Welcome to 2021 With Barry Ritholtz

and he's also the head of Holts Wealth Management. And I was like, oh, yeah, Barry, we can solve this problem. Let's dr Barry. Barry is great. You can throw anything at him and he's probably has three opinions on it um. And that's exactly the kind of thing we want to do, is just bring up these things we're seeing and just get his take. And he does not have a shortage of takes, and they're usually good and they usually get your thinking. And so you know, it's a good top

of the year guest. And if you are interested in listening to prayer conversations with Barry, We've did a Use Your Disillusion Volume one and two episode a while back, and we basically just went really long on that one. We'll try to keep this one a little shorter though. That was the first and only episode that was two episodes. It was we could not contain Barry into one episode. But this time we're gonna do it right. We're gonna keep keep it to one, aren't we. Yes, we are, well,

we're gonna try our damnedest this time on Trillions. Welcome to the Jungle of with Barry rid holes Berry. Welcome actor Trillions. Well, thanks for having me again. Okay, we got to talk about the fact that this is uh the beginning of a new year with a completely different political landscape than we've had for a bit, which is, you know, a democratic uh sweep. Uh So, So, Barry, what how are you talking to investors and to to

prepare them for this new world? So first off, the data about is so amazing and compelling that I think it's going to, if not influence the incoming Biden administration at the very least, it will look it will confirm their priors. It will it will basically give them license to do what they wanted to do anyway, and the data is this externality hits the market, the economy collapse that it's worst. GDP was probably cut in half. We saw the single biggest drop in the markets, the single

biggest spike unemployment in the shortest period of time. And then Congress that normally can't agree on renaming the library past the first Cares Act. It was what two point one trillion dollars um versus you know, six or seven hundred eight hundred billion for the financial crisis that was doled out over four months for years. This was eight months. And what's amazing is you can really see it in the economic data. So year of a year we saw a one trillion plus increase in the after tax personal

income of Americans compared to the previous year. That's an eight percent gain over like eight or nine months from like March to November, same period versus giant increase. How does that manifest itself? Um savings rates go up. Not only does retail sales go higher, they go above the pre pandemic level. They spiked up, and credit card delinquencies are now at you know, if not all time lows, really close to it. And that's what you know the

old joke. I think it was Warren Buffett who said, give me a trillion dollars, I'll throw you a hell of a party. Um, hey, here's a trillion dollars and they threw a hell of a party. What does that mean going forward? Well, it means that the Biden administration now has carte blanche first for the Cares Act three. Right, we just had a you know, a mini Cares Act, a trillion dollars. They're gonna do another two trillion dollars, part of which is going to include four hundred billion

dollars for the vaccine rollout for the States. Another part of that is going to be a two thousand dollar check for everybody. Um, they'll problem I'm guessing that there'll be a national mask mandate and a temporary lockdown while vaccines go out. And you can't fix the economy until you fix the pandemic. A lot of my friends on the right, um, completely couldn't wrap their head around that. And uh, I think the data absolutely shows that. But it's not just the pandemic. You're gonna see a long

overdue infrastructure bill. I don't know, four billions, four trillion, five trillion, six trillion over a decade. If they were smart, they would fund this with fifty or a hundred year bonds. I don't know how smart these guys are, but that's what I would do. We we may have actually said that exact same thing last time I was on This time,

we're gonna get an infrastructure bill. There's gonna be a green new deal with extended UM tax credits for solar and e vs, and maybe even smart roads with implanted RF devices so self driving cars don't have to rely on, you know, crappy little cameras to see where they're going. They'll know exactly where they're going just a giant rollout. Oh and ps, we're also going to see a massive

expansion of Obamacare. When we added thirty five to forty million people to the role of to the roles of sured the first Obamacare, it had a huge impact on healthcare and hospital and pharmaceuticals and that entire sector, which is a huge chunk of UM retail sales. This time, maybe we had another twenty to twenty five million people similarly going to impact UH, the economy and retail sales. All of those things cares at three. The infrastructure deal

the Green New Deal. The expansion of Obamacare means that we're looking at a massive multi year stimulus, which, as we learned in twenty it turned out that John Maynard Keynes was right, and when demand falls off, it's very easy for the government to replace it by substituting their own spending. For what you would normally see from households

and businesses, there's some offsetting costs. You're gonna see everybody making more than four k is going to see their tap top tax rate pick up a couple of percent. You're gonna the corporate tax rate probably go back towards I don't know if it'll get to tht I'm more interested in the alternative minimum tax for corporations. So if you're an Apple or a Facebook and you're making hundreds of billions or Microsoft, you can't pay like no taxes.

There'll be a twelve percent. Hey, you report your profits to the your shareholders. That's what we're gonna attack you on. So that's the that's gonna be the trade offs we'll see. So you just laid out a lot of spending, a lot of stimulus. That's your vision of the future. It's very it's very clear, How do you shift portfolios or or do you not? You just know all this and know that that's why you're in you know, the Vanguard Total Market Fund and you know whatever else? Or do

you tweak things? Do you add an infrastructure e t F onto it or a clean energy e t F. Those have been seeing some flows. No. So basically the big philosophy we try and share with our clients and investors is this, there's a lot of noise, there's a lot of cross currents. You should leave I I wasn't exaggerating when I said own a globally diversified portfolio of low cost ETFs. Hey, maybe I'll add rebalance once a year and then leave it the hell alone. But were

you mentioned the behavioral side. How do you train people to leave it the hell alone? Well, you give them a data based explanation of what's going on in the world, so they're comfortable with leaving it alone. Because when things don't make sense, they want to sell. When when there are cross currents and there's confusion and there's noise, hey

I don't really understand this, Maybe I should sell. And you know, one of the most popular pieces I wrote for Bloomberg opinion this year was explaining why, hey, maybe mr market isn't so rational after all. And we looked at all the components of the SMP five hundred index to figure out to answer the question that we got over and over from clients. This market doesn't make sense. I look around, the economy isn't going to hell? How can the stock market keep going up? There's something wrong here.

And when you look around at at why the economy looks like how well your local dry cleaner is doing a third of the business, they were all the little restaurants are closing, the bars are closing, the retailers. Even the gas station isn't doing well. Gases like a buck nineties, so everything is so cheap. Their personal experience is the economy is terrible, but that's not what drives the market. When we look at we took apart to the SMP five index and found top ten names are sent of

the index. And these are companies that are a global They get most of them get half of more of their business from overseas, where they admittedly did a much better job than we in America did managing the pandemic, and be they're perfectly set up for the work from home environment. So Apple, Microsoft, Amazon, Netflix, go go down the list of all those giant companies that are doing great. Hey, the pandemic went for another ten years, they would be fine.

They don't care. But when you look at what's doing really poorly, it's travel and hotels, and you know, your most people's personal economic experience is not very well reflected in the SMP five hundred, and in fact the number that blows people away. Take the thirty worst industrial sectors um, thirty words sectors in the SMP five, the little sub industry groups and just throw them away, send them all to zero. It takes two off of the SMP five hundred.

So it when you could explain to clients, hey, it may seem that the market is irrational, but your personal economic situation and what you're seeing around you is very very um not publicly traded, it's very private, and so therefore it's actually rational that the global, profitable, big cap companies that are working um taking advantage of working from home, are doing really well and therefore leave your damn portfolio alone. Okay, so if I if I leave my portfolio alone, I'm

still living in a world that has gigantic infusions of cash. Yeah, stimulus, stimulus coming fed doing what it's gonna do. How concerned about you know this bubblicious environment? Are you so? Having been a trader and lived through the nineties and two thousand, um, this isn't this, this is this is still a fraction of that, right, I remember when you would buy something and that would go up there. Every sale was punished immediately.

It was it was just hey, from from I remember, it was from my birthday in October untill the top in March from the nasdack doubled. Right, we had the best year in in a decade. The Nasdaq was up forty So it's still not not even anywhere close to that. And by the way, most of those companies that are doing really well have giant revenues and giant cash on the balance sheets and huge profits. That said, there are all sorts of pockets of speculation. UM Bitcoin probably the

poster child speculation. Uh, someone smarter than me can explain what it's fundamental intrinsic value is. Um. I like to tell people the intrinsic value of a dollar is that we it's are all. I'll admit it's a delusion it's a collective delusion that a dollar has value. Plus it's with Uncle Sam demands you pay your taxes in and they have a standing army to enforce it. So it's more than just an abstract thing. Bitcoin has become an

asset to speculate with um. The spacks clearly have gone, you know, berserk And what was the thing Elon Musk mentioned the other day? And the wrong company you know went up fift These are all anecdotes, but you know you see enough of them. Oh and did I mention Tesla? Testlas looks a little bubblicious. I don't want to short it yet, but I'm interested in it. I mean, the trader in me says there's a there's some money to

be made on the downside there. I've just watched too many people carry down on their shields to want to step into that fray just yet. I don't want to. I don't want to go deep on bitcoin. But do you own any crypto? No? None. And by the way, when clients come to me and say I want to buy some crypto, it's like, all right, go buy some crypto. I don't care. I'm not gonna tell you not to. Just don't mortgage the house and leverage up with crypto,

because he'll knows I was. I was just gonna end I could tell you where equities will be a hundred years from now, more or less. I have no idea what crypto will be. Where will equities being in a hundred years from now higher? That's not a hard bet to make, right And if it's not higher, we have you have to worry about clean water and air at that point, right right, Well, you know a lot of advisors are talking about working in crypto to the portfolio.

You see institutions getting into it. Is there any thought that you might lose or upset clients if if it's not part of the ritolds portfolio. You know, some of the basic rules of investing are know what you are own, know what it's worth, and understand how it fits into a diversified portfolio. And if someone wants to take you know, five percent two of their liquid net worth and by bitcoin, um I would tell them two things. Write your password down and put it in your bank vault. Because what

what is it? Something like twenty of bitcoin value has been lost? That stop and think about that just for a second. A fifth to a quarter of the value of bitcoin is lost behind forgotten passwords or lost thumb drives, So to me, that's not necessarily a Hopefully institutions will be able to solve that. Maybe maybe Fidelity or somebody else that is moving into that space will do it. But that's kind of a warning. The other thing is, you know, until you understand what it is, what it does,

and what it's you know purpose. I like the explanation that it's a solution in search of a problem, but none of that matters. If someone says to me, hey, I want to own two or three percent of bitcoin, great, we'll set up a side pocket for you, you you know, a separate account. We won't charge you on it, and it'll be here, and anytime you want to sell it or buy more, you can do it. Just understand, assume it goes to zero. That's how much you should put

into it, enough that it doesn't change your lifestyle. And if it goes to a million, hey god bless Tesla. Okay, we were looking at some numbers in my team and there's some mind blowing stuff. Besides the price jump. Obviously that's been parabolic. The volume in tesla um so for twenty years, not nothing traded more than Spy. I think Apple did on one days. Now, yeah, Tesla has now traded more than Spy for twenty six out of less twenty days, and in the past month it's traded a

trillion dollars. UM, what's going on here? Have you have you ever seen anything like this? Is this the retail investor? Um? What do you think will happen to Tesla? If we were to you know, timestamp now and look back and we're you know, we're five years down the road, what call would you make? Where will Tesla be? And just give me your general wide take on Tesla? So so I have a hard time. UM. You know, you need

a certain distance from things to be objective. If you're too far away, you don't understand anything about it, And if you're too close, you know too much and it's hard to see it. You guys know, I'm a car guy, and while I'm both fascinated and intrigued by Tesla, the automobile, Tesla, the company has not shown itself to be UM a great automobile manufacturer. They are interesting cars with great technologies,

but terrible manufacturing. UM. And I understand why Tesla didn't hook up with Ford or Toyota to manufacturer that the US, But I don't know how long their lead is going to stay. Keep them in the lead. So, uh, the number of cars that are coming out of kind of fascinating, the the initial ones. Everybody is following here. First off, before we go into the details, Tesla one like hold hold aside the company the stock. Elon Musk changed the

paradigm of automobiles for the right reason. Hey, uh, internal combustion engines and and carbon based transportation is destroying the planet and just impacting the them the climate. And so therefore I'm going to introduce this electric car and everybody better come along. We're gonna You're gonna be left behind. And the rest of the car industry said, we're not gonna let Musk do to us what Bezos did to retail, and Bezos did to cloud computing, and Bezos did to

go down the list. So the paradigm has shifted. Elon Musk has won the internal combustion versus electric car debate. Now that he's won that, he has created a massive amount of future competition for himself. So the Porsche take Can Turbo comes out and it's spectacular. It's much better than anything out of Tesla, except it's a hundred and

eighty six thousand dollars. It's it's a high end luxury, very fast forward four seat e V. The question is, can somebody come out and make a product that's competitive with the Tesla UM with either the Model three UM or or them the model uh at? Why? Or go down the list? And we now have an answer. The new Ford Mustang Maki is every bit as good as anything from Tesla. It the reviews are spectacular. Everybody seems to love it. The one thing people don't like is

the name Mustang. But you know, get over yourself. And the argument now is, and I have this argument with some mutual friends, Dave not Agan. I argue about this all the time. You seem to think Tesla is a car company. Their genius is the network of super fast charging stations. Dave range anxiety was has always been nonsense of all trips in a car are within you know,

fifty miles of the home. And if you're gonna take any electric car and along the trip, well you may have to do a little more planning in the Mustang than the Tesla. But you know, so what and PS, there's still a bajillion gasoline cars around, so this isn't gonna be a problem. By the time the gasoline cars go away. I don't know if it will be some consortium a ford in Toyota and Volkswagen will have the charging network equal to Tesla's. Maybe the government rolls went out.

Maybe a bunch of manufacturers agree in a standard and they all use it interoperably. But I don't think that's worth the massive premium that Tesla is getting. And PS, there are startups like the Lucid Air is a spectacular car. Um uh, the I'm gonna get the name wrong, the Bolinger Bodinger, the suv and the pickup truck really interesting. PS. The the GM Electric Hummer, Oh my god, that that's a spectacular vehicle. So elon Muskwaden. We're all going electric.

And it's a matter of time before it becomes clear that Tesla is not going to have a market share of the electric market. Um and so at a certain point, and and this is the difference between a company and a stock. And this is why I have no interest in shorting Tesla yet um the stock looks fantastic. Think the companies on fire. It's just going higher and higher. It's a great story. The narrative behind it is just

kicking everything else's ass. Eventually that'll probably come to an end, and at a certain point the downside in Tesla is going to be a great trade. But I don't think we're there yet. We're maybe we're closer than further. I don't know, but you know the three bullet points elon musk one. Everybody's going e V. Tesla stock is on fire. Anybody who shorts this is killing themselves. But one day they'll say, oh, I wish I had a few pennies left to still short this. It's a shame I went

broke in. Can I give you a fourth bullet point? Cathy Wood might be even hotter than Tesla. So I don't want to disc Cathy because I think she built something spectacular. I um, I watched from a distance that entire arc of her minority shareholder exercising the right to buy that forced her to buy him out. Now, I don't know if she goes on to be a hundred billion or a trillion dollar company. I kind of think that she may have top picked herself. When so, when

you see someone who's had just an amazing ride. I mean, what was it six years ago? They were a hundred million, two hundred million. That's when they went to Reliance as their marketer. And there, this and that, and nobody expected her to blow up to be a fifty billion dollar company. But she just bought them out with a note at some ungodly price. It's undisclosed. I don't know if it's fifty million, a hundred million. It's kind of weird. It reminds me so God bless her for kicking ass. I

hope the farm goes to a hundred billion dollars. But when we look back in hindsight and say, hey, Cathy would financed a hundred million dollar buy out of her firm after they raised fifty billion dollars and after a hundred and sixty percent raise, we may look back at that and say she is like the mutual fund buyers that managed to top tick the hot funds, she may have top ticked herself. I hope that doesn't happen. I

hope the fund does great. Um. I find her research and her approach fascinating, but it would really make for an ironic ending to that story. And like as an advisor. You guys don't touch anything like that, anything that's highly concentrated, you know, because we do talk about this idea of a Barbell portfolio very low cost passive and then you

you know, put some hot sauce on top. And you know, because the middle those middle closet indexing active managers seem like it's just they're not nobody's interested in that anymore. They want either cheap beta or shiny objects, right right, Well, well, the you know, the closet indexers, what's the point. Come for the high fees, stay for the under performance. It

does nothing for you. So so if you're gonna be pretty um, if you're gonna be pretty beta, and maybe you have a lean towards value or small cap or whatever.

To me, the more interesting aspect of the concentrated positions is not us putting clients into a concentrated position, but a client coming to us and saying, hey, I'm a sea level executive at fill in the blank Exo, Mobile, Amazon, Google, Apple, It doesn't matter, and while I love your concept of a diversified portfolio, I don't want any more exposure to fill in the blank, technology, energy, whatever it is. And so That's one of the reasons we've been embracing UM

for those sort of clients. Direct indexing. We work with O'Shaughnessy's product called Canvas, and we have about two million dollars in that product and basically what and we with one of the beta testers with them and and just

really blown away with how good the technology is. Basically, we could take our core portfolios of you know, fifteen mutual funds and give it to them and say replicate these with all individual stocks and they run the holdings through their their software and they say, here's stocks that look exactly like your seventy thirty portfolio UM. And then we get to say, okay, separate from this five million dollars.

This client has ten million dollars in Apple UM employee stock options and another two million dollars in Apple stock that he can't sell. So a, let's tune out Apple from his holdings and be what else trades very much like Apple that he doesn't need more exposure to, And then we tune that out and so they get a diversified portfolio without all of the hyper concentration that they come to us. There's a couple of other things This software does. The E s G aspect of it is

mind blowing. How specifically you can tune out different things, whether it's gun manufacturers, or reduce the exposure to companies that never have had a woman on their board of directors, like you can really fine tune this. The software really is just amazing and it's it's one of the better E s G projects products I've I've ever seen. Okay, a couple of questions on this, So customer dexting and director next to get something we've been tracking UM Parametric

custom Core is the big one. It didn't really see much in flows last year. You guys are definitely tip of the spear type advisors. But it's I the E T F and Vanguard and a couple. You can get a whole portfolio for four basis points and you're not making active bets, so there's no chance you're gonna underperform because as you are the market, you're gonna take active bets and pay up. Isn't that against where where it all went? It all went from complex to simple. Isn't

this going the other under direction? Yes and no. So so first I'm not of the camp that things direct indexing eats passive. I think it's a very specific niche with a very specific audience. UM, and the three key audiences are a the concentrated equity position that you have to work around. That's one be the E S G. Um investor who really wants the ability to fine tune it in a lot of ways and see the high income as opposed to high asset investor who has a

giant tax bill. The tax lost harvesting ability when you have two thousand stocks as opposed to twelve mutual funds, it's world's apart. It's it's you know, hundreds and hundreds of basis points versus I could squeeze twenty or thirty basis points swapping this total market funds for that total market funds. This is just a huge, huge um source of tax alpha. If I could use a horrific cliche and so I agree the tax alpha and it makes

so much sense. The E S G is hard to argue with because E S G. E T s aren't going to cut it if you have specific views, because it's a copy cutter approach. So subjectivity is great. UM, that's I get that the tax alpha. At first, you're gonna run out of losses to use at some point and if a bear market hits, what the e t s and the mutual funds that can that advantage should go away, and then your left giving all your money to one company? Does that? Is that a little concerning?

Like whereas when I go food shopping, I like to get different brands, so I don't want to give my whole I don't know, there's something about having choy some different brands and sure, um, well that's why I said, I don't. I don't see us with one eight billion and I have two million in this. I don't see the whole thing rotating over to that anytime soon. That said, the complexity is certainly an aspect there. The software covers it.

The cost and credit O'Shaughnessy with something very very clever that they did. They said, if you set this up as pure beta, there's no cost to it. We're only

going to charge you for the active share. So our portfolios are about a twenty lean towards value and small cap, and so you're only paying a fee on that um and you're you're basically getting it no charge because the transactions are free, the holding is free, and so yes, you're adding a level of complexity, but surprisingly you are not increasing the fees, so it's not six BIPs, but it'll end up being you know, twenty or thirty BIPs, which is pretty reasonable. And that's before you know the

tax advantage. So I don't see a cost penalty with this if you're that type of client who's got a bigger income and a lot of tax um issues they're dealing with. So Barry, I just want to get your take on this too, which is that obviously Vanguard is getting bigger and black Rock to do oppoly. They now want about of most stocks with a concern. I think that distortion concerns have died down a little bit, like you know, because they're seeing stocks go up and down.

So clearly Active is in control. But what is bubbling up is how are they voting? And should two companies have that much power in their voting? And I guess, as somebody who owns Vanguard and just watches this stuff, what do you do? You think they have too much power? And if they do, what should be done? So we own Van Garden black Rock also, and I just saw the other day the crossed I think the Financial Times reported um Vanguard crossed seven trillion, which is a pretty

big milestone. Um, do they have too much power? Well, well, first of all, any investor who wants to vote their own you know, um individual proxies can we just know from experience, nobody does that. Nobody really cares so um or or or they don't care enough to vote the proxy. And so when you look at black Rock and you look at Vanguard as fiduciaries for their clients, the you

know the I want to reframe the question. The better way to my response to that question is another question, which is do you think that black Rock and Vanguard with six of the outstanding equities seven trillion for Vanguard, what what is black Rock? Eight points something trillion? Does anybody believe for a moment they want to get into

the business of voting proxies against the interest of their investors. No, this isn't the arguments the Milton Friedman argument that no, banks and brokers would never behave ridiculously and blow themselves up by using leverage um, and therefore they don't need to be they don't need to be regulated. That argument is very, very different, because they're engaging in a risky

behavior for further profit. This is hey, maybe there, This is what the legal law the law review community, in desperate need of topics to write about, has been, you know about and and it's kind of silly stuff. I mean, I guess there is a risk that a big private company like Vanguard or a big publicly traded company like black Rock, maybe they might in a given instance abuse their seven percent market share and vote a proxy in a way on a given company that is against their

interests but against the investor's interest. But why why are they going to go down that rabbit hole? They own some percentage of twenty companies like Now, that's why you get these letters as to why from Larry Fink as to why you should be more green and you should have a diverse portfolio board of directors, And he's doing it by letters because he can't do it by proxy. Otherwise, as our colleague Matt Levin would say, that would be

you know, the basis of securities litigation. You're giving an excuse for lawyers to sue you because you're not operating in your in your client's best interest. So that's a long answer to I don't really see that as as a realistic um thing that's going to happen, and the first time it were to happen, the outcry would be so you know loud, it would never happen again. There would be new restrictions put in place internally. But you have a really nice business. Why mess with it for

something as stupid as a proxy vote? Who cares? Okay, here's my question. When we get back two normal times, whatever that looks like, what's the thing from this time that you want to make sure that you retain. So there's a couple of things we we've talked about this, my wife and I, my partners and I. First, UM, I've lived in New York my whole life, and the

winters here are less than desirable. And while I'm not a giant fan of Florida, I've always fantasized of just going someplace warm and sunny for a month or two and working remote. And I always wondered if that was doable, and and now we all know it's completely doable. Um. The more r I A related aspect to that, UM we've discussed internally. My partner JESSH. Brown wrote a long blog post about this. You now know as an r

I A that local doesn't mean anything. You have a national potential client base because nobody saw anybody for the past nine months and everything worked fine, and so whatever hesitancy there was about I need a local advisor, that's gone. Because if we're doing this over Zoom or Google Hangout or whatever your preferred technology is, if I'm down the block or across the country, it's meaningless. And I think

that's gonna potentially change the industry to some degree. Um, the the ability to hire people remotely that I don't have to come into the office every day, So I think, I think that's going to be a change. And then the other thing you kind of come to realize is the advantage of just a clean sheet of paper and just saying to yourself, Hey, I have to drop all my assumptions. I can't assume that I have to be in the office five days a week. I can't assume

that clients want to meet us all the time. I can't assume that we have to have, you know, a big office in the city. That I think a lot of fundamental assumptions that had inertia and a general rational for their existence. Um, get get a clean um review because it's clear that a lot of our assumptions about everything turn out to be wrong. Very ahole. Thanks joining us on Trillians. As always, Thanks guys, thanks for listening

to Trillions. Until next time. You can find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify, and wherever else you like to listen. We'd love to hear from you. We're on Twitter, I'm at Joel Webber Show, He's at Eric Baltunas, and you can find Barry at rid Holes. This episode of Trillions was produced by Magnus Hendrickson. Francesca Levy is the head of Bloomberg Podcast. Bye.