Meet the Masters – Bob Stein, Deputy Chief Economist at First Trust Advisors

Originally Posted On: https://olderaleighfinancial.com/meet-the-masters-bob-stein-deputy-chief-economist-at-first-trust-advisors/

Meet the Masters Full Transcription:

Alex Mihajlov:

All right, good morning. It’s March 5th, 2020. Raleigh, North Carolina. Bob Stein from First Trust Investors, thank you for joining us. What a treat for us to get you.

Bob Stein:

My pleasure to be here.

Alex Mihajlov:

On the Meet the Masters program with Olde Raleigh Financial, we are honored to have you. You were the chief economist for the Senate Budget Committee on Capitol Hill. When did you leave that life?

Bob Stein:

So, let’s see. That was 2001 and 2002. It was my last job on Capitol Hill. I had previously worked for the Joint Economic Committee and the Banking Committee as well, but after that I stayed in politics or the political world at least. I wasn’t running for office myself.

But I spent four years after that at the U.S. Treasury Department working as a deputy assistant secretary for macroeconomic analysis, which was the longest title I will ever have in my entire career.

Alex Mihajlov:

What administration were you there with?

Bob Stein:

That was Bush two. So, that was W. 43rd president.

Alex Mihajlov:

Did you ever get to hang out with him?

Bob Stein:

I did not get to hang out with him, but I spent a lot of time with the treasury secretary himself or two of the treasury secretaries, but John Snow, who was the treasury secretary for most of my time there, and Hank Paulson, who I overlapped with for six months as well.

Alex Mihajlov:

That was quite a time in our history.

Bob Stein:

Yeah.

Alex Mihajlov:

Speaking of history and what’s going on today, let’s talk about what is top of everybody’s mind in the media, the coronavirus. Do you want to talk about this versus other health crisis and its impact on the market?

Bob Stein:

Sure. I mean, it’s obviously not going to help the U.S. economy in the near term. We suspect at this point in time … And obviously things could get worse. We’re not doctors or immunologist or epidemiologist or any of those other words that I’m not sure I really understand what they are.

Alex Mihajlov:

Any other ologist.

Bob Stein:

Exactly. So, it could get worse and I’m not knowledgeable enough to say it won’t. But it will be a drag on GDP growth. We still think the first quarter will be positive. If there’s any quarter that’s negative, it’s the second quarter, but I’m suspicious that won’t be negative and that if it is, the third quarter would show a big snapback, and so we wouldn’t get two consecutive quarters of negative growth to trigger a recession call.

Now that said, I think by the end of the year, the U.S. economy will still have grown in a 2 to 2.5 percent range and about 2.5 percent in 2021. So, our base case is still intact. Moderate economic growth. No boom, no bust.

Now, that said, you could look back at a couple of episodes of the Asian flu, not the Spanish flu a hundred years ago right after World War I, but a couple episodes of Asian-originated flu since World War II. One was in 1968 and 1969. 100,000 people in the United States died over that timeframe from the Asian flu. 100,000.

So, you normalize that given the growth in the population since then and that would be like around … Guesstimating off the top of my head, about 150 to 175,000 American dying this year from this new flu virus. We think it’s going to come in significantly smaller. Here’s the key. In 1968 and 1969, there was no recession of the United States, so even if the flu does get out of hand, it doesn’t guarantee we’re going into recession.

Now, another episode was 1957, 1958. That was another time when 100,000 Americans died from the Asian flu, not the regular flu, but the Asian flu. Normalized for our size and population, that’d be about 200,000 people today. And there was a recession that year. But I’ve been looking at the literature, no one has ever said that recession was caused by the flu. It was caused by tight monetary policy. The Fed had been very tight leading up to that episode and we did have a recession. At the time, nobody thought it was flu related and nobody really has made that case since.

Alex Mihajlov:

Right. So, your thought on this is this could be a good period to accumulate assets slowly?

Bob Stein:

Exactly. Exactly.

Alex Mihajlov:

Use panic to your favor?

Bob Stein:

Use panic to your favor. The worst thing I think you could do is just go with the herd and clear out of the markets, and here’s the reason why. Even if you time a bear market entry point correctly or a correction entry point correctly and you pat yourself on the back for a couple of months or a couple of weeks or however long it is, eventually the Coronavirus is going to turn and start getting a little bit less bad than expected. Eventually, this will go away just like those other episodes of Asian flu.

So, you have to not only make that first call correctly but the second call correctly, because as soon as the news shows that things are getting less bad, the market’s going to react immediately. The market doesn’t wait until everybody is cured and the Asian flu has completely disappeared. It’s going to react much earlier than that. So, unless you’re confident that you can make both calls correctly, the best thing to do is just wait and accumulate because over time we will probably look back on this period as a time when equities were cheaper than they are in the future.

Alex Mihajlov:

Thank you. That’s great comment. Let me ask you about the secure act and actually not specifically about the secure act, but what do you think is coming next? I mean, they kind of gutted the lifetime IRA stretch for children, et cetera, et cetera. What do you think they’re going to do next?

Bob Stein:

Well, it took a while to get to secure act passed through Congress. Given that it’s an election year and we don’t know the outcome yet and both sides will be gaming the system, unwilling to commit to policy changes where they think they can get a better deal in 2021 because they might have more seats in the house or more seats in the Senate or control of the white house when they don’t today. I think we’re unlikely to see any major legislation affecting investors this year. I don’t even expect to see the discussions of GSE reform, Fannie and Freddie reform, coming to fruition. I think both sides will be thinking they can get a better deal in 2021 than they can get this year. So, why commit this year? We’ll see what happens with the election.

Alex Mihajlov:

Well, let’s talk about elections. What are your political tea leaves telling you? Let’s run. Let’s say Biden gets the nomination and he wins the election. What does that look like?

Bob Stein:

That’s a great question. Right now, I’d give Joe Biden, as of today, two days after Super Tuesday where he did extremely well relative to expectations. I’d give him today about an 85 to 90% chance of getting the nomination. I think Bernie Sanders only has a five to 10% chance and I’m probably being generous and maybe all the other candidates combined, including people who might come out of the woodwork later on. That’s really what I’m emphasizing. Maybe a 5% chance just in case something happens to Biden health wise or something like that. So, I really think Biden is overwhelmingly likely to be the nominee. If he is the nominee, I think it’s essentially a toss-up between Biden and Trump. I give Trump a very slight edge, just the same as you would give a football team going to the super bowl. I wouldn’t be surprised if the underdog won when the favorite is only a slight favorite.

So in that situation, let’s say Joe Biden wins the white house. Chances are that the Democrats would not take control of the U.S. Senate. Republicans would still be in charge of the U.S. Senate. They’re probably a diminished majority. Right now, they have 53 seats, so they may come out of it with something like 52 but the Democrats would still be in charge of the house. What that means is that every piece of legislation going to a President Joe Biden’s desk would have to be bipartisan. It’d have to be able to get it through the U.S. Senate. So, even if we hear discussion of Medicare for all or a green new deal or a watered-down version of those pieces of legislation because it’s Joe Biden, not Bernie Sanders, or we hear about a wealth tax.

It can’t happen, as long as the Republicans keep control of the U.S. Senate. In fact, I don’t even think Joe Biden would be able to repeal the Trump tax cuts enacted in 2017. So, I think a Joe Biden presidency, as long as Mitch McConnell’s still majority leader or the Republicans are still in charge of the U.S. Senate, we see less change legislatively on tax policy, on fiscal policy in general, than we would anticipate given a switch in the white house.

One area though, and I’m a little bit optimistic about that, is on entitlement reform. As long as President Trump is in office, I don’t think the Republicans are going to control the U.S. House and the Democrats who do control the U.S. House will not want to give him a success story on reforming entitlements for the long run on social security, Medicare, or Medicaid. If Joe Biden is in the white house, that dynamic changes a little bit. Joe Biden wants a legacy. He may only serve one term. So, I think Republicans in the Senate would be willing to reform Medicare or Medicaid or social security. Most Democrats will not support that, but if Joe Biden’s in the white house, he may be able to bring along just enough Democrats in the house to get entitlement reform accomplished, which is oddly something that, as I mentioned earlier, President Trump would not be able to accomplish because the Democrats would not want to give him a success story on that issue.

Alex Mihajlov:

Let’s talk about other potential surprises in this process while we’re going through it and then we’ll talk about Trump. Let’s say Bernie gets the convention and says, “I’ve had enough of the Democrats. I’m done. I’m taking my people and my ball and I’m going to break off and go independent.” Does that fracture the democratic party enough to throw the ball to Trump?

Bob Stein:

Yeah. I mean, if Bernie Sanders ended up running as an independent, I think that would almost guarantee that President Trump would win re-election, but I don’t think he will.

Alex Mihajlov:

You don’t think he’s [inaudible 00:10:37] enough?

Bob Stein:

I don’t think Bernie Sanders is going to run as an independent. He was willing to accept losing to Hillary Clinton back in 2016. It looks likely that Joe Biden will have a majority of the delegates, so for him to participate in the democratic primary, lose clearly, pretty much fair and square or as fair and square politics are, and then to take his ball and go play somewhere else, I think that would break and destroy so many bridges he has within the democratic party. He’d probably be thrown off committees as a U.S. Senator and I think it would really leave a sour legacy for him personally to have run in a primary but not accept the winner of that primary process.

I mean, you have to recognize that in the past week or so, Hillary Clinton said, “You know what? If Bernie Sanders is the nominee, I’ll support him.” Nobody else in the major parts of the demo … I’m not saying she was being genuine, but she said that and to then reject the same willingness to support the nominee, it would reflect poorly on him.

Alex Mihajlov:

He is 78 years old, though. Or what is he? 74? 78?

Bob Stein:

Oh no, he’s in his upper seventies. I mean, it looks like he’s in his upper eighties, but he is in his upper seventies.

Alex Mihajlov:

Yeah. Yeah. Before we get to Trump, is there anything in the political world right now that you think this could come out of left field? You know, Hillary jumping in, Michelle Obama jumping in?

Bob Stein:

No, Hillary or Michelle Obama are not going to jump in. I could discuss the vice-presidential choices that Biden would make.

Alex Mihajlov:

Let’s do that.

Bob Stein:

So, I’ve had this view for the past year that one person he will strongly consider that nobody else is really talking about is Tammy Duckworth, the junior Senator from the state of Illinois, and I could see by your expression, you’re like, “Who the heck is she?” You’ve probably heard about her before. So, she’s a Senator from the state of Illinois. Minority candidate, veteran, disabled. She lost both legs in Iraq.

Alex Mihajlov:

Wow.

Bob Stein:

So, if Joe Biden wants to be on the stage with somebody who genuinely reflects patriotism and sacrifice for country, there’s nobody better than Tammy Duckworth. Another strategy would be to go with Catherine Cortez Masto, who is a Senator from the state of Nevada, who is basically part of Harry Reid’s political machine. That would be a play, not really for Nevada, but because she’s Hispanic, a play for Arizona.

Bob Stein:

If Joe Biden and Catherine Cortez Masto can flip Arizona, it had been a Trump state in 2016, into their column, and if Joe Biden can take his original home state of Pennsylvania with him as well, it makes the electoral college math very difficult for president Trump. He wouldn’t have to win just one of Wisconsin or Michigan. He would have to win both. Now, that’s a possibility as well.

I think he’ll also take a close look at Amy Klobuchar from Minnesota who I think he views among the three I just mentioned as the most ready to be president in case she were called upon to become president. Possibly, Deval Patrick, the former governor of Massachusetts, as well.

Alex Mihajlov:

He got nowhere at the election though. I mean, he-

Bob Stein:

Got nowhere. In my view, in early 2019, I was touting him as somebody who, if he got in, would be a formidable candidate. He got in way too late. Way, way too late. So, he wasn’t able to really exploit the fact that he’s very close with President Obama and could use his advice to build a political machine. So, he just got in way too late, but I do think he would make an interesting vice-presidential running mate.

Alex Mihajlov:

Do you think there was more behind the Bloomberg candidacy than just him getting in and spending his money? Was there another ulterior purpose of that?

Bob Stein:

I think he was in it to get the nomination. He thought Joe Biden was faltering. He made a very grievous mistake, which was participating in the Nevada debate. If he had stayed above the fray and said, “All those little [inaudible 00:14:52] are debating, I’ll come in and debate later at my timing,” he could have retained a lot more popularity. As soon as he debated his and he was not prepared. It was like entering in the playoffs when you hadn’t even gone through the regular season or spring training. He just was not ready. And I think people realized at that moment when they saw him unprepared, that if they wanted a more moderate candidate, they were going to have to stick with Biden and Bloomberg lost his mojo. So, I just think that was a key decision. He should have turned down the opportunity to participate in that debate and waited another weekend, become more prepared.

Alex Mihajlov:

Well, he’ll hire you for his next run. I feel certain.

Bob Stein:

Yeah.

Bob Stein:

Well, my rates are going to be pretty darn high if he hires me.

Alex Mihajlov:

Let’s talk about Donald Trump and let’s look at the other scenario. Let’s say, he wins and both houses go Republican. What happens then?

Bob Stein:

Well, first of all, I think that’s very unlikely.

Alex Mihajlov:

What chance do you give that?

Bob Stein:

Well, I would say, given that Biden is likely to be the nominee, I would say less than 10%. If you look back historically at presidents who have presided over a house controlled by the opposite party who have run for reelection, they have not been able to really take back the house for their own political party. Eisenhower couldn’t do it. Reagan couldn’t do it. Bill Clinton couldn’t do it. Barack Obama couldn’t do it. President Nixon wins by 23 points over McGovern, 1972. Republicans gain I think 12 or 13 seats in the house of representatives.

They need to win 18 seats this time around given all the gerrymandering issues going on. So, I just don’t think it’s very likely. Possible, but unlikely. But let’s say it happens. I think in that case they’ll extend the Trump tax cuts, may deepen them and will probably go for some Medicaid reform. Medicaid reform, not Medicare for the senior citizens, not social security because that takes 60 votes in the U.S. Senate and he won’t have them, but he could do some Medicaid reform, block granting it to the States and letting them handle it the way they want.

Alex Mihajlov:

Cool. What surprises do you see in this lineup in the Trump-Biden campaign? It’s going to be phenomenal to watch.

Bob Stein:

If I knew what the surprises would be, they wouldn’t really be surprises would they? Yeah. I don’t know. There will be surprises and the only thing I can tell you is there will be surprises. I have no idea what they’ll be.

Alex Mihajlov:

All right. Let’s get off politics for a second. What are you reading these days?

Bob Stein:

So, the book I’m reading right now, I try to read one book a month, and the book I’m reading right now is called The Age of Entitlement by Christopher Caldwell. he basically looks back to the 1960s, 70s, and 80s, a cultural change in the United States and his thesis is that there are essentially two countries within the United States right now, one which is allegiant to the original constitution, the old Republic, and another new one that cuts across cultural and ethnic lines, which is really allegiant to the Civil Rights Act of 1964, 1965 and the Fair Housing Act of 1968 and what those laws have done and how they’ve interacted with the court system. His thesis, and I’m not saying I necessarily agree with it or not, but it’s an interesting one, is that those laws and the interaction with the courts have essentially created a second constitution about the role of government in American life. Many people in the United States, perhaps a majority, implicitly believe that constitution supersedes the original constitution.

Alex Mihajlov:

Wow. Interesting.

Bob Stein:

Interesting book. Not too long. It was about 300 pages.

Alex Mihajlov:

You were telling us a great story about one of your favorite bands and brown M&Ms. Tell us the story again and tell us what else you’re listening to.

Bob Stein:

That’s right. So, there’s a story about Van Halen and the M&Ms and my understanding is that they really had a good reason for the M&M requirement in their contract. Everybody says, “Oh, they were prima donnas. They wanted a certain color of M&M removed.” I don’t know whether it was blue or brown or yellow or whatever, but the reason is because their concerts were so complicated for that era, 1980s rock, in terms of the pyrotechnics, in terms of the electronics, in terms of setting up the scaffolding, jumping off of it, doing all their antics, that they were really taking their lives in their hands every time they had a concert. So, they wanted to make sure and they needed a method to make sure that whoever was managing the concert operations, the site, the hotel that they would stay in, everything, had thoroughly read everything in the contract.

So, they put in not just the thing about the M&M, but some other things as well. If they got to their place, they got to their hotel and they saw that color M&M when they had told them not to have that color M&M, they knew that management group had not thoroughly read the contract and if they didn’t handle the M&Ms right, well they might not handle the pyrotechnics right, the scaffolding right, or anything else and they couldn’t trust them and they wouldn’t do the concert.

In terms of what I’m listening to right now, I find myself as I get older listening to more and more Johnny Cash, which really annoys my kids and then I remember when I was a kid, I didn’t like Johnny Cash, but what I try to explain to them is that with each passing year or decade, they’ll like Johnny Cash more and more. Just something about the tone of his voice that you respond to more as you get older than when you were younger.

Alex Mihajlov:

What’s your favorite Johnny Cash song?

Bob Stein:

I Hung My Head. Something about the story and then someone doing something wrong and then accepting the punishment that he deserved.

Alex Mihajlov:

Bob, I really appreciate your time. It’s always great to see you. I love coming to hear you talk.

Bob Stein:

Thank you.

Alex Mihajlov:

Thank you for all your knowledge. We really appreciate you spending time with us.

Bob Stein:

I appreciate it.

Alex Mihajlov:

Thank you so much.

Bob Stein:

Thank you. Sure thing.

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