First Trust ROI Podcast
On the ROI podcast, we discuss some of the most important questions facing investment professionals today, ranging from macroeconomic views, to perspectives on the equity and fixed income markets, to insights on practice management. We aim to cut through the noise, examine the data, and provide fresh insights to investment professionals as they help their clients find better ways to invest…seeking to generate attractive returns on their investments.
First Trust ROI Podcast
Ep 39 | Brian Wesbury | Why Government Spending Cuts May Cause Short-Term Pain, But Long-Term Prosperity | ROI Podcast
Brian Wesbury explains why cutting government spending could be painful in the near-term but boost longer-term economic growth, similarities and difference between Trump and Reagan, and how he thinks about investing in an overvalued market.
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I wouldn't even be back in this industry if it wasn't for you. I blame you for the podcast. I also blame you for when I finished grad school and came back. It was supposed to be a short stint at First Trust and I don't want to get too into the philosophical reasons, but it was kind of like I was a sales guy and I just didn't really believe anymore. It was like I wanted to sell stuff to make a lot of money.
Brian:And.
Ryan:I was pretty good at that, right, but I was like, well, what's the meaning behind it? Is it a good thing or a bad thing? Right, and that's because I didn't really understand, like a lot of the economics and a lot of like the freedom equated to a lot of the economic theories that you talk about. And I think without that I would have lasted another year or two back at First Trust, but I'd be gone.
Brian:You know, entrepreneurship is an amazing thing because it it's where all wealth is created. And then there are a lot of people that believe the financial sector is just this sort of I don't know parasitic thing that hangs on to what everybody does. But without the financial sector, none of this stuff gets done. I mean, if you're a home builder, you can't build a house without insurance, without a bank, without the lumber company being banked, and so it's essential, and one of the key things about the United States is the depth and breadth of our financial system. And then it all runs like seriously on integrity, and you have to be able to trust people's word and that, and, and so when I look at you know people that are in heads of major financial institutions, you know I may disagree with them politically or philosophically about clean energy or dei or something like that, but in the end, integrity and honesty and doing what you say you're going to do it's absolutely essential in the financial world, and if you don't do it, you fail.
Ryan:It's what allows capital to be supplied, and if you can't supply the capital through the capital markets, then all the growth that businesses experience because they can access that capital doesn't happen.
Brian:Yeah, and everybody keeps trying to find better and cheaper and more efficient ways to do it. And you know, I mean we've been doing this for a long time. I mean I don't mean just Wall Street, I mean this goes back to the Roman Empire and the bankers of, you know, austria and all these rules and kind of the costs of finance. You know, it's almost like when you look at a realtor why is it 6%? Well, they worked their butts off, you know, and I know that the new rules came down, but it's like the costs have kind of been set because that's the risk of markets and that's it's the cost of doing business, and yet the benefits that come from it are greater than the cost.
Ryan:Otherwise we wouldn't do it hi, welcome to this episode of the first trust ROI podcast. I'm Ryan Isakainen, etf strategist at first trust. I'm joined today by Brian Westbury, chief economist at first trust. I'm gonna ask Brian about Westbury, chief Economist at First Trust. I'm going to ask Brian about what his views are for the economy as we head into another new year, 2025. We'll talk a bit about the new administration, what some of its policies, what the implications of those policies might be. We'll also talk a bit about stocks, valuations and artificial intelligence. Thanks for joining us on this episode of the First Trust ROI Podcast. You're still an outlier. For years, you were an outlier on the bullish side of things and we've talked over the last year and a half on the podcast and otherwise, and you're now an outlier still on the bearish side of things, and that's true, I think, of the economy as well as the equity market. So why are you such an outlier?
Brian:Yeah, exactly, I think. I mean. Obviously I don't want to criticize my peers in the industry that have forecasts, but almost everybody right now has an S&P 500 forecast of over 7,000. We've had two 20-plus years, 20% growth years in a row 25, 26, and they just think we're going to have another one. And every model I look at says we're overvalued. I'm partial to our model, the capitalized profits approach, that takes a look at profits and the discount rate, the interest rate, and that model says we're overvalued right now by about 20% roughly.
Brian:And this is not a trading model, don't go short. This is a 30,000 foot view down and it just says the market is expensive and we all know it's really at the top of the market, the top seven or 10 companies. They make up a huge part of the S&P 500 and their PE ratios are even higher than the rest of the market combined. That's number one. Then you start looking at other models. Schiller does a 10-year kind of looking back growth and earnings PE ratio and we're at the highest level since 1999. If you look at I've always called it the Buffett model, but he looks at market cap as a percent of GDP and that's at a record high right now, the S&P 500 market cap never been a bigger share. It's over 150% of GDP. And then there's a Greenspan model and that's the equity risk premium and it's the inverse of the PE compared to the 10-year treasury and right now you can earn more on the 10-year treasury than the price, the earnings yield, of the S&P 500. So every one of these models says the same thing, and the last time they said this, all of them said this was 1999.
Brian:So I hate saying that, because I don't expect 2000. I'm not looking for a dot-com crash, I'm just the market's overvalued. We're frothy. Look at all these meme coins Trump coin, I get it, people love Trump but it has no intrinsic value, zero whatsoever. It's not part of blockchain, it's not part of the crypto world in any way. It's just a meme coin and it's worth tens of billions of dollars and these kinds of things.
Brian:These are the things that happen, you know, like tulip mania, meme coin mania. These are very expensive stocks. These are the kind of things that happen when you have too much liquidity and people get used to the momentum. So I think a lot of these forecasts to come back to your question are based on momentum and they're not really looking at valuation. They could still be right. Just because we're overvalued doesn't mean we can't get more overvalued. That's what happened in 97, 98, 99. I just keep thinking we're going to see a slowdown, especially if Trump is successful at cutting deficit spending, because that's been half of our GDP growth in the past couple of years.
Ryan:All right, that's a rabbit hole I want to go down, because I've heard you talk about this before as well the size of government and how that can actually, over the long term, impede economic growth. So let's say the Trump administration is successful in cutting a lot of the government spending in that part of their policy. Does that slow down the economy or is that good for long-term growth?
Brian:It's great for long-term growth. What I worry about is it's tough for short-term growth. So, yeah, keynesianism I don't believe we ought to run deficits to cause the economy to grow. I think it's a highly inefficient way. It's way better to cut taxes, cut regulation, let the entrepreneur loose, and so I'm just not a fan of Keynesianism. That doesn't mean that if the government throws a bunch of money in, they can't create some jobs. Now they're going to cost other jobs, but it's going to look okay on paper, if you will.
Brian:So what they did with the Green New Deal basically that was the Inflation Reduction Act was really the Green New Deal, and so they've been investing tens of billions of dollars in green energy. Well, that's investment. It's windmills, solar farms, all those kinds of things. At the same time, they've been giving tons of money to states for Medicaid, and one of the fastest growing job categories in the United States is you can get paid by Medicaid to stay home and take care of a family member. So it's like in-home care funded by Medicaid, and if they're not hiring a nurse, they're hiring a grandkid.
Brian:And in New York State, kathy Hochul, the governor of New York, actually said in a speech last year the majority of jobs created in the state of New York were created with that. So it's really just redistribution from people paying taxes or government borrowing and then creating jobs. And if you take out government health care and social services social assistance from the jobs numbers, we have about a third of the job growth. That's showing up like 2.2 million jobs created in the past year, only 890,000 without government, without health care, without social assistance. So the private sector has been slowing down.
Brian:It's the government spending that has been keeping job growth up, and if you get rid of that and Trump wants to go after it you're going to slow down the economy, and so that's the short term and I joke, it's like quitting heroin, and I don't know this personally, but I've seen it on TV. It hurts. So I think we're addicted to all this government spending. It hurts. So I think we're addicted to all this government spending, keynesianism, deficits and getting unaddicted, going cold turkey. It hurts, so it hurts us in the short term, even though we win in the long term.
Ryan:So we're recording this on January 29th and who knows what happens between now and when it airs, but I think it was this morning that I saw just a headline, and I haven't had a chance to dig into it at all, but there was a headline that suggested that the federal government was basically offering I don't know if it was to everybody or certain categories the ability to you can leave and get paid through September, and I think on a previous podcast we talked about that right after the election as maybe something that it would do. Is that actually? That's actually happening.
Brian:Yeah, we talked about this before. So Elon Musk had an interview with Joe Rogan before the election I forget September or something like that and he's like hey, you're going to cut millions of jobs from the government. Evidently that's what you want to do. I mean, then you're going to throw people out of work. I mean, the headlines are going to be terrible and everybody's going to be worried about the economy, like I just said because take away pay from people, and then what do all these people do?
Brian:and they're unemployed, et cetera, et cetera. And Elon Musk mused that that, hey, um, we'll just pay them and and take you know, I. And I added I don't remember him saying this, but I added take away their phone, take away their computer, take away their office, send them home, don't let them do anything, and pay them. And I thought the tax payers would be better off like it until they find another job or something like that. Well, they made a little modification of this blanket thing that I was talking about at the time. Yeah, so they're saying is look, you have to come back to the office, but you don't have to, and if you don't, you can work remotely until September and we'll pay you, but after that.
Brian:So it's like sort of a you have to work in the in a lot of jobs you get, they'll give you a six month severance package or something like that, but they're what they're saying is basically we'll pay you to stay at home for, I guess, the next nine months. Now, yeah, and that's brilliant. I. I actually think it's a brilliant plan. It will cost taxpayers, but it is kind I don't know what the right word is because you're going in and this isn't like coming into a private company and laying off 2,000 people. This is potentially four or 500,000, a million it's potentially that many. And so being kind but shrinking the size of the workforce, I think would be magnificent, and then these companies can get more efficient. We can use AI, we can use computers.
Brian:The government is still running computers that you and I and anybody watching this would laugh at. You have a better computer for your kid to do their homework on than the government. Employees have computers in their offices, and so Elon Musk is the perfect person to upgrade the technology and get us more efficient, and we have to do it from the outside because, as we saw with Obamacare and all these, whenever they do it from the inside or hire some politically connected consultant, it just all falls apart. So this is a great opportunity to make the government more efficient. It's going to cost taxpayers, it's very generous for nine months, et cetera, but they're going to use the opportunity of making them come back to the office to give them the chance to retire.
Ryan:Retire, or they could re-enter the workforce and do something that's maybe more productive, and they're going to add more to the economy than it would have otherwise.
Brian:Yep. Well, that's why I say cutting government spending actually makes us better off in the long run because we get more efficient.
Ryan:Regulation is the other part of what the DOGE was kind of focused on. I think it's at least the headlines suggest that it's more towards cost-cutting now, but you think the regulation making things more efficient is still going to be a big part of the Trump policy platform going forward.
Brian:I definitely think it will. I mean, in his first administration he didn't have a doge, but I think it was a rule. I mean you can quote me, but please, like I think I remember this Like if you had a regulation you got to get rid of two or three, whatever that number was.
Brian:And it worked. We actually shrunk the Federal Register, and so they'll be able to do that. It's interesting you bring up the spending versus regulation, because Vivek Ramaswamy was going to do the regs and Musk was going to do the spending and then Vivek decided to run, and I know everybody speculates. He got fired, got chased out, whatever. Who knows, it doesn't matter, he's going to go run for governor in Ohio. That leaves Musk. So what happens to the regulation? I still think they'll focus on it. Okay, and and and. But I'm really glad that.
Brian:I was glad to hear that they had actually divided it into two, because we can cut spending. And you know, I mean I don't know either. You can ask me this but these NGOs which is the NGO stands for non-governmental organization, which is a farce because they're funded by government, they're just not a government agency and a lot of them have been designed and received money to help immigrants come across the border, to put them up once they get across the border, to help them navigate the system of welfare and how to move into the United States. Ngos are over in the Middle East, they're everywhere, and the government is funding them to the tune of billions and billions and billions and billions of dollars and Trump cut their funding off. He froze it. They got a lawsuit that said you can't do that because these were congressional votes that said we're going to fund all this, and I think Trump backed off on that. So spending is hard to cut because you can't do it directly with an executive order, and most spending is Social Security, medicare, medicaid, these entitlement programs where I hope they really go as a combination of the two.
Brian:I'm not sure the exact number, but I think we have something like 140 different welfare programs in the United States. 140 different programs with their own entire bureaucracies, their own entire staffs, their own entire rules and, first of all, navigating. It is a nightmare but it's highly inefficient. And I believe bringing all of that together making welfare dependent on work, like what Clinton did, and welfare as we knew it If you don't have a job within two years, you can't stay on but combine all that make it more efficient, and so I think they're going to make headway in this. But some of the easy like they thought it was low-hanging fruit. Let's just cut off the NGOs. Then they got sued into oblivion.
Ryan:Yeah, I mean all the recipients of that money. I mean there's constituencies that are pretty happy to receive those funds, and then they have Congress people, and then you know, everyone wants everyone else to be cut, but they don't want themselves to be cut. So that's, that's the challenge.
Brian:You know I look at. I look at the group of people that Trump wants to head agencies, and I don't want to get into personalities or all the crazy conspiracy stories and drinking and whatever. That doesn't matter. What I want to see is somebody that wants to head an agency, that wants to get rid of it, and so far I haven't seen one. And my hero of all time is a guy named Alfred Kahn, and I've been talking about him.
Ryan:I love the story.
Brian:Carter hired him to take over the Civil Aeronautics Board in the 70s and people don't remember this because it's been gone so long but they would set the price of every seat on every airplane flight you had to go. If you were an airline, you went on bended knee to Washington. Like you know, I want to raise the price by $15 a seat or whatever. Then they would have to agree. Well, like Alfred Kahn thought this was insanity and he came over, took over the Civil Aeronautics Board, got rid of it, deregulated the airlines Magnificent story, only one I've ever in history of the United States I've ever known to do that, at least to a major agency. And there are hundreds and hundreds and hundreds of temporary government like, let's say, research projects or a committee to study the effects of aircraft carriers and like whatever it is like. You can make up whatever you want. It's probably in existence and they're still there. You know it doesn't mean they're employing a bunch of people, but there still exist and they were started 20 years ago and we need to go find all of those and get rid of them and they can do all of that and that brings, I mean, I'm not sure where you want to go next. But I love all these things. These are like cut taxes, cut regulation, cut spending, cut the size of government and we. It will be a huge benefit and there are a lot of Trump supporters out there that I talked to that are they just think this is going to usher in a golden age tomorrow, today, and I agree that all these things should be done. But Reagan wanted to do those too, and the stock market did not fare well in the first year and a half of his presidency.
Brian:Because when you go in and you make those changes, another way to say the same thing is Javier Malay in Argentina has had a great deal of success. I'm certain they really do have a budget surplus because he was able to cut spending. They've slashed regulations, gotten rid of many government programs altogether. He really did take a chainsaw. The problem is they have an unemployment rate in Argentina. It's about 40%. That economy is not. You hear all these good things and people that want smaller government are really excited about Javier Mele and they are getting it done and it will benefit Argentina hugely. But that economy is not doing great right now. It's still in recession, and so I just worry that when we cut spending. Get rid of that stimulus to growth. In the short term we'll pay a price. And then what I really worry about is the Fed comes in, cuts rates and starts printing money again to compensate for the lower deficits, and that's what creates the inflation to come back.
Ryan:How accurate do you think, or how fair is the comparison between Trump and Reagan? Is Trump like the new Reagan, or what are the similarities and differences.
Brian:Yeah, I think it's the best parallel that I could use. I mean they both wanted a strong defense, a military. I mean Trump, I believe, just called for the Iron Dome, which, reagan?
Ryan:it was Star Wars is what we called it. He got ridiculed for that.
Brian:Yeah, he got ridiculed for that. But now, because the Iron Dome in Israel is so successful, trump's not going to get ridiculed, but they, because of the Iron Dome in Israel is so successful, trump's not going to get ridiculed, but they both want strong defense. They both wanted less regulation. Reagan was fond of saying how many words is it For worse? Nine eight, seven words in the English language. I'm here from the government, I'm from the government, I'm here to help.
Brian:Yeah, and so they're the same. That way, trump is more populist than Reagan was, and I always get worried a little bit about the phrase populism, because what I hear is not communism really. But oh, we're just going to do things to make people happy or give them things, and that's the way we reach the populace, and that always scares me a little bit, but it's a pretty good parallel. They both want smaller government. They both want lower taxes.
Brian:Trump has now called for getting rid of the income tax and replacing it with a sales tax, a national consumption tax, which I always get worried a little bit about that, because if you've paid taxes all your life on your income and you saved money to retire on, now you're going to have to pay taxes on everything you spent, so you're double taxed. And so I never did like that because of that. But I've sort of changed my mind and the reason is that it would be a much simpler tax system. You wouldn't have people spending hours of their lives and tens and tens of thousands of dollars to file taxes or more and having this much paperwork and all of that Just tax consumption.
Brian:The only reason you work is to earn an income. The only reason you earn an income is to consume. It doesn't matter where you tax it Income when you earn it or when you spend it. So let's start taxing it when we spend it. It'll make the tax system simpler, even if the generation that is alive right now and is saved after tax has to pay. The greatest generation went to war. Guess what? This generation can pay taxes twice. I mean, it's not that much of a sacrifice to ask.
Ryan:Do you think that those proposals have a chance of actually kind of progressing? Because I can hear the objection already like this is regressive, it hurts the poor the most. You're just trying to, you know, make the rich happy, and they're not going to spend their money anyways. They're just going to put it somewhere that's sheltered and then they don't have to pay taxes.
Brian:Oh yeah, no, it's going to be demagogue to death. Oh yeah, yeah, the odds of it making it into law are minor, taking it into law are minor. But what I'm getting to? I mean Reagan wanted a flat tax. I mean there are similarities. That's sort of where I was going. Sure, I totally. I mean all those arguments are going to be brought out. You just articulated them perfectly. And this Congress? There is no way they'll do that. Yeah, and that's really kind of the big thing they have to do is extend the Trump tax cuts. But they're already horse trading.
Brian:And I worry, you know, reagan, I would argue Reagan is more of a philosophy, like they're both sort of philosophical. We don't want this big government, and why? Because big government harms our freedoms, harms our growth, and we want to get rid of it because it increases freedom, increases entrepreneurship, increases growth. As a result, both Reagan and Trump were kind of that way. They come at it a little bit differently.
Brian:The problem is then you go from a philosophy to a transactional Congress. So they've already given up on the salt deduction, like so we had knocked it down to 10 000. I mean, trump's already said it's going up to 20, maybe even more, and and so that's now they've started horse trading and what I'm getting is hey, you give that to new jersey, what are you going to give to iowa? You have to have subsidies for farms and windmills or ethanol. So the minute you start that transactional, that's where the consumption tax runs into problems, because Congress can't vote for it, they can't vote for anything clean, they all have different constituencies, and so where philosophy meets, transactional is when government really, in my opinion, kind of breaks down. You don't always get the most efficient. You get the political, transactional system, not the most efficient economic way of doing things.
Ryan:We've talked before about the potential for Trump using tariff policies and he, I think, talked about the external revenue service. Now, and there was just recently the use of the threat of tariffs with Columbia to kind of shove them into taking back some of the people that may have been illegally in the US. Where do you think we land with tariff policies? Is this like? Is this just a tool, or is it something that the Trump administration really wants to have kind of across the board?
Brian:Right, I remember we were. I was watching one of the playoff games I think it might've been the Bills Chiefs when I read to the table that I was watching the game with, oh my gosh, colombia refused planes of deportees, right. And Trump is like no visas, 25% tariffs, going up to 50 in six hours if you don't die. And I'm like listen to this. And we all, everyone at the table is like I wonder how long it's going to take them to say don't fly them here, we'll come pick them up. And it was like four hours later Columbia caved. And so I am okay with using tariffs as a tool, but you have to also be willing to use all the tools. We're going to drop out of NATO I'm not asking us to or saying, but that's a tool too. We're going to take away USAID from Egypt if you don't do it. Not just terror, like we're going to put a tariff on. We're going to take USAID. We're going to revoke your visas. This company can't trade. You have to use all the tools. If it's a tool, it can't be the only tool, and what I'm fearful of, or what I have been a little fearful of, is just this general cross-the-board tariff. Universal tariff is what we would call it, and Trump has already come out and said he's not going to do that. Now he'll do it. I mean, it's not a true universal tariff. If he goes after Canada and Mexico, that's a Canadian and Mexican tariff. Universal would be everywhere and that's what Herbert Hoover did in 1930. And most economists believe it's a huge part of the Great Depression. So please, let's not do something like that. If you tariff us, we should tariff you. If we're trying to get you to stop close the border, tariffs are a tool, but there are other tools too, and so this can cause some dislocations until we work things out. I think Mexico, they're already building tent cities, they're already stopping migrants at the border. I mean, I don't know if you've seen the numbers on immigration, but it's gone from like 2,500 people a day to 40 and shown up at the border. I mean, people know not to come. Number one, mexico's stopping them. Number two, and I think these tariffs have a lot to do with it. So I wouldn't be surprised if Mexico hasn't already done enough to avoid the tariff that Trump's talked about. Canada, they seem to be. You know they're going to push back against Trump and so it'll—anyway. That's another thing, you know.
Brian:So when I talk about the market being overvalued, I worry because there's chips in the glass, like you know. Like if you squeeze a glass like that has no chips in it. I mean, I'm not strong enough to break this glass, but if you put a little crack in there and then I squeeze it, it can shatter a lot easier and I and tariffs put a little chip in the glass, like it's like you start changing flows and trade patterns and things like money flows, that's. That's the kind of thing that can. I'm not talking about it's not a depression, it's not a massive collapse, it's not 2000 again, it's not not 08. It's none of that. But those are the things that can kind of start like the market's overvalued and it could have a pretty good correction just because it's overvalued, and these are the kinds of things that could be a catalyst for that.
Ryan:So the market, after two really strong years, valuations get expensive. You know, we saw again we're recording this on the 29th. On Monday, there was, over the weekend, the DeepSeek AI announcement and that caused a huge sell-off in some of those stocks and I think a lot of people look at that and say, well, it's just kind of a sell-first, ask questions later, but it's more likely when things have done well and they're kind of expensive, right? Yeah?
Brian:they're expensive. They're priced for perfection. They weren't. They were not priced for, and I know there's a huge debate. Did they have the nvidia super chips or right? Did they spend more? Did they steal stuff, like there's always like, like questions, right, but the the shocker of that was they did it with a lot less resources, energy, money, time, chip capacity and, of what I've read, it looks like they could have done this, like they really didn't steal it. And then the other thing is they made it open source, because if you're Google and you have your own AI, you don't want to make it open source because that's how you make money. But if you make it open source and available to anyone, why do they need Google? And so I think this was one of the cracks in the glass. It may have a little bit of nefariousness in it somewhere, but it's not all nefarious.
Brian:And I believe there are Musk, figured out how to put up a rocket for $1.50 at the cost of NASA. And if you're going to tell me that, the biggest companies in the world Google, meta, they are highly centralized. They only have their engineers working on stuff. They just come at things with a ton of bricks. We're going to spend $50 billion and we need a nuclear reactor to power our thing. We're going to brute force everything and our AI is going to be a god. It's going gonna know everything. To me, that's a perfect example, something that must would go after yeah, like and simplify it, and that's what the Chinese did that we're not using 32-bit, we're using 8-bit. He uses 10% of electricity and that's plenty like, and we're not gonna. We're not gonna make our thing. God, we're, we're going to use an engineer. We need an engineer, a lawyer, when we need a lawyer, a doctor, when we need a doc, as the expert. It's called the, the. It's called the experts.
Ryan:Yeah model of experts.
Brian:Model of experts yeah and um and and so ours kind of puts them all together, makes them god. They just said no, we'll just use. If it's an engineering problem, use the engineer. And it just made it way more simple. Yeah, and you didn't have to have all this wasted energy and time and I think there's something real there. Yeah, and I'm not trying to say nvidia is going to collapse or go out of business. I'm not saying any of that. I just think there there are ways to make this way more efficient and there's going to. In the tech world, what have we learned? I mean, have we learned nothing? I mean, palm Pilot owned the market and basically the Palm Pilot in the late 90s was the Apple iPhone.
Brian:I mean it was clunkier and wasn't as good, but all that it could do the Apple iPhone does. And yet those guys 3Com went out of business, and so it's like this idea that they're untouchable. That's where people make a mistake and I think people are overly euphoric. Trump's policies are great I'm not going to argue that but they're not great tomorrow. It isn't going to change the whole world tomorrow. Reagan didn't. It took him a year and a half before we bottomed and finally took off, and so we have to live. I still believe we have to live through some pain before we get to the game.
Ryan:It kind of reminds me of like a technology hype cycle, like a new technology whether it's AI or whatever comes out and immediately people begin to imagine all that it could add and all the good things, and then so the related stocks start moving higher and then it's like, well, it hasn't happened yet and we get a little impatient and it still hasn't happened, and then things sell off, but then finally you start to see some of those innovations kick in and then profits, and it seems like there's a sort of similar analogy with the new administration where you know there's a lot of the first month after the election stocks were flying and then, because everyone's excited, and then they kind of come back down and it takes a little bit of time, and it seems like an analogy between those two things.
Brian:I totally agree, and the Palm Pilot's the historical reference that I use. It was unbelievable yeah it was, and yet it was 10 years too early. Yeah, and everybody like the market was unbelievable yeah it was, yet it was 10 years too early. Yeah, the market was right. This thing is going to change the world. It just turned out it wasn't that thing made by that company, right. We had to go through a lot of pain before we got to when the technology finally got into enough hands to become a network benefit.
Ryan:Okay, so you've used this morphine analogy for the economy for a while. When does the morphine wear off, and how do you tell when the morphine has worn off?
Brian:Yeah, I thought it already had. I mean, the money supply clearly is down, that's part of the morphine, and so the other. But the deficit actually went up. I mean, john Maynard Keynes, who's the king of deficits, like the economist who sold everybody on using them. He's spinning in his grave like a tornado right now Because under 4% unemployment, no world war, major war, and we are running $ trillion dollar deficits over six percent of GDP there. It's the most irresponsible budget I have. It's mind-boggling how irresponsible it is. So I would you know what I'm that, but that's morphine. And so now Trump's in there and he's gonna cut it and and so the bottom line is is that I think the morphine's out and and then, and then I've all to go along with this. All that morphine it.
Brian:It boosted the value of assets. So equities clearly, houses clearly, you know. So assets went up. Uh, oil prices you know anybody that's involved in those things. One if you don't have assets, you lost and, and we're seeing so from the. I kind of look at this one as a kind of a bottom-up. Um, slowdown in the economy, defaults rising, banks are turning down more and more loan applications, credit card applications getting turned down more and more so. The inflation killed people without assets. I don't mean kill literally, but financially destroyed them, and that's why it was such an important issue in the election. And right now it kind of it still feels at the top of the income spectrum, that everything's fine, when in reality it's not, and so we're still living off of that morphine. There's still some left in our system, but it eventually wears out, especially if we cut the deficit and the Fed does not increase the money supply any from here.
Ryan:So I was talking with one of our financial advisor clients and they were opining on your call that we're about 20% overvalued and they said well, what do I do with that? Does that mean I shouldn't own stocks? Or I don't know what to do with that, because Brian said you're not a trading model. So how would you answer that?
Brian:Yeah, I own stocks, I just don't value. Okay, and I know you talked to David McGarrel, who's our chief investment officer. He knows he has forgotten more about stocks than I ever knew, and so I always tell everybody if I had a thousand bucks you know people that people ask me like what do I do if you? Hey, westbury, if you had a thousand bucks, what would you do with it? I'd pick up the phone and call Dave McGarrel and what he tells me to do is don't, don't wait.
Brian:39% of your money in seven stocks. They're expensive. The other 493 are way less expensive and the bottom 100 are way less expensive than the middle 200. And so what I've moved is toward value and I've underperformed because I've been here for a while. My model's been saying for about a year, we're overvalued and so I've underperformed if all you did was buy the S&P 500, but I believe I will outperform. I'm fine, I've been cautious and I believe I will outperform.
Brian:I think value investing will just like it did in 2000, 2001, 2002, is about to have its day and so I want to be careful buying those really expensive stocks, not because they're going to it's different than 99, because back then they didn't have any earnings. Earnings were bad back then. Now they're making hundreds and hundreds of billions of dollars combined entities, but they're spending tens and tens and tens and hundreds maybe of billions on the AI. And now there's a big question about whether they're going to get returns for that that are anywhere near what they're spending. And so you know, and so far AI hasn't paid off yet. So it's sort of like the Palm Pilot was there. It was there, it had everything. I mean, you could flip up that little antenna right on the screen like get on the internet, you could do it all, and that company still went out of business. It was unbelievable technology. Ai is unbelievable technology, but is it going to pay? Can you spend $50 billion and get paid back for that?
Ryan:I don't know. Yeah, and it's. I think another takeaway is it's tough to pick the winners and losers this far in advance. I have very little doubt that there will be some massive, massive winners, but I think if you're choosing the companies that have done well so far, those could be far different from the ones that ultimately, when we're talking a decade from now, are the big winners exactly, and one of the things people do is they're buying these Nvidia chips, building big.
Brian:You know, I call them AI factories. I like to call them factories because everybody thinks technology is clean. It's not clean. They need so much electricity and they're not getting it from solar and wind. They're getting it from nuclear or from natural gas, coal and oil, but so I call them factories. There's people that build these factories and then they rent out time on these chips.
Brian:And what's just happened? Because of DeepSeek, the rental prices have fallen and there's a big question about whether you can buy an NVIDIA chip and actually earn enough in rent to make the purchase. It's like building an apartment building. If you can't charge rents that are high enough, you lose money, and that's what a lot of people have done. They went ahead and ordered a bunch of chips, believing if they got these chips first, they could then rent them out and make a profit, and all of a sudden, the rents fell.
Brian:And so this whole thing is fascinating and Trump dominates the news, ai dominates the news and Dave McGarrel talks about this, but that's creating a lot of noise. But underneath, we know the drivers of the market, and what they say is the market's a little overvalued. I still think we're going to have a recession. We haven't had one in a long time. The Federal Reserve, the money supply has shrunk, the deficit's going to be cut, the morphine drip is over and, yes, all these things are good for the long run, but in the short run, I think we're going to pay a price.
Ryan:All right, last question for you what are you reading? Book recommendations You've given us a bunch of great book recommendations in previous episodes. What are you reading today?
Brian:Yeah, well, I'm going to give you one. It's a heavy one, I mean, man, is it a slog? I wish Jordan Peterson would write a little bit more accessibly. He's so academic and kind of brilliant. But this book is amazing and it's called we who Wrestle With God. Okay, and it's Jordan Peterson.
Brian:You know he talks about the Bible all the time and I believe the way I would describe him is he believed that. You know he talks about the Bible all the time and I believe the way I would describe him is he believed that. You know, the Bible is one of the greatest books ever written because it's got all human psychology in it and he's a psychologist, so he's like man. Look at this. I mean it was written 2,000 years ago, et cetera, et cetera. And so he and I don't believe he's a Christian, but man he seems like he's this close and so he's wrestling with God and it's really. It's fascinating, there's so many.
Brian:He actually talks about AI in there, does he? Yeah, in large language models and builds it up from, because, you know, god created man and then man created, like with God's help, I guess you'd say with the language, and then with spelling and language and paragraphs. That's how large language models learn. They analyze our writing, our talking, and so then you look at lawyers and you find out which words go together. I mean, because these are machines, everything's a zero and a one to it. It doesn't really hear. It breaks it down into letters and paragraphs and sentences, and all this came. God created man and called him very good and then gave him a method to communicate, and that's where it all came.
Brian:And so these AI models are trying to, in a sense, become God and anticipate what we would say to this or that, but really all they're doing is reading the Internet and by having this massive amount of human communication in there, they learn how to communicate with humans, even though they're not humans, and and. But it's all statistics that are doing it. It's all zeros and ones, so you're not really communicating with another being. You're communicating with a zero and one, and, and it's all based on the statistic. Anyway, he writes about this and which is fascinating. So, yeah, right next to Adam and Eve, and why she ate the apple. And then your next thing you know you're talking about AI. It's a fascinating book, or you're reading about AI.
Ryan:Yeah, I've seen that it's on my reading list. I've listened to a lot of Jordan Peterson podcasts and things and he's always an interesting guy, very insightful, especially with that sort of clinical psychologist, uh lens that he views everything through all right. Well, we'll add that to the book list. Um, time's flown by once again here, brian, thank you for joining us on the podcast, um and uh, providing your insights, as you absolutely right. Great to be with you all right, and thanks to all of you for joining us on this episode of the First Trust ROI Podcast. We will see you next time.
