Ladies and gentlemen, welcome to the business Brew.
I am your host, Bill Brewster. As always, thank you for tuning
in. This episode features Stewart
Lauren of Fort Sheridan Advisors.
Stewart was on the pod previously, though we talked
about non financial things, so I had reached out to him after I
said I really enjoyed speaking with you.
And if you ever want to come on the pod, hit me up.
I'd love to talk to you about financial related stuff next
time. So Stew Stewart put together a
deck that he's been very involved in Chicago politics
recently. And I think, I mean, you'll hear
it in the episode, but it's got him thinking about the evolving
social dynamics in society and and how there might be
investable themes to go along with that.
So I will link to his deck in the show notes.
And I hope you like what you see or hear.
I think it's a very interesting conversation.
Not the most uplifting, but it is very data-driven and there's
not, you know, it's just kind of it is what it is.
So anyway, I hope you enjoy the episode.
As always, none of this is financial advice.
Everything in this program is for entertainment purposes only.
Please consult your financial advisor before making any
investment decisions and do your own due diligence.
Enjoy the show. Ladies and gentlemen, Stewart
Lauren back for the second time. More investment focus this time.
He and I have been in touch for a while and he sent me over a
deck that he said, you know, I'm kind of working on hooking up
some themes. Would you want to talk about?
I said, I like this very much. So here is the episode.
So, Stuart, thank you for stopping by.
You want to give people some background in case they don't
know. Sure, absolutely.
And thanks Phil for having me on.
So my name is Stuart, I'm in Chicago.
I'm at a firm called Fort Sheridan Advisors.
We are about a billion dollar asset manager.
We manage accounts for ultra high net worth, high net worth
individuals and institutions and also do some advisory work.
We've done some thematic funds in the past.
And I had an idea sort of born out of my experience in Chicago
that that I call the age of social disruption.
And the gist of it is that I think we're going through a
period where economic disaffection, social
disaffection, political disaffection leads to more
populist type politics. It leads to consumers looking
for escapism. And it could be potentially A
regime shift in markets in terms of in investment opportunities
and risks. I'm a history major by
background and I think the American experience has some
central tenets to it, many of which are fraying at the seams,
and we can get into that. But the the main thesis and
we've seen it play out of the last couple years in terms of
political results is that we're probably in a socio
economically, socio politically bit more of a turbulent time
period than we've experienced in the past.
What, what historical periods would this remind you of?
You know, when you're, when you're thinking about this, are
there other countries, are there different periods or is this
sort of a unique time? You know, I think it's sort of
unique in the American experience and, and I can get
into why, but I, I think key to the American experience has been
this idea that we have sort of unlimited geographic mobility
and economic mobility. And for various reasons and, and
it's really been a process over the last century, but more so
in, in recent years, geographic mobility is really difficult.
I was surprised by this. By this slide in your deck, I
was surprised how I was surprised a how how many people
used to move and then I was surprised how the how drastic
these the drop off has been you you don't even see many inner
county moves anymore right that's.
Right in in the 1950s, geographic mobility defined by
people just moving was about 20% of the population.
For different county moves that was about reached a peak of
about 7 1/2%. Different state moves was about
3% and the the total geographic mobility has dropped from about
20% to 7 1/2%. In 2023, which was the last
census data. Different county and state moves
have plummeted and, and we all know the reasons why housing has
become unaffordable for many. And that leads to a sense of
people just feeling stuck. And when you pair that with
declining economic mobility, it, it's not a really great melting
pot. And what do you do when you're
stuck physically and you're stuck economically?
You know, if you're going to seek to move, I think you might
seek to move ideologically, psychologically.
And we, we can get into some of the implications of that.
Yeah. Now.
Yeah, I guess it would be interesting to see cohorts of
people that are happily stuck first, those that are miserably
stuck, right, That would be it. That's true.
Interesting thing because because some of, I mean some of
it obviously some people have like mortgages on homes that
they like or a lot of these homes I guess are actually paid
off, which is wild to me. But that is neither here nor.
There, it's just the sense I think of opportunities being
foreclosed and I think that resonates with some people
obviously more than others. You know, you talk about people
in our age bracket. I'm going to be 40 in a couple
weeks. You know it's a.
Great decade of your life. Hopefully.
It'll be good. You know.
Although the midlife crisis may come, but that we'll get through
that, don't worry about it. Pretend you did the right thing.
Pretend that you know you you went to college because that's
what everyone said you should do.
You took out debt to do so and you graduate into a job market
around 2008. And the opportunity set is not
perhaps what you expected. The recovery is slow.
You got to be in your mid late 30s.
Maybe you have kids. The world shuts down if you have
kids. You don't know what to do with
them. And then maybe when you're
finally ready to buy a house, housing costs have exploded 50%.
So, you know, fortunately that that doesn't describe everyone
in our peer group, but for a lot of people that's been that their
experience. And it's unsurprising that
politically the the exit valve for that is on the left,
arguably quasi socialism. And you're, you're seeing
candidates like that went across the country.
I'm in Chicago, we we have one as our mayor.
New York might have one seen, too.
And on the right, you're seeing a surge in populism, and it's
just at a very base level, people want a more responsive
politics, regardless of whether the policies behind it have any
merit. Yeah, yeah.
The wild thing, too, is not only is the New York candidate
potentially going to win, you're starting to see some national
support behind them. Yeah, it's a a very different
type of politics, I think resonates with the base of each
party who's who's fired up by all of these issues.
And I I just am not sure what the catalyst would be for
everyone to take a step back and maybe think more rationally
through this. Yeah, Well, one of the one of
the charts that you had, you know, laid out like Republicans,
how they describe Democrats, how Democrats describe Republicans.
Maybe it would help if we all just kind of dropped our labels
and stop being football fans for a little bit, started being
Americans, but that's not going to happen.
That would certainly help. But maybe what what I should do
is just go through the the main tenets of this thesis that I
have. Yeah, I would like.
To real quick before you do that, I'd be curious just to get
briefly into your experience in Chicago because I know that
you've inserted yourself into local politics and like what
have you, what have you seen that sort of got you pulling on
this thread? Well, I never thought I'd be
politically active. I became so in the last four
years because the the policies in Chicago started affecting my
family life. We we had some close calls with
public safety right around our house, which isn't the most
exciting thing to have happen when you have little kids.
I had. 3 when I was like. Yeah.
Two armed robberies at gunpoint in my alley.
Not not what you sort of expect when you move into those types
of neighborhoods. So I, I became a bit more
politically active when our current mayor, Brandon Johnson
was campaigning, I was very active in warning about the the
implications of him winning, particularly for the the city's
economic and financial future. He won, credit to him.
But since he's been in office, I've been working with some of
the, for lack of a better term, more rational officials, elected
officials in in city government and in the state government
trying to prevent sort sort of the, the worst of their policies
from a finance perspective from coming into action.
I've I've testified in City Hall about finance issues, I've
worked behind the scenes and preventing some disastrous terms
of bond issuances from from getting implemented.
So it's sort of like blocking and tackling until the next
election. But I tried to take a step back
a year or so ago and, you know, it's, it's one thing to sort of
complain all the time about how are people like this winning and
they're going to destroy the city.
It's, it's another to think, OK, well, what propelled someone
with this set of views to victory?
Obviously some people needed to support it for him to get as far
as he did. And you're you're seeing
candidates like him resonate across the country on New York
being the primary example. It's it's more constructive to
think how did we get here and what does it mean, especially if
if you want to change the the political landscape.
But as an investor, I think it's really important to think, all
right, what does this mean? What, what does this mean for
now in the future? And how does that change the
risk environment potentially in the opportunity set?
Yeah. Yeah, I agree.
All right. So do you want to go, do you
want to go through like sort of the age of social disruption,
for lack of a better term? And we'll kind of see.
How it goes, I'll, I'll, I'll do a brief run through my thesis.
So again, the, the, the main point is that people who are
experiencing economic challenges, people who are
experiencing social frustration, political frustration, the, the
combination of all that will lead to a more populist type of
politics on the left and the right.
And it's going to lead to people looking for an escape valve in
their personal lives. And I think that gives us just a
different type of risk and investment environment than
perhaps we're used to. I think looking back in history,
reading some of the foundational texts in, in, in the US
experience are really helpful for framing about how we think
about the country. One of those to me is
Tocqueville's Democracy in America.
And, and the commentary that he had, you know, 200 years ago
almost still is important for how we conceive ourselves today.
And I would argue we're we're getting away from that.
So one of the things that he remarked back when he he wrote
his volumes is that when, when all the privileges of birth and
fortune are abolished, when all professions are accessible to
all and a man's own energies may place them at the top of any one
of them, and easy and unbounded career seems open to his
ambition. There's been there's been this
idea in the American experience that, you know, basically we all
start as equals. We, we can accomplish
everything. Obviously, you know, that's not
how history is played out for everyone, but that that's a
really important concept in terms of how we view ourselves
and view the country. And to the extent we get away
from that, that's leading to to a lot of turbulence.
So we already talked about declining geographic mobility
and, and, and to a smaller extent economic mobility.
But just keep point at the outset.
If we have this sort of break in the unwritten social contract,
which is that this this is basically a land of opportunity
where if you work hard, you can have a good outcome that's going
to lead to a break in the status quo in politics and the economy
and consumer behavior. And, and I think what it means
is that individuals are likely to be more self focused and more
short term oriented. And the government, importantly,
is likely to be more responsive to popular needs to maintain its
support and legitimacy. And we can get into all that.
So. And you and you get your your
idea of individuals are more short term focused is is based
on the premise that if you are less optimistic about the future
and your mobility than thinking long term.
Absolutely. Why even plan for the why even
plan for the long term? Yeah, if if it seems
unattainable. Yeah.
And and I think for a lot of people in our peer group, like
that's their mindset. And you know, you, you either
just spend all of your disposable income or you know,
you, you trade zero data expiry options and, and hope for a home
run. So we, we don't need to get into
all the data on housing. I think everyone listening to
this realizes that housing has become a lot of it a lot more
expensive in many markets and we don't build enough of it.
About 1/3 of the country lives in stressed housing markets,
which, which means that their, their housing expenses to income
is over 30%. For a lot of people in big
cities, it's more than that. And the the great news, and I
say great in a very sarcastic way, is should you not be able
to afford housing? Rents have outpaced wages since
the GFC. So your rent is going and.
Even more so the last couple years now.
Now my landlord friends really like that.
But that's probably not good for social stability.
First time buyers are are being priced out.
The the average age of home buyers was 33 six years ago.
Now it's 38. You have more adults and who are
25 to 34 living with their parents.
So in in the 1960s that that was about 10% of that age group
lived with their parents. Today it's closer to 20%.
I'd be curious to know those that don't.
I'd be curious to know how much of their housing is subsidized
by their parents. Yeah, they're, well, I keep
reading about how everyone in your marketing is getting
parental handouts. Yeah, it's, but, but just think
about that like if, if you're living with your parents still
as a young adult, you're, you're just, you're not going to be
able to start your career or family life the the way you
probably want it to. And I I would think that leads
to a lot of frustration. There was a study done by some
Stanford statisticians in 2017 on the number of children who
are out earning their parents. And every 10 year cohort from
the 40s through the 80s, that number keeps dropping and
dropping to the point where people born up until the mid
1980s, only 50% of that cohort was out earning their parents.
It used to be in prior decades, sixty, 7080%.
So the, the presumption that you'll be more successful than
the prior generation, you know, that's that's in question.
And I would guess that the data from kids born in the 1990s
substantiates that. If that study's updated, it
would be odd if it. Doesn't I mean to your point,
like on that chart, 194050607080 goes down reliably.
So the 1990's, the probability it it.
Yeah, I would agree with you. It'd be interesting to see.
So, so economic social mobility or excuse me, economic and
geographic mobility that that's foreclosed to to many and
compared to the past. From the financial standpoint,
from a personal finance standpoint, a lot of people are
having difficulty out there. About 1/3 of Americans have
difficulty paying their bills. There was a survey done earlier
this year by Bankrate that asked if you, if you have an, an
emergency savings account, how much do you have?
About 70% has less than five months of expenses covered, 50%
plus has less than 3. Wages are not keeping up with
corporate profits. You know, we, we, we hear this
all the time. The top 10% is doing better than
than the rest And, and it's more extreme the, the higher up you
go on those percentiles. But the top 10% has over 50% of
the wealth. The bottom 90% has over 50% of
the debt. I, I think what adds gasoline to
all of this and, and sets it further on fire is people are on
their phones all day long on, you know, Instagram or whatever,
looking at all these influencers who are portraying amazing
lifestyles and, and you think, you know, why can't I have that?
There's actually a term for that called money dysmorphia.
And about 45% of Gen. Z and millennials are
categorized as exhibiting that. And it again it just.
Leads to a lot of frustration. And the question is, what's the
outlet for that frustration? And it's, it's a unfortunately,
in my view at least, it's a type of politics that doesn't
probably stand the chance of accomplishing the, the, the
goals it purports. So again, quasi socialism and
populism, which I think will lead to a lot more instability.
Driven by a lot of resentment, I would think.
Right? Like, yeah.
And, and again, I'm not judging anyone for that, you know, I,
it's, it just sort of is what it is when we're trying to
understand it. We have all these younger kids
graduating from college now with tons of debt.
There's a question, you know, they, they had a couple years
where debt repayments were were paused that started to resume.
How are they going to repay that?
That the delinquency rate on student loans for being 90 days
behind is about 30% right now. And if you look at some of the
employment numbers for recent college grads, it's not looking
great. There's a question is that AI
taking those entry level jobs? If so, how are these kids ever
going to repay that debt? I, I have some strong views on
that as my, my wife and I repaid a lot of student loans and that
was not a fun experience. But if if you're 20 something
years old with six figures of debt and your employment
prospects are not what you thought they were, you're,
you're going to vote for someone who says, hey, let's cancel
student debt, sign me up. Labor market.
You know, we've all seen the statistics about, about the
decline in manufacturing jobs over the years that's affected a
lot of blue collar communities across the country.
And the, the question is, what's going to happen to white collar
work? I use AI all the time and I, I
think it, it allows me to be extremely more productive.
But if, if you're a junior person in the labor force and
firms are trying to protect their profit margins, you know,
there's a cost to hiring someone new.
Are you going to hire someone new or are you going to use
Chachi Petito 3 model? So longer term, I'm really
bullish about what AI means for productivity, but shorter term,
it's probably going to be quite disruptive.
And white collar workers have never really needed to deal with
that type of disruption. So on for, for the blue collar
workers, I, I think most data shows that disaffected people in
the Midwest who lost their manufacturing jobs over the last
20 or 30 years that they've supported more populist type
candidates, which, you know, it's part of Trump space.
And I think to the extent white collar workers are affected, a
lot of them go for sort of a different flavor on the the
other side, social institutions. You know, Tocqueville said in
his Democracy in America that Americans of all ages, all
conditions, all dispositions constantly form associations,
associations of 1000 times religious, moral, feudal,
general, restricted, enormous or diminutive.
We're social preachers in in America and something changed
where a lot of those social connections are just becoming
more afraid. So anyway, you look at it merit,
there was a popular chart shared on Twitter the other day about
30 year olds who are married and have a home and just showing
severe decline. But if you look at marriage
across the board, not as many people are getting married, not
as many people are having kids. That the total number of
families with kids under 18 peaked in about 2006, about 36
million. We're now back down to about 33
million. Those are 1995 levels, despite
the population being quite larger.
There's a survey done by Pew across different countries asked
me how close do you feel to people in your community and
country? the US ranked just about dead
last compared to 24 other countries.
In those surveys, only 66% of people felt close to other
Americans. 54% of respondents said they're close to people in
their communities. In 1990, the average American
had at least three friends. Today those numbers are are
about half. So 50% of people in the 1990s
said they had more than three friends.
Now it's closer to to 25%. Yeah dude, in the amount of
people that say that they have no friends is 12%.
That's crazy. It's sad and.
It used to be 3 for context. Yep, we're we're spending more
time alone. Particularly like after COVID,
younger Americans are spending a lot more time alone.
The crazy thing about this that keeps going off in my head and
it's, it's probably not correct, but I think so much of it and,
and maybe I'm putting a square peg into a round hole here, but
I really feel like a lot of it is phone addiction and social
media. And meanwhile, the market caps
of those companies are the highest, right that out of the
entire market. You know, it's just wild to me
that I think that, like, a big component of what is driving
loneliness is also apparently the most lucrative.
It's kind of messed up if I'm right, yeah.
There, there used to be a book not used to there was a book
called Bowling Alone, which sort of predicted much of this maybe
20 years ago. The the sequel could be
scrolling alone. Yeah, that's right.
It's and it's not like when you're doing some of these
activities that you're, you know, if we're on the phone
texting your friends, you know, that's, that's a way of
engagement. But, but I think for many, the,
the fact that so many Americans say they have 0 or only 1-2 or
three friends at least says to me that a lot of that time spent
alone, if it's on the phone, it's not social time.
Religious affiliation is declining.
In 1900, almost every single American was part of a religious
community. We're down to about 70%
religious affiliation out of that group.
You know, most people are not serious devotees and and
religion, you know, for some is really important, for others
it's not. But what it does provide is a
sense of community. And if if you have no sense of a
local community, if you have no sense of a religious community,
if you have no sense of a friend community, like you're going to
try and find something. And I think for a lot of people,
unfortunately, the community that they do find is a political
1. And that's great, but it just
leads to like, hyper bipartisanship.
And I don't think that's the healthiest thing for the
American experience there. There was actually a study done
earlier this year published in a journal called Political
Psychology. It said basically that political
identity now outweighs all other social identities.
That's crazy. That's not good.
No, and and it goes into how ideology is driving
polarization, which isn't surprising.
Like if, you know, people need some purpose in life and for
money, like the outlet is politics and it's sort of an all
or nothing thing and. Well, that, yeah, the the
problem as I see it is if people are, if the primary identity is
politics and the way that people describe the other party is so
unfavorably now, it's like, how can you have a sense of
community if you think half of the country is complete morons
that are like brainwashed or hateful or whatever, right.
Like that? That is not a good place to be.
No, it, it makes it tough. I mean, there's been surveys
about like wouldn't if, if you're a Democrat or Republican,
would you let your child date or marry someone from the other
party? And, and like the, the answers
are basically no, which, which to me is crazy.
Like, it's the last thing I'd care about, but a lot of people
really care about this. Well this could be total fake
news, but I saw today that that there was something floated on
Twitter so take it for a huge grain of salt.
But 43% of Republicans would support Trump if he was in the
Epstein files. Like what?
What are we talking about? I didn't see that.
I just saw it this morning. I was like, this is insanity.
I don't know if it's real, right?
But like the fact, the fact is I actually kind of believe that it
could be real and that's kind of.
Sick people derive a lot of meaning, but like, if you're not
deriving meaning out of other aspects of your life, if you're
not deriving professional meeting, if, if you're not
deriving family meaning, community meaning, you got to
find something that's meaningful.
And if it's politics, you know, you're, you're going to support
your candidate and your party. And no matter what, I know.
I say this is I say this to people, but like, I supported
Jay Cutler as a Bears fan. I hope Jay Cutler is super, you
know, happy. But that was the wrong decision.
And it's like the Pledge of Allegiance to the Bears had me
defending, you know, my guy, Jay.
And people were like, you're blind.
And they were right. No comment on that.
Poor Jay, he could sling the ball.
That was fun. Oh well, it should have been a
different outcome. Anyway, I digress.
Anyways, if you don't. Think it's that different than
politics, for the record. No, it's not like people.
It's it's the same. I, you know, sports is a much
healthier outlet in my opinion than politics.
But people care about their political group candidates
inside, just like you care about your sports team.
Well, and dude, to your point, if your, if your identity in
communities that you used to get, you know that your identity
and community that from is gone and all of a sudden people are
shifting more to politics. Like it's, it's a natural sort
of conclusion that people would be more dug in.
But man, that's that's a scary place to be.
So, so not only are we shifting more to politics, but like we're
more frustrated by our political institutions at the same time.
So probably no surprise. Trust in the government is at
basically 70 year lows per per surveys.
Only 22% of people say that they trust in the federal government,
down from post World War 2 numbers in the mid 70%.
There was a survey by Gallup of confidence in various US
institutions. Congress pulls the last with sub
10% confidence. Probably not a surprise.
Small business actually pulls the highest.
Yeah. We've talked about the growing
sense of partisan division. There's intensely competing
cultural values on each side. And to no surprise, like we're
we're, we're getting candidates emerging on each side who are
tapping into this frustration. And they are not the
establishment type candidates that we grew up with.
I think on the Republican side, it's pretty much been overtaken
by the, the Trump version of populist politics.
And on the left side, the, the establishment Democrat Party,
you know, of the Clinton, Obama years, they, they don't have
anywhere near the same kind of sway that they once did.
All the energy is on the farther left of the spectrum and it's
with candidates like AOC or or candidates like Mandani and
representatives like AOC. That's, you know, where where
all the popular support is. Really interesting surveys and
this is starting to get more into topical discussion for
markets. But young Democrats in a survey
a couple years ago for respondents age 49 and younger,
socialism is far more popular than than capitalism. 60% of
respondents under 49 support socialism over capitalism.
Now there's a question, do they know what that means?
I'm not so sure, but I think they support the concept of just
the government providing a lot more services and redistributing
wealth and not having free market competition.
Totally opposite skew on the Republican side.
And another interesting note on that survey is that it it
actually on the left, socialism pulled higher with upper and
middle income respondents than than lower income.
And, and I think that speaks to maybe the experience that people
in our cohort have had where, you know, you graduate college
with a lot of debt, you're making, let's say, low to mid 6
figures. You're in a big city, you know,
you feel like you maybe should be doing better than you are.
And things just seem more unaffordable.
And you're, you're on your phone all day seeing the, the lives of
the rich and famous and thinking, you know, I should
have that. And it's I think the mindset of
people who respond this way and support candidates who propose
socialist type policies is understandable.
Even if I don't agree with it. I, I just, it's important to to
get the the impetus behind why so many are feeling that way on
the right survey show that the populist support is growing.
Both parties surprisingly would support strong men leaders and,
and, and I think that speaks to just people being fed off on
each side and wanting someone to take charge and get their, their
lives better for them. What worries me just in terms of
the, the institutions that I think have worked so well for
the, the country and, and for just capitalism is that the far
left and far right, the populace right and, and the very
progressive left, both are in pretty strong agreement that the
economic system in the country is not working.
You know, they, they have different approaches maybe for,
for how they fix that, but the institutions are only so strong
as the, the, the people who support them.
And if, if we're seeing just an erosion and institutional trust
and capitalism and, and our economic system itself, I, I
think that's something investors need to take into account so we,
we can get into now more of the, the macro and market
implications. But fertility rates down, you
know, is, is people have more expensive lives and have started
their adulthood later in terms of just having their own house
and, and being married. Birth rates are falling.
And perhaps it's not, I mean, that's not just AUS phenomenon.
It's, it's a Western global phenomenon.
But because we have so many healthy older people, it's, it's
really a challenge in, in the US because our dependency ratio is,
has gone from about 15% in the 60s to now close to 30% today.
So it, it's really going to start pressuring the entitlement
system. We have Social Security and and
Medicare there. There's a question, how do you
get around that? Maybe AI rescues today, maybe
robotics can help to some extent.
But the the key thing I think is across the board, I think
Americans see some of our budget deficit and go, whoa, those
numbers don't seem sustainable. We need to cut spending.
And actually, for polling, most Americans, regardless of
political affiliation, do think the government spends too much.
Yeah, and misallocates the resources, right?
Yeah. Well, the same polling also
asks, do you think the government spends enough in XYZ
area? So for almost every single area,
the response is we spend too little.
So again, overall 16% of people, only 16% of respondents think we
spend too little, 60% of people think we spend too much, 22 just
about right. So, so 60% of people think we,
we spend too much on various government programs, but 60% of
people think we spend too little on healthcare, on Social
Security, on infrastructure, on Medicare, on education, on
environmental issues like like name your issue.
Yeah, that's right. People don't think you spend the
environment. So I, I, I think what, what it
comes down to it is that if, if you are benefiting personally
from government spending or, or you're in a difficult spot in
your own personal life, which I think many are, you don't want
to see the government pull back from spending.
So, so we have this conundrum where we, we see the deficit
numbers just growing and growing, But if the government's
going to maintain its popular support, you know, each party at
this, there's no consensus anymore for cutting the deficit.
Like, the the doge thing was a cute little experiment, but at
the end of the day that there's just no support on the left or
the right to really pull back from social assistance spending.
It's too important for too many people.
Yeah. So, you know, we're in markets.
We, I think we can talk about what that means for rates, but
my view is regardless whether we're going to go on a cutting
cycle and in the next couple months like I, I, I think the,
the, the longer end of the Treasury curve probably has some
upward pressure to it. That's what I've been trying to
figure out. I've been trying to figure out
why would a cutting cycle reduce the long end outside of term
premium right like but. I I don't think it would like
what would reduce the long run is if the economy slows some
somewhat or if you know, people's views on longer term
inflation change, but. So I think this might be dumb,
but if the economy slows doesn't the doesn't that the probability
of a budget like deficit to GDP problem expand even further?
It could in in in the short term, you know, typically the 10
year treasury. Tracks is a place, not nominal.
GDP and you know, just look at what the 10 years done the last
couple days as we've got some mixed economic data.
But I do think longer term the the look at the Treasury term
premium, you know, it was negative a couple years ago and
it is now very positive again. I think that was wild about this
and I, you know, I mean, I should know this, but seeing it
is different. But in 1984 it was 5% was the
treasury term premium. That's, that's it's .68% right
now, right? Very.
Positive real interest rates back then.
You know, another question is, are we really going to get that
serious about tackling inflation?
I think there is a strategic benefit probably to letting it
run at 3%. Everyone hates inflation.
Like I, I certainly don't like it and politically it was a
loser. But there's a difference between
having 6 or 7% inflation and let's say 2 3/4 to 3% inflation.
And that could be very helpful over time and sort of eroding
away our our debt problem. It certainly seems like whoever
is appointed next for the Fed chair will not have a very
strong inflation fighting mandate from the administration.
And again, the the other way, potentially out of the
predicament which the the government finds itself in of
having to probably spend a lot to maintain popular support.
But also not letting the the finance situation of the country
just blow out of proportions would be productivity unlocking
AI. If if AI can increase economic
productivity and we can get higher GDP growth, you know,
that does wonders for our debt ratios in in future years.
So I do think as, as part of this thesis, I have the
government's going to double down on investments that support
productivity enhancements, whether that's an AI, energy,
manufacturing, health. I, I don't think we're going to
tackle deficits the traditional way by cutting spending.
It will have to be. We really turbocharged GDP and,
and on the consumer side, you know, we've talked about
everyone feels, not everyone, many people are feeling
frustrated in their own lives, whether that's economic, social,
political frustration. What's your outlet?
We're spending more time in social media.
We're spending more time doing video games, streaming.
We're, we're spending a lot more time in the digital world
forming relationships, which very well could be meaningful
than we are in the physical world.
We are if, if you're looking to get out of your financial
situation, you know, maybe you're, you're trading options
or, or levered ETFs retail, which didn't really used to be
the main driver in markets. It is now a huge component that
there's data showing that net retail purchases, it basically
quadrupled in 2020 when everyone was at home trading their
stimulus money, but they, they stayed at that really elevated
level. And I, I think retail volumes,
the latest JP Morgan data shows that for large and midcap
stocks, retail volumes are in, in excess of 20%.
You know, there's been periods when it's got as high as 40% of
trading and you can look at the option volume.
It's just absolutely exploded the the daily volume for for
calls and puts now about 80 million or so.
You know, 10 years ago it it was 1/3 of that.
And and that's not all retail, obviously, but I think it's
probably a good chunk, especially when you look at, you
know, the zero day to expiry options.
It's it's the Reddit Wall Street bets crowd.
You know, more people are turning to crypto is a financial
alternative. I don't think that's shocking
news to anyone listening to this get gambling.
The the casinos in Vegas are having a tough time right now.
But gambling across the board, whether that's in person or
sports betting has gone way off. It's it's almost doubled.
We've gone from a we've gone from a world where ESPN wouldn't
touch gambling because it was affiliated to Disney to a world
where ESPN is has dedicated gambling feeds.
That's my opinion. Hey, if you want to gamble on
sports, more power to you. I will say one of the best, one
of the best golf events that I watched was ESPN and and it was
literally 2 guys betting whether or not people would hit the
greens on their next shot. It was incredibly entertaining.
And then I was thinking, how the hell am I going to teach my kids
how to do this in a healthy way? Or like introduce the concept to
them so that they're not, you know, I mean, I don't know.
The 18 year old male is such an idiot.
Well, whether that's a smart thing to do or not aside, more
people definitely are doing it. And there's this mindset that,
you know, why do you need to plan for the future?
It's just going to be unattainable anyways.
Spend every discretionary dollar you have.
So credit card balance are going up.
Credit card limits are going up by now.
Pay later volumes are are going way up.
It's about $100 billion gross merchandise volume in in BNPLII.
Personally am suspect of that business model because I don't
know what happens to those companies if we ever get a
recession, but more and more consumers are financed the NPL,
yeah. Oh, the loss rates on completely
discretionary items will be 0. Don't worry about it, there
won't be any problems. But you know, if you want a big
ticket item, like that's the way you're going to do it.
If if you don't have the money, you look at travel, you look at
dining, you look at live entertainment, like spending in
all those categories is going way up.
Spending on personal care is way up.
I I have a dog, I also have two kids.
But for a lot of people with without kids like pets are the
new kids. And the number of cats and dogs
in the country has gone up about 50% from 20 years ago.
And people spend a lot on their pets.
US spending on pet industry is about 140 billion last year,
which is up from 60 billion in 2016.
So that's an another category that that could see some
benefits. So what what I tried to do and
for anyone interested, I can make this deck available.
It's it's a fairly lengthy one, but come up with different
categories that are positively exposed to these trends for
investing. And, and the idea is that this
could be how you allocate part of your portfolio or, or you
could build a thematic fund fund around it.
Because I do think these trends are going to be with us for some
time. And, and I've seen it first hand
from living in Chicago that when people get really frustrated
with the status quo, you know, they don't go for the candidate
who will make a very reasoned pitch about what policies you
need to implement to improve things.
They'll go for someone who says I can fix everything and they
don't go into any details, but they are charismatic and
telegenic, so how? Much of Chicago's problem is you
can't get through the machine enough to get on the ticket.
Like, like, do we think that the mayor that's there today is
there in a truly open election, or is it that the political
machine sort of lifted him to get elected?
I Well, one of the problems we have is that no one votes.
I think we had only 30% or so people turn out in the last
mayoral election and you don't need to win a lot of votes to
become mayor of the city if that's the turn out.
Another problem and, and I think it looks to be a problem in New
York, is that the pragmatic voters don't rally around one
candidate in, in Chicago, there was a dozen or so people who ran
for mayor. And it, it gives a pathway for
someone who, you know, maybe only has 2030% support to, to
make it to the, the final round. And then, you know, once a
candidate is on the final ballot, they have a really good
shot. Yeah.
So I, I don't think this is just a Chicago problem.
I don't think it's just a New York City problem.
I would expect across the country, especially in cities
that have these cost of living issues and have highly educated
workforces where maybe a, a lot of the, the people don't feel
like they've achieved what they should have in life.
Yet you're, you're going to get at least on the left, more
candidates in the Brandon Johnson Sohran Mamdani style.
And it's, you know, I just think it's reality we we need to live
with on the right. I do think you got the type of
populism that we've seen the, the, the last, you know,
arguably 8 years, nine years. And it's I think we're a long
way away from bipartisanship and candidates like we had in the
1990s emerging. Yeah, it's, I don't know, It's
going to be interesting to see how it all plays out.
I will. I will say at the federal level,
like the, the government, you know, can print all the money it
wants to that there are obviously repercussions from
doing that, whether that's for the dollar or for interest
rates. But like, there are ways to
tackle some of these social problems and just for lack of a
better term, give money to, to people who are struggling or
just need extra assistance at the local level.
Like I, I don't know what a lot of States and cities will do.
The more that the the government gives money for or the
government diverts its finances for Social Security and Medicare
and federal programs, the less that's going to flow into state
and city coffers. And for States and cities, at
least in many of the blue States and cities, the finances just
are horrendous. And it's not clear how that gets
improved. And you have all the same sort
of social pressures at a local level, but without any fiscal
flexibility to tackle them. And for a lot of, you know, in
Chicago and New York and California, it's, it's not like
tax rates are low and you have scope to increase them.
It's, it's going to be a very challenging environment for, for
those States and cities, unfortunately, to, to get their
economies and finances in shape. It's, it's something I spend a
lot of time, a lot of headache thinking about for Chicago,
because we probably have the worst finances of any major
city. We have a lot of these social
pressures. The mayor wants to tackle all of
them. He wants to build housing.
He wants to provide assistance to lower income residents.
And I'm not saying those are bad goals, but like if you have no
way to pay for them and you promise people them, you're
going to really upset a lot of your supporters, which he has.
And you're you're just not going to be able to accomplish
anything that you want to do. And you're not going to work on
tackling like the underlying challenges that the city has.
I, I sort of view cities and states as being engaged in 0 sum
competition. You know, the federal level,
everything's positive. Some like the, the economy grows
fantastic, like more for everyone.
States and cities are competing with each other for talent, for
capital, for resources, for, for investment.
And if you have a set of policies that is responsive to
these social pressures, which diverts money away or diverts
resources away and policies away from just creating an
environment where you can have sustainable economic growth and
tax rates so high that they frighten businesses and
residents with the ability to go elsewhere away.
It's sort of the self perpetuating cycle and you need
to break out of it. I'm a little more optimistic
about Chicago just because we've seen how incompetent this type
of policy set is, especially with with the current people we
have in place trying to implement it.
So I don't think the appetite for trying this again is there.
But for a lot of cities, like, you know, the the worst thing
that could happen to New York is that a guy like Mandani gets
elected and he's confident. So it's, I don't think anyone
should be surprised that you see these younger charismatic
candidates start emerging whose politics maybe we personally
find outrageous. But they're resonating with a
lot of people who feel disaffected.
And I don't think it's a fair presumption that, you know, we
revert back to some sort of normal set of some normal
operating environment, just like it's probably not a fair
assumption for interest rates that you're going to revert back
to like, you know, 2% ten year and 3% mortgages.
Like we're we're in a structurally different regime
for for the markets and we're in a structurally different regime
for maybe society as well. And it, it just sort of is what
it is. If you're an investor, your job
is not to just complain all the time saying, you know, things
need to go back to how they used to be.
It was so much better. I think your job is to say
what's the environment we're operating in?
How might it change over time? What are the implications and
how do I position for that? Yeah, a lot of this makes me
want to have more assets outside the US like exposure.
I mean, I know that that may not be the right conclusion, but
it's the one I have. I don't know about that because
I'm not sure other Yeah. I mean, it's always good to
diversify. But like, longer term, like we,
we still have the world's most important companies doing the
most important things. You just hope politics doesn't
get in the way of it. Yeah.
My, my guess is that economic growth is the way out of all of
this. And if you could get just a
stretch of three, 4% GDP growth with low inflation, you know,
that solves a lot of problems. And if you're at the city level,
if you can, if you're Chicago and you can pull in Austin, TX
and, and get 5 or 6% growth for a decade plus, you know, that
really does a better job of solving having 20% funded
pensions than raising taxes to an astronomical level and
pushing businesses out of the city.
Yeah. Well, Chicago, I mean, I
obviously have endowment bias to that city, but it always made
sense to me because the cost of living is very palatable.
I mean, the only, the only form of population control that I
understand that Chicago has is the winter.
But outside of that, outside of that, it's an incredible place.
As long as. It was great.
I I like it. I I'm much more involved than
I'd ever thought I'd be in city governance.
I I think we have a lot of great things going for us.
It's cheaper to live here than the coasts.
There is a diverse economy. It's got dynamic culture.
People are nice. We also have 25% funded pensions
and we have the highest combined property sales tax regime in the
country. And we have a mayor who says
that people aren't paying enough and he he wants it higher.
Now, thankfully state law prevents him from doing that,
but he he's not exactly the biggest selling point businesses
in, in terms of trying to generate some economic growth.
Yeah. Well, especially when you have
somebody like Wisconsin not that far away.
Right. No.
And like, I, I don't know how much you want to delve into
Midwest politics, but like, Illinois as a whole has probably
the, the worst funded pension system across the country.
Can Kentucky, the percentages are slightly worse, but
Illinois, the numbers are astronomically worse.
We, we have as a state like 145 billion of unfunded pension
liabilities. And then you had Chicago having
40 billion. The governor just signed a bill
that will increase the benefits going to pension recipients.
And there's no. Easy way out of it because the
state constitution protects pension benefits, making reform
exceedingly difficult. Yeah, Rauner tried to get it
done, didn't he? Yeah, and he put 60. 6% of the
votes. The the courts wouldn't allow
it, He couldn't do it. So my own personal feeling is
that legal protections aside, at some point, like the, the lack
of money, the, the reality that there's no money to to pay these
obligations down the line will matter more than the, the, the
legal constructs. Like I'm, I'm a lawyer by
background. I got this stuff.
But financial reality, Trump's legal reality, I think it not,
not in that you can ignore the law, but that it will create a
lot of pressure down the line on these pensions to to negotiate
some sort of haircut. Because eventually there's going
to be popular support for reform.
And it could be pretty draconian.
And they're probably better off coming to the table to make an
agreement before everyone in the entire state is so fed up with
rising taxes to pay people who retire at 55 at 90% of their
salary and demands of, you know, 50% haircuts.
So I think it will get resolved somehow.
I think the easiest way to resolve that is economic growth,
Ian. But for the problem for Chicago
is that, and the state of Illinois frankly, is that we're
surrounded by other states who have a lot more probusiness
labor laws, who have a lot more probusiness energy laws.
You know, Illinois has 6 nuclear reactors in operation, which is
the most in the country. But we also have a law that
prevents any new nuclear large scale reactors from being built
because the governor's friendly with the Sierra Club people and
thinks that nuclear waste is going to cause, you know,
another Chernobyl or something. Like it's crazy.
It's very clear if you're trying to attract data center
investment, which we are, but you're not building any more
power generation and you're curtailing gas and coal because
we have a 2050 net zero policy. Like at some point pretty soon
you're gonna run out of power. And no surprise, industry is
really reluctant to make major investments here because they
can see 5 to 10 years down the line and understand the power
tightness that we'll have across the state and don't want to pay
exorbitant electricity costs. So Indiana doesn't have that
problem. Wisconsin doesn't have that
problem, surrounding states in the Midwest don't.
And consequently, like we've lagged in economic growth.
And I think over the last 10 years, Illinois grown just north
of maybe 1% annually. During Governor Pritzker's six
years, we've increased our GDP by about 5% versus I think with
the last six years, the USGDP is up closer to 16%.
So like policies matter. And again, if you, you have a
population who is frustrated across all these various
different things we've talked about, they're, they're going
to, they're not going to vote for someone who is explaining
that the, the policy insurance and outs like, like you and I
can, you're going to vote for someone who says, you know, I'm
going to make your life better in these three easy ways and
everything will be fine. And it's at the federal level,
again, like there are ways out of this that that I think aren't
horrible longer term, but for, for States and cities, like it
really is a 0 sum competition and you just hope that your,
your local policy makers understand that and are more
pragmatic than they are ideological.
I mean, I've seen, I've seen Gavin Newsom recently talk about
how the fact that like, you know, California is a net donor
to the federal government. I mean, do you see any of this
playing out where the cities say like, well, we're going to not
send as much money to the federal government?
Like, I don't even know how that would be possible in in in sort
of the mechanics of it, but. Seems to me like.
I don't think like politics. What?
I, I don't think that's possible, but like politics is
getting more extreme and outrageous.
Like it's just, it's like a sports game.
Every side. It's, I don't know if sports
game or reality TV shows that the the better term, but like
these people are just aren't being serious.
And, and As for California, you know, I, I don't know how those
figures look when you take into account disaster relief funds
that are sent their way because they're, they're in a part of
the country where you're prone to drought and wildfires.
And it's my guess is it's a bit more nuanced than the governor
there is letting on. Yeah, well, that's if I were not
sitting in Florida, that's what I would be complaining about
Florida, right. We have we, we, we do take a lot
and and I think a lot of the policies down here arbitrage
some of what we're talking about.
And meanwhile, we're also accepting of the hurricane funds
when we. You have natural disasters.
We have man made ones here. Well, we might have some man
made ones too. I thought.
I thought something that was pretty interesting was the you
share a map of the of the United States and it's like the
percentage of people that are what have difficulty playing
paying bills. And it's not shocking to me that
the Southeast like dominates relative to the rest of the
country. But it is sort of surprising
that the Southeast lean so conservative given that all
these states look like they're four to five points north of the
general average. And I mean Mississippi and
Alabama are like way out there. Alabama that's 49.6% and 45.5%
respectively. Have over 1/3 of the state have
difficulty paying bills. That's wild.
I would guess some of that's a cultural thing.
Why they no doubt the way they do.
So some of it is, you know who who do they blame for that
predicament right now? Inflation really balloon, you
know, during the Biden administration.
And I think that's in large part why the 2024 election turned out
the way it did. I'm not surprised that part of
the country voted the way they did.
Yeah, it's and, and again, in large cities just the, the the
numbers are even more extreme. And there are things you could
do to improve that like like Ezra Klein, Derek Thompson with
their abundance book. I don't know if you read it, but
I I thought it. Was I kind of want to, I've
listened to a number of their interviews and I, I, I find it
interesting when they get talking, I'm like, yeah, but you
guys are kind of pointing out like the structural problems of
implementing your ideas. But I do want to read the book.
It's, you know, there are pretty basic things you you could do to
relieve some of these cost pressures, but for various
vested interest reasons, like they're really hard to do.
And instead of people voting for those who would implement those
changes, which would improve their lives, they end up voting
for people who double down on the way things are and are just
going to make things worse. You think rent control in New
York City is going to lead to more affordable housing?
Like no, we don't need to get into what the why, but like it's
just not how it works. Government run grocery stores.
You know, the mayor here wanted to do that too.
Good luck like. Why now, Why do you not like
that idea that that idea I'm a little curious about.
I don't think that they would out compete capitalism, but I do
think it would be kind of interesting to see them try.
I think that they would end up losing the competition.
If you had a very confident operator doing it, that's one
thing. If you have a mayor who has been
unable to balance the budget within like a billion dollars of
where it should be operating a store with two or three percent
margins, margins, yeah. That's like a strap, Yeah, no
doubt, yeah. And you're going to be sub scale
to acquire the stuff that you need to acquire, right like
that. That is a tough, tough business.
You know, for, for this theme, it's something that I've written
about over the last couple years.
I never really put it together. And I felt, you know, you've
heard people speak, I think very intelligently about it, like
Peter Thiel going back even in a couple years before me.
And it just felt like if I'm ever going to put something
together, now's the time because you're starting to see elections
turn out the way I would expect them to.
And I, I think this way of viewing American Society has
some predictive value to it, which is valuable as citizens of
the country. And I I think is valuable as
investors like it. It matters what the political
regime that you're investing in is it it matters if there's just
a fundamental level of support for just basic capitalist
precepts like it. We'd like to think that longer
term, you know, everyone will come to their senses and will
allow the economy to operate the way it's basically always
operated in the country. But, you know, ultimately
popular support matters. And if the system is just not
working for enough people, you should probably expect some
systemic change. I'm really focused locally on
making sure that the systemic changes don't wipe Chicago's
future off the map. Because I think just for
Chicago, like, we're in a really precarious position where it
really does matter who our next leaders are because the the
state of just the the economy has changed so much, where
businesses and people and capital are mobile.
And if you're not attracting it, you're really falling behind.
But for for the rest of the country at the federal level,
you know, I think you need to think through like what what
does the investment regime going forward look like?
Does it look like the one we're all accustomed to?
Or is it going to look dramatically different based on
the type of people we elect? Are we going to have a type of
politics that is more populist in the sense where you have one
person saying, you know what, like, I don't, I don't like
your, the, the way your sector's operating.
I'm going to mandate that you lower prices or, or you, you
know, you're subject to tariffs or, or whatever.
Like, it could be Trump, it could be someone else in the
future. The the political institutions
that we have are strong and the legal institutions we have are
strong. But there's a lot of scope for a
strong federal government to operate differently.
And I do think it matters, again, if you're a long term
investor thinking through the type of regime you're in, what's
your view? I'm not a Dumor, by the way.
Yeah, I know. I know you made that clear
before the contest, before the discussion.
I said, I said this is not the happiest of discussions, but
there could be, there could be a, you know, a, a good outcome
to your point, we could grow our way out of it.
Do you have a view on the current, you know, tariff policy
versus the court cases that have sort of appear to have ruled
against it? I.
And has it resolved itself? I think so, but just really
quickly, by way of background, I went to Harvard Law.
I was a corporate lawyer for a couple years.
I'm not a practicing lawyer. I haven't touched like a legal
document and. We don't have to talk about this
if you. Don't want to, but I do think
that it's pretty clear in the Constitution, like who's
supposed to be in charge of trade and implementing tariffs.
And it's not the executive they're arguing that it's, you
know, part of various national security exemptions.
I think that's questionable. But the longer this goes on, you
know, the more support it probably garners amongst at
least the Republican side. And even if courts decide that,
you know, this, this regime isn't workable, they'll, they'll
try various other exemptions or the Congress will just pass an X
saying, Hey, we're implementing these tariffs.
And if they get implemented, do you really think that the
Democrats are going to say, we just found some hidden source
of, you know, 500 billion ish in tax revenue?
We're, we're going to make that go away, you know, the next time
we're elected? No, like they they could have
taken off Trump's tariffs during Biden's term and they let them
stay. So it's.
I was surprised. I was surprised procedurally
that day one when Trump had like a mandate that he didn't ask
Congress for the authority to do this.
But I also have a theory that every president's got an
Achilles heel and his his, he doesn't care very much for
process and that may be his. It'll be interesting to watch.
Think that's a fair comment in, in in any event, I do think
we're for lack of a better term, in a bit more turbulent socio
economic, socio political regime.
And you know, we, we can decry that or we can try and figure it
out and think what are the ramifications for, for
investing. And if you care about local
policy to the degree I do, you know, how do you try and improve
the system from within? It's a lot easier to do at the
local level than it is at the federal level.
Yeah, yeah, I agree. I've I've enjoyed, I've enjoyed
watching your journey, getting involved.
So I I look forward to seeing where it where it leads to.
I appreciate that I I recently was invited to City Hall to
testify about some of our finance and credit issues, and
safe to say I don't think I'll be receiving a return invite now
that anytime people realize who I am.
They didn't. They didn't exactly get what
they wanted out of you. Huh.
No. Well, good for you for doing it.
They need to hear it. Well, if anyone's interested in
following up with me about any of these topics, please feel
free to reach out. I have a deck I can send you.
I can go over specifics of in terms of how we're structuring
portfolios around these ideas. Again, I worked with a firm
called Fort Sheeran and Advisors.
We're located outside of Chicago.
I've been there about 10 years, about a billion dollars of AUM
and we we like structuring portfolios that are for lack of
a better term different. You know, our clients expect us
to to perform well, but we really do try and work hard with
our clients, whether they be institutions or or family
offices or or individuals to create unique portfolios that
achieve their objectives. So, so we're not A1 size fits
all type of investment manager and and we're active allocators.
Awesome. Well, thank you very much for
coming on. We'll link to how to how to get
in touch with you in the show notes.
And I appreciate your time, man. Yeah, any time discussion.
I enjoyed it. I enjoyed it.
Have a good one Have. A good one.
Thanks so much. Take care.
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