Will AI Replace Financial Advisors?

00:00:00.000 | - Welcome back to Portfolio Rescue. As always, I'm joined by Duncan Hill.

00:00:21.600 | Duncan, thanks for making it. We get a ton of questions from people on YouTube and

00:00:26.880 | our inbox. Sometimes the questions are topical, sometimes they're evergreen,

00:00:29.680 | but we have a very intelligent audience, right? So great question. So let's get in.

00:00:35.200 | So remember, our email here is askthecompoundshow@gmail.com if you have a question for us.

00:00:39.520 | Let's do one. - Okay. First up today, we have, "Technology has made investing easier with

00:00:46.720 | indexing, direct indexing, robo-advisors, etc. With AI in vogue right now, what does the RIA

00:00:53.360 | and financial planning space look like in another 20 to 30 years? Will there still be a human need

00:00:58.240 | to hold your hand or talk you off the ledge? Or will the only human interactions be those...

00:01:02.800 | Sorry, we lost it there. Will be those maintaining the tech behind the scenes?"

00:01:09.680 | - All right. I love this question. There were similar questions asked when robo-advisors came

00:01:15.280 | out. It was kind of like, "Is financial advisor still necessary here?" And AI is not robo-advisors,

00:01:22.720 | right? This is a whole other thing. Obviously, no one knows how AI will transform our lives,

00:01:27.680 | but speculation is just running rampant now because of all the chat GPT stuff.

00:01:31.040 | The possibilities seem endless. There's tons of speculation from people. I think this is

00:01:35.840 | the fun stage of innovation where people just spend all their time thinking what the future

00:01:38.800 | could look like. I do think this is one of the first major technological breakthroughs where

00:01:43.680 | people can see it immediately. The first time they try it, they say, "Oh, I get it. This makes

00:01:47.280 | sense. I've done a few demos on some of this stuff, on some ideas and startups, and it makes

00:01:52.080 | sense." So even though we don't know exactly how it's going to change our lives, how the businesses

00:01:56.320 | will use it, I think we can be sure that it's going to evolve from here. I'm going to skip over

00:01:59.920 | the Terminator end of days stuff, right? Because I don't know. That's a pretty easy one to figure

00:02:05.360 | out what the end game is. So I'm going to focus on how this could change the financial advice

00:02:10.240 | realm going forward. I do agree with you, by the way, though, just for the record,

00:02:15.040 | from what you were saying on Animal Spirits yesterday. I think that the negative that is

00:02:18.720 | going to come from AI is very easily or likely going to outweigh the positive if we're not careful.

00:02:25.680 | Unfortunately, there's going to be some wonderful things that come from it, I think,

00:02:29.040 | especially for knowledge workers like us. Content clips, and there's going to be so many different

00:02:33.920 | things you can do, and we're going to look at one of those right now. I do think the downsides

00:02:36.480 | could be pretty drastic and scams, and I think it's just another tool of a tool belt for people

00:02:41.600 | who want to take advantage of others. So one of our loyal viewers, I don't know if he's in the

00:02:45.040 | chat today, Part-Time Larry, which is just a, it kind of sounds like a comedian's name, maybe? Like,

00:02:49.440 | "Oh, I'm going to see Part-Time Larry tonight." He has a YouTube channel, and it's called OpenAI

00:02:53.040 | for Finance that's looking into some of the ideas here. He created this video, and he didn't even

00:02:57.040 | send it to us. Someone else sent it to us, and he used chat GPT to essentially create a portfolio

00:03:03.120 | rescue question and answer engine that just blew me away. Maybe we'll try to put a link in this in

00:03:08.000 | the show notes. Yeah, we'll wing to it. So he took all of the questions that we've been answered,

00:03:14.080 | he uploaded them somehow, and he created this financial advice box, basically, where you ask

00:03:19.120 | a question, and it would spit out an answer based on how we've answered questions here in the past.

00:03:24.400 | So it's essentially a portfolio rescue AI. And the whole thing that he... I didn't get all the

00:03:30.880 | technical aspects of what he was explaining, but it did kind of blow me away. And we're still in

00:03:35.040 | the early innings of this stuff here, right? This stuff is only going to get better and more useful,

00:03:39.440 | and I was blown away by the stuff he could do when we're still in like the first inning of this

00:03:44.080 | stuff. So I love the idea of having an archive of my blog or any of the podcasts and giving people

00:03:51.360 | the ability to search seamlessly for charts and graphs and data and answer and context and even

00:03:56.480 | movie recommendations. So if Larry's listening, my next AI request for him would be, people always

00:04:01.520 | ask us for Animal Spirits, "Do you have a list of all your movie and TV show recommendations

00:04:05.600 | somewhere?" No, that'd be way too hard for us and too much of a pain in the butt. But if AI could

00:04:09.120 | do it, that'd be great. All of Michael's horrible movie recommendations and my wonderful TV movie

00:04:15.120 | recommendations. So maybe AI can help there too. So the question is, will everyone have their own

00:04:19.520 | AI financial advisor someday that executes a financial plan on their behalf? It wouldn't

00:04:23.040 | surprise me if something like that existed someday. It certainly makes a lot of sense.

00:04:27.040 | Do we need John Connor to go back in time to save financial advisors and kill this technology

00:04:33.280 | before it gets off the ground? I would actually go the other way here. I think if AI lives up to

00:04:37.200 | its promise, I think it's just going to be a commodity that everyone has access to. And that

00:04:42.560 | only increases the value of human advice, right? So Howard Lindzen, friend of the show, likes to

00:04:46.480 | say that there's no such thing as information overload, only filter failure. And I think if AI

00:04:51.440 | ends up becoming this subtotal of human knowledge on the internet that has this interactive format,

00:04:56.160 | then the best advisors are going to be the ones that were able to filter out the best uses of it,

00:05:00.240 | make their lives more efficient and make things, make tools better for their clients to use it in

00:05:04.000 | concert with that technology. So I think it's like a compliment to good advisors. So I think

00:05:08.960 | that's always been the case, advisors who are able to use the newest technology. So the thing about

00:05:12.880 | financial advice is there is no black or white or right or wrong for most of the big decisions,

00:05:17.680 | right? What's the right asset allocation for me? Well, it depends. What's the safe withdrawal rate

00:05:21.680 | for my portfolio? Well, it depends. Should I invest this extra money or put it into paying

00:05:25.680 | off my mortgage? Well, it depends. There's so many different questions you can kind of

00:05:29.120 | go down that path and say, it depends, it depends, it depends, right? And so I think good

00:05:34.000 | financial advisors know how to mix probabilities, statistics, and financial data with a little bit

00:05:38.000 | of common sense and empathy and behavioral psychology. So I think the value of a good

00:05:42.560 | financial advisor is always going to come down to things like trust and effective communication

00:05:45.840 | and setting realistic expectations and just having a deep understanding of your clients and

00:05:50.160 | diagnosing problems before you give a prescription. And so I think still having that ability to help

00:05:57.600 | people through tough parts of their life or good parts of their life, the birth of a child,

00:06:02.240 | the death of a spouse, divorce, retirement, loss of a job, big purchases, market crashes,

00:06:07.040 | all this stuff, I still think you're going to need a human being on the other end of that to

00:06:10.240 | help see you through. Because financial planning is not just like a one-time event. You don't

00:06:14.160 | create a financial plan and that's it. It's a process that takes a while and you have to navigate

00:06:17.840 | those decisions. And I think navigating those decisions requires a lot of compassion and

00:06:21.840 | education and communication and just a level of trust that is difficult to establish with a piece

00:06:25.840 | of software. So I just think AI is likely going to be able to help with a lot of the technical

00:06:31.600 | financial variables going forward, but there's a huge difference between technical knowledge

00:06:36.000 | and the management of relationships. Right or wrong, people like to work with other people

00:06:40.880 | that they respect or they trust or they just like to work with. So I still think it's silly to

00:06:46.480 | predict what's going to happen with AI right now because there's so many, most of the forecasts

00:06:50.560 | people are making right now are going to look silly in probably a few years, maybe a few months.

00:06:54.640 | I think there will always be a place for financial advisors and the best ones have always known how

00:06:57.600 | to mix the best human elements with the best elements of technology. And I don't see that

00:07:01.280 | changing anytime soon. Yeah, that sounds right to me. And also, how many people are like, "Oh,

00:07:07.360 | I really wish that I had a chatbot instead of a real person to talk to about fill-in-the-blank

00:07:11.920 | topic." Now, there will come a time when the AI chatbots will probably be better than the average

00:07:16.800 | human, I guess, that you would be talking to as far as support goes. But yeah, to me,

00:07:21.520 | yeah, I just, I think that the human element is a pretty important part. But I mean,

00:07:26.080 | we're biased, we're humans, right? So I guess if we were AI, we'd have a different opinion.

00:07:30.320 | Yeah, you're asking a barber whether a robot haircutting machine, I mean, did the Flowbee

00:07:34.880 | put barbers out of business? No, right? You want that good conversation when you're sitting in the

00:07:40.000 | barber chair, right? So I do think the human element of it is, because again, a lot of the

00:07:45.920 | decisions people are forced to make about their life, there's two or three different paths that

00:07:50.000 | you could take. So I think someone that helps you make those decisions is always going to be helpful.

00:07:53.440 | And I think the best experts will be the ones that can rely on this AI to help them better

00:07:58.960 | answer questions on people's behalf, and then figure out which is the right or wrong answer

00:08:03.040 | for them personally, because there are no answers that are right for everyone.

00:08:07.600 | It's very circumstantial. Also, what's to stop the AI from starting to take a cut?

00:08:11.280 | You know, it's like all your transactions you suddenly start noticing aren't quite adding up.

00:08:15.680 | The AI's like, "I didn't do anything. What are you going to do?"

00:08:18.800 | This is a financial scamming part. You need someone to monitor the AI to make sure they're

00:08:22.080 | not stealing all your money. All right, let's do another one.

00:08:24.480 | All right, that question was from Michael, by the way. We've had a lot of Michaels writing in.

00:08:28.080 | Yeah, that's true. Great, yeah. Everyone born between 1975 and 1991,

00:08:32.960 | 75% chance you're named Michael or John.

00:08:36.080 | Right.

00:08:36.320 | All right.

00:08:37.040 | All right, up next we have a question from Jeff. And Jeff asks, "How far in advance do markets

00:08:43.200 | generally get things priced in? Does it change from sector to sector? The reason I ask is that

00:08:47.920 | Josh on TCAP was saying he thinks commercial real estate is the next shoe to drop. That got

00:08:52.000 | me thinking about how well the market prices stuff in."

00:08:54.240 | Easily one of the hardest questions to answer when it comes to the markets, because

00:08:57.840 | sometimes the market is forward-looking enough to price things in, right? Like when the vaccine

00:09:03.520 | got here during COVID, there was a lot of other factors at play, but markets were already back

00:09:07.840 | at all-time highs by the time the vaccine rolled out, right? But there are some times when the

00:09:12.160 | market overreacts, sometimes when it underreacts, and sometimes when it just doesn't react at all

00:09:15.360 | until it's too late. And there's an old joke, I think Paul Samuelson said it, that the stock

00:09:18.880 | market has predicted nine of the last five recessions. I wrote about this last year,

00:09:22.160 | about the two different types of bear markets. So John, throw the first one up. So you have

00:09:25.120 | recessionary bear markets, which these are pretty easy. They encompass the majority of the worst

00:09:28.560 | market crashes in history. Some pretty nasty times, the Great Depression in 1973, '74 bear

00:09:33.680 | market from inflation and bursting of the dot-com bubble, great financial crisis. That's pretty

00:09:37.200 | easy, right? Most of the bear markets in history are associated with an economic downturn, which

00:09:41.680 | makes sense. But there have also been plenty of bear markets that have taken place outside

00:09:44.880 | of recessions. So we have the non-recessionary bear markets too, right? And some of these

00:09:48.960 | happened for legitimate reasons, but some of these happened just because the market decided

00:09:53.280 | to overreact, and there was no real reason there. And it's not like the market... In 1987,

00:09:58.000 | when the stock market crashed more than 20% in a single day, the next day all the headlines were

00:10:02.480 | proclaiming, "I think a Great Depression is here. The stock market has to know something." And the

00:10:06.640 | stock market recovered, and it was off to the races again for the rest of the '90s, and things

00:10:12.560 | were fine. So, John, just throw up the little summary here just for people. So the non-recessionary

00:10:17.920 | ones don't freak out as bad, which makes sense, because a lot of times they're not correlated

00:10:22.480 | with a really nasty recession. But people can overreact. The stock market can overreact because

00:10:28.480 | people are the ones pulling the trigger, right? And you'll notice I didn't include the current

00:10:33.200 | incarnation of a bear market, because we don't really know if it'll be associated with a recession

00:10:36.400 | or not. I would say if we go into a recession in the next six to 12 months, you can count this one

00:10:40.960 | as put that in recessionary camp. If not, I think we push it out. This was a non-recessionary bear

00:10:45.360 | market. We shall see. Burton Malkiel has a quote about efficient markets that I think applies here

00:10:52.000 | in terms of thinking about what's priced in. And his quote about efficient markets is not that like

00:10:56.320 | it means the markets are always right, but he said the price is never right. In fact, prices are

00:10:59.600 | always wrong. What's right is that no one knows for sure whether they're too high or too low.

00:11:03.520 | It's not that the prices are always right. It's that it's never clear that they are wrong. The

00:11:06.880 | market is very, very difficult to beat. And so I think one of the harder things to understand

00:11:11.920 | with the markets is it's not really good or bad that matters, but better or worse. And when you're

00:11:17.360 | trying to figure out what better or worse is, you are trying to answer this question about what's

00:11:21.280 | priced in. And again, that's really tough to figure out. So it does seem like commercial

00:11:25.520 | real estate is a thing people are becoming worried about. I don't know what's priced in,

00:11:30.000 | because it does kind of seem like this is clear as day for a while that people aren't going back

00:11:34.480 | to the office. Big cities like New York and maybe San Francisco, their commercial office space is

00:11:40.880 | going to be in for a world of hurt potentially. But we're talking about a $20 trillion market

00:11:44.880 | here. Some parts of commercial real estate will be fine. Other parts are probably in for a huge

00:11:48.480 | adjustment period. But the biggest question here is not only what's priced in, but how much does

00:11:53.200 | this actually impact the economy or the stock market? Maybe certain segments or investors or

00:11:58.000 | buildings are in trouble, but is that really enough to impact the entire economy? Will other

00:12:02.480 | parts of the real estate market pick up the slack, because those people have to go somewhere, right?

00:12:07.040 | Now, these are the only answers that show why it's just so difficult to answer. And I think

00:12:10.800 | everyone thinks they know what's priced into the market at any one time, but no one really

00:12:14.880 | knows for sure. And the biggest risks are usually the ones that you don't see coming,

00:12:20.080 | like the ones that you don't see barreling down the highway. Those typically aren't the

00:12:23.360 | ones that get you. It's the ones that you don't see coming, maybe like a bank run, right? Those

00:12:27.200 | kind of things. Right, right. Yeah, efficient markets. That's some of my favorite jargon,

00:12:31.680 | you know? You start dropping that when you want people to know you know what you're talking about.

00:12:34.800 | Well, or yeah. It's a weird argument to have, and markets are like kind of sort of efficient,

00:12:41.520 | and in that they are hard to beat. But of course, markets are irrational because humans are

00:12:45.520 | irrational. Right. All right, let's do another one. Okay. You know what won't be irrational? AI.

00:12:51.280 | Yeah, not at all. I'm just picturing there has to be like a big off switch somewhere,

00:12:57.040 | right? If we're headed toward the Terminator, everyone says, "Well, it'll happen before

00:13:00.320 | anyone knows it, and this thing, this sentient being will become so smart that it'll just wipe

00:13:03.920 | us all out." I just want a red button to hit off, like, "Okay, we're calling it. No more AI."

00:13:08.800 | I think we have that. I think the person controlling it, though, is Elon Musk.

00:13:11.920 | Okay. All right, let's do another one. Okay. Up next, we have a question from Ryan.

00:13:16.240 | "My question revolves around bailouts. I'm too young to remember how everything played out in

00:13:20.080 | 2008, so this whole episode with SBB is new to me. I understand why government officials stepped in

00:13:25.040 | to avoid more bank runs, but I can't reconcile that with the fact that bailouts don't seem fair.

00:13:29.760 | How did we get here? Does every big financial institution just get bailed out in the future

00:13:34.480 | if they run into problems?" We've had a ton of questions about this. A lot of people feel like

00:13:39.600 | it's unfair. Yes. There's a lot of this going on, so why don't we bring in the guy who literally

00:13:44.080 | wrote the book on this subject, Mr. Barry Ritholtz. Hey, Barry. You wrote a book called

00:13:50.480 | Bailout Nation to kind of help people understand how we got to this place following the 2008

00:13:55.360 | financial crisis. When did this book come out again? 2009, 2010? Late 2009.

00:14:00.560 | Also, I want to just give you... You have Rubini on the cover.

00:14:05.600 | Crazy, right? Right? That's hilarious.

00:14:08.560 | I love that. "A beam of enlightened thinking in a sea of delusional complacency." That could be

00:14:17.200 | the best blurb I've ever read. Not bad. I read this book when it came out. Correct me if I'm

00:14:24.000 | wrong, but you kind of trace this back to how it was kind of a snowball building up, starting with

00:14:29.280 | the Chrysler bailout in the '70s, right? Before. Lockheed in 1971. It went Lockheed.

00:14:34.960 | During the Vietnam War, they had run into financial problems. They took, I think it

00:14:40.560 | was a $250 million loan from the government. They had screwed up. Then Chrysler in 1980 was another

00:14:50.240 | example of it's an election year. It's a big employer. It's somebody that is located in a

00:14:59.760 | politically important swing state. They got a multi-billion dollar loan because they had been

00:15:07.520 | mismanaged for not just a couple of years, for decades. They eventually paid it back. It'll

00:15:12.480 | work out. Eventually Chrysler gets bought by Mercedes, who a couple of years later says,

00:15:17.920 | "Why did we buy them? They're terrible." They learned how to build Jeeps and that was it. They

00:15:23.760 | spun them back out. The question, why are we bailing people out? I think you need to be a

00:15:32.720 | little nuanced in your definition of what a bailout is. First, and we could get into a lot of

00:15:41.120 | details, when you look at '08, '09, what happened is people who were extremely risk-embracing and

00:15:50.000 | aggressive and painted themselves into a corner, their own decision-making, their own behavior,

00:15:56.240 | got them into trouble. They were made whole. To me, a bailout is when someone gets rescued

00:16:02.800 | from their own folly. People had the right to be mad about those bailouts, the way things happened

00:16:09.760 | and the way that that was structured. It did feel like, "We're going to let a lot of these homeowners

00:16:14.720 | lose their houses and they're screwed and you're on your own, but the banks, we're going to make

00:16:18.560 | you whole." I think people had a right. None of those guys went to jail. Some of them probably

00:16:24.720 | should have. Some people should have gone to jail. Dick Foulds, front and center. The CEO

00:16:29.120 | of Lehman Brothers was engaging in a repo 105 every quarter. They were hiding all this debt

00:16:35.760 | off balance sheets so shareholders couldn't see it. A lot of bad behavior. Now, who is bailed out

00:16:41.760 | this time? The depositors in Silicon Valley Bank? Let me make sure I understand this. You select a

00:16:50.400 | top 20 bank with a 50-year track record. What recklessness or bad behavior or bad decision

00:16:58.560 | making did the depositors have that we have to worry about moral hazard? It's one thing when you

00:17:07.440 | say every bank was making a ton of money securitizing junk mortgages and they didn't

00:17:14.640 | care about the quality of it and the thought was, "Let's just jam as much as this stuff into stuff

00:17:20.640 | and sell it back out to the market and get paid a ton of money for it." There's some moral hazard

00:17:27.680 | there. They're engaging in reckless behavior in order to profit from it. Someone who goes down

00:17:33.360 | to the corner bank and says, "Here's my $500,000. I'm running a small business and I need to do

00:17:40.000 | payroll and accounts payable and all that through this. Oh, and I'm over the $250,000 minimum."

00:17:45.440 | Sealing for FDIC. What did that guy do wrong? Right. This would have been different if the

00:17:51.600 | equity holders would have been bailed out and the bond holders would have been bailed out.

00:17:54.960 | That's the kind of thing that people got mad about in a way which felt like that happened

00:17:58.320 | to a lot of banks. AIG for sure. A lot of the banks, there were rescues. Even Bear Stearns,

00:18:03.200 | this was bought at $2 a share. It moved up to $10 a share. It was a very famous picture.

00:18:08.560 | Someone taped a $2 bill to the Bear Stearns glass door entrance at their headquarters that went

00:18:15.040 | viral back in the day. But that's the real question. Silicon Valley Bank,

00:18:19.040 | shareholders, zero. Wiped out. The bond holders, it's going to be somewhere between 30% and 50%.

00:18:25.440 | They're going to lose a big chunk of it. That's very different than, "We're going to make you

00:18:30.960 | whole and we're going to save you from your own bad decision making."

00:18:34.400 | I think the sentiment that I can kind of relate to is I've seen people saying things like,

00:18:40.240 | in individual businesses, I think most people would make a distinction, but an individual who

00:18:44.240 | had millions of dollars in the bank, shouldn't they have known the FDIC limit? And so isn't

00:18:48.480 | that kind of them being reckless at that point? You know, if you're running a business, what are

00:18:53.600 | you going to do? I've also seen people pointing out that a lot of the same people who were asking

00:18:58.080 | for the bailout in this case are the same people who've talked about the bailout for student debt

00:19:03.440 | or whatever, essentially being unfair. When 17 and 18 year olds making big loan decisions,

00:19:09.360 | you could argue is an ignorance situation, right? People don't understand what they're getting into.

00:19:14.000 | Okay, someone who didn't understand the FDIC limit, that's their own ignorance maybe.

00:19:17.360 | I've seen a lot of people making those points. When it does, I know some people argue about

00:19:21.520 | what's systemic and what's not. I do think when it gets down to the banking industry like this,

00:19:25.120 | there's no regulator politician in their right mind that's going to just, "Okay, let's let the

00:19:28.640 | system fail so these people get punished." Because then you punish other people. That's

00:19:32.480 | the thinking here. Unless you get a crazy person running one of these FDIC or the Fed or something,

00:19:38.080 | I don't see how that ever happens where someone just, "Okay, let's let the system fail because

00:19:41.440 | these bad actors did something wrong." Ben, you're dead right with that because

00:19:46.400 | the concern isn't some small businesses over the FDIC limit or some people with a little money over

00:19:54.000 | it are going to be punished for going to a local bank. The thinking of the FDIC and the Fed is

00:20:00.880 | a run on the bank is pure emotion, pure psychology. It's a contagion and we want to

00:20:07.360 | stop it here in its path. If you look at the market the past two weeks, it seems as if the

00:20:12.960 | market is behaving. You never want to try and guess what the mostly kind of sort of efficient

00:20:18.320 | market is thinking, but it seems like the market has said, "Hey, it looks like the Fed and the FDIC

00:20:25.280 | has halted the contagion from spreading," and that's good for the overall economy.

00:20:30.560 | Yeah. All right. Let's do another one, Duncan. Okay. And just a quick follow-up there. What would

00:20:35.600 | Monday that week have looked like had they not basically stepped in and said, "We're backstopping

00:20:39.600 | above the limit"? A little bit of panic, right? I think if you remember, those of us old enough

00:20:45.200 | to have traded through '07, '08, '09, it's like every week there was a different piece of news

00:20:52.480 | that came out and the market reacted to it. Probably the worst of all was when Congress said,

00:20:58.400 | "Oh, we're not going to backstop the Fed. We're not going to allocate any money," and

00:21:02.160 | it was like a 10% drop in a couple of days. That was nasty. That was a bad day.

00:21:06.080 | Late October. That was early October of 2008. That was like, wow.

00:21:10.080 | I remember that. It was a scary day.

00:21:11.600 | It might have been the biggest percentage drop since '87.

00:21:14.560 | So it would have had horrible market ramifications, but also bank run potential, right?

00:21:20.640 | Well, keep in mind, the difference between 2023 and 2006, '07, '08, '09 was every bank,

00:21:30.400 | every brokerage firm, every private lender, they all had gone to the same buffet,

00:21:36.880 | and they all were eating the same poisoned food, and they all subsequently got very, very sick.

00:21:41.440 | This seemed to be, you know, Signature Bank is different than Silicon Valley Bank. There

00:21:47.280 | was one other bank that had a separate issue. Some of them had too much exposure to crypto.

00:21:51.840 | Silicon Valley Bank was a simple duration problem, and by the way, Silicon Valley Bank

00:21:57.760 | had duration hedges on in 2022, and they had gone up so much in money because of rising rates

00:22:06.400 | that they took their profits. They sold them, and everybody got a big fat bonus, not realizing

00:22:13.920 | you just took your hedges off, and the Fed is going to continue to raise.

00:22:17.360 | So, you know, there's always these complex layers of things going on beneath the surface.

00:22:22.560 | Cool. This is a perfect segue to the next question, and by the way, I love this.

00:22:29.040 | We're helping settle a debate. I love this. I want more of this. People should write in

00:22:32.320 | more often for you to settle debates. Okay, so this question's from Kevin.

00:22:37.920 | "Help me settle a bet I have with one of my co-workers. We're both advisors with an RIA.

00:22:42.320 | I know there is always something to worry about when it comes to the markets, but what should we

00:22:45.680 | worry about more right now? Inflation at 6% or the Fed breaking things/the banking crisis? I'm

00:22:51.600 | more worried about the banking crisis leading to a slowdown, while he still thinks inflation

00:22:55.360 | should be the Fed's biggest priority. Thoughts?" The funny thing is, Barry, you do a really good

00:22:59.680 | job of always looking at the macro through the lens of probabilities, but I think it's hard to

00:23:03.520 | kind of separate the two right now, because if there is a banking problem, that could impact

00:23:08.000 | inflation, right? So it's kind of hard to handicap this one. Yeah, no doubt about it. I mean,

00:23:15.120 | looking at inflation, especially on the good side, it very much looks like inflation peaked,

00:23:21.040 | you know, three quarters ago. In June of last year, look at lumber, container ships, copper,

00:23:26.640 | like all the things that had skyrocketed. Even food prices are moderating. It always feels like

00:23:33.360 | the Fed is late. They were late to get off of their emergency footing. They were late to recognize

00:23:38.720 | inflation. Remember, they had a 2% target, and CPI went through that in March 2021. They waited a

00:23:45.280 | full year to start tightening. They should have been off of zero long before that. The problem

00:23:52.640 | isn't the level of the Fed at, you know, around 5%. It's how rapidly they raise rates. And that's

00:24:01.200 | where, you know, I did a blog post a couple of weeks ago, before Silicon Valley blew up. The Fed

00:24:08.000 | is breaking things, and it could get worse. And, you know, that fastest ever tightening cycle from

00:24:14.960 | zero to 5%, that's the problem. 5% is not historically high rates. Right. I think, yes,

00:24:23.600 | that's the problem is we've never seen it go from zero to five this fast. And it would be nice to

00:24:29.040 | have a little bit of a breather here to see what happens and make sure nothing else. Because when

00:24:32.720 | people were talking about the Fed breaking stuff, no one ever said it's going to be a banking crisis,

00:24:36.560 | right? No one was predicting that. People thought, well, the Fed's going to send us into

00:24:39.600 | recession, and people are going to lose their jobs. And it was the wrong thing. So I think

00:24:43.680 | that's the thing you have to worry about is what are the unintended consequences of this aggressive

00:24:48.400 | rate hiking? And if inflation is still high, five or six months down the line, then maybe the Fed

00:24:53.520 | has to, you know, step on the gas a little bit more. But I think that's the worry is, like,

00:24:58.560 | what are the other ramifications here if they keep raising and keep being so aggressive?

00:25:02.000 | That's the irony is that it's just a reminder of how bad we are as a species making predictions

00:25:10.400 | and forecasting. Everybody a year ago forecasting a recession, turns out the economy is very

00:25:17.120 | resilient and employment continues to hold up. But a few years ago, oh, the banks are fine. We could

00:25:23.120 | roll back regulations and allow them to carry less capital. That turned out to be a terrible decision.

00:25:29.200 | Yeah, I think it is, if we're giving the Fed a pass here, managing a $24 trillion economy

00:25:35.280 | and trying to get it to maneuver one way or the other is very difficult. And we've seen

00:25:40.000 | that their levers that they can pull might not have the desired effects that they want.

00:25:44.160 | Maybe they shouldn't be trying to manage a $24 trillion economy. And maybe they should listen

00:25:50.160 | a little more to the bond market, because it seems like the Fed has spent much of the past three

00:25:55.840 | years ignoring what the markets were suggesting to them. And a perfect example from the Lowe's

00:26:02.640 | post-COVID crash in March 2020, by the end of the year, and this goes directly to your mostly

00:26:11.760 | efficient market conversation earlier, by the end of the year, the stock market rallied 68%.

00:26:18.160 | If that's not a market signal that, hey, maybe this is an emergency and we should get off zero,

00:26:25.120 | I, to ignore that, I say with the benefit of perfect 2020 hindsight,

00:26:30.240 | seems to have been the big mistake. Had they paid attention to that, they could have done

00:26:35.440 | a quarter point every other meeting and slowly brought us to a place where rates weren't

00:26:42.240 | inflationary, but they weren't breaking things. If you throw a dinner party at eight o'clock,

00:26:46.560 | Jerome Powell's showing up at 1130, right? Always late to the party. Yeah, 100%.

00:26:52.800 | All right, we got one more. - Okay. So, last but not least,

00:26:57.280 | we have a question from Brendan. "How did you get your start in writing and podcasting? I'm

00:27:03.520 | fascinated by markets and have been since college. I selfishly want to write to document my thoughts

00:27:08.160 | and commentary on the market, and if it gains steam, great. Did you find this idea of documentation

00:27:14.640 | helpful in your career progression? What initial steps should I take to potentially become a

00:27:18.800 | financial journalist on top of working in the industry?" - All right, so I wrote a blog post

00:27:23.680 | about this recently, reflecting on some lessons since it's been about 10 years since I started

00:27:27.200 | Wealth of Common Sense. I'll go through some of my biggest takeaways and we'll get some of Barry's

00:27:31.040 | too. I just said, Barry, you've heard about this before, like writing is a form of learning,

00:27:34.560 | like it's, I write to figure out what it is I think. That's part of it that I never really

00:27:38.320 | banked on before is how much, how helpful that would be in terms of just collecting your thoughts

00:27:43.360 | and it's not just like you have it already formed here, it's like the writing process helps you get

00:27:47.440 | it out, right, and helps you figure out what it is you're trying to figure out, right? - A hundred

00:27:52.080 | percent. Daniel Boorstin, the former librarian at Congress, used to say, "I write to figure out

00:27:57.120 | what I think and besides at that hour all the bars are closed," and, you know, it's only half

00:28:02.000 | in jest. Very often until you put words to paper, until you actually type something out, you don't

00:28:08.720 | really understand the nuance of the whole argument. I started blogging because, and you're coming up

00:28:16.480 | on 10 years, July will be 20 years for me since the launch of TypePad when I launched. - Did you

00:28:22.800 | call the big picture from right away? - So when it was on GeoCities, I know I have some screen grabs

00:28:28.720 | of it in like '98 or '99, it might have been the big picture and it was definitely the big picture

00:28:34.400 | on TypePad which was the first WYSIWYG editor where, you know, on GeoCities you take, you know,

00:28:41.760 | a half hour to write something then two hours to code it in HTML. Once you move to TypePad,

00:28:47.200 | it's sort of like writing on a Word doc or a Google doc where you can underline. Imagine every

00:28:54.960 | indent, every paragraph break, every, you know, italicized you had to come up with the right code

00:29:02.080 | for. This made it much easier and then '08 moving to WordPress really turned out to be very robust

00:29:09.200 | then and really interesting. - I think the biggest thing, you've been doing this along with me

00:29:12.560 | obviously, you and I never got into this because we said we're going to be financial journalists,

00:29:16.640 | we're going to get a big audience. We did it because we found this stuff interesting and we

00:29:19.760 | wanted to put our voices out there. It's not like we had this grand scheme. I think none of us did,

00:29:24.320 | me or you or Josh or Michael or Nick. So I think to have longevity and do this for a long time,

00:29:29.680 | you have to write about things that you care about, not things that you think you want people

00:29:32.560 | to read about. You can't like try to optimize this for things people want to learn and I'm

00:29:36.000 | going to create the best headlines because that's going to get the most people to read and I'm going

00:29:38.800 | to write about this topic because that's what everyone's clamoring for. You obviously want to

00:29:42.880 | write stuff people want to read, but you kind of have to do it in your own voice and write about

00:29:47.280 | things that you care about. Otherwise, no one else is going to care about them if you don't.

00:29:50.720 | - That's absolutely right. Listen, I started blogging because I wanted to become a better

00:29:57.200 | writer and the only way to become a better writer is to A, read good writing and B,

00:30:03.280 | write and preferably a little bit every day. And so what started as, "I'm just going to pull

00:30:09.360 | a half hour to an hour aside early each morning to prep for the trading day," became just a habit

00:30:16.720 | and it's like, you know, the best gym rats are the guys who work into a routine and they just

00:30:22.720 | go all the time. It's just part of their daily schedule. It's not like anybody has to tell them

00:30:28.880 | go to the gym or go for a run. It's just part of how they operate.

00:30:33.200 | - It is a routine and obviously there's people who were born to write that just have that natural

00:30:37.440 | gene. But when I was in high school and college, I hated writing papers because I never found a

00:30:42.800 | topic that I enjoyed enough to actually get into it. And once I started to write about finance and

00:30:47.840 | psychology and the markets, I loved it so much that I wanted to do a lot and I go back to the

00:30:53.200 | first few things I wrote. They're probably horrible, but I think it's something that if

00:30:56.320 | you do it enough and you have a routine, you can get better at too.

00:30:58.880 | - No doubt you get better at it, but really you hit on the magic secret, which is write about

00:31:06.320 | things that you're really interested in that you want to learn more about. You know, I do a car

00:31:11.520 | post a couple of times a month, not because I feel anybody cares what I say about this car or that,

00:31:18.240 | but it kind of allows me to do a deep dive into a particular type of car and just the exercise of

00:31:25.360 | researching and pulling out some data and putting it together, like, "Oh, I really understand why

00:31:31.600 | this type of EV has become suddenly popular." And it's just, it's a learning exercise.

00:31:37.600 | - Yeah, and I love the fact that I get to do it now. And sometimes you, personally, I forget people

00:31:43.520 | are on the other side reading it sometimes. It's great to get feedback from people.

00:31:45.920 | - Audience of one.

00:31:46.960 | - Yeah, that's kind of the way you have to approach it. So I wouldn't approach this

00:31:50.720 | trying to become a journalist and build an audience. I would approach it for,

00:31:54.400 | "Is this going to help me personally, make me a better advisor, make me communicate better to my

00:31:58.720 | clients?" And if other people want to read that and you do build an audience, great, but I wouldn't

00:32:03.360 | start with that proposition.

00:32:04.560 | - And to answer the second half of the question about the podcast, you know, some of the writing

00:32:10.480 | began because I was frustrated with what I was reading. And I remember having an argument back

00:32:15.840 | and forth with a Wall Street Journal editor who were talking, it was, there was a column about the

00:32:21.600 | improving housing market from February to March to April. I'm like, "That's seasonality." Guys,

00:32:27.840 | look at it year over year. If it's really improving, it shouldn't be going down year

00:32:33.040 | over year. It always bottoms in December, January. It always tops in July. Why? Because people want

00:32:38.960 | to move into a new school district so their kids don't miss the start of the new school year in

00:32:44.480 | September. So podcasting kind of began the same way. I was frustrated with the same stupid

00:32:51.680 | questions on TV interviews you heard over and over again. So what's your favorite stock? Hey,

00:32:56.560 | where's the Dow going to be a year from now? And when is the Fed going to raise, cut, whatever?

00:33:01.760 | And those answers to that question have a shelf life about as long as it takes for the guy to

00:33:08.720 | walk out of the building, and then they're already stale. So the idea behind Masters in Business was

00:33:15.200 | always, "Hey, if I could get really intelligent, accomplished people to sit down with me and say,

00:33:20.560 | 'Here's how I became who I am. Here's how I developed my process. And here's what you can

00:33:26.160 | learn from me.'" I thought that was more valuable than stock picks, forecasts, and Fed predictions.

00:33:34.160 | Amen. I remember I wrote some piece about like, "Why doesn't financial television do this,

00:33:37.920 | this, and this?" Back when I just first started blogging. And you emailed me and said, "This is

00:33:42.560 | before I even worked with you, I think." And you said, "I'm developing behind the scenes at

00:33:47.040 | Bloomberg this sort of thing that you're writing about." And what year was it? 2013, 2014?

00:33:51.600 | So it was the column launched in 2013, and the podcast didn't launch till the following July,

00:34:00.480 | but it was in development for six months. And by the way, those first six months of

00:34:05.600 | podcasts, they're just horrible. They're just not worth listening to.

00:34:09.840 | That's another thing that you're talking to people and interviewing, that's another thing you can get

00:34:13.600 | better at. My favorite recent one is always one of my favorite guests is Cliff Asness,

00:34:17.920 | who you said in recent weeks. So good. So much fun. But how often do you get to

00:34:23.360 | find a legendary fund manager billionaire and ask him if he's a dickhead? I know he's a science

00:34:31.280 | fiction wonk, and we were talking about Philip K. Dick, and the fans of Philip K. Dick, of which

00:34:37.680 | I count myself as one, call themselves dickheads. So he brought something up. I said, "Are you a

00:34:43.920 | dickhead?" And he just laughed. He knew exactly where I was going. The ability to have those

00:34:50.560 | sorts of conversations. I'm glad you explained that because I did not know that.

00:34:52.240 | Okay. The ability to do that is just one of those crazy things, to have that conversation.

00:35:00.480 | And I wouldn't have asked him that if he, you know he's like a crazy Marvel fan,

00:35:05.920 | and he's a big sci-fi geek, and he actually reeled off all or at least many of the Philip

00:35:13.440 | K. Dick books that became big science fiction movies. Total Recall, based on Philip K. Dick.

00:35:21.360 | We Can Remember for Your Wholesale is the name of the book. Blade Runner

00:35:25.120 | is based on Do Androids Dream of Electric Sheep? Minority Port. And there was an Amazon series,

00:35:32.400 | when streaming first got big, called Man in the High Castle, that was based on a Philip K. Dick

00:35:37.920 | story of what happens if Japan won World War II and America lost? What does the world look like?

00:35:44.080 | And you know, he is one of those people that loves that sort of stuff.

00:35:48.560 | That sort of conversation is what makes that format so much fun.

00:35:54.960 | Yeah. I didn't realize the movie thing was a science fiction. That's great. I love Minority

00:35:58.880 | Port. One thing I was going to say there, just quickly to Brendan, is he said journalist there.

00:36:04.320 | I think that there's a distinction here between like blogging and journalism, right? Journalism

00:36:08.640 | is kind of the opposite of what you're talking about, where you're told this is what we need

00:36:12.080 | you to write about. This is the hot topic this week. You guys can write about whatever you want.

00:36:16.160 | That's part of the beauty. The people that work for Bloomberg and the Wall Street Journal and

00:36:20.400 | Financial Times, these people went to journal of the school in those cases, or they were so...

00:36:24.720 | Yeah, you're right. That's a totally different thing.

00:36:26.320 | There's a big difference between opinion and commentary and actually reporting what happened,

00:36:33.120 | actually reporting the news. When I had the Washington Post finance column and when I

00:36:37.680 | write for Bloomberg, it's clear that this is my opinion. And in fact, like when I broke some news

00:36:45.200 | about the bonuses with Bill Gross and PIMCO, even the way they did it, they brought in Mary Childs

00:36:54.080 | to do the story on Bill Gross and I did the opinion piece about why are you paying somebody

00:37:00.800 | $300 million annual bonus seems a little excessive for managing fixed income.

00:37:07.120 | Do you have any news to break today?

00:37:08.480 | The only news I could break is as soon as you said the mostly sort of efficient market,

00:37:16.400 | that was the title of one of my first viral posts. And I went back and looked at it and

00:37:24.800 | embarrassingly, it's 2004, the mostly kind of sort of efficient market. So I don't know if that's

00:37:32.800 | news or nostalgia, but it's just hilarious. I was a junior in high school.

00:37:37.440 | Whatever's old is new again, it just circles around.

00:37:40.800 | I graduated college that year. Okay. Thanks to Barry for joining us. Love his stories as always.

00:37:45.520 | Remember, email us if you have a question, askthecompoundshow@gmail.com.

00:37:49.520 | Leave us a review, hit the subscribe and like button. If you have any comments on YouTube,

00:37:53.840 | thanks as always to everyone who showed up live. We always appreciate your comments.

00:37:57.200 | And we'll be back. I'm gone next week on spring break. We'll be back. We'll still be here though

00:38:02.000 | with a special episode. Surprise show. See you next time. See you everyone. Thanks, Barry.

00:38:19.200 | [Music]

Will AI Replace Financial Advisors?

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