December 9, 2024 • 31 mins
Richard Bernstein provides his perspective on key investment themes to watch in the year ahead, including overlooked opportunities, potential pitfalls, and the value of seeking “maximum diversification”.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Ryan (00:13):
Hi, welcome to this episode of the First Trust ROI
podcast.
I'm Ryan Isakainen, etfstrategist at First Trust.
In today's episode, I'm joinedby Richard Bernstein from the
firm that bears his name,richard Bernstein Advisors.
Rich has been on Wall Streetfor over 40 years.
Before coming to RBA, he wasthe chief investment strategist
at Merrill Lynch.
Rich and I are going to discusswhat's going on in the markets
(00:36):
in 2024, what he expects in 2025, and some of the risks and
opportunities in the equitymarkets.
Thanks for joining us on thisepisode of the ROI Podcast.
So, rich, thanks again forjoining us on the podcast.
It's been a weird year.
It's like.
I don't think anyone coming into 2024 expected that we're
(00:57):
recording this on December 4th,that the S&P 500 would be up 27%
.
Richard (01:01):
Yeah, crazy, did you expect that?
No, not in a million years.
Ryan (01:04):
Yeah, okay.
So, given that I'm crazy, didyou expect that?
No, not in a million years,yeah, okay.
So, given that I'm going to askwhat you expect for next year,
do you think that the market'sgoing to continue on this hot
streak or do you think we'regoing to have some more
surprises up in the next 2025?
Richard (01:20):
Well, ryan, I think the big difference now versus a
year ago is the amount of riskthat individual investors are
ready, willing and able to take.
That is a big difference.
You know, there's always thisnotion that people are chasing
performance.
I think there's tons of datathat shows that people are now
(01:40):
full in chasing performance, andso you know, I think what does
that mean for the market.
We'll talk about that, I'm sure, but the market's probably not
as safe as most individualinvestors believe right now,
that there's probably more riskin the market than people think,
which I'm sure we'll get into.
My argument is this is a timefor maximum diversification.
(02:03):
I think most investors areshunning diversification because
they think it's a suck onperformance, and I think that's
going to be the big story for2025.
Ryan (02:12):
So from one to 10, 10 is being super risk chasing, one is
being super risk averse.
Where do we fit on thatspectrum, do you think?
Richard (02:20):
I think investors right now are somewhere.
I'd say nine, nine and a halfOkay, so really Really up to
there's lots of data that I hateto use the word unprecedented,
because my joke is that we'reseeing unprecedented use of the
word unprecedented, but there isunprecedented risk-taking among
individual investors.
You have never seen this before.
Ryan (02:38):
Yeah, okay.
So you mentioned maximumdiversification.
Can you unpack that a littlebit?
Richard (02:44):
Yeah, I think.
Look, everybody knows that themarket is up a lot because of
the concentration of the market.
That's been the big story.
I mean, honestly, we did notexpect 2023's concentration to
continue into 2024.
Obviously, that was the reasonwhy I think we underestimated
the potential in the market wasan erowness of the market, but
(03:11):
when you have such a smallnumber of stocks dominating the
US market and, to a largerextent, dominating the global
markets, it questions like arethere really no opportunities in
anything else?
And so I think the narrownessof the market gives investors an
opportunity, one to diversify,which reduces risk, but also to
expand the opportunity set ofthe portfolio, which nobody
seems to want to do outsideseven or 10 stocks.
Ryan (03:30):
So, from an earning standpoint, those Magnificent
Seven or whatever acronym youwant to apply to them have been
fantastic over the last year ortwo 2022, they really softened a
bit, but then they've comeroaring back as everyone's
embracing AI.
What are you seeing in terms ofearnings expectations going
forward into next year?
Richard (03:52):
Right.
So what's interesting is theearnings growth of the
Magnificent Seven isn't going toimplode, or you can make this
very dramatic story.
I don't think that's the rightway to approach it.
It's not that the earnings aregoing to implode.
It's more that the fundamentalsare broadening.
There's more companies that arestarting to grow.
We put out something a month orso ago that pointed out that
(04:12):
there are now roughly a littlebit more than 70 companies just
in the S&P 500.
Forget mid-cap, small cap,non-us 70 companies just in the
S&P that are forecast to growearnings 25% or more, and only
one of the MAG-7 passed thatscreen.
So the opportunity set isgrowing and I think that's the
story for at least the firsthalf of 25 is that fundamentals
(04:35):
are probably going to bestronger than people think.
Ryan (04:37):
Okay, A lot of attention has sort of shifted towards the
small and mid-cap segment of themarket.
Do you think that the wehaven't really seen the earnings
improve quite as much in someof that segment of the market,
although I think theexpectations in the next couple
of years imply that?
But do you think that that'slikely to occur in the
underlying fundamentals of thosecompanies?
Richard (04:58):
I think that's right and there's many reasons why I
would argue that small caps andmid-caps are going to be
incrementally attractive toinvestors.
You know one their relativeearnings are starting to go up.
Right I think by the end ofthis year into early next year,
you'll find small and mid capearnings growth will be a
multiple of mag seven earningsgrowth.
Certainly nobody believes thatright now.
You're not hearing muchdiscussion about it, but that's
(05:19):
what the forecasts imply, isthat that would be the case.
Now, when I say forecasts imply,people go well, who would
believe the forecast?
Well, why would you believe theforecast of the MAG-7 any more
than you believe the forecast ofanything else?
Are MAG-7 analysts innatelysmarter than other analysts?
No, I mean.
So it's a little selectivejudgment there that we trust the
MAG-7 forecast and we don'ttrust the forecast of any other
(05:41):
stock.
But by the end of this year,early next year, small and mid
caps and something I'm surewe'll get into in more detail is
this whole notion ofdeglobalization.
And the world is contracting,whether people like it or not,
for whatever reason.
We could argue why this ishappening, but it is happening
and deglobalization, we think,is going to favor more
(06:04):
domestically-oriented stocks asopposed to stocks that are
getting a lot of their growthfrom outside the United States.
Ryan (06:13):
Yeah, I'm glad you brought that up, because it was
something I wanted to ask youabout.
You've been kind of talkingabout this theme of
deglobalization and reshoringfor over a decade now.
Richard (06:25):
Yeah, that's right.
Ryan (06:26):
So if you were to think that in maybe a baseball analogy
, what inning are we in?
When it comes to that sort oftrend.
Richard (06:32):
So, ryan, I just want to point out and to kind of peak
people's interest a little bit,that if I could give you a
theme that has outperformed theS&P 500 for the last decade, the
last five years, three years,one year pick whatever time
period you want and had notechnology stocks in it Number
one, would you be interested?
Number two have you ever heardof it?
(06:52):
And the answer is probably noto most of this.
And it's all aboutdeglobalization that's involved
in that.
So what inning are we in?
I think we're in the very earlyinning still, even though it's
a 10-year plus theme already.
It's hard to argue that numberone.
People have gravitated to it,that it's getting headlines and
that the valuations arestretched.
None of those are true.
So I think we're still in thevery early innings.
Ryan (07:14):
Okay, and so, when we think about the types of
companies that benefit, whattypes of companies do you think
benefit from that trend ofdeglobalization and reshoring of
, especially reshoring ofmanufacturing?
Richard (07:25):
Right.
So our argument has been thatthe main beneficiaries of that
of deglobalization are mid-capand small-cap industrial
companies, right, primarilythose that get their sales from
within the United States.
So you know, if you're talkingabout deglobalization, your
company gets sales from China.
Well, that doesn't do much foryou.
Here.
It's really you know, you wantcompanies that primarily sell
(07:46):
into the United States, that arefrom the United States.
These are companies that arereally the nuts and bolts of
everything that's going on, evenmost growth stories that people
are talking about, the nuts andbolts of this.
So, for instance, let's saysomebody talks about data
centers.
Well, who provides the HVAC tokeep the data centers cool?
Who provides the carbon wire sothat the HVAC and the data
(08:11):
centers can actually get theirelectricity?
All those kind of things.
And the way I describe it topeople is if you were to snuggle
up to somebody and say, youknow, whisper mag seven in their
ear, they'd be like, oh, wow,this is so exciting.
Snuggle up to somebody and youknow just whisper the words ball
bearings, yeah, and watch themmove away from you very quickly,
yeah, and watch them move awayfrom you very quickly, but
(08:32):
that's the whole story.
Is that nobody thinks there's astory in things like ball
bearings or carbon wire, inlandbarges, hvac, all these
different things?
Ryan (08:39):
So it is really ripple effects in part from some of the
themes that people areenthusiastic about, like
artificial intelligence, because, to your point, data centers,
the demand for data centers,imply all sorts of different
types of companies that willbenefit.
Electricity is another thingthat we've talked about.
The demand for electricity isgoing to be huge.
Richard (09:00):
Yeah, I think 2024 was the first time in many years
we've actually seen an increasein the demand for electricity in
the United States, which ispretty wild.
But the problem is the US gridis like 1950s technology.
So people talk aboutinfrastructure and generally
infrastructure investmentsrevolve around either paving
roads or food courts andairports and things like that
(09:22):
silly things like that.
But really real infrastructureis things like modernizing the
grid, which is not difficult todo and we just have to make an
effort to do it.
Ryan (09:31):
Yeah, which is not difficult to do, and we just
have to make an effort to do it,yeah.
The other I don't want to getinto.
We've gone through thepolitical season so I won't talk
too much about politics, butone of the things that people
are talking about is thepotential for the next couple of
years that will have an impacton potentially domestic
manufacturing and global as well, is the potential of adding
(09:51):
tariffs, and the incomingadministrations talked a lot
about that, so I just want yourthoughts on what the impact will
likely be maybe the likelihoodthat tariffs will actually be
implemented and how important isit.
Richard (10:06):
So for us, I think the biggest.
There's kind of two issues here.
Number one is we don't thinkthat tariffs will be as broadly
implemented as is being talkedabout.
Why?
Because we don't produceanything here in the United
States anymore.
My joke is, you know, isanything you're wearing right
now, ryan, made in the UnitedStates?
No, the answer is no, nothing.
No piece of clothing you arewearing is made in the United
(10:26):
States.
And so if you start puttingtariffs on clothing, clothing
prices are going to go up andthere's no domestic substitution
to take the place of thoseimported goods.
So if you start raising prices,you start seeing inflation goes
up.
We know consumers don't likeinflation.
Probably not politicallypalatable to start having all
this inflation.
(10:47):
So you may have it on selecteditems.
That's entirely possible.
My guess is you won't have itas broadly as some people are
concerned about right now.
Um, but you know, is thatimportant in terms of industries
?
Well, you know, depending onhow they structure this and
that's the big, if right and Idon't think anybody actually
knows certain domesticindustries could be protected
(11:07):
and that would be very good forthem.
Um, other industries we don'thave.
So then it falls entirely onthe consumer and that would not
be good.
So I think the jury should weshould remain kind of agnostic
about this yet until we see whatactually happens.
Ryan (11:21):
Yeah, you don't think we're going to have the relaunch
of the textile industry in theUS.
Something tells me we'reprobably not, and something also
tells me we're not going to runaround naked either, so we're
probably going to have somethingin between you know, the other
part of the incomingadministration policies that
people are talking a lot abouthas to do with regulation, and
(11:44):
you know a lot of talk about theDOJ, the Department of
Government Efficiency, elon Muskand Vivek and I guess,
generally speaking, what's yourexpectation for next year and, I
guess, beyond, are we going tosee an era of deregulatory
policies being put in?
Richard (12:03):
place.
So two things there.
One is kind of the regulationand I think in terms of less
regulation, I don't know ifyou'll actually have
deregulation, but certainly lessregulation, less regulation.
I don't know if you'll actuallyhave deregulation, but
certainly less regulation.
I think that's a fair bet.
We can discuss whether thathelps companies or doesn't help
companies.
I think the data is much moremixed than people think.
(12:24):
I always point out thatSingapore seems to be a pretty
nice place to do business andit's the most regulated economy
in the entire globe.
So certain regulation will goaway and that'll that'll be
helpful to to many corporationsand and, um, you know, I think
that will be the trend and Idon't think I'm saying that
that's anything unique thatpeople haven't heard before.
Um, the the governmentefficiency stuff.
(12:46):
Look, you always want thegovernment to be more efficient.
I don't think there's anybodywho really would campaign saying
we want a less efficientgovernment.
It's easier said than done.
The problem is how do youcreate an efficient, more
efficient government withoutmean?
It's pretty hard to do thosekinds of things.
(13:14):
So we'll see what happens, but Ithink the notion that we want
to try to make the governmentmore efficient is a very noble
one, and why wouldn't we want totry to do that?
Ryan (13:24):
Yeah, it seems to me that regulations do tend to compound
over time.
Oh, absolutely, and there'sreally no incentive usually to
end up trimming old regulationsthat don't really have a place
Right.
Richard (13:34):
And I think you know there's two kinds of regulations
.
There's regulations that stymiebusiness and regulations that
protect the economy Right.
And we'll see what happens.
Some of those you knowprotecting the economy is
probably good, stymieingbusiness probably not so good
yeah.
Ryan (13:46):
Yeah, it seems like everyone probably wants certain
regulations that are helping toprotect them, if want certain
regulations that are helping toprotect them.
Richard (13:53):
If it's your industry, you want less regulation.
That is no doubt about that.
Ryan (13:56):
Yeah yeah, yeah, okay.
Another topic I wanted to askyou about that we talked a
little bit about last time wasthinking about inflation and Fed
policy.
I think when we spoke last itwas either when the Fed had just
begun cutting rates, or maybeit was even before, but it
(14:17):
certainly, as the year hasprogressed, it has become more
and more apparent that the Fedwas not going to cut as much as
the market had priced in.
So right now, as we're recordingthis on the 4th of December,
it's something like 75% chancethe Fed's going to cut this
month.
Richard (14:38):
What's your outlook going past that?
So I think there's two ways tothink about this.
Number one is a lot of peoplediscuss should the Fed be
cutting rates or should they notGiven that?
Jay Powell is not exactlycalling me up and asking me my
opinion on this one.
I don't think what I think theyshould do becomes relevant.
I think we all have to discountthat.
As investors, we have to try tofigure out what is the Fed
going to do and how do we builda portfolio around that.
(14:59):
And look, I will be honest, Idon't understand why the Fed
wants to ease so aggressively.
Financial conditions are veryeasy right now.
You see that in credit spreadsbeing remarkably tight.
You see that in things likeprivate debt having no trouble
raising capital.
You see that in something likeBitcoin, where speculative
capital is running rampant.
So there's major bank balancesheets are in great shape.
(15:20):
We know that.
So where is the stress in thefinancial system that's
stymieing the economy in oneform or another?
It doesn't exist.
So I don't quite understand whythe Fed is so intent on cutting
rates.
That being said, they're goingto cut rates right, and we could
argue about how much, but Ithink the important point that
comes out of this is that Ithink investors should be If you
(15:43):
think of the world as anover-under bet, take the over on
nominal growth.
That nominal growth, real growthplus inflation, nominal growth
will be stronger than investorsthink right now.
The Fed is.
Gdp is tracking right now atroughly 3% growth.
Corporate profits areaccelerating and the Fed's
(16:04):
cutting rates?
That doesn't make for a weakereconomy.
So let's take the Fed's cuttingrates.
That doesn't make for a weakereconomy.
So let's take the over onnominal GDP Now.
Maybe it's more inflation,maybe it's more growth.
I'm not telling you.
I'm smart enough to figure thatout to the decimal point but I
think you want to take the overon growth, at least for the
first half of the year.
Ryan (16:21):
The other, I think, surprising thing about rates.
Since the Fed has begun cutting, we've seen the longer end of
the yield curve move higher andit's come back a little bit.
But was that a surprise to you?
Well?
Richard (16:32):
it wasn't really, because we didn't think the Fed
should be cutting in the firstplace.
If the Fed cuts rates and we'reheading into recession, the
whole curve shifts down, andthat's not what happened, as you
point out.
And so what it says is the Fedis cutting rates into a
reasonable nominal growtheconomy that's likely to get
stronger, and if people want totry to envision what the 10-year
(16:56):
will do in 2025, just say whatdo you think nominal GDP growth
is going to be?
And you have a pretty goodforecast of what the 10-year is
going to do.
It doesn't track decimal pointto decimal point, but the trends
are pretty close and so if youthink nominal growth is going to
be 5% to make up a number youshould expect the 10-year to
roughly be around 5%.
(17:16):
If you think it's going to be4%, then it tells you.
But it's pretty hard right nowto figure out how nominal growth
would be below 4 to get you a10-year that's low.
Without something likequantitative easing or something
like that where the Fed isbuying up all these treasuries
unlikely to happen the 10-yearis probably going to be a bit
higher than people think as well.
Ryan (17:35):
Yeah, the federal spending and the budget have been
deficit spending for the last,really since COVID, and
sometimes I wonder, if rates dostay higher, what does that mean
for some of the financing ofthe treasury debt?
Richard (17:52):
So there's an interesting.
There's kind of an interestingweird thing that we have to kind
of consider here and that isthat a little more inflation
helps pay down the debt.
Right, because governmentrevenues go up because of
inflation.
A lot of people call thatbracket creep and things like
that, where tax revenuescorporate and personal tax
(18:15):
revenues start going up andsales taxes go up on the local
level and things like that, andso you see, the government
revenues start to go up and atthe same time debt is fixed,
start to go up and at the sametime debt is fixed right, so it
becomes easier to pay off thedebt.
A lot of people derogatorilycall that inflating away the
debt.
Right, and that can happen.
(18:35):
What people don't realize isthat throughout the 60s into the
70s we inflated away our debt.
If you look at debt to GDP, itlooks very low back then.
One of the reasons it was solow was that nominal GDP was so
high because of inflation, andso, yeah, rates may go up.
It doesn't necessarily meanthat we're cooked Now if rates
(18:58):
go up and the economy stalls.
that's a whole different storybecause then tax revenues don't
go up because nobody's buyingthings, nobody's got jobs,
there's no incomes, everythingelse.
So we have to watch that interms of what it means for
higher rates.
But higher rates themselvesdon't necessarily signal some
kind of death and destructionfor the federal government.
Ryan (19:20):
Okay, okay, so high-level portfolio positioning for
heading into next year.
You mentioned maximumdiversification, but how should
investors think aboutpositioning portfolios?
Maybe unpack that a little bitmore.
Richard (19:37):
So in our portfolios they are really primed for what
I just said, that we're takingthe over on nominal growth right
Again, nominal growth beingreal plus inflation, keeping in
mind that profits growth is allnominal.
Right, there's no real profitsgrowth, it's nominal.
So we're taking the over onprofits growth.
We're taking the over on GDPnominal GDP.
(20:00):
And so, historically, thatwould say you want to emphasize
cyclical stocks, right, keepingin mind the cycle is determined
by cyclicals Sounds silly, butpeople forget it.
And so you know.
Our portfolios are structuredso that we're overweight things
like energy.
We are definitely overweightindustrials, for some of the
reasons we talked about before.
We are overweight mid-caps andsmall caps.
(20:22):
We have a small overweight infinancials because of the yield
curve steepens.
That's going to help thefinancial sector and even
outside the United States you'reseeing some of this happen.
So we have a pretty decentweight in emerging markets,
ex-china, not so much developedworld, but most of our non-US
exposure is in EMX China.
(20:42):
Okay.
Ryan (20:43):
Are there any specific areas?
I mean India or Southeast Asia.
Yeah, it's pretty mixed.
I mean India or Southeast Asia,or yeah, it's pretty mixed.
Richard (20:50):
I mean, you're actually you know there's some positive
things, believe it or not.
I mean people can't believethis stuff is going on because
it becomes so US centric.
But you know, even places likeBrazil, there's been some
positive things going on.
The stock markets are dirtcheap.
They performed miserably in2024.
So there's some realopportunities in places like
that.
(21:10):
Certainly Taiwan, althoughthat's obviously risky from a
political point of view, butyou've got stocks there that are
very important to thetechnology sector.
Korea some of the best autocompanies in the world are in
Korea.
I always love how everybody'sgaga about electric vehicles and
nobody talks about Koreancompanies, which are actually
the leaders in electric vehiclesand things like that.
(21:32):
So there's opportunities aroundthe world that people just don't
even consider anymore, which isreally kind of interesting.
Ryan (21:41):
So you're overweight those areas Is it safe to say that
you're underweight?
Some of the Mag7, thentechnology we are underweight.
Richard (21:48):
Depending on our portfolios, we range from equal
weight to underweight the Mag7.
But technology is a slightunderweight in our portfolios.
We're overweight tech excludingthe Mag7.
So, if you think, about ourstory about mid caps and small
caps, the broadening of themarket.
That kind of makes sense, evenwithin the tech sector.
Ryan (22:09):
Okay, so that said a lot of times we hear, and I even I
don't know if guilty is theright word, but I talk a lot
about making analogies betweenthe hype cycle related to AI and
what happened with the internetin the early 2000s.
Richard (22:27):
Do you think that's a fair comparison?
I think it's a very faircomparison and I think it's a
fair comparison to virtually anynew technology that you've seen
through time.
You can think about therailroads and the bubbles that
revolved around the railroadsway back when.
I think investors have a verytough time differentiating
between an economic story and aninvestment story.
(22:47):
Tough time differentiatingbetween an economic story and an
investment story.
They're not the same.
The economic story relating toAI Will AI change the economy?
Of course it will.
Who would argue otherwise?
Right, I mean, of course it'sgoing to change the economy.
But let's remember, theinternet changed the economy.
The automobile changed theeconomy.
The railroads changed theeconomy.
My personal favorite, the lightbulb changed the economy, right
.
Massive productivity enhancingtechnology, because it turned
(23:10):
the economy to a 24-hour economy.
Right, you can't have agraveyard shift in the dark,
right?
So this is not the first timewe're seeing technology change.
So when you hear people saythis is an unprecedented period
of technological innovation,again that word unprecedented
bothers me, but it's just nottrue.
I mean, we had many periodswhere you've had huge
(23:30):
productivity enhancingtechnologies.
Okay, that's the economic story.
What's the investment story?
So one of the rules that we liveby at RBA is we try, when we
think long-term, about long-termsecular themes.
We try to think like the onebanker in a town with a thousand
borrowers.
So think about that one bankerin the town with a thousand
borrowers.
He or she is going to mint it.
(23:51):
Right, there's no competition.
They're going to set theinterest rate on every loan.
It's going to be like loansharking, right, it's going to
be fantastic returns.
Turn it around Thousand banks,one borrower.
That borrower is going to makeout like a bandit because the
(24:11):
banks are going to compete forthe only loan in town,
effectively driving down theinterest rates, so the borrower
is going to get free money.
Moral of the story long-termsecular returns are always,
always a function of the supplyand demand of capital, and so
it's hard to argue that AI isstarved for capital.
And that's the whole point.
And that's why I think longerterm returns are going to be
disappointing for people.
Ryan (24:30):
Yeah, I can't help listening to your scarcity of
capital analogy.
Think of the energy sectorTraditional energy versus green
energy or whatever renewableenergy.
It seems like that's been thestory.
Richard (24:45):
So, ryan, let me give you a fact that I'm sure most of
the viewers of this, orlisteners, are completely
unaware of, and that is that theUnited States may be a net
exporter of energy, but we arenot energy independent.
Why are we not energyindependent?
Because the United States doesnot have refineries that can
(25:06):
refine shale oil.
Virtually all shale oil is forexport, so people don't realize
this right, and so we get about60% of our oil from Canada
Interesting point relative totariffs, by the way we get about
60% of our oil from Canada.
We are not energy independent.
(25:26):
So there's a massive need toyour point about capital
starvation, there is a massiveneed for the modernization of US
energy infrastructure.
I mean it's just if you thinkabout, why does everybody
understand the issues related tonational security and
semiconductors, but they don'tunderstand the risk to the
(25:55):
United States of energy orvirtually anything right?
Or we're dependent on the restof the world for everything.
How come nobody seems tounderstand that either?
So I think there's hugeinvestment opportunities here
that are much more exciting thanAI from an investment point of
view.
Right, maybe the?
You know, as I said, nobody'sgoing to cuddle up to you if you
whisper ball bearings but,you'll probably get a better
investment return.
Ryan (26:12):
That is a great place to kind of land the conversation.
No one's going to cuddle up toyou with ball bearings.
I have one more question foryou, though.
I try to end the podcastepisodes with a recommendation
from my guests on what they'rereading, what they've read
recently Any bookrecommendations on the Rich
Bernstein reading list?
Richard (26:32):
That's an interesting one.
I don't know if I mentionedthis last time, but I'm a big
kind of spy, espionage kind offan oh excellent and I'm reading
a book right now.
Of course I cannot remember thetitle.
It's about 1960s, about the FBIand a black woman as an FBI
(26:54):
agent and how she ended up as anFBI agent and what she was
going through in the 1960s,which is obviously a very
turbulent time, becauseeverybody says, you know, oh,
this is an unprecedented timefor turbulence in the United
States.
Go read about the 1960s for asecond.
You'll see some pretty goodturbulence in our history and
it's just an interestingdichotomy of FBI and civil
rights.
It's like just too many thingswrapped into one book and it's
(27:14):
just an interesting dichotomy ofFBI and civil rights.
It's like just too many thingswrapped into one book and it's
kind of interesting.
But of course I can't rememberthe name of it, so it doesn't
make any difference.
Ryan (27:23):
All right, hold on.
The book you refer to isAmerican Spy.
We looked it up.
Yes, exactly, that is it.
That is it.
That is the book.
Richard (27:31):
It is a very interesting read about all these
things kind of bumping heads,the FBI, civil rights, 1960s,
all these different things.
It's kind of interesting, notonly from the point of view of,
if you like, espionage it's kindof cool, but it's also kind of
cool relative to history.
If you're a little bit of ahistory buff, a little bit of an
espionage buff, it's a prettygood combination.
Ryan (27:54):
I will have to check that out.
One more question for you, andagain this is something I've
asked a few other people and gotsome interesting answers.
So as long as I got you on thespot here, okay, you've been on
Wall Street for 40 years.
You've been in this industry.
You've been very successful init.
Let's say your path went in adifferent direction.
(28:14):
What else would you have donehad you not gone into the
investment industry?
Richard (28:18):
Interesting.
Well, given that I'm 5'8", mydesire to be a New York Knick
died very early, but that waswhat I had hoped to be when I
was like 14 or something.
Ryan (28:28):
Spud Webb he's a Spud Webb .
Richard (28:30):
Yeah, and I had like zero vertical leap.
I was going nowhere.
I was going absolutely nowhere.
But when I graduated collegethis is a very I actually tell
our interns you know our collegeinterns and when I speak to
college students about careersand things like that, I always
say do not try to plan out yourlife, because there's going to
(28:51):
be lots of twists and turns.
Things are going to change.
The way the world is today willnot be the way the world is 15
years, 20 years.
You want to be flexible enoughto understand those changes.
For me, that change occurredsix months into my career.
So when I graduated college Iwanted to be a labor economist.
Okay, and why People say laboreconomist?
(29:12):
You got to think.
Late 70s, early 80s, laborunions were very powerful in the
United States.
And every corporation had alabor relations department.
It was literally a growthindustry.
Right Today, who would thinklabor relations is a growth
industry?
That was 1979, 1980 growthindustry.
And so I actually landed a jobin a very prestigious economic
(29:36):
consulting firm, in their laboreconomics group, and it was kind
of cool work and we were doingvery interesting things.
Well, I graduated in May of1980.
In November of 1980, aseverybody knows, ronald Reagan
beat Jimmy Carter in thepresidential race and we were
consultants.
I worked for a consulting firm,consultants billed by the hour,
Not exaggerating.
(29:57):
Tuesday is election day,wednesday morning 50% of our
business went away.
Okay, I was not the sharp attackin the box, but it was very
clear to me this was no longer agrowth industry.
Okay, and one of my friends Iwas a pretty good computer
programmer One of my friendsended up going to a sub of Chase
(30:17):
Bank that had the largest setof economic and financial
databases in the world and hesaid to me there was a job
opening.
He said you have to come here,you're going to love this stuff.
And I said Wall Street.
What do I want to come to WallStreet for?
I don't want to work on WallStreet.
And he actually said to me inthis famous quote between the
two of us the starting salary istwice what you're making right
now.
I said, okay, I'll go for theinterview, and my biggest client
(30:41):
turned out to be the MerrillLynch Investment Strategy Group.
Wow, and that's how I got toWall Street.
And so you know I don't.
It's a good story about tryingto be flexible, about trying to
adjust.
I'm not going to tell you.
I thought this out at the time.
It was more luck and stupidityof just saying, oh wow, that's
kind of an interesting salary.
I'll take that, not thinkingabout anything else, but I think
(31:02):
it's a good lesson for youngerpeople to keep in the back of
their heads about the need to beflexible throughout your career
.
Ryan (31:09):
That's very interesting, thank you.
Thank you for your insights.
Once again, thanks for comingon the podcast, absolutely
Thanks for the invitation.
Yeah, Hopefully we can do itagain Not too far down the road.
Love to and thanks to all ofyou for joining us on this
episode of the First Trust ROIpodcast.
We'll see you next time.
Hi, welcome to this episode of the First Trust ROI
podcast.
I'm Ryan Isakainen, etfstrategist at First Trust.
In today's episode, I'm joinedby Richard Bernstein from the
firm that bears his name,richard Bernstein Advisors.
Rich has been on Wall Streetfor over 40 years.
Before coming to RBA, he wasthe chief investment strategist
at Merrill Lynch.
Rich and I are going to discusswhat's going on in the markets
(00:36):
in 2024, what he expects in 2025, and some of the risks and
opportunities in the equitymarkets.
Thanks for joining us on thisepisode of the ROI Podcast.
So, rich, thanks again forjoining us on the podcast.
It's been a weird year.
It's like.
I don't think anyone coming into 2024 expected that we're
(00:57):
recording this on December 4th,that the S&P 500 would be up 27%
.
Richard (01:01):
Yeah, crazy, did you expect that?
No, not in a million years.
Ryan (01:04):
Yeah, okay.
So, given that I'm crazy, didyou expect that?
No, not in a million years,yeah, okay.
So, given that I'm going to askwhat you expect for next year,
do you think that the market'sgoing to continue on this hot
streak or do you think we'regoing to have some more
surprises up in the next 2025?
Richard (01:20):
Well, ryan, I think the big difference now versus a
year ago is the amount of riskthat individual investors are
ready, willing and able to take.
That is a big difference.
You know, there's always thisnotion that people are chasing
performance.
I think there's tons of datathat shows that people are now
(01:40):
full in chasing performance, andso you know, I think what does
that mean for the market.
We'll talk about that, I'm sure, but the market's probably not
as safe as most individualinvestors believe right now,
that there's probably more riskin the market than people think,
which I'm sure we'll get into.
My argument is this is a timefor maximum diversification.
(02:03):
I think most investors areshunning diversification because
they think it's a suck onperformance, and I think that's
going to be the big story for2025.
Ryan (02:12):
So from one to 10, 10 is being super risk chasing, one is
being super risk averse.
Where do we fit on thatspectrum, do you think?
Richard (02:20):
I think investors right now are somewhere.
I'd say nine, nine and a halfOkay, so really Really up to
there's lots of data that I hateto use the word unprecedented,
because my joke is that we'reseeing unprecedented use of the
word unprecedented, but there isunprecedented risk-taking among
individual investors.
You have never seen this before.
Ryan (02:38):
Yeah, okay.
So you mentioned maximumdiversification.
Can you unpack that a littlebit?
Richard (02:44):
Yeah, I think.
Look, everybody knows that themarket is up a lot because of
the concentration of the market.
That's been the big story.
I mean, honestly, we did notexpect 2023's concentration to
continue into 2024.
Obviously, that was the reasonwhy I think we underestimated
the potential in the market wasan erowness of the market, but
(03:11):
when you have such a smallnumber of stocks dominating the
US market and, to a largerextent, dominating the global
markets, it questions like arethere really no opportunities in
anything else?
And so I think the narrownessof the market gives investors an
opportunity, one to diversify,which reduces risk, but also to
expand the opportunity set ofthe portfolio, which nobody
seems to want to do outsideseven or 10 stocks.
Ryan (03:30):
So, from an earning standpoint, those Magnificent
Seven or whatever acronym youwant to apply to them have been
fantastic over the last year ortwo 2022, they really softened a
bit, but then they've comeroaring back as everyone's
embracing AI.
What are you seeing in terms ofearnings expectations going
forward into next year?
Richard (03:52):
Right.
So what's interesting is theearnings growth of the
Magnificent Seven isn't going toimplode, or you can make this
very dramatic story.
I don't think that's the rightway to approach it.
It's not that the earnings aregoing to implode.
It's more that the fundamentalsare broadening.
There's more companies that arestarting to grow.
We put out something a month orso ago that pointed out that
(04:12):
there are now roughly a littlebit more than 70 companies just
in the S&P 500.
Forget mid-cap, small cap,non-us 70 companies just in the
S&P that are forecast to growearnings 25% or more, and only
one of the MAG-7 passed thatscreen.
So the opportunity set isgrowing and I think that's the
story for at least the firsthalf of 25 is that fundamentals
(04:35):
are probably going to bestronger than people think.
Ryan (04:37):
Okay, A lot of attention has sort of shifted towards the
small and mid-cap segment of themarket.
Do you think that the wehaven't really seen the earnings
improve quite as much in someof that segment of the market,
although I think theexpectations in the next couple
of years imply that?
But do you think that that'slikely to occur in the
underlying fundamentals of thosecompanies?
Richard (04:58):
I think that's right and there's many reasons why I
would argue that small caps andmid-caps are going to be
incrementally attractive toinvestors.
You know one their relativeearnings are starting to go up.
Right I think by the end ofthis year into early next year,
you'll find small and mid capearnings growth will be a
multiple of mag seven earningsgrowth.
Certainly nobody believes thatright now.
You're not hearing muchdiscussion about it, but that's
(05:19):
what the forecasts imply, isthat that would be the case.
Now, when I say forecasts imply,people go well, who would
believe the forecast?
Well, why would you believe theforecast of the MAG-7 any more
than you believe the forecast ofanything else?
Are MAG-7 analysts innatelysmarter than other analysts?
No, I mean.
So it's a little selectivejudgment there that we trust the
MAG-7 forecast and we don'ttrust the forecast of any other
(05:41):
stock.
But by the end of this year,early next year, small and mid
caps and something I'm surewe'll get into in more detail is
this whole notion ofdeglobalization.
And the world is contracting,whether people like it or not,
for whatever reason.
We could argue why this ishappening, but it is happening
and deglobalization, we think,is going to favor more
(06:04):
domestically-oriented stocks asopposed to stocks that are
getting a lot of their growthfrom outside the United States.
Ryan (06:13):
Yeah, I'm glad you brought that up, because it was
something I wanted to ask youabout.
You've been kind of talkingabout this theme of
deglobalization and reshoringfor over a decade now.
Richard (06:25):
Yeah, that's right.
Ryan (06:26):
So if you were to think that in maybe a baseball analogy
, what inning are we in?
When it comes to that sort oftrend.
Richard (06:32):
So, ryan, I just want to point out and to kind of peak
people's interest a little bit,that if I could give you a
theme that has outperformed theS&P 500 for the last decade, the
last five years, three years,one year pick whatever time
period you want and had notechnology stocks in it Number
one, would you be interested?
Number two have you ever heardof it?
(06:52):
And the answer is probably noto most of this.
And it's all aboutdeglobalization that's involved
in that.
So what inning are we in?
I think we're in the very earlyinning still, even though it's
a 10-year plus theme already.
It's hard to argue that numberone.
People have gravitated to it,that it's getting headlines and
that the valuations arestretched.
None of those are true.
So I think we're still in thevery early innings.
Ryan (07:14):
Okay, and so, when we think about the types of
companies that benefit, whattypes of companies do you think
benefit from that trend ofdeglobalization and reshoring of
, especially reshoring ofmanufacturing?
Richard (07:25):
Right.
So our argument has been thatthe main beneficiaries of that
of deglobalization are mid-capand small-cap industrial
companies, right, primarilythose that get their sales from
within the United States.
So you know, if you're talkingabout deglobalization, your
company gets sales from China.
Well, that doesn't do much foryou.
Here.
It's really you know, you wantcompanies that primarily sell
(07:46):
into the United States, that arefrom the United States.
These are companies that arereally the nuts and bolts of
everything that's going on, evenmost growth stories that people
are talking about, the nuts andbolts of this.
So, for instance, let's saysomebody talks about data
centers.
Well, who provides the HVAC tokeep the data centers cool?
Who provides the carbon wire sothat the HVAC and the data
(08:11):
centers can actually get theirelectricity?
All those kind of things.
And the way I describe it topeople is if you were to snuggle
up to somebody and say, youknow, whisper mag seven in their
ear, they'd be like, oh, wow,this is so exciting.
Snuggle up to somebody and youknow just whisper the words ball
bearings, yeah, and watch themmove away from you very quickly,
yeah, and watch them move awayfrom you very quickly, but
(08:32):
that's the whole story.
Is that nobody thinks there's astory in things like ball
bearings or carbon wire, inlandbarges, hvac, all these
different things?
Ryan (08:39):
So it is really ripple effects in part from some of the
themes that people areenthusiastic about, like
artificial intelligence, because, to your point, data centers,
the demand for data centers,imply all sorts of different
types of companies that willbenefit.
Electricity is another thingthat we've talked about.
The demand for electricity isgoing to be huge.
Richard (09:00):
Yeah, I think 2024 was the first time in many years
we've actually seen an increasein the demand for electricity in
the United States, which ispretty wild.
But the problem is the US gridis like 1950s technology.
So people talk aboutinfrastructure and generally
infrastructure investmentsrevolve around either paving
roads or food courts andairports and things like that
(09:22):
silly things like that.
But really real infrastructureis things like modernizing the
grid, which is not difficult todo and we just have to make an
effort to do it.
Ryan (09:31):
Yeah, which is not difficult to do, and we just
have to make an effort to do it,yeah.
The other I don't want to getinto.
We've gone through thepolitical season so I won't talk
too much about politics, butone of the things that people
are talking about is thepotential for the next couple of
years that will have an impacton potentially domestic
manufacturing and global as well, is the potential of adding
(09:51):
tariffs, and the incomingadministrations talked a lot
about that, so I just want yourthoughts on what the impact will
likely be maybe the likelihoodthat tariffs will actually be
implemented and how important isit.
Richard (10:06):
So for us, I think the biggest.
There's kind of two issues here.
Number one is we don't thinkthat tariffs will be as broadly
implemented as is being talkedabout.
Why?
Because we don't produceanything here in the United
States anymore.
My joke is, you know, isanything you're wearing right
now, ryan, made in the UnitedStates?
No, the answer is no, nothing.
No piece of clothing you arewearing is made in the United
(10:26):
States.
And so if you start puttingtariffs on clothing, clothing
prices are going to go up andthere's no domestic substitution
to take the place of thoseimported goods.
So if you start raising prices,you start seeing inflation goes
up.
We know consumers don't likeinflation.
Probably not politicallypalatable to start having all
this inflation.
(10:47):
So you may have it on selecteditems.
That's entirely possible.
My guess is you won't have itas broadly as some people are
concerned about right now.
Um, but you know, is thatimportant in terms of industries
?
Well, you know, depending onhow they structure this and
that's the big, if right and Idon't think anybody actually
knows certain domesticindustries could be protected
(11:07):
and that would be very good forthem.
Um, other industries we don'thave.
So then it falls entirely onthe consumer and that would not
be good.
So I think the jury should weshould remain kind of agnostic
about this yet until we see whatactually happens.
Ryan (11:21):
Yeah, you don't think we're going to have the relaunch
of the textile industry in theUS.
Something tells me we'reprobably not, and something also
tells me we're not going to runaround naked either, so we're
probably going to have somethingin between you know, the other
part of the incomingadministration policies that
people are talking a lot abouthas to do with regulation, and
(11:44):
you know a lot of talk about theDOJ, the Department of
Government Efficiency, elon Muskand Vivek and I guess,
generally speaking, what's yourexpectation for next year and, I
guess, beyond, are we going tosee an era of deregulatory
policies being put in?
Richard (12:03):
place.
So two things there.
One is kind of the regulationand I think in terms of less
regulation, I don't know ifyou'll actually have
deregulation, but certainly lessregulation, less regulation.
I don't know if you'll actuallyhave deregulation, but
certainly less regulation.
I think that's a fair bet.
We can discuss whether thathelps companies or doesn't help
companies.
I think the data is much moremixed than people think.
(12:24):
I always point out thatSingapore seems to be a pretty
nice place to do business andit's the most regulated economy
in the entire globe.
So certain regulation will goaway and that'll that'll be
helpful to to many corporationsand and, um, you know, I think
that will be the trend and Idon't think I'm saying that
that's anything unique thatpeople haven't heard before.
Um, the the governmentefficiency stuff.
(12:46):
Look, you always want thegovernment to be more efficient.
I don't think there's anybodywho really would campaign saying
we want a less efficientgovernment.
It's easier said than done.
The problem is how do youcreate an efficient, more
efficient government withoutmean?
It's pretty hard to do thosekinds of things.
(13:14):
So we'll see what happens, but Ithink the notion that we want
to try to make the governmentmore efficient is a very noble
one, and why wouldn't we want totry to do that?
Ryan (13:24):
Yeah, it seems to me that regulations do tend to compound
over time.
Oh, absolutely, and there'sreally no incentive usually to
end up trimming old regulationsthat don't really have a place
Right.
Richard (13:34):
And I think you know there's two kinds of regulations
.
There's regulations that stymiebusiness and regulations that
protect the economy Right.
And we'll see what happens.
Some of those you knowprotecting the economy is
probably good, stymieingbusiness probably not so good
yeah.
Ryan (13:46):
Yeah, it seems like everyone probably wants certain
regulations that are helping toprotect them, if want certain
regulations that are helping toprotect them.
Richard (13:53):
If it's your industry, you want less regulation.
That is no doubt about that.
Ryan (13:56):
Yeah yeah, yeah, okay.
Another topic I wanted to askyou about that we talked a
little bit about last time wasthinking about inflation and Fed
policy.
I think when we spoke last itwas either when the Fed had just
begun cutting rates, or maybeit was even before, but it
(14:17):
certainly, as the year hasprogressed, it has become more
and more apparent that the Fedwas not going to cut as much as
the market had priced in.
So right now, as we're recordingthis on the 4th of December,
it's something like 75% chancethe Fed's going to cut this
month.
Richard (14:38):
What's your outlook going past that?
So I think there's two ways tothink about this.
Number one is a lot of peoplediscuss should the Fed be
cutting rates or should they notGiven that?
Jay Powell is not exactlycalling me up and asking me my
opinion on this one.
I don't think what I think theyshould do becomes relevant.
I think we all have to discountthat.
As investors, we have to try tofigure out what is the Fed
going to do and how do we builda portfolio around that.
(14:59):
And look, I will be honest, Idon't understand why the Fed
wants to ease so aggressively.
Financial conditions are veryeasy right now.
You see that in credit spreadsbeing remarkably tight.
You see that in things likeprivate debt having no trouble
raising capital.
You see that in something likeBitcoin, where speculative
capital is running rampant.
So there's major bank balancesheets are in great shape.
(15:20):
We know that.
So where is the stress in thefinancial system that's
stymieing the economy in oneform or another?
It doesn't exist.
So I don't quite understand whythe Fed is so intent on cutting
rates.
That being said, they're goingto cut rates right, and we could
argue about how much, but Ithink the important point that
comes out of this is that Ithink investors should be If you
(15:43):
think of the world as anover-under bet, take the over on
nominal growth.
That nominal growth, real growthplus inflation, nominal growth
will be stronger than investorsthink right now.
The Fed is.
Gdp is tracking right now atroughly 3% growth.
Corporate profits areaccelerating and the Fed's
(16:04):
cutting rates?
That doesn't make for a weakereconomy.
So let's take the Fed's cuttingrates.
That doesn't make for a weakereconomy.
So let's take the over onnominal GDP Now.
Maybe it's more inflation,maybe it's more growth.
I'm not telling you.
I'm smart enough to figure thatout to the decimal point but I
think you want to take the overon growth, at least for the
first half of the year.
Ryan (16:21):
The other, I think, surprising thing about rates.
Since the Fed has begun cutting, we've seen the longer end of
the yield curve move higher andit's come back a little bit.
But was that a surprise to you?
Well?
Richard (16:32):
it wasn't really, because we didn't think the Fed
should be cutting in the firstplace.
If the Fed cuts rates and we'reheading into recession, the
whole curve shifts down, andthat's not what happened, as you
point out.
And so what it says is the Fedis cutting rates into a
reasonable nominal growtheconomy that's likely to get
stronger, and if people want totry to envision what the 10-year
(16:56):
will do in 2025, just say whatdo you think nominal GDP growth
is going to be?
And you have a pretty goodforecast of what the 10-year is
going to do.
It doesn't track decimal pointto decimal point, but the trends
are pretty close and so if youthink nominal growth is going to
be 5% to make up a number youshould expect the 10-year to
roughly be around 5%.
(17:16):
If you think it's going to be4%, then it tells you.
But it's pretty hard right nowto figure out how nominal growth
would be below 4 to get you a10-year that's low.
Without something likequantitative easing or something
like that where the Fed isbuying up all these treasuries
unlikely to happen the 10-yearis probably going to be a bit
higher than people think as well.
Ryan (17:35):
Yeah, the federal spending and the budget have been
deficit spending for the last,really since COVID, and
sometimes I wonder, if rates dostay higher, what does that mean
for some of the financing ofthe treasury debt?
Richard (17:52):
So there's an interesting.
There's kind of an interestingweird thing that we have to kind
of consider here and that isthat a little more inflation
helps pay down the debt.
Right, because governmentrevenues go up because of
inflation.
A lot of people call thatbracket creep and things like
that, where tax revenuescorporate and personal tax
(18:15):
revenues start going up andsales taxes go up on the local
level and things like that, andso you see, the government
revenues start to go up and atthe same time debt is fixed,
start to go up and at the sametime debt is fixed right, so it
becomes easier to pay off thedebt.
A lot of people derogatorilycall that inflating away the
debt.
Right, and that can happen.
(18:35):
What people don't realize isthat throughout the 60s into the
70s we inflated away our debt.
If you look at debt to GDP, itlooks very low back then.
One of the reasons it was solow was that nominal GDP was so
high because of inflation, andso, yeah, rates may go up.
It doesn't necessarily meanthat we're cooked Now if rates
(18:58):
go up and the economy stalls.
that's a whole different storybecause then tax revenues don't
go up because nobody's buyingthings, nobody's got jobs,
there's no incomes, everythingelse.
So we have to watch that interms of what it means for
higher rates.
But higher rates themselvesdon't necessarily signal some
kind of death and destructionfor the federal government.
Ryan (19:20):
Okay, okay, so high-level portfolio positioning for
heading into next year.
You mentioned maximumdiversification, but how should
investors think aboutpositioning portfolios?
Maybe unpack that a little bitmore.
Richard (19:37):
So in our portfolios they are really primed for what
I just said, that we're takingthe over on nominal growth right
Again, nominal growth beingreal plus inflation, keeping in
mind that profits growth is allnominal.
Right, there's no real profitsgrowth, it's nominal.
So we're taking the over onprofits growth.
We're taking the over on GDPnominal GDP.
(20:00):
And so, historically, thatwould say you want to emphasize
cyclical stocks, right, keepingin mind the cycle is determined
by cyclicals Sounds silly, butpeople forget it.
And so you know.
Our portfolios are structuredso that we're overweight things
like energy.
We are definitely overweightindustrials, for some of the
reasons we talked about before.
We are overweight mid-caps andsmall caps.
(20:22):
We have a small overweight infinancials because of the yield
curve steepens.
That's going to help thefinancial sector and even
outside the United States you'reseeing some of this happen.
So we have a pretty decentweight in emerging markets,
ex-china, not so much developedworld, but most of our non-US
exposure is in EMX China.
(20:42):
Okay.
Ryan (20:43):
Are there any specific areas?
I mean India or Southeast Asia.
Yeah, it's pretty mixed.
I mean India or Southeast Asia,or yeah, it's pretty mixed.
Richard (20:50):
I mean, you're actually you know there's some positive
things, believe it or not.
I mean people can't believethis stuff is going on because
it becomes so US centric.
But you know, even places likeBrazil, there's been some
positive things going on.
The stock markets are dirtcheap.
They performed miserably in2024.
So there's some realopportunities in places like
that.
(21:10):
Certainly Taiwan, althoughthat's obviously risky from a
political point of view, butyou've got stocks there that are
very important to thetechnology sector.
Korea some of the best autocompanies in the world are in
Korea.
I always love how everybody'sgaga about electric vehicles and
nobody talks about Koreancompanies, which are actually
the leaders in electric vehiclesand things like that.
(21:32):
So there's opportunities aroundthe world that people just don't
even consider anymore, which isreally kind of interesting.
Ryan (21:41):
So you're overweight those areas Is it safe to say that
you're underweight?
Some of the Mag7, thentechnology we are underweight.
Richard (21:48):
Depending on our portfolios, we range from equal
weight to underweight the Mag7.
But technology is a slightunderweight in our portfolios.
We're overweight tech excludingthe Mag7.
So, if you think, about ourstory about mid caps and small
caps, the broadening of themarket.
That kind of makes sense, evenwithin the tech sector.
Ryan (22:09):
Okay, so that said a lot of times we hear, and I even I
don't know if guilty is theright word, but I talk a lot
about making analogies betweenthe hype cycle related to AI and
what happened with the internetin the early 2000s.
Richard (22:27):
Do you think that's a fair comparison?
I think it's a very faircomparison and I think it's a
fair comparison to virtually anynew technology that you've seen
through time.
You can think about therailroads and the bubbles that
revolved around the railroadsway back when.
I think investors have a verytough time differentiating
between an economic story and aninvestment story.
(22:47):
Tough time differentiatingbetween an economic story and an
investment story.
They're not the same.
The economic story relating toAI Will AI change the economy?
Of course it will.
Who would argue otherwise?
Right, I mean, of course it'sgoing to change the economy.
But let's remember, theinternet changed the economy.
The automobile changed theeconomy.
The railroads changed theeconomy.
My personal favorite, the lightbulb changed the economy, right
.
Massive productivity enhancingtechnology, because it turned
(23:10):
the economy to a 24-hour economy.
Right, you can't have agraveyard shift in the dark,
right?
So this is not the first timewe're seeing technology change.
So when you hear people saythis is an unprecedented period
of technological innovation,again that word unprecedented
bothers me, but it's just nottrue.
I mean, we had many periodswhere you've had huge
(23:30):
productivity enhancingtechnologies.
Okay, that's the economic story.
What's the investment story?
So one of the rules that we liveby at RBA is we try, when we
think long-term, about long-termsecular themes.
We try to think like the onebanker in a town with a thousand
borrowers.
So think about that one bankerin the town with a thousand
borrowers.
He or she is going to mint it.
(23:51):
Right, there's no competition.
They're going to set theinterest rate on every loan.
It's going to be like loansharking, right, it's going to
be fantastic returns.
Turn it around Thousand banks,one borrower.
That borrower is going to makeout like a bandit because the
(24:11):
banks are going to compete forthe only loan in town,
effectively driving down theinterest rates, so the borrower
is going to get free money.
Moral of the story long-termsecular returns are always,
always a function of the supplyand demand of capital, and so
it's hard to argue that AI isstarved for capital.
And that's the whole point.
And that's why I think longerterm returns are going to be
disappointing for people.
Ryan (24:30):
Yeah, I can't help listening to your scarcity of
capital analogy.
Think of the energy sectorTraditional energy versus green
energy or whatever renewableenergy.
It seems like that's been thestory.
Richard (24:45):
So, ryan, let me give you a fact that I'm sure most of
the viewers of this, orlisteners, are completely
unaware of, and that is that theUnited States may be a net
exporter of energy, but we arenot energy independent.
Why are we not energyindependent?
Because the United States doesnot have refineries that can
(25:06):
refine shale oil.
Virtually all shale oil is forexport, so people don't realize
this right, and so we get about60% of our oil from Canada
Interesting point relative totariffs, by the way we get about
60% of our oil from Canada.
We are not energy independent.
(25:26):
So there's a massive need toyour point about capital
starvation, there is a massiveneed for the modernization of US
energy infrastructure.
I mean it's just if you thinkabout, why does everybody
understand the issues related tonational security and
semiconductors, but they don'tunderstand the risk to the
(25:55):
United States of energy orvirtually anything right?
Or we're dependent on the restof the world for everything.
How come nobody seems tounderstand that either?
So I think there's hugeinvestment opportunities here
that are much more exciting thanAI from an investment point of
view.
Right, maybe the?
You know, as I said, nobody'sgoing to cuddle up to you if you
whisper ball bearings but,you'll probably get a better
investment return.
Ryan (26:12):
That is a great place to kind of land the conversation.
No one's going to cuddle up toyou with ball bearings.
I have one more question foryou, though.
I try to end the podcastepisodes with a recommendation
from my guests on what they'rereading, what they've read
recently Any bookrecommendations on the Rich
Bernstein reading list?
Richard (26:32):
That's an interesting one.
I don't know if I mentionedthis last time, but I'm a big
kind of spy, espionage kind offan oh excellent and I'm reading
a book right now.
Of course I cannot remember thetitle.
It's about 1960s, about the FBIand a black woman as an FBI
(26:54):
agent and how she ended up as anFBI agent and what she was
going through in the 1960s,which is obviously a very
turbulent time, becauseeverybody says, you know, oh,
this is an unprecedented timefor turbulence in the United
States.
Go read about the 1960s for asecond.
You'll see some pretty goodturbulence in our history and
it's just an interestingdichotomy of FBI and civil
rights.
It's like just too many thingswrapped into one book and it's
(27:14):
just an interesting dichotomy ofFBI and civil rights.
It's like just too many thingswrapped into one book and it's
kind of interesting.
But of course I can't rememberthe name of it, so it doesn't
make any difference.
Ryan (27:23):
All right, hold on.
The book you refer to isAmerican Spy.
We looked it up.
Yes, exactly, that is it.
That is it.
That is the book.
Richard (27:31):
It is a very interesting read about all these
things kind of bumping heads,the FBI, civil rights, 1960s,
all these different things.
It's kind of interesting, notonly from the point of view of,
if you like, espionage it's kindof cool, but it's also kind of
cool relative to history.
If you're a little bit of ahistory buff, a little bit of an
espionage buff, it's a prettygood combination.
Ryan (27:54):
I will have to check that out.
One more question for you, andagain this is something I've
asked a few other people and gotsome interesting answers.
So as long as I got you on thespot here, okay, you've been on
Wall Street for 40 years.
You've been in this industry.
You've been very successful init.
Let's say your path went in adifferent direction.
(28:14):
What else would you have donehad you not gone into the
investment industry?
Richard (28:18):
Interesting.
Well, given that I'm 5'8", mydesire to be a New York Knick
died very early, but that waswhat I had hoped to be when I
was like 14 or something.
Ryan (28:28):
Spud Webb he's a Spud Webb .
Richard (28:30):
Yeah, and I had like zero vertical leap.
I was going nowhere.
I was going absolutely nowhere.
But when I graduated collegethis is a very I actually tell
our interns you know our collegeinterns and when I speak to
college students about careersand things like that, I always
say do not try to plan out yourlife, because there's going to
(28:51):
be lots of twists and turns.
Things are going to change.
The way the world is today willnot be the way the world is 15
years, 20 years.
You want to be flexible enoughto understand those changes.
For me, that change occurredsix months into my career.
So when I graduated college Iwanted to be a labor economist.
Okay, and why People say laboreconomist?
(29:12):
You got to think.
Late 70s, early 80s, laborunions were very powerful in the
United States.
And every corporation had alabor relations department.
It was literally a growthindustry.
Right Today, who would thinklabor relations is a growth
industry?
That was 1979, 1980 growthindustry.
And so I actually landed a jobin a very prestigious economic
(29:36):
consulting firm, in their laboreconomics group, and it was kind
of cool work and we were doingvery interesting things.
Well, I graduated in May of1980.
In November of 1980, aseverybody knows, ronald Reagan
beat Jimmy Carter in thepresidential race and we were
consultants.
I worked for a consulting firm,consultants billed by the hour,
Not exaggerating.
(29:57):
Tuesday is election day,wednesday morning 50% of our
business went away.
Okay, I was not the sharp attackin the box, but it was very
clear to me this was no longer agrowth industry.
Okay, and one of my friends Iwas a pretty good computer
programmer One of my friendsended up going to a sub of Chase
(30:17):
Bank that had the largest setof economic and financial
databases in the world and hesaid to me there was a job
opening.
He said you have to come here,you're going to love this stuff.
And I said Wall Street.
What do I want to come to WallStreet for?
I don't want to work on WallStreet.
And he actually said to me inthis famous quote between the
two of us the starting salary istwice what you're making right
now.
I said, okay, I'll go for theinterview, and my biggest client
(30:41):
turned out to be the MerrillLynch Investment Strategy Group.
Wow, and that's how I got toWall Street.
And so you know I don't.
It's a good story about tryingto be flexible, about trying to
adjust.
I'm not going to tell you.
I thought this out at the time.
It was more luck and stupidityof just saying, oh wow, that's
kind of an interesting salary.
I'll take that, not thinkingabout anything else, but I think
(31:02):
it's a good lesson for youngerpeople to keep in the back of
their heads about the need to beflexible throughout your career
.
Ryan (31:09):
That's very interesting, thank you.
Thank you for your insights.
Once again, thanks for comingon the podcast, absolutely
Thanks for the invitation.
Yeah, Hopefully we can do itagain Not too far down the road.
Love to and thanks to all ofyou for joining us on this
episode of the First Trust ROIpodcast.
We'll see you next time.
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