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The 2 Big Questions Barry Ritholtz Is Hearing Now

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What You Need to Know

  • He's focused on the market long term but on the trajectory of the pandemic short term.
  • Ritholtz says clients are asking about housing prices and inflation and he's focused on their purposes for their money.
  • He understands blockchain but is hesitant about crypto.

Barry Ritholtz, the co-founder and chief investment officer of Ritholtz Wealth Management who’s also well known for his blog, The Big Picture, opinion columns on Bloomberg and for hosting that news site’s Masters in Business podcast, spent some time recently talking with Thinkadvisor about the financial markets and economy, federal tax hikes and the concerns of the clients of his $2 billion firm.

In a wide-ranging interview, Ritholtz brought his no-nonsense, practical views on some of the top issues and questions facing financial advisors as they serve their clients, always adding context to the discussion.

Here are some highlights.

What Ritholtz Is Hearing From Clients

The two biggest questions he’s hearing in 2021: Is there a housing bubble and is inflation rising?

On Housing

Housing prices are rising because there is not enough supply, Ritholtz says. Builders have been focusing on multi-family units but not on single-family homes. “Nothing is available and prices are going up,” he says.

Higher lumber prices are adding to that pain. But he says homebuilders are now shifting from building apartments to building homes. They did build out in the exurbs in the early 2000s believing that people would tolerate a longer commute to the city to work, but maybe the lesson from pandemic is that people don’t need to commute.

On Inflation

“I don’t expect to see much inflation. … Every generation fights the last war,” he says. “If you’re 60-something today you have a vivid recollection of the ’70s’ stagflation. Inflation was up but wages were not… Nor was job availability. The ’70s left a scar on a lot of people, but in my expert opinion we’ve been in a deflationary environment for three decades.”

He continued, “I don’t care about core inflation because the Fed took rates so low …. physical goods are cheaper, labor is outsourced. … But health care and college costs keep going up — markets where consumers have no say.”

Ritholtz also noted that in housing and other markets where supplies are in short supply, short prices are rising, but those hikes are will last maybe six to 18 months and then normalize.

Ritholtz on the Markets

“I don’t care about the next month,” he says. “Next month is only relevant because Memorial Day is a three-day weekend.”

He continued, “Our clients understand they put money in the stock market because they’re investing for long-term goals,” such as paying for college and retirement and giving to charity. “You have to think in those long-term concepts when investing for the long term.”

Over the course of the pandemic, the U.S. stock market experienced its fastest selloff and one of its fastest recoveries, breaking even in five months, Ritholtz said. “Once you get that recovery the market has a trend behind it, the wind at its back … and starts to attract a different type of buyer.

“There are all sorts of signs of froth, frothiness that normally would make me nervous, but these aren’t normal times. People have been stuck at home, bored, and so the market is a new casino for them … Who cares about GameStop … [The runup in the stock] “is just bored traders entertaining themselves.”

What Ritholtz Is Watching

“I’m waiting to see if the pandemic is really over,” he says. “Hopefully we’re getting past this. Some flareups are concerning, like in India and South America, no doubt. Variants are concerning because it’s so important to get herd immunity. It’s scary but not a problem — yet.”

As for the markets, Ritholtz is watching revenues. “I’m looking at where company revenues have been going. Are we at a point where profits are what people think they should be …There are some negatives — there’s no way to argue that this isn’t a somewhat expensive market …. Pretty fully valued. There’s not a lot of room for error. I want to see revenues and if profits make sense relative to that.

“The market was looking past pandemic through the recovery and reopening early on and probably got ahead of itself.”

As for where the stock market goes from here, Ritholtz says he’s not trying to guess but “it could go up based on earnings, trade sideways or sell off. It could be all or one of those.”

He likened the 2020 stock market during the pandemic to one focused on “non-market externalities” like the Pearl Harbor attack, 9/11, and the John F. Kennedy assassination. “Historically you get a wobble and markets go back to do what they did before the hit.”

 What He’s Telling, Asking Clients

“Our process begins with a conversation that turns into a financial plan … a conversation, about risk, what they want to do with the money — save for college … or something lofty like eradicate a disease and everything in between. The key is purposeful capital. If you invest for a purpose you can assert clearly and into action.

“Once investing toward a purpose, what happens next month doesn’t matter. It’s about accomplishing these goals over next year or over a lifetime. And about how much risk do they want to take relative to what they want to accomplish. Do they want to have a little more long term? Don’t need it for 5 to 10 years? Or need it for grandkids 40 years from now?”

He continued, “Clients have said to us. I love the idea of sailing and have an eye on a 50-foot boat. It costs $200,000 … There are a lot of spending nags. That don’t drink lattes, only buy used cars. Pennywise stuff is ridiculous. If you can afford a sailboat, buy it. If you can’t, don’t buy it. Don’t overleverage or borrow too much. Live within your means and understand how borrowing and spending fit into your plan. “

On Direct Indexing

“Over 60% to 70% of assets under management for the average person tends to be tax-deferred,” Ritholtz says.

For assets in taxable accounts, Ritholtz sees the advantages of using direct indexing, which allows investors to own the individual stocks within an index but harvest the losses of individual shares as they become available.  The 30%-plus loss in the stock market during 2020 provided a “huge amount of losses” to harvest to offset gains, Ritholtz says. His firm uses Canvas, a custom indexing platform from O’Shaughnessy Asset Management, for direct indexing.

On Digital Assets

“Crypto assets have been around for 13-14 years,” he says. “They are not brand new. I don’t agree with the philosophy that fiat  currencies will disappear.”

Ritholtz said the narrative for very wealthy investors to hedge 1%-2% of their assets in crypto  makes sense, but at a certain point the “hypsters” are selling cryptocurrencies. He’s concerned about “any asset class that explodes suddenly in value, attracting all sorts of shysters, separating fools from their money.”

But he’s not considering crypto assets for clients now, noting studies that have reported 20% to 30% of those crypto assets for individuals missing and lost forever.

“I can’t call up a client, saying you had $20 million, now you have about $15 million …” he says.  Once there’s an ETF from a trusted third party, insured against such losses, at that point there’s an investment vehicle.”

Blockchain is different, according to Ritholtz, who understands the value of its use as an “interesting new technology,” for example, in smart contracts for artists like Taylor Swift, who control the resale price of tickets for her concerts, which “gets the middleman out of the way and rewards artists.”