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Meet the Masters – Andrew Opdyke, CFA, Discusses China, First Trust Advisors, Economic Data and More!
Hey everybody! Trevor Chambers with Olde Raleigh Financial, once again, we continue with our Meet the Masters series as part of our blog called, Soundtrack to an Advisor’s Life. I got a great guy today that I’m excited to have and host, Andrew Opdyke, he is from First Trust Portfolios, and he an economist there. Welcome buddy, how are you?
I’m good Trevor, I’m happy to be with you today. How are you?
I’m really good. So we use some of your products, and I must say, I want to give a shout out to First Trust, you’re really a first class organization, and I’m sure it must be challenging, but a fun organization to work for. And all the events you’ve ever been in have been so professionally run with you guys, and I just wanted to shout out to that.
So my man, interesting times to be an economist, huh?
Oh my gosh, I never thought, yeah, when I went through school in undergrad, grad school, all that, I never thought I’d spend this much time looking into things like epidemiology, and looking into how the constitution is written in specific areas related to election timing and things like that. So an unusual year for sure.
Yeah. That’s cool, you guys I’m sure are burning the midnight oil over there. All right, I want to jump into some questions, and we’ll kind if meander around a little bit, although I do want to hear about your background. So let’s talk about China a little bit, and looks like we’re decoupling, the West, at least the United States, is going through that process. Can you talk to that a little bit, what are some of the ramifications, what are you seeing, and how do you invest in that type of an environment?
Yeah, it’s an interesting thing. And you know what, honestly, if we didn’t have COVID this year, if we hadn’t been dealing with this global pandemic, I think that still would’ve been the dominant theme this year like it was in 2019 and like it was in 2018, we had the trade war escalation and that was on so many people’s minds, how that was impacting things like business investment.
Now, when I evaluate the situation that we have with China, and why are we in this to begin with and what is the direction that’s moving both us and China and so much of the rest of the world, in terms of are we separating, are we moving away from free trade, essentially what we had is that China, they’ve got a misunderstanding of the word copyright. I think historically, they treated copyright as the right to copy. And if we go back 50, 60 years, it was this environment where, here was the United Stated, here was a lot of the developed market countries, and they were bringing around new technologies, and China was kind of behind the curve on those. So they were starting to bring in things like electricity to some of the rural areas, and things like plumbing, and they were some of the low hanging fruit. They were catching up to the rest of the world, and we saw an explosion in Chinese growth over a timeframe as they were catching up and implementing technologies that many of the developed nations had had for a little while then.
But as we’ve gotten recently, they kind of caught up, caught up, they’re reaching higher in the tree, to catch the fruit of growth, and they started now competing in areas like technology, and healthcare, and things that the rest of the world is playing on. And as they’ve approached those areas, we’ve said, okay, listen historically, countries have maybe turned a bit of a blind eye to some of what was going on with intellectual property theft and violations on IP on an international stage, but now you’re fighting in the current game. And now as a developed nation, you’ve been developing for decades now, you need to play by the same rules as everyone else.
That kind of is what brought us to that point in 2018, where people started to put their foot down and say, listen, if you want to be working on 5G and you want to be working on semiconductors, and you want to be world leaders in technology, you need to play by the same rules, you need to respect the rights and the intellectual property of countries around the world. And we had this dispute with them, and we said, listen, if you don’t want to do that, we’re going to move away. We’re going to put some blocks, we put the trade restrictions up in place, and they reciprocated on us.
But the more important thing that happened in ’18 and ’19, it wasn’t the back and forth about what industry is going to see new trade restrictions next. What didn’t get as much media coverage but was incredibly important, is that companies stared to react. And they said, well, you know what, we need to start thinking about our supply chains. We need more reliability, we need more predictability, we want to go towards areas where we’re less concerned about things like the property theft. So we saw a movement particularly last year, in 2019, where our high tech production moved out of China to places like Vietnam and South Korea. Some of the softline goods, they moved to places like Vietnam. Some of the more complex goods moved to places like France and the United Kingdom and Canada and Mexico, who while all of this was going on last year, don’t forget, we came to new trade agreements with Canada, Mexico, and Japan, who are three of our four largest trade partners, Canada and Mexico being one and two, China three, and Japan four.
So as I’ve watched kind of this fight with China, if you take a step back and you view the whole picture, I think we are still moving towards freer trade, but we’re saying, China, you want to play on the big stage. And you’re kind of ready to play on the big stage, you’ve grown, you’ve advanced, but if you’re going to do that, if you’re going to play, you’re playing by the same rules as everyone else.
So is it creating volatility? It is. Is it creating some concern for businesses, they think about how they are going to invest and where they’re going to invest? It creates come hiccups on that. But behind the scenes, when you look at the data, and we have a saying at First Trust, that at the end of the day, match wins, and the math shows that as a whole, while it’s shifting where activity is taking place, the activity is still taking place, and it’s moving towards more reliable, more consistent trade partners. And I expect that trend is going to continue for the next few years.
So before we started, we talked on this a little bit, do you think that maybe we pushed globalism a little too much, and that came to the rise of populism and Trump, and Bernie, and all of that, I mean, what’s your thoughts on that?
Yeah, there’s a possibility. So I went to Northwestern, and so did my boss, Brian Wesbury, who’s our chief economist, and we’ve talked in the past, and we would talk about the courses that I was taking at Northwestern and what he took, and back when he was at Northwestern, this is in the ’90s, ’80s and into the ’90s, there was this huge discussion over Japan. And what was Japan doing, they were these world leaders, they were growing, and they had picked an industry, they had picked manufacturing. It ended up being the right choice, and they saw this massive explosion in growth. So the rest of the world saw that and said, hey, look at what they did, look at these investments they did, and we need to start replicating them.
And so Brian, when he was in school, they were reading books about Japanese supply chain management, and industry growth. Now, here we stand, 20, 30 years later, and as we all know, Japan has had kind of this multi decade period where they haven’t seen growth. But we made these shifts, from the US, and so many countries did, we made shifts in terms of international global operations, and maybe we move a little too fast in areas, because we jumped on that train, and then as soon as things pivoted, most places were not in a position to make some adjustments.
I think that may have contributed a bit towards kind of the populism that we’ve seen. I think one of the other things is that, especially over the past 10 years or so, it’s kind of been a period of global calm, I would say. We’ve had the trade disputes with places like China, but from a US standpoint, when things are quiet, when we’re in a war, it’s an us versus them, and the country bands together. Think back to after 9/11, any problems that we had as a nation, we kind of put to the wayside and we said, listen, this is an us versus them fight. We are all Americans, we are all US citizens, we are all here, and somebody is acting on us. So it shifted attention away from our internal disputes towards external.
As things calmed down, as we had a calm, then we start focusing back on our internal flows. And I think over the last 10 years, we’ve seen some of that, we’ve seen more infighting, we’ve seen more of that conversation, and it’s not new. It’s not new, we’ve seen things like this back in the ’60s and the ’70s, but we haven’t had it for a little while. So right now, we’re seeing it and it feels like a different scenario, it feels like a new scenario, but we’ve had protests before, we’ve had them over a number of different topics historically, we’ve had violent protests before. We’ve seen major shifts in terms of elections and how the nation wants to move from a policy perspective.
So I would say part of it is the fact that it has been relatively peaceful, so then when we had ’08, ’09, and it brought up this dynamic of how much of it was the banks, and how much of it was government, and what was the role that each of these institutions played, it became a focal point. And then people were looking and saying, oh, the banks getting bailed out, or corporations getting bailed out, and the US consumer is getting left by the wayside. I think that’s a simplistic view on it, but because we were in this period of calm, it started conversations. It started conversations that have emerged over the last 10 to 12 years, in terms of what is the role of government, how do they act, how do we want our nation to form, and it’s been a volatile period.
But I think honestly, I think it’s a positive thing for the country as a whole, we work through issues and we evolve and we grow. It’s the history of the United States.
Yep, well said. And also well said for clients to hear that, these things just pop up. Things happen, and there’s going to be problems, and if your timeline and your retirement is 30 plus years, you’re going to see a lot of problems and great successes in that timeline, that’s super important point to drive home.
All right, so let’s change up here a little bit. Inflation, what do you think about that? I don’t know, is it going to be as bad? Who knows, but what’s your thoughts?
Okay. So when I think about inflation, now this is a question that popped up again, it popped up after ’08, ’09, remember we had the Federal Reserve doing quantitative easing, adding trillions of dollars to the banking system, but back then, all the money was going on the banks’ balance sheets. It sat not technically in vaults, because it’s not physical cash, we’ve moved to this digital world, but it was zeros and ones in a computer system that said the banks had this money on their balance sheets. But they weren’t lending it, they were getting paid for holding the cash, they were getting paid by the Federal Reserve a really small amount. But if didn’t make it to companies, if it didn’t make it to consumers, it wasn’t going to be inflationary. So we didn’t have a concern back then.
Now, this time around, things have been a little different. We’ve had things like the way we did the stimulus with the checks that were sent out, we’ve seen things like the additional payments on unemployment benefits. We’ve seen things like the PPP loans that were sent to small and medium sized businesses. Now, those were done because we’re in this unusual situation where people are out of jobs, have seen businesses close really through no fault of their own. It’s not that they had bad businesses, it’s not that they had bad products or services, their employees are not sitting home business they were poor workers, we had this pandemic emerge that nobody could really control, nobody was looking last year and saying, hey, we need to prepare for this massive pandemic that’s coming, because nobody knew it was coming. So we’ve seen this big government response.
Now, money’s flown into the system, but this time it is in the hands of consumers, it is in the hands of businesses. And they have the capacity to spend it, but so far, they haven’t. What’s happened is, the money that’s come in has largely been kind of sitting in checking accounts, savings accounts, or in money market funds, really, really low yielding, but “safe assets”. If you got stung in 2008/2009, and then you got stung again here, the demand for safety, for predictability, is incredibly high. You didn’t see either one of these things coming, they’re gut wrenching, especially when you’ve spent decades building up your retirement, working day in and day out, week in, week out, month in, month out, to prepare for retirement, and then you get blindsided by something like this.
So what’s held inflation back so far is that people have this demand for safety and they’re not spending the money, they’re holding on it, because a dollar is a dollar, today, tomorrow, into the future. It’s more predictable.
Now, my concern is that when we get confidence, that okay, maybe the worst of the pandemic really is behind us, we’re on this growth path and that looks likely to continue, or we hit say something like a vaccine, at that point in time, if the confidence returns and people say, hey, I’m comfortable spending some of this money now, moving it out of savings, out of checking, I’m comfortable kind of getting back into the economy, but at the same our supply chains haven’t fully come back online, that’s a recipe for inflation. There’s been a massive increase in money in the system.
I’m not expecting ’70s hyperinflation, and even that technically is maybe not hyperinflation on the global scale, but I’m not expecting double digit inflation. We were running about 1.5, 2% inflation from kind of the recession, ’08, ’09 recession, until the beginning of this year, I think that’s going to accelerate to somewhere around a 3-ish percent, maybe a little bit higher over some shorter timeframe. So we’re going to see that impact over the next few years, that could impact bond pricing, that could impact the dollar, it could impact commodities, but I think it’s going to be a gradual process.
But at the end of the day, I do believe that inflation is going to be coming, we’re going to see an accelerated rate over the next 5 to 10 years.
Awesome. All right, well said. Hey man, tell me about you a little bit, what’s your background? We talked earlier, before we started recording, you went to Kellogg, you mentioned that earlier. Tell me about how you arrived at your seat there at First Trust?
So, I’m born and raised in the west suburbs of Chicago, grew up here. I went to Hope College, it’s a small college in western Michigan, and I did economics, business, and philosophy. And I loved it. Now, I came out in a recession. I came out, I graduated from back then, coming out into a recession, and it was a difficult environment. I actually went into a completely different field in finance. I spend a few years, about five years, working in the web industry. So I worked with the teams that manage the websites for a bunch of NFL teams, I managed the sports department, so it was a really cool experience, but finance, economics was where my heart was.
So about a decade ago, a friend of mine who works here at First Trust, said hey, there’s this guy, Brian Wesbury, who’s now my boss, and he’s looking to bring somebody else on. Are you interested in meeting and having a conversation with him? So I got to come in, I got to talk with Brian, I got to talk with Jim Bowen who’s the head of, we’re a privately owned company. And we’re going to remain a privately owned company, and it’s because Jim, Brian, these guys that are the leaders of the company and the founders of the company have a very clear vision in terms of what we want to do, and we want to do things our way. We have this opportunity to invest heavily in research, to invest heavily for the long term picture. We don’t have shareholders looking at the quarter to quarter.
So I came here, I came to First Trust about 10 years ago. Went to Northwestern, did the MBA there, it was a fantastic experience, and then I did the CFA. So the Chartered Financial Analyst, depending on how you space them out, it’s like a two to three year. You take three tests, there’s these massive tests, you study 300, 400 hours for it, you go to a location one day during the year, you do six hours of testing. It’s got like a 45% pass rate at each level, but it’s a deep dive on the finance side.
And I love it, I love this stuff, I love doing this. There’s never a morning I wake up not looking forward to going into work, because the people I work with, the advisors we get to work with, the content we get to look at, it’s ever changing, it’s always interesting, there’s always something new to be learning. And at the end of the day, I got to be learning something, I got to be growing on something, or else I’m going to get bored.
Yeah, it’s awesome. And your guys’ insights are always just, I [inaudible 00:17:27] down to often what you’re hearing. So that leads me perfectly into this man, talk to me about the economy right now. I mean, Wesbury often talks about green shoots, [crosstalk 00:17:38] early in this crisis. Where are we at? Housing numbers look good, or at least are coming back, so what else are you guys seeing that our listeners might take some more solace in so they could start spending that money?
Yeah, so there’s been this ongoing battle, I’ll call it the battle of the progress versus the virus, and the virus dominates headlines. The media, and this honestly, is one of the biggest things that we deal with day in and day out, not just during COVID, but every day since the last recession, since ’08, ’09, there’s been this constant fear of what’s coming next, what’s going to drive the next recession. We are loss-averse people, psychologically, we avoid pain more so than we seek gain, and we’re always nervous about what’s coming next.
And the media, it has an incentive to do that, they want to you to stay tuned, and if they said, hey, everything looks great today, the markets are moving higher, and we’ve made some progress on xyz, well you can turn off the TV and you can go outside and get some fresh air, go for a walk, spend time with the family. But if they say, hey, stick around because right after the break, we’re going to talk about what could throw this recession even further down the hole. And then you’re like, well hold on, what is this thing that maybe I don’t know about, and especially if you got stung in the past, you’re going to pay attention to that. So they have an incentive towards pessimism.
But again, we focus on the data. And the GDP number, yeah, it was terrible in the second quarter, it was the worst number for any give quarter that we’ve seen in the post World War II era. But we say the employment number start to turn in May, that was when they turned, and that typically, historically, has been the marker for the bottoming out from the downturn side of a recession. We saw it turn in May, we saw it move higher June, July with the employment numbers, and it’s continuing to trend in a positive direction. So it looks very likely that this is going to go on the record as the largest decline, single quarter decline, in the post World War II era, but also the shortest recession.
And when we look at the data right now, if you look at jobless claims, how many people are filing for unemployment and are remaining on the unemployment rolls who aren’t returning back to work, that number has been steadily declining, and it continues to move in a positive direction. We’ve seen a pick up in requests from staffing agencies, there’s the ASA Staffing Index which tracks how many companies are looking for workers to fill positions, and that’s up about 7% in the last month. We watch things like rail car traffic and steel production, those are demand pieces for manufacturing companies, and those, rail car traffic is up about 11% in the last month, steel production is up 5%. And then we watch voluntary activity from individuals, whether that’s how people are getting up back on planes, how many people are checking into hotel rooms, or things like gasoline sales, how many people are getting back on the road. And those numbers that we get on a daily or weekly basis are showing strength and they’ve been showing strength now for a little while.
It got a little dicey for a period in time, kind of in July, when we were seeing that second wave, or I would argue that was really the first wave for states that hadn’t seen a first wave yet, but we saw a little bit of friction, a little bit of volatility during that, but now that we’ve once again turned, the numbers are pointing higher.
And housing number as you mentioned, we saw really strong housing numbers come out earlier this week, and last week we saw retail sales numbers that came out and those have been stronger. Really, if you look back at the short term indicators or the monthly or quarterly indicators, outside of GDP, which we won’t know Q3 GDP numbers until the end of October, about a week before the election, but that number right now looks like it’s on line to see about a 20% annualized increase in Q3, granted, coming off a lower base, because of what we had in Q2.
But, as I evaluate the situation, I think there’s very little argument that we are on a recovery pathway. Now, it’s a question of is it V-shaped, or is it going to kind of swoosh off, what could drive us towards a slower, faster pace of growth? That’s what we’re watching every day, but growth is here right now.
Awesome. All right, that’s great. Well, kind od along those lines, couple of other things, I had some late questions come in from my partner via text here, one of my partners over here, let see if you can manage these. What’s your market forecast in your opinion, short term and long term? And can you define how you come about, how do you define your long term forecast and that short term forecast? That’s just for our listeners.
Yeah. So we think about what is fair value. Now, there’s the price you pay and there’s the value you get. So we define value as historically, how have the markets traded relative to things like profits, because I believe that profits are the lifeblood of markets. If you buy stocks, if you buy equity, you are buying a share in a company, in fact companies grow over time as they produce more and as they have higher sales and earnings and net income, ultimately that flows through as a benefit to you as a shareholder.
So we watch profits as a primary piece, profits as they grow over time. And we look at the discount rate, how much does it cost for companies to borrow? How much, right now for example, I’m not going to into individual companies, but let’s say you’re an information technology company, and you are thinking about making investment over the next 10 years, and you’ve got some projections on how much cashflow and what on is going to come in. Well, right now, the cost to borrow for a 10 year period is at historically low rates. And you’ve probably seen that, if you’re thinking about what are mortgage rates right now, or things like that, mortgage rates are down at like record lows.
So we take into account that profits number, we look at things like the borrowing cost, that discount rate, and we compare how those have moved historically with the markets. And we look back every quarter going back to 1955, so you can see periods of disconnect, like we saw in the ’90s, when markets got overvalued. We can this massive undervaluation during ’07, ’08, ’09, as markets plummeted, they moved further than the profits and the interest rates justified. We look at this number, and this our long term, that’s kind of where are moving, how much room is there kind of to grow, before we get back into the point where the market can really just grow at the pace of earnings. So that number right now is very high, because interest rates are so low. And yes, we took a hit in the second quarter, profits took a hit in the second quarter, but if you look at estimates from analysts, they’re expecting that earnings are going to get back to where they were probably next year, and then moving forward.
But as I look at that, now I have to say, okay, if I believe that the markets are undervalued, and I don’t have kind of a specific target of where we’re going to be in five years, but as it stands right now, and five years is a really tough timeline to estimate from an economic perspective. Realistically, you can look out about a year to a year and a half, and after that, you’re kind of guessing. So we can look and say, are we severely undervalued, are we overvalued, or are we roughly fairly valued? I believe we’re undervalued.
Now, in order for us to get a short term target, where can we get to this year? Where can we get to next year? You have to look at that undervaluation and say, what are the short term factors? For example, this year, we still have elections coming in November, we have this battle between the COVID pandemic and the recovery side of it. And those are going to bring volatility to the markets, it could a headwind to both earnings getting back and consumer sentiment getting back, bringing some of the money back into the markets.
So every year, at the beginning of the year, we put out a target, this year we started the year at 3650, pre-COVID, and we moved it a little bit lower, we moved it to 3350 as we got early into COVID. But now as we look at it, the recovery has been kind of a bit faster than we were expecting, I think that 3650 number, whether we see it this year or whether that kind of is looking out into next year, I think that’s a very achievable number, based on what we’re seeing from a growth standpoint, people getting back to business. The markets are undervalued, it’s just how long does it take us to get the wheels back turning and [inaudible 00:26:19]. The vaccine is going to play a key role in that. If we get a vaccine in the fourth quarter of this year, which I think is a distinct possibility, I think we could easily pass that 3650 number next year.
So one of the things, and this is why Trevor, I love that we get to talk on an ongoing basis. This podcast, we do the recording, people get to listen to it, but we get to continue this conversation tomorrow, and next week, and next month. So that’s why we get to have these conversations with you, week in and week out, so we can kind of play and adjust as new information comes in, as unexpected events occur on the downside or on the positive side.
But yeah, 3650 is kind of where I’m targeting right now, for this year into next year, there’s not a specific date point on it. But even that, I believe is under the fair valuation that we could see in the next three to five years.
And that leads me to this, as you talked earlier about a lot of people parking cash, I think there’s something like, I don’t know, between 4 and 5 trillion sitting in the money markets, which is just insane.
Yes. So I think I know your answer to this, but equities versus fixed income, that fixed income, that’s the tough one. But yeah, any thoughts on that?
Yeah, so I mean, fixed income, especially if you’re looking at things like Treasuries. I look at Treasuries and I’m like, a 10 year at 0.6% or 0.7%, I can almost guarantee you, I can’t guarantee you, but I can almost guarantee that inflation is going to run higher than that. So if that is your return, you’re guaranteeing a loss in the earnings power of your money.
Now, I think equities are undervalued. I think there are opportunities in fixed income. We saw some areas like the high yield markets, where credit spreads expanded, when I say spreads, there’s how much more do you demand as an investor, how much more yield do you require to go into something like a high yield or a lower rated company than in the Apple of the world, that has immaculate credit, that has massive cash, and really you can pretty much be guaranteed has no concerns about paying their bills. There’s been some disconnects through all the volatility, and areas like high yield have seen things open up to some relatively attractive levels.
But here’s the thing I would say at the end of the day. When I look at the equity versus fixed income argument, I have the benefit of being able to look at this from again, a value versus price standpoint, what is the value that you’re getting for whatever price you pay. But there’s a critical element in that conversation for everybody who listens in on this call, and that is, their unique circumstances, and that’s where Trevor I go to you, because we get to look at these valuations, but you get to travel through time with your clients, you get to know their unique situation. What are their goals short term and long term? What’s their level of comfort? Because if you have a need for a certain amount of cash inflow that’s going to be coming, and you need it over the next year, two years, three years, then what you should be or what makes sense to invest in, is going to be different than if you’re looking at a 20, 30 year time horizon.
So that’s I love this kind of relationship that we can get to have, this partnership that we get to have, and you can then come and say, hey Andrew, I was talking with this client this week, here’s their situation, here’s what they need, based on those scenarios, where’s the opportunity? I think there’s more opportunity in general right now on the equity side than there is on the fixed income side, but there are pockets of fixed income that still provide opportunities as well.
All right, switching it up, we’re going to talk politics here. Let’s just say Biden wins, his tax policy, what do you think he’s going to be able to get done? And obviously that has a lot to do with the Senate, or whatever, but can we talk politics in general, and then I would like your thoughts on, what if Biden wins, what does that mean?
Yeah, so Biden, let’s talk on that, let’s talk on the tax perspective, let’s talk about what happens if Biden wins. If Biden wins the Presidency, there’s a decent probability that the Democrats will take the Senate as well, and they’re going to keep the House. So he’s put out a couple of tax proposals, really five proposals, on what he wants to do from a tax standpoint. There are two I think he can get done, and those would be, they can lift the top personal tax rate to 39.6 from 37, we’re going back up to kind of where we were at. So raise the top personal tax rate.
No, no! Come on man! All right, but go ahead.
Okay. The second one is on the corporate tax rate, and they could raise the corporate tax rate to 28 from 12. Now, I know a lot of people look at that and say, oh man, corporate tax rate is moving higher, certainly a headwind to earnings and earnings per share, but I kind of take a glass half full on this move to 28 from 21, if they get in that position and could do it, because if you remember, pre-2018, we were at 35%, not 28%. So now the conversation on the, let’s raise corporate taxes, now they’re putting the ceiling on this thing at 28, and the debate as it moves forward from there is going to be on 28 versus 21, not 35 versus 21. So even though it would be a trend back towards higher tax rates, and then he’s also talk about higher minimum tax rates, it’s a step forward over the long term, in that the debate is shifting towards a lower tax rate over time.
But okay, those two pieces are the ones that Biden could potentially get through, he would have to votes in the Senate, he would have the votes in the House. The ones that I do think are going to happen, they’ve talked about eliminating the step up basis on assets at death, I do no think that’s going to happen. There’s a lot of complexities on, somebody passes away, they leave assets like stock to their kids, the kids in many cases have an incredibly difficult time trying to figure out what the cost basis is on that. There’s a lot of complexities, I don’t ultimately expect that’s going to come through.
They’ve also talked about treating cap gains and dividends as regular income, rather than paying the capital gains rate, you can pay the higher personal tax rate on earnings over a million dollars, I do not think that this Senate would have the votes to pass that through. Even though the Democrats would have the majority, there’s people in California, there’s people in places like New York and Connecticut who are not going to want to pass that through, so they’re going to be pressing their senators. I don’t think that one will pass.
And the one that I think is virtually impossible to pass is, he’s talked about trying to apply the Social Security tax again for incomes over 400000. Right now, it goes to that base in the 130000 roughly, you pay Social Security tax up to that point, once you pass it, then you no longer pay Social Security tax on that income. They’ve talked about reintroducing it at 400000, I think that one is dead in the water.
So the two that could potentially pass are the top personal tax rate and the corporate tax rate. But here’s what I want everybody to remember, and to do this, take a step back in time with me for a minute, okay. Let’s go back to 2008, 2009, and 2008, 2009, we had Obama elected, becomes the President, so the Democrats have the Presidency, and remember, that’s Biden as the VP. They have the Senate with 59 seats. If they get pretty much basically every single toss up Senate seat this time around, they could be at 53, so they will have a slimmer majority. But they had 59 back then, and they had the House. Now, they also had the Bush era tax cuts, and that was a talking point, are they going to eliminate, roll back, the Bush era tax cuts. But then, just like now, they were in an environment where we had elevated unemployment, an economy that was looking in getting back onto its feet, it was dealing with a recession.
So as I think about what is going to be the priorities for a Biden administration if that were to come, if we saw a Democratic sweep, they have a short window, they have a two year window really, to get things done, because in 2022 at the mid-term elections, it looks very likely that the Republicans are going to take back the Senate. So then the Democrats have to make a choice now, are they going to focus that initial push on policy, are they going to focus on raising tax rates, individual and corporate, in an environment where they’re also trying to support employment growth, when they’re trying to convince companies to be investing in new plant, property, equipment, trying to re-grow the US economy, from the state levels on up.
And I think that that has a very really probability of delaying their actions. We didn’t see the Bush era tax cuts rolled back until 2013, which was four years after Obama came into office. They don’t have four years this time around, they would have to push it through early. They’d have the votes to push it through, but I’m not convinced yet that it actually would happen. I think in the early stages, everybody is going to want to focus on economic growth.
So at the end of the day, here’s what I would say when you think about the elections. It’s like you’re playing a baseball game and the umpire comes to you in the second inning and says, in the sixth inning, we’re changing the rules, home runs are now going to take away a point, they don’t add. So from the second inning until you’re about to be in the sixth inning, you’re still going to play by the rules that were in place. You’re not going to make the shift in the second inning for what’s going to come into place in the sixth inning, because the rules haven’t changed yet. So you’re not going to shift your batters, you’re not going to change out who’s in play, you’re not going to shift your strategy for a batting order or things like that. You play by the rules that are in place until it looks very clear and you’re about to reach that point where things are going to change.
The market makes some movements. The market makes some movements, because they’re forward looking, but it is not an environment where if you don’t move in August, or September, or October, that you’re going to miss the boat on the impact to the markets that’s going to come from whoever the President is. There’s volatility in these months leading up, but really what typically happens is, there’s volatility over uncertainty, and regardless of who gets elected on November 3rd if we have all the votes in, or maybe it gets delayed like we saw back in, what was it, 2000, with the hanging chads and we didn’t know until December, either way, once we know who will be in office, it brings this clarity in terms of, at least I know the direction that policy is going to go, and we tend to see businesses then start to invest, and individual start to put money to work, because the uncertainty is gone.
So last thing I’ll say here on the election, but this is a point I hope rings true with people, I can’t tell you right now who will win the election. I think right now, my personal view, if you made me bet today, I think that Trump is going to pull out a narrow victory. With the debates and some other stuff that’s coming, I think that he’s going to ultimately come back in the polls and will win the electoral college. But, I can’t say that for sure.
Here’s one thing though that I’m very, very confident about, that the day after we get the results, November 3rd, December, whatever it may be, the day after we get the results, half the country is going to be pissed, half the country is going to be ecstatic about it, and everybody is going to go back to work. And we’re going to keep working, we’re going to keep moving forward, and we’re going to remain one of the most productive countries on the face of this Earth. And Apple is going to product an iPhone regardless of who the next President is. And Amazon is going to continue to grow their distribution and try to get down from two day to one day to six hour to one hour shipping, or whatever it is, regardless of the Presidential outcome. And entrepreneurs and innovators are going to build new companies, and they’re going to push industries forward regardless of who wins this election.
That’s the American spirit, and that is something I would most certainly not bet against.
Yeah, and we concur with that wholeheartedly, and I think there’s a bunch of people who are sitting and waiting till after this election on a lot of cash. I mean listen, if Biden wins, I think we’re going to be in a pretty substantial pull back in the market, I would think, and then that’s freaking people out. Yeah, it’s a long game, and when you listen to you guys talk, when Bowen comes on, the guy that heads up First Trust, he often uses the words, we had this recession, but you know what we did? We just went back to work.
And that’s what we do, and a lot of people just forget that. It’s like, no, I still got to buy lettuce, and I still got to buy, and also we forget that, not to go too far on this, but we forget that we were founded by a couple of groups of Dutch guys down in Lower Manhattan, and they’re all about making money. And that’s never going away man, good or bad, but it’s never going away, and it’s not going away.
It’s not going away, yeah.
All right, great stuff. What do you want to talk about? I love to hear, is there something that you have a particular interest in? I love this question because I always get from guests, I always get something out. All right, I know you think about stuff, so what your thoughts? What are we not seeing, is there something special or interesting in the economy that you may some insight on? Go ahead, the floor is yours.
Yeah. Let me go one issue/challenge, and then let me talk about something that I think is underappreciated. So let me go with the challenge first. The challenge, one thing that we were looking at going into this year that’s been exacerbated by what’s going on with COVID, is the national debt picture and the national debt issue. We are in this environment where we’ve been running deficits year in, year out, for a while. That seems to be one of the few bipartisan agreements, is that we’ll spend more than we take in, and we need to address the spending issue. No country on the face of this Earth in history has taxed its way to consistent prosperity, it just doesn’t happen. We need to address the spending side. And we’ve spent another 2, 4 trillion dollars this year, adding onto the debt.
Now, it’s not a major concern to me here in the short term, because in the short term, what matters the most is our ability to pay our debt, our ability to pay any of the interest payments that come due. And while the debt has been rising, interest rates have been declining since the 1980s, and this year for example, pre-COVID, the average yield on debt that we had outstanding was about 2.4%. We’ve been issuing, on the short end, but we’ve been issuing debt at about 0.2% to pay for the stimulus and to pay for the actions that we’ve taken. Now that money is added to the debt, we do need to pay it, but it’s very affordable. It’s like refinancing your mortgage, you have an amount that’s outstanding, but when rates move lower and lower and lower, your cost per month decline.
So in the short term, next one, three, five, years, it’s not something that’s going to be a headwind that’s going to stop a US recovery, or that’s going to throw us into a recession. But I got two kids at home, and this is what I would like to see as the top priority in the next three, five, ten years, that somebody will step up and say listen, we need to address the spending picture, we need to address that issue, because we’re on an unsustainable path with building it up. I would love the debt, and particularly how we’re going to address the spending side of it, to become a national priority.
I do not see anybody on either side of the aisle who is willing to fight that battle right now, in part because it’s so convenient with how low rates are, and it’s not a headwind immediately. And frankly, it’s a lot easier to get re-elected if you’re promising to give things to people, it’s a lot harder when you say, listen, we promised a little too much, we need to work together to address this. So that is what I see as a challenge that’s going to face us 5, 10, 15 years down the road, and something I hope we start battling or start addressing sooner rather than later.
On the opportunities, or kind of the side of, what is being missed right now that I wish more people understood or thought about? And there are like, I would call them miracles, there are some miraculous things that are taking place in the US and around the world that I think are underappreciated because of that fear we have, the loss aversion we have. When we look at things like cancer and the mortality rates on cancer, and how many people now get cancer, and cancer is a horrific thing, and I think pretty much everybody who’s listening to this, everybody I know has been impacted by it in some way, whether it’s a family member, a friend, somebody we know has battled it. The good news is that every single day we’re making progress on dealing with things like cancer, the mortality continues to decline year in and year out. We’re making this unbelievable progress that we never hear about.
And when I look at what’s happening with the vaccines this year, with COVID, we’ve got this environment where normally, this would be a two, three year process, and we’re talking about having vaccines processed through, coming to market, in the span of six months, six to eight months.
It is mind blowing if you take a second and stop and think about what’s going on, and when you think about the fact that we’re living in this time period where pretty much regardless of where you are in the world, you had never had more information, readily available at your fingertips for free basically, instantaneously. You can now get a better education on a cell phone than you could have going to Harvard 60 years ago. A kid who’s in India can learn topics and dive deeper, get more information, better information, than the ultra elite could in our grandparents’ age.
And I think that’s an incredible thing that’s happening. With that, the world poverty rate has been declining, we went from around 60% just as recently as the ’60s and the ’70s to now we’re under 10%. And the literacy rates, and the rates that people are going to school in places like Africa and India and China, to me it’s an unbelievable thing in world progress that we miss, because we’re always concerned about what is that next fatal thing for the markets or for the economy. We miss out on the miracles that have been consistently driving us forward.
If you look at the economy, if you look at the markets over the last 60 years, if you kind of squint, yeah, the squiggles are there, but it’s clearly a line moving higher, and that’s coming from this progress. The emotions drive short term volatility, the fear drives short term volatility, but the real things that are taking place around us that we often miss are driving us forward over time.
Well, let me ask you a personal question. How old are your children?
I’ve got a two year old and a five year old.
Okay. So I got a 13 year old and a 16 year old, and just the fact that they’re in their rooms right now, online, at school, through whatever, Zoom, it’s just like, that was not possible five years ago.
No, that wasn’t possible when I was in high school. I mean, 20 years ago, we couldn’t have done that. Imagine if we had hit COVID in the ’90s, the impact would’ve been even more severe, the timeline would’ve been even longer, and our ability to operate wouldn’t be anywhere near, and that’s just 20 years ago. It’s incredible.
I wouldn’t say even five years ago, I don’t know if Zoom had already been out at capacity, to do what they needed to do. So yeah, it’s incredible.
A couple of more personal questions, and I know you’re a busy man, being an economic superhero, what do you do outside of being an economic superhero, like what are you reading, what are you podcasting, what are you streaming, what’s going on?
Before you go further, are you a Sox guy? I know you’re a Chicago guy, where are you at with that?
So I’m a Bulls fan, I grew up in the Jordan era, so Bulls were everything. I watch a little bit of Blackhawks. I played baseball growing up, but I don’t watch a ton of baseball, but when I do, I’m a Cubs guy. We did some celebrating when they finally won the pennant again a few yeas back.
But I’m a big reader, I love to read. Right now, I’m reading Why We Sleep, it’s a book on one of the questions I’d never really thought of, why is it that we sleep at night? What is it that goes on in our bodies and our brains, why do we need six to eight hours a sleep per night? I read across a ton of different topics. I love biographies, if you haven’t read Boys in the Boat, which is about the 1936 Men’s US Olympic rowing team, phenomenal book. Or I love books like Show Dog, about Phil Knight, who built Nike. Oh my gosh, you see these people, and you see the success they’ve built up, but you don’t see the battle that got them there. You don’t see how incredibly difficult was the path, and how so many people would’ve quit before they ever got to that point.
So I read really broadly. My office here at First Trust and my office at my house, it’s just filled with books. And probably a third of them are books I’ve completed, and the majority of them are books that I’ve got that I want to read. I usually have a few books going at a time, so right now I’m reading Why We Sleep. I’m reading called Off the Clock, it has to do with just building memories with your family and time management and things like. Short books, but it’s been a cool thing, as I think about in this time of COVID, when we can’t do a lot of stuff, when we can’t go out, we’re not really going on trips like we used to, what are some of the things you can do to build those memories with your family, with your kids, things that kind of last a lifetime. And then I’m also reading Barbarian Days, which is a book, won a Pulitzer a few years back, but it’s a true story about a guy who basically chased surfing, and he was looking for the perfect wave around the world.
So that, I usually do at the end of the night. I read a lot of research here for work, that is the vast majority of my job is reading, trying to keep up on everything. If you’re looking for people to kind of just follow, Mark Perry at the American Enterprise Institute, he’s got a blog called Carpe Diem, I think that’s a fantastic blog. Scott Grannis at Calafia, and I probably butchered that name, Calafia Beach Pundit, I think he is fantastic. So those guys, and than Bret Swanson, he’s also at the American Enterprise Institute, he talks on technology progress. Those are guys that when they publish, I’m usually taking a look to see what they’re talking about.
But that’s [inaudible 00:49:55] I’m watching. When I’m not working, when I’m not reading, a few years ago, I had the opportunity with some people that I grew up to build, we started a non-profit that works with kids facing life threatening illnesses in their families. We do camp experiences for them. It’s all based on donations. We bring these kids in a couple of times a year, this year we can’t, because of everything that’s been going on, so we’re working to bring the experience to them. But if you’ve got kids, and so once you have kids, you realize that that situation where you would do anything for your kids to avoid them having to go through the medical emergencies, and these things that are just incredibly difficult battled.
So built this camp up a few years ago, and we bring the kids in, we bring the whole family in, and say, this is a week or a weekend, where theses kids can just be kids. Everybody there is facing a life threatening illness, we’ve got staffing to help with that, we’ve got the medical resources to help with that. Where a normal camp experience, they maybe stand out, because if you got the other kids who aren’t facing that, they’ve got different needs, but when everybody is facing something, it’s like that fades away. So the kids get to be kids, they just get to enjoy a break from the hospitals and the surgeries and everything else that’s going.
So that’s been a blessing that we’ve been able to work on these past few years, that’s what I’m typically working on when I’m not with the family, reading, or here in the office. We’ve been blessed.
What’s the name of that charity?
Camp Bangarang. Camp Bangarang, and we’ve been running for a few years now. We’re largely based in kind of the Mid West, similar to the Paul Newman foundation. Actually, the guy who is our camp director came from the Paul Newman foundation. They’ve got a similar theme, similar thing they do, we found that it was kind of underrepresented here in the Mid West. There some places out in New York, they’ve got one in California, they’ve got at Ireland international. We talked with them first about bringing one here to the Mid West, they’ve got a focus on Europe right now, because Europe is severely underserved, but they said, hey, there’s a need there and if you guys want to do that, we wholeheartedly support what you’re doing.
So it’s been a fantastic thing to do. When we go, I get to bring my two year old and my five year old to camp. They get to go and they get to interact and it’s a great experience for them too. They love it, the families love it. It’s one of those things you always walk away and it brings a smile to your face, seeing the smile on the kids’ faces.
That’s big. All right, so Camp Bangarang everybody. I do also just a lot with a related one, here in Raleigh, and there may be others around the country. But there’s a great charity here in Raleigh, North Carolina called Flight of Hope, and they transport kids who are in a desperate need, which is a huge expense, you know, to fly somebody [crosstalk 00:52:45] of surgery in God knows where. So I just want to shout out to them, same sort of thing, and that’s huge man.
All right. Well, last question, I always ask my guests, I love food and all that, so where are you getting take out from? I typically like to shout out for Indian restaurants, because I never, listen, you talk about getting decimated, restaurants, holly cow! So where in your neighborhood or nearby are you getting some food lately, for the family? Give a shout out to-
So okay, so if you’ve been to the Chicago land area, Portillo’s is out here. Portillo’s hot dogs, burgers, I mean they got everything. If you ever come to Chicago, go to Portillo’s, fine one. That’s what we had last night for dinner, my kids love it. They deliver now, which is a little bit dangerous. But that’s been a big one for us. We got a locally owned pizza place that’s right down the street from us, that we’ve been hitting up a lot. And yeah, that’s what we’ve been doing.
What’s the cuisine at Portillo’s?
So they’ve got Chicago style hot dogs, they are like basically the Chicago style hot dog. They’ve got phenomenal cheeseburgers, one of the best burgers in the area. It is incredibly good, they got great salads. And if you come, get a piece of the chocolate cake.
Chocolate cake, okay. You heard it here. That’s awesome.
All right brother! Hey man, let’s do this again. Maybe in a two, three months, we’ll review the tape and we’ll see where we’re at. But we really appreciate your time and your insight, and I look forward to doing this again some time.
Absolutely. Trevor, thank you so much for having me.
All right brother! Hey man, have a good week, and good luck, I know you guys are going to be slamming now, coming into the end of the year with all this stuff, so I look forward to getting the advice.
Perfect. All right, take care. All the best.
Thanks a lot. Yeah brother, bye, bye!