Betty Liu on market impacts from the coronavirus outbreak | Money in :60 | GZERO Media


I’m Betty Liu with your Money In 60 Seconds. So, the impact of the virus has pretty much been felt in the global markets. We’re now back up to around record territory, erasing most of the losses. Initially when US officials reported the second virus outbreak in the US, the markets fell. And in fact, the S&P fell the most in three months. So, in the early 2000s, a SARS outbreak actually hit the markets even more. We saw the S&P fall 13 percent based on the outbreak. But economists say it’s really not an apples to apples comparison because at the time when SARS was happening, we were in a very different economic time. That’s your Money In 60 Seconds.

Economy and the Market in 2020


As we typically do with our outlook reports,
we start with an overview on the economic environment as we see it in the subsequent
years and then we tie what are essentially those macro-views into what we expect for
the stock market. So, let me start with a perspective on the
U.S economy, which in 2019 had fairly steady growth. Nothing to write home about, but quite frankly
that’s been the name of the game for this entire economic expansion. And we generally expect something similar
in 2020. Probably no significant lift in growth, but
so far, the conditions don’t appear to be ripe to suggest that a recession is at risk. Now, what we had been writing about quite
a bit in 2019, and we think carries into 2020, is that we do have a bit of a bifurcated economy
in the United States, where we’ve had a very beleaguered manufacturing sector, much
stronger services sector. Another way to divide the economy when you
think about this notion of bifurcation is to look at the difference between business
investment and consumer spending. Regardless of how you slice and dice it, the
weakness has clearly been concentrated in manufacturing, in things like CEO confidence
and CFO confidence, weak capital spending, overall weak business investment. Now, although those represent smaller portions
of the economy than either services or consumer spending, as we’ve been pointing out, they
tend to punch above their weight in terms of the broader impact into the overall economy. And much like was the case in 2019, what we’re
watching in 2020 is to see whether, number one, the weakness persists in manufacturing,
in business investment, and whether it starts to morph into weakness in the broader parts
of the economy. So far, that has not been the case. We’ve been talking about this very healthy
dividing line between those portions of the economy, but also what we’re paying close
attention to is the labor market because it’s typically within the labor market that we
start to see that weakness more from the manufacturing or business investment side of the economy
into the broader economy. So that’s one of the things that we’re
watching for. We also focus a lot on leading economic indicators. Those sub-indicators that give you a heads
up on what is going to happen. Those have been kind of a flat trend over
the last year or so. On a change-basis, we are down to about flat
levels. That’s not a recession warning, but something
we need to keep an eye on. What’s been keeping the leading indicators
from moving more into negative territory, of course, has been the strength in the stock
market, the un-inversion of the yield curve, still very low unemployment claims. But we are seeing some weakness in some of
the other sub-indicators. So, I will keep a close eye on those leading
indicators. In terms of the implications that all of this
has had and will continue to have for the stock market, clearly, we have been in a very
strong stock market environment. I think that has been on the basis of all
the liquidity that’s been added into the system via the federal reserve, lowered interest
rates three times in 2019, caused a loosening of financial conditions. That’s one of the reasons why in 2019, although
we had de minimis earnings growth, almost no earnings growth, we actually saw P/E ratio
valuations expand. And that was because the macro-environment
really supported that valuation expansion. As we look ahead into 2020, I think we are
at a stage where we’re less likely to get that boost to valuations from the macro-conditions
of easy Federal Reserve policy, given that the Fed is on hold at this point; which means
we’re probably at or near a stage where the “E” in the P/E, earnings, are going
to have to start to do some of the market’s heavy lifting. Now, expectations are for earnings growth
to pick up in 2020, back into double-digit territory in the second half of 2020. Those estimates may still be a little bit
too high, unless we get a lift in the global and U.S. economy sufficient to bring those
earnings estimates up. But that I do think represents a risk in 2020,
that if we don’t get the expected earnings growth, that we’re not going to see much
valuation expansion, if at all. And the other risk I think we need to monitor
in 2020 is investor sentiment. Courtesy of how well the stock market has
done, and not just the U.S. stock market, global stock markets, really asset classes
across the board over the past year is that investor sentiment has moved into the “extreme
optimism” zone. Whether you’re looking at attitudinal measures
of sentiment, or behavioral measures of sentiment. Now, in and of itself, that doesn’t suggest
risk for the market. The market can continue to do well, investors
can remain optimistic, but it does set up the possibility that if there is some sort
of negative catalyst, that the weakness might be a bit more pronounced given that excess
optimism. Because it might trigger some selling by investors. So, that is another thing that we’re keeping
an eye on in 2020.

2020 Bond Market Outlook


2019 has been a very good year in the Bond
Market, with investors benefiting from both falling interest rates and stronger demand
for bonds in the riskier segments of the market. We expect 2020 to be a somewhat more challenging
year, but one that also offers investors the opportunity to add more income to their portfolios. Here are three key points about our outlook
for the fixed income markets in 2020. First, we expect the Federal Reserve to keep
short-term interest rates on hold for the foreseeable future. Barring a change in the economic outlook,
Fed Chair Powell has told us that the Fed plans to keep short-term interest rates in
the range of 1.5% to 1.75%, and we don’t expect a big change in the economic outlook
to shift that, so short-term interest rates should stay anchored in that region. Secondly, we do see room for interest rates
to move up somewhat for intermediate to longer-term bonds. Our estimate is that 10-year treasury yields
could move up to 2.25% to perhaps 2.5% over the course of the year as trade tensions ease,
the economy starts to look a little bit stronger, and inflation expectations pick up modestly. That would offer an opportunity to investors
who are looking to add more income to their portfolios to find better yields without having
to stretch into lower credit quality bonds. Thirdly, we are concerned about the riskier
segments of the fixed income market because the yields offered on those bonds are low
relative to treasuries. We suggest investors move up in credit quality
because the risks associated with bonds like high-yield bonds or bank loans are starting
to outweigh the potential rewards.

Why It’s So Hard to Beat the Market P1 | Common Sense Investing with Ben Felix


Active fund managers want earn better returns
than the market, while taking less risk. I’ve talked about the shift toward index
funds in Canada and the U.S., and how the prolonged poor performance of active funds
is a driving force of that shift. While it seems logical that fund managers,
some of the smartest, highest paid, and best equipped people on the planet, should be able
to use their resources to create a favourable result for investors, the data simply does
not support their ability to do so. On average, active fund managers consistently
underperform the market. If these people are so smart… why is it not showing up in returns? I’m Ben Felix, Associate Portfolio Manager
at PWL Capital. In part 1 of this two-part episode of Common
Sense Investing, I’m going to tell you some of the reasons why it’s so hard for active
managers to beat the market. William Sharpe’s 1991 paper The Arithmetic
of Active Management, published in the Financial Analyst’s Journal, is a great starting point
in explaining the challenge that active managers face. It’s pretty simple. Actively managed funds, on average, have significantly
higher fees than passively managed funds. Quick side note: Canadian mutual funds have
some of the highest fund fees in the world, with an average of 2.35%. Contrast that with the fact that you could
build a couch potato ETF portfolio for as low as 0.16%. So back to William Sharpe. His 1991 paper said: Before costs, the return
on the average actively managed dollar will equal the return on the average passively
managed dollar. This makes perfect sense because there is
one global market, and, in aggregate, all passive and active funds are investing in
that same market. Sharpe went on to say that after costs, the
return on the average actively managed dollar will be less than the return on the average
passively managed dollar – same returns before fees, but lower returns after fees due to
higher fees. If fees were not in the picture, you might
expect about half of active managers to be able to beat the market. Add fees in, and that number drops to less
than half at best. Ok, so the average active manager is unlikely
to beat the market in a given year due to fees. But who’s going to hire an average active
manager? The idea of manager skill has been the subject
of a lot of research. In a 1997 paper published in the Journal of
Finance, Mark Carhart explained that investment expenses and exposure to certain risks almost
completely explain persistence in equity mutual funds returns. So, if there’s little to no evidence of managers skill it means that the managers who have done well may have just been lucky
in the past. Finding the manager who has done well in the
past and will continue to do well is a gamble, not a guarantee. Are they skilled, or are you giving your money
to someone who has been lucky? An important distinction here is that when
we are talking about skill, we only care about relative skill. Any mutual fund manager is likely to be intelligent,
well-read, and competent, but they need to be more intelligent, well-read, and competent
than the other manager on the other side of the trades that they’re making. Any time a manager sells a stock that they
think will do poorly, another manager is buying it because they think it will do well. Only one of them will be right. The investment management industry is full
of PhDs, CFA charterholders, and MBAs. Currently, most of the world’s stocks are
owned by institutions rather than individuals. Most trades are a bet between two highly skilled
professionsls. The level of competition is exceptional. As more and more skilled managers enter the
active management business, luck becomes increasingly important as a determinant of their success. Supporting this idea, in a 2013 paper, Pastor,
Stambaugh, and Taylor found that the increasing size of the actively managed fund industry
has a negative impact on active funds’ performance. More skilled competition is making it increasingly
challenging to generate higher returns. Let’s say that you do find a skilled manager. They have had a few good years, but you can
tell that they are skilled rather than lucky. So… You invest your money in their fund. So do a lot of other people, because the performance
is good. Fairly quickly, the fund will grow to a point
where the manager’s skill becomes less useful, or even useless, because there is so much
money that needs to be invested. It’s one thing for a skilled manager to
find a few good stocks to invest a few million dollars in, but if a fund has a few billion
dollars to invest, the manager may have trouble being different from the market. When that happens, the investors in that fund
end up with a really expensive index fund, known as a closet index fund. The math just doesn’t work out
for the average active manager, and finding a manager that will be consistently above
average is extremely difficult in today’s increasingly competitive environment. Even if a manager is successful in generating
higher returns, their success will be their own downfall. In my next video, I will be talking about
one more reason that causes many actively managed funds to underperform. My name is Ben Felix of PWL Capital and this
is Common Sense Investing. I’ll be talking about this and many other
common sense investing topics in this series, so subscribe and click the bell for updates. I’d also love to hear from you as to what
topics you’d like me to cover.

Seoul, Tokyo to hold working-level talks over wartime history and trade


South Korea in Japan will hold
working-level talks in Seoul today on their month-long diplomatic route over
wartime history and trade Seoul’s Director General for Asia and Pacific
affairs kim jong han will meet with his japanese counterpart this afternoon it’s
the first such talks between the two sides since mid November of last year
the route between South Korea and Japan began as Tokyo slammed South Korean
supreme court rulings that ordered Japanese firms to compensate Korean
victims of Japan’s wartime forced labor according to Japanese broadcaster NHK
the two officials will also exchange information on the corona virus outbreak

Stock Market and Political Predictions for 2020 (w/ Jason Trennert & Vincent Catalano)


VINCENT CATALANO: Jason, welcome to Real Vision. JASON TRENNERT: Thank you for having me. VINCENT CATALANO: Tell us a little bit about
Strategas, besides the fact of the name, and get into the definition that came from it,
Strategas is what? JASON TRENNERT: Yeah, so Strategas. We’re a research firm that focuses on macro-economic
research, economics, policy, technical analysis, fixed income strategy, and it’s also a broker
dealer. In addition to research analysts, we also
have sales traders, and institutional salesman. Basically what we do is we write reports on
these big picture things. We publish them and then we travel around
the country and the world to tell institutional investors what we’re thinking. VINCENT CATALANO: That’s fantastic. You are, your role is? JASON TRENNERT: I’m the chairman of the company
and also the chief investment strategist. I mainly focused on the equity markets, but
try to also pull everything together. VINCENT CATALANO: One of the founders? JASON TRENNERT: One of the founders, that’s
right. I started in 2006. I had worked at Heiman for about 15 years
at a place called ISI Group from ’91 to 2006. Then my partners Nick Bohnsack, and Don Rissmiller,
they joined me and we started Strategas in 2006. VINCENT CATALANO: That’s fabulous. Want to start off talking about the markets,
overall, the equity markets. One of the things that stood out to me and
key reason to discuss with you today is earlier in this year on CNBC, one of the hosts there
was pressing you and Rich Bernstein. Where’s the market going to go? What’s the price going to be at? Where are we going to end up? That thing and Rich deferred, demurred. You said, “All right, I’ll give you a–“,
and you gave a number. The number was, I think for the S&P, which
was at the time around 2600 or something like that, you said in the neighborhood of like,
3000. In fact, you gave a specific number, 3005. JASON TRENNERT: Yeah. Oh, wow. That implies a certain expertise I don’t have
but at least I was bullish, at least that was on the right direction. VINCENT CATALANO: No, right direction. Yeah, definitely on the amplitude of the low
was pretty close to it. Here we are coming to the end of 2019, where
do you see the equity markets today? Valuation was tough before and more so now. JASON TRENNERT: The hard part now is the market
is not cheap by any normal standard. I don’t also think it’s particularly expensive
given where interest rates and inflation are. We’re using, just to use round numbers, about
$175 for S&P 500 operating earnings. If you put an 18 multiple on that, which I
think is fair, given where again 10-year Treasury yields and inflation is, it would tell you
the market right now is fully valued, but not overvalued. VINCENT CATALANO: Not Cape like overvalued. JASON TRENNERT: Not Cape like overvalued. I’m not sure I’m a big fan of Cape, frankly,
especially with interest rates this low to begin with. We were talking this morning in our– we have
morning meeting every morning at 7:30 where we all get together and we discuss the market’s
direction and what’s happening. Our view is largely that if we’re going to
be wrong on the market, it’s likely that the market’s going to continue to strengthen more
than people think that markets rarely stop at fair value. They tend to get overvalued before bull markets
end, and even though– again, it’s pretty fully valued right now, with the Fed on hold
for most of next year, it’s certainly hard to be short, it would be my view. VINCENT CATALANO: Earning’s looking pretty
good going into next year, at least the next 12 months. In any event, interest rates being low. That suggests to me that you guys use something
along the lines of a discounted cash flow model for value. JASON TRENNERT: Yeah, we do the earnings on
a bottom up basis, really from a sector level so that not bottom up all 500 S&P 500 companies,
but we do it sector by sector and we build it up from there and come up with an earnings
estimate for the year. Then we use a variety of econometric models
to forecast the multiple. Frankly, right now, the models spit out what
I would say was almost socially unacceptable numbers of 20 or 21, or 22 times earnings
just because you have secularly low interest rates and inflation. Probably we don’t want to bite on that too
much because generally speaking, it’s hard to get a multiple more than 19 or 20 on a
sustainable basis but by the same token, 18, or 19, is perfectly reasonable. Again, we’d rather be a little cautious and
be wrong by market moving up the other way as opposed to being too galosh and have the
market call the wrong way. VINCENT CATALANO: At an 18 multiple, that
sounds a little bit like the rule of 20. JASON TRENNERT: Yeah, that’s a fair– the
rule of 20 was created by my old boss, Jim Maltz and he had found over time, over a long
period of time, that if you added up the multiple of the S&P 500 and inflation, that on average,
the sum of those two items equal 20, over long periods of time. We have very sophisticated models that look
at all sorts of things. Then we have the rule of 20, and I’d have
to say that the rule 20 is just as good as some of the very sophisticated econometric
models. They’re largely getting at the same thing,
which is largely the idea that when you’re discounted cash flows by lower interest rates,
the net present value is quite a bit higher. That’s largely what it’s getting to. VINCENT CATALANO: Now, you referenced the
Fed and low interest rates and all, where do you see rates going into the next year,
which is a big factor all the way around economically in the financial market? JASON TRENNERT: Yeah. Well, short rates in my view are going to
stay in the current range. The Fed just met last week, second week of
December. You’re going to between 1.50 and 1.75, the
Fed has made it pretty clear, too, they’re not going to change until inflation is above
2 and looks like it’s going to stay above 2%. Right now, with inflation about 1.50, little
more than 1.50, that doesn’t seem to be likely anytime soon. I think the Fed is done for next year. Long rates, on the other hand, though, I think
should start to drift higher. Frankly, I think it’s a good thing if they’re
drifting higher because it’s a reflection of real GDP growth, as opposed to inflation. It’s hard to forecast inflation right now,
in my opinion. Our expectation is that a stronger global
economy next year will allow interest rates to move higher, and that actually winds up
being good for S&P 500 operating earnings because a steeper yield curve tends to be
good for financials. VINCENT CATALANO: That yield curve being more
positively sloped is a reflection of an economy, US and worldwide, that’s in better shape? JASON TRENNERT: That’s in better shape. Again, you have decent growth with low inflation. It’s really a Goldilocks type scenario. I think, again, next year is an election year,
too, as if we can’t forget, but the Fed probably doesn’t want to be too involved, wants to
be less involved than it has been over the last few years, probably doesn’t want to get
the president involved. They don’t need to. Again, they’re in a position now where inflation
is so tamed that I don’t think they have to worry too much about inflation getting away
from them, running away from them, and they can take their time with the next move. VINCENT CATALANO: Tell us about the political
scene because you guys covered that as well. Dan Clifton. JASON TRENNERT: Yep. Daniel Clifton. VINCENT CATALANO: Down there in Washington
and what’s your firm’s perspective on that? Implications economically and implications
for the market? JASON TRENNERT: Yeah, we’ve been in– and
I was saying before, we’ve had plenty of bad calls, but one of the good calls we’ve had
was on this idea of populism being something that can last. We were pretty early on in taking Donald Trump
seriously as a presidential candidate, pretty early on taking Brexit seriously as a potential
outcome. We’re still very much of the view that populism
is an enduring political theme. One thing I feel strongly about is that whoever
next president is, it will be a populist. The question is, is it the right of center
populace that’s in the presidency now, or is it a left of center populist, like a Bernie
Sanders or Elizabeth Warren? I think the days of– for the time being,
the days of having an establishment candidate are probably pretty unlikely, in my opinion,
and I think that it’s largely reflective of concerns that everyday people have that are
not largely and they have not really been met by the orthodoxy of the bigger parties. VINCENT CATALANO: That argues against someone
like a Joe Biden. JASON TRENNERT: Like a Joe Biden, in my opinion,
he may very well win the nomination but I think if he ran against Donald Trump, he might
have a decent chance of beating him but I think Donald Trump would win. Listen, incumbents have a hard time losing
anyway. Incumbents particularly have a hard time losing
when the economy is as strong as it is now. Now, there’s 10 months in– VINCENT CATALANO:
In any number of events. JASON TRENNERT: 10 months is an eternity,
especially these days in a 24-hour news cycle. Our best guess is that the status quo will
prevail, which is to say that Donald Trump will be reelected, that the Democrats will
keep hold of the house and the Republicans will keep control of the Senate. In our opinion, that’s the most likely outcome. By the same token, it’s pretty a 50/50 country,
and anything could happen but economy, in my opinion, will be the single most important
factor in terms of who gets elected next. VINCENT CATALANO: It’d be interesting to see
what the consequences of that would be worldwide. JASON TRENNERT: Donald Trump being reelected? VINCENT CATALANO: That’s correct. In other words, 2016 wasn’t an aberration,
it is what is. JASON TRENNERT: Yeah. My opinion, Brexit, what’s happening in Italy,
what’s happening in a lot of the regional elections in Europe I think give you a pretty
strong indication that 2016 wasn’t an aberration, that there are a lot of secular pieties on
both the left and the right that have been followed by the establishment candidates,
by establishment parties, that average people are saying this just doesn’t work for us. You could go through whether it’s free trade
with a country that’s not really interested in free trade, like China or open borders
or formal Care Act or wars, endless wars and all these sorts of things average people were
starting to question and they want something different. VINCENT CATALANO: Do you think that the, in
the US, the Democrats basically with their embrace of let’s call it the coastal elites,
so to speak, and in particular, Wall Street and Silicon Valley, do you think that that
is a dynamic that’s there that the democrats are missing? JASON TRENNERT: That’s my opinion. I grew up in– both my parents were Democrats
and I was a Democrat for a while, but it was very different party at that point, it was
largely for working men, working women. It was largely anti-communist, if you had
a strong religious faith, you didn’t feel that you were necessarily excluded. The party has changed a lot now and we could
debate those things, but I could say there’s a lot of people who have those opinions now
that might not feel that at home in the Democratic Party, and I think that’s one of the issues. I think that’s part of the why Donald Trump
won, he recognized that and recognized that there are certain longing for something. That’s why I think Joe Biden would probably
have the best chance of beating Donald Trump because I think he has that every man type
of feel. I think he would have a better shot at winning
than either Sanders or Warren. VINCENT CATALANO: How do you blend longer
term trends and themes with shorter term business cycle related issues? How do you mesh the two together? Because I get a sense that you do that you
do look at both. How do you develop that into an investment
methodology? JASON TRENNERT: Yeah. Well, that’s a great question. Because it is a constant struggle, and it’s
mainly because our clients are professional investors so to be frank, the main thing we’re
trying to get first is the next six to 12 months, just trying to make sure our clients
stay employed. Then in turn, keep us employed, because one
of the hard parts about the investment business, particularly when it comes to stocks and stocks
are the longest duration assets you can get really, maybe aside from real estate. Yet most people who manage stocks are managed
at best, or evaluated on a once a year basis. Then some hedge funds are evaluated on a monthly
basis. It’s an almost impossible task for the professional
investor today, in my opinion, that they again have our trading at very long duration assets
and yet, they’re held of this very short term standard. We try to give the longer term themes and
we publish separate reports on the longer term themes once every quarter, where we try
to give people say these are big, long term things to think about whether it might be
populism or whether it might be the convergence between the public and private equity markets
or very, very long term ideas. We publish those on a quarterly basis to make
sure people know what we’re thinking about those things but we also publish every day
about what’s happening every day and what we think is the most likely outcome on a shorter
to intermediate timeframe. VINCENT CATALANO: See, I think that that’s
one of the great value propositions of Strategas, is the fact that you do reconcile the long
term framework, so to speak, with the short term practical elements of it. What you said before about professional investors
that they’re judged on a shorter term basis, they’re in long duration assets, for the most
part, judged on a short term basis in many cases. Which is a difficult balancing act to do and
the thing I’ve always been struck by is that Strategas, my sense is that you guys have
your ear to that ground better than pretty much anybody. JASON TRENNERT: Well, that’s a very nice thing
to say. It’s actually, in my opinion, is one of the
great compliments you could give our firm. I think if we do that well, it’s largely because
we– for better or worse, we travel all the time meaning I’d say for worse because I have
to go through TSA or the airport. For better, once you get to wherever you’re
going– which I travel 70, 75 days a year and will be in everywhere from- – being everywhere
from Des Moines to London to Singapore and balance. My partners travel more than I do if you can
believe it, they’re a little younger than I am. The bad thing about that is time away from
your family and it’s not easy physically. The good thing though is that you meet a lot
of different types of investors and not just hedge funds here in New York. You also meet mutual fund managers in Boston
and state pension plans and the middle part of the country and then you might deal with
a big bank in Europe or big public pension plan in Australia, those types of things. You have a good idea of where people are positioned
and how people are thinking and it keeps your mind fresh too, because you’re not just talking
to each other, which is one of the biggest, let’s say one of the biggest risk in the investment
businesses, you just spent a lot of time talking to other people that have the same idea as
you do, or the same similar backgrounds or similar circumstances. VINCENT CATALANO: How do you factor that into,
or do you not factor that into your estimates of where the financial markets will be? That dynamic of what they’re thinking etc. JASON TRENNERT: Yeah, I wouldn’t say it’s
not, certainly not. There’s no mathematical way we do it, but
we do meet every day as a firm. We have a morning meeting, as I said, at 7:30
every morning and we share all the time what we’re hearing from the road, and the questions
that were being asked by investors and that the questions that were being asked by professional
investors inform a lot of our written work because again, if you spend a couple of days
on the road, let’s say in Texas, you’ll find that you’ll get the same two or three questions
in almost every meeting or something that’s on people’s minds. That will be the basis for the next report,
we say we should look into– we might not know the answer, well, likely not know the
answer. Then we’ll do the research and we’ll say this
is actually what happens. This is how long it takes between the first
Fed easing and the next Fed tightening on average, how long does that take? A lot of things along those lines, what happens
when the dollar strengthens or when the dollar weakens as it relates to earnings or sector
weightings or things along those lines? VINCENT CATALANO: That then gets fed back
into the decision process? JASON TRENNERT: Exactly. VINCENT CATALANO: What happens if you had
a view, a consensus view, let’s call it out there, of professional investors, some of
which may carry more weight than others in your mind in terms of their insights and their
views? If that is in conflict, let’s say, with the
fundamental valuation work that you’ve done with maybe the technical market intelligence
that’s there, what happens with that? Does that tilt, you say, oh, well, we believe
this but this element here is a dynamic? JASON TRENNERT: Well, I have to say as always,
as a basis for all the things we do I have to say is, it’s long enough to know that you
have to be humble in this business because it’s a very humbling business. We’re never– I would say the style of the
firm is decidedly never to pound the table on anything. We are always thinking about ways when we
put on any new call. Before we put it on, we think about how we
might be wrong and what would cause us to change our mind before the trade is put on
or before the idea is established because it becomes important because you want to be
able to recognize when you’re wrong quickly as opposed to just trying to paper over it
or make other excuses for it. Our clients, mercifully, our clients give
us a lot of benefit for showing our work. Like as long as it’s well thought out and
well-reasoned, our clients cut us wide slack when we’re wrong. Again, we try to have this discipline of when
we are wrong, admitting it quickly and moving on and getting onto something where we might
have an edge. VINCENT CATALANO: That comment reminds me
of something that Byron Wien of Morgan Stanley, one said at a CFA market forecast event that
I did, when he was asked the question why are we doing this forecast for the year ahead? He said, it’s not the specific forecast for
the number, it’s the process that you put into it in understanding. That sounds like what you just said. JASON TRENNERT: I think that’s right. I think Wall Street or in the investment business,
it can be sometimes when people are not involved in the business, it can seem rather dry or
very uncreative. Yet I think the investment business in many
ways is more and more intellectually stimulating businesses there can be because virtually,
everything can have an investment implications. It can be very creative business in its own
way. If you’re a news junkie like I am, you spend
a lot of time learning about all sorts of different things, not just political events,
but scientific events or social movements, all of those things can go into higher thinking. It’s important. I view it that way, something where you’re
constantly learning and trying to test your thesis and all the rest. VINCENT CATALANO: Social Science with money. JASON TRENNERT: Yeah. I think the problems– it is a social science,
and the problems in the financial markets come when people try to make it a hard science
I find. That’s when people like long term capital
trying to make it a hard science, people that packaged mortgage backed securities and credit
default swaps, they try to make it a hard science like you put a little bit of a beaker
A and a beaker B and it equals beaker C, all the time. The thing is when you’re dealing with human
beings, it doesn’t work that way. That’s one of the things I have to say worries
me a little bit about this Fed. I feel more confident in the past Fed, Bernanke
Fed and the Yellen Fed, like I worry quite a bit that they viewed their role as really
almost as chemists, or hard scientists, where, if you do enough of one thing, it will always
turn out the way you expect it and it just doesn’t. When you’re dealing with human beings, of
course, it doesn’t work that way. VINCENT CATALANO: I want to get to a couple
of actionable items and areas that your friend was looking at. Before we do, I’d like to get your views on
private equity. Quite a bit of money is going in that direction. Institutional investors are shifting money
more so than at any point in the past into private equity. First, what’s your view in general of private
equity as an investment vehicle alternative? Then secondly, I’d like to get your thoughts
on what you think the motivating factor might be for institutional investors going into
private equity that might include the whole issue of required rates of return, and not
being able to hit it when you have interest rates at 2% and 3% and you got mark to market
with that, and then you have private equity that’s [indiscernible] your thoughts on private
equity. JASON TRENNERT: Well, I have to say in terms
of just being frank about it, we have no private equity clients. Consider the source. All of my clients are public equity or public
market clients. I want to be fair, or just tell you where
my biases might lie, but I’m very skeptical about private equity, the future returns of
private equity being anything like what they were in the past. David Swensen really put private equity on
the map in terms of an institutional asset class. What he discovered was that there was a discount
for illiquid private companies, or that there was a liquidity premium for publicly traded
companies. He said, I can buy these assets, and I can
buy them in the private markets at a discount and eventually, they’ll either be public and
so on, I’ll make a lot of money. That made a lot of sense. He made a lot of money doing it, but of course,
he was the first person to do it. Now, you’re 25 years removed from when David
Swensen really started doing that and there are now 7000 private equity funds that have
about $3 trillion in assets. In my opinion you’re running out of– and
valuations, in my opinion, are not cheap anymore. I would argue that there’s actually an illiquidity
premium now over the public markets. Part of this and this gets into your second
question, which is why are people throwing so much money there? Frankly I think people are chasing performance
and I would also say that there’s an opacity of the private markets that is very appealing
if you don’t want to be embarrassed or fired. Not to be overly cynical about it, but your
average public pension plan has an investment return assumption of 7.50%. Very hard to do that when 10-year Treasury
yields are below 2% and the long term average returns of public equities are 7, pretty hard
to get to 7.50. The only way you can really get that is through
leverage. That’s what private equity provides. It also though, it provides the best leverage
because it moves much more slowly, the marks move much more slowly and so you’re more unlikely
to be embarrassed again or fired by having very outsized allocations to private equity. VINCENT CATALANO: That aspect that, you brought
this up several time now, that aspect is I think really underappreciated by many investors. That dynamic of the potential of career suicide,
of getting fired, it’s almost as though– okay, I’ve refrained from saying this or making
this connection but it’s just such a fun thing I think to do, CFA equal CYA. JASON TRENNERT: Yeah. Well, listen, I think all of us and no matter
what line of work we’re in, job number one is keeping your job. I think that we’re just human beings. We’re all part of the same hypocrisies. You have to just recognize that and try to
use it to your advantage and it doesn’t mean that people were all– no, it doesn’t mean
you’re bad people or– VINCENT CATALANO: No nefarious reasons. JASON TRENNERT: There’s no nefarious reasons
but there is a reality of the institutional investment business which, again, is as career
as a central part of it. Just like anyone else in any other profession
has the same tensions, that this just happens to be with other people’s money that tells
they’re different. VINCENT CATALANO: That’s a great, great point. Last item, actionable ideas. Sector coping style investing, asset allocation. Give us some thoughts on Strategas as you
where I might want to be for 2020. We had Rich Bernstein on the program here
a couple of months ago and late cycle investing was his thing that he was emphasizing, your
thoughts on where we’re at and where we ought to be as investors? JASON TRENNERT: Yeah, I would say in that
regard, we have a little bit of a different view than Rich and that I’m not convinced
where his late cycle as it might seem, I know the business expansion is 10 years old. It might seem late, but I also think that
the real Fed Funds Rate is zero. Usually what ends recoveries is the Fed killing
it. Inflation rises where the Fed killing it and
here because of financial repression, you’re pretty far away from that. What we’re telling our clients to do is to
get more cyclical. We’ve told them to really get more, we told
them to buy financials, we’re overweight four sectors, financials, industrials, technology
and telecom. We’re of the view that actually next year,
the global economy will pick up. That’s largely because a lot of the trade
tensions will largely be behind us, at least as far as it relates to business confidence. In my opinion, the trade war, in some ways,
it’s sterilized some of the benefits of the tax cut that you got at the end of 2017. That was good for capital spending for a year
but then it faded because businesses got scared because of trade. If trade is behind us, there is a chance that
business confidence picks up, capital spending picks up and also global economic activity
picks up and that should be good for those sectors. VINCENT CATALANO: Anything in terms of the–
any thoughts in terms of the global markets, emerging markets, frontier, Europe? JASON TRENNERT: Europe in my opinion is probably
as a trade, as more of a trade or a tactical approach let’s say for a year, six months
to a year as opposed to secular, I like you’re up quite a bit because in some ways, I tend
to think it almost got hurt the most between the tensions between China and the US just
because it’s so trade oriented, it’s so geared towards trade, it should benefit the most
if global growth starts to pick up. The question will be longer term, whether
Europe makes the structural changes it needs to pave the way for long lasting growth, but
for next year, at least in my opinion, Europe looks quite good. VINCENT CATALANO: That’s terrific. Thanks so much, Jason. JASON TRENNERT: Thank you. I appreciate it. VINCENT CATALANO: All the best in the year
ahead. JASON TRENNERT: Thank you. Thanks a lot. Thanks for having me. Appreciate it.

Richard Wolff Debunks the Myth of Higher Hourly Pay


I decided to take a look at hourly pay,
the average pay per hour that most Americans who are on a wage system get.
Back in 1973 is when I started. That’s a long time ago, friend,
almost half a century. The average wage in this country was $4.03 an hour.
Okay. So, I did a little calculation that we economists do.
And I said, let’s take a look at what you could get for $4.03 an hour
in 1973 and adjust it to 2018, the last year that we have numbers
for. And I adjusted. How much money would you need per hour in 2018 to be able to
buy the same bundle of goods that you could buy for $4.03 in 1973.
And I came up with the answer. You’d need today an average (ready?) of $23.68 an hour.
That would be the average wage you’d need for a worker to be able
to buy, on average, as much today as he or she could in 1973. $23.68.
Well what is the average wage of the United States in
2018? You needed $23.68 to be at the same place you were fifty years ago. You know
what the average is today? $22.65. That’s right. The average wage in America today, in
terms of what it can buy, is less than what it was 50 years ago. So if you’re
feeling pinched, if you’re feeling your economic situation is difficult, if
you’ve had to adjust your family because living on one person’s wage simply will
not give you a decent lifestyle, so that your wife, or your elderly parents, or
your children have got to go to work now too, you’re right. You’re
living what has happened. But it’s even worse because over the last 50
years that the real wage of what you could buy with your income has gone
nowhere (actually gone down a bit), over that time your productivity (that’s what
your labour adds per hour to what your employer produces and sells) that’s gone
up somewhere in the neighborhood of, somewhere between 25 and 35 percent. So
let’s be real clear. Productivity, your output, what your brains and muscles add
to your employers materials goods and services to sell, that’s gone steadily up.
Productivity measures what you the worker give to your employer, by means of
your work. Wages are what the employer gives you for your work. So let’s review
what the employer has been giving you for the last 50 years has gone nowhere.
But what you give to the employer has zoomed up by a third. That’s why there’s
a gap between rich and poor in the United States. Working people, their
incomes have gone nowhere. But the employer class, a small minority in this
country, has made out like the bandits that capitalism makes them be.

Paul Krugman Explains Why Cutting Taxes for the Wealthy Doesn’t Work


-I have to ask you this. As an economist, I imagine
people all the time — friends, family —
ask you to give them investment advice, ask you
to predict the future. -Yeah.
-Yeah. And what do you tell them
when they ask you that? -I tell them I don’t know, and nobody else knows either.
[ Laughter ] -And you have a Nobel Prize
for this, and yet, that is the basis of it.
-Yeah. -Yeah.
-Most of the time, it’s — you know, it’s
just not that easy, right? -What is it about economics that makes it so hard
to predict? -Okay, first of all,
think about weather. Weather prediction is,
you know, so-so because it’s an incredibly
complex system, but at least it’s physics.
-Right. -And economics is all of that
plus it’s about people. So it’s just —
it’s just inherently — most of the time —
you know, once in a while, we can see something
that’s really clear, i.e. housing bubble. Okay, that was crazy, and something bad was going to
happen when it burst. But most of the time,
it’s this enormous system. You know, there’s a rule,
everything in the economy affects everything else
in at least two ways. And so, being able to tell you
whether GDP growth will be 1.5 or 2.5 percent
next year, nobody can do that. -The president seems pretty
confident that he can tell you exactly
how it’s going to go. -Uh, yeah. Uh…
[ Laughter ] -We’ll get to him.
We’ll get to him. -We’ll get to him, okay. -So this —
“Arguing with Zombies,” you’ve talked in your columns
over the years about these zombie ideas,
meaning that they are ideas that will not die in regards
to economics. And the two that keep
coming back are climate change denialism,
and more importantly, cutting taxes for the wealthy. -Yeah, not more importantly
but more commonly. So the big political zombie
in America is the belief that cutting taxes
on the wealthy is magic and will pay for itself. And it has a success rate of
exactly zero after many — but nonetheless, is basically
official doctrine for the Republican Party. -Now this is a situation
where President Trump and the Republican Congress
cut taxes for the wealthy, they went out on television, they told us
it would pay for itself. It has not paid for itself. If anything, the deficit
is ballooning. And yet, it doesn’t seem
as though they will pay any political cost
for this. -Yeah. And that’s a lesson,
I think, for everybody. You know, we’ve had
a long history now, several decades in which
Democrats, when in power, try to be all responsible
and get no credit for it. And Republicans just gleefully
run up huge bills, and I got to say,
maybe, you know, next time there’s
a Democratic president, she or he should be prepared to run some deficits
for a good cause. -Yes. Well, that would be
the difference, right? The idea is that
with progressive ideas, you can run deficits
and actually use that money to pay for things like
social services, as opposed to putting it back
in the pockets of the rich. -Yeah, I mean, think —
Trump has added about $300 billion
a year to the deficit. We can actually put
a fairly precise number on that. Think of what America would
look like if President Obama had been allowed to spend
$300 billion a year on infrastructure, right?
-Yeah. -$300 billion a year. We would be — you know,
we wouldn’t be stuck in that one tunnel under the
Hudson River all the time. -Right.
-And so — And what we’re doing now
is we’re running these big deficits for no —
you know, to basically just to cut taxes
on corporations, and the corporations aren’t
even using the money. They’re just using it
to buy back stock. So the deficits themselves don’t
do a whole lot of harm, but think of what we could be
doing with that money. -Things that would actually
be multi-generations ahead still paying benefits.
-Yeah. I mean, the funny thing, the tax cuts don’t pay
for themselves. Child nutrition, child —
health care for children, those do pay for themselves,
because they lead — in the long run,
they lead to healthier, more productive adults who
end up paying more taxes. So it’s actually —
we’ve got the wrong — you know, we’re doing voodoo
on the wrong front here. -Do you think —
how many billionaires, how many Republicans
in good faith believe this idea that tax cuts will pay
for themselves? -That’s a hard question to
answer because people are really good at double think.
-Yeah. -Right? People manage to
convince themselves, even if something
is patently false, most people don’t manage — most people don’t go around
saying to themselves, you know, twirling
their mustache, and saying, “I’m being evil.” Though I think some of them do. -Yeah, yeah, yeah.
-Mitch McConnell probably does. -I could name five.
Yeah, yeah, yeah. -But the — but the — I think that pretty much
they know — at some level, they know
that it’s false. They have to know
that it’s false. It’s just — there are
no success stories. And so, it’s just — but it’s
tremendously convenient. -Has this — you talk about
how this was something that was very much the case
during the Bush presidency, but it has mutated
into something far more bold than it was then.
-Yeah. I mean — well, you know,
each successive Republican president
magically has managed to make his predecessor look
good in the rearview mirror. So we look now
at the Bush years, and the thing was that Bush — a little business about lying us
into war and that sort of thing, but aside from that,
they were — -It’s just that thing.
Yeah, yeah, yeah. -They were a little —
yeah. They were a little bit careful. They didn’t actually make
outlandish claims about tax cuts paying for themselves. They came up with other
rationales. You know, the government’s
collecting too much money, or we just won a war,
so, great, let’s cut taxes. They weren’t as blatant. So the — the zombification
of the Republican Party has been an ongoing process. And it gets a little bit worse with each successive
administration.