May 15, 2024 • 28 mins
In this episode, Clem Miller and Steve Davenport address a key investor question: Just how actionable is the economists’ and strategists’ standard playbook of intense “Fed Watching”?
Steve and Clem challenge the myopic view, reinforced by business media, that somehow the Fed is an all-seeing puppeteer controlling U.S. and global financial markets.
Steve and Clem point out that for investors to make any money on Fed decisions depends on their being able to make quick macro trades on non-consensus views on inflation rates and employment. And even then, the chances of success are minimal.
Steve and Clem stress that they favor buy-and-hold investing, where earnings, corporate structures, and capital allocation, among other fundamentals sculpt stock performance, outweighing the influence of the Fed’s short-term interest rate adjustments.
Straight Talk for All - Nonsense for None
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Steve Davenport (00:03):
Hello, this is Steve Davenport from Skeptic's
Guide to Investing.
I'm here today with ColinMiller.
And we're going to try to talkabout.
What is the major media eventfor the last six to nine months,
which is Fed watching and theFed and their decision about
when they will possibly lowerrates.
There seems like a lot of otherthings to think about with
(00:27):
Ukraine, gaza, the overallintensity of inflation in
various areas, real estate,interest rates but we in the
media are looking at this andsaying should we really be
focused on the Fed?
Is the focus on the Fedmisguided?
(00:48):
What is their real purpose andhow do we use that as a form of
alpha for our strategies?
Can you add alpha from thisidea of looking at the Fed?
If it were true, theneverybody's Fed watcher would be
the highest paid person withthe hedge funds.
I'm not sure that's the case.
(01:12):
I think that when we look atthis and I want to ask Glenn,
because he's much more of afundamentalist in terms of how
the companies react I look atthis and I say the Fed is trying
to use one measure interestrates as a way to influence the
(01:33):
economy.
And when we think about the USeconomy, we think about Texas
and the oil regions and Oklahomaand other areas.
We think of technology inSilicon Valley and up in the
great Northwest near Seattle,and then we look at auto
production in middle America andwe look at the financial sector
(01:55):
in New York.
Each one of these areas or Feddistricts is going to have a
very different view of howinterest rates affect us.
If we have an area that'sgrowth is coming mostly from
housing aka Florida, northCarolina, south Carolina those
areas should have a much biggerinfluence in terms of how
(02:20):
interest rates affect them.
Other areas, like thetechnology areas in California,
they're not using debt.
Therefore, if they're not usingdebt, does the rate matter?
Does the rate matter forMicrosoft?
Does the rate matter for Oracle?
Is it about AI and nothing aboutinterest rates?
If it is, then you could takewhole sectors of the economy and
(02:44):
just move them away from thisdiscussion.
And if you think about where'sthe growth in the economy, why
would we focus on interest rateswhen we can focus on growth
rates of 20% or 30%?
Because of new insights intohow AI will evolve over the next
five 10 years insights into howAI will evolve over the next
(03:07):
five 10 years.
It's a much nicer discussionbecause it has a much better
result.
An extra 50 basis points maymean something bad for a lot of
the commercial real estateholdings of mid-sized banks, but
it doesn't mean anything to thetechnology sector.
But it doesn't mean anything tothe technology sector, clem,
(03:32):
when you look at the Fed andI'll just say A or B, relevant,
irrelevant.
Clem Miller (03:35):
I would say mostly irrelevant because and I would
use a somewhat different word, Iwould use the word actionable
from an investment standpoint Isall this Fed watching really
actionable?
And I would say that it is notactionable, and I would give a
(03:57):
few reasons for saying that.
You've touched on a few of them, which is that the economy is
really too broad for the Fed toact.
I would say that if you look atwhat some of the media, the
business media, talk about withregard to the Fed, you would
(04:20):
think that the US is a centrallyplanned economy, like the
Soviet Union used to be, thatthe Fed is pulling the strings
as if the economy was some kindof marionette.
And it's really not.
The economy has a life of itsown and, if anything, the Fed is
really riding this buckingbronco that it really can't
(04:44):
control.
And so I would say that youknow that.
You know really, it's hard tobe able to look at the Fed and
say that you know they're doing,that.
You know they are the ones thatare in control of the economy,
because they certainly are notin charge of the economy.
Now, I would also say thatthere's a certain amount of
(05:08):
expectations theory that'sinvolved in looking at the Fed.
So it's not a question really oftrying to determine what the
Fed is going to do, which isreally the content of a lot of
media and personalities,economists, who talk about this.
It's really the more importantthing is discussion of whether
(05:34):
the expectations regarding theFed and Fed actions are
actionable, and there you've gotso many folks from all the
investment firms that haveeconomists, chief economists and
whatnot who are looking at theFed.
(05:54):
You've got so many folkslooking at this that there's a
consensus opinion that arisesand you know you could only
really make.
You know, assuming if youassume that the Fed was in
control of the economy, you knowyou'd only be able to make
money if you had a non-consensusopinion that was actually
(06:19):
correct.
And the tendency of manyeconomists is to not move away
or not challenge the overallconsensus.
They get paid to make decisionsand they're never going to get
(06:39):
their pay docked if they make adecision that everybody else is
making or offering an opinion.
Steve Davenport (06:48):
They all get it wrong.
Clem Miller (06:50):
What.
Steve Davenport (06:51):
Or if they all get it wrong.
Clem Miller (06:52):
Or if they all get it wrong, if they all get it
wrong, they're still not goingto get docked because everybody
else got it wrong too.
So yeah, I think, given thatthis is about that, the only way
to make money is to have anon-consensus opinion.
That's correct.
I think that the opinions andthe analysis of the Fed is
(07:15):
really not all that actionablecompared to looking at other
things that are affecting theeconomy, and by that it's not
just the US economy we'retalking.
The global economy is importanttoo, since some 40 percent of
S&P 500 revenues come fromabroad.
(07:37):
Us economy is the globaleconomy is important as well.
So I, you know those whetherthe fed is relevant or not, is I
think it's.
I think it's much less relevantthan many people actually think
it is.
Steve Davenport (07:53):
People started to think about this and when I
looked at um, I'm a big believerin the uh research that talks
about the wisdom of crowds,right, and research that talks
about the wisdom of crowds.
And when you think about thewisdom of crowds, these people
gravitate towards something.
And we're going to talk aboutmeme stocks later in another
(08:15):
podcast.
But when you see people movingin a certain way and you see a
lot of attention given to thespend, you would suspect I
wouldn't give something thismuch attention unless there was
this much benefit.
Right, I mean, economic animalswere driven to.
We've got eight hours in a daythat the market's open and we
(08:39):
look at it and say, okay, how doI use those eight hours to help
my clients generate betterrisk-adjusted returns and move
on in terms of capturing growthand extracting value?
But I just am amazed,Clem, whyis there such hope?
If you and I are right and thatit is mostly irrelevant?
(09:00):
If you and I are right and thatit is mostly irrelevant, which
I believe is the right decisionhow does it become such a fervor
and such an intense speculationabout this event or potential
event when we say, gee, if itwere inefficient to do this,
(09:22):
people wouldn't waste their time, but yet we say over and over
and over again that they dowaste their time.
So I guess I'm having troublewith the economic animals and
CNBC and how they are lookingout for the average investor out
(09:42):
there watching TV.
Out for the average investorout there watching TV.
Maybe the average investorisn't watching TV.
Maybe the average investor issitting there and saying I never
watch CNBC because it hypes uptoo many things and it gets too
involved.
Maybe I mean, is it possiblethat we're, as an industry,
(10:03):
we've given people a lot morecredibility than they should
have, or given them a lot morepower to talk about a topic that
maybe it isn't relevant.
Maybe it is relevant we're justnot educated enough to
appreciate the subtleties.
Clem Miller (10:21):
Yeah, I think that, like I said, like you've said,
I think that investors put waytoo much emphasis on what the
Fed may or may not do.
There's a big focus oneverybody knows that when the
Fed acts, they act on the basisof what's going on with
(10:43):
inflation and also withemployment statistics, and those
are not really all thatpredictable.
And so you could have one weekyou could have inflation go down
the next month.
One month you could haveinflation go down.
The next month you could haveinflation go up.
(11:04):
One week you could haveunemployment go down.
The next week you could haveunemployment go up.
And it's sort of basicallyjerking around investors.
It's noise.
You know a lot of investors arelooking at that and make,
(11:26):
trying to make decisions basedon this noise.
And you know what, steve?
They are playing into the handsof speculators.
It's the speculators who aremaking money off those who off
those who just don't know thatthey should focus on
(11:47):
fundamentals of individualstocks and especially those.
It's much better to sort of holdon to positions, buy and hold,
than it is to buy and sell allthe time based on you know to do
.
You know a lot of trading, youknow like I'm talking about, you
(12:09):
know, moving to cash, movingout of cash, moving into cash,
moving out of cash, based onwhatever's happening with
inflation and employment in aparticular week or month.
It's just, it's, it's sort ofcrazy how much people look at
this one institution and makedecisions based on what this one
(12:30):
institution is doing.
I mean, it's, it's like, youknow, it's like the movie, right
, wizard of Oz.
The Fed is not, is not Oz, theFed is not Oz.
Or let's put it this way the Fedis Oz, has no A little taller
than Oz, but it's not completelydifferent than Oz.
(12:50):
In fact, I kind of believe, ifI remember correctly, that the
Wizard of Oz was kind of ananalogy for the Fed.
If you look back, there are alot of analogies in that movie.
I think the Wizard of Oz was ananalogy for the Fed.
If you look back, there are alot of analogies in that movie
and I think the Wizard of Oz wasan analogy for the Fed, and I
think there was some wisdom tothat back in the 30s, and now
(13:11):
we're about 90 years away fromthat and I think it's still
appropriate, I agree.
Steve Davenport (13:18):
I think the other aspect of this and I know
that you'll have a littletrouble with this word, but it
could be to me that there'spolitics involved here, clem to
(13:44):
make the right decision and yetthey tell people it's highly
favorable for us to not do anyincreases or decreases around
the election, because then we'llbe viewed as political and
they'll be politically motivatedand I sit there and I go.
Isn't the whole world political?
Yeah, I have most decisionshaving an influence of somewhat
from politics.
Clem Miller (14:04):
Absolutely and to not make this idealist view of
the Fed.
Steve Davenport (14:09):
Like they are.
They take the information andthey bring it to the mountaintop
and everybody comes to thetable, and at the table, all
ideas are shared.
Ideas are shared and there isgeneral looking for consensus
and looking for a better idealof how the economy should
(14:29):
operate.
It feels to me a little bitlike how do we come and tell
ourselves these stories thatmake us believe that, yes, these
people are so wise and so goodthat they will not make
decisions, even if the data issaying just so?
They avoid the outcome oflooking political.
(14:52):
Does that make sense.
I mean, if the rates come down,they should come down in
February, they should come downin September, it shouldn't be.
Oh wait a minute, we're thismany days away from the election
and therefore we can't lowerrates, because that would just
look too political right.
Clem Miller (15:12):
Well, yeah, I mean, and a decision not to do that
is itself political.
So no matter which way they go,it's a political decision.
Steve Davenport (15:23):
Either way.
Yeah, I just think that tryingto you know, why don't we
simplify according to our twovariants?
We are making this decisionbased on how we see the price,
of price control.
We are making this decisionbased on what we see from
(15:48):
employment.
We have this third rail orthird variable, which is how is
the market doing?
Because if the Fed really looksat itself and says how many
decisions has it made in thelast 10 years, tell me how many
of them have been based on areaction to the market being too
high, too low or suddenly notworking the way it was supposed
(16:10):
to work, I would say that it'sprobably in that 70% 80% of the
decisions are based on themarket of securities, which are
only owned by half of theeconomy.
So if the population doesn'tall own stocks, does the Fed
really need to be focused on howstocks are reacting, or is it
(16:34):
really the underlying economy?
Are stocks the underlyingeconomy, clem?
Clem Miller (16:42):
Oh, of course not.
But from an investor standpoint, you can't invest in the
economy, you can't invest in GDP, you just can't right.
There's no instruments fordoing that.
You can invest in stocks, andstocks don't represent shares of
the economy.
They're more than that.
(17:03):
They represent earnings growth,which is based on US and
basically global economic growthbased on shares which can be
bought, which can be repurchased, dividend yield, multiple
(17:26):
expansion, which is partly basedon rates but also partly based
on things like geopolitical riskin terms of spreads.
There's a lot that goes intoshare prices that go way beyond
just Fed control of interestrates.
In fact, the Fed can't evencontrol long-term yields.
Long-term treasury yields.
(17:48):
Long-term treasury yields whiparound regardless of what
happens with the Fed on theshort run.
They don't control even thewhole yield curve.
I mean, unlike in Japan whichuntil recently, was trying to
control the whole yield curve,the US doesn't do that, the Fed
doesn't do that and, if anything, the longer end of the yield
(18:11):
curve, 10-year treasury yieldsthat's way more important for
stocks than what happens on theshort end with the Fed funds
rate.
Steve Davenport (18:23):
Well, I understand companies borrowing
and companies need access tocapital, but again, isn't that
industry specific?
It's not really all companies.
A lot of companies, smallcompanies are funded by internal
cash flow, so they don't needto know what the rates are.
They just need to know howtheir business is going.
And if real estate seems to bethe one that I think has just
(18:47):
been crazy recently is thesehigher rates were going to cause
a downturn in real estate andit hasn't happened.
Clem Miller (18:57):
Yeah, I mean this little supply.
I mean real estate is a greatexample.
The whole stock market, Ishould say, has been doing quite
well, despite the fact thatrates continue to remain high.
So coming back to is the Fedproviding us actionable
(19:18):
information?
If you just based your stockmarket decisions on how high the
Fed funds rate is, you wouldhave lost out on a whole bunch
of stock market appreciationover the last couple of years.
I mean you would have been,you'd be looking at all.
If you based it all on the Fed,you'd be looking back and
(19:39):
saying, gosh, I missed out onall of this stock market
appreciation.
You'd feel terrible and I'msure some of you may have done
that and are looking back andsaying, darn, I shouldn't have
done that.
Steve Davenport (19:53):
Well, I think that, first of all, I think it
simplifies the story.
If you're in the media or atCNBC and you say people want a
simple story, they want tounderstand higher rates mean bad
for the economy, bad for stocks, lower rates good for stocks,
good for the economy, good forspending, and I would love for
(20:14):
the world to operate in simpleif-then.
But I've come from the beliefthat we all have multiple
variables.
It's a multivariate approach.
There's four or five areasearnings, earnings growth,
(20:36):
overall corporate structure,capital allocation decisions.
There's many things that weneed to put into the equation
and the Fed's influence oninterest rates is one of those
variables and I guess do youhave.
If I said, the economy and thestock market is going to be
(21:00):
based on these four variablesand how I believe that I'm
bullish or not is going to be.
If all of these things areclicking, these are going to be
the things that help us toachieve better results.
What would be your top four?
Clem Miller (21:19):
Well, I take a look at this from a stock
perspective.
You mentioned capitalallocation.
Capital allocation that'ssomething that is a management
decision, company by company bycompany, which you can see based
on where the free cash flow isbeing allocated.
So some of those, a lot of that, is based on individual company
(21:44):
decisions.
But if you aggregate it, if youlook at this on an aggregated
basis, which I think is the youknow sort of where you were
going, Steve, with the question.
I think taking a look atdividend policy, dividend growth
, dividend outlays as apercentage of free cash flow or
(22:04):
earnings, I think that's a keyelement.
Free cash flow or earnings, Ithink that's a key element.
Dividends, stock buybacks thehigher the stock buybacks, I
think the better.
Overall revenue growth in theeconomy or overall sorry,
overall revenue growth of S&P500 stocks, I think is relevant,
(22:25):
and, of course, S&P 500 stocks,I think is relevant, and of
course, that's a function of theUS and global economy.
Profit margins right, Becauseprofit margins are what convert
revenue growth into profitgrowth and, as I pointed out,
share buybacks convert profitsinto earnings growth.
(22:46):
And then, of course, multipleexpansion right, so that's
relevant as well.
So all of those things areimportant.
They're important at theaggregated level and even much
more important at the individualstock level.
Steve Davenport (22:59):
My point was going to be if we came up with
four or five variables, I thinkit would be hard, I think it
would probably be more like six.
And then you'd say how do Imake one of these variables
worth a lot more than the others?
Then you'd say I probably wouldjust equal weight them, just
because I don't have adefinitive way to isolate the
(23:20):
variables.
Then I'd go okay if there's sixand there's 16% each in terms
of impact on the underlying.
The Fed is one of six variables.
It's not-.
Clem Miller (23:35):
MIKE GREEN.
I wouldn't even, personally, Iwouldn't even put them in the
six.
Steve Davenport (23:39):
MIKE GREEN.
I think interest rates and itsimpact on consumer spending, all
the things that flow from theFed, Corporate capital structure
decisions are made based on.
You know, I mean companies dida lot of borrowing before the
Fed raised rates, right, so theyobviously thought something was
(24:00):
important.
Clem Miller (24:01):
But not the Fed funds rate.
That's much less important thanthe 10-year treasury.
Steve Davenport (24:07):
I agree, it's a nuanced view of how 10-year
treasury.
I agree it's a nuanced view ofhow the Fed rate impacts the
whole economy.
It's not a direct from theovernight rate.
I guess what I'm saying is, ifthe direction of rates is higher
or direction of rates is lower,we're going to have different.
Clem Miller (24:25):
You're saying and I totally agree that there are
multiple levers to what's goingon with stocks and maybe the Fed
is one of those levers, butthere are many more levers that
are involved that the Fed hasabsolutely no control over, and
(24:46):
the overall investment community, especially retail investors,
have much less knowledge aboutall the levers that go into this
because of the media'soverwhelming focus on the Fed.
Is that about right, steve?
Steve Davenport (25:05):
Yeah, I mean I was looking for a summary and
you gave it to me before I evenasked.
So I believe that we as asociety spend too much time on
the wrong issues.
It's about your time in themarket, not timing the market
right.
If you look at all the research.
Lower your fees, be morepatient and stay in the market
(25:28):
through bad times and good, andwork on your savings so that you
have more alternativesavailable to you in your
financial future.
All of those things havenothing to do with the Fed.
When I look at an individual,should an individual spend time
thinking about whether SteveLeisman is being overly bearish
(25:52):
or bullish?
Steve Leisman is just anotherperson who has an opinion.
I look at it and say save,invest, do it for a long period
of time.
Not trade, but invest, and doit in a way that's effective,
meaning hopefully your fees arenot too high.
I think that most of the peoplewould walk away with.
(26:16):
I got something that's going tobe very helpful to me.
Now I know what to avoid,because I think if we spend our
time only focusing on what we do, we also have to spend our time
focusing on what we don't do.
Let's not focus on the Fed andif we make that decision all of
a sudden, I've given a personyou know an hour a month that
(26:37):
they can now go and do somethingelse in their life.
It's going to give them morejoy and more results, right yeah
?
So thanks for listening today.
We hope you enjoyed theSkeptic's Guide and we hope all
of you will continue to listenand continue to enjoy what we do
(26:57):
.
If you have any ideas, pleasecall us or email or text.
Thank you.
Hello, this is Steve Davenport from Skeptic's
Guide to Investing.
I'm here today with ColinMiller.
And we're going to try to talkabout.
What is the major media eventfor the last six to nine months,
which is Fed watching and theFed and their decision about
when they will possibly lowerrates.
There seems like a lot of otherthings to think about with
(00:27):
Ukraine, gaza, the overallintensity of inflation in
various areas, real estate,interest rates but we in the
media are looking at this andsaying should we really be
focused on the Fed?
Is the focus on the Fedmisguided?
(00:48):
What is their real purpose andhow do we use that as a form of
alpha for our strategies?
Can you add alpha from thisidea of looking at the Fed?
If it were true, theneverybody's Fed watcher would be
the highest paid person withthe hedge funds.
I'm not sure that's the case.
(01:12):
I think that when we look atthis and I want to ask Glenn,
because he's much more of afundamentalist in terms of how
the companies react I look atthis and I say the Fed is trying
to use one measure interestrates as a way to influence the
(01:33):
economy.
And when we think about the USeconomy, we think about Texas
and the oil regions and Oklahomaand other areas.
We think of technology inSilicon Valley and up in the
great Northwest near Seattle,and then we look at auto
production in middle America andwe look at the financial sector
(01:55):
in New York.
Each one of these areas or Feddistricts is going to have a
very different view of howinterest rates affect us.
If we have an area that'sgrowth is coming mostly from
housing aka Florida, northCarolina, south Carolina those
areas should have a much biggerinfluence in terms of how
(02:20):
interest rates affect them.
Other areas, like thetechnology areas in California,
they're not using debt.
Therefore, if they're not usingdebt, does the rate matter?
Does the rate matter forMicrosoft?
Does the rate matter for Oracle?
Is it about AI and nothing aboutinterest rates?
If it is, then you could takewhole sectors of the economy and
(02:44):
just move them away from thisdiscussion.
And if you think about where'sthe growth in the economy, why
would we focus on interest rateswhen we can focus on growth
rates of 20% or 30%?
Because of new insights intohow AI will evolve over the next
five 10 years insights into howAI will evolve over the next
(03:07):
five 10 years.
It's a much nicer discussionbecause it has a much better
result.
An extra 50 basis points maymean something bad for a lot of
the commercial real estateholdings of mid-sized banks, but
it doesn't mean anything to thetechnology sector.
But it doesn't mean anything tothe technology sector, clem,
(03:32):
when you look at the Fed andI'll just say A or B, relevant,
irrelevant.
Clem Miller (03:35):
I would say mostly irrelevant because and I would
use a somewhat different word, Iwould use the word actionable
from an investment standpoint Isall this Fed watching really
actionable?
And I would say that it is notactionable, and I would give a
(03:57):
few reasons for saying that.
You've touched on a few of them, which is that the economy is
really too broad for the Fed toact.
I would say that if you look atwhat some of the media, the
business media, talk about withregard to the Fed, you would
(04:20):
think that the US is a centrallyplanned economy, like the
Soviet Union used to be, thatthe Fed is pulling the strings
as if the economy was some kindof marionette.
And it's really not.
The economy has a life of itsown and, if anything, the Fed is
really riding this buckingbronco that it really can't
(04:44):
control.
And so I would say that youknow that.
You know really, it's hard tobe able to look at the Fed and
say that you know they're doing,that.
You know they are the ones thatare in control of the economy,
because they certainly are notin charge of the economy.
Now, I would also say thatthere's a certain amount of
(05:08):
expectations theory that'sinvolved in looking at the Fed.
So it's not a question really oftrying to determine what the
Fed is going to do, which isreally the content of a lot of
media and personalities,economists, who talk about this.
It's really the more importantthing is discussion of whether
(05:34):
the expectations regarding theFed and Fed actions are
actionable, and there you've gotso many folks from all the
investment firms that haveeconomists, chief economists and
whatnot who are looking at theFed.
(05:54):
You've got so many folkslooking at this that there's a
consensus opinion that arisesand you know you could only
really make.
You know, assuming if youassume that the Fed was in
control of the economy, you knowyou'd only be able to make
money if you had a non-consensusopinion that was actually
(06:19):
correct.
And the tendency of manyeconomists is to not move away
or not challenge the overallconsensus.
They get paid to make decisionsand they're never going to get
(06:39):
their pay docked if they make adecision that everybody else is
making or offering an opinion.
Steve Davenport (06:48):
They all get it wrong.
Clem Miller (06:50):
What.
Steve Davenport (06:51):
Or if they all get it wrong.
Clem Miller (06:52):
Or if they all get it wrong, if they all get it
wrong, they're still not goingto get docked because everybody
else got it wrong too.
So yeah, I think, given thatthis is about that, the only way
to make money is to have anon-consensus opinion.
That's correct.
I think that the opinions andthe analysis of the Fed is
(07:15):
really not all that actionablecompared to looking at other
things that are affecting theeconomy, and by that it's not
just the US economy we'retalking.
The global economy is importanttoo, since some 40 percent of
S&P 500 revenues come fromabroad.
(07:37):
Us economy is the globaleconomy is important as well.
So I, you know those whetherthe fed is relevant or not, is I
think it's.
I think it's much less relevantthan many people actually think
it is.
Steve Davenport (07:53):
People started to think about this and when I
looked at um, I'm a big believerin the uh research that talks
about the wisdom of crowds,right, and research that talks
about the wisdom of crowds.
And when you think about thewisdom of crowds, these people
gravitate towards something.
And we're going to talk aboutmeme stocks later in another
(08:15):
podcast.
But when you see people movingin a certain way and you see a
lot of attention given to thespend, you would suspect I
wouldn't give something thismuch attention unless there was
this much benefit.
Right, I mean, economic animalswere driven to.
We've got eight hours in a daythat the market's open and we
(08:39):
look at it and say, okay, how doI use those eight hours to help
my clients generate betterrisk-adjusted returns and move
on in terms of capturing growthand extracting value?
But I just am amazed,Clem, whyis there such hope?
If you and I are right and thatit is mostly irrelevant?
(09:00):
If you and I are right and thatit is mostly irrelevant, which
I believe is the right decisionhow does it become such a fervor
and such an intense speculationabout this event or potential
event when we say, gee, if itwere inefficient to do this,
(09:22):
people wouldn't waste their time, but yet we say over and over
and over again that they dowaste their time.
So I guess I'm having troublewith the economic animals and
CNBC and how they are lookingout for the average investor out
(09:42):
there watching TV.
Out for the average investorout there watching TV.
Maybe the average investorisn't watching TV.
Maybe the average investor issitting there and saying I never
watch CNBC because it hypes uptoo many things and it gets too
involved.
Maybe I mean, is it possiblethat we're, as an industry,
(10:03):
we've given people a lot morecredibility than they should
have, or given them a lot morepower to talk about a topic that
maybe it isn't relevant.
Maybe it is relevant we're justnot educated enough to
appreciate the subtleties.
Clem Miller (10:21):
Yeah, I think that, like I said, like you've said,
I think that investors put waytoo much emphasis on what the
Fed may or may not do.
There's a big focus oneverybody knows that when the
Fed acts, they act on the basisof what's going on with
(10:43):
inflation and also withemployment statistics, and those
are not really all thatpredictable.
And so you could have one weekyou could have inflation go down
the next month.
One month you could haveinflation go down.
The next month you could haveinflation go up.
(11:04):
One week you could haveunemployment go down.
The next week you could haveunemployment go up.
And it's sort of basicallyjerking around investors.
It's noise.
You know a lot of investors arelooking at that and make,
(11:26):
trying to make decisions basedon this noise.
And you know what, steve?
They are playing into the handsof speculators.
It's the speculators who aremaking money off those who off
those who just don't know thatthey should focus on
(11:47):
fundamentals of individualstocks and especially those.
It's much better to sort of holdon to positions, buy and hold,
than it is to buy and sell allthe time based on you know to do
.
You know a lot of trading, youknow like I'm talking about, you
(12:09):
know, moving to cash, movingout of cash, moving into cash,
moving out of cash, based onwhatever's happening with
inflation and employment in aparticular week or month.
It's just, it's, it's sort ofcrazy how much people look at
this one institution and makedecisions based on what this one
(12:30):
institution is doing.
I mean, it's, it's like, youknow, it's like the movie, right
, wizard of Oz.
The Fed is not, is not Oz, theFed is not Oz.
Or let's put it this way the Fedis Oz, has no A little taller
than Oz, but it's not completelydifferent than Oz.
(12:50):
In fact, I kind of believe, ifI remember correctly, that the
Wizard of Oz was kind of ananalogy for the Fed.
If you look back, there are alot of analogies in that movie.
I think the Wizard of Oz was ananalogy for the Fed.
If you look back, there are alot of analogies in that movie
and I think the Wizard of Oz wasan analogy for the Fed, and I
think there was some wisdom tothat back in the 30s, and now
(13:11):
we're about 90 years away fromthat and I think it's still
appropriate, I agree.
Steve Davenport (13:18):
I think the other aspect of this and I know
that you'll have a littletrouble with this word, but it
could be to me that there'spolitics involved here, clem to
(13:44):
make the right decision and yetthey tell people it's highly
favorable for us to not do anyincreases or decreases around
the election, because then we'llbe viewed as political and
they'll be politically motivatedand I sit there and I go.
Isn't the whole world political?
Yeah, I have most decisionshaving an influence of somewhat
from politics.
Clem Miller (14:04):
Absolutely and to not make this idealist view of
the Fed.
Steve Davenport (14:09):
Like they are.
They take the information andthey bring it to the mountaintop
and everybody comes to thetable, and at the table, all
ideas are shared.
Ideas are shared and there isgeneral looking for consensus
and looking for a better idealof how the economy should
(14:29):
operate.
It feels to me a little bitlike how do we come and tell
ourselves these stories thatmake us believe that, yes, these
people are so wise and so goodthat they will not make
decisions, even if the data issaying just so?
They avoid the outcome oflooking political.
(14:52):
Does that make sense.
I mean, if the rates come down,they should come down in
February, they should come downin September, it shouldn't be.
Oh wait a minute, we're thismany days away from the election
and therefore we can't lowerrates, because that would just
look too political right.
Clem Miller (15:12):
Well, yeah, I mean, and a decision not to do that
is itself political.
So no matter which way they go,it's a political decision.
Steve Davenport (15:23):
Either way.
Yeah, I just think that tryingto you know, why don't we
simplify according to our twovariants?
We are making this decisionbased on how we see the price,
of price control.
We are making this decisionbased on what we see from
(15:48):
employment.
We have this third rail orthird variable, which is how is
the market doing?
Because if the Fed really looksat itself and says how many
decisions has it made in thelast 10 years, tell me how many
of them have been based on areaction to the market being too
high, too low or suddenly notworking the way it was supposed
(16:10):
to work, I would say that it'sprobably in that 70% 80% of the
decisions are based on themarket of securities, which are
only owned by half of theeconomy.
So if the population doesn'tall own stocks, does the Fed
really need to be focused on howstocks are reacting, or is it
(16:34):
really the underlying economy?
Are stocks the underlyingeconomy, clem?
Clem Miller (16:42):
Oh, of course not.
But from an investor standpoint, you can't invest in the
economy, you can't invest in GDP, you just can't right.
There's no instruments fordoing that.
You can invest in stocks, andstocks don't represent shares of
the economy.
They're more than that.
(17:03):
They represent earnings growth,which is based on US and
basically global economic growthbased on shares which can be
bought, which can be repurchased, dividend yield, multiple
(17:26):
expansion, which is partly basedon rates but also partly based
on things like geopolitical riskin terms of spreads.
There's a lot that goes intoshare prices that go way beyond
just Fed control of interestrates.
In fact, the Fed can't evencontrol long-term yields.
Long-term treasury yields.
(17:48):
Long-term treasury yields whiparound regardless of what
happens with the Fed on theshort run.
They don't control even thewhole yield curve.
I mean, unlike in Japan whichuntil recently, was trying to
control the whole yield curve,the US doesn't do that, the Fed
doesn't do that and, if anything, the longer end of the yield
(18:11):
curve, 10-year treasury yieldsthat's way more important for
stocks than what happens on theshort end with the Fed funds
rate.
Steve Davenport (18:23):
Well, I understand companies borrowing
and companies need access tocapital, but again, isn't that
industry specific?
It's not really all companies.
A lot of companies, smallcompanies are funded by internal
cash flow, so they don't needto know what the rates are.
They just need to know howtheir business is going.
And if real estate seems to bethe one that I think has just
(18:47):
been crazy recently is thesehigher rates were going to cause
a downturn in real estate andit hasn't happened.
Clem Miller (18:57):
Yeah, I mean this little supply.
I mean real estate is a greatexample.
The whole stock market, Ishould say, has been doing quite
well, despite the fact thatrates continue to remain high.
So coming back to is the Fedproviding us actionable
(19:18):
information?
If you just based your stockmarket decisions on how high the
Fed funds rate is, you wouldhave lost out on a whole bunch
of stock market appreciationover the last couple of years.
I mean you would have been,you'd be looking at all.
If you based it all on the Fed,you'd be looking back and
(19:39):
saying, gosh, I missed out onall of this stock market
appreciation.
You'd feel terrible and I'msure some of you may have done
that and are looking back andsaying, darn, I shouldn't have
done that.
Steve Davenport (19:53):
Well, I think that, first of all, I think it
simplifies the story.
If you're in the media or atCNBC and you say people want a
simple story, they want tounderstand higher rates mean bad
for the economy, bad for stocks, lower rates good for stocks,
good for the economy, good forspending, and I would love for
(20:14):
the world to operate in simpleif-then.
But I've come from the beliefthat we all have multiple
variables.
It's a multivariate approach.
There's four or five areasearnings, earnings growth,
(20:36):
overall corporate structure,capital allocation decisions.
There's many things that weneed to put into the equation
and the Fed's influence oninterest rates is one of those
variables and I guess do youhave.
If I said, the economy and thestock market is going to be
(21:00):
based on these four variablesand how I believe that I'm
bullish or not is going to be.
If all of these things areclicking, these are going to be
the things that help us toachieve better results.
What would be your top four?
Clem Miller (21:19):
Well, I take a look at this from a stock
perspective.
You mentioned capitalallocation.
Capital allocation that'ssomething that is a management
decision, company by company bycompany, which you can see based
on where the free cash flow isbeing allocated.
So some of those, a lot of that, is based on individual company
(21:44):
decisions.
But if you aggregate it, if youlook at this on an aggregated
basis, which I think is the youknow sort of where you were
going, Steve, with the question.
I think taking a look atdividend policy, dividend growth
, dividend outlays as apercentage of free cash flow or
(22:04):
earnings, I think that's a keyelement.
Free cash flow or earnings, Ithink that's a key element.
Dividends, stock buybacks thehigher the stock buybacks, I
think the better.
Overall revenue growth in theeconomy or overall sorry,
overall revenue growth of S&P500 stocks, I think is relevant,
(22:25):
and, of course, S&P 500 stocks,I think is relevant, and of
course, that's a function of theUS and global economy.
Profit margins right, Becauseprofit margins are what convert
revenue growth into profitgrowth and, as I pointed out,
share buybacks convert profitsinto earnings growth.
(22:46):
And then, of course, multipleexpansion right, so that's
relevant as well.
So all of those things areimportant.
They're important at theaggregated level and even much
more important at the individualstock level.
Steve Davenport (22:59):
My point was going to be if we came up with
four or five variables, I thinkit would be hard, I think it
would probably be more like six.
And then you'd say how do Imake one of these variables
worth a lot more than the others?
Then you'd say I probably wouldjust equal weight them, just
because I don't have adefinitive way to isolate the
(23:20):
variables.
Then I'd go okay if there's sixand there's 16% each in terms
of impact on the underlying.
The Fed is one of six variables.
It's not-.
Clem Miller (23:35):
MIKE GREEN.
I wouldn't even, personally, Iwouldn't even put them in the
six.
Steve Davenport (23:39):
MIKE GREEN.
I think interest rates and itsimpact on consumer spending, all
the things that flow from theFed, Corporate capital structure
decisions are made based on.
You know, I mean companies dida lot of borrowing before the
Fed raised rates, right, so theyobviously thought something was
(24:00):
important.
Clem Miller (24:01):
But not the Fed funds rate.
That's much less important thanthe 10-year treasury.
Steve Davenport (24:07):
I agree, it's a nuanced view of how 10-year
treasury.
I agree it's a nuanced view ofhow the Fed rate impacts the
whole economy.
It's not a direct from theovernight rate.
I guess what I'm saying is, ifthe direction of rates is higher
or direction of rates is lower,we're going to have different.
Clem Miller (24:25):
You're saying and I totally agree that there are
multiple levers to what's goingon with stocks and maybe the Fed
is one of those levers, butthere are many more levers that
are involved that the Fed hasabsolutely no control over, and
(24:46):
the overall investment community, especially retail investors,
have much less knowledge aboutall the levers that go into this
because of the media'soverwhelming focus on the Fed.
Is that about right, steve?
Steve Davenport (25:05):
Yeah, I mean I was looking for a summary and
you gave it to me before I evenasked.
So I believe that we as asociety spend too much time on
the wrong issues.
It's about your time in themarket, not timing the market
right.
If you look at all the research.
Lower your fees, be morepatient and stay in the market
(25:28):
through bad times and good, andwork on your savings so that you
have more alternativesavailable to you in your
financial future.
All of those things havenothing to do with the Fed.
When I look at an individual,should an individual spend time
thinking about whether SteveLeisman is being overly bearish
(25:52):
or bullish?
Steve Leisman is just anotherperson who has an opinion.
I look at it and say save,invest, do it for a long period
of time.
Not trade, but invest, and doit in a way that's effective,
meaning hopefully your fees arenot too high.
I think that most of the peoplewould walk away with.
(26:16):
I got something that's going tobe very helpful to me.
Now I know what to avoid,because I think if we spend our
time only focusing on what we do, we also have to spend our time
focusing on what we don't do.
Let's not focus on the Fed andif we make that decision all of
a sudden, I've given a personyou know an hour a month that
(26:37):
they can now go and do somethingelse in their life.
It's going to give them morejoy and more results, right yeah
?
So thanks for listening today.
We hope you enjoyed theSkeptic's Guide and we hope all
of you will continue to listenand continue to enjoy what we do
(26:57):
.
If you have any ideas, pleasecall us or email or text.
Thank you.
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