June 16, 2025 • 33 mins
Richard Bernstein draws on over four decades of investment experience to offer insights on how to navigate risks and opportunities amid soaring economic uncertainty and market volatility.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Ryan (00:08):
Hi, welcome to this episode of the First Trust ROI
podcast.
I'm Ryan Isakainen, etfstrategist at First Trust.
Today, I'm joined by RichardBernstein of Richard Bernstein
Advisors.
Rich is the CEO and founder ofthe firm that bears his name.
Today, we talk about what'sgoing on in the equity markets,
where there might beopportunities, the risks related
(00:30):
to all of the uncertainty thathas emerged in 2025.
Thanks for joining us.
You were talking a second ago,before we got started, about an
example of navigating tariffs, apublisher in Canada and I
thought it was such a greatexample, so I want you to share
it again if you're willing,because I think that sets the
table for our conversation.
Richard (00:50):
Sure.
So, ryan, first let me say it'snot my job to opine on whether
policies are good or bad.
Of course, as an investor, youjust got to determine the best
portfolio for whatever policy isin place.
And so, with that in mind, yes,I know someone who is a senior
manager in one of the majorpublishing companies and I don't
(01:11):
know a month, six weeks ago,whenever it was, they had an
emergency, all hands on deckmeeting of senior management
because of the tariffs, and theypulled in people from all over
the country, maybe all over theworld, I really don't know, but
a lot of people and they were ina meeting for like four or five
hours and when they came out ofthe meeting, they were informed
that the tariff decisions hadbeen changed and everything they
(01:34):
had decided to do was now wrong.
So they went into a meetingwith one set of rules.
Four or five hours later, therules have changed.
Ryan (01:49):
So you know, as I said, you'd think that some person
would have come in andinterrupted the meeting and say,
hey guys, hold on here a minute.
But evidently that didn'thappen.
I just I wanted to share thatbecause I think that is like it
typifies what businesses havehad to go through, with all of
the uncertainty.
And I mean it's almost likeuncertainty has been normalized
this year.
Richard (02:02):
Yeah, and you know, for all of us as investors, we tend
to think of uncertainty as justbeing volatility or something
like that, and we don't thinkabout it from the point of view
of a company and how companieshave to plan.
And the uncertainty hindersplanning and I think companies
can deal with any policy.
I know everybody.
No CEO has ever said to me theywant to be more highly
(02:23):
regulated.
So you know.
but regardless of whether it'sregulation or not regulation,
whenever there's a clear set ofrules, I think any CEO can
pretty much deal with that.
They may not like it, but theycan deal with it.
But when the rules are changing, you just can't plan, and so it
hinders capital spending, ithinders hiring and everything.
Ryan (02:40):
Yeah, Now I'm glad you've kind of made that distinction
between operating a company andinvesting, because that was my
thought and my question for youis how do you recommend
investment professionals thatare advising their clients and
investors themselves?
How do they navigate all thatuncertainty?
Richard (02:56):
Yeah.
So, ryan, I think one of thethings that we've tried to do at
RBA through the years is investfor scarcities, right?
Sometimes there's not a lot ofearnings growth, so you want to
find the companies that do haveearnings growth.
Sometimes there's a lot ofearnings growth.
You want to find the scarcity.
It might be value, so you wantto invest for value and things
like that.
I think everybody understandsthat there's a ton of
(03:16):
uncertainty out there right now.
Maybe it's going to subside,maybe it's not, but what that
says is that the scarcity in theequity market right now I would
argue in the fixed incomemarket to some extent as well is
certainty, and so you want toemphasize certainty in your
portfolio.
Now, that doesn't mean going to100% cash.
Somebody challenged me recentlyand said oh, you mean we should
(03:36):
just have cash.
And I said no, no, no, that'snot right.
But what is certainty?
Certainty is dividends right Abird in the hand is worth two in
the bush.
Certainty is dividends right Abird in the hand is worth two in
the bush.
Certainty is better balancesheets and stronger balance
sheets and more visible outcomesand things like that.
And I think a lot of investorshave really bought off on kind
(03:56):
of pie-in-the-sky long-termgrowth stories.
Well, obviously, the range ofoutcomes has gotten broader and
broader and broader for thoselong-term themes.
So I think certainty is whatpeople should emphasize in their
portfolio.
Ryan (04:10):
That's certainly what we're doing, Certainly what
we're doing at FDA.
So dividends, maybe higherquality, repeatable earnings
those sorts of companies.
Richard (04:17):
Exactly, it's not the amount of growth, it's the
visibility of growth.
Ryan (04:21):
Yeah, now, given that there is a lot of uncertainty, I
think back to the last time theTrump administration was in
office and there was a lot oftrade war rhetoric and there was
a lot of tariff negotiations,and it went back and forth, and
back and forth.
And then, in 2019, we had arally and, I think, caught a lot
(04:42):
of people by surprise, myselfincluded.
If I'm completely honest, doyou think this time we need more
certainty before we can havesome sort of a rally in markets,
or does it sneak up on us again?
Richard (04:56):
I think.
Well, first of all, I think youknow the first Trump
administration.
We have to be careful about anyconclusions, because it was
kind of sidetracked by thepandemic, right Before we ever
really saw what was going tohappen.
All of a sudden there was thepandemic and, you know, I don't
think we should give itincomplete, maybe not a grade of
ABCD, because of the pandemic.
(05:16):
You know, can the market rally?
Well, certainly it can.
I mean, you know, there'stiming differences with the
amount of stimulus coming fromthe new tax package or whatever.
There's questions about tariffsand when they're actually going
to be employed and to whatlevel.
So in the meantime, yeah, themarket can still rally.
(05:37):
I think, rather than talk aboutthe market, which has been kind
of what everybody's alwaysworried about, and get you on
television to talk about themarket, I think one has to
realize that the market isdominated by such a few number
of stocks right now.
Then, when you talk about themarket, you're basically talking
about seven or ten companies,and I'm not sure there's huge
(06:00):
opportunity in those seven orten companies.
Like, who doesn't know whatthey are?
I bet everybody watching thiscan name all seven or ten
companies, right, how muchopportunity is there.
Rather, I think what peopleshould be doing is thinking
about the opportunity set beyondthose seven companies, and is
that a viable opportunity inthis environment that we're
heading towards?
I would argue I think it's ahuge opportunity, um relative to
(06:22):
those seven or 10 companies.
Ryan (06:24):
By the way, I was reading a note that your team had
published that it said somethinglike something about the mag
seven and the mid seven.
Richard (06:33):
Yes.
Ryan (06:33):
I've got three teenagers.
That is fantastic.
Richard (06:36):
Right, the mag seven becomes the mid seven.
Yes, and what we're trying toshow in that is that, look, the
mag seven may be magnificentcompanies, but they're not
unique anymore.
Maybe they were five years agoor four years ago, but they're
certainly not unique anymore.
And the example that we gavewas that the median projected
earnings growth rate for theMAG7 is 10% a year.
(06:58):
10% earnings growth over thenext 12 months.
That's it, just 10% earningsgrowth.
If you look at the other 493,their earnings growth forecast
is 9%.
So how unique are thesecompanies?
I'm not so sure, and so theyseem to be kind of
run-of-the-mill median typegrowers.
So we use the Gen Z term mid,and we said the Mag 7 becomes
(07:22):
the mid 7.
Ryan (07:23):
Yeah, and so maybe the premium valuation that you're
paying for that mag seven groupof stocks is not exactly, I mean
if you want to pay a premiumvaluation for uniqueness, right.
Richard (07:34):
Why?
Why do we pay more for amaserati than we do for a
chevrolet?
There's not a lot of maseratis.
Why are fabergé eggs soexpensive?
Because there's only like 15 ofthem in the world, right?
And so things like that.
If something is unique, yes,you should pay a higher price
for it, but if something's notunique, why the higher valuation
(07:57):
?
That doesn't make any sense,and we seem to understand that
in every other aspect of oureconomic lives, but when we come
to the stock market, somehowpeople lose that.
Ryan (08:02):
Yeah, one of the things that we talked about last time
you joined me on the podcast wasre-industrialization, and you
had talked about why that's anecessary thing and it's a good
thing.
And while we're still kind ofon the topic of trade and
tariffs and that sort of thing,I think that's one of the goals
that the new administration hasat least alluded to, if not said
(08:25):
outright.
They want to balance trade, andthat involves
reindustrialization, probably.
So is that?
I guess?
My first question is is a trade, a balanced trade relationship
with our trading partners?
Richard (08:37):
is that a?
Ryan (08:37):
good thing or a bad thing, it depends, okay.
Richard (08:41):
How's that?
For a decisive answer?
It depends.
I mean.
There's many economists whopointed out nothing unique to me
.
There's nothing wrong with thetrade deficit with a specific
country, right?
Certain countries can producethings that we don't produce and
we produce things othercountries don't produce, and
that's perfectly normal Ineconomic terms.
It's called comparativeadvantage and that's fine, and
(09:02):
they're always going to have acomparative advantage.
I think the United States is ina very different situation, in
that we have a massive tradedeficit that has been growing
for 20, 25 years and we're justvery highly dependent on the
rest of the world for everything.
There's actually very littlethat we supply to the rest of
the world.
That's value-added production.
(09:22):
We provide crops, we provideenergy, we provide raw materials
, but there's not a lot ofvalue-added goods that we
provide to the rest of the world, especially when you take out
those raw materials.
So we're highly dependent onthe rest of the world for these
value-added products.
That, I think, is the issue,because you then end up being
(09:44):
dependent on the rest of theworld for virtually everything.
You know my joke we probablydid this last time.
I use it all the time isanything you're wearing right
now made in the United States?
And the answer, of course, isno, there is nothing.
That's because the United Stateshas lost about 90% of our
textile manufacturing capacityin the last 30 years, so that's
not necessarily huge value added.
(10:06):
I guess we could all run aroundnaked.
That would be interesting.
But if you think about thatrelative to steel, relative to
aluminum, relative to othermanufacturing and things like
that, you can start tounderstand the predicament that
we're in.
So I don't think we're evergoing to go back to the 1950s
(10:26):
and 60s manufacturing powerhouse, nor do I think we can or
necessarily we should.
But to regain some element ofeconomic independence is
important and I think, ryan, Ijust want to point out when I
say that I think it's reallycritical for people to
understand that when we at RBAtalk about the American
Industrial Renaissance, you guysknow this at First Trust very
(10:47):
well.
We've been on this theme since2011, right.
I mean, I think the AIR ETF,which we have with you, came out
in 2014, right, and before thatit was a UIT.
So this is not a new theme forus.
This was something that wasclearly in the cards that
politicians ignored, and wethought that, again, looking for
scarcities, this was somethingthat had clearly in the cards
that politicians ignored, and wethought that because, again,
looking for scarcities, this wassomething that had to happen
(11:11):
and I think now it's finallyreached the, the political
spectrum where people finallyunderstand that this is
important, different ways tosolve the problem.
I get that and and and that'swhat you're hearing a lot about
right now, but the theme hasbeen a theme of ours for more
than a decade.
Yeah, okay, so if that's whatyou're hearing a lot about right
now, but the theme has been atheme of ours for more than a
decade.
Ryan (11:27):
Yeah, okay.
So if that's a desirableoutcome, I had Brian Westbury on
my podcast a few episodes agoand he kind of I'll summarize
his opinion.
It was a lot more nuanced thanI'll say, but it was basically
that the Trump administration'srecognized the problem, but he
(11:51):
wasn't sure that tariffs was theright tool to address the
problem.
Richard (11:53):
What would you advise?
If you were an advisor, I wouldagree with Brian on that, I
think.
Look, the goal here is a verynoble goal and I agree with the
goal 100%.
Tariffs, I'm not sure, are thebest way to solve the situation,
and the reason why is simplybecause tariffs I'm going to
sound professorial here for asecond, I apologize Tariffs
assume that goods havetremendous elasticity.
(12:15):
In other words if you raise theprice on one, good customers are
going to switch to the cheaperAmerican-made good, which, in
theory, fine, that might makesense.
The problem is we were justdiscussing a second ago we don't
make a lot of stuff here, sothere's no ability to switch to
an American made good, unless wewalk around naked, unless we
walk around naked.
Exactly right, we don't makeclothing and people do not want
(12:37):
to see me walking around naked.
Ryan (12:38):
I guarantee you that one.
Richard (12:40):
So the problem is is that the tariff becomes a tax
because there is no ability toswitch?
Is that the tariff becomes atax because there is no ability
to switch, and so I think that'sa little bit not the most
efficient way to solve theproblem.
I've argued for many, manyyears that what we should have
been and should continue to dois provide massive incentive for
(13:03):
companies to locatemanufacturing here in the United
States, and the example I usedway, way back in 2011 in a
report it was an op-ed in theFinancial Times that said make
the United States a giantenterprise zone.
Now, for those people thataren't familiar with enterprise
zones, they're zones that areset up, usually in cities, to
(13:23):
try and attract investment, andyou get huge, huge tax
incentives, but only if you'rewithin the zone.
If you're outside the zone,there's nothing.
So if you look at the innerharbor of baltimore that's
always one that people talkabout you can actually see where
the where the boundaries are ofthe enterprise zone, because
the second you go one block awayfrom where the boundary was,
there's no development and andyou can literally see it, and so
(13:45):
my idea was turn the UnitedStates into a giant enterprise
zone.
We can't compete on the cost oflabor with other countries, but
we can compete on the after-taxcost of capital.
Why don't we do that?
Say, if any company builds aplant, keeps it in the United
States for X number of yearshuge, I mean out of this world
(14:06):
tax incentives to reload thatplant here in the United States,
because you have to offset ourhigher cost of labor and there's
two inputs to productioncapital and labor.
We can't compete on labor,let's compete on capital.
The interesting thing rightabout when I wrote that 14 years
ago was I went to economists onthe left and on the right and
(14:27):
asked them their opinion and itwas crickets from everybody,
because everybody had staked outtheir claim.
Nobody wanted to meet in themiddle, and today we know that
more than ever before.
But that was even evident adecade ago.
Ryan (14:39):
So is that why something like that hasn't been proposed
and advanced?
I think so.
Richard (14:44):
I think that's right.
I think that if you think aboutthe politics involved with what
I'm suggesting, the Republicanswould argue that it's
industrial policy that we'rehanding out favors to certain
industries, and the Democratswould say that we're giving tax
breaks to corporations.
Right.
So you know, and what I actuallywas trying to propose was
something in the middle thatgave you a little bit of tax
(15:05):
incentive, but only if youbehaved well, and but didn't
give just open end tax cuts anddidn't you know, unless they
were doing good thing.
I mean, it seemed to be verysensible, I don't know.
Ryan (15:16):
It's not like that hasn't been tried in other countries.
Richard (15:19):
Oh it's done all over the place.
I mean, as I said, it's done.
Cities do it all the time yeahyou know, in the united states,
baltimore being the perfectexample that was probably 30
years ago that they set this up,but there is some positive
effect.
But the beauty of it is, ifthere is no positive effect, it
doesn't cost you anything.
Right, because you're onlyrewarding good behavior.
If nobody behaves well, there'sno tax loss.
(15:41):
As opposed to giving, say,apple or Microsoft or or NVIDIA
a tax break and then they go andproduce in China.
Right, why should the UnitedStates be funding production in
China?
That doesn't make much sense tome.
Ryan (15:55):
OK.
So, given the level ofuncertainty that everyone is
dealing with, the first quarterwas a pretty tough quarter for
GDP but there was some somemaybe front running of imports
that were involved with that.
The second quarter at thispoint we're recording this on
June 3rd, it's going to air onJune 16th the Atlanta Fed's GDP
(16:16):
now says something like fourplus percent.
Richard (16:18):
Surging, absolutely surging.
Ryan (16:19):
Yeah, but is that just the opposite side of the coin you
think?
I think it probably is.
Richard (16:24):
I think the gyrations of GDP are.
Clearly you don't get gyrationsfrom that just in the normal
economy, unless something fallsapart.
So there's got to be someexternal influence here and I
think we'd all agree it'sprobably trade that's doing this
.
But you know the underlyingeconomy remains reasonably
healthy.
I mean we could argue about howhealthy, but but it's certainly
(16:46):
reasonably healthy.
Um, uh, you know, you're seeing, the labor market is still
pretty strong.
We could argue there's littlecracks around it, but labor
market's pretty strong.
Um, consumption is stillreasonably healthy.
Personal income is stillreasonably healthy.
You know it's like I.
I think we could.
You know we could argue aboutthings like construction and
housing and all those type ofthings, but you know, but I
(17:06):
don't think we're heading for arecession in the near future.
Now, more important forinvestors, I think people should
be looking at profits growthrather than economic growth.
The profit cycle itself isdecelerating and it looks like
that's going to happen.
Regardless of whether there'stariffs or no tariffs or
uncertainty, that really lookslike it's going to happen.
We have some very toughcomparisons coming up versus the
(17:29):
end of 2024, which means thatearnings growth is going to slow
down.
Doesn't mean it's goingnegative, but our forecast is
we're going to go from about 14%earnings growth for the S&P
year on year to about 2%.
That's meaningful but not direat all.
Ryan (17:44):
So how does that compare when you look at different, if
you slice the market differently, because, as you noted earlier,
those 10 companies they accountfor a lot of that probably
shift in level of profit growth.
Richard (17:57):
So, where you see it, I'm saying, obviously this will
make sense after I say it, yourmore cyclical industries are
going to see more of a slowdownthat's why they're called
cyclical, but your more stablegrowth will do okay, which is
why I mentioned before that ourportfolio is oriented towards
certainty.
Certainty for us in a sectorframework means more defensive
(18:18):
sectors.
So we've changed quite a bitOur portfolios in the last six
months.
Eight months have changed quitea bit from being very, very
cyclical, trying to takeadvantage of that upturn in
profitability, to being moredefensive.
So we're now overweight thingslike Saples and healthcare and
utilities and quality, and we'vemoved up in market cap all the
kind of things that you do whenyou want to try and gain more
(18:38):
certainty.
Ryan (18:40):
So the Fed has, I mean, I think, coming into this year
there was maybe three or fourcuts that were predicted by the
markets or priced into themarkets.
Now I think we're at like two,maybe by the end of the year.
So two-part question.
One should the Fed be cuttingrates at some point this year?
And two do you think theyactually will?
Richard (19:00):
I don't think they have the flexibility to do it right
now.
I think the uncertainty some ofthe leading indicators of
inflation have turned up.
Wages are still pretty healthyand, as I said, the labor market
is still reasonably tight.
I don't think the Fed is goingto cut rates until they see
(19:20):
demonstrable weakness in thelabor market.
Right, there are two things areinflation and unemployment, and
I think, given the uncertaintyabout inflation, nobody knows
what the impact of tariffs isgoing to be.
I mean like you know, somepeople say, oh, it's going to be
definitely inflationary.
Some people say, I don't knowhow anybody could make that
judgment.
Yet I really don't know.
And that's what the Fed isfaced with is they don't know.
So they're going to take theircue not from inflation, but
(19:44):
they're going to take their cuefrom the labor market, and the
labor market is still prettyhealthy.
I think, if everybody wants toplay along at home like the home
version of Hollywood Squares,you watch weekly initial jobless
claims, because that is aleading indicator of employment,
of the remainder of theemployment statistics, and it'll
give you a pretty good earlywarning radar about will the Fed
(20:04):
be able to cut rates.
Right now it's still prettyhealthy.
There's not much to be said,and I think you're hearing that
from the Fed.
Ryan (20:11):
Profits.
Profit growth is decelerating.
Is there anything in your kindof as you pull out your crystal
ball and you think, well, maybethis is a growth surprise.
Is there any sort of growthsurprise that would catch the
market off guard?
Richard (20:29):
So I think I'm Trying to be optimistic yeah, no, no,
no, I would say I'm going to.
I think, yes, there is thatchance that we're going to see
stronger profits growth, but Ithink that people want to shift
their mindset from real growthand real GDP to nominal growth
and nominal GDP.
And the reason I'm saying thatis when I started back in the
(20:49):
dark ages a bazillion years ago,nominal GDP was as important as
real GDP to investors becausethere was a lot of inflation.
Nominal GDP meaning real GDPplus inflation.
There was a lot of inflation,so people concentrate a lot on
nominal GDP.
Well, for decades now, wehaven't had to worry about
nominal GDP.
I'm sure a lot of people don'teven know what it is, and that's
(21:10):
because inflation has been solow.
So if you think about corporateprofits growth, corporate
profits growth is nominal.
It's important.
If companies can raise prices,profits will go up.
So I think we want to get awayfrom just thinking about units
and unit growth, which is whatpeople have really been focused
on, and understand that theremay be some pricing power here
(21:30):
that companies can takeadvantage of.
I think that would be awhopping surprise to many
analysts, because they haven'thad to deal with that in ages.
Ryan (21:38):
Yeah, that's a good point.
The other thing, or one of theother things that we discussed
last time you were on wasBitcoin and you were kind of
using it as a measure ofliquidity in the market and you
know, since then, bitcoin hascontinued to kind of move higher
.
Richard (21:55):
Yeah, it's moved higher , it went down, it went down
pretty dramatically and now it'sback up, so I'm not sure it's
quite the store of value thateverybody sometimes makes it,
but is it still?
Ryan (22:03):
do you still look at it as maybe a proxy for how much
liquidity is in the market?
Richard (22:07):
I definitely think it is, and I think it certainly
shows the speculative fervorthat still exists.
You know, one of the thingswe've done recently is we've
shown the correlation betweenBitcoin, which I would argue is
the ultimate speculative assetin this cycle.
We've shown the relationshipbetween Bitcoin and other
speculative investments, andtheir correlations are all very,
(22:28):
very high.
The one thing that I do takebig exception to is this notion
that Bitcoin is somehowdifferent than other
cryptocurrencies.
And that's a big theme.
The crypto fans like to say oh,bitcoin is real, these other
things are fake, except thecorrelation of their returns is
like over 80%.
So there's really not that muchof a difference between Bitcoin
(22:51):
and Ethereum and Doge andSolana or whatever that other
one.
They all tend to move together.
So that says to me this is morespeculative than some people
sort of assessing the futurevalue of cryptocurrency, of
bitcoin, as a usablecryptocurrency that were true it
should be leaving the otherones behind interesting, yeah, I
(23:12):
I candidly I don't know what tomake of it sometimes, because I
would have never thought itwould be at the level that it's
at today no, it's prettyshocking and and, um, you know,
one of the things that I find alittle disheartening editorial
here for a second that I find alittle disheartening is that the
US financial markets used to bethe pristine financial market
(23:35):
of the world.
Right, we were the cream of thecrop class and other countries
envied our ability to have thisclear and transparent and A-plus
rated financial market, andwhat's happened in the last 5,
10, 15 years is that we've kindof moved away from that.
(23:55):
And I think crypto and the factthat crypto is getting and this
is not a political statement,because both sides of the aisle
are on this Crypto is gettingmore attention than it probably
should in Washington.
I think we've lost sight ofbeing that pristine financial
market.
All in the name of we want tospeculate.
That seems very weird to me.
Ryan (24:15):
Yeah Well, saying pristine financial market, we also used
to have a pristine credit rating.
Richard (24:20):
Well, yeah, we don't have that either.
Ryan (24:22):
That has seemed to have, um, well, I think the last
rating agency just downgraded,so, um, that's a good segue.
What?
What do you think of of, uh,the health of the?
The us credit market?
I mean you, well, the ustreasury market, I mean what?
What is our?
Are we worthy of a triple a?
Richard (24:40):
credit rating.
No, I'm I clearly not, becausenow nobody rates that we forget
that the dollar is the safehaven currency.
There's kind of de facto and dujour right, du jour is by law.
De facto is what is and what'shappened.
And the dollar and the treasurythe treasury is the safe, the
(25:01):
treasury no treasury bond is defacto the safe haven asset, but
it actually isn't, and the onlything that's saving it is that
the treasury market is the mostliquid and deepest in the world
versus other AAA ratedsovereigns which don't have that
liquidity.
So, if you want safer assets notsafe, but safer assets you have
(25:22):
no place to go but the UnitedStates.
And where do you see that?
You see that in spreads oftreasuries versus AAA rated
sovereigns.
And there's a chart that wehave that goes back I don't know
, I can't remember how many itgoes back to like 1990.
And it shows treasuries 10-yeartreasury yield versus the
(25:43):
10-year treasury yield of theGerman Bund, which is AAA rated,
and early on, before we gotdowngraded in 2011,.
What you find is the two bondstrade back and forth and back
and forth.
There's a little blip withGerman reunification and they
were printing money like crazybecause they wanted to reunify
Germany and all that.
But generally the two bondstrade back and forth and back
(26:03):
and forth to reunify Germany andall that.
But generally the two bondstrade back and forth and back
and forth.
Okay, 2011, we get downgradedand almost to the day, not too
much exaggerating treasuryyields start to climb relative
to German bonds and that hasnever gone away.
And right now it is almost 200basis points of extra yield that
we pay versus German bonds andother AAA rated sovereigns.
(26:24):
And so this notion that we'regoing to be penalized my
argument is we have beenpenalized.
If you had a muni bond and itwas downgraded, you wouldn't
expect.
You expect the yield to go up.
If it was a corporate bond andit was downgraded, you expect
the yield to go up.
Guess what happened?
We're not AAA anymore.
Our yield went up relative toAAA rated sovereigns, and so
(26:50):
what that means is we've beenpenalized.
If you think about how everymortgage, every corporate bond,
every muni bond, everything ispriced off the 10-year, our
economy has already been damagedby this for the last 10 to 12
to 14 years.
Why didn't anybody notice?
Nobody noticed because theabsolute level of interest rates
was so low.
Everybody said, oh, rates areso low, this is great.
Ryan (27:06):
Well, the boons were negative yields.
They were, that's right, nicestretch there.
Richard (27:10):
And, if you think about it, why were we still paying
positive interest rates when AAArated sovereigns were not?
And this was true all aroundthe world?
It was really it was a crazy,crazy thing.
Ryan (27:22):
I mean the Germans had much more austerity coming out
of the financial crisis.
They did Absolutely, and now itseems like this year they've
kind of maybe loosened the pursestrings a bit or at least said
they were going to.
Richard (27:34):
It'll be very interesting to see what happens
because a lot of major NATOcountries not all of them by any
means, but several of the majornato countries are aaa rated
and if they are going to changetheir spending patterns and
their government borrowing andeverything else, well, it'd be
interesting to see what happensyeah, well, international um
(27:55):
equities have certainly had agood year thus far.
Ryan (27:58):
I mean europe in particular, but also, I think,
brazil has done relatively wellthere's been some other pockets
that have done really well.
Some of that, I think, is justcurrency translation because the
dollar has weakened right.
But what's your outlook oninternational stocks?
Do you think that there'sopportunity there?
Richard (28:14):
I think there is, and I think that international
quality, specifically Europeanquality, is on sale.
I think this is for us, this isthe most exciting theme of the
next year to roughly, let's say,six to 18 months.
I think it's the most excitingtheme I could offer people is
international quality.
The growth rate, the expectedearnings growth rate for
(28:37):
international quality is as high, if not higher, than that for
the MAG7.
Again, this notion of the MAG7becomes the mid-seven, but yet
their dividend yield is almostinfinitely higher because most
of the mag 7 doesn't really paya dividend.
Right.
You know, for I'd say inprobably roughly four to four
and a half percent dividendyield and similar projected
growth and evaluation.
(28:58):
That's a half.
That sounds okay to me.
Ryan (29:02):
So quality international I think that's an important
qualifier, although I don't knowwhat you think about the low
quality stocks.
But I looked at the MSCI AcquiXUS index and something like 43%
of that index had returns onequity below 10%.
Yeah right, so not necessarilythe high quality earnings.
(29:22):
So our takeaway from that wasthat it is important to be
selective when you're investingin nationals A hundred percent,
and I think that's part of ouremphasis here.
Richard (29:32):
Is that the way to think about using my example
before the Maseratis are on sale?
If we could buy a Maserati fora Chevy price, I think we'd all
do it, or most of us would, andthat's kind of what's going on.
Ryan (29:43):
Yeah, Valuations are definitely compelling, Although
you know we've been sayingvaluations for international
look pretty attractive for thelast decade.
Richard (29:49):
Absolutely, but they had to compete with what was
somewhat we could argue how muchsomewhat of a Magnificent Seven
environment, and their growthrates weren't there.
Now, I think, you get thegrowth rates, you get the
dividends and you get thevaluation, which is a pretty
good combination.
Ryan (30:03):
Yeah, yeah.
It strikes me that it's alwaysimportant to at least attempt to
avoid the value traps, correctand maybe using some screens
where you're screening fordividends or quality or some
other factors is a way to dothat.
Absolutely, I always have.
I try to come up with a goodfinal question for you, rich,
and you're always good atanswering it.
(30:24):
But I'm looking around.
You were able to bring alongsome interns from RBA and it got
me thinking like, okay, you'vebeen doing this for four decades
plus, right?
Richard (30:35):
Yeah right.
Ryan (30:45):
If you were to go back when you were younger in your
career, what have you learnedthat you would pass along and
say like this is what I didn'tunderstand back then, but I do
now and it's been reallyimportant.
Richard (30:49):
That's an interesting question because I'll answer
that specifically.
But I recently realized that,looking back on my career, there
were several points in mycareer where I thought I was
reasonably smart and when I lookback I realize I really didn't
know crap.
I really didn't know what I wasdoing but it sounded good and I
convinced myself I was smart.
And I think that's kind ofimportant, because you should
(31:13):
never stop trying to learn andnever stop trying to improve,
and one of the things that, infact, we talked about this
yesterday with our intern crop,given that it's the beginning of
June and that's when internsflood New York City, that's
right.
Don't overly plan your future.
I did not do that.
I was the person who, ininterviews, everybody asked me
(31:35):
where do you want to be in fiveyears?
And I would say I don't know.
If you're 21, five years is like25% of your lifetime.
I mean, I don't know, but ittook me a while to realize that
was the wrong answer because Iwasn't getting job.
Second interviews and then Istarted making stuff up.
But that's kind of how I've runmy life, do not?
I think younger people,especially these days, think
(31:56):
everything has to be plannedRight and and that I have to
follow a certain pattern and Ihave to do certain things, and I
just think that's the wrong way.
I don't think.
I think putting on blinders andnot experiencing what's around
you and not taking advantage ofopportunities you didn't
anticipate is is really bad.
I think it hinders people'scareer growth.
Ryan (32:19):
That is great advice.
And you know, don't, don'tthink you're smarter than you
are is the other takeaway that Iheard in there.
Richard (32:26):
Yeah, I'm constantly reevaluating my own intelligence
.
Ryan (32:30):
Well, hopefully we all are and hopefully we all are
learning something.
Richard (32:34):
Hopefully you're not reevaluating my intelligence.
No, no, that's why I have youon the podcast because I always
learn new things.
Ryan (32:40):
I have the smartest people I know on and you are one of
them.
So thank you for coming on.
Thank, you, and thanks to allof you as well, for joining us
on this episode of the FirstTrust ROI podcast.
We will see you next time.
Hi, welcome to this episode of the First Trust ROI
podcast.
I'm Ryan Isakainen, etfstrategist at First Trust.
Today, I'm joined by RichardBernstein of Richard Bernstein
Advisors.
Rich is the CEO and founder ofthe firm that bears his name.
Today, we talk about what'sgoing on in the equity markets,
where there might beopportunities, the risks related
(00:30):
to all of the uncertainty thathas emerged in 2025.
Thanks for joining us.
You were talking a second ago,before we got started, about an
example of navigating tariffs, apublisher in Canada and I
thought it was such a greatexample, so I want you to share
it again if you're willing,because I think that sets the
table for our conversation.
Richard (00:50):
Sure.
So, ryan, first let me say it'snot my job to opine on whether
policies are good or bad.
Of course, as an investor, youjust got to determine the best
portfolio for whatever policy isin place.
And so, with that in mind, yes,I know someone who is a senior
manager in one of the majorpublishing companies and I don't
(01:11):
know a month, six weeks ago,whenever it was, they had an
emergency, all hands on deckmeeting of senior management
because of the tariffs, and theypulled in people from all over
the country, maybe all over theworld, I really don't know, but
a lot of people and they were ina meeting for like four or five
hours and when they came out ofthe meeting, they were informed
that the tariff decisions hadbeen changed and everything they
(01:34):
had decided to do was now wrong.
So they went into a meetingwith one set of rules.
Four or five hours later, therules have changed.
Ryan (01:49):
So you know, as I said, you'd think that some person
would have come in andinterrupted the meeting and say,
hey guys, hold on here a minute.
But evidently that didn'thappen.
I just I wanted to share thatbecause I think that is like it
typifies what businesses havehad to go through, with all of
the uncertainty.
And I mean it's almost likeuncertainty has been normalized
this year.
Richard (02:02):
Yeah, and you know, for all of us as investors, we tend
to think of uncertainty as justbeing volatility or something
like that, and we don't thinkabout it from the point of view
of a company and how companieshave to plan.
And the uncertainty hindersplanning and I think companies
can deal with any policy.
I know everybody.
No CEO has ever said to me theywant to be more highly
(02:23):
regulated.
So you know.
but regardless of whether it'sregulation or not regulation,
whenever there's a clear set ofrules, I think any CEO can
pretty much deal with that.
They may not like it, but theycan deal with it.
But when the rules are changing, you just can't plan, and so it
hinders capital spending, ithinders hiring and everything.
Ryan (02:40):
Yeah, Now I'm glad you've kind of made that distinction
between operating a company andinvesting, because that was my
thought and my question for youis how do you recommend
investment professionals thatare advising their clients and
investors themselves?
How do they navigate all thatuncertainty?
Richard (02:56):
Yeah.
So, ryan, I think one of thethings that we've tried to do at
RBA through the years is investfor scarcities, right?
Sometimes there's not a lot ofearnings growth, so you want to
find the companies that do haveearnings growth.
Sometimes there's a lot ofearnings growth.
You want to find the scarcity.
It might be value, so you wantto invest for value and things
like that.
I think everybody understandsthat there's a ton of
(03:16):
uncertainty out there right now.
Maybe it's going to subside,maybe it's not, but what that
says is that the scarcity in theequity market right now I would
argue in the fixed incomemarket to some extent as well is
certainty, and so you want toemphasize certainty in your
portfolio.
Now, that doesn't mean going to100% cash.
Somebody challenged me recentlyand said oh, you mean we should
(03:36):
just have cash.
And I said no, no, no, that'snot right.
But what is certainty?
Certainty is dividends right Abird in the hand is worth two in
the bush.
Certainty is dividends right Abird in the hand is worth two in
the bush.
Certainty is better balancesheets and stronger balance
sheets and more visible outcomesand things like that.
And I think a lot of investorshave really bought off on kind
(03:56):
of pie-in-the-sky long-termgrowth stories.
Well, obviously, the range ofoutcomes has gotten broader and
broader and broader for thoselong-term themes.
So I think certainty is whatpeople should emphasize in their
portfolio.
Ryan (04:10):
That's certainly what we're doing, Certainly what
we're doing at FDA.
So dividends, maybe higherquality, repeatable earnings
those sorts of companies.
Richard (04:17):
Exactly, it's not the amount of growth, it's the
visibility of growth.
Ryan (04:21):
Yeah, now, given that there is a lot of uncertainty, I
think back to the last time theTrump administration was in
office and there was a lot oftrade war rhetoric and there was
a lot of tariff negotiations,and it went back and forth, and
back and forth.
And then, in 2019, we had arally and, I think, caught a lot
(04:42):
of people by surprise, myselfincluded.
If I'm completely honest, doyou think this time we need more
certainty before we can havesome sort of a rally in markets,
or does it sneak up on us again?
Richard (04:56):
I think.
Well, first of all, I think youknow the first Trump
administration.
We have to be careful about anyconclusions, because it was
kind of sidetracked by thepandemic, right Before we ever
really saw what was going tohappen.
All of a sudden there was thepandemic and, you know, I don't
think we should give itincomplete, maybe not a grade of
ABCD, because of the pandemic.
(05:16):
You know, can the market rally?
Well, certainly it can.
I mean, you know, there'stiming differences with the
amount of stimulus coming fromthe new tax package or whatever.
There's questions about tariffsand when they're actually going
to be employed and to whatlevel.
So in the meantime, yeah, themarket can still rally.
(05:37):
I think, rather than talk aboutthe market, which has been kind
of what everybody's alwaysworried about, and get you on
television to talk about themarket, I think one has to
realize that the market isdominated by such a few number
of stocks right now.
Then, when you talk about themarket, you're basically talking
about seven or ten companies,and I'm not sure there's huge
(06:00):
opportunity in those seven orten companies.
Like, who doesn't know whatthey are?
I bet everybody watching thiscan name all seven or ten
companies, right, how muchopportunity is there.
Rather, I think what peopleshould be doing is thinking
about the opportunity set beyondthose seven companies, and is
that a viable opportunity inthis environment that we're
heading towards?
I would argue I think it's ahuge opportunity, um relative to
(06:22):
those seven or 10 companies.
Ryan (06:24):
By the way, I was reading a note that your team had
published that it said somethinglike something about the mag
seven and the mid seven.
Richard (06:33):
Yes.
Ryan (06:33):
I've got three teenagers.
That is fantastic.
Richard (06:36):
Right, the mag seven becomes the mid seven.
Yes, and what we're trying toshow in that is that, look, the
mag seven may be magnificentcompanies, but they're not
unique anymore.
Maybe they were five years agoor four years ago, but they're
certainly not unique anymore.
And the example that we gavewas that the median projected
earnings growth rate for theMAG7 is 10% a year.
(06:58):
10% earnings growth over thenext 12 months.
That's it, just 10% earningsgrowth.
If you look at the other 493,their earnings growth forecast
is 9%.
So how unique are thesecompanies?
I'm not so sure, and so theyseem to be kind of
run-of-the-mill median typegrowers.
So we use the Gen Z term mid,and we said the Mag 7 becomes
(07:22):
the mid 7.
Ryan (07:23):
Yeah, and so maybe the premium valuation that you're
paying for that mag seven groupof stocks is not exactly, I mean
if you want to pay a premiumvaluation for uniqueness, right.
Richard (07:34):
Why?
Why do we pay more for amaserati than we do for a
chevrolet?
There's not a lot of maseratis.
Why are fabergé eggs soexpensive?
Because there's only like 15 ofthem in the world, right?
And so things like that.
If something is unique, yes,you should pay a higher price
for it, but if something's notunique, why the higher valuation
(07:57):
?
That doesn't make any sense,and we seem to understand that
in every other aspect of oureconomic lives, but when we come
to the stock market, somehowpeople lose that.
Ryan (08:02):
Yeah, one of the things that we talked about last time
you joined me on the podcast wasre-industrialization, and you
had talked about why that's anecessary thing and it's a good
thing.
And while we're still kind ofon the topic of trade and
tariffs and that sort of thing,I think that's one of the goals
that the new administration hasat least alluded to, if not said
(08:25):
outright.
They want to balance trade, andthat involves
reindustrialization, probably.
So is that?
I guess?
My first question is is a trade, a balanced trade relationship
with our trading partners?
Richard (08:37):
is that a?
Ryan (08:37):
good thing or a bad thing, it depends, okay.
Richard (08:41):
How's that?
For a decisive answer?
It depends.
I mean.
There's many economists whopointed out nothing unique to me
.
There's nothing wrong with thetrade deficit with a specific
country, right?
Certain countries can producethings that we don't produce and
we produce things othercountries don't produce, and
that's perfectly normal Ineconomic terms.
It's called comparativeadvantage and that's fine, and
(09:02):
they're always going to have acomparative advantage.
I think the United States is ina very different situation, in
that we have a massive tradedeficit that has been growing
for 20, 25 years and we're justvery highly dependent on the
rest of the world for everything.
There's actually very littlethat we supply to the rest of
the world.
That's value-added production.
(09:22):
We provide crops, we provideenergy, we provide raw materials
, but there's not a lot ofvalue-added goods that we
provide to the rest of the world, especially when you take out
those raw materials.
So we're highly dependent onthe rest of the world for these
value-added products.
That, I think, is the issue,because you then end up being
(09:44):
dependent on the rest of theworld for virtually everything.
You know my joke we probablydid this last time.
I use it all the time isanything you're wearing right
now made in the United States?
And the answer, of course, isno, there is nothing.
That's because the United Stateshas lost about 90% of our
textile manufacturing capacityin the last 30 years, so that's
not necessarily huge value added.
(10:06):
I guess we could all run aroundnaked.
That would be interesting.
But if you think about thatrelative to steel, relative to
aluminum, relative to othermanufacturing and things like
that, you can start tounderstand the predicament that
we're in.
So I don't think we're evergoing to go back to the 1950s
(10:26):
and 60s manufacturing powerhouse, nor do I think we can or
necessarily we should.
But to regain some element ofeconomic independence is
important and I think, ryan, Ijust want to point out when I
say that I think it's reallycritical for people to
understand that when we at RBAtalk about the American
Industrial Renaissance, you guysknow this at First Trust very
(10:47):
well.
We've been on this theme since2011, right.
I mean, I think the AIR ETF,which we have with you, came out
in 2014, right, and before thatit was a UIT.
So this is not a new theme forus.
This was something that wasclearly in the cards that
politicians ignored, and wethought that, again, looking for
scarcities, this was somethingthat had clearly in the cards
that politicians ignored, and wethought that because, again,
looking for scarcities, this wassomething that had to happen
(11:11):
and I think now it's finallyreached the, the political
spectrum where people finallyunderstand that this is
important, different ways tosolve the problem.
I get that and and and that'swhat you're hearing a lot about
right now, but the theme hasbeen a theme of ours for more
than a decade.
Yeah, okay, so if that's whatyou're hearing a lot about right
now, but the theme has been atheme of ours for more than a
decade.
Ryan (11:27):
Yeah, okay.
So if that's a desirableoutcome, I had Brian Westbury on
my podcast a few episodes agoand he kind of I'll summarize
his opinion.
It was a lot more nuanced thanI'll say, but it was basically
that the Trump administration'srecognized the problem, but he
(11:51):
wasn't sure that tariffs was theright tool to address the
problem.
Richard (11:53):
What would you advise?
If you were an advisor, I wouldagree with Brian on that, I
think.
Look, the goal here is a verynoble goal and I agree with the
goal 100%.
Tariffs, I'm not sure, are thebest way to solve the situation,
and the reason why is simplybecause tariffs I'm going to
sound professorial here for asecond, I apologize Tariffs
assume that goods havetremendous elasticity.
(12:15):
In other words if you raise theprice on one, good customers are
going to switch to the cheaperAmerican-made good, which, in
theory, fine, that might makesense.
The problem is we were justdiscussing a second ago we don't
make a lot of stuff here, sothere's no ability to switch to
an American made good, unless wewalk around naked, unless we
walk around naked.
Exactly right, we don't makeclothing and people do not want
(12:37):
to see me walking around naked.
Ryan (12:38):
I guarantee you that one.
Richard (12:40):
So the problem is is that the tariff becomes a tax
because there is no ability toswitch?
Is that the tariff becomes atax because there is no ability
to switch, and so I think that'sa little bit not the most
efficient way to solve theproblem.
I've argued for many, manyyears that what we should have
been and should continue to dois provide massive incentive for
(13:03):
companies to locatemanufacturing here in the United
States, and the example I usedway, way back in 2011 in a
report it was an op-ed in theFinancial Times that said make
the United States a giantenterprise zone.
Now, for those people thataren't familiar with enterprise
zones, they're zones that areset up, usually in cities, to
(13:23):
try and attract investment, andyou get huge, huge tax
incentives, but only if you'rewithin the zone.
If you're outside the zone,there's nothing.
So if you look at the innerharbor of baltimore that's
always one that people talkabout you can actually see where
the where the boundaries are ofthe enterprise zone, because
the second you go one block awayfrom where the boundary was,
there's no development and andyou can literally see it, and so
(13:45):
my idea was turn the UnitedStates into a giant enterprise
zone.
We can't compete on the cost oflabor with other countries, but
we can compete on the after-taxcost of capital.
Why don't we do that?
Say, if any company builds aplant, keeps it in the United
States for X number of yearshuge, I mean out of this world
(14:06):
tax incentives to reload thatplant here in the United States,
because you have to offset ourhigher cost of labor and there's
two inputs to productioncapital and labor.
We can't compete on labor,let's compete on capital.
The interesting thing rightabout when I wrote that 14 years
ago was I went to economists onthe left and on the right and
(14:27):
asked them their opinion and itwas crickets from everybody,
because everybody had staked outtheir claim.
Nobody wanted to meet in themiddle, and today we know that
more than ever before.
But that was even evident adecade ago.
Ryan (14:39):
So is that why something like that hasn't been proposed
and advanced?
I think so.
Richard (14:44):
I think that's right.
I think that if you think aboutthe politics involved with what
I'm suggesting, the Republicanswould argue that it's
industrial policy that we'rehanding out favors to certain
industries, and the Democratswould say that we're giving tax
breaks to corporations.
Right.
So you know, and what I actuallywas trying to propose was
something in the middle thatgave you a little bit of tax
(15:05):
incentive, but only if youbehaved well, and but didn't
give just open end tax cuts anddidn't you know, unless they
were doing good thing.
I mean, it seemed to be verysensible, I don't know.
Ryan (15:16):
It's not like that hasn't been tried in other countries.
Richard (15:19):
Oh it's done all over the place.
I mean, as I said, it's done.
Cities do it all the time yeahyou know, in the united states,
baltimore being the perfectexample that was probably 30
years ago that they set this up,but there is some positive
effect.
But the beauty of it is, ifthere is no positive effect, it
doesn't cost you anything.
Right, because you're onlyrewarding good behavior.
If nobody behaves well, there'sno tax loss.
(15:41):
As opposed to giving, say,apple or Microsoft or or NVIDIA
a tax break and then they go andproduce in China.
Right, why should the UnitedStates be funding production in
China?
That doesn't make much sense tome.
Ryan (15:55):
OK.
So, given the level ofuncertainty that everyone is
dealing with, the first quarterwas a pretty tough quarter for
GDP but there was some somemaybe front running of imports
that were involved with that.
The second quarter at thispoint we're recording this on
June 3rd, it's going to air onJune 16th the Atlanta Fed's GDP
(16:16):
now says something like fourplus percent.
Richard (16:18):
Surging, absolutely surging.
Ryan (16:19):
Yeah, but is that just the opposite side of the coin you
think?
I think it probably is.
Richard (16:24):
I think the gyrations of GDP are.
Clearly you don't get gyrationsfrom that just in the normal
economy, unless something fallsapart.
So there's got to be someexternal influence here and I
think we'd all agree it'sprobably trade that's doing this
.
But you know the underlyingeconomy remains reasonably
healthy.
I mean we could argue about howhealthy, but but it's certainly
(16:46):
reasonably healthy.
Um, uh, you know, you're seeing, the labor market is still
pretty strong.
We could argue there's littlecracks around it, but labor
market's pretty strong.
Um, consumption is stillreasonably healthy.
Personal income is stillreasonably healthy.
You know it's like I.
I think we could.
You know we could argue aboutthings like construction and
housing and all those type ofthings, but you know, but I
(17:06):
don't think we're heading for arecession in the near future.
Now, more important forinvestors, I think people should
be looking at profits growthrather than economic growth.
The profit cycle itself isdecelerating and it looks like
that's going to happen.
Regardless of whether there'stariffs or no tariffs or
uncertainty, that really lookslike it's going to happen.
We have some very toughcomparisons coming up versus the
(17:29):
end of 2024, which means thatearnings growth is going to slow
down.
Doesn't mean it's goingnegative, but our forecast is
we're going to go from about 14%earnings growth for the S&P
year on year to about 2%.
That's meaningful but not direat all.
Ryan (17:44):
So how does that compare when you look at different, if
you slice the market differently, because, as you noted earlier,
those 10 companies they accountfor a lot of that probably
shift in level of profit growth.
Richard (17:57):
So, where you see it, I'm saying, obviously this will
make sense after I say it, yourmore cyclical industries are
going to see more of a slowdownthat's why they're called
cyclical, but your more stablegrowth will do okay, which is
why I mentioned before that ourportfolio is oriented towards
certainty.
Certainty for us in a sectorframework means more defensive
(18:18):
sectors.
So we've changed quite a bitOur portfolios in the last six
months.
Eight months have changed quitea bit from being very, very
cyclical, trying to takeadvantage of that upturn in
profitability, to being moredefensive.
So we're now overweight thingslike Saples and healthcare and
utilities and quality, and we'vemoved up in market cap all the
kind of things that you do whenyou want to try and gain more
(18:38):
certainty.
Ryan (18:40):
So the Fed has, I mean, I think, coming into this year
there was maybe three or fourcuts that were predicted by the
markets or priced into themarkets.
Now I think we're at like two,maybe by the end of the year.
So two-part question.
One should the Fed be cuttingrates at some point this year?
And two do you think theyactually will?
Richard (19:00):
I don't think they have the flexibility to do it right
now.
I think the uncertainty some ofthe leading indicators of
inflation have turned up.
Wages are still pretty healthyand, as I said, the labor market
is still reasonably tight.
I don't think the Fed is goingto cut rates until they see
(19:20):
demonstrable weakness in thelabor market.
Right, there are two things areinflation and unemployment, and
I think, given the uncertaintyabout inflation, nobody knows
what the impact of tariffs isgoing to be.
I mean like you know, somepeople say, oh, it's going to be
definitely inflationary.
Some people say, I don't knowhow anybody could make that
judgment.
Yet I really don't know.
And that's what the Fed isfaced with is they don't know.
So they're going to take theircue not from inflation, but
(19:44):
they're going to take their cuefrom the labor market, and the
labor market is still prettyhealthy.
I think, if everybody wants toplay along at home like the home
version of Hollywood Squares,you watch weekly initial jobless
claims, because that is aleading indicator of employment,
of the remainder of theemployment statistics, and it'll
give you a pretty good earlywarning radar about will the Fed
(20:04):
be able to cut rates.
Right now it's still prettyhealthy.
There's not much to be said,and I think you're hearing that
from the Fed.
Ryan (20:11):
Profits.
Profit growth is decelerating.
Is there anything in your kindof as you pull out your crystal
ball and you think, well, maybethis is a growth surprise.
Is there any sort of growthsurprise that would catch the
market off guard?
Richard (20:29):
So I think I'm Trying to be optimistic yeah, no, no,
no, I would say I'm going to.
I think, yes, there is thatchance that we're going to see
stronger profits growth, but Ithink that people want to shift
their mindset from real growthand real GDP to nominal growth
and nominal GDP.
And the reason I'm saying thatis when I started back in the
(20:49):
dark ages a bazillion years ago,nominal GDP was as important as
real GDP to investors becausethere was a lot of inflation.
Nominal GDP meaning real GDPplus inflation.
There was a lot of inflation,so people concentrate a lot on
nominal GDP.
Well, for decades now, wehaven't had to worry about
nominal GDP.
I'm sure a lot of people don'teven know what it is, and that's
(21:10):
because inflation has been solow.
So if you think about corporateprofits growth, corporate
profits growth is nominal.
It's important.
If companies can raise prices,profits will go up.
So I think we want to get awayfrom just thinking about units
and unit growth, which is whatpeople have really been focused
on, and understand that theremay be some pricing power here
(21:30):
that companies can takeadvantage of.
I think that would be awhopping surprise to many
analysts, because they haven'thad to deal with that in ages.
Ryan (21:38):
Yeah, that's a good point.
The other thing, or one of theother things that we discussed
last time you were on wasBitcoin and you were kind of
using it as a measure ofliquidity in the market and you
know, since then, bitcoin hascontinued to kind of move higher
.
Richard (21:55):
Yeah, it's moved higher , it went down, it went down
pretty dramatically and now it'sback up, so I'm not sure it's
quite the store of value thateverybody sometimes makes it,
but is it still?
Ryan (22:03):
do you still look at it as maybe a proxy for how much
liquidity is in the market?
Richard (22:07):
I definitely think it is, and I think it certainly
shows the speculative fervorthat still exists.
You know, one of the thingswe've done recently is we've
shown the correlation betweenBitcoin, which I would argue is
the ultimate speculative assetin this cycle.
We've shown the relationshipbetween Bitcoin and other
speculative investments, andtheir correlations are all very,
(22:28):
very high.
The one thing that I do takebig exception to is this notion
that Bitcoin is somehowdifferent than other
cryptocurrencies.
And that's a big theme.
The crypto fans like to say oh,bitcoin is real, these other
things are fake, except thecorrelation of their returns is
like over 80%.
So there's really not that muchof a difference between Bitcoin
(22:51):
and Ethereum and Doge andSolana or whatever that other
one.
They all tend to move together.
So that says to me this is morespeculative than some people
sort of assessing the futurevalue of cryptocurrency, of
bitcoin, as a usablecryptocurrency that were true it
should be leaving the otherones behind interesting, yeah, I
(23:12):
I candidly I don't know what tomake of it sometimes, because I
would have never thought itwould be at the level that it's
at today no, it's prettyshocking and and, um, you know,
one of the things that I find alittle disheartening editorial
here for a second that I find alittle disheartening is that the
US financial markets used to bethe pristine financial market
(23:35):
of the world.
Right, we were the cream of thecrop class and other countries
envied our ability to have thisclear and transparent and A-plus
rated financial market, andwhat's happened in the last 5,
10, 15 years is that we've kindof moved away from that.
(23:55):
And I think crypto and the factthat crypto is getting and this
is not a political statement,because both sides of the aisle
are on this Crypto is gettingmore attention than it probably
should in Washington.
I think we've lost sight ofbeing that pristine financial
market.
All in the name of we want tospeculate.
That seems very weird to me.
Ryan (24:15):
Yeah Well, saying pristine financial market, we also used
to have a pristine credit rating.
Richard (24:20):
Well, yeah, we don't have that either.
Ryan (24:22):
That has seemed to have, um, well, I think the last
rating agency just downgraded,so, um, that's a good segue.
What?
What do you think of of, uh,the health of the?
The us credit market?
I mean you, well, the ustreasury market, I mean what?
What is our?
Are we worthy of a triple a?
Richard (24:40):
credit rating.
No, I'm I clearly not, becausenow nobody rates that we forget
that the dollar is the safehaven currency.
There's kind of de facto and dujour right, du jour is by law.
De facto is what is and what'shappened.
And the dollar and the treasurythe treasury is the safe, the
(25:01):
treasury no treasury bond is defacto the safe haven asset, but
it actually isn't, and the onlything that's saving it is that
the treasury market is the mostliquid and deepest in the world
versus other AAA ratedsovereigns which don't have that
liquidity.
So, if you want safer assets notsafe, but safer assets you have
(25:22):
no place to go but the UnitedStates.
And where do you see that?
You see that in spreads oftreasuries versus AAA rated
sovereigns.
And there's a chart that wehave that goes back I don't know
, I can't remember how many itgoes back to like 1990.
And it shows treasuries 10-yeartreasury yield versus the
(25:43):
10-year treasury yield of theGerman Bund, which is AAA rated,
and early on, before we gotdowngraded in 2011,.
What you find is the two bondstrade back and forth and back
and forth.
There's a little blip withGerman reunification and they
were printing money like crazybecause they wanted to reunify
Germany and all that.
But generally the two bondstrade back and forth and back
(26:03):
and forth to reunify Germany andall that.
But generally the two bondstrade back and forth and back
and forth.
Okay, 2011, we get downgradedand almost to the day, not too
much exaggerating treasuryyields start to climb relative
to German bonds and that hasnever gone away.
And right now it is almost 200basis points of extra yield that
we pay versus German bonds andother AAA rated sovereigns.
(26:24):
And so this notion that we'regoing to be penalized my
argument is we have beenpenalized.
If you had a muni bond and itwas downgraded, you wouldn't
expect.
You expect the yield to go up.
If it was a corporate bond andit was downgraded, you expect
the yield to go up.
Guess what happened?
We're not AAA anymore.
Our yield went up relative toAAA rated sovereigns, and so
(26:50):
what that means is we've beenpenalized.
If you think about how everymortgage, every corporate bond,
every muni bond, everything ispriced off the 10-year, our
economy has already been damagedby this for the last 10 to 12
to 14 years.
Why didn't anybody notice?
Nobody noticed because theabsolute level of interest rates
was so low.
Everybody said, oh, rates areso low, this is great.
Ryan (27:06):
Well, the boons were negative yields.
They were, that's right, nicestretch there.
Richard (27:10):
And, if you think about it, why were we still paying
positive interest rates when AAArated sovereigns were not?
And this was true all aroundthe world?
It was really it was a crazy,crazy thing.
Ryan (27:22):
I mean the Germans had much more austerity coming out
of the financial crisis.
They did Absolutely, and now itseems like this year they've
kind of maybe loosened the pursestrings a bit or at least said
they were going to.
Richard (27:34):
It'll be very interesting to see what happens
because a lot of major NATOcountries not all of them by any
means, but several of the majornato countries are aaa rated
and if they are going to changetheir spending patterns and
their government borrowing andeverything else, well, it'd be
interesting to see what happensyeah, well, international um
(27:55):
equities have certainly had agood year thus far.
Ryan (27:58):
I mean europe in particular, but also, I think,
brazil has done relatively wellthere's been some other pockets
that have done really well.
Some of that, I think, is justcurrency translation because the
dollar has weakened right.
But what's your outlook oninternational stocks?
Do you think that there'sopportunity there?
Richard (28:14):
I think there is, and I think that international
quality, specifically Europeanquality, is on sale.
I think this is for us, this isthe most exciting theme of the
next year to roughly, let's say,six to 18 months.
I think it's the most excitingtheme I could offer people is
international quality.
The growth rate, the expectedearnings growth rate for
(28:37):
international quality is as high, if not higher, than that for
the MAG7.
Again, this notion of the MAG7becomes the mid-seven, but yet
their dividend yield is almostinfinitely higher because most
of the mag 7 doesn't really paya dividend.
Right.
You know, for I'd say inprobably roughly four to four
and a half percent dividendyield and similar projected
growth and evaluation.
(28:58):
That's a half.
That sounds okay to me.
Ryan (29:02):
So quality international I think that's an important
qualifier, although I don't knowwhat you think about the low
quality stocks.
But I looked at the MSCI AcquiXUS index and something like 43%
of that index had returns onequity below 10%.
Yeah right, so not necessarilythe high quality earnings.
(29:22):
So our takeaway from that wasthat it is important to be
selective when you're investingin nationals A hundred percent,
and I think that's part of ouremphasis here.
Richard (29:32):
Is that the way to think about using my example
before the Maseratis are on sale?
If we could buy a Maserati fora Chevy price, I think we'd all
do it, or most of us would, andthat's kind of what's going on.
Ryan (29:43):
Yeah, Valuations are definitely compelling, Although
you know we've been sayingvaluations for international
look pretty attractive for thelast decade.
Richard (29:49):
Absolutely, but they had to compete with what was
somewhat we could argue how muchsomewhat of a Magnificent Seven
environment, and their growthrates weren't there.
Now, I think, you get thegrowth rates, you get the
dividends and you get thevaluation, which is a pretty
good combination.
Ryan (30:03):
Yeah, yeah.
It strikes me that it's alwaysimportant to at least attempt to
avoid the value traps, correctand maybe using some screens
where you're screening fordividends or quality or some
other factors is a way to dothat.
Absolutely, I always have.
I try to come up with a goodfinal question for you, rich,
and you're always good atanswering it.
(30:24):
But I'm looking around.
You were able to bring alongsome interns from RBA and it got
me thinking like, okay, you'vebeen doing this for four decades
plus, right?
Richard (30:35):
Yeah right.
Ryan (30:45):
If you were to go back when you were younger in your
career, what have you learnedthat you would pass along and
say like this is what I didn'tunderstand back then, but I do
now and it's been reallyimportant.
Richard (30:49):
That's an interesting question because I'll answer
that specifically.
But I recently realized that,looking back on my career, there
were several points in mycareer where I thought I was
reasonably smart and when I lookback I realize I really didn't
know crap.
I really didn't know what I wasdoing but it sounded good and I
convinced myself I was smart.
And I think that's kind ofimportant, because you should
(31:13):
never stop trying to learn andnever stop trying to improve,
and one of the things that, infact, we talked about this
yesterday with our intern crop,given that it's the beginning of
June and that's when internsflood New York City, that's
right.
Don't overly plan your future.
I did not do that.
I was the person who, ininterviews, everybody asked me
(31:35):
where do you want to be in fiveyears?
And I would say I don't know.
If you're 21, five years is like25% of your lifetime.
I mean, I don't know, but ittook me a while to realize that
was the wrong answer because Iwasn't getting job.
Second interviews and then Istarted making stuff up.
But that's kind of how I've runmy life, do not?
I think younger people,especially these days, think
(31:56):
everything has to be plannedRight and and that I have to
follow a certain pattern and Ihave to do certain things, and I
just think that's the wrong way.
I don't think.
I think putting on blinders andnot experiencing what's around
you and not taking advantage ofopportunities you didn't
anticipate is is really bad.
I think it hinders people'scareer growth.
Ryan (32:19):
That is great advice.
And you know, don't, don'tthink you're smarter than you
are is the other takeaway that Iheard in there.
Richard (32:26):
Yeah, I'm constantly reevaluating my own intelligence
.
Ryan (32:30):
Well, hopefully we all are and hopefully we all are
learning something.
Richard (32:34):
Hopefully you're not reevaluating my intelligence.
No, no, that's why I have youon the podcast because I always
learn new things.
Ryan (32:40):
I have the smartest people I know on and you are one of
them.
So thank you for coming on.
Thank, you, and thanks to allof you as well, for joining us
on this episode of the FirstTrust ROI podcast.
We will see you next time.
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