November 3, 2025 • 38 mins
Bob Carey discusses some of the biggest questions on the minds of financial professionals heading into the final stretch of 2025, including whether or not investors should be afraid of higher equity valuations.
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Episode Transcript
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Ryan (00:12):
As we approach the end of 2025 and the calendar gets ready
to flip to 2026, investors havea lot of questions.
They wonder where do stocks gofrom here?
Are we at valuation levels thatare too expensive?
What's going to happen with theFed?
Are they going to continuelowering interest rates next
year?
What's going to happen with theeconomy?
What's going to happen withalternative assets like gold,
(00:34):
which reached new highsrecently?
Well, today I've got Bob Carey,Chief Market Strategist at
First Trust, to address some ofthose questions and others on
this episode of the First TrustROI podcast.
Thanks for joining us.
So you were telling me beforewe turned the cameras on about
an event that you were speakingat, and uh you said that most of
(00:57):
your questions that people wereasking you were what?
Bob (01:01):
Yeah, it it seems like people are fishing for uh what
could go wrong.
I mean, we've obviously hadjust an incredible couple of
years here uh in the stockmarket.
Um you think about where wewere at this time back in 2022
when a lot of folks wereconcerned about the Fed raising
rates, having a recession.
Uh the recession didn'tmaterialize in the way that that
(01:24):
many thought.
And here we are, essentiallyuh, you know, the SP's almost
doubled from where it was just afew years ago.
And you know, a lot of peopleare comparing what we're going
through now with the late 90sand and a lot of memories of of
the dot-com meltdown in thoseyears after that.
Um so it seems like investorsare I mean, they're obviously
(01:45):
happy.
If they've if they're in themarket, they're happy.
But there seems to be thisforeboding, ooh, something's
gonna go wrong at some point.
And and there's no questionsomething will go wrong.
We have, you know, these alwayskind of happen, but trying to
figure out what could be theproblem or the issue or the
trigger point is is anybody'sguess.
And it that seems like a lotseems like behind every question
(02:06):
that we you get when you aretalking to financial advisors,
their clients, it seems likethat's yeah, that's right at the
fr at the front of their mindwhen they when they are asking
me, and I'm you know, I'mlooking at them going, I I don't
I don't know exactly what whatcould go wrong.
All I know is that companiesare spending a lot of money
right now on AI and AI-relatedinvestments, and it you know,
(02:27):
maybe those investments don'tpay off.
And that that's probably thesimple answer, but what the what
the catalyst will be, whoknows?
Ryan (02:34):
It's it's healthy for markets for people to ask that
question.
What can go wrong?
Exactly.
It's uh it's only when everyoneis really, you know, charged up
emotional about FOMO, fear ofmissing out, that you know
they're throwing capital atthings because they don't want
to they don't want to miss thenext 20 percent.
Right.
That's when you run intotrouble.
Bob (02:54):
Trevor Burrus, Jr.
Exactly.
One of the things that we cando, when we when we we look at a
stock or an index in the marketor a sector, um we can see what
companies are generating interms of the returns on their
business, and we can see howfast they're adding um items to
their balance sheet, we cancalculate fair value using a
variety of scenarios.
And one of the things that wecan do is we can see what the
(03:15):
market is implying about futurereturns, you know, based upon
today's stock price.
Today's today's stock price atany stock is a reflection of
what the market thinks is goingto happen in the future.
And you know, it is interestinglooking at some of these tech
companies that are generatingjust massive returns on capital.
I mean, they are just they'rejust cash flow machines at this
(03:38):
point.
And I I'm encouraged somewhatthat that most of those stocks
have considerably lower returnsbaked into the share prices when
you when you look ahead, sayfive years.
Um that you know isn't allthat's not always been the case.
And when you have uh a highreturn business and you've got
it priced so that it remains ahigh return business into a
(04:01):
longer period of time in thefuture, some say perpetuity, um,
that's when you start to getworried about valuations.
And so we we see some of theMag 7 companies generating, you
know, 40, 50 percent returns oncapital, but the market you're
essentially paying for a 20percent return business five
years down the road.
Now, still that's a pretty highexpectation.
The company remains a 20percent return business, and
(04:24):
it's not a guarantee that it'sit's that's the scenario.
But um I think trying toquantify what the market is
expecting is critical.
And to me, it's a margin ofsafety issue then for investors.
Ryan (04:36):
Yeah.
So the market is you're sayingthat the market's not assuming
that we're gonna maintain thislevel of profitability and
growth.
Trevor Burrus, Jr.
Right.
But it's actually a little bitmore sanguine and a little bit
more um not pessimistic, but butnot quite as uh overly
optimistic as it's maybe in thelate 90s.
Bob (04:52):
It's a life cycle thing.
You know, every company has alife cycle, and you know, there
are some companies that havedefied those expectations over
long periods of time where theyjust you look at a um just as an
example of Microsoft, you know,it's been a high return
business from the moment theycame on the scene 40 years ago.
Um it's incredible how longthey have remained a high return
(05:14):
business.
So the it's it's pretty obviousthe companies continue to come
up with new uh new businesses,new investments have paid off,
and it can they they maintain avery, very high return on their
business.
And and yet we've got companiesthat have come along in the
last you know five years, andVIDI is a good example where
it's it's a you know it's a goodbusiness five years ago,
certainly nothing to sneeze at.
(05:35):
All of a sudden it's like thiscompany is generating more cash
than they they know what to dowith.
And so as the company looks atits business, it its problem is
it has more cash coming in thanthey can they can reasonably
invest it back into thebusiness.
And uh in in that particularcase, there are there is a
pretty significant fade of bothreturns and and asset growth at
(05:59):
some point down the road.
And you know, the longer theygo defying those expectations,
that's that's usually whatdrives share prices higher.
Ryan (06:06):
Yeah.
So some of those big technologycompanies that have been really
high return businesses havebeen characterized by being
pretty capital light.
They haven't they don'ttypically have to make these
huge capital investments thatthey've made.
Um Well, let's say investmentsare different.
Bob (06:22):
It's not like they're going out and buying um plants and
equipment and whatnot.
But you know, but now they are.
But yeah, because they theykind of have to.
I think we we are reaching aphysical limitation in terms of
our ability to produce enoughelectricity and and you know
these plants, um, you know, wecan only build chip plants so so
(06:43):
quickly.
And so it it really it isinteresting to see um some of
these companies realize that atsome point they they need
physical assets.
You know, they they can you canstay a design firm and have
somebody build your chips foryou for so long, and at some
point um you you might notnecessarily want to rely on that
(07:03):
that supplier to continue to beyour manufacturing agent.
It at some point you probablyneed to get in that business
yourself.
Yeah.
Uh so there's a risk that thatmight not work.
Ryan (07:12):
Yeah, and there's I I I'm thinking mainly of like all the
data centers as well.
Right.
All I mean, there's that's notall technology companies, but uh
the the hyperscaler companies,those big hyperscalers, they're
spending a lot on um building upthat data center capacity.
Exactly.
And and all that goes withthat.
I mean, we think of youmentioned energy.
(07:33):
Um I just saw uh Jensen Wong onCNBC a week or two ago, and he
was talking about the need to uhcreate more energy, but one of
the things that he suggested wasthat um some of those data
center big tech companies wouldactually have their own power
plants that are you know behindthe meter instead of relying on
the utilities to supply power.
Bob (07:53):
Exactly.
Ryan (07:54):
Which uh that's interesting.
Bob (07:55):
Well, I remember a couple years ago, Delta Airlines was um
in need of jet fuel, and sothey bought a refinery.
So there's there are someanalogies with other other
industries where uh a companythat has a vital uh need to uh
to grow, they they they makethat investment themselves
(08:15):
rather than relying on somebodyelse.
So um I remember I think it wasabout this time a year ago that
uh it was announced that thatconstellation um energy was
starting to reopen Three MileIsland.
I think we might have talkedabout it.
And uh oh, by the way, uh whenwe're done bringing this plant
back online, we're gonna sellall of electricity to Microsoft.
Ryan (08:35):
Yeah.
Bob (08:35):
I mean it's like wow, that's pretty incredible.
I mean, what would have powereda spit a city or maybe in a
region of the country with a lotof people, you've got one
company saying, no, no, no, weneed that electricity for our
you know for our data uh needsgoing forward.
Ryan (08:51):
And and that one in particular, if I'm not mistaken,
I think they signed like a20-year per power purchase
agreement.
Bob (08:57):
So it wasn't just like, yay, but it's a long-term
commitment.
Trevor Burrus, Jr.
Exactly.
I mean these these assets, um,a a an electric power plant, I
don't care whether it's gas orwhether it's nuclear, you know,
these are long-lived assets.
Yeah.
So it makes sense that yourrevenue stream, you'd want to
lock that up for the long-termlife of the asset.
So I I think it is it it tellsyou how far into the future some
(09:18):
companies are are thinkingabout these things.
Ryan (09:20):
Aaron Powell Yeah, that constellation uh Microsoft deal,
I just saw an update.
I think originally they saidthat 2028 was the expected um
time that they were going torestart the nuclear reactor, and
I thought, well, that's youknow pretty pretty optimist.
It seemed optimistic to me.
I mean, I'm not a nuclearengineer either.
But then I saw an updaterecently, and they said they're
(09:40):
actually ahead of schedule andmight be able to do it by 2027,
which that's pretty amazing.
Bob (09:45):
That is I hadn't I hadn't seen that.
That's that's crazy.
Yeah, it's crazy.
Ryan (09:49):
It is.
It makes you um for the forthose that need power, it makes
you uh wish that there were moredecommissioned nuclear reactors
that they could just kind offlip the switch back on.
Bob (09:59):
Exactly.
What's interesting aboutnuclear energy is or nuclear
power is the U.S.
Navy is it runs on nuclearpower.
I mean, we've so we have youknow decades of expertise with
that technology.
And i I I think I think I thinkthat clearly is going to be
part of where we get more andmore of our capacity.
Yeah.
(10:19):
So we'll we'll see how thisplays out.
Ryan (10:21):
Okay, so um I want to get back to FOMO and fear and
valuations.
Um, you know, one of thereasons, one of the things that
people point to and they'reconcerned about, myself
included, is um, you know,valuations are if you just look
at a forward PE multiple for theS P 500, when we're recording
(10:42):
this, it's somewhere north of 22times, 22 and a half times,
something like that.
And uh, you know, the last youknow, it it's varied over time,
but you look longer term, maybethe last 25 years, it's about 17
times forward earnings.
That's right.
If you look back at otherthings like the um the you know
Schiller PE ratio, thecyclically adjusted PE ratio,
(11:04):
there's there's all differentways people look at valuation.
Um, in your view, what explainswhy stocks have gotten more
expensive and is thatsustainable?
Should we be you know hidingunder the desk and afraid of
these high valuations?
Bob (11:20):
I think it's it's really two things.
First of all, uh profit marginsfor the companies in the S P
500, uh when you look atrevenues and you take a look at
what's what's what's left overin terms of profitability, uh
margins are at an all-time high.
So essentially from an earningsand a cash flow perspective, it
(11:40):
just simply means that thecompanies are getting more from
from their businesses than everbefore.
A building that is fullyoccupied is gonna be worth more
than a building that's empty.
Um any business that haspricing power is gonna be worth
more than a company that is uhyou know a price seeker, you
(12:02):
know.
It it really it's justinteresting how how this all
plays out.
So profitability has gone uplargely because of margins, and
we have a higher percentage ofcompanies in the SP today that
are higher returned businesses.
So the collective um kind of acoupon, if you will, of
corporate S P 500 companies ishigher.
So if you think of if you justimagine a bond that used to have
(12:25):
a 6 percent coupon, um, and youwake up and now it's a 10
percent coupon, it's it's justgonna sell for a higher price
because there's more cash flowattached to that asset.
Um at the same time, in thelast year we've seen that the
yield on the 10-year treasury,this the the S P 500
historically is valued mostly onthe 10-year treasury, is is
(12:49):
typically where the discountrate discussions come in.
And we were at five percentabout this time a year ago.
Now we're closer to fourpercent.
Um I look at it this way, it'spretty simple.
Four percent is exactlytwenty-five times earnings.
And here we are, we have an SPat about twenty-five times
trailing earnings and abouttwenty-two times looking ahead
(13:11):
at next year.
Um I I think the market isprobably right where it should
be.
I think it it could it change,could valuations come back down?
Obviously they could, but Ithink it would take an increase
in interest rates, which I don'tis likely I don't think that's
gonna happen with the Fedperhaps cutting interest rates a
couple times here goingforward.
Maybe, maybe, maybe the sh mostof the actions in the short
(13:33):
end.
But I I don't really think thatum that we're gonna see the
10-year treasury go back to fivepercent.
Maybe, maybe it does.
But um and I think as long ascompanies continue to generate
high returns on their businessfor the for the time being.
And if you look at earnings, Imean we're obviously in the
middle of earnings reportingseason.
I'm not seeing anything inthese earnings reports that
(13:54):
implies that we should take downour estimates for next year.
Ryan (13:57):
Yeah.
And the 10-year yields, I mean,around four, by the time we air
the this podcast episode, we'renot really sure what'll where
it will be.
But um, watch it go to five.
Um when I looked um, you know,yesterday, uh and today's uh
October 23rd, it was below four.
And it's been a while sincewe've been below four, and it's
(14:18):
trending lower.
And you know, again, it'll bepopped up a little bit this
year.
So um but that's um that that'sthat is kind of interesting
that we have seen uh the ratestrend lower, and it seems to me
that I mean the October rate cutfrom the Fed is all but
certain.
We'll see that next week.
And then it's it justbehaviorally, forget about why
(14:43):
what the Fed should do in theeconomy.
If you've got a new Fed chairthat's going to be appointed
next year, and that's you know,I think May is when Powell's
term is up, um, and you've gotyou know the people jostling to
be the next Fed chair, and itjust seems like there's a lot of
reasons why the Fed will bemore dovish next year.
Bob (15:03):
Trevor Burrus Well, inflation, the the trend right
now for inflation is closer tothree percent.
Yeah.
And the Fed's, you know, theupper bound is four and a half
percent or four and a quarterpercent on the Fed funds rate.
That that spread between fourand a quarter and say three is
that's that's room for the Fedto cut rates.
I I don't think the Fed wantsto lower interest rates below
(15:25):
the inflation rate.
I mean I think we've learned Ithink we we saw what that will
do.
Right.
And all of a sudden we had thehighest inflation in 40 years.
Um I I don't think, you know, II think I think you're correct
that we're gonna get a moredovish Fed.
You know, maybe maybe they cutrates down to three percent over
the next year.
Yeah.
Um I think a short-terminterest rate of three percent
(15:49):
uh may prove to be a little bittoo low.
It might stoke some inflationconcerns, but it's pretty clear
the Fed is more worried rightnow about the labor markets and
the economy.
And uh markets tend to like itwhen the Fed is worried about
that as opposed to taking awaythe punch ball and raising
interest rates.
So don't fight the Fed.
That's that's that's an oldaxiom that's been around
(16:09):
forever.
That's that's you know, thatthat that's always been a factor
in driving markets.
Trevor Burrus, Jr.
Ryan (16:15):
Yeah.
Well, and and the reality isright now, again, this could
change by the time we air thisepisode on Monday, but the data
from government data isbasically on hold for the most
part.
There's so much.
Bob (16:28):
We should just get the government out of the business
of releasing data.
We don't need it.
Private uh there's a lot ofsources of economic data.
Private data sources aren'tbad.
Yeah.
That's they've that's maybe thegovernment should get out of
that business.
Ryan (16:41):
Yeah.
Um the the other thing that'sinteresting regarding
valuations, um, the equal weightS P 500, last time I checked,
was right around 17 timesforward earnings.
Right.
I mean, that's the differencebetween 22 and a half and 17.
That's pretty wide.
Exactly.
It's been a while since we'veseen that that big of a
(17:01):
differential.
Bob (17:02):
Yeah, and I think that reflects the differences
between, you know, those 493companies that are driving that
that equal weight index.
You know, they're not umthey're good businesses, they're
certainly generating greatreturns on capital.
Uh their their ROIs have goneup, but not anywhere near like
what the Mag 7 companies have.
(17:23):
So I think it's just areflection of of I mean, uh a
high PE is is a reflection ofhigh returns, high growth.
Lower PE is usually lowergrowth.
Um there's no doubt there'sthere's a lot of value.
More traditional valueinvestors are going to find a
lot to like about the S P 493.
Ryan (17:43):
And then as you get lower into mid and small cap stocks,
valuations are even a bitcheaper.
That's right.
Um what's your what's your takethere?
We've talked about that alittle bit before.
But um is there stillopportunity in mid and small cap
stocks?
Bob (17:57):
Yeah, I think uh my confidence level is probably a
little bit higher for mid-caps,but I think small caps, you
know, for the most part, if welook at earnings estimates every
year for the last three or fouryears, at the beginning of the
year, and you look at estimatesthroughout the year, uh small
caps have just not generated theearnings growth that investors
(18:17):
were maybe hoping for.
So we've had um essentially aconstant kind of revaluation,
but this year, uh estimates areholding up better this year than
they have in the past.
One of the problems with uh aRussell 2000 index, or maybe
it's an SP small cap index, isthat a lot of times the more
successful companies in theindex graduate into the next
(18:40):
tier.
So there's a little bit of aproblem where you've you've got
companies that are succeedingthat that have larger market
caps within the index, and thenall of a sudden we can't
continue to ride that momentum.
Ryan (18:52):
That's what it is, exactly.
Bob (18:53):
Yeah.
Well said.
That's exactly what it is.
So it's it I think that's partof the problem with that part of
the market.
Ryan (19:00):
I I would also think that the headwinds of higher interest
rates have a bigger impact onthose smaller companies.
No doubt about it.
Bob (19:07):
Um over the last couple of years, which small companies
need capital to grow.
Right.
And now with the Fed uh morelikely to cut rates a little
more aggressively here goingforward, I would I would think
that we would get a pop fromthat.
Yeah.
Ryan (19:21):
I mean, if it if if I'm right and it is a headwind, then
the same the opposite would betrue that you get a tailwind
from lower rates.
Bob (19:27):
Yeah, and we and it was about this time a year ago that
the small and mid-caps wererunning pretty hard.
And then we get to December oflast year, and all of a sudden
our expectations for the Fedchange quite a bit.
I mean, we we got the rate cutin September of twenty-four, and
as we wrapped up twenty-four,it became pretty obvious that
the Fed was in no hurry to cutrates.
(19:50):
And I think I think the Fed wasusing you know the tariffs as
an argument.
Well, we can't cut rates nowwhen we could have pricing
issues, inflation issues.
Uh now that that's beenimplemented and we can gauge the
impact of of tariffs oninflation better now than we
could a year ago, um I I thinkinvestors in small caps, I think
they've been disappointed.
(20:11):
And I just think a lot ofinvestors are just like, yeah, I
just, you know, you know.
But all of a sudden what willhappen is you'll have a big run
in that part of the market andeverybody will be like, oh,
yeah, small caps.
Yeah.
You know, so I I want to beahead of it.
And I think I think there is Ithink there's an opportunity in
small and mid.
Ryan (20:27):
Yeah, yeah.
There's a reason why uhcontrarian uh opportunities
exist.
And that it's if you're aheadof what everyone has already
come to understand, then maybethe opportunities pass you by.
Bob (20:39):
Exactly right.
Ryan (20:40):
Yeah.
Um, another uh anothernarrative that um is you know we
come across from time to timehas to do with the concept of
dry powder and uh money marketfund assets.
And we're at a there's a lot ofmoney market fund assets right
now.
Um do you do you think that um,you know, is that money that's
(21:01):
gonna stay parked in moneymarkets, or now that rates are
coming down, do you think thatthat's gonna find a way into
risk assets again?
Bob (21:07):
I would think some of that money will get reallocated.
And it might not go intoequities, but I I would think
that some of it would at leastgo into um the array of fixed
income areas that where yieldsare a little bit higher.
You know, the yield curve uhyou think about we got short
rates at over four right nowfrom a Fed perspective.
(21:27):
Um the two years at three and ahalf roughly, and the ten years
closer to four, and the thirtyyears at four and a half, the
yield curve is you know, I thinkthat's probably gonna be the
story over the next couple ofyears, is the yield curve gets
back to its normal shape.
And I would think that some uhsome of that cas some of that
money market fund asset flowmight slow down a little bit and
(21:51):
end up further out in the curveat some point.
Or maybe some of it goes intoother areas, maybe it goes into
real estate.
It's just I think things likethat.
I think eventually people aregonna go, you know, I'm getting
a decent yield, it's you know,maybe maybe inflation is three
percent, maybe trends lower andI'm earning three percent.
I might not move a lot of ofthat money into other assets,
(22:11):
but I I think it is a sign thatinvestors are still cautious and
concerned.
I I've talked to a lot offinancial advisors and a lot of
them have, you know, they'vethey've they've got higher
levels of cash and you know,equivalents, T bills, things
like that became very um youknow, very popular.
And you think about it, you'rerunning five percent here in in
T-bills not that long ago.
(22:31):
Um as these these mature, youwould assume that investors are
gonna start going, hey, I'd I'dlike to maybe look at something
else.
Ryan (22:39):
Yeah, yeah.
And you know, we we just uh ourour last podcast episode I had
Bill Housey and John Wilhelm on,and we were talking about um
even some of the the tax-freebond yields.
For higher quality tax-freebonds, you get like a tax
equivalent yield in some casesseven, eight percent.
Right.
Um, and you know, all of asudden you're looking at fixed
income where you're gettingreturns that are similar to what
(23:01):
people expect for equities.
Exactly.
Bob (23:03):
Um, it's one one of the things I learned last night, I I
I knew this, but I didn'trealize it the extent that there
is a large segment of the munimarket that's taxable.
Yeah.
And um I was on this panel lastnight with this gentleman from
a firm that specializes inmunis.
It's an $800 billion assetclass.
And the collective quality ofthose credits stacks up really
(23:28):
well against corporate credits,and the yields are are
competitive with potentiallyless credit risk.
So um, you know, it's it'sfunny.
I think of munis and Iimmediately default to taxable
equivalent, but there's athere's there's an opportunity
there as well for some investorswho might not be as sensitive
to taxes.
Trevor Burrus, Jr.
Ryan (23:46):
So that's municipal issuers who have projects that
don't qualify for tax-free uhstatus, right?
That's so they're borrowingmoney for something that doesn't
qualify.
Yeah, that is that is aninteresting market because it's
it seems very uh niche, youknow, kind of it's an $800
billion niche.
Bob (24:05):
It's a big niche.
Trevor Burrus, and the gray andwell and the gray I mean you
think about the size of the bondmarket, we're talking about
trillions of dollars.
But it's you know it'sapproaching a trillion dollar
asset class.
It's you know I I I'm certainlynot an expert in that part of
the marketplace, but I I thoughtit was compelling.
Ryan (24:19):
Yeah.
Well, and then you've you'vealso got people pouring money
into gold, which um, you know,the gold prices have really
surged this year.
More recently, they've reallypulled back pretty sharply.
Do you uh have a an opinion onanything related to gold?
Bob (24:37):
Well, I I've been joking for years that my wife likes
gold.
Uh maybe platinum a little bitmore than gold.
Um not as an investmentperspective from an investment
perspective, but just from anaesthetics perspective.
But um no, I think I think youknow, basically the precious
metals as an asset class didnothing for a long time.
Just absolutely nothing.
(24:58):
And I remember during theduring the pandemic watching the
money supply surge and youknow, the m you started to see
gold prices maybe maybe bottomout and perk up a little bit.
Um and now that we've got theFed positioning to r to cut
rates further, um I I think Ithink that's that's probably
(25:21):
driving some of the concern.
The dollar weakened in thefirst half of the year, it seems
like it's stabilizing here.
But I think that like likeanything, it's it's an area of
the market that investors wantednothing to do with, and all of
a sudden we get this big pop,you know, 50 percent move
basically uh in recent uh times,and all of a sudden investors
are like, oh, I need to buygold.
It's like um the problem withgold is that it doesn't it it
(25:46):
doesn't it's somewhat useful asa as a as a commodity but it's
you know it's really a s it's astore of value.
And um they they continue tofind more gold, they continue to
produce more gold, so it's nota fixed you know, supply.
It is it is a supply that tendsto go up over time.
And I just think investors umyou know, I do think investors
(26:08):
should have some commodities ina properly diversified asset
allocation model.
Um but it's interesting, likeyou know, we we we haven't
talked about this, but the priceof energy.
You know, normally gold and oilkind of go together
historically.
And then I'll if you look atthe price of oil, it's right
where it was twenty years ago.
And natural gas prices havebarely changed even further back
(26:30):
in time.
You know, we're we're it's justI think ultimately it's about
productivity and in our abilityto produce these commodities.
And I I I'm sure that with thisrecent increase in silver and
and gold, uh you are gonna seeproduction go up significantly.
You have to.
I mean, it's just that's themarket uh reacting to that, and
(26:51):
that that will probably coolsome of this off.
Ryan (26:54):
It's it seems like some of those commodity assets and gold
is sort of a unique uh assetbecause it has held that sort of
store of value defensive aspecttrade to it.
Um but it's really hard tofigure out what is overvalued or
undervalued or expensive orcheap, unlike we were talking
(27:16):
before about uh the value ofequities.
You look at you know, what aretheir profits, how are they
gonna grow, what's thelikelihood they continue to grow
at a certain pace?
There's no profits for gold.
Um the gold companies haveprofits, but there's no PE
ratio, there's no dividends thatyou can analyze for gold.
That's right.
Bob (27:33):
It's it's like crypto.
Yeah.
I mean, what's what's you know,what are these cryptocurrencies
worth?
Well, you know, it's just I Ithink all of this goes back to
COVID, COVID policies, themassive increase in the money
supply.
There's just a and youmentioned how much money is in
money market funds, it all kindof ties together.
There's just a lot of liquiditythat just kind of finds places
(27:56):
to go and drives prices up.
And it was just it seems likewe have this this um this wave
of of money that just kind ofsloshes around and and just
occasionally sends up prices ofthings.
Ryan (28:09):
You know, it does make sense to have some of those some
of those assets that aresloshing around that you don't
expect in your portfolio.
It makes sense to diversify andallocate to those things.
But um yeah, they're just partof the reason why it makes sense
is because they don'tnecessarily behave with the same
rules that you do with stocksor bonds.
Bob (28:28):
Trevor Burrus, Jr.
Exactly.
Asset allocation is uh is is aninteresting topic because um
correlations change over timeand uh assets don't always move
the way they have in the past.
And I think it's I do thinkthat with the stock market as
high as it is right now, thatthere has been a lot of interest
among investors and investmentadvisors, I'm sure, to diversify
(28:53):
or maybe mitigate some of therisk of of a of a decline in the
stock market.
I mean, at some point we'regonna wake up and the market's
gonna be down ten percent,twenty percent.
And so I think, you know, Ithink this is this all kind of
this is all related.
I think I think that investorsare are looking for things to
position themselves in thatmight not necessarily correlate
(29:14):
with the market going down.
Demand for products that havehedging strategies and
different, you know, financialengineering, yeah, if you want
to call it.
Um the demand is high, and Iget it.
It's I think a lot of investorshave lived through enough bear
markets and enough enoughdownturns that they know that at
some point we will have a arecession, we'll have a bear
market, some event will happen.
(29:36):
Um what what that event is wedon't know, but it it's it's I
think a lot of folks are justtrying to stay ahead of that or
trying to get ahead of it.
Ryan (29:45):
Yeah, and we don't know because if we did it would
already be reflected in theprices and you wouldn't have to
worry about a ten percentdecline.
Exactly.
Yeah.
That that you the you only getthese big movements when new
information gets priced inquickly.
That's right.
And that's why uh to yourpoint.
Yeah, all those those bufferedstrategies, all those things
that protect on the downside umhave been really popular.
(30:06):
Yeah, and for good reason.
Bob (30:07):
Yeah.
And they they make a lot ofsense.
I think, you know, we talkedabout this before.
Uh demographics are what theyare.
I mean, we are we are living,on average, a lot longer past
our working years.
And, you know, the days ofpeople working, retiring, and
and passing away in five yearsor ten years, I mean, that is
(30:30):
now turning into maybe twenty orthirty years or even more for a
lot of people.
So I think anything that keepsinvestors in the market or you
know, w uh in in whatever waymakes sense or whatever is in
line with their risk toleranceis I think is is wonderful.
I think it's a good thing.
Um it's funny, the other day Iwent to uh to a hospital to give
(30:53):
a presentation.
It was a luncheon and I arrivedat the hospital and it's you
know you know 15 minutes herefrom the offices here at First
Trust in Wheaton and I could notfind a parking place in this
parking lot.
I mean it was just I mean, uhthere were I mean I'm driving I
finally found somebody and Itracked them down and I followed
them to their parking space.
(31:14):
I had to stalk them to you knowto find and I and I'm realizing
I've only got a couple minutesbefore my presentation.
And then I started thinkingabout something, and I don't
know what made me think of this,but twenty-five years ago, at
the turn of the century, um itseemed like we we were talking
about the baby boomers gettingolder, and you know, the this
(31:34):
this the I remember the taglinewas every six or seven seconds a
baby boomer turns fifty.
And that was a big deal.
You know, and I realized that'stwenty-five years ago.
Well, those same people thatwere turning fifty twenty-five
years ago now turning 75, and Ithink most of them were at the
hospital having something done.
Uh and and so demand for youknow for for health care and the
(31:58):
need to have um have assets topay for for health care uh and
and the all the things that areinevitable as we get older, um,
I I think it all kind of tiesin.
And it and it to me it's and wewe've kind of forgotten about
that.
We're all focused on this AIstuff, but we still have this
aging population and thesedemographic issues that um I
(32:18):
think are going to affectinvestors um profoundly.
Ryan (32:22):
Yeah.
It it's amazing.
Time time uh kind of flies, youknow, the 2025 we're already
kind of rounding third base anduh heading heading towards home.
I mean, we're end of October,two months left in 2025, and
then the calendar flips again.
Exactly.
Um so do you has has 2025 uhmet your expectations coming
(32:44):
into this year?
Do you do you think uh, youknow, as you look back over the
last 10 months or so, is it whatyou expected?
Bob (32:51):
Uh I I do think that um I think the market the market's
done better than I thought itwould do.
I thought we'd have a prettygood year.
Um if we look at where earningsestimates were at the beginning
of the year, you know, Ithought that we would eventually
get the Fed to to cut ratesmaybe once or twice this year.
Uh there were times this yearwe thought maybe the Fed might
(33:11):
not cut rates.
But I d I thought that we'dhave enough earnings growth to
grind out, you know, maybe aneight to ten percent return.
Instead we're here, I don'tknow, what fourteen percent as
of today.
Ryan (33:22):
Yeah.
Bob (33:22):
Uh not including dividends.
So uh I think it's been abetter year than than I would
have thought.
Uh the problem is when you whenyou strip away you know that S
P five hundred return and youlook at the rest of the market,
it's like it's the same storythat we've had for the last
couple of years, where it's theS P and the Mag 7, the the
market cap weighted indexes umhave done well.
(33:44):
And you know, kind ofeverything else is is more in
line with that 8 to 10 percentrate of return.
Uh maybe the biggest surprisethis year is is how outsized
returns have been in in overseasmarkets.
Yeah.
That's been a it's been areally good year for that.
It has.
Uh I think currency uh was wasthe main driver of that.
Um and I think other I thinkcentral banks around the world
(34:06):
uh have been more aggressive incutting rates this year.
Uh the fact that the Fed's onlyour Fed has only cut rates one
time.
We've had multiple rate cutsfrom the Europeans by
comparison.
I think that um I think I thinkthat is the main driver of
outsized returns in marketsoverseas.
And valuations are loweroverseas, too.
Ryan (34:26):
Valuations and the the opportunities for to to pick up
stocks at a cheaper price.
Right.
Um there's plenty to goshopping from.
Yeah.
Bob (34:34):
It's monetary policy, it's the dollar, it's price discovery
all going on, but still I Icaution people at the end of the
day, I don't I don't know thatI'd want to have a portfolio uh
necessarily overweighted ininternational stocks.
I still I still think we arefar and away the most fertile
ground for opportunities forcompanies.
We just simply have bettercompanies longer term.
(34:56):
You just have to pay more forthem.
Ryan (34:57):
Yeah.
Yeah.
Well, I usually um end theconversation asking you about a
book, right?
Yeah.
Today I'm gonna throw you acurveball here.
Uh-oh.
Um and uh This has not beenscripted.
This is unscripted, surprise.
But one of the things I knowabout Bob Carey is that he is uh
uh a highly interested in musicsort of guy.
(35:19):
Yeah.
Um so I'm gonna ask you insteadin the Bob Carey deep tracks,
like give us a give us a goodmusic recommendation that is not
you know super mainstream, uhthat uh, you know, when
someone's done with a podcast,they can say, you know, Apple
Music, find this for me.
I got something.
Okay.
Bob (35:39):
It it is a book.
I asked for a song and give mea book.
But it's but it's musicrelated.
Okay, perfect.
Okay.
I I just I got done reading umuh Tom Petty's guitar player,
Mike Campbell.
Okay, uh was with Tom his wholecareer, and Tom's obviously
been gone for a while, uh passedaway a number of years ago now.
(36:00):
But his his guitar player, hisbandmate uh Mike Campbell wrote
a book just simply calledHeartbreaker.
Ryan (36:08):
Okay.
Bob (36:08):
And it's a big thick, you know, memoir basically of his of
his life and his time in theband.
But it goes it's a lot morethan just music, but it's it's
about just a lot of things thathave happened in the past.
I everybody that I'verecommended that book to has
been like, that is incredible.
And you can listen to it onSpotify.
You can listen to him narratethe book.
It's about 24 hours of himtalking, and you think you
(36:30):
think, God, that's just a that'sa lot to get through.
It it is amazing how fast those24 hours go if you listen to
it.
Interesting.
I did both listening and I wasreading, and it's just
incredible what he saw.
Ryan (36:42):
So it was read by the author.
Yeah, exactly.
Yeah, exactly.
Heartbreaker by Mike Campbell.
Mike Campbell.
Um there was another uh there'sa book that I read a year or
two ago when it had first comeout um from Bono.
Have you ever read theSurrender by Bono?
It kind of goes through uh avariety of song titles and he's
got stories that go along withthem.
Bob (37:02):
Yeah, yeah.
I I think it's cool that thatwe get to hear from these people
that are still with us tellingtheir stories about uh about all
this great music um that'sthat's that's been a part of our
lives if you're especially ifyou're a little bit older.
It's just like I mean, how doyou how do you not know Tom
Petty and you two or theBeatles?
Or yeah.
I mean it's it's it is kind ofcool that we get to hear from
(37:23):
these guys.
All right.
Well, we'll add Heartbreaker tothe uh Mike Campbell.
Ryan (37:28):
Mike Campbell Heartbreaker.
Um Bob, it's always a pleasure.
Thank you for uh for joining.
I think this is our 58thepisode of the podcast, and you
were the first episode.
So always appreciate having youon.
So is this the end of it?
Are you are you gonna continuebookends?
No, no, we're uh you need tokeep going.
Bob (37:46):
This is these are these are really, really valuable, uh
insightful, and they're fun tolisten to.
Ryan (37:51):
Yeah, well, they're definitely fun for me to uh to
do.
And uh so again, thank you forhelping us kick it off and and
uh continue.
Bob (38:01):
Just so many interesting people who work here, and you
you get you get out of what whatwhat we're all about with our
these conversations.
Ryan (38:09):
Well, it gives me an excuse to talk to uh some of my
favorite people at the firm, soyourself included.
So thank you.
Thank you.
And thanks to all of you forlistening and uh joining us on
this episode of the First TrustROI podcast.
We'll see you next time.
As we approach the end of 2025 and the calendar gets ready
to flip to 2026, investors havea lot of questions.
They wonder where do stocks gofrom here?
Are we at valuation levels thatare too expensive?
What's going to happen with theFed?
Are they going to continuelowering interest rates next
year?
What's going to happen with theeconomy?
What's going to happen withalternative assets like gold,
(00:34):
which reached new highsrecently?
Well, today I've got Bob Carey,Chief Market Strategist at
First Trust, to address some ofthose questions and others on
this episode of the First TrustROI podcast.
Thanks for joining us.
So you were telling me beforewe turned the cameras on about
an event that you were speakingat, and uh you said that most of
(00:57):
your questions that people wereasking you were what?
Bob (01:01):
Yeah, it it seems like people are fishing for uh what
could go wrong.
I mean, we've obviously hadjust an incredible couple of
years here uh in the stockmarket.
Um you think about where wewere at this time back in 2022
when a lot of folks wereconcerned about the Fed raising
rates, having a recession.
Uh the recession didn'tmaterialize in the way that that
(01:24):
many thought.
And here we are, essentiallyuh, you know, the SP's almost
doubled from where it was just afew years ago.
And you know, a lot of peopleare comparing what we're going
through now with the late 90sand and a lot of memories of of
the dot-com meltdown in thoseyears after that.
Um so it seems like investorsare I mean, they're obviously
(01:45):
happy.
If they've if they're in themarket, they're happy.
But there seems to be thisforeboding, ooh, something's
gonna go wrong at some point.
And and there's no questionsomething will go wrong.
We have, you know, these alwayskind of happen, but trying to
figure out what could be theproblem or the issue or the
trigger point is is anybody'sguess.
And it that seems like a lotseems like behind every question
(02:06):
that we you get when you aretalking to financial advisors,
their clients, it seems likethat's yeah, that's right at the
fr at the front of their mindwhen they when they are asking
me, and I'm you know, I'mlooking at them going, I I don't
I don't know exactly what whatcould go wrong.
All I know is that companiesare spending a lot of money
right now on AI and AI-relatedinvestments, and it you know,
(02:27):
maybe those investments don'tpay off.
And that that's probably thesimple answer, but what the what
the catalyst will be, whoknows?
Ryan (02:34):
It's it's healthy for markets for people to ask that
question.
What can go wrong?
Exactly.
It's uh it's only when everyoneis really, you know, charged up
emotional about FOMO, fear ofmissing out, that you know
they're throwing capital atthings because they don't want
to they don't want to miss thenext 20 percent.
Right.
That's when you run intotrouble.
Bob (02:54):
Trevor Burrus, Jr.
Exactly.
One of the things that we cando, when we when we we look at a
stock or an index in the marketor a sector, um we can see what
companies are generating interms of the returns on their
business, and we can see howfast they're adding um items to
their balance sheet, we cancalculate fair value using a
variety of scenarios.
And one of the things that wecan do is we can see what the
(03:15):
market is implying about futurereturns, you know, based upon
today's stock price.
Today's today's stock price atany stock is a reflection of
what the market thinks is goingto happen in the future.
And you know, it is interestinglooking at some of these tech
companies that are generatingjust massive returns on capital.
I mean, they are just they'rejust cash flow machines at this
(03:38):
point.
And I I'm encouraged somewhatthat that most of those stocks
have considerably lower returnsbaked into the share prices when
you when you look ahead, sayfive years.
Um that you know isn't allthat's not always been the case.
And when you have uh a highreturn business and you've got
it priced so that it remains ahigh return business into a
(04:01):
longer period of time in thefuture, some say perpetuity, um,
that's when you start to getworried about valuations.
And so we we see some of theMag 7 companies generating, you
know, 40, 50 percent returns oncapital, but the market you're
essentially paying for a 20percent return business five
years down the road.
Now, still that's a pretty highexpectation.
The company remains a 20percent return business, and
(04:24):
it's not a guarantee that it'sit's that's the scenario.
But um I think trying toquantify what the market is
expecting is critical.
And to me, it's a margin ofsafety issue then for investors.
Ryan (04:36):
Yeah.
So the market is you're sayingthat the market's not assuming
that we're gonna maintain thislevel of profitability and
growth.
Trevor Burrus, Jr.
Right.
But it's actually a little bitmore sanguine and a little bit
more um not pessimistic, but butnot quite as uh overly
optimistic as it's maybe in thelate 90s.
Bob (04:52):
It's a life cycle thing.
You know, every company has alife cycle, and you know, there
are some companies that havedefied those expectations over
long periods of time where theyjust you look at a um just as an
example of Microsoft, you know,it's been a high return
business from the moment theycame on the scene 40 years ago.
Um it's incredible how longthey have remained a high return
(05:14):
business.
So the it's it's pretty obviousthe companies continue to come
up with new uh new businesses,new investments have paid off,
and it can they they maintain avery, very high return on their
business.
And and yet we've got companiesthat have come along in the
last you know five years, andVIDI is a good example where
it's it's a you know it's a goodbusiness five years ago,
certainly nothing to sneeze at.
(05:35):
All of a sudden it's like thiscompany is generating more cash
than they they know what to dowith.
And so as the company looks atits business, it its problem is
it has more cash coming in thanthey can they can reasonably
invest it back into thebusiness.
And uh in in that particularcase, there are there is a
pretty significant fade of bothreturns and and asset growth at
(05:59):
some point down the road.
And you know, the longer theygo defying those expectations,
that's that's usually whatdrives share prices higher.
Ryan (06:06):
Yeah.
So some of those big technologycompanies that have been really
high return businesses havebeen characterized by being
pretty capital light.
They haven't they don'ttypically have to make these
huge capital investments thatthey've made.
Um Well, let's say investmentsare different.
Bob (06:22):
It's not like they're going out and buying um plants and
equipment and whatnot.
But you know, but now they are.
But yeah, because they theykind of have to.
I think we we are reaching aphysical limitation in terms of
our ability to produce enoughelectricity and and you know
these plants, um, you know, wecan only build chip plants so so
(06:43):
quickly.
And so it it really it isinteresting to see um some of
these companies realize that atsome point they they need
physical assets.
You know, they they can you canstay a design firm and have
somebody build your chips foryou for so long, and at some
point um you you might notnecessarily want to rely on that
(07:03):
that supplier to continue to beyour manufacturing agent.
It at some point you probablyneed to get in that business
yourself.
Yeah.
Uh so there's a risk that thatmight not work.
Ryan (07:12):
Yeah, and there's I I I'm thinking mainly of like all the
data centers as well.
Right.
All I mean, there's that's notall technology companies, but uh
the the hyperscaler companies,those big hyperscalers, they're
spending a lot on um building upthat data center capacity.
Exactly.
And and all that goes withthat.
I mean, we think of youmentioned energy.
(07:33):
Um I just saw uh Jensen Wong onCNBC a week or two ago, and he
was talking about the need to uhcreate more energy, but one of
the things that he suggested wasthat um some of those data
center big tech companies wouldactually have their own power
plants that are you know behindthe meter instead of relying on
the utilities to supply power.
Bob (07:53):
Exactly.
Ryan (07:54):
Which uh that's interesting.
Bob (07:55):
Well, I remember a couple years ago, Delta Airlines was um
in need of jet fuel, and sothey bought a refinery.
So there's there are someanalogies with other other
industries where uh a companythat has a vital uh need to uh
to grow, they they they makethat investment themselves
(08:15):
rather than relying on somebodyelse.
So um I remember I think it wasabout this time a year ago that
uh it was announced that thatconstellation um energy was
starting to reopen Three MileIsland.
I think we might have talkedabout it.
And uh oh, by the way, uh whenwe're done bringing this plant
back online, we're gonna sellall of electricity to Microsoft.
Ryan (08:35):
Yeah.
Bob (08:35):
I mean it's like wow, that's pretty incredible.
I mean, what would have powereda spit a city or maybe in a
region of the country with a lotof people, you've got one
company saying, no, no, no, weneed that electricity for our
you know for our data uh needsgoing forward.
Ryan (08:51):
And and that one in particular, if I'm not mistaken,
I think they signed like a20-year per power purchase
agreement.
Bob (08:57):
So it wasn't just like, yay, but it's a long-term
commitment.
Trevor Burrus, Jr.
Exactly.
I mean these these assets, um,a a an electric power plant, I
don't care whether it's gas orwhether it's nuclear, you know,
these are long-lived assets.
Yeah.
So it makes sense that yourrevenue stream, you'd want to
lock that up for the long-termlife of the asset.
So I I think it is it it tellsyou how far into the future some
(09:18):
companies are are thinkingabout these things.
Ryan (09:20):
Aaron Powell Yeah, that constellation uh Microsoft deal,
I just saw an update.
I think originally they saidthat 2028 was the expected um
time that they were going torestart the nuclear reactor, and
I thought, well, that's youknow pretty pretty optimist.
It seemed optimistic to me.
I mean, I'm not a nuclearengineer either.
But then I saw an updaterecently, and they said they're
(09:40):
actually ahead of schedule andmight be able to do it by 2027,
which that's pretty amazing.
Bob (09:45):
That is I hadn't I hadn't seen that.
That's that's crazy.
Yeah, it's crazy.
Ryan (09:49):
It is.
It makes you um for the forthose that need power, it makes
you uh wish that there were moredecommissioned nuclear reactors
that they could just kind offlip the switch back on.
Bob (09:59):
Exactly.
What's interesting aboutnuclear energy is or nuclear
power is the U.S.
Navy is it runs on nuclearpower.
I mean, we've so we have youknow decades of expertise with
that technology.
And i I I think I think I thinkthat clearly is going to be
part of where we get more andmore of our capacity.
Yeah.
(10:19):
So we'll we'll see how thisplays out.
Ryan (10:21):
Okay, so um I want to get back to FOMO and fear and
valuations.
Um, you know, one of thereasons, one of the things that
people point to and they'reconcerned about, myself
included, is um, you know,valuations are if you just look
at a forward PE multiple for theS P 500, when we're recording
(10:42):
this, it's somewhere north of 22times, 22 and a half times,
something like that.
And uh, you know, the last youknow, it it's varied over time,
but you look longer term, maybethe last 25 years, it's about 17
times forward earnings.
That's right.
If you look back at otherthings like the um the you know
Schiller PE ratio, thecyclically adjusted PE ratio,
(11:04):
there's there's all differentways people look at valuation.
Um, in your view, what explainswhy stocks have gotten more
expensive and is thatsustainable?
Should we be you know hidingunder the desk and afraid of
these high valuations?
Bob (11:20):
I think it's it's really two things.
First of all, uh profit marginsfor the companies in the S P
500, uh when you look atrevenues and you take a look at
what's what's what's left overin terms of profitability, uh
margins are at an all-time high.
So essentially from an earningsand a cash flow perspective, it
(11:40):
just simply means that thecompanies are getting more from
from their businesses than everbefore.
A building that is fullyoccupied is gonna be worth more
than a building that's empty.
Um any business that haspricing power is gonna be worth
more than a company that is uhyou know a price seeker, you
(12:02):
know.
It it really it's justinteresting how how this all
plays out.
So profitability has gone uplargely because of margins, and
we have a higher percentage ofcompanies in the SP today that
are higher returned businesses.
So the collective um kind of acoupon, if you will, of
corporate S P 500 companies ishigher.
So if you think of if you justimagine a bond that used to have
(12:25):
a 6 percent coupon, um, and youwake up and now it's a 10
percent coupon, it's it's justgonna sell for a higher price
because there's more cash flowattached to that asset.
Um at the same time, in thelast year we've seen that the
yield on the 10-year treasury,this the the S P 500
historically is valued mostly onthe 10-year treasury, is is
(12:49):
typically where the discountrate discussions come in.
And we were at five percentabout this time a year ago.
Now we're closer to fourpercent.
Um I look at it this way, it'spretty simple.
Four percent is exactlytwenty-five times earnings.
And here we are, we have an SPat about twenty-five times
trailing earnings and abouttwenty-two times looking ahead
(13:11):
at next year.
Um I I think the market isprobably right where it should
be.
I think it it could it change,could valuations come back down?
Obviously they could, but Ithink it would take an increase
in interest rates, which I don'tis likely I don't think that's
gonna happen with the Fedperhaps cutting interest rates a
couple times here goingforward.
Maybe, maybe, maybe the sh mostof the actions in the short
(13:33):
end.
But I I don't really think thatum that we're gonna see the
10-year treasury go back to fivepercent.
Maybe, maybe it does.
But um and I think as long ascompanies continue to generate
high returns on their businessfor the for the time being.
And if you look at earnings, Imean we're obviously in the
middle of earnings reportingseason.
I'm not seeing anything inthese earnings reports that
(13:54):
implies that we should take downour estimates for next year.
Ryan (13:57):
Yeah.
And the 10-year yields, I mean,around four, by the time we air
the this podcast episode, we'renot really sure what'll where
it will be.
But um, watch it go to five.
Um when I looked um, you know,yesterday, uh and today's uh
October 23rd, it was below four.
And it's been a while sincewe've been below four, and it's
(14:18):
trending lower.
And you know, again, it'll bepopped up a little bit this
year.
So um but that's um that that'sthat is kind of interesting
that we have seen uh the ratestrend lower, and it seems to me
that I mean the October rate cutfrom the Fed is all but
certain.
We'll see that next week.
And then it's it justbehaviorally, forget about why
(14:43):
what the Fed should do in theeconomy.
If you've got a new Fed chairthat's going to be appointed
next year, and that's you know,I think May is when Powell's
term is up, um, and you've gotyou know the people jostling to
be the next Fed chair, and itjust seems like there's a lot of
reasons why the Fed will bemore dovish next year.
Bob (15:03):
Trevor Burrus Well, inflation, the the trend right
now for inflation is closer tothree percent.
Yeah.
And the Fed's, you know, theupper bound is four and a half
percent or four and a quarterpercent on the Fed funds rate.
That that spread between fourand a quarter and say three is
that's that's room for the Fedto cut rates.
I I don't think the Fed wantsto lower interest rates below
(15:25):
the inflation rate.
I mean I think we've learned Ithink we we saw what that will
do.
Right.
And all of a sudden we had thehighest inflation in 40 years.
Um I I don't think, you know, II think I think you're correct
that we're gonna get a moredovish Fed.
You know, maybe maybe they cutrates down to three percent over
the next year.
Yeah.
Um I think a short-terminterest rate of three percent
(15:49):
uh may prove to be a little bittoo low.
It might stoke some inflationconcerns, but it's pretty clear
the Fed is more worried rightnow about the labor markets and
the economy.
And uh markets tend to like itwhen the Fed is worried about
that as opposed to taking awaythe punch ball and raising
interest rates.
So don't fight the Fed.
That's that's that's an oldaxiom that's been around
(16:09):
forever.
That's that's you know, thatthat that's always been a factor
in driving markets.
Trevor Burrus, Jr.
Ryan (16:15):
Yeah.
Well, and and the reality isright now, again, this could
change by the time we air thisepisode on Monday, but the data
from government data isbasically on hold for the most
part.
There's so much.
Bob (16:28):
We should just get the government out of the business
of releasing data.
We don't need it.
Private uh there's a lot ofsources of economic data.
Private data sources aren'tbad.
Yeah.
That's they've that's maybe thegovernment should get out of
that business.
Ryan (16:41):
Yeah.
Um the the other thing that'sinteresting regarding
valuations, um, the equal weightS P 500, last time I checked,
was right around 17 timesforward earnings.
Right.
I mean, that's the differencebetween 22 and a half and 17.
That's pretty wide.
Exactly.
It's been a while since we'veseen that that big of a
(17:01):
differential.
Bob (17:02):
Yeah, and I think that reflects the differences
between, you know, those 493companies that are driving that
that equal weight index.
You know, they're not umthey're good businesses, they're
certainly generating greatreturns on capital.
Uh their their ROIs have goneup, but not anywhere near like
what the Mag 7 companies have.
(17:23):
So I think it's just areflection of of I mean, uh a
high PE is is a reflection ofhigh returns, high growth.
Lower PE is usually lowergrowth.
Um there's no doubt there'sthere's a lot of value.
More traditional valueinvestors are going to find a
lot to like about the S P 493.
Ryan (17:43):
And then as you get lower into mid and small cap stocks,
valuations are even a bitcheaper.
That's right.
Um what's your what's your takethere?
We've talked about that alittle bit before.
But um is there stillopportunity in mid and small cap
stocks?
Bob (17:57):
Yeah, I think uh my confidence level is probably a
little bit higher for mid-caps,but I think small caps, you
know, for the most part, if welook at earnings estimates every
year for the last three or fouryears, at the beginning of the
year, and you look at estimatesthroughout the year, uh small
caps have just not generated theearnings growth that investors
(18:17):
were maybe hoping for.
So we've had um essentially aconstant kind of revaluation,
but this year, uh estimates areholding up better this year than
they have in the past.
One of the problems with uh aRussell 2000 index, or maybe
it's an SP small cap index, isthat a lot of times the more
successful companies in theindex graduate into the next
(18:40):
tier.
So there's a little bit of aproblem where you've you've got
companies that are succeedingthat that have larger market
caps within the index, and thenall of a sudden we can't
continue to ride that momentum.
Ryan (18:52):
That's what it is, exactly.
Bob (18:53):
Yeah.
Well said.
That's exactly what it is.
So it's it I think that's partof the problem with that part of
the market.
Ryan (19:00):
I I would also think that the headwinds of higher interest
rates have a bigger impact onthose smaller companies.
No doubt about it.
Bob (19:07):
Um over the last couple of years, which small companies
need capital to grow.
Right.
And now with the Fed uh morelikely to cut rates a little
more aggressively here goingforward, I would I would think
that we would get a pop fromthat.
Yeah.
Ryan (19:21):
I mean, if it if if I'm right and it is a headwind, then
the same the opposite would betrue that you get a tailwind
from lower rates.
Bob (19:27):
Yeah, and we and it was about this time a year ago that
the small and mid-caps wererunning pretty hard.
And then we get to December oflast year, and all of a sudden
our expectations for the Fedchange quite a bit.
I mean, we we got the rate cutin September of twenty-four, and
as we wrapped up twenty-four,it became pretty obvious that
the Fed was in no hurry to cutrates.
(19:50):
And I think I think the Fed wasusing you know the tariffs as
an argument.
Well, we can't cut rates nowwhen we could have pricing
issues, inflation issues.
Uh now that that's beenimplemented and we can gauge the
impact of of tariffs oninflation better now than we
could a year ago, um I I thinkinvestors in small caps, I think
they've been disappointed.
(20:11):
And I just think a lot ofinvestors are just like, yeah, I
just, you know, you know.
But all of a sudden what willhappen is you'll have a big run
in that part of the market andeverybody will be like, oh,
yeah, small caps.
Yeah.
You know, so I I want to beahead of it.
And I think I think there is Ithink there's an opportunity in
small and mid.
Ryan (20:27):
Yeah, yeah.
There's a reason why uhcontrarian uh opportunities
exist.
And that it's if you're aheadof what everyone has already
come to understand, then maybethe opportunities pass you by.
Bob (20:39):
Exactly right.
Ryan (20:40):
Yeah.
Um, another uh anothernarrative that um is you know we
come across from time to timehas to do with the concept of
dry powder and uh money marketfund assets.
And we're at a there's a lot ofmoney market fund assets right
now.
Um do you do you think that um,you know, is that money that's
(21:01):
gonna stay parked in moneymarkets, or now that rates are
coming down, do you think thatthat's gonna find a way into
risk assets again?
Bob (21:07):
I would think some of that money will get reallocated.
And it might not go intoequities, but I I would think
that some of it would at leastgo into um the array of fixed
income areas that where yieldsare a little bit higher.
You know, the yield curve uhyou think about we got short
rates at over four right nowfrom a Fed perspective.
(21:27):
Um the two years at three and ahalf roughly, and the ten years
closer to four, and the thirtyyears at four and a half, the
yield curve is you know, I thinkthat's probably gonna be the
story over the next couple ofyears, is the yield curve gets
back to its normal shape.
And I would think that some uhsome of that cas some of that
money market fund asset flowmight slow down a little bit and
(21:51):
end up further out in the curveat some point.
Or maybe some of it goes intoother areas, maybe it goes into
real estate.
It's just I think things likethat.
I think eventually people aregonna go, you know, I'm getting
a decent yield, it's you know,maybe maybe inflation is three
percent, maybe trends lower andI'm earning three percent.
I might not move a lot of ofthat money into other assets,
(22:11):
but I I think it is a sign thatinvestors are still cautious and
concerned.
I I've talked to a lot offinancial advisors and a lot of
them have, you know, they'vethey've they've got higher
levels of cash and you know,equivalents, T bills, things
like that became very um youknow, very popular.
And you think about it, you'rerunning five percent here in in
T-bills not that long ago.
(22:31):
Um as these these mature, youwould assume that investors are
gonna start going, hey, I'd I'dlike to maybe look at something
else.
Ryan (22:39):
Yeah, yeah.
And you know, we we just uh ourour last podcast episode I had
Bill Housey and John Wilhelm on,and we were talking about um
even some of the the tax-freebond yields.
For higher quality tax-freebonds, you get like a tax
equivalent yield in some casesseven, eight percent.
Right.
Um, and you know, all of asudden you're looking at fixed
income where you're gettingreturns that are similar to what
(23:01):
people expect for equities.
Exactly.
Bob (23:03):
Um, it's one one of the things I learned last night, I I
I knew this, but I didn'trealize it the extent that there
is a large segment of the munimarket that's taxable.
Yeah.
And um I was on this panel lastnight with this gentleman from
a firm that specializes inmunis.
It's an $800 billion assetclass.
And the collective quality ofthose credits stacks up really
(23:28):
well against corporate credits,and the yields are are
competitive with potentiallyless credit risk.
So um, you know, it's it'sfunny.
I think of munis and Iimmediately default to taxable
equivalent, but there's athere's there's an opportunity
there as well for some investorswho might not be as sensitive
to taxes.
Trevor Burrus, Jr.
Ryan (23:46):
So that's municipal issuers who have projects that
don't qualify for tax-free uhstatus, right?
That's so they're borrowingmoney for something that doesn't
qualify.
Yeah, that is that is aninteresting market because it's
it seems very uh niche, youknow, kind of it's an $800
billion niche.
Bob (24:05):
It's a big niche.
Trevor Burrus, and the gray andwell and the gray I mean you
think about the size of the bondmarket, we're talking about
trillions of dollars.
But it's you know it'sapproaching a trillion dollar
asset class.
It's you know I I I'm certainlynot an expert in that part of
the marketplace, but I I thoughtit was compelling.
Ryan (24:19):
Yeah.
Well, and then you've you'vealso got people pouring money
into gold, which um, you know,the gold prices have really
surged this year.
More recently, they've reallypulled back pretty sharply.
Do you uh have a an opinion onanything related to gold?
Bob (24:37):
Well, I I've been joking for years that my wife likes
gold.
Uh maybe platinum a little bitmore than gold.
Um not as an investmentperspective from an investment
perspective, but just from anaesthetics perspective.
But um no, I think I think youknow, basically the precious
metals as an asset class didnothing for a long time.
Just absolutely nothing.
(24:58):
And I remember during theduring the pandemic watching the
money supply surge and youknow, the m you started to see
gold prices maybe maybe bottomout and perk up a little bit.
Um and now that we've got theFed positioning to r to cut
rates further, um I I think Ithink that's that's probably
(25:21):
driving some of the concern.
The dollar weakened in thefirst half of the year, it seems
like it's stabilizing here.
But I think that like likeanything, it's it's an area of
the market that investors wantednothing to do with, and all of
a sudden we get this big pop,you know, 50 percent move
basically uh in recent uh times,and all of a sudden investors
are like, oh, I need to buygold.
It's like um the problem withgold is that it doesn't it it
(25:46):
doesn't it's somewhat useful asa as a as a commodity but it's
you know it's really a s it's astore of value.
And um they they continue tofind more gold, they continue to
produce more gold, so it's nota fixed you know, supply.
It is it is a supply that tendsto go up over time.
And I just think investors umyou know, I do think investors
(26:08):
should have some commodities ina properly diversified asset
allocation model.
Um but it's interesting, likeyou know, we we we haven't
talked about this, but the priceof energy.
You know, normally gold and oilkind of go together
historically.
And then I'll if you look atthe price of oil, it's right
where it was twenty years ago.
And natural gas prices havebarely changed even further back
(26:30):
in time.
You know, we're we're it's justI think ultimately it's about
productivity and in our abilityto produce these commodities.
And I I I'm sure that with thisrecent increase in silver and
and gold, uh you are gonna seeproduction go up significantly.
You have to.
I mean, it's just that's themarket uh reacting to that, and
(26:51):
that that will probably coolsome of this off.
Ryan (26:54):
It's it seems like some of those commodity assets and gold
is sort of a unique uh assetbecause it has held that sort of
store of value defensive aspecttrade to it.
Um but it's really hard tofigure out what is overvalued or
undervalued or expensive orcheap, unlike we were talking
(27:16):
before about uh the value ofequities.
You look at you know, what aretheir profits, how are they
gonna grow, what's thelikelihood they continue to grow
at a certain pace?
There's no profits for gold.
Um the gold companies haveprofits, but there's no PE
ratio, there's no dividends thatyou can analyze for gold.
That's right.
Bob (27:33):
It's it's like crypto.
Yeah.
I mean, what's what's you know,what are these cryptocurrencies
worth?
Well, you know, it's just I Ithink all of this goes back to
COVID, COVID policies, themassive increase in the money
supply.
There's just a and youmentioned how much money is in
money market funds, it all kindof ties together.
There's just a lot of liquiditythat just kind of finds places
(27:56):
to go and drives prices up.
And it was just it seems likewe have this this um this wave
of of money that just kind ofsloshes around and and just
occasionally sends up prices ofthings.
Ryan (28:09):
You know, it does make sense to have some of those some
of those assets that aresloshing around that you don't
expect in your portfolio.
It makes sense to diversify andallocate to those things.
But um yeah, they're just partof the reason why it makes sense
is because they don'tnecessarily behave with the same
rules that you do with stocksor bonds.
Bob (28:28):
Trevor Burrus, Jr.
Exactly.
Asset allocation is uh is is aninteresting topic because um
correlations change over timeand uh assets don't always move
the way they have in the past.
And I think it's I do thinkthat with the stock market as
high as it is right now, thatthere has been a lot of interest
among investors and investmentadvisors, I'm sure, to diversify
(28:53):
or maybe mitigate some of therisk of of a of a decline in the
stock market.
I mean, at some point we'regonna wake up and the market's
gonna be down ten percent,twenty percent.
And so I think, you know, Ithink this is this all kind of
this is all related.
I think I think that investorsare are looking for things to
position themselves in thatmight not necessarily correlate
(29:14):
with the market going down.
Demand for products that havehedging strategies and
different, you know, financialengineering, yeah, if you want
to call it.
Um the demand is high, and Iget it.
It's I think a lot of investorshave lived through enough bear
markets and enough enoughdownturns that they know that at
some point we will have a arecession, we'll have a bear
market, some event will happen.
(29:36):
Um what what that event is wedon't know, but it it's it's I
think a lot of folks are justtrying to stay ahead of that or
trying to get ahead of it.
Ryan (29:45):
Yeah, and we don't know because if we did it would
already be reflected in theprices and you wouldn't have to
worry about a ten percentdecline.
Exactly.
Yeah.
That that you the you only getthese big movements when new
information gets priced inquickly.
That's right.
And that's why uh to yourpoint.
Yeah, all those those bufferedstrategies, all those things
that protect on the downside umhave been really popular.
(30:06):
Yeah, and for good reason.
Bob (30:07):
Yeah.
And they they make a lot ofsense.
I think, you know, we talkedabout this before.
Uh demographics are what theyare.
I mean, we are we are living,on average, a lot longer past
our working years.
And, you know, the days ofpeople working, retiring, and
and passing away in five yearsor ten years, I mean, that is
(30:30):
now turning into maybe twenty orthirty years or even more for a
lot of people.
So I think anything that keepsinvestors in the market or you
know, w uh in in whatever waymakes sense or whatever is in
line with their risk toleranceis I think is is wonderful.
I think it's a good thing.
Um it's funny, the other day Iwent to uh to a hospital to give
(30:53):
a presentation.
It was a luncheon and I arrivedat the hospital and it's you
know you know 15 minutes herefrom the offices here at First
Trust in Wheaton and I could notfind a parking place in this
parking lot.
I mean it was just I mean, uhthere were I mean I'm driving I
finally found somebody and Itracked them down and I followed
them to their parking space.
(31:14):
I had to stalk them to you knowto find and I and I'm realizing
I've only got a couple minutesbefore my presentation.
And then I started thinkingabout something, and I don't
know what made me think of this,but twenty-five years ago, at
the turn of the century, um itseemed like we we were talking
about the baby boomers gettingolder, and you know, the this
(31:34):
this the I remember the taglinewas every six or seven seconds a
baby boomer turns fifty.
And that was a big deal.
You know, and I realized that'stwenty-five years ago.
Well, those same people thatwere turning fifty twenty-five
years ago now turning 75, and Ithink most of them were at the
hospital having something done.
Uh and and so demand for youknow for for health care and the
(31:58):
need to have um have assets topay for for health care uh and
and the all the things that areinevitable as we get older, um,
I I think it all kind of tiesin.
And it and it to me it's and wewe've kind of forgotten about
that.
We're all focused on this AIstuff, but we still have this
aging population and thesedemographic issues that um I
(32:18):
think are going to affectinvestors um profoundly.
Ryan (32:22):
Yeah.
It it's amazing.
Time time uh kind of flies, youknow, the 2025 we're already
kind of rounding third base anduh heading heading towards home.
I mean, we're end of October,two months left in 2025, and
then the calendar flips again.
Exactly.
Um so do you has has 2025 uhmet your expectations coming
(32:44):
into this year?
Do you do you think uh, youknow, as you look back over the
last 10 months or so, is it whatyou expected?
Bob (32:51):
Uh I I do think that um I think the market the market's
done better than I thought itwould do.
I thought we'd have a prettygood year.
Um if we look at where earningsestimates were at the beginning
of the year, you know, Ithought that we would eventually
get the Fed to to cut ratesmaybe once or twice this year.
Uh there were times this yearwe thought maybe the Fed might
(33:11):
not cut rates.
But I d I thought that we'dhave enough earnings growth to
grind out, you know, maybe aneight to ten percent return.
Instead we're here, I don'tknow, what fourteen percent as
of today.
Ryan (33:22):
Yeah.
Bob (33:22):
Uh not including dividends.
So uh I think it's been abetter year than than I would
have thought.
Uh the problem is when you whenyou strip away you know that S
P five hundred return and youlook at the rest of the market,
it's like it's the same storythat we've had for the last
couple of years, where it's theS P and the Mag 7, the the
market cap weighted indexes umhave done well.
(33:44):
And you know, kind ofeverything else is is more in
line with that 8 to 10 percentrate of return.
Uh maybe the biggest surprisethis year is is how outsized
returns have been in in overseasmarkets.
Yeah.
That's been a it's been areally good year for that.
It has.
Uh I think currency uh was wasthe main driver of that.
Um and I think other I thinkcentral banks around the world
(34:06):
uh have been more aggressive incutting rates this year.
Uh the fact that the Fed's onlyour Fed has only cut rates one
time.
We've had multiple rate cutsfrom the Europeans by
comparison.
I think that um I think I thinkthat is the main driver of
outsized returns in marketsoverseas.
And valuations are loweroverseas, too.
Ryan (34:26):
Valuations and the the opportunities for to to pick up
stocks at a cheaper price.
Right.
Um there's plenty to goshopping from.
Yeah.
Bob (34:34):
It's monetary policy, it's the dollar, it's price discovery
all going on, but still I Icaution people at the end of the
day, I don't I don't know thatI'd want to have a portfolio uh
necessarily overweighted ininternational stocks.
I still I still think we arefar and away the most fertile
ground for opportunities forcompanies.
We just simply have bettercompanies longer term.
(34:56):
You just have to pay more forthem.
Ryan (34:57):
Yeah.
Yeah.
Well, I usually um end theconversation asking you about a
book, right?
Yeah.
Today I'm gonna throw you acurveball here.
Uh-oh.
Um and uh This has not beenscripted.
This is unscripted, surprise.
But one of the things I knowabout Bob Carey is that he is uh
uh a highly interested in musicsort of guy.
(35:19):
Yeah.
Um so I'm gonna ask you insteadin the Bob Carey deep tracks,
like give us a give us a goodmusic recommendation that is not
you know super mainstream, uhthat uh, you know, when
someone's done with a podcast,they can say, you know, Apple
Music, find this for me.
I got something.
Okay.
Bob (35:39):
It it is a book.
I asked for a song and give mea book.
But it's but it's musicrelated.
Okay, perfect.
Okay.
I I just I got done reading umuh Tom Petty's guitar player,
Mike Campbell.
Okay, uh was with Tom his wholecareer, and Tom's obviously
been gone for a while, uh passedaway a number of years ago now.
(36:00):
But his his guitar player, hisbandmate uh Mike Campbell wrote
a book just simply calledHeartbreaker.
Ryan (36:08):
Okay.
Bob (36:08):
And it's a big thick, you know, memoir basically of his of
his life and his time in theband.
But it goes it's a lot morethan just music, but it's it's
about just a lot of things thathave happened in the past.
I everybody that I'verecommended that book to has
been like, that is incredible.
And you can listen to it onSpotify.
You can listen to him narratethe book.
It's about 24 hours of himtalking, and you think you
(36:30):
think, God, that's just a that'sa lot to get through.
It it is amazing how fast those24 hours go if you listen to
it.
Interesting.
I did both listening and I wasreading, and it's just
incredible what he saw.
Ryan (36:42):
So it was read by the author.
Yeah, exactly.
Yeah, exactly.
Heartbreaker by Mike Campbell.
Mike Campbell.
Um there was another uh there'sa book that I read a year or
two ago when it had first comeout um from Bono.
Have you ever read theSurrender by Bono?
It kind of goes through uh avariety of song titles and he's
got stories that go along withthem.
Bob (37:02):
Yeah, yeah.
I I think it's cool that thatwe get to hear from these people
that are still with us tellingtheir stories about uh about all
this great music um that'sthat's that's been a part of our
lives if you're especially ifyou're a little bit older.
It's just like I mean, how doyou how do you not know Tom
Petty and you two or theBeatles?
Or yeah.
I mean it's it's it is kind ofcool that we get to hear from
(37:23):
these guys.
All right.
Well, we'll add Heartbreaker tothe uh Mike Campbell.
Ryan (37:28):
Mike Campbell Heartbreaker.
Um Bob, it's always a pleasure.
Thank you for uh for joining.
I think this is our 58thepisode of the podcast, and you
were the first episode.
So always appreciate having youon.
So is this the end of it?
Are you are you gonna continuebookends?
No, no, we're uh you need tokeep going.
Bob (37:46):
This is these are these are really, really valuable, uh
insightful, and they're fun tolisten to.
Ryan (37:51):
Yeah, well, they're definitely fun for me to uh to
do.
And uh so again, thank you forhelping us kick it off and and
uh continue.
Bob (38:01):
Just so many interesting people who work here, and you
you get you get out of what whatwhat we're all about with our
these conversations.
Ryan (38:09):
Well, it gives me an excuse to talk to uh some of my
favorite people at the firm, soyourself included.
So thank you.
Thank you.
And thanks to all of you forlistening and uh joining us on
this episode of the First TrustROI podcast.
We'll see you next time.
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The Burden
The Burden is a documentary series that takes listeners into the hidden places where justice is done (and undone). It dives deep into the lives of heroes and villains. And it focuses a spotlight on those who triumph even when the odds are against them. Season 5 - The Burden: Death & Deceit in Alliance On April Fools Day 1999, 26-year-old Yvonne Layne was found murdered in her Alliance, Ohio home. David Thorne, her ex-boyfriend and father of one of her children, was instantly a suspect. Another young man admitted to the murder, and David breathed a sigh of relief, until the confessed murderer fingered David; “He paid me to do it.” David was sentenced to life without parole. Two decades later, Pulitzer winner and podcast host, Maggie Freleng (Bone Valley Season 3: Graves County, Wrongful Conviction, Suave) launched a “live” investigation into David's conviction alongside Jason Baldwin (himself wrongfully convicted as a member of the West Memphis Three). Maggie had come to believe that the entire investigation of David was botched by the tiny local police department, or worse, covered up the real killer. Was Maggie correct? Was David’s claim of innocence credible? In Death and Deceit in Alliance, Maggie recounts the case that launched her career, and ultimately, “broke” her.” The results will shock the listener and reduce Maggie to tears and self-doubt. This is not your typical wrongful conviction story. In fact, it turns the genre on its head. It asks the question: What if our champions are foolish? Season 4 - The Burden: Get the Money and Run “Trying to murder my father, this was the thing that put me on the path.” That’s Joe Loya and that path was bank robbery. Bank, bank, bank, bank, bank. In season 4 of The Burden: Get the Money and Run, we hear from Joe who was once the most prolific bank robber in Southern California, and beyond. He used disguises, body doubles, proxies. He leaped over counters, grabbed the money and ran. Even as the FBI was closing in. It was a showdown between a daring bank robber, and a patient FBI agent. Joe was no ordinary bank robber. He was bright, articulate, charismatic, and driven by a dark rage that he summoned up at will. In seven episodes, Joe tells all: the what, the how… and the why. Including why he tried to murder his father. Season 3 - The Burden: Avenger Miriam Lewin is one of Argentina’s leading journalists today. At 19 years old, she was kidnapped off the streets of Buenos Aires for her political activism and thrown into a concentration camp. Thousands of her fellow inmates were executed, tossed alive from a cargo plane into the ocean. Miriam, along with a handful of others, will survive the camp. Then as a journalist, she will wage a decades long campaign to bring her tormentors to justice. Avenger is about one woman’s triumphant battle against unbelievable odds to survive torture, claim justice for the crimes done against her and others like her, and change the future of her country. Season 2 - The Burden: Empire on Blood Empire on Blood is set in the Bronx, NY, in the early 90s, when two young drug dealers ruled an intersection known as “The Corner on Blood.” The boss, Calvin Buari, lived large. He and a protege swore they would build an empire on blood. Then the relationship frayed and the protege accused Calvin of a double homicide which he claimed he didn’t do. But did he? Award-winning journalist Steve Fishman spent seven years to answer that question. This is the story of one man’s last chance to overturn his life sentence. He may prevail, but someone’s gotta pay. The Burden: Empire on Blood is the director’s cut of the true crime classic which reached #1 on the charts when it was first released half a dozen years ago. Season 1 - The Burden In the 1990s, Detective Louis N. Scarcella was legendary. In a city overrun by violent crime, he cracked the toughest cases and put away the worst criminals. “The Hulk” was his nickname. Then the story changed. Scarcella ran into a group of convicted murderers who all say they are innocent. They turned themselves into jailhouse-lawyers and in prison founded a lway firm. When they realized Scarcella helped put many of them away, they set their sights on taking him down. And with the help of a NY Times reporter they have a chance. For years, Scarcella insisted he did nothing wrong. But that’s all he’d say. Until we tracked Scarcella to a sauna in a Russian bathhouse, where he started to talk..and talk and talk. “The guilty have gone free,” he whispered. And then agreed to take us into the belly of the beast. Welcome to The Burden.