In their latest episode of the VALUE: After Hours Podcast, Tobias Carlisle, Jake Taylor, and Barry Ritholz discuss:
- Barry Ritholtz: From Blogfather to Podcast Pro
- How Not to Invest: The Making of Barry’s New Book
- The Belfer Family Tragedy: Enron, Madoff, FTX
- The Real Cost of Bernie Madoff: It Wasn’t the Money
- Billion-Dollar Advisors, Underperforming Portfolios
- Fiduciary Failures and the Problem with Finance
- Panic Selling, Risk Off, and Behavioral Finance
- High-Frequency Trading and The Vanguard Effect
- Jake’s Veggies: Trophic Cascades and Tariff Lessons
- Tariffs, Trump, and Market Reaction
You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:
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Transcript
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Barry Ritholtz: From Blogfather to Podcast Pro
Tobias: And we are live. I’m Tobias Carlisle. This is Value: After Hours. Joined as always by my cohost, Jake Taylor. Our special guest today, he needs no introduction, but we’re going to give him one anyway, the great Barry Ritholtz.
Barry, I’m just going to read out what you’re currently doing, because I don’t want to skip any of these. You’re the cofounder, chairman, chief investment officer of Ritholtz Wealth Management. You’re the blog father, because you created The [Jake crosstalk] Big Picture, one of the first weblogs. You’re also the creator and host of Masters in Business, the longest running and most popular podcast on Bloomberg Radio. It’s fantastic. Welcome to the show.
Barry: Well, thank you so much for having me.
Jake: Yeah, it’s great to have you on, Barry. I remember reading The Big Picture way back in the day and before I knew anything at all. So, it was really helpful to– You were always had really good insights consistently, yeah and then what you’ve done with the podcast. I mean, I catch a lot of those because it’s– You ask really good questions and then you’re smart enough to shut up and let the guest answer them, which [chuckles] sometimes we’re okay at that too, but maybe not always.
Barry: See, you’re listening to after I got better at it. The first year, pretty unlistenable. [Jake laughs] It’s me just caffeine and adrenaline, and I have a list of questions and I’m just so puppy dog excited about going through it. The head of radio pulled me aside once and said “So, we know you’re new to radio. But when a guest tells you he’s murdered his wife, don’t just go to the next question on your guest.
Jake: Yeah.
Barry: -Ask him, how did you kill her? Why did you kill her? How did you get away with it? What motivated you? How come nobody caught you until now? And tell us about your emerging market small cap value funds” is the wrong question to follow up with.”
Jake: That’s probably why he killed his wife though it was underperforming so badly. [laughs]
Barry: Right. I don’t know if that’s a legitimate defense for murder emerging market small cap value, but it could be a legitimate-
Jake: Insanity
Barry: -claim for insanity. Exactly.
Tobias: Yeah [Jake laughs] Sorry to step in, Jake. Did Barry notice– [crosstalk]
Barry: No, no, you were right there. It was obvious.
Tobias: Barry, we’ve got your brand-new book and I’m going to try and hold it in front of myself, so it actually appears and doesn’t– No, it’s not going to work.
Barry: Let’s see if I can do that.
Jake: Yeah.
Tobias: There we go.
Barry: How Not to Invest.
Tobias: How Not to Invest.
Barry: There you go. The ideas, numbers, and advice that destroy wealth―and how to avoid them I still have to double check the subhead, because that went back and forth through a whole bunch of iterations.
Tobias: No doubt. No doubt.
Barry: I’m happy with the way the final cover came out. It’s been quite a ride.
Tobias: Great title. Why choose that frame as the theme for the book?
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How Not to Invest: The Making of Barry’s New Book
Barry: So, Bailout Nation was about 15 years ago. And truth be told, we all get busy. Writing a book is a lot of work. I mean, writing a decent book is a lot of work. Anybody can just crank out a half ass book as we can see on the Amazon bookshelves.
Jake: [laughs]
Barry: But I didn’t want to phone it in. I didn’t want to do a lightweight book. Right around 2013, we had just launched the new firm and a bunch of publishers had said, “Hey, it’s been a few years since Bailout Nation and then the paperback. How about another book?” I’m busy. And besides, there are all these books telling people what to do. Most people are still pretty crappy investors. So, that went on for about, I don’t know, seven, eight years.
During the pandemic, I found myself with a little extra time. Around then, Morgan Housel’s book, The Psychology of Money came out. I know Morgan for 10, 15 years. He started nagging me, “Listen, it’s really easy. You have all this other published work [Tobias laughs] and you just string it together. [Jake laughs] It’s not that much work. Look at The Psychology of Money, that book took me two weeks to write,” all of which was total bullshit.
[laughter]But when everything reopened, and I came back home after a vacation and just started sifting through, all right, here are the columns I did at the Washington Post and at Bloomberg. Here are the quarterly calls I’ve done for clients and the various notes about different topics.
I just started, I don’t know if your listeners will be able to see this, but I’m reaching for these. I just started writing on 3×5 index cards all of these different topic ideas. I have a giant bulletin and board on my wall in the desk in the office. I just started putting stuff up there. It before long, you start moving stuff around. I usually work on a computer, but sometimes just having it where you could touch it and feel it changes the creative thought process. And man, a lot of these things just fell neatly into bad ideas, bad numbers, bad behavior.
Once you break the world down to those three things– I don’t even know if I could think of a fourth or a fifth topic. Bad ideas are, here’s all the crap that we think, we believe, we talk about, we read, we listen to that are bad. And then, numbers are just more specifically, and this is what that looks like mathematically. That’s a different type of bad idea. And then, those two things lead to our actions, our behavior. God damn if there aren’t a lot of really bad behavior.
By the way, I throw a lot of shade at a lot of people in the book for bad ideas and bad numbers, and especially bad behavior, included in that list is myself. I frequently own up to some really boneheaded investments, trades, missed opportunities I’ve made. We seem to as nice as it is to let someone else pay the tuition, pay for the tuition on a lesson, sometimes the lessons that we experience firsthand. Put your hand on that hot stove, you’re very unlikely to do it again, sometimes for the right reason, sometimes for the wrong reason. So, a lot of my really dumb behavior is in the book as well.
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The Belfer Family Tragedy: Enron, Madoff, FTX
Tobias: One of the stories that you mentioned– You have a few great stories in there, but one of the ones is the billionaire family that they invested in Enron, Bernie Madoff and FTX. Will you take us through that one?
Barry: So, a buddy of mine works for– I forgot which of the many shows, conferences, etc., out there. He had asked me, “Hey, you want to come down and present to a group of a thousand high net worth investors?” I had been using a previous presentation I thought was getting a little old after the pandemic. I said to him, “Look, I’m working on this new presentation called How to Avoid Financial Disaster. There was an F-bomb in there which didn’t work for them, so we had to pull that out. And I said, “If you guys don’t mind being the guinea pig, sure, I’m happy to come down and tell the story.”
There had been a Financial Times article about the Belfer’s, this lovely family, who the father had come to New York from Poland, and halfway across the ocean, the Nazis invaded Poland. So, suddenly, he arrives in New York, the dollars in his pockets are worthless, and just builds an amazing business. It’s just spectacular. Started out as down sales, and then they added like feathers and down, eventually builds it up gets the contract for the army. It’s a whole crazy story about that.
Then they start with foam rubber. Foam rubber uses oil. He opens an oil company. Like one success after another. There’s a giant wing, the north wing of the Metropolitan Museum of Art, New York, which is just an immense, immense museum. If you ever go in the north wing, the sculpture garden, there’s an Egyptian pyramid one end of it and all these– That’s the Belfer Egyptian. That’s a Belfer statue garden. It’s insane. They just donated all this money to Einstein School of Medicine. And just like an endless array of–
So, I’m telling the story, because it really points out the three things that you– Whether you’re wealthy or very wealthy or middle class, hey, you shouldn’t manage your own money unless you know what you’re doing. And if you’re going to manage your own money, avoid these mistakes. If you give your money to somebody else, well, make sure they’re worthy of your trust and a fiduciary on your behalf. And lastly, if you’re going to pour money into some newfangled thing, Why do you want to be the– what’s the old joke, the second mouse gets the cheese in the mousetrap? You don’t need to be the first guy.
Tobias: Pioneer.
Barry: So, I start telling the story about– So, the foam rubber company was Belfer Petroleum, which got sold to this company, which got sold to that company. Eventually, Belfer Petroleum is bought by Houston Oil and Gas. The son, I think his name was Robert, now becomes on the board of directors of Houston Oil and Gas.
This is in the 1980s. The company does great for like 10, 15 years. You may know Houston Oil and Gas better by its modern name Enron. By the time Enron peaks, the Belfer family has $2 billion worth of Enron stock. He just thinks it’s a bad look to sell at the first sign of trouble, so he runs the $2 billion down to zero. New York Times does a whole piece, he feels stupid, blah, blah, blah. And so, maybe we shouldn’t be doing this ourselves. Let’s get some help.
So, a Jewish family in finance, active in philanthropy. Hey, guess who runs in those circles? This guy, Bernie Madoff. And so, they roll the money into him. I recall the first time, like it hadn’t been widely publicized. There was that little story in the FT.
Look, I read papers all around the world. I don’t think a lot of Americans are reading Der Spiegel, or Le Monde, or The Sunday Times or The Financial Times. So, I can feel the awning– I am losing the audience. And I have to tell you, I’m loving it because I know what’s coming up. I’m telling the story and I could just tell they don’t believe a word of this. And so, I go over through the Bernie Madoff thing, and then after Madoff blows up, hey, maybe this whole equity thing is not for us. Let’s try a different thing. They roll into Sam Bankman-Fried and FTX.
There’s loud murmurs throughout the crowd, like people are talking amongst themselves. And so, I just let it run [chuckles] and then I say, “Right about now, you folks are saying, I don’t know who the fuck this Ritholtz guy is, but man, is he full of shit.” [Jake laughs] Next slide is The Financial Times, The New York Post, The Wall Street Journal, the photos of all three stories.
The room just erupts. People lose their minds. And so, around that time, I’m like, “This would make a really good chapter in a book.” I think that’s the longest chapter in the book. But it just goes to show you– We’re always so embarrassed about our mistakes. First of all, the Belfer’s are just fine. Let me just let your– [crosstalk]
Jake: What are they in now? Because I want to know– Make sure I’m staying clear.
[laughter]Barry: Well, here’s the fascinating thing. The Bernie Madoff recovery was about 96%. By coincidence, the special master for the Madoff recovery was the special master in the Enron bankruptcy. So, small world. “You again?” I can imagine him seeing the Belfer family, “Wait, you’re in both of these?” And then the recovery for FTX is about 118%.
As much as Michael Lewis got slacked for going infinite, it turned out he was more or less right. They weren’t stealing. They were doing a lot of dumb things. They were commingling funds. Lots of shit the FTX did was either ill-advised or illegal. But they weren’t just ripping people off. Maybe they were ripping people off, but they didn’t take the money and go out and buy islands and jets. All the money was recovered. They also got lucky to a large degree. Bitcoin recovered.
Jake: That’s facts. Yeah.
Barry: Some of their AI investments did well. They’re still finding accounts. There’s an argument that Lewis made that is not wrong, that whether he is guilty of a crime or not, clearly, this was a bunch of kids that had no business. There was no CFO. There were no accountants. There were no adult supervision with tens of billions of dollars. Like, they lost track of hundreds of millions of dollars.
So, yeah, I’m going to say, he did a bunch of stuff that certainly in the United States was illegal. I don’t know if it was illegal in the Bahamas, or Bermuda or wherever the hell he was. But so much stupid stuff. Commingling funds and allowing their hedge fund to trade against clients. In the US, everything he did was certainly criminal in a lot of ways.
Overseas, I think that that’s the argument Lewis was making.
Anyway, so, the lessons that you see, we all are afraid to say, “I don’t know.” We frequently lack humility. Wall Street is very much a fake it till you make it kind of place. Back in the day when the big shops used to do training, it would be a year of you’re in junior investment advisory training, and it’s a week of modern portfolio theory and building a bond ladder and asset allocation, and then it’s 51 weeks of essentially sales training. And that sales training is primarily project self-confidence, act like you’ve been there before, win over the customer through your superior knowledge.
Like, to me, when someone asks the question, “You don’t know the correct answer is?” “I don’t know, but I know exactly where I can get that answer. And let me speak to the person who’s the expert in that space, and I’ll circle back with you.” That was frowned on for the past 50 years. Here’s the answer. Hopefully, you’re not blowing the guy up with your answer. So, humility and just admitting, “Hey, I don’t know,” it goes a long way.
You see that in, unfortunately, the Belfer’s. Even when they sought help, it didn’t go about it in the greatest way. Before the book published, I reached out to them, “Hey, I’d like to have you check a chapter this and that,” through the contact at the foundation. Nobody ever got back to me. I think I got it right primarily through public filings and through a variety of different newspaper articles and stuff. Kind of fascinating story.
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The Real Cost of Bernie Madoff: It Wasn’t the Money
Barry: To me, the big takeaway from Enron, Madoff and FTX, what was surprising in that chapter was it wasn’t that Bernie Madoff stole money, which is a surprising thing to say, because people got back 96% of their money that they had given him. What Bernie Madoff stole was time. Kind of an interesting thought.
If you gave Bernie Madoff a million dollars in 1990 and you got back $960,000, what’s a million dollars compounded for 35 years at about 10% a year? Hey, he pretty much ripped you off of $10 million, not $40,000. It was all that time and compounding. That was like a big shocker that you discover as you’re writing out all these things, Oh, he didn’t steal money. He stole time. You could always make more money. You can’t get more time.
Tobias: I’m going to come back to the story about the advisors who went on the big coffee adventure. But let me just give a shoutout to– Petah Tikva, Israel. What’s up? Winter Park, Florida. Valparaíso. How are you, Mac? Tampa, Florida. Lausanne, Switzerland. Toronto. Bendigo, Victoria. Early stuff for you. [chuckles] Tallahassee. Waterloo. Halingskarvet, Norway. Andhra Pradesh, India. San Diego. Beacon, New York. Jackson Hole. Mendocino. Cincinnati. Zurich, Scotland. Antwerp. Katowice.
Barry: Wow, you guys on global.
Tobias: Surbiton. Salzburg. Fallbrook, California. Ullervad, Sweden. Bucharest. Philly. What’s up? Gerrards Cross in the mean streets. Yeah, good spread. Thanks for that, guys. We love having you here.
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Billion-Dollar Advisors, Underperforming Portfolios
Barry, one of the other favorite stories that I had in there as a massive coffee drinker and lover, and the same thoughts cross my mind too. If I could find some wealthy family to back me into some sort of coffee roll up, let me know. [Barry laughs] The advisors did very well. The family, not so much. Do you want to tell that story?
Barry: Yeah. It’s funny what sneaks by during the dog days of summer sometimes these articles come out and you miss them. There was this big Bloomberg story about a family. They’re German, like generations of German chemical industrialists that survived both wars and built a small fortune. The problem is it should have been a large fortune. The headline that blew my mind was they have two advisors for 20 something years. Their advisors became billionaires. Not through their side investments, not through having hundreds of billions of dollars in assets that they’re charging a fee.
One family, these guys ran the family office and each managed to capture a billion dollars apiece while at the same time wildly underperforming both the index and the benchmark. So, I don’t know why they felt entitled to a billion dollars other than just having the sheer chutzpah to take that much in fees. “Hey, how do we do this year?” “We underperformed the S&P 500 by 400 basis points. That’s got to be worth $100 million, line it up.” [Jake chuckles] Like, stop and think about who–
I’ll tell you a funny story that didn’t make it into this book, but it was bumped out by this story, but that story led directly to this story. A bunch of years ago, I presented– It was right after Bailout Nation. My deck of the moment was, “This is your brain on stocks.” I gave a presentation to TIGER 21. I love asking people in a crowd questions. Everybody thinks they know the answers, “So, quick question. How’s your portfolio done this year? Where are you? How many of you know?” All these hands go up.
Like, “Put your hands down. You have no idea how your portfolio did. Let me ask you an easier question. How have you done relative to your benchmark in relative to the index?” 80% of the hands gone up. “No, put your hands down. You don’t know. Now, final question. Net of fees, taxes, everything. Would you have been better off being in an index fund or in your broadly diversified assortment of privates, hedge funds, venture capital?” Now, some people come up to me and say, “I’m in D.E Shaw. Should I sell?” And my answer is always, “No. D.E. Shaw shooting the lights out.” Or, Point72 or millennium or Citadel or especially their core funds.
If you’re in Renaissance technology and you’re not in the medallion, it really doesn’t matter, That’s the money maker. But hey, if you’re in a top decile fund and they’re shooting the lights out, it’s worth it. But Sturgeon’s law, 90% of everything is crap. So, [Tobias laughs] 90% of hedge funds, private equity, venture funds, it’s a lot of agita, it’s a lot of additional tax filings, K1s, etc., they really have to do great to be worth beating that.
So, I do this whole presentation and I explain, “You don’t know what you own, you don’t know how well it’s done, you don’t know how well it’s done relative to the benchmark and you don’t know how well it’s done, net of fees and taxes.” And so afterwards, a bunch of people come up to me, “You’re wrong, blah, blah, blah, give me your card. I’ll prove it to you.” [Jake laughs]
I am not exaggerating. I got 10 out of 10 subsequent emails was, “Holy shit, you were right. I had no idea.” Because you get these cheery letters talking about, “Here’s what we did this quarter here, this worked out well and this sector is working.” It’s never quite the complete net-net picture. And so, everybody just believes, the cheerful chatter and the conference calls as opposed to looking at the bottom line. So, that was the original version of that chapter.
And then, when I stumbled across that story, I want to say it was summer of 2024 in Bloomberg, it’s like, “Oh, my God, this is the ultimate example of people not knowing how well they’re doing, not knowing what they’re paying in fees, not knowing what the benchmark should be.” You would think if you have a few billion dollars, in this case, it was 15, it should have been 35, back of the envelope math that Bloomberg calculated. Had it just been very conservative, modest 60/40 portfolio, it would have more than doubled from what the performance was.
You would think you would pay close attention to it. In the past, we’ve reviewed portfolios for clients who have a billion dollars, or prospective clients, a billion dollars at some of the biggest firms in the world. They genuinely don’t know what they own. No one’s really explained it, because it’s not a fiduciary relationship. It’s a sales pitch. You’re shocked to see that on $500 million, some people are paying 1%, a billion and a half dollars. A 1% fee. And in a lot of these giant portfolios that we’ve reviewed, billion, $3 billion, $5 billion, half of it is privates that are very expensive and coincidentally house product.
So, come for the high fees, stay for the underperformance. That stuff makes me crazy. That comes out, I hope, in the book also. So, if there’s ever a sequel, that Tiger 21 meeting will definitely get a chapter.
Tobias: The coffee advisors, how did they get away with that? They framed it as some private equity. Because they bought Keurig and they bought a few other things, so they could argue that there’s no immediate mark to compare it against?
Barry: So, the Bloomberg article takes pains to say, there is no allegations of wrongdoing. As far as we can tell, we don’t see anything assuming that all these fees were disclosed. I don’t know if these were consulting fees, or whatever or side deals. But as an attorney, I went to law school, practice for a few years. There’s a Latin phrase, res ipsa loquitur, which translates roughly as, the thing speaks for itself.
So, if you’re managing somebody’s $15 billion and the standard fee on portfolio that size is 10 bips, 15 bips– By the way, anyone who has a billion dollars or $10 billion and you’re paying somebody 1% to underperform, please reach out to my office. We’ll save you-
Jake: We’ll do it for half of that.
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Fiduciary Failures and the Problem with Finance
Barry: -hundreds of million– Right. [Tobias laughs] We will do it for a twentieth of it and we’ll be thrilled to death to have them as clients. So, essentially, Bloomberg really took care to say, there are no allegations of wrongdoing. Okay, so there might not be technical allegations of wrongdoing. But if you have a $15 billion client and you’ve somehow managed to squeeze a billion dollars in fees times two, I think it’s safe to say that you’re probably not a fiduciary, that you’re probably not working in the best interests of the clients. This is what’s always astonished me about finance, in general.
Look, your lawyer has an obligation to zealously represent you and put your interest first. As does your accountant. Your doctor takes a Hippocratic oath, “First thing above all else is do no harm.” But why is it that people think it’s okay that your relationship with the person managing your family’s wealth, your retirement money, the money you’re saving for your kid’s college, that relationship is the same as the guy trying to sell you a used Honda Accord? That makes no sense in the world.
And so, the finance industry has fought this tooth and nail, because truth be told, not being a fiduciary is really fucking profitable. That’s how maybe a billion dollars in fees on a $15 billion household is an extreme. But various versions of that, they exist throughout the world.
Jake: You might be insulting the used car salesman.
Barry: [laughs] I know a lot of really good used car salesmen too. They’re looking for repeat business.
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Panic Selling, Risk Off, and Behavioral Finance
Tobias: Barry, I’ve got a few stats to throw at you before my next question. These are current stats. So, the consolidated equity positioning current percentile 2% since 2010. So, this just means that everybody’s sold out of their equities. Systematic equity positioning in the fourth percentile since 2010. Extreme underexposure. Vol control funds adjust equity exposure based on volatility. Equity allocations now in the first percentile since 2010.
This is after we’ve had the giant drawdown. So, one of the things that you talk about in the book is panic selling. Pros clearly aren’t immune to it. If anything retail may do less just because they’re not paying as much attention, they don’t know as much. But what cycles–[crosstalk]
Jake: Are you saying that everyone is risk off right now?
Tobias: Yeah. Everybody–
Jake: Is that what those numbers are saying?
Tobias: Hedge funds are risk off, vol funds are risk off. Everybody’s risk off, because–
Barry: Not everybody. Because if you look at the flows from Vanguard and BlackRock– So, there’s really clever thing they do, they compare SPY and VUG, the Vanguard S&P 500 and the BlackRock iShares version of it. You frequently see outflows in SPY and inflows into Vanguard and BlackRock, which tends to be more of a mom-and-pop type of shop. So, that’s one thing.
The other thing is, and this is important. I interviewed Jim Chanos 10 years ago. Maybe 15 years ago. He pointed out, when he launched his hedge fund in the 1980s, there was a couple of hundred hedge funds, they all generated alpha. Now, there’s 11,000 hedge funds. Pretty much those same original couple hundred hedge funds are the alpha generators. Maybe he’s being a little tight.
So, let’s say it’s a thousand hedge funds. When you go back to the pre-Great Financial Crisis era, there was far fewer funds, far more concentration of talent at hedge funds. And you also ended up with a lot of good information in the pre-Reg FD days. I think Reg FD has done enormous damage to hedge fund returns, because– Hey, Jim Cramer talks about this in his first book. I’m trying to remember the name–
Tobias: Street Addict?
Barry: Street Addict. That’s right. My head, I was thinking Wall Street Junkie. Street Addict, where he essentially talks about all the stuff– And good for him for his confessional. He talks about all this stuff that they used to get away with that you couldn’t do any of it today. You couldn’t hang out in the bathroom at a conference, and pretend to be a CEO and talk to another CEO who’s throwing up, because he has to know, “I got to go now, go out and lie to these assholes and tell them we’re going to hit our numbers.” Meanwhile, this guy just has food poisoning.
So, the CEO who’s talking to him thinks, whatever, I read the book 100 years ago and I’m sure I’m getting that wrong. But that’s one of the things that’s so fascinating. It’s not just risk off, but that they really– So, the quants have done pretty well. The emerging managers, not emerging markets, emerging managers who identify these small inefficiencies and can mine it and outperform. But that doesn’t scale up to tens of billions of dollars. And so, we’ve had this really unusual shift in what’s been going on with that. I don’t know if it’s risk off for everybody. I know who generates alpha is really, really specific. And it’s not the same as it was 25 years ago.
Jake: You think that the pod shops have [clears throat] generally shorten the time horizon, that most price movements are more related to that now, just because there’s so much firepower there?
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High-Frequency Trading and The Vanguard Effect
Barry: That’s a really good question. I haven’t the slightest idea. It makes intuitive sense, but I think you would need to speak to someone who’s a market structure expert who can identify that. One of the things that I’ve changed my mind over the years about was the evils of high frequency trading. Flash Boys and all the Flash Crash and Michael Lewis’s book, they all paint a really negative picture.
I’ll never forget. I asked Bill McNabb, CEO of Vanguard. He was a guest multiple times on the podcast. He shocked me, because Vanguard is all about saving fees. We don’t care what it takes. Wherever we could cut costs, we’re– He’s like high frequency trading has been a godsend for us. We can execute all these orders. The spreads have tightened. It is much cheaper. Our trading costs have gone down.
You put that into context with the Eric Balchunas chapter called the Vanguard Effect. His book, The Bogle Effect. He wrote an article in 2016 essentially citing that Vanguard’s focus on low fees have saved investors a trillion dollars. Some combination of Vanguard clients and then everybody else forced to compete with them and fee pressure. That was 2016, it was a trillion. It’s probably over $2 trillion now.
So, when the head of Vanguard Group, when the CEO, now chairman emeritus says, “This has been a huge money saver for us in our closet. And our clients, I have to go back and rethink, hey, maybe were all up in arms and this is just the natural evolution of technology and automated trading.” It’s not going to be the guys standing at the post on the floor of the exchange anymore. What I grew up mesmerized by, look at trading places.
Jake: Yeah.
Barry: It’s not just that it’s funny and sort of, but not exactly true. That’s a slice of history even when that was true, all that stuff is long gone. I know there’s still some open outcry and hand signals in certain markets, but not like the old days.
Jake: I’d be curious if that liquidity provider argument for the algo high speed trading. If we went through another grinding bear market, let’s say it looked like 2000, 2002, 2003, the argument has always been like, “Well, these guys will pull all of their bids when things are just going down.” And that’s when you really kind of want that liquidity. It might be regime specific. And so, maybe the argument’s not quite as good if we saw a bear market.
Barry: Well, what happened in 2020 Q1 during the pandemic, 17 trading days, down 34% and then a rip-roaring rally that we had clients calling in constantly, “Hey, has the market lost its mind?” “I don’t think so. It’s market cap weighted.” “Yeah, but all these stores have closed in my neighborhood.” “Well, their market cap is tiny. They’re not affecting the index.”
Jake: Yeah.
Barry: So, Apple and Amazon and Microsoft, that moves the index. The local dry cleaner and restaurant– There’s a chapter that goes over this and talks about, “Hey, get rid of all the travel companies, the hotels, the airlines. They’re a rounding error.”
Jake: Yeah, they are not–
Barry: I think it was the worst 30 sectors and it was barely 6% of the S&P 500. They’re down 40%, 50%, 60%. And then, you take tech and it’s just screaming and market cap just drags everybody else. So, the index is market cap weighted, the world is experience weighted. So, you drive around and you see all these things closed, you think, how are we ever going to get out of this? That’s your personal economy. That’s not the market economy.
Tobias: Yeah, I was shocked at how small the airlines were when we went through 2020. I had a look at the market caps and they were like $30 billion to $50 billion, which was a quarter of cash flow from Google.
Jake: Buffet’s got it in the couch cushions.
[laughter]Barry: Even the big oil companies which we all see, because they’re the only product we consume that advertises its wares on 20-foot large signs 30 feet, 40 feet in the air. Nobody else gets to do that every other corner. And so, you would think, wasn’t ExxonMobil one of the biggest companies in the world? All of the oil companies, they’re still substantial but they’re not as substantial as they once were.
Jake: They’re not trillion-dollar companies.
Tobias: JT, it’s the top of the hour, a little bit past. You want to give us your veggies [crosstalk] folks?
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Jake’s Veggies: Trophic Cascades and Tariff Lessons
Jake: [chuckles] All right. We need to do a little shout out to this gentleman, Brian, that is a private equity guy that Toby met with in Japan. And unfortunately, I missed the meeting. But he relayed a veggies topic Toby which then got to me. It’s this concept called trophic cascades. That’s what we’ll be covering today.
So, first, trophic is derived from the Greek word for nourishment or food. And so, the trophic level in biology is basically each step in the food chain or the food web. So, first, a little bit of history lesson. In the early 20th century, wolves were deliberately eradicated from Yellowstone National Park through very aggressive hunting and trapping and poisoning. They were seen as a threat to livestock, and game and human safety. And so, we all said, “You got to go, wolves.”
So, by 1926, these targeted efforts had eliminated the last known pack from Yellowstone. As always, the most important question you should almost always be asking is, and then what? And in this case, in the wolves’ absence, the elk population exploded, because there wasn’t a predator to keep them under wraps. And so, they were grazing heavily on all these young trees. And then, these unchecked herbivores then led to the decline of many plant species which then affected other species. Beavers had less wood to harvest for their dam building. Birds lost their nesting grounds. River banks actually eroded, because there was deep rooted vegetation to hold the riverbank in place. And so, the literal shape of the topography of Yellowstone changed from this trophic cascade.
So, let’s fast forward a little bit. In the mid-1990s, these gray wolves were reintroduced after being extinct for decades. And then, of course, what happens next? There’s fewer elk, and then the elk actually started avoiding open meadows, like they were afraid to go in open meadows again, which then allowed willow trees to grow back. The beavers returned. The rivers literally changed course again, because their banks were stable and the entire landscape reshaped itself from a single top-level intervention. So, the key insight here is that ecosystems are deeply interconnected. Small changes at the top can create wide reaching effects that cascade throughout the entire system.
And of course, this is a powerful metaphor that we might be able to apply somewhere else. And so, I’m going to get over my skis a bit. But we’re going to see if we can relate some of this to what’s been the big topic du jour lately, which is tariffs. So, the US has a long history of tariff use, notably during the 1930s with the Smoot-Hawley Tariff Act. This well intended piece of legislature was meant to protect American jobs during the Great Depression. It dramatically raised tariffs on some 20,000 imported goods. And of course, and then what? It sparked retaliatory tariffs worldwide. Rather than boosting the economy, these tariffs contributed to a deeper global downturn and basically another trophic cascade in action.
So, let’s fast forward to then Trump’s first presidency and the US imposed tariffs on China in 2018, I think is when they went to effect. So, let’s use the analogy here of the tariffs as our wolves. What happens when we then release them back into the economic wild? The first order effects are the most obvious, tariffs make imported goods more expensive. It’s the equivalent to basically a consumption tax, but on imported goods specifically. And the cost of those of US imports from China naturally shot up.
So, to give you some sense, tariffs of 10% to 25% depending on the product were placed on over $360 billion worth of Chinese goods between 2018 and 2020. The US importers then paid about $66 billion more in duties during that span. It’s not entirely clear how much of that cost was absorbed by Chinese firms versus how much was passed on to American companies and consumers.
But despite this protectionist intent, US manufacturing employment, which was the whole point of that, barely budged. According to the Peterson Institute, it was some 6,000 net new manufacturing jobs were created. And yes, of course, these tariffs hit Chinese exporters, yes, but they also bounce back onto American soil. It’s always these unintended consequences.
Second order effects are the behavioral responses here. The prey animals change how they graze, the shrubs grow back. And the second order effects here were workaround strategies that a lot of companies started doing. So, companies like Nike, Apple, Hasbro, they all shifted part of their supply chains out of China. This trade war turned Vietnam basically into an export powerhouse, almost overnight. And of course, then China retaliated with their own protectionist sentiments, which, not to say they’re the enemy, but there’s that saying that the enemy has a say.
And so, in 2017, before the trade war, the US sold $12 billion worth of soybeans to China. The next year, after China imposed tariffs of their own, they that number went to just $3 billion, which is a 75% reduction. So, that actually wiped-out thousands of American farm jobs, and then the government stepped in with $20 billion of subsidies to help the farmers. So, basically, there’s all these unintended consequences.
Third order effects then are where things really start to get interesting, because the system changes on a bigger scale there, like structurally, policy realignments, strategic decisions that people and animals are start making. So, the trees start growing back, the beavers start building dams, the rivers stabilize. And in this case for the companies, if you guys remember, it was like China Plus One was theme of the time.
So, all these multinational firms went, “Yes, we’ll keep things in China. We’ll have a Chinese footprint, but we have to build somewhere else too.” 76% of firms surveyed by UBS in 2020 said that they were planning on keeping China, but also considering moving production outside. So, foreign direct investment at that time in China went down by 25%. But meanwhile in Southeast Asia, foreign direct investment went up $60 billion. It’s not just about dollars either. There’s also like trust and predictability and perception of risk that happens, that changes. Just as the deer became more fearful of open spaces after the wolves were back, companies fretted over their exposed supply chains.
So, basically, to sum this all up and put a bow on it, tariffs teach us that nothing happens in isolation. Just like the wolves, there are these effects that echo throughout the system long after they’re introduced. Economic ecosystems, just like natural ones, are very sensitive to intervention and it’s impossible basically to avoid unintended consequences, which in my mind, when I think about that, perhaps it’s a vote for more incrementalism and allowing the system to settle a little bit before you put the next phase on as opposed to just massive sweeping interventions that then create the very destabilizing to an ecosystem and then who knows where the hell you end up. So, there’s the veggies for today.
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Tariffs, Trump, and Market Reaction
Tobias: What do you think, Barry? There’s a few different directions we could go. One is from your book, Politics and Investing Don’t Mix and the other one is that you’ve seen gurus making predictions for a long time. What do you think?
Barry: So, a few thoughts and I’ll throw a execution, since we were talking about HFTs into this. So, first, there’s very few experts in tariffs, because the consensus for a century has been that tariffs are bad. It’s really hard to come up with an explanation that tariffs are good. So, it doesn’t matter what your politics are. You see this on the right, you see this on the left.
Tariffs interfere with our ability to trade freely around the globe. If you’re a Milton Friedman, no borders, open trade. I don’t agree with everything Milton Friedman believed, but it’s hard to argue that the post-World War II structure and global free trade dramatically benefited the United States.
We have some geographic benefits with a big ocean on either side, that at least pre-nuclear weapons was a giant safety net. We’re blessed with all sorts of natural resources. We have over the generations attracted the best and the brightest from around the world. So, the post-World War II order really benefited us dramatically. By the way, we saw the last time we did these global tariffs, The Smoot-Hawley 1930 version, didn’t work out too well.
I wrote a piece and I did this for a quarterly call for clients back in April 15th. What’s the best case, worst case and middle case scenarios of the tariffs? And the best-case scenario is take the president seriously, but not literally. He’s playing 3D chess, and this is all part of a negotiating deal. There’ll be all these side deals and blah, blah, blah. I’m rooting for that to happen.
I’m not sure it’s hard to tell how much control Bessent and Lutnick has it over him. But here’s the funny part of it. We took him seriously, but not literally. But here’s a guy who says, “Tariffs is the most beautiful word in the dictionary. Call me tariff man.” He’s been talking about tariffs for 40 years. And to some degree, it’s a failure of imagination that none of us, myself included, believe that anyone would completely up. And Pax Americana like, “Hey, this has worked out really well for us.”
Yeah, we have problems. We have wealth inequality and income inequality and we have poorest borders and we have an ongoing drug issue. I would argue that it’s a demand problem, not a supply problem, but hold that argument aside. The war on drugs has not really been very successful. But what’s fascinating to me about this is, let’s do a compare and contrast with the tariff policy introduction and how the Federal Reserve introduces a change interest rate regime.
So, if you just want to see a compare and contrast with here’s how the pros do it, “Hey, in a couple of months, we’re going to raise rates. By the way, we’re looking at, PCE. I know you guys focus on CPI, but we like core PCE. It’s four meetings away and then it’s three meetings away. Hey, we told you last meeting, here’s the dot plot. The dot plot has changed.” And then, hey–
Jake: Thinking about it.
Barry: Right. “And then, it’s two meetings away. And so, then all the Fed presidents fan out.” All right. It’s not quite a flood the zone strategy, but they go to the New York Economic Club and to the Chicago Club. I saw somebody speak at the Petroleum Club of Houston. I didn’t even know such a thing existed. But there are all these places and a dozen Fed Governors fan out. “And then, it’s coming next me. Here it comes.” Then there’s the meeting where they vote to raise rates. Then there’s the press conference where Jerome Powell plays tennis with reporters for an hour and just keeps answering questions. Then a month later, the minutes come out. The market gradually adjust to it. That’s one approach.
The other approach is, [Jake laughs] tariffs. “Hey, tariffs are here. Get your tariffs. Red hot tariffs.” The market just takes a giant shit, because we were told to take you seriously, but not literally. We should have taken you literally, but not seriously, that sort of thing.
We forget from the first administration, this is 47, from 45. They’re not polished and smooth the way Jerome Powell, smooth as glass. “Yeah, we’re going to raise rates 500 basis points, but it’s not going to be a surprise.” Had they just done that– What we were down 20%, 22% in 2022, something like that? Had they just dropped the bomb, we would have been cut in half. There’s a way to like, “Okay, brace yourself, Martha. Here it comes.” I think that skillset is missing from the folks that are running this administration.
Whether you agree with tariffs as a policy or not, and I’m not a fan, the thing that stands out is just how opaque this was to just big foot into the rose guard and say, “Here it is, global tariffs. By the way, we’re going to freeze every corporate executive and every family that’s planning on booking a vacation. Everyone’s going to be frozen until this shit all clears. And don’t be surprised if CapEx and investing in hiring slows.”
If all of these soft data points that we track that are noisy and unimportant, they start to become a hard data. We’re seeing it in consumer spending, you’re seeing it in FedEx’s guidance, you’re seeing it in Delta saying, “We’re seeing a big decrease in bookings going forward.” You’re seeing in a drop, 75% drop, in Canadians visiting the United States, booking travel to the United States. So, creating a lot of–
I know the president loves the attention and the mayhem and the turmoil. I don’t care if you’re a fan, or if you love him or hate him. That’s who he is. The question for us is, should that be the basis for your investments? I try and make the argument that, “Hey, if you’re retiring in 5 years, 10 years, 15 years, he’ll be a distant memory.” I don’t believe this third talk nonsense. He loves trolling the libs and they rise to the bait. It’s pretty like, why do you folks continue to respond to this? He’s a Twitter troll. Just stop. Can you be a little smarter than this?
My right-wing friends think I’m far left. My left-wing friends think I’m far right. I really think of myself as down the middle, at least, especially when it comes to analyzing markets and policies. So, I think that if you’re looking past, if you have a newborn baby and you’re putting money into in the US, the 529 accounts, that you could save tax free for college, hey, the kid’s not going to school for 15, 16 years. Don’t worry about it. You’ll be on the other side.
Now, there is a worst-case scenario where he plays Russian roulette with the American economy. Ben Hunt at Epsilon Theory wrote this piece about disrupting Pax Americana, and the end of foreign funding of our bonds and the end of the dollar as the global reserve currency. That’s a really, really bad outcome.
And if you want to get a sense of what the worst-case scenario looks like, just think about England after the British Empire ended. They went through a long period where they’re broke and– Brexit hasn’t helped them at all. So, there is a lot of risk and I don’t want to make light of it, but there’s a chart on ritholtz.com today that goes back a hundred years. There’s always a reason to sell.
Michael Batnick in my office put this together down. We’ve lived through worse stuff than this. If you just for a second think about how really bad some of the history that we’ve lived through and what some of the worst-case scenarios look like, we lived through the 1970s stagflation, we lived through World War II, we lived through the Kennedy Assassination, the Great Depression. You could go on and on to all the things that we’ve suffered.
I don’t think this is bad as the worst of those things, but it does feel a little reckless to me to say, “Hey, we’re going to take a $28 trillion economy and play Russian roulette with it.” That’s a lot of risk for– I put a 10% to 20% likelihood of the worst-case scenario. That’s Russian roulette. Spin the wheel. It’s a 15%, 16% probability. Do you really want to do that with the entire US Economy? So, that’s about as partisan as I get with it.
We have lots of problems. People are frustrated with the inability for it to be solved. I would point people to some of the more complicated aspects of this. Citizens United and the flow of money into politics has had a huge effect. I love the idea that every congressman should wear a jumpsuit [Jake laughs] like the race car drivers, so you could see exactly who owns them. I think that would be a great law. So, you could tell or–
Jake: Staple that one to the insider trading one and– [crosstalk]
Barry: That’s right. That’s right. Or, and I’m just spitballing here. Maybe we go back to the days where you can’t buy congressmen and senators and they’re not allowed. Maybe we publicly fund elections and stop allowing people to buy off elected representatives. I know that’s a little radical and crazy. It worked for a couple of hundred years. I don’t know why we moved away from it. Oh, that’s right, the Supreme Court is completely corrupt and has destroyed its own institutional reputation. Other than that, we’re fine.
Tobias: Aside from that, Mrs. Lincoln, how was the play?
Barry: Right. That’s right.
Jake: Yeah.
[laughter]Tobias: Barry, given that backdrop, and you’re the chief investment officer for Ritholtz, what are you suggesting to clients? Basically, it’s business is normal, because we’ve got a very long way to go, or are you making some sort of changes in the short term?
Barry: So, I’ll give you two specific answers to that. If you have a need for money in the next 12 months to 24 months, if you’re retiring into this, if for whatever reason you’re buying a house or a kid goes to school and this turmoil is making you nervous, that’s perfectly fair and legitimate. We would say maybe you have too much risk on if you really need to draw this money down. What we’d rather have you do is draw money down from the fixed income side of your portfolio. Tips have been performing pretty well as have more or less treasuries, other than that spike in the 30 year and the 10-year [chuckles] last week in rates.
So, if you’re uncomfortable at a 70/30 or 60/40, because you know you need this money, you want to make sure that you don’t do anything silly. You mentioned the study that showed 31% of people who panic out in markets never return to equities. And that study comes post-financial crisis. So, imagine panicking out January, February, March and then missing one of the greatest decades in market history.
Jake: That double dip, it’s coming. You just got to–
[laughter]Barry: We started talking about humility. Part of the reason the people who sell don’t go back in is they don’t want to admit they were wrong. They don’t want to say, “I was wrong.” When I was on the desk and anytime I put on a discretionary trade, I would write a little bit, a couple of notes about it, “Here’s where I’m getting in. Here’s where I’m buying it. Here’s my upside target, and here’s my stop loss.” When you’re objective and you’re not freaking out because down 10%, up 12%, down 6%, when you’re calm and rational, you can make those decisions. You just have to trust your earlier self to follow those rules.
I like to tell people, “You read the card on the back of the seat back in front of you while you’re waiting your turn to take off. Not when an engine flames out at 30,000ft. You’re probably not in the best state of mind to make good decisions then.” So, cut a deal with yourself. Write your own little contract with yourself. So, that’s one thing.
What we have found has been really successful in terms of managing clients. I talk about a cowboy account in the book. That’s obvious to scratch your itch when market’s going up. What scratches the itch when market’s going down? So, we set up a tactical portfolio we call Goaltender. It’s been running for about 10 years, 12 years.
If you read the little sales pitches on most tactical portfolios, those people are all trying to generate alpha. We’re not trying to generate alpha, we’re trying to generate beta, “Wait, what do you mean? How do you generate beta?” Well, the whole purpose of having a slug of your money in a tactical portfolio that uses a 10-month moving average to rotate out of the S&P or the NASDAQ 100 or the S&P midcaps is to more or less end up with what the market gives you. But since this is a relatively modest slug of your portfolio, and by dumb luck, and again, I’ve brought up luck a few times, we do this on a monthly basis, we look at the numbers March 31st, 2025 because we had broken the 10 month.
By the way, this doesn’t work with the 200 day and it doesn’t work with– I forgot what it was, was the 40 week because they’re too noisy. The 10 month gives very few signals. We got out of the S&P 500 in the goaltender portfolio and we rotated out of the NASDAQ 100 and that went into bonds. What that does is it creates, what I call, behavioral alpha. So, “Hey, we have a lot of money with those idiots Ritholtz. What are they doing?” “Well, on Monday they sold the S&P and they sold the NASDAQ and now we’re 15% or 10% or whatever it is below that.” “Okay, that was in the tactical portfolio?” “Yes.” “Okay. And hopefully, that’s in a qualified account, so we’re not paying taxes on it?” “Yes.”
So, the goal of that portfolio isn’t to outperform. It’s to let you use the rest of your money and just leave it alone. “Hey, we did something. You would be amazed. The bias action.” The action towards bias. Action bias means just do something anything. Make the pain stop. “Hey, we sold a little S&P and we sold a little NASDAQ.” “Fucking great. Thanks, I’ll talk to you in a month.” That’s what it’s supposed to be.
Meb Faber wrote this great paper looking at what’s the best sell signal for various asset classes. I want to say about 15 years ago, it got a bajillion downloads. It was just a simple 10 month moving average is pretty good. Now, there’s a tendency to be a little whippy. There’s also a tendency to get back in a little late if you’re using the 10-month. So, we came up with some clever ways to get back in earlier based on a variety of different factors. How fast it fell.
Breath depth, it doesn’t matter, you just want to get in before the 10 month gives you the buy signal, because that’s usually six months late. But the point of this is not to outperform. The point of this is to let people feel comfortable that we’ve done something and now I don’t have to worry about my real money. And that’s really important.
Tobias: Barry, we’re coming up on time. If folks want to get in contact with you, follow along with what you’re doing or buy the book, what’s the best way to go about doing those things?
Barry: Couple of places. The easy thing, hownottoinvestbook.com is a bunch of information about the book, a bunch of reviews and blurbs and links to buy it anywhere in the US or around the world. Obviously, you can go to Barnes & Noble, or Amazon, or Books-A-Million or any of your local bookstores is an option. You can find me at ritholtz.com and my research and writing. You can find my firm at ritholtzwealth.com. Google me, I’ll come up somewhere, LinkedIn, Twitter, BlueSky.
Jake: Not hard to find.
Barry: Yeah, I’m not ducking under my desk. I’m usually pretty easy to find.
Tobias: Barry Ritholtz, thanks very much. Jake, as always, a pleasure.
Jake: Thanks, Barry. Real pros pro. Good to have you.
Barry: Well, thank you so much for having me. This was a blast.
Tobias: See you, folks.
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