Talk Your Book: The 3 A's of the U.S. Economy

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0:39Wealth Management may maintain positions in the securities discussed in this podcast.

0:46Welcome to Animal Spirits, Michael and Ben. On today's show, we speak to Bill Mann, one of our favorite guests to have on, about the stock market. And I said something, you know, about the golden age of, what did I say, of what? Finance? Of asset prices? Golden age, yeah. Golden age of asset prices. Asset prices. At some point, this will end. And we'll enter a new cycle. And there'll be a recession and a bear market. And then that will end. And then there will be another bull cycle. And on and on we go. I say this all the time. Doesn't part of you just want to fast forward to be like, just get on with it already?

1:20Like, what is – are we still going to be doing this in 2029? Like having these same conversations? We could have said this thing in 2017. And we would have been like, geez, we still didn't get the comeuppance. And it's 2026 already. Yeah, I think a lot of newer listeners are acting as if these conversations about the length of the bull market is new. Like quite literally, it was getting longer than the tooth in 2016. That's what it felt like, of course. But the thing you said, like the golden age is going to go away. But our talk with Bill, he talked about how everything is just more financialized.

1:51Think about it. People are betting on words people will say in speeches now and stuff. And gambling and day trading, all this stuff. Like that financialization of our economy is not going away. That's only going to be continued to grow and grow and grow in everything that can be financialized in some capacity probably will in the years ahead. It already has been. Yeah. I also think like during these conversations, maybe we lose sight of the fact, even though we bring it up all the time, that it's, it's earnings and margins and that's it. Right. It's not like, it's not like, Oh, why are people, why is the stock market at a record high?

2:23Because earnings and margins are. Right. Right. And when earnings and margins dipped in 2022, guess what happened to the stock market? Got killed. And so that's it. So what's going to, if we switch it to like the business side of things, what's going to slow down earnings and margins? Probably AI overspend, right? Like all of these data centers that were just overbuilt. It's funny though, the thing that could take us down is the thing that's trying to increase margins even more, right? They're investing to make things for everyone, everyone, quote unquote, more efficient. So even if you get the comeuppance, the other side of it hopefully is technology that makes the margins improve even more.

3:07All right. The bull market lives on. We'll see. Listen, it's just the risk is always the same. The biggest risk is just a recession, like a nasty recession. That's the risk. And I guess you could say the longer this goes and the more the spending builds and builds, the harder that fall could be, even if it's kind of a mild recession. Yeah. Is this Howard Marks said this? Somebody said this. The worst loans are made in the best times. And so maybe that's what's happening today is there's too much debt and people are getting sloppy. And I don't know, maybe that's it. Who knows? Or 10 years from now, this is still going and people are still, when is it going to end?

3:45Who knows? Yeah, that too. All right, so here's our talk with Bill Mann. Bill is the chief investment strategist at Motley Fool Asset Management. Always a good discussion with him. Bill's got a great laugh. Guy likes to laugh. Funny guy, right? All right, so here's our talk with Bill.

4:02Bill, welcome back to the show. Great to see you guys. All right, so I like this concept you have. You're talking about how the biggest things that are driving the markets right now are the three A's, asset prices, AI, and the affluent consumer. And I want to start with asset prices because I think this is still a relatively new thing where the markets are just so much more important than they used to be in the past. And I talked about this a little bit because Andrew Ross Sorkin was talking about the 1929 stuff in his book, which is really good. But I said the biggest difference between now and then is just that the stock market just matters so much more, right?

4:35There's so many more people invested in the stock market. There's the 401k and IRAs and the Robinhood. And it's just it's easier than ever to invest. And there's just more people invested. I don't know, 60 % or something of the, of households. It works every time. 60 % of households have some ownership in the stock market. It's just more important than ever these days. And to your point, it's like a self-fulfilling prophecy where it's so much more important to household consumer spending and sentiment and how they feel about things. And that translates in the economy. So it's like some people say the stock market is not the economy, but in a lot of ways, it has a huge impact now, way bigger than it ever has before.

5:08So I'm just curious what your thoughts are on there. First of all, Michael, it's way too early for a Sex Panther reference. Never. Never. Yeah, it's an interesting point to describe the breadth of ownership and exposure to the stock market. I think it even goes beyond that. And you see venture capital getting involved in buying up houses and buying up veterinary practices. so much of our lives, whether we want to believe it or not, have become financialized. You can even take it into student loans. I mean, all of that is super, you know, it's got a lot of exposure to what's happening in the markets, what's happening in the credit markets.

5:54It didn't really used to be that way. And because of this, the level of asset values in this country, mainly the stock market and then the housing market, have just such a way of reflecting back into the economy in terms of current spending. And it's always been that way. The economy is ultimately at its core a game of confidence. But what gives you confidence? And it's not necessarily what people's salaries are. And it's definitely in the bottom 60 % of the economy here. you know, it's definitely not really related to what salaries are and what employment is. Bill, I was about to drop an incredible chart on your head.

6:44Not that you could see it. I was going to describe it, but damn it. I asked ChartKid for the wrong chart. All right. Here's what I was trying to ask for. And I think that what he did was, all right. So this morning I was listening to the CEO of PIMCO on an Odd Lots podcast. And they were talking about debt, obviously. And the Buffett indicator, which looks at debt to GDP, he said something like, what about like household assets as a percentage? Like compare debt to household assets because Americans are so much wealthier not than the government, but like maybe we're looking at the wrong inputs.

7:24So Matt, this chart is household debt as a percent of GDP, which I wanted to show household assets. But this just goes to like the bigger picture of what you were saying is that – and if this is like a generational top, I will hand up and apologize. Are we living in the golden times for like – because obviously, it doesn't feel like that in many ways. But just from the point of view of asset prices, is this the golden age of asset prices? I think you have to, and I always take a little bit of umbrage with like a debt to GDP number because one's basically a current account number and then one is long-lived.

8:03Assets is kind of the same thing, but it is very much true that a lot of spending comes from the confidence that comes from those overall asset values. And it does include your household assets, right? Like I think that there is a huge part of the population in this country, let's call it the top 10 % for sure, but probably the top 40 % that feels like they can go for quite a long time with a lower level of income because of the level of assets that they do have. So, yes, in terms of – I hate to call it a golden age because you can flip on the news and you see people are hurting. People are hurting at a lot of different levels of this economy.

8:50But I think that you can say that we have an optimized, financialized economy right now to see how many eyes I can get into a single sentence. Well, get into that. That's the other side of it. You talk about the affluent consumer. That's the opposite of the other people hurting. And I think the hard part for a lot of people in this economy is that if you look at all the stats going back to like post-World War II era, it was a huge growth in the middle class. And now the middle class has shrunk. But a lot of it is because people are moving up to the upper class. And so we're hollowing out the middle.

9:18So you have the low and the high. And I think that's the thing that really gets people. But you have this affluent consumer class and whatever you want to call it, the top 10 % or the top 20 or whatever it is, powering most of the consumption and their share is growing. So it's like, what can slow that down? That's the question. Because a lot of times it seems people say, you know, the, you know, stocks return to their rightful owners in a bear market. But usually that means the people with the money. So bear markets for a little bit, even playing field a little, but then it just, the people who have the money buy the stocks when they're down, and then it goes back up, and then they're fine.

9:52So I guess, like, what stops the affluent consumer? What is it, just a nasty financial crisis and recession? I think so. And it would really have to be a nasty one, because if you really think about it, the stock market's performance has not really been correlated to those assets growing over that same period of time, literally since the global financial crisis in 2009. I mean, they've moved generally in the same direction, but they haven't moved in lockstep at all. And they don't show short-term correlation between each other in a way that we might assume that they would. So I think that a recession that really gets into lending and really gives people fear that they can't convert their long-term assets into current assets, that's what it would take in order to stop that trade.

10:57I do wonder. I mean, there's all sorts of ways that this could stop. and talking about the debt and the assets, like Ben and I were talking about this last week, the debt is good. That's not going away. And the assets are what's creating this confidence. And you hit asset prices 30%. And yeah, that confidence will turn in a second. I also don't want to act like we haven't seen the assets get hit because we have several times in the past 10 years. It's not like this has been - Of course, yeah. And that's kind of my point, right? But it's just not necessarily that it's linked to the stock market.

11:28Yeah. All right, so let's get into the stock market. We are living, we're recording this on January 26th. And it's an interesting time as it always is. But we've seen the MAG7 really as a group go sideways for the last couple of quarters. And you're starting to see a broadening out of different stocks within the 493, the Russell 2000, the Russell micro cap. And investors are going into industrial stocks and utility stocks and out of tech stocks. Because it's a different playbook. And who knows if this is a blip and it will revert right back to the Mag 7 after they report earnings and it's everybody backing the ship.

12:11Or is this a regime change where, you know what, maybe we're rethinking how big these companies can be. There seems to historically have been no way to slow them down. But I saw a chart the other day comparing the size of NVIDIA to like, I don't know, 25 blue chip, blue chip stocks. Yeah. And maybe investors are like, hey, you know what? Yeah, this is a transformative technology. Yeah, the margins are insane. But like there's other stuff out there. And we don't need to pay. We don't need to pay. We don't need to buy$4 trillion companies. There's other things to look at. There is a certain math.

12:52And this is, I'm just going to throw it out ahead of time. This is a stupid way to think about things. And yet, sometimes I think things are stupid and yet somewhat useful, which is you take a look at NVIDIA, for example, for moving towards a$5 trillion company and just divide that by the population of the world and just say, this is what is expected in terms of earnings for NVIDIA right now. Forget any growth. Forget any growth in the stock price. Forget any – the reason you own a stock presumably is because you believe it's going to go up over time. And I really do struggle with those – the large numbers that are involved in terms of the amount of earnings that are discounted into the current price just based on how much economic activity has to flow back to these huge companies.

13:46So I don't know if you guys think about things the same way, or if you agree with me, that's a really stupid way to think about things. No, I mean, I've never compared, I've never thought about NVIDIA versus the global population. I think that's totally idiotic, but I think you're right because Chartkin made a chart showing that like NVIDIA has actually gotten cheaper over time. The forward PE has come down from 70 down to 35, and it's a reasonable price to pay. and I would agree, but why in the world, how in the world can a company that is bigger than the stock market of Japan get a premium on its multiple?

14:27It wouldn't make sense. It would be bigger than the Fed's balance sheet. And so eventually, is it an earnings bubble of NVIDIA that's going to normalize? Even a market multiple sounds reasonable, despite the fact that it is changing the world, despite the fact that it seemingly has no competitors, that its margins are sky high. And all of that, I don't know, a normal multiple seems right to me. Yeah. And thank you for humoring my thoughts out loud on this. I think that these large companies really are going to have to become income stocks. These are companies that are really going to have to reward their shareholders by paying out large dividends over time.

15:13Have to, Because I don't see how they can continue to keep that level of assets in and reasonably expect even a market level return. Although I would say, again, the MAG-7, they are some of the best companies and the best economic engines that have ever been devised. So I'm not making any declaration, but as you said, at some point, they become so existentially large and so large relative to other things that it's really hard to see how they are going to make every dollar of assets do anything other than being returned to shareholders. Well, one of the strange things about this cycle, and I don't know how long you want to define it, if it's been 10 or 12 years, even the nifty 50 was only a few years, like the buy, you know, one decision stocks to buy.

16:06But wait, Pat, hold on. There's been multiple cycles. Like I think the mobile thing was a cycle. The cloud computing thing was a cycle. Then we had the COVID and the rate hike. Like I think the latest cycle, even though it's been a long one, the one that we're talking about today is AI. It's 2022. Yeah, but it's just all these same stocks. That's the thing. These stocks have moved with this, and they've been the winners after every time. So I think the hard thing to wrap your head around if you're a student of market history is the fact that usually the companies that everyone knows that are the highest quality, and they have the premium valuations, usually those stocks end up underperforming or at least perform in line with the market.

16:44They're not the ones that are given the premium and outperformed by a wide margin like these companies have. And I think that's going to be the hard part for a lot of investors if that should ever switch. and I don't know, people keep saying it can't last forever. It feels like it has lasted forever. I'm sure if you're an active manager, it feels like it's lasted forever. But I guess my question to you is, is AI the thing that levels the playing field? Is AI the thing that actually makes these other companies catch up a little bit? Because they're not the ones who have to put all these resources in, right?

17:10The ones spending trillions of dollars are the big tech companies. And they might not be the only ones that see the benefits of it. Could it be that these smaller and mid-sized companies actually gain most of the efficiencies without having to have a big cost outlay in terms of their R &D for it. It's so funny, Ben, thinking of these companies that are fantastic at generating returns on equity as being the risk assets because of the investment that they have to make to build out something that doesn't yet exist. And they're guessing. They're guessing what the tenor of AI is going to be. They're guessing what the payoff schedule is going to be.

17:47They're guessing what the economics are going to be. So I think in some ways, looking at what's happened, say, from about the middle of 2025 in the markets till now, is that we're seeing sort of a recognition that the Mag7 and the top 10 % and the AI companies had such a large component of the economy and of the market. that there's really only two ways that you're going to be able to revert that. One is for the other 493 to outperform and do very well. And the other is for the 7 to go down. There is no other way for that concentration to solve itself. So naturally, I look at the broadening of the market.

18:39I look at the relative underperformance of the MAG-7 over the last, call it, seven months. I think it's really good news. I think it's good news for all of us. Me too. I want to get to how you guys see the world and implement this stuff through your strategies. But before we leave the MAG7 point, Apple is such an interesting stock because it has been the number one most widely owned stock by retail investors, right? By boomers. It just has been forever and ever. And it's gone through multiple cycles, multiple iterations. But you mentioned like the transition to an income stock. Apple sort of is that they're buying back a lot of stock.

19:20Their EPS is going up as a result of that. They're paying a dividend. I don't know what the shareholder yield is. I'm going to guess it's four to 5%. Maybe that sounds high. I don't know. But it's also trading at like the 30 times forward earnings, which it really never did ever. And I don't know if this is a result of just the predictability that Apple is going to deliver what it's going to deliver, even though it's not growing. I don't know if this is like, Michael, what are you talking about? They take 30 % of everything and the iPhone is the center of everything. So if AI explodes on mobile, what do you mean?

19:54Of course, it's going to be huge growth. So I don't know, maybe it's just that simple. But how do you think about the stock like Apple and then opening this up to how you all at the full think about managing portfolios and ETFs? How do you think about Apple, the second biggest stock in the world? Yeah. So Apple to me is it's really interesting because they do seem committed under this leadership to buying back shares. And they've done they've they've bought back hundreds of billions so far. If you if you think about what you know, if if you think about what a share of stock is, I mean, there's a reason that in classic finance that equity is considered to be more expensive than debt, because any share of stock is a perpetual claim on earnings, perpetual claim on assets.

20:36So if you remove a share of stock, even for a company that has billions of shares, you're removing a claim on earnings not just for 2026, but forever. So the fact that they have shown no sign of slowing down the repurchase and the retiring of their shares, to me, it makes a whole lot of sense that their market multiples would be higher than otherwise. Because if you think about what a stock price is, it's a discounting mechanism. If you're discounting against a smaller and smaller number of shares, that can only be helpful for a company that's generating good financial returns if they're buying them well.

21:30And if they're buying them well is a pretty massive proviso to what they're doing. So for us at – I don't know. Did that answer your question for how we might think about that? Yeah. So for us at The Motley Fool, we have always believed – The Motley Fool, which is parent company and sister company of Motley Fool Asset Management, that also provides the index that our passive products are based upon, comes from Motley Fool's research, have always believed roughly in the power law of the stock market, which is the small number of companies provide the overwhelming amount of returns. And so we have never gone about trying to make sure that we are widely diversified.

22:19Obviously, our ETFs are diverse, but we haven't gone into community banks, for example, for the sake of making sure that we've got a position in community banks. We have focused on the power law component of the market, which is even if it doesn't happen on a day-to-day basis over time, companies that have certain attributes are the ones that have traditionally driven the stock market and have driven 99 to 125 % of the returns. And so that's always been what we have done. That is how all of the passive and active ETFs at Motley Fool Asset Management are structured. And then they're just looking at focusing on different parts of the market.

23:06So you don't like to put limits or constraints on sectors, for instance, within your strategies? So we would prefer not to. Now, several of our funds, TMFE, for example, is a capital efficiency fund, and it does have constraints. But again, just like every ETF, just like every mutual fund, I think of these as a tool that's supposed to do a job. So TMFC is our flagship fund. It's 100 of the largest companies recommended by the Motley Fool, our sister company. And it is not constrained at all by industry or by market cap. We want for that expression to be, you know, just give me the good stuff. Give me the good stuff, you know, at the percentages at which, you know, at which their market cap weightings would suggest we should have them.

24:01So what is the good stuff? I mean, it's been the MAG-7 for sure. You know, we are much more diverse than that. We have companies like MCOR, for example, in Motley Fool, in TMFC, which is a company which provides services for the electric power industry that provides designs, design, you know, and regulatory work. You know, that's the kind of thing that, you know, that we identified a while ago, regardless of what you think about where AI is going, one of the things that it absolutely leads to is much higher use of production of power, much higher consumption of power. And we like to be in these industries in a capital efficient way.

24:51So as opposed to being the one that's got to go out and sit in endless meetings with neighborhoods so you can build power lines and build power plants, just you have a company that designs and does the consulting for the industry. So those types of businesses tend to generate really high capital returns. They're fantastically capital efficient. And it's the type of company that has, generally speaking, provided great returns over the long term in the stock market. My view is that Motley Fool has kind of like a really much longer term time horizon in terms of like buy and hold, not like buy and hold forever.

25:32But is that the general thesis for most of your strategies or do you have other strategies that have higher turnover? So for the most part, our turnover ratios will fall somewhere between 20 and 30 percent. So the reciprocal of that is the average stock that's currently in the portfolio is a three to four year hold within the portfolio. So the Motley Fool itself has recommended NVIDIA in like 2005, I want to say. And they recommended Microsoft in 1998 and never sold. So they very much are committed to long-term holds. I feel like I'm name-dropping just the biggest, most obvious companies in the planet, but did the same thing with Chipotle back in the day.

26:24So yes, very much committed to identifying companies that are doing something special and not really worrying so much about being right about when you buy and when you sell. Bill, the dominant theme as we open the show with today is obviously AI. And it is moving so fast. The reality is nobody has any idea. Yeah. Nobody knows. And I think Google is the best example of this. ChatGBT was going to kill the search engine. Oh, my God. Let's sell Google. And now it's, I don't know if Google is the second biggest stock in the world, third, whatever it is. Obviously, that was 100 % wrong. Gemini came along and the rest is history.