Well, I'm very excited to welcome one of my favorite writers and podcasters, Ben Carlson. We're here to discuss Ben's fifth book. So, you're five ahead of me. Focusing on building long-term wealth and managing market volatility, which not much market volatility around here these days. In addition to talking about market trends, where I'm probably going to start. And while I'm going to try to start asking the questions, Ben's so good at these things, we may end up with time for folks to throw up questions in chat because he's a thoughtful guy. I bet a lot of people here read him and rightly so. Ben, welcome.
So, we're definitely going to get to the book shortly, I promise. And for attendees, as always, we bought a hundred copies. When this is done, I'll send you the link. You can enter your address. It'll get mailed to you by the people who do those things. Before that, I want to start with, you know, because I'm in DC. I'm a political guy. The biggest political puzzle, and you tweeted about it again in some ways today, but for me, for the upcoming midterms, the biggest puzzle is the so-called vibe session where the S&P's hit 27 new all-time highs so far this year. Unemployment's down at 4.1. That's lower than the average this decade and a lot of the past decades. The Atlanta Fed this morning is projecting 5% for the quarter, which is blistering GDP growth. The latest manufacturing readings were strong. Capex is off the charts. Home prices for those of us who own, admittedly, is high, but people are pissed. People are scared and the consumer sentiment is epically low. What gives, Ben?
I wish I had a definitive answer here. I think it's a lot of things. I think we've definitely learned that, you know, it's been 40 plus years since we had high inflation. People really hate inflation. And I think, even as someone who studies psychology and I wrote two whole chapters in the book about the psychology of inflation, one of the reasons I wrote them is because the reaction was so visceral and strong that it felt like we had kind of extinguished high inflation from the system and then we got it and people got really angry. So that was the first thing. I don't think that we were really used to huge uncertainty like people were in the past. So, I think the pandemic really threw people for a loop that it was just this thing from left field that came out of nowhere. And I think it really kind of jarred people. And it forced people to be more insular and alone and on their screens. And so I think a lot of that is part of the reason that, man, you figure in the past when the stock market is at all-time highs and the economy is still growing and unemployment is at 4%, you know, you'd think sentiment would kind of match that. Now, there's obviously other stuff going on here that people could be latching on to. It kind of depends who you ask, and I think that's part of it, too. I don't know how many people, Bruce, maybe people in DC still answer surveys. I don't know how many people still answer surveys. And so, it could be a sampling thing where the people who used to answer them in the past, you know, not everyone has a landline in their house anymore that they're willing to answer every time. And so it's easier to screen these things out. So I think it's kind of a confluence of things, but it is very interesting that if you look at it, the sentiment readings are lower now than they were in the Great Financial Crisis. Lower than they were at the depths of COVID, right, when things were really scary and uncertain. Lower than the early 1980s when inflation was a lot higher. So it is a little puzzling.
Yeah. And you know, if you're a politician, you know, a hot economy, a hot stock market, lots of jobs, feels like, you know, not that many more dials you can potentially turn. We did see a general negative vibe. We even before the pandemic and when inflation was low, with almost no visible inflation, people were souring. It feels in a lot of ways to me almost a 21st century thing where, you know, after 9/11 and after the Iraq war and after the GFC, people sort of feel like they can't keep up, whatever their 401k says.
Yeah, it's certainly part of it. I think the other piece we didn't really touch on is, you know, we're a nation of consumers and we really like to borrow. And so even if you look back at the last 50 years and say, hey, these interest rates are kind of, you know, average historically going back to like the 70s. We had in the last 25 years, these rates feel really high for people. And I think the number is something like 75% of all consumers hold some form of debt. And we like to spend money in this country. We like to borrow money in this country. So, I think the fact that you have rapidly rising interest rates, while it's good for savers and fixed income investors, it's not great for people who want to borrow. And I don't think people like to have that feeling that, man, it's tough for me to buy this thing because I can't borrow to get it anymore. And I think that could be part of it, too. That and it happened so fast that we went from, you think about it, sub 3% mortgage rates to now over 7%. And it wasn't like people had time to adjust. It happened, it felt like overnight. Happened really quick. And I think those fast moves in markets and the economy are really what throw people off.
Yeah. Something I'm wondering about, we're already seeing the government's other pre-existing short-term low rate borrowing being replaced by high interest rate borrowing. A lot of homeowners with 30-year fixed who refi'd during the epically low are comfortable. But one of the things that I wonder about is a lot of businesses either borrowed a lot and/or got acquired by private equity who was borrowing a lot on their balance sheets. And what I haven't looked at is when does that start resetting in a way that could create a whole lot of business pain from folks who had been at low rates but are about to owe a lot more each month of their cash.
Well, and many small businesses borrow at floating rates. So, they're feeling the pain of this, right? The big corporations were able to lock in low rates. They're fine. They have a lot of cash flow. The smaller businesses, they're dealing with, you know, that's why even like small cap companies for a while got dinged. Even if you were able to borrow at 3%. Right? My wife occasionally will say, "Hey, what about this house down the street? Why don't we look at that house?" I say, "No, we have a 3% mortgage. We're not leaving." And I think there's probably a lot of people who feel stuck. Even though it's a great deal financially, it's an awesome inflation hedge. It's like, well, yeah, but if I move to the house down the street that's bigger and better and nicer, now I'm paying 7% on the mortgage and the price is much higher. So, I think a lot of people feel stuck by that as well.
All right, hot topic two. I had three hot topics, then we're going to jump into more of the book stuff, but AI, you've spoken on podcasts, you've written, you know, I feel like there's the whole existential risk. Are we all going to be dead? We're not going there because you're a markets guy, but the big market question is this a bubble? There's a growing amount of off-balance sheet debt. There's lots of circularity among big players. So it feels like one goes down and, you know, OpenAI has a problem, a lot of people may have a problem. The valuations certainly seem like they are getting so nosebleed it's hard to see how revenue could catch up in time. Torsten this morning noted that a lot of the big tech in his daily chart, which I love. I bet you get that, too. A lot of the big tech guys are projected to have a lot more free cash flow than the customers who are supposedly going to be paying them. So, one of the two probably can't be true. I'm curious how you see AI. Is this the railroads, electrification, fiber? Is this yet one more infrastructure bubble like the last or is it different this time?
It's interesting. Buffett said something along the lines of if studying history was all you needed to make money in the markets, librarians would be the richest people on the planet. Right? So, I think there is a lot to studying history and I feel like if you did study market history, and I wrote about it a lot in the book, you look at all the booms of the past, this one would check all the boxes. You mentioned it, right? It's this big technological innovation. So, people get really excited. There's now this big binge where it's a big part of the economy. They're taking on debt to fund it. Now there's a lot of excitement. There's a lot of things happening and even if the AI technology ends up doing everything the tech people say and more. A lot of times that still ends in tears in the meantime, right? The dot-com bubble, we got everything that people wanted from the internet and more, right? Streaming videos and YouTube and the ability to talk to people anywhere on the planet anytime you want. All these things that probably people didn't even think were possible, but we still had to go through the dot-com bubble to get there. So I think the first one would be if you're looking at the history checklist, we kind of do check all the boxes. I will say though that like the sample size of those historical events is not that large, right? You mentioned the railroad and the dot-com, and like there's a handful of these that you say, "Yeah, that sort of does seem similar." I think the one difference this time is how gigantic these companies are, right? If we put the hyperscalers in one big bucket, I don't know, we're probably talking anywhere from 20 to $30 trillion in market cap if you include like OpenAI, whatever they're going to be, and Anthropic when they're one or two trillion dollar companies when they go public. And they've all seemed to hold hands and jump off the bridge together. And that's the part that's both scary and also like, well, what if they just keep going and put their, you know, they all say, you know, the bigger risk is going too small on this, not going big enough. And it's funny, we talked about inflation in the first part of this. That's the other piece we didn't mention is that them spending all this money and building these data centers. It's they've gone from intangible businesses to tangible businesses and they're spending a lot and that's helping drive up inflation as well, you know, and it's crowding out maybe money that would go to build houses or other things that people want to build. And so, there's also like a political risk here, where, you know, it's becoming a huge political talking point that, you know, a lot of the public doesn't like AI. So, there's a million moving pieces here. And so I can't like pound the table and tell you one way or another because it is possible that these market cycles are happening so much faster that, yeah, we get some sort of bear market once, you know, Nvidia has a bad quarter or Meta pulls back on spending for some reason. But it's also possible that the ROI comes even faster than people assume. So to me this is a really hard one to handicap and I can't like pound the table in one direction or another.
As unsatisfying as that answer is.
Well, we had Paul Kedrosky on, who's one of my favorite guys to follow, although he's a bit of a...
He's pounding the table, isn't he?
Sort of. He's not quite a permabear, but he points out the emperor lacking clothing all over the place, which is true. And this may get to ultimately the thesis of the book in a lot of ways is buy and hold what you can afford to have invested for a long period of time. A good strategy you stick with is better than a great strategy you don't stick with. But what are you as an investor paying closest attention to that might cause you to say, I see something happening now that's AI adjacent that's causing me to rethink my strategy?
Well, I think the thing that many investors should be thinking about now, and I think if you've had money in the market for the past 5, 10, 15 years, you've probably exceeded your expectations in terms of returns. If you look at your household net worth, your house is up in value. Your stock portfolio is doing wonderfully. And now what you have since rates are rising rapidly, you have 4% cash yields, 5.5% high quality bond yields, maybe six and a quarter corporate bond yields. For the first time in maybe 20 years, I think the 30-year hit the highest level since 2002 today. This makes a lot of people worry. Oh my gosh, bond yields are going higher because of all the people are worried about it. It's possible also that bond yields are rising because economic growth is higher and the bond market is buying into AI and higher inflation being here. So I think one of the great things about this market is that there is an off-ramp. Like in the 2010s, all of our clients were hitting their heads against the wall going, I want to be in a 60/40 portfolio, but the bonds are giving me nothing, so I'm going to be in an 80/20 instead, or I'm going to go 90/10 because there's just no alternative to stocks. And luckily, the stock market more than kept up its end of the bargain, right? Stock market has done great for people. Now you actually have an off-ramp if you say I'm really concerned that something like this is going to blow up or it's just not going to do as well as it has and I have 5% here that I can get in the bond market and maybe rates go from 5% to 6%, you get a little bit of short-term pain, but now you actually have yield on that part of your portfolio for the first time in seemingly forever. And so that's a lot of the conversations we're having with our clients. If you like ramped up the risk a lot and you're worried about AI, hey, listen, it's possible this thing goes another three, four, five years. You can't guess these things, right? That's what happened in the dot-com bubble. People thought it was crazy and then it got even crazier. But now you at least have something that's relatively safe that's not going to have as much volatility and doesn't have as big of drawdown risk as the stock market.
Yeah. People forget that Greenspan used the phrase irrational exuberance in 1996.
Party went on for a pretty good time after that.
I think the stock market doubled from there.
NASDAQ was up 290% since that, although then it gave it all back. The S&P didn't give quite everything back, but it doubled.
All right. Timely question number three, Ben, and this goes to a little bit of stuff you've been saying and writing with the Federal Reserve. You argue that higher short-term rates, which, you know, the Fed just turned it up, but that won't end the war in Iran. That probably won't bring energy prices down. It shouldn't cause the hyperscalers necessarily to stop hyperscaling. And it won't slow the US government, which is, you know, spending like a drunken sailor for a few decades and continuing. So, if inflation drivers are the war, capex, and sovereign debt, and they're all proceeding apace, what will the hikes accomplish?
I think that first 25 basis point hike probably doesn't accomplish a whole lot except that it signals that the Fed is willing to act. I guess if you looked at the expectations today, I think the bond market or the traders are expecting that short-term rates could get as high as 5%. That's what they're expecting, you know, and obviously the caveat that even the Fed doesn't know what they're going to do in the future. They're not very good at predicting rates either. It feels like they're pushing on a string, but obviously at a certain point if the Fed keeps raising and raising, it's going to hit other parts of the economy and it's going to lead to maybe political risk, right? Where maybe it does force some politicians to take a step back and look at what they're doing. And I think it's going to slow the parts of the economy and maybe it does cause some of the hyperscalers to realize like, oh, the hurdle rate keeps getting bumped higher and higher and higher and we're not just spending out of free cash flow anymore. We're spending out of debt. So obviously at a certain point they have to start worrying. But you know, I don't know what that point is and it seems like it does just mean higher borrowing rates for consumers and when do they finally tap out?
All right, let's turn to book number five. Congratulations. It's a broad overview and you know, you're a writer. It's what you do for a living. It's what you've done. It's how I first found you. It's you and Morgan Housel during co were like maybe the happiest find for me on the internet was all the Wealth of Common Sense blog stuff which I've loved. I'm curious as a writer, is it just every couple years you want to write a new book? Was there something new that you hadn't said you wanted to say? How did this one come together? And why are the elements that are in this book in this book as opposed to prior or future books?
This one just kind of felt like a culmination of things I've been writing about because I felt like the last two decades are kind of opposite sides of the same coin where I really kind of started out in the investment business in the early 2000s and lived through the Great Financial Crisis and I saw how coming out of that crash so many investors were, and I was in the institutional field so I'm working with pensions and endowments and huge pools of capital and these places are supposed to be, you know, especially like the endowments and foundations, their time horizon is forever, right? It's a perpetuity. We have to make our short-term payments, but other than that, we're very long time horizon. And I saw how short-term oriented they became because of the crash and how much career risk there was. And everyone is investing from the fetal position. And so after the crash had already happened, people are looking for black swan funds and how do we just hedge downside volatility? We don't care about upside. We just want to protect the downside. And that's how everyone is investing. And I just, it was interesting for me to see that dynamic. And now in the 2020s, it's the opposite. And it's we can't take enough risk. Why aren't we leveraging this? And why aren't we adding this? And why don't we just concentrate on this one sector? And it's totally a different mindset. And I looked at risk and reward as kind of the yin and the yang of those two things. And it's kind of to provide a reminder that, you know, the good times tend to follow the bad times, but they're also bad times that follow the good times. And the hard part is understanding how long these cycles can last and how far they'll go. And that's the unknowable piece. But it was kind of a reminder to both of those feelings you get as an investor, right? And we all feel them. When things are going well, you feel invincible. And when things are going poorly in the markets, you feel like the worst investor in history. And it's usually neither of those two things, but those are human emotions that you just can't help.
Yeah. No, I am absolutely a panic, run with the herd, need to not manage my own money for the very emotional reasons you're describing. One of the things I loved about the book is it's, you can read this on a cross-country flight. It's very readable. It's interesting. I love charts, of course, lots of great charts in there, fun anecdotes. My favorite, I think, is the tale of Bob, the world's worst market timing investor. Assuming you have that at your front of mind, explain why. Because I know a lot of folks who right now are sitting on cash feeling like, man, market valuations are so high. I don't want to be that jackass who jumps in at the top of the market and then finds that, you know, I'm an idiot, but that's what they thought a year ago and that's what they thought two years ago and they keep thinking it now, you know, speaking for a friend. Tell us the story of Bob.
Yeah. And I thought about this one about a decade ago because we were getting all these clients coming to us in like 2014, 2015 and they said, "I sold all of my stocks in 2008 and I've been sitting in cash ever since waiting for a crash and I just couldn't pull the trigger. Please help me." And there was a lot of that going on. And I thought about it and, you know, every investor thinks that whenever they make a trade they're going to impact the whole market, right? You buy a stock and it's going to go down or you sell a stock and it's going to go up. And I thought fine, let's say we figure out what this guy is and I looked at what if you just bought at all the market peaks. So, you bought, you know, this guy had a 40-year track record of investing and he held all his money in cash until he got really ready to do it and his nerves were up and he bought, you know, right before the 1973-1974 bear market, right before the 1987 crash, right before the dot-com bubble blew up, and then right before the Great Financial Crisis. And how did he do? And I didn't know how it would work out. And the numbers were better than I thought. And so I sent the numbers off to our data guy and I said, "Hey, look, these are better than I assumed they'd be. Please check these for me." And he's like, "No, those are right." And the IRR was actually pretty good and the returns were pretty good and I said, you know, I put some simple saving estimates in there and he grew his savings by inflation. And it turned out even though Bob made like these four ill-timed purchases, he kept his money in the market the whole time and he still ended up a millionaire. And it's still by far my most widely read blog post. I think I wrote it 10 years ago. People still read it every year. And it's a story that's really resonated with people about like the power of thinking and acting for the long term and how timing doesn't matter as much. It's funny for the book I actually said, well, what if he would have just dollar cost averaged instead, right? Instead of trying to time the market. And of course, he did a lot better. And I also thought, well, what if he just put his money at the bottom of every bear market? And he actually still did, and, you know, held cash until then, he actually still did better just dollar cost averaging. And so the point of it is like how much brain damage you can cause yourself trying to overthink these things, when you should get in, when you should get out, and more of it depends on your time horizon and how long you're planning on having that money invested in the markets for.
