35:13 [Speaker Changed] It’s why it’s broadening. So
00:35:14 [Speaker Changed] It’s going the other way. So
00:35:15 [Speaker Changed] That’s destructive. Yes. It’s even just among the magnificent seven. Now
last year, so that moniker came because those were the seven largest stocks, right? In the s and p and in
the nasdaq. They’re not the seven largest anymore. Six of them are still the sixth largest. Pat Tesla has
dropped down. Right. It’s kind of bouncing between the ninth and the 10th spot. So leapfrogging Tesla
has been Berkshire Hathaway, Eli Lilly and Broadcom has been, you know, kind of breathing down
Tesla’s neck. Last year they were the seven largest stocks consistently throughout the year. They weren’t
the seven best performers, but they were all strong performers, double and triple digit. You only had to
go down to the 63rd ranking within the s and p 500 to capture all seven of those names. Year to date, as
you and I are recording this, three of the seven stocks are ranked year to date performance in the
bottom quintile. So they, they, four of them have a, three of them have a four handle in terms of the
ranking. So
00:36:10 [Speaker Changed] That’s Tesla,
00:36:11 [Speaker Changed] Tesla, apple, and alphabet. Hmm. Now Nvidia is still the best pouring stock,
but you’ve got this massive spread in terms of, of performance among just that group of names. And you
have these sort of stealthy breakouts happening in areas like industrials, even to some degree in
financials and I, which have
00:36:30 [Speaker Changed] Been giant laggard for right.
00:36:32 [Speaker Changed] Forever. But, you know, sectors and groups and categories. There’s
rotation, I think all elses l that’s, that’s a healthy thing. I think still a bit more work needs to be done. But
in terms of, back to the original part of your question, you know, how do you navigate this? First of all,
understand what’s actually going on in the market. Understand that indexes can often paint a very
different picture versus if you look under the surface. And that’s why in, in my latest report, I, I said that
this may be more of a duck market than a bull market.
00:37:01 [Speaker Changed] That’s, that’s a que literally a question I have expl, I love the metaphor of a
duck. Explain what
00:37:07 [Speaker Changed] That means. So I, it was, i I I guess is the, the quote originally is attributed to
Michael Kane who talked about a duck being very calm on the surface, but paddling like the dickens
underneath. And to put some numbers behind what I mean in this context, that both the s and p and the
Nasdaq are, are still trading around all time highs within the case of the SP no more than a 2%
drawdown from a year to date high maximum drawdown. And it’s a little bit worse, it’s 3% for the
nasdaq, but that’s at the index level. Lemme just use the NASDAQ as an example of this. And as you and
I are doing this first weekend in March, we’re not very far into the year, but the average member,
NASDAQ member maximum drawdown from year to date highs is negative 22%. That’s
00:37:49 [Speaker Changed] Big. It’s
00:37:50 [Speaker Changed] Big. That’s bear market level decline. So there’s a lot more churn going on
under the surface. And I think especially in this environment, you wanna understand what’s going on
under the surface, not just make assumptions about the market at the index level because of what has
been that bias in terms of performance to just a, a relatively small handful of names.
00:38:13 [Speaker Changed] So those data points that you bring up are really quite interesting because
there has been an increasing course of people talking about passive flows and indexing are destroying
price discovery. You know, David Einhorn a few weeks ago said, passive is destroying value and it’s
damaging market structure. You are essentially making the case that there’s plenty of price discovery,
that it’s not uniform. That money isn’t just flowing into names blindly. Right. If Apple Alphabet and Tesla
are in the bottom quintile of performers when they are amongst the top 10 biggest stocks that really
contradicts, oh no, it means there’s other, it just flows.
00:38:57 [Speaker Changed] There’s other stuff going on. It’s not
00:38:59 [Speaker Changed] Just fund flows into indexes.
00:39:01 [Speaker Changed] Now passive did just surpass active in terms of the amount of money in
passive ETFs and, and funds versus active that just happened at the end of, of 2023. But dispersion is up
and correlations are way down. And I think that that’s supportive of active and that is not me saying sell
all your passive vehicles and back up the truck and load up on active. We have always for years thought
there’s a home for both active and passive,
00:39:30 [Speaker Changed] Poor and satellite
00:39:31 [Speaker Changed] In, in portfolios. Right. The point is more that active in general and broadly
has just not been playing on a level playing field with passive. I think that’s improving. And it’s, you’re
right, there is price discovery. Again, a lot of that has to do with the return of the risk-free rate and an
environment in, in the Zer era where
00:39:50 [Speaker Changed] Competition with bonds, you mean by
00:39:52 [Speaker Changed] Return of the, and just, you know, the, the Zer era 0% interest rate, that
was the support for zombie companies and companies that really had no business, you know, existing.
And I think with that return of the risk free rate, it is, it has brought about more price discovery. It is
represented a, a reconnection of fundamentals to prices. Not every day, not every week. You still get
these, you know, cap driven concentration problems in the market like last year. But that’s starting to
ease a bit. And if you’re only looking at the index level and you see certain ugly days, I think the real
story, which is arguably a more optimistic story, can often be found under the surface. Not on the
surface.
00:40:37 [Speaker Changed] Huh. That, that’s some really fascinating stuff and I, I love that perspective
of here’s what the chatter is saying, but when we look at the data, it’s telling you something else.
Alright, last question on Schwab. You’ve been there I think later this
00:40:52 [Speaker Changed] Year, 20, 24 years.
00:40:54 [Speaker Changed] So your next year is 25 years. Yes. Yes. That longevity, first of all is unusual
days, well,
00:40:59 [Speaker Changed] Two, two days for all intents and purposes. Two jobs in 38 years,
00:41:03 [Speaker Changed] Not, not too bad.
00:41:04 [Speaker Changed] Right? So that’s not common on Wall Street. I think
00:41:08 [Speaker Changed] It’s definitely increasingly rare. Yeah. The, the question is, tell us what’s
kept you at one place for a quarter of a century?
00:41:18 [Speaker Changed] A lot of it has to do with the culture and I, I give a tremendous amount of
credit to the man behind the firm, Charlie Chuck Schwab. Yeah. And who is still with us. And he’s still a
pretty active chairman and I know him personally as well as professionally. And, and his vision of what
Schwab should be and has turned into is it really, I think, separates us from maybe the, the typical Wall
Street firm because you know, our, our sort of marketing tagline of sorts of through client’s eyes is, is
actually legitimate. And I think the perspective of the individual investor, what they maybe not want,
but what we know they probably need is just very different than the institutional world. And I, and I
think approaching investing through the eyes of individual investors is, is just a sort of different ball
game. And, and there was, there was nobody that preceded me in this role.
00:42:14 So when Schwab acquired US Trust in 2000, it was only 10 months after I had joined us Trust
Chuck. And, and our, our CEO at the time, Dave Patrick came to New York to meet all the US Trust
executives and they sat down with me and said, we want to create this role of chief investment
strategist. Any interest, I’m making a longer conversation very short. I said, yep, hell yeah, count me in.
And the rest is sort of history. But they, they, they gave me a lot of free reign to, to sort of create this,
this role, but with my full knowledge based on what I know was their mission around the organization of
this is through individual client size. And that’s, it’s a reason why we don’t try to do things like market
timing or year end price target. It’s about long-term planning and strategic asset allocation and, and just
understanding how markets work and how behavior comes into the mix. So it’s just been a great
platform for me and I love it. I I hope I’m there for a lot
00:43:15 [Speaker Changed] Longer. Another 25 years. I,
00:43:16 [Speaker Changed] Well, hmm, boy, that would be interesting. Yeah.
00:43:19 [Speaker Changed] Well, so, so let me,
00:43:20 [Speaker Changed] I’d be my mom’s age then. So,
00:43:21 [Speaker Changed] So you mentioned the culture at Schwab. Let me share a perspective. I I
don’t know if I ever shared this with you. So my firm launched in 2013 with very little money. TD was our
custodian. And
00:43:40 [Speaker Changed] I think I’ve heard of TD right
00:43:42 [Speaker Changed] Now part of Schwab. That’s right. And the first couple, and we just, the
reason we did that is our, our prior firm, the clients were custody to TD and it made it just a single letter,
you know, LOA in order to, to transfer the accounts over. And it took us about a year or two after you
hear it for the hundredth time, where we would go on a road trip. So we were a small shop, but you
know, between our media exposure and everything else had a national footprint. And we would go to
Seattle or San Francisco or Chicago or Austin, Texas. And after you hear it, like the 19th time, Hey, we
love you guys. I would love to have you manage our portfolio, but we’ve been with Schwab and we’re
not leaving them as our custodian. Let us know as soon as Schwab is one of your platforms, you know,
you can only only have to hit me over the head with a hammer 14 times before I’m like, Hey,
00:44:43 [Speaker Changed] Maybe I should, maybe
00:44:44 [Speaker Changed] We should. And now we have, I think we have, I’m doing this off the top of
my head, you know, 4 billion plus on the Schwab platform from essentially nothing. Well, thank you 10
years ago on behalf of Trump. Well, you guys have been a great part. You know, I don’t, again, I always
like to disclose things, but it, it was, it was dumbfounding in the beginning where it’s like, I don’t
understand they’re custodian why people?
00:45:07 [Speaker Changed] No, it’s a partnership. I’m glad you started to use that
00:45:10 [Speaker Changed] Word. And that’s what we ended up learning is, oh, the culture at Schwab
and the way they do things. This isn’t just, hey, leave your money with us, we’ll send you a statement
every quarter. And that was it. It’s a very different relationship. And to Chuck’s credit, you guys created
something that did not exist amongst most custodians. Correct. Beforehand, am I
00:45:33 [Speaker Changed] Overstating this or no, no, not at all. And, and, and we are, you know, by far
the, the largest in terms of not just custodying assets for the RAA community, but representing that
partnership in, in everything from research and trading and succession planning. It it is, it’s an important
part of our business for sure.
00:45:54 [Speaker Changed] Let’s talk a little bit about the markets and the economy today, starting
with, all right, we’re at all time highs in the nasdaq, we’re at all time highs in the s and p 500. I’ve heard a
bunch of people on TV come out and say, oh, you know, this makes me nervous. What does the data say
about what all time highs in, in broad indexes mean for the next couple of quarters? Well,
00:46:19 [Speaker Changed] Starts two years that have a lot of momentum do tend to carry through, but
there’s, with, with any data point like that, if you’re looking at aggregate data or averages, there are
always exceptions to sure to those rules. And as we already talked about, there’s been a lot more churn
under the surface than when you pick up, if you’re only looking at index level. But to say that this has
been a unique cycle, both on the market side of things and the economy side of things, is the ultimate
understatement. And I, I think that to be an analyst of, of the market. And, and one of the nice things for
me as strategists at Schwab is that I get to wear the two hats of both market strategists, but also
economist. We don’t have a separate chief economist and I like that because I get to marry the, the
views, I’m not beholden to somebody else’s view on the economy.
00:47:05 And on that front, the, the nature of this economic cycle helps to explain why we’ve had so
many funky things happen in terms of the market cycle. And it’s the, we’ve been using the, the rolling
recessions terminology because that’s actually what has happened in the, the early part of the
pandemic, during the stimulus fueled piece of that cycle. That all of that stimulus was essentially
funneled into the good side of the economy because we had no access to services. That was the
breeding ground of the inflation problem with which we’re still dealing. But we subsequently went into
recession like conditions for many of those goods oriented categories like manufacturing and housing,
housing related, a lot of consumer oriented products and goods that were big beneficiaries of the
lockdown phase. And we’ve gone from hyperinflation to disinflation to some deflation based on certain
categories of goods. But of course we’ve had the later pickup and offsetting strength on the services
side. And you’ve seen that roll through in terms of market behavior too. And it just makes this backdrop
kind of a, an apple compared to history’s oranges. And I, I think we, we have to be mindful of that when
trying to gauge where we are in the market cycle, where we are in the economic cycle. It’s just a, it’s a
very unique period.
00:48:19 [Speaker Changed] Any other historical parallels that come up? I personally hate the 1970s
parallel because you certainly know the employment picture, the inflation picture, the geopolitics,
everything was just so much worse than what we’re dealing with today.
00:48:35 [Speaker Changed] It’s a very, very different backdrop relative to the 1970s. I guess the only
comparison that we’re witnessing right now is the desire on the part of the Fed and maybe Powell in
particular, to not repeat the mistakes of the 1970s in terms of monetary policy, premature, you know,
hanging of the victory banner easing policy only to see inflation sort of rear its its head again. So I think
that is maybe one similarity in terms of what the playbook is for the Fed. But I totally agree with you
that the nature of what was driving inflation, the backdrop in terms of geopolitics and demographics
and labor versus capital is not a mirror of what we’re experiencing right now. But I think the Fed took
some lessons from, from the mistakes back in that era.
00:49:20 [Speaker Changed] If you are looking for parallels, and I, I think you’re right. There’s, this is
totally unique, but the immediate period after World War ii hundred percent is kind of similar. You have
all these GIS returning and all this pent up, Hey, we couldn’t do all these things and a spike in inflation
that came down, unemployment collapsed. ’cause you had all these people coming back to work. It’s not
perfect.
00:49:47 [Speaker Changed] No, but I think you’re right. It was, it was a military war, not a health war.
Right. Which was the case this time. But it had some of those same characteristics in terms of supply
demand imbalances and the drivers of, of inflation. Obviously there are plenty of differences. Sure. Not
least being what happened on the other side of it with which, you know, massive amount of military
personnel coming back into the private sector and into the civilian workforce and the rebuilding of the
global infrastructure. That is one era that I have used often as a, as a reference point with that
differential being military war versus health
00:50:26 [Speaker Changed] War. So let’s talk about some of the other differentials. ’cause I think
they’re informative. Not only did we bring a lot of technological usage forward or things that existed,
look, we’ve had FaceTime for 15 years. It’s not like it’s new and screen shares and o other things like
that. But they just became more widely adopted. It
00:50:46 [Speaker Changed] Was forced adoption because we had to Right. Had no choice. We had no
choice. Yeah.
00:50:49 [Speaker Changed] But, but today we have office buildings that are not running full occupancy.
Return to office has been, you know, we’re 60%, 70% back. You have a lot of hybrid work, you have a lot
of people working from home. How does this affect how you perceive the economy? What does this
mean for things like, hey, commercial or residential real estate investing?
00:51:13 [Speaker Changed] Yeah, so, so commercial real estate tends to get thought of too.
Monolithically commercial real estate is a very broad category, obviously. Right? And it’s inclusive of not
just the world of offices, but you know, multifamily residential and warehousing and retail and
healthcare facilities, et cetera. So we can’t paint commercial real estate with one broad brush. There are
segments within Siri that are quite healthy versus say office. And even within office of course, big
differentials in terms of urban versus suburban. Certain regions in the country are, are doing much
better. There’s the different parts of the country have larger percent that have gone back into that more
typical office structure. And then of course the exposure to commercial real estate, which is yes, down
into the smaller regional banks, many of the same banks that that suffered the most from last year’s
mini banking crisis. But even there, there’s a, you know, a vast array in terms of maturity schedules and,
and what type of, of commercial real estate exposure on our podcast, one of the recent guests that we
had on that I interviewed, it’s actually a friend of mine, Al Rebel, who is the founder and CEO of Kane
Anderson, a big huge private equity private real estate company.
00:52:24 And although they’re specifically more involved in student housing and and senior housing,
he’s an expert more broadly. And I asked him at the outset of the interview, I said, let me ask you an
expert, and I’m not an expert, a question about how I’ve been terming it. Have I been describing it? And
feel free to tell me you’re dead wrong, Lizanne. I think it’s, this is not a LeMans kind of problem. It’s
more of a slow moving trade wreck or a, a simmering problem over time. And fortunately for me, he
said, yes, that’s I think, an apt to descriptor. That doesn’t mean the problems aren’t still ahead of us, but
it’s over a more graduated period of time. And with some of the carnage will come opportunities. And
that was maybe a more interesting part of the conversation is some of the sort of dis distressed firms
looking at this as an eventual opportunity to come in and acquire some of these properties, you know,
significant discounts. So with carnage comes opportunity.
00:53:17 [Speaker Changed] I’m glad you brought up private equity because during the era of zero
interest rates when you couldn’t really find any sort of yield in the public markets, private equity, private
debt
00:53:30 [Speaker Changed] Venture.
00:53:31 [Speaker Changed] Right. Pretty, pretty good numbers. Seven, eight, 9% yield versus two, 3%.
Now that the risk-free rate is in the threes or fours and muni bonds are giving you the tax equivalent of
depending on the state, six, seven, 8% yield. How do you think about private equity?
00:53:50 [Speaker Changed] Yeah, it’s not my area. So I’m gonna, I’m gonna answer the question by
tying it back to something that is, I, I spend more time thinking about. To the point you made in the
early part of asking that question was what was a shift in the zero interest rate environment by many
investors that were looking for anything resembling a decent yield and it forced them just out the risk
spectrum, right? Whether it was to riskier segments of the fixed income market or into the publicly
traded equity markets, or to your point into the private markets, be it private equity or venture. And for
many of investors, they, they weren’t really comfortable with that kind of risk. And it’s not just the risk,
but for many of investors, it’s the transparency and liquidity that they had to give up. Now we have an
environment wherein essentially hold to maturity risk-free treasuries and things like, you know, money
market funds, a lot of money has, has gone back in that direction. On that note, and this is somewhat
tangential, but I think it’s important too many people view the $6 trillion that’s sitting in money markets
as some, maybe not imminent, but some huge source of, of funding for the equity market.
00:55:06 [Speaker Changed] Cash on the sidelines.
00:55:07 [Speaker Changed] On the sidelines, right? I, I think, I think a lot of that money is actually
probably fairly sticky. It’s money that represents the cash needs or the, the, the liquidity side of, of asset
allocation. And isn’t sitting there just waiting to go into riskier assets, be it public equity markets or
private. I think a lot of that is probably fairly sticky
00:55:29 [Speaker Changed] And it migrated to money market funds because of the five, whatever, 5.3%
yields after a drought of decades of not getting any sort of yield that’s, Hey, I could earn a real rate of
return relatively risk free. Great. I’m going to reduce my risk profile. Right. And, and capture some of
this. That’s a great thing. I I’ve never really understood that cash on the sideline. The, the other thing
that’s related, and, and you might see it from your perch at Schwab, whenever we people talk about
fund flows, look at all this money flowing into equity funds are flowing out. It seems like it’s a year
behind what the market’s doing. The market crashes and then there are fund flows out. Look at 21 or
23, even as the market is rallying, the funds are flowing in the opposite
00:56:22 [Speaker Changed] Direction. It’s performance chasing up and down. That’s, you know, as old
as the day is long.
00:56:26 [Speaker Changed] It’s just that simple. It’s just performance chasing.
00:56:29 [Speaker Changed] And you know, the other thing about the $6 trillion that’s in money market
funds is yes, that’s an all time record in level terms, but relative to total stock market capitalization, it’s
nowhere near a record. So you have to be careful, first of all, number one, I think it’s a mistake to our
point that we just made, that this is not sort of short-term cash on the sidelines, that it’s just itching to,
to jump over onto the equity side of things. But even if you make that assumption, the firepower has to
be put in the context of share of market capitalization and there it’s nowhere near a record high.
00:57:03 [Speaker Changed] That’s really interesting. So we’ve talked a little bit about the Fed. We
haven’t really delved into too much about inflation. You hinted at it before and CPI peaked in June,
2022. How do you look at where we are today in the first quarter of 24 and what does that mean for
people’s portfolio?
00:57:22 [Speaker Changed] So we, we think the disinflation trend is still largely intact, but it doesn’t
mean it is linear. And we’ll quickly get down to the fed’s 2% target. Obviously there’s a lot of
components within inflation metrics, not to mention lots of ways of measuring inflation. And we can talk
about the fed’s preferred measure of PCE and then there’s core PCE or super core, super core, you
know, X shelter. And there’s the differentials in terms of how things like the shelter components are
measured and calculated and what share they represent of metrics like CPI versus PCE. I’d say one of the
more important things that has happened this year is number one, Powell and other members of the
Fed have emphasized more the rates of change, the three month rate of change, the six month rate of
change. And then specifically in the 60 minute interview that Powell did following the January FOMC
meeting, he, he started talking more about the 12 month rate of change.
00:58:23 I think that that was a way to almost quantify the notion that they wanna make sure that if and
when inflation comes down to or near the target, that there’s sustainability to that. That it’s not just a
sort of a, a quick shot down and they, they fear the risk of it moving back up again in terms of what’s
happened very recently is that not only did we have the hotter than expected January CPI report for
both CPI and PCE, the three month rate of change has turned back up. The six month rate of change has
turned back up. The 12 month hasn’t yet. But based on how these things work, right, if three month is
moving up, six month is moving up, 12 month is probably going to start moving up. And that, that’s part
and parcel of why the shift has occurred from a march start to then it was a may start, maybe it’s not
until June and you’ve really condensed the expectation around the number of rate hikes.
00:59:16 Not to mention that there are a few strategists out there more recently that are saying maybe
they don’t cut at all this year. I think the market definitely was way over its skis earlier in the year when
it expected not just a march start, but six rate cuts. There was just nothing in the data that the Fed is
supposed to be monitoring on either side of their dual mandate. That suggested such an aggressive
pivot. And I would also say to a lot of investors, I was saying at the time, be careful what you wish for. If
you think after the most aggressive tightening cycle in 40 years, that in short order they’re gonna pivot
to an aggressive rate cutting cycle. The background conditions supporting that are probably not what
you would wanna see either as an economic participant or as a market participant.
00:59:55 [Speaker Changed] So you wear an economics hat, I have this discussion all the time with
people. Someone said, imagine how great the economy would be if oil was $30 a barrel. And I said, Hey,
if you want $30 a barrel oil, you need a really deep recession. Yeah. Global. It, it doesn’t happen out of
context. You the idea of careful what you wish for, right? You want six rate cuts, that means the
economy is, is
01:00:19 [Speaker Changed] Recession
01:00:20 [Speaker Changed] Is having a hard time. Yeah. So, so since, since we have you wearing the
economist hat, where’s my recession? I was promised recession. Oh,
01:00:28 [Speaker Changed] We had the rolling recessions,
01:00:30 [Speaker Changed] But I was promised a full recession in 22 and then 23. And not only did we
not have a recession, unemployment fell to the mid threes. GDP is robust. When you look around the
world, this isn’t all right, everybody is with the cleanest shirt in the hamper. It’s not that we have a
robust growth economy and the rest of the world does not, doesn’t seem to be keeping keeping
01:00:56 [Speaker Changed] Up with us. So here’s what, here’s what happened. It’s in the context of this
whole notion of, of the roll through when we had the individual sectoral recessions in manufacturing
and housing and housing related and a lot of consumer rent and products. And it did end up with
negative GDP for the first six months of 2022. Right? The reason why
01:01:14 [Speaker Changed] Negative on a real basis, right? On a real basis nominal basis. It
01:01:17 [Speaker Changed] Wasn’t, it wasn’t, but you had, and, and not that back to back negative GDP
quarters is the definition of a recession. It’s not, it never has been the definition of a recession.
01:01:25 [Speaker Changed] Thank you for saying that. I, I’m
01:01:26 [Speaker Changed] Shocked and when people say, well, the traditional or the typical, it’s not.
The NBER has been the official arbiters of recession since the mid 1970s and two quarters in a row of
negative GDP has never been the definition, the key line perhaps within that much more comprehensive
definition that the NBER uses, that helps to explain why six months of negative GDP ultimately wasn’t
declared a recession. Again, not because it was two quarters in a row, but the key part of the NBE R’S
definition is spread across the economy. The weakness that led to the first half of 2022, having no real
growth in the economy was concentrated. It was concentrated on the good side of the economy
manufacturing. We had the offsetting strength in services services, a larger employer by far helping to
explain the resilience in the labor market. The services components of inflation are stickier by nature,
including the, the shelter components helping to explain the roll through in inflation.
01:02:23 And again, it’s just another example of the unique nature of this cycle. So I think when I look
forward, I think, okay, so if and when services has their day in the clouds and, and, and we start to see
more than just some cracks that we’ve started to see, like an ISM services employment component,
going back into contraction territory, what you may get is you, you have a roll through of recoveries in
areas or at least stabilization that have already taken their hits. A lot of people, if view no landing as best
case scenario, there’s going to be a landing, you know, at some point the plane lands. But I, I do think a
near term no landing scenario might also mean a no cutting scenario. And then the question, which I
don’t know that I have an answer to is what exactly has been propelling the stock market? Is it the
prospect of easier monetary policy or is it that growth has more than hung in there and that translates
to better top line growth, better bottom line growth? Maybe a little bit of both, but it’s hard to sort of
isolate one or the other is the key driver.
01:03:23 [Speaker Changed] I’m so glad you brought that up because anytime I’m at a dinner party, I’m
at a barbecue, I’m somewhere and the dominant narrative is thrown at me. So what happens to the
markets if the Fed doesn’t cut sooner or later? And my answer is always, why do you think that
whatever that news headline is, is what’s driving the markets? First of all, there’s a hundred factors or a
million
01:03:48 [Speaker Changed] A million factors, right?
01:03:50 [Speaker Changed] And second, just because it’s on TV or online or in the newspapers doesn’t
01:03:55 [Speaker Changed] Mean I I love that and I, you know, I know it’s the, the job of journalists. If I,
if I’m doing an interview on the phone with a print reporter or if I’m going on a TV program, and
especially if questions are concentrated around what the market is doing, you know, that particular day,
right? And the question is always some form of, you know, what drove the market today or, or what
turned the market at, you know, midday as if the market is sort of this inanimate thing that just sits
around waiting for one particular news headline. And on any given day, any given week, if you just
change the sign on what the market was doing, I could come up with plenty of things to point to to say,
this is why the market boomed today, or this is why the market went down. It is kind of silly, but, but,
01:04:41 [Speaker Changed] And no one likes the answer. How do I know? Right? People are not
satisfied with that.
01:04:45 [Speaker Changed] I I, I try more often than not to answer questions especially that are about
sort of, what’s the market gonna do with I have no idea. And then sometimes I pause for a fact like that.
Well, that’s the truth. I I assume you’re gonna have follow up questions for me. And that’s not what the
listeners or the viewers wanna hear. I don’t know, but anyone answering that question, that’s the
honest answer. I dunno.
01:05:06 [Speaker Changed] A hundred, a hundred percent. And people don’t realize it makes the
matters worse. The journalist writes up the, the story, someone else writes the headline and they’re
looking for the clt most salacious percent thing to pull out. How many times have you read a story
where you read the headline and the story is not do and the story has nothing to do with that headline?
Do it right. Hundred percent. It’s really true. I don’t know is probably the most underused phrase on
Wall Street. And it really should be because you know, first of all, it’s great when you’re do it on live tv,
you get a question. So where’s the market gonna be in a year? I don’t know. I don’t know how, how,
how am I supposed to know? Nobody knows. Nobody knows. It’s, it’s,
01:05:45 [Speaker Changed] And again, like 1980 seven’s example, even if you nailed 1987 and said it’s
flat, the market’s not gonna do anything. No one’s gonna believe, oh yes it is, the market is gonna do a
lot. It just right. It’s not gonna end the year with much to show for it.
01:05:57 [Speaker Changed] That, that’s really funny. So given everything we’ve said about the markets,
the duck paddling underneath, what’s going on below the surface, how should investors think about
forward expectations? What, what should they think about, Hey, you know, we’ve been seeing this,
2010 is the market, what do we average 13, 14% a year, even with some bad quarters in that the rest of
2020 was amazing, 21 was huge, 23 was huge. Here we are starting out 24 strong. At what point should
investors begin to moderate return expectations?
01:06:33 [Speaker Changed] Well, the discipline of rebalancing keeps you in gear in perpetuity without
having to figure out, okay, is this the moment I wanna lessen risk in my portfolio or take more risk in my
portfolio? But I think the two key risks right now have more to do with called the internals of the market
than anything out there that we’re observing as risks. Obviously, you know, geopolitics and the election
and black swan risks are always the potential, but I think sentiment and valuation. Now, the one
important caveat around saying sentiment and valuation are a risk in this case, meaning sentiment’s
gotten pretty frothy, both attitudinal measures and behavioral measures and valuation is fairly stretched
as the important caveat is neither even at extremes represents anything resembling market timing tool.
As we all learned in the 1990s, valuation can get stretched and sentiment can get stretched, and that
can last for years.
01:07:24 What it does is set up maybe a risk factor to the extent there’s a negative catalyst when you
sort of have everyone on one side of the boat and you’re priced for perfection. But again, that
environment can last. But I would certainly put both of those in the risk column. In terms of what could
the potential negative catalyst be that could cause a contrarian move relative to optimistic sentiment?
Well, we’ve already talked about a lot of them. It, it could be something outsized in terms of inflation or
the Fed policy, you know, reaction function, geopolitics is ever present. Given that 2023 was a very low
volatility year, you’ve got the likelihood of mean reversion and you throw the election into the mix as a
potential volatility driver. I don’t think that’s a stretch otherwise, I think you stay up in quality within the
equity portion of the portfolio. I think factor based investing makes a lot more sense than monolithic
groups of stocks or even maybe at the sector level, investing based on characteristics and looking for
quality companies with strong balance sheets and ample interest coverage and strong free cash flow
and positive earnings trends and revisions and, and apply that analysis across the spectrum of sectors
and even cap ranges, really
01:08:31 [Speaker Changed] Informative and insightful. Let’s jump to our speed round. Our favorite
questions that we ask all of our guests starting with tell us what’s entertaining you. What are you
watching or listening or streaming these days?
01:08:44 [Speaker Changed] So I don’t read a lot of books. Every once in a while I’ll listen to them, but
I’m a big podcast listener, aside from our own and yours, I’ve always been a fan of Masters
01:08:54 [Speaker Changed] In business. I always tell people, you don’t have to mention this. No,
01:08:56 [Speaker Changed] No, no. I I I’ve been a regular listener of Masters in business in podcast form
and listening to you on the, on the radio. So I
01:09:02 [Speaker Changed] Even in the beginning when it in
01:09:04 [Speaker Changed] Terrible, even in the, I’m a long time fan. No, well ’cause I was a guest sort
of in the beginning, right? So you
01:09:08 [Speaker Changed] Weren’t sort of, you were one of the, the early guests. I, when I couldn’t get
anyone on, I worked my way through my personal phone book and then
01:09:17 [Speaker Changed] Well, you couldn’t get anybody on. You got me on.
01:09:20 [Speaker Changed] Yeah, no, no, seriously, the general response to requests was no, when I
asked somebody I knew personally. I don’t mean you weren’t anybody. When I asked someone I knew,
all right, I’ll do you a favor. ’cause really nobody’s paying attention to this. That was then now’s 10
million a
01:09:39 [Speaker Changed] Year. But I’m, but I am, I am a fan. Grant Williams has a few podcasts and
he always has really fascinating guests on
01:09:46 [Speaker Changed] Very eclectic mix of people.
01:09:48 [Speaker Changed] Very eclectic mix. But I like that it, it’s often macro focused. And there’s a
number of other podcasts sporadically that I’ll listen to outside of the world of finance. I’m a big
Smartless fan. Oh sure. I mean, they’re just so funny and, and so lovely and brilliant. And so
01:10:03 [Speaker Changed] That’s, I think they just sold that, that for an ungodly amount of money too.
01:10:06 [Speaker Changed] Yes, good for them.
01:10:07 [Speaker Changed] Good for them. Good for them. Yeah, that’s,
01:10:09 [Speaker Changed] That’s it. And then streaming, I guess the one that I’m in the midst of now is
Feud Capote versus the Swans. Really? Yes. So it’s, it’s not a documentary, but it’s, you know, based on
true stories, but with great actors playing parts and it’s multi episode. And so that’s, that’s a good one
that I’m into right now.
01:10:28 [Speaker Changed] So I kind of know the answer to this question, but I want to ask in any way
for anyone listening this deep into the podcast, tell us about your early mentors who, who shaped your
career.
01:10:38 [Speaker Changed] So Marty’s wi clearly, obviously
01:10:40 [Speaker Changed] Right,
01:10:41 [Speaker Changed] Lewis Ru Kaiser in terms of my entree into the world of television and
learning what matters and what doesn’t matter. And I I got it. Chuck Schwab,
01:10:51 [Speaker Changed] I know you, you said you’re, you’re too busy reading research reports to
read a lot of books in addition to winning on Wall Street by Marty Zweig. Any other books you would
recommend to someone interested?
01:11:00 [Speaker Changed] Yes, so the, one of the best books I ever got about investing was given to be
my Marty when I started in the business in 1986. And it’s a little book, it’s paperback, a lot of people
have probably heard of it, but reminiscences of a Stock Operator, of course. It’s just so fabulous. And I
also like, and it’s similar in its sort of size and structure with paperback, where are the customer’s
yachts? So those are my two. And then, you know, winning on Wall Street, you know, I gotta plug
Marty’s book and that, that still resonates even today, right now, at times I’m listening to a book and I’ll,
I’ll listen to, you know, 15 minutes at a time and then not listen to it for months and months is by
Nathaniel Filbert. And it’s just the history of Nantucket where oh really? Which is my place. I spend parts
of the summer and about the, the era from the 16 hundreds into the 17 hundreds when it was the
whaling capital of the, the world. And so that’s a,
01:11:49 [Speaker Changed] I’m gonna share a book with you only because you are now in Naples. I just
finished reading Bubble in the Sun, the history of Florida real estate Booms and busts. Ah, and the
theory is the Florida real estate boom in the twenties is the biggest migration in US history and its
collapse was one of the factors that led to the Great Depression. It, it’s an deeply researched, absolutely
fascinating. Remember that. All right, good. I think you would really
01:12:19 [Speaker Changed] Appreciate that. I’m gonna add it to my list,
01:12:21 [Speaker Changed] Our final two questions. What sort of advice would you give to a recent
college grad interested in going into finance or investment?
01:12:30 [Speaker Changed] I would say, and this is advice I would give to a college grad, going really
into just about any industry, but I think maybe finance a little bit more too many college grads than
coming into finance. It’s about, well, what did I learn in college? What courses did I take? To fairly
honest, it doesn’t matter. You’re not, you’re not bringing something into the mix that the company
doesn’t already know. So the the more broad advice I always give to people who are starting out and
they’re going through the interview processes, there always seems to be this strong desire to come
across as interesting, be interested, focus more on being interested than being interesting. Huh,
01:13:05 [Speaker Changed] Good advice. And our final question, what do you know about the world of
investing today? You wish you knew 36 years ago when you were first getting started
01:13:15 [Speaker Changed] To start early and young?
01:13:17 [Speaker Changed] Start early and young. Yep. The power, the magic of compounding.
01:13:20 [Speaker Changed] The magic of compounding. And, and even if it means sacrificing a little of
the pleasures when you’re much younger and you’re trying to divide a very small amount of money into,
you know, fun versus savings versus work is, is starting early is just so powerful. Even if it’s just putting it
in some version of savings.
01:13:39 [Speaker Changed] Lizanne, this has been just absolutely delightful. Thank you, thank you. My
pleasure so much for being so generous with your time and allowing me to really improve on our first
conversation, which in preparation for this I listened to and was just utterly mortified. Oh, not
01:13:56 [Speaker Changed] I disagree with you now. I didn’t,
01:13:57 [Speaker Changed] Not because of you, because Sumit,
01:13:59 [Speaker Changed] I didn’t listen to the whole thing at your suggestion. I listened to the first,
just the opening five or 10 minutes and, and I still remember it like it was yesterday.
01:14:08 [Speaker Changed] I, I remember sitting in that darkened room room around that round table,
you, me and Larry. Literally my first television appearance, I wanna say that was like oh three.
Something crazy like that. Yeah, it might have been. So anyway, we have been speaking with the
delightful Lizanne no e Saunders Chief Investment strategist at Schwab, helping to oversee over $8
trillion on their platform. If you enjoy this conversation, well be sure and check out any of our previous
500 discussions we’ve had over the past 10 years. You can find those at iTunes, Spotify, YouTube,
wherever you find your favorite podcasts. Be sure to check out my new podcast at the money short, 10
minute questions and answers with experts about your money. I’m really enjoying doing this podcast to
just get to the meat of an issue. 10 minutes. You can find those in your Masters in Business Feed. I
would be remiss if I did not thank the crack team that helps us put these conversations together each
week. Robert Bragg is my audio engineer. Atti ValRun is my project manager. Anna Luke is my producer.
Sean Russo is my researcher. I’m Barry Ritholtz. You’ve been listening to Masters in Business on
Bloomberg Radio.

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