Ep 63 | Brian Wesbury | Mr. Wesbury Goes to Washington | ROI Podcast

In this episode, Brian Wesbury discusses his recent testimony on Capitol Hill, First Trust’s economic outlook for 2026, and implications of overvalued markets.

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Transcript

Capitol Hill Testimony Context

Ryan 0:09

Where is the economy heading in 2026? What are the implications for the equity market? And what was Brian Westbury doing on Capitol Hill recently? Welcome to this episode of the First Trust ROI podcast. All right, well, Happy New Year.

Brian 0:23

Yeah, happy new year to you.

Ryan 0:24

So I want to start off. You spent some time on Capitol Hill recently. I did. Providing testimony to the Senate and uh Rand Paul's committee, right? Yep. Um tell us what that was all about.

How QE Reshaped Banks And Inflation

Paying Interest On Reserves Debate

Brian 0:36

Yeah, it's uh Homeland Security and Government Affairs Committee, which is a weird place to have this hearing. But uh It is a weird place. Well how does that fit together? Yeah, I you know what? The the Senate rules allow different committees to take on different things that may not it should have been in the banking committee. Yeah, that's what I would think. But but they chose to do it there. Like I I'm not quite sure why. But Homeland Security and government affairs, legally somehow they could do whatever they want, I guess. Um and in this case, uh so uh if you go back long, Charlie Kirk before he was assassinated, I did uh his podcast, and uh then I also did Steve Bannon's podcast, and it was all over one issue, uh, and that is that the Federal Reserve, because of quantitative easing, uh has flooded the banks with reserves. And then the question becomes how do you keep all of those reserves, that money that the Fed printed, from turning into a massive increase in the money supply, which then would create inflation. And the Federal Reserve uh they flooded the system with reserves, and then they increased the capital requirements on banks, they increased liquidity rules on banks, both of those make it more difficult for the banks to lend that money because they need to keep the cash on hand. And then the third thing they did was they just they got the approval from Congress to pay interest to the banks on those reserves. So technically the banks could uh buy treasury bonds and earn interest from treasury bonds, or they could keep it in reserves and earn interest uh from the Fed, and then the Fed owns the bonds and earns the interest there. I hope that makes sense because it's i i i it either the banks own the bonds or the feds own the bonds, and if the Fed owns the bonds, then they give they pay for them with these reserves. So that amount of money last year, the Federal Reserve paid private banks um almost $200 billion a year. I think it was uh the exact figure is about $180 billion. And uh a bunch of that, $30 to $40 billion, went to foreign-owned banks and even some Chinese banks. Uh and so uh that's how I got Charlie Kirk interested in the story and Steve Bannon, and then somehow uh Ted Cruz and Rand Paul picked it up, and they were putting a bill in to keep the Federal Reserve from paying interest to private banks just to hold the cash that they created. And so that was the beginning of the story. That's why we had the hearing. Uh they wanted to talk about how do we get the Federal Reserve to not pay banks hundreds of billions of dollars a year. And if you think about it that way, that money, the if the Fed didn't pay it out, they would end up giving it to the Treasury. And over a five-year time period, it could be uh a trillion dollars of less government spending uh and a smaller deficit. So they're that's how the politicians came into this. Um when I went to the to the hearing, I went back to the root, and I'll do this real briefly, but quantitative easing started in 2008. And there are a lot of people who believe that it was quantitative easing that saved the United States during the great financial crisis, the subprime loan problem. Um I completely disagree with this. They started quantitative easing in September of 2008. The market, the stock market fell another 40 percent after that. It didn't bottom until March of 2009. Now, some people say, well, it just took a while, delayed reaction. Like that's crazy because what happened in March of 2009 was we changed mark-to-market accounting. We did not need quantitative easing. And and then that model that we developed during the great financial crisis, uh spend a bunch of money, TARP, and print a bunch of money, quantitative easing, uh that model got transferred to COVID, but during COVID it was like three times bigger. So so we we've now gotten into this excuse excuse me, it we've now gotten into this uh uh approach where where the Fed by printing money and the government by borrowing and spending money just saves the economy no matter what happens. And that's what everybody believes. And I don't buy this at all. Uh and and then Is that modern monetary theory? Yeah, it is. Uh but the the and the second thing, the way to think about this, and this is what I testified to the committee, was that if if you if you really think about it, the f the government decided to shut the economy down, and then we're gonna spend five trillion dollars to pay people not to work. Uh basically, that's what we did. And uh and if they told the marketplace, banks, insurance companies, pension funds, this is what we're gonna do. We're gonna lock the economy down, we're gonna borrow five trillion dollars from you, the private marketplace, um, and then we're gonna pay people not to work. What kind of interest rate do you think the market would ask for? You know, I I mean I make it up uh six percent for a 10-year bond. Well, because the Fed bought it all, they got they they had 0% interest rates. They had they drove the tenure down to one. The price didn't move. We had no market for the risk that we were taking. And that's why I am so against quantitative easing. So, yes, the fact that we're paying banks, that's not a good thing. It all came out of this. But my belief is that the problem goes even deeper than just that, in that we have a bigger government than we would have otherwise if the Federal Reserve would not have come in and bought all this debt. And because the Fed doesn't care if they get marked to market, they don't care how much money they lose on the bonds they buy, they don't care. But the marketplace does. And so our government would and should have had to pay a lot more to do what they did during COVID than than the quantitative easing by the Fed allowed them to get away with. And so that's why I am completely against this. So when when uh they called me up and said we'd love for you to testify, I was uh chomping at the bit because uh I don't think there's many economic um uh uh uh firms, if you will, or economists that understand this whole quantitative easing thing as well as we do. And uh and so it was perfect. It was fantastic. Uh I debated the former vice chairman of the Fed at that hearing, uh guy named Don Cohn. And I actually knew him in the 90s. I had a battle with him back then. Um he worked for Greenspan, and uh I told him before the hearing, I said, you know, the the battle we we wanted them to only focus on inflation, not unemployment. Like the Fed should only be focused on one thing. Um I said, you won that battle, but you're not gonna win this one. And we had a good laugh because we hadn't seen each other in 30 years. He's actually a good friend, but we totally disagree on this quantitative easing thing.

Ryan 8:20

So is there an outcome that you see where there could be an end to I mean, uh quantitative e quantitative easing kind of rolls off over time, you know, the bonds mature and maybe you don't reinvest. Right. But I I just think I heard uh headline at least that uh the Trump administration was gonna buy $200 billion worth of mortgages or something. Isn't that a version of quantitative easing? Yes, absolutely.

QE vs. Market Price Discovery

Brian 8:41

I don't know who they're gonna have do it. They I guess they're talking about Fannie Mae and Freddie Mack uh uh to doing this. It it would be QE is when the Fed actually creates the money. In this case, they would be taking uh the money from Fannie and Freddie, although I don't think Fannie and Freddie actually have all these profits in the bank because they give them to the Treasury, so they would end up having to take it back. Like I I'm not sure how that would work. There are there are so many things about the Trump administration, the deregulation, the the slimming down of the bureaucracy. We 260,000 fewer government jobs today than we had last January. Uh um tariffs in certain situations I can support, otherwise I get worried because a tariff is a tax. Uh uh the one big beautiful bill actually did cut some Medicaid spending, although that now they're voting to put it back in for another temporary two years or three years. Um but they're they're uh not wasting money on solar and wind, uh I think is a really powerful thing. But then we move into these territories where the the president seems to want to try to influence markets, take 10% ownership and intel, uh take 15% of the ready revenue from Nvidia if they sell chips, uh all of those things I really worry about. And now his attempts to make houses more affordable by blocking BlackRock or or you know from buying homes, institutional buyers of fund you know, funds or something like that. Or and we're gonna buy $200 billion of mortgages to try and knock rates down. None of that's gonna work. That's not why houses are unaffordable. So there there are many, many things the Trump administration is doing that I think are good for productivity and long-term growth. Others that we're we're stepping over a line uh interfering with the economy.

Ryan 10:46

I think it also sets a precedent that whatever who's whoever the next administration is can then make these command-control decisions for their preferences. Yeah, yeah. Which they they've already, you know, both sides ha have done. Yeah, have done it. Um so the I think the thing that you have uh taught over the years that I have I think is really important is the importance of price discovery with all of these things. Because if you get rid of the market, you don't have the price, you don't know what the yield is, you don't know what the um I'm curious what you think about this. I think of everyone's focused on AI right now and how AI is kind of, you know, we're moving towards uh general intelligence. And it seems to me that that prices are kind of there's an analogy there where prices can give you the right answer, just that's the the um invisible hand, right? If you will. So it it's I don't know. Maybe maybe I'm reaching for an analogy there. I'm curious what you think.

Brian 11:43

Yeah, well, the I mean the whole thing about price discovery, this is the way I uh like to describe it, is within the price of every item, the price of a tomato is every cost that goes into producing it. The gasoline and the truck that that drinks it to the grocery store, the the grocery store clerk that brings it out of the back room and puts it on there, the farmer that had to buy the fertilizer and run the tractors with diesel, like all of that ends up in one price. And and you're kind of you're like, well, it's just one price. Yeah, but it includes millions of of decisions that were made. And and that's why price discovery works, because because every ounce of information in the market is included in all the prices. And so once the government starts to interfere with that process, and this is why I didn't like quantitative easing, because they were avoiding the price discovery like how much the analogy I I use every once in a while, just to think about it, is let's say Greece decided they got they got some kind of hair in their shorts and and they uh decided they were gonna fight China. Like we're we're gonna go to war with China. We need $500 billion. And and now they have to sell that to the bond market. Like, because if you think about government bonds, that's what they were. I mean, America issued bonds to fight in the Revolutionary War, we issued bonds to fight World War II. Uh if you go back further with Napoleon and like and the whole, you know, all all wars in history have been financed with debt. So here we have Greece wanting to fight fight China. How much do you think anybody would buy that debt? Because that's that's kind of crazy. Like Greece has no point and reason to fight China. They would lose because they're Greece and they're China. And and so, of course, the bond market wouldn't fund it. But if you brought in the Fed and they bought all the bonds, Greece would still lose the war, but they would pay a lot less than I mean, the market wouldn't lend them the money.

Ryan 13:51

Right.

Proposed Mortgage Purchases And Housing

Brian 13:51

And so what I what I was saying with COVID, the market would have charged so much for COVID to lock down the economy that that we wouldn't have ever spent as much if the market was involved. And that's why governments always get rid of price discovery by price fixing, uh, by putting caps on prices. They've done it throughout history. Uh uh President Trump wants to put a 10% cap on credit card interest rates. And that's a populist thing. Like anybody with credit card interest is like, oh, yeah, I love that. But but cr what's gonna end up happening as a result of that is less credit will be available because that the there's a reason the interest rates on credit cards are where they are. And it's not greed, it's because a lot of people don't pack the pay back their credit cards. And so if you're gonna if you're gonna make it available to everybody, you have to charge a price that includes those people not paying it back. And that means it's a higher interest rate than people like.

Ryan 14:55

Yeah, and if you if if you don't allow that to happen, you get a lot of malinvestment as well. Right. Exactly. And you've talked about that over the years quite a bit as well. Right. Um and so all the uh all the decisions made by one administration in favor of their priorities, and then you get a new administration, and maybe these were good or maybe they were bad, but they didn't have the backing of what the free market actually decided.

Brian 15:18

Right, exactly. Well that's and the big one for me has been uh has been the uh environmentally related clean energy investment. Because uh it's been subsidized like crazy, and uh wherever it's been subsidized the most, electricity costs the most, and Germany has now been in recession for six months because big one of the biggest reasons is electricity prices are double what they are in the rest of uh most of the rest of Europe and triple what they are in the United States, and their manufacturers cannot stay competitive with that cost of energy. And it's all because we've messed up the free market and the price discovery process along the way.

Ryan 16:04

Trevor Burrus So uh throughout last year when we when we spoke, there were a few different times where you talked about this analogy with respect to inflation of sort of the ember still burning and you gave the, you know, it's it's in the campfire and you still see that little ember burning and you're worried that it's gonna flare back up. Um are we still concerned that the are the embers out at this point? Do you think inflation uh is the risk is to the upside still?

Brian 16:29

Um Well, I would argue that the way money has been, money the money supply uh over the last three years has only grown about two percent. And that's really weak money growth. It has grown faster than that in the past year. But if you go from three years ago to today, it's only up about two percent. That's why inflation has come down. And there are a lot of people who thought it was gonna shoot back up. I I I wasn't in that camp, but we still haven't put it out completely. I mean, uh we in fact we just got CPI data for November, and inflation's running over two point over two and a half percent, no matter how you look at it. And uh it needs to be below two. I I I'd like zero percent inflation. But uh and and not not below two just because that's what the Fed wants, but it should be below two because two and a half means the embers are still there. And the Federal Reserve uh has been cutting interest rates, but they also just restarted quantitative easing. Now it's smaller, it's 40 billion a month, which isn't all that much, but that means the money supply is creeping, gonna creep higher. And and so I would say the embers are there. We need we need to be tighter for longer to put it out completely, but they've reversed course in both in both ways. They've cut interest rates and they're doing QE again. And both of those mean that we're starting to, you know, pump some oxygen back on those little embers. Yeah.

AI, Prices, And The Invisible Hand

Ryan 18:08

So uh Jerome Powell, uh his his term as uh the chair is going to expire, I believe, in two or three months. No, May. It's in May. So um it seems pretty obvious that he's not going to you know be renominated as as chair. Yes. Um pretty fair, right?

Brian 18:26

Although with Trump, you never know. You never know. That's true.

Ryan 18:28

Um But more recently, um he and and the Fed, I guess, in general, came under uh in criminal investigation. Or is it a criminal investigation for uh their lying to Congress is what they're saying. Yes. Which raises concerns about the independence of the Fed. And that you know, I'm not gonna ask you to comment on what the uh investigation will uh uncover, uh, because who really knows. Uh but but there are a lot of people that are talking about concerns about independence of the Fed. Is that something that we need to worry about?

Energy Subsidies And Competitiveness

Brian 18:59

Um yes. We we definitely need to worry about the independence of the Fed. Wherever, I mean, it's there's a lot of academic studies, and gosh, you don't even need academic study to just see wherever Venezuela, Zimbabwe, I mean, th there's so many, you know, where the uh the the politicians get control of monetary policy, it never turns out good. You always end up with inflation because and and uh and so yes, we do have to be concerned. Here's I just like to frame the whole issue right now that we're living with. And that is that uh so I just described quantitative easing, and what it really is is the Federal Reserve financing government spending. Um the Federals say, oh, it's just serendipitous or coincidental that we did QE at the same time they were running up the deficit. It's not. The Federal Reserve, in my opinion, should have never financed that government spending in a way. Or during COVID, but they did. And that's, in my opinion, they violated independence because they helped the government spend more than it would have been able to. I mean, technically politicians still could have spent it, but it would have cost them a lot more. All those bills would have affected the deficit way more if the Fed weren't buying it at super low interest rates. So they violated that. By the way, over history, the Fed has violated independence multiple times. The other thing that Powell did, you know, Fed chairmen, I want to say this clearly, Fed chairmen have always said things like, we don't comment on fiscal policy. We deal with the reality in the market like after whatever politicians decide to do. And for for the most part, they stay true to that. But Powell took it on himself to uh talk directly about tariffs. Um they're going to cause inflation, therefore we can't cut interest rates. So why did he pick that one? And not when Biden wanted to raise tax rates or massively increase the deficit? Like why why? So so Powell made himself relevant in a in a political debate when it's always been the rule of the Fed to stay out of that stuff. And so he should have never done that. You can't pick and choose which policies. If the Fed stays out of fiscal policy, you don't get to choose to be involved in it. And he did. Um and he and Trump, pretty clearly to me, do not like each other. And this DOJ investigation about whether he lied to Congress, I I have no comment on that. But Powell responded to that with a video where he said this attack by the DOJ and the grand jury is a vendetta, a political vendetta against me because I won't cut interest rates. So, like you tell me who's at fault. And I mean I think everybody has uh uh part of the blame. The Fed violated the independence by Powell's comments on tariffs and by doing quantitative easing. Um and so we that ship sailed. And so trying to blame one side or the other uh at this point, uh like you when you see two crazy people arguing on a corner and you're in your car, you don't know which one is crazy. Like or two people arguing uh on a street corner. You don't know which one's crazy. Uh they might both be, might only be one of them, but um they're out there arguing, and and that's where we are today. I think Powell has responsibility for this. So this one-way street that Trump is causing all of this, I don't buy that at all. Powell has been a huge part of this uh this fight, and it and it's about time it's coming. I mean, I I really want to see the Fed get rid of quantitative easing. I want the them to go back to their scarce reserve model. And everybody will tell you, oh, it's gonna be so disruptive to the marketplace. And I look at the marketplace today, you you all the losses on bank balance sheets, all the losses on the Fed balance sheets, it's like one and a half trillion dollars. It's three times more than the subprime losses were when all this started. So you're telling me that would upset the market? Well, we've already upset the market. The only reason it's not a problem is because we don't mark the market.

Ryan 23:43

So how would let's say, let's just for a second go down that road, how would you actually um manage that without all the money going in would it just be regulations that you have to keep the the assets on the balance sheet of the banks until they mature, or how how does that actually work?

Brian 23:59

Yeah, well what they'd have to do basically is trade all the reserves that the banks hold for the bonds that the Fed holds. And I mean JP Morgan just did this, where they said, we're we're gonna we're gonna we're gonna get rid of the reserves and we're gonna take bonds on. Okay. And um and they they did it on their own. And so the more banks that do that, now what's inter reserves had a z have a zero capital requirement. Bonds have a positive capital requirement. So so as long as you have enough capital, you can make this trade. If you don't, you can't. And so so what they need to do is reduce the capital requirements, liquidity rules, in order to get this done. I know that this gets a little complicated in here, but yeah, the Fed can get rid of all its bonds, take all the reserves back, destroy them, and and the banking system, you know, it will have more risk in it because it will own bonds and not over. I mean, remember reserves have zero risk. They're the the the Fed's not going to default on them. You earn interest on them, they have no maturity because they're basically overnight kind of instrument. They're not even overnight, they're just like zero maturity. Um and if you change your trade your zero maturity debt reserves for two, five, ten year bonds, you're taking um uh uh risk, the maturity risk of of a of a longer-term bond. The price can all it can swing. Whereas reserves can't. A dollar is a dollar is a dollar every day. Um it's not even like a mutual fund. It's better than that. It's uh it's a dollar. And and whereas a bond, we all know bond prices change. So if you own a dollar of 10-year bonds, tomorrow it could be worth 98 cents. Right. Or a dollar two. You know, but yeah.

Ryan 25:50

And then when those bonds mature, the banks will then have actual cash. Yeah, then they get the key. They could lend out, yeah.

Are Inflation’s Embers Still Alive

Brian 25:58

And they decide whether to reinvest, make a loan. I mean, and once they own the bonds, they can sell them to fund a loan. Sure. Yeah. So but but right now what we've done is we've taken all the risk of owning all that debt and we put it at the Fed. Yeah. And we've taken it off the banks. And I believe JP Morgan, I can't remember the exact amount of money, it was a significant chunk. They're they're a humongous bank. But it was a significant chunk. They decided that the risk of owning, I'm not even sure what kind of maturities they bought, but three-year, five-year, seven-year paper was low, and they were gonna earn a higher interest rate because the Fed is now cutting the the interest rate they're paying on reserves. So if I can if I can earn 3.8 and the Fed's gonna pay me three and a half, I I'd rather get the three point eight. So that was the choice they made. And um and that's the way you reverse this whole process. But it can be uh it can be forced, too. The Fed can just say, you're not gonna hold that many reserves, um, you're gonna hold more bonds. And uh that would you know that brings us back to more of a marketplace. What worries me today is that the Fed they've the problems go even deeper because what they did is they separated the money supply from interest rates. So it used to be that banks traded Federal funds. They don't anymore. The Fed just sets the Federal funds rate. It's like price fixing. And that's go back to price discovery. You know, I I still believe that well, we had zero percent interest rates for nine years. And if if it costs you zero to borrow, are you more likely to spend more or less? You know, so I mean we see that all the time. That's why car dealers put zero percent interest rate on loans. Because somebody will buy one, but just because they don't have to pay interest on the loan.

Ryan 27:56

So the Fed is uh the market's pricing in, I think, two more cuts in 2026. You think that's likely? Uh uh one or two, yeah.

Brian 28:04

And then we're gonna get a new Fed chairman in May, and it all depends on whether that person does the bidding. I mean, Trump has said he wants interest rates at one percent or lower. And uh that makes no sense when inflation is two and a half, but that's what he has said.

Ryan 28:19

He just tried to push the bid to that side so that maybe he gets three or is he actually open for a way?

Brian 28:26

You know, if he gets his choice running the Fed, he may get exactly what he wants. I I I hope not, because interest rates should not be one percent again. Uh, but that's what we're talking about. And they're doing QE all over again. Um again, not as much as they did the first round, but it's thirty, forty billion a month. And all that's gonna increase the money supply. And that and then to come back to the inflation embers, that's what is worrisome. And gold prices are I mean, we're at an all we recently been at all-time record highs in the price of gold. And the reason is people see that this Fed policy that's and the pressure on the Fed, whether independence or not, I don't care, but that that that could lead to more inflation. So people are buying gold and Bitcoin because they they see the Fed under attack and now they're just gonna be easy and they and they might be. I I there's an old saying that the sash makes the man and or the woman, you could say. But once you get that sash on, chairman of the Federal Reserve Board, are are are you just gonna be a political like do whatever Trump wants, or are you now will you now take responsibility for whatever problems the Fed might cause? And uh you never know sometimes. Sometimes you put the sash on and you got the job by saying, Oh, I'll I'll get you interest rates at one percent, then you got there and you realize that if we do that, inflation's coming back, so I'm not gonna do it. And then now you're in a fight with Trump again.

Ryan 30:13

Yeah.

Fed Independence And Politics

Brian 30:14

Um but if the sash makes the the man or the the person, then um then we might not get as many cuts as President Trump wants.

Ryan 30:25

So you and your team just put out your uh price target for the S P 500 for 2026. Can you share that with us?

Brian 30:33

Sure. You know, if if profits go up about 10 percent right now per this year, and if the 10-year Treasury falls to three and a half, then the S P 500 is worth about 5,000, all right, 5,200, somewhere right in there. Um but that means interest rates have to come down, they and they've been stubborn, the tenure has to come down, uh, and profits have to go up by ten. If profits go up by more, then it gets even higher. So so we always try to make a judgment, and and this I I could I could just say the model says 5,000, that's our forecast. And I I don't do that because we all know there's a hundred other things, like probably some we don't even see, like like uh Maduro, like in Venezuela. We woke up on January 3rd and oh my gosh, we snatched the guy out of his bedroom. So it's like all this stuff we don't see, but what we do know is that AI seem the AI investment is going to continue. It seems to be raising productivity in some places. We do have deregulation. We uh were keeping tax rates low this year, we avoided a tax hike, we have immediate expensing uh at 100 percent now because of the one big beautiful bill. So there's a lot of positive things going on, and the Fed is cutting interest rates. And so as a result, I s my forecast for the end of this year is six thousand on the S P 500. I think it's overvalued the market by every metric I look at price to sales, uh PE ratios, the buffet indicator, like all these, every single model I look at says the market's overvalued. So do I think it's going down to 5,000 and at the same time the Fed is cutting interest rates? No, I don't. But if the economy slows, and by the way, that I we might be getting to this, I have never seen a more convoluted set of economic data in my life. If you if you look the last six months, if I exclude government employment, which has actually been down, but also this category called health care and social assistance, which has been in the news a lot lately because that's the the program that pays people to stay at home and take care of the elderly or teach kids or and there's been a ton of abuse in that program. Um, but those are counted as jobs. If Medicaid's paying you to stay home and take care of grandma, you get paid. If Medicaid is paying you to stay home and teach kids, you get paid. And and then that's a job. And and so if you take out government health care and social assistance, we've had negative job growth for six months. I mean, that's that's man manufacturing is down 44,000 jobs in the last six months. Retail trade jobs, retail stores, down 31,000 in the last six months. So if you look at employment data, I I mean, on its surface, it's saying this economy is shrinking. It's a recession. If you look at GDP data, it's the opposite. I mean, we're gonna we're gonna grow over 5% in the fourth quarter. And a lot of that has to do with the trade deficit swinging around because of tariffs. Um also affected by the tariffs. Um and so there's a bunch of different things going on, but it is I've never seen it like this, where employment's going down and yet GDP is going up. Um and it's a really difficult time to forecast uh right now. And and then inflation is kind of stubborn in the 2.6, 2.7 percent area. It's it right now the Fed may not cut in January. And wait, wait until you see the fireworks from that.

Ryan 34:30

So your your your equity forecast is more bearish than pretty much the everyone else in on Wall Street anyway.

Brian 34:39

Everyone else on Wall Street has it going up from here.

Ryan 34:41

We do we do not. I want you to take a minute just for implications. Yeah. If someone's a financial advisor and they're they're you know watching this and they're like, well, what does that mean? Should I own stocks still?

How To Unwind QE In Practice

Brian 34:53

Yeah. Yes, you should. Because if we really tear apart the marketplace, the the overvaluation is coming from the mega cap stocks. And I don't know whether it's seven or ten or twenty, but but that's where the and and the smaller the market cap in in the S P 500, the cheaper using PE ratios those stocks are. And so uh w what what I what we're calling it, what I call it, is broadening out. I I'd rather own a fundamentally weighted index than a market cap weighted index. I I don't want to put 40 cents of every dollar that I invest in 10 stocks. Like I I especially when they're trading at PE ratios of over 30. Um and and so I'm not saying in other words, the m this as an investor, you ought to think of it as a market of stocks, not a stock market. So what I I want to invest in companies, not the market.

Ryan 36:03

Okay. So the S P 500 target is is bearish, but you think there's opportunities elsewhere? Plenty. Um final question for you. Um the economy um is it heading into a recession this year? You talked about some weak numbers in employment and some other kind of convoluted numbers.

Brian 36:20

This is uh I hate being this way. Like Ryan, I hate being this way. I right now I could paint a picture of boom. Like uh like because we have deregulated, we've kept kept tax rates all we have AI, we have all like the the technology boom. Like I I could paint a paint a picture of boom, all right. Um I could also paint a picture of disaster. Um and uh let me just do that. I mean, I just made the boom picture. Right now, lower income Americans are we're the default rates on loans are going through the roof. We're about to put student loan, we're gonna start garnishing paychecks over student loans. Um it it it it's and and that's the the reason this has happened is because quantitative easing created more inequality than we've ever seen. So if you have assets, you won. Um if you don't, you're paying three times more for meat and and your income has not kept up. So so that's what all this QE and inflation did. Um and so my belief is the consumption has remained strong um partly because of what we would call the wealth effect. In other words, if if if you're a baby boomer and if you've accumulated assets for 40 years, your house is worth more, your stocks are worth more, your pension's worth more, everything's worth more, and you're spending. If the stock market cracks, I I don't even think it has to take that much, and people pull back on the top, they're already pulling back on the bottom. Uh that's I could see a recession this year. So so I I've kind of I I I've never seen it more difficult to forecast. My belief is that the economy is going to slow and that interest rate cuts aren't gonna make uh any difference. Um and I mean we had zero percent interest rates for seven years and it was only two percent growth in the economy. So they they're not the deciding factor. Um and so I I just get wor I do worry about the economy. I also believe that profits are not gonna grow as fast as the as the consensus believes. And that's why I'm I'm I'm comfortable forecasting a lower value for the SP 500.

Ryan 38:44

Okay, well, our time has flown by once again. Um thanks for uh cutting cutting carving out some time for us. Um hopefully we can have you on a lot more in 2026. Uh the people love the Westbury episode. So I'll try to twist your arm as much as I can. All right, thanks. Thanks, Ryan. Thank you for coming on, and thanks to all of you as well for joining us on this episode of the First Trust ROI podcast. We'll see you next time.