Ken Fisher Discusses the Federal Reserve Balance Sheet, Oil Markets, DOGE and more–March 2025

Transcript:

[Transition Music]

Naj Srinivas

Hello and welcome to the Fisher Investments Market Insights podcast, where we discuss our firm's latest thinking on global capital markets and current events.

I’m Naj Srinivas, Executive Vice President of Corporate Communications here at the firm. Today, we’ll hear from founder, Executive Chairman and Co-Chief Investment Officer of Fisher Investments, Ken Fisher.

In this episode of Market Insights, Ken answers some common listener questions to help you better understand the world of finance and investing.

But before we dive in, I'd like to ask you a favor. Recommend our podcast and rate it wherever you listen. In just a few minutes, you can help make this valuable information available to even more people. Thanks so much for your help, in advance.

With that, let's dig in with this month’s Ken Fisher mailbag. Enjoy.

[Transition Music]

Ken Fisher

Every month, people ask questions, I can type on big cards so my ancient eyeballs can, read them when I'm talking to you and I try to answer them quickly. First one this month is, our new president seems determined to reduce regulation, particularly around energy. I'm wondering what your opinion on market impact could be. Let me make this real simple.

A, I am not 100% certain, but here's how it works. Yes, I think almost everyone knows that the president's aimed at doing that. B, what moves pricing is what people currently expect versus what subsequently ends up happening. If he is more able to successfully reduce unimportant regulations to free up production, whether energy or not, more than people think, that will increase outputs and in those categories that will tend to bring down pricing in most of the categories, like energy in particular, as it relates to the stocks of the companies. The pricing is more important than the volume. Although that's not true in every category in everything.

But what do I think? I don't really know how successful he can be, what he's attempting to do, we've never seen anyone attempting to do. And yet, it's broadly understood that he's attempting to do it, and he doesn't have the votes in Congress to eliminate regulations through congressional mandate, which is the way you would really take a sledgehammer to things.

So instead, what he does, it tries to drain the swamp and write executive orders. And I don't know how successful truly, that can be. We've never seen someone try to do what he's trying to do, and therefore it's a little beyond my ability to fathom. I am in favor of, for the most part of reducing regulations, most regulations, most regulations were well-intended, with unintended consequences that were worse than if we'd done nothing.

For the most part, free markets regulate pretty well, not perfectly, but pretty well. And Adam Smith's traditional concept of the invisible hand from his book The Wealth of Nations. In terms of the invisible hand, providing this governing feature of regulation where people benefit from the competition in the competition is the regulation, is a pretty good thing.

Should the drop in fed reserves be concerning to investors?

Well, what that means is that, just a backup real quickly. Between 2000 and 2007, as we went through the 2009 recession, and a little thereafter, the Fed Reserve, a Federal Reserve system for central bank, was buying up government securities and other debt securities to use as reserves to build more reserves into the banking system on the theory that this made the banking system less prone to bank failures.

Then, a few years back, they started reversing course on that, having ended their process of doing this, This is them, planfully trying to take us to what they think of as normalcy. What I would say is that the increase in bank balance sheets and Federal Reserve purchases of debt securities was actually something that didn't prove that ability to eliminate potential bank failures during the time period in which they engaged in doing it, but slowed down the growth in the economy, GDP, and made things less raucous in the period of 2010, 11, 12, 13, 14, 15 than they would have been if they hadn't done any of that.

Generally, when central banks try to interfere with the marketplace, they do more harm than good. While being well-intentioned.

Undoing what they've done, undoing what they did between 2007 through 10, 11 and even 12 is actually good. Could they overshoot the mark? Yes. But returning to some sense of normalcy. And actually, if you look up almost exactly these questions online, if you look up, Federal Reserve balance sheet reduction online, it'll take you to where you can actually see their own explanation of what they're doing or what they intend to be doing. And as long as they don't go too far, I think it's more than fine because it's returning us to where we were more or less once upon a time, and they never should have varied from that in the first place.

As a rule, first, do no harm. As a rule, they really tend to make mistakes when they do things, and the Federal Reserve is one of the major sources of problems in our economy over time, well-meaning, always while never taking accountability for the problems they create.

Let me just go off on a tangent for a second. The huge surge in inflation that we got between 2020 and 2022 was directly created by the central bank, stupidly increasing the quantity of money vastly relative the size of the economy in immediate reaction to Covid. It was a stupid set of decisions, but they never take accountability for these things. They didn't take accountability for that. They don't take accountability for having built up these bank reserves they didn't need to do. And ironically, the reduction of them makes people somewhat fearful. If it makes people somewhat fearful, returning to normalcy is a good thing.

Can you please give an industry analysis on dual registered advisors, brokers, hidden fees, conflicts of interest? And do you feel as though the industry is lobbying for these types of incentives, and also explain the history behind these types of fees in the industry? Oh my God, let me just say that these are supposed to be short answers. And this. You know what I'm going to do with this? I'm not going to answer it because, I mean, this would take me 15 minutes to do it justice. Maybe if I wasn't so verbose, I could do it in eight. But these are supposed to be much shorter answers than that. I'm going to write a column on this, and I'm going to write a column on this soon. And I write better than I talk anyway, so I don't I mean, I don't write all that well, but I certainly write better than I talk. So let me, let me do that this way.

There's been a lot of chatter about the oil market in the news. Well, that's pretty common. And there seems to be mixed signals on what will happen. That's pretty common. What is your take? First, as I think you know, President Trump, has famously articulated the phrase “drill, baby, drill”. Now, I just want you to understand that the president can't make firms drill.

What the president can do is reduce problems somewhat that impede the desire of firms to drill. But in reality, my expectation is that there will be less that will be done in these regards than people think. Because the administration doesn't have the power to eliminate most of the impediment, and the industry is pretty mature, and globally, and pretty restrained. Not looking to do something extreme. So I think we'll see pretty stable oil prices, not big swing, of course, in the short term there's always normal short term volatility whether the price of oil goes up a few bucks or down a few bucks is total insignificant noise. But in terms of big swing, I don't think there is one.

Will the DOGE Advisory Committee impact the economy? So I'm not going to talk to you about what DOGE is, because I think everybody's read about that and clearly it will impact the economy. The question is how much. And my view is that will impact the economy a lot less than people talk about. In the law, Doge is really nothing more than an arm of the president doing things that the president otherwise himself could do. Where he's delegated to them to do it. You go out and figure this stuff out and go do it. And then, of course, if what they come back doing is something he doesn't like, he can stop it, because he has the power to do that. If he's doing stuff they like, then he lets them go, just as if he was instead putting his own time into doing it.

Will Elon Musk and Doge have huge impact? If you actually look at the money they talk about as a goal, they talk big. But if you look at what they've actually been able to pinpoint and do, it's not been that big relative the size of the economy.

I'm not opposed to increasing government efficiency, which is what the G and the E and Doge stands for. I'm all for that. What does that really mean? Well, that going from a general beneficial concept, the government should be more efficient, to the devil's in the details, and I don't want to get into that because there's a more amounts of government than you could possibly imagine. And a lot of this stuff, as you go to make it more efficient, it's not always clear that what you do does make it more efficient. And again, I'm not an expert on all that. Will it impact the economy? Yes. But less than people think. I'm going to make a point to you. If you look at the Pentagon as a building, most of the space of that is being used for storage of paper files. Maybe you didn't know that.

The fact of the matter is, they're sitting there on expensive real estate with paper files. Should that stuff be computerized? I don't know, because the cost of computerizing it might be more than just more or less burning the files up. Maybe we don't need those files. I don't really know, but I don't know how with that amount of mass files, somebody intelligently figures that out in a big hurry. And if you do it in a big hurry, maybe you do something you shouldn't do. I don't really know. I don't have a great answer for you. Do I think it'll impact the economy? Yes. Do I think the impact will mostly be good? Mostly, yes. Do I think it's probably less than people expect it'll be? Yes.

Is euphoria in crypto also a bearish warning sign? Well mind you, that assumes there actually is euphoria in crypto. And let me just say I've never been a fan of crypto. If you think Bitcoin. Bitcoin's the big kahuna. There's a limited supply of bitcoin. We're getting close to the end of the creation of that. But crypto itself has an unlimited supply. In the long term, you can bury demand for crypto with supply.

Will the world? I don't know. Today I seem to be in an I don't know mode about a lot of things, but do I think the crypto market overall has some euphoric tendencies to it? Yes, I do. Why? Because crypto overall doesn't do anything. It's a digital function to it. At least with something like gold, you've got some function. With copper, you've got a lot of function and almost nothing but function. But with crypto you say, what's the actual function? And there's a little bit of a squeaky watermelon seed, in my opinion. There isn't something you do with it. And if you take a lot of these crypto currencies, it's really hard with most of them to see that anybody is actually using them for something.

So yeah, I think there's some euphoria there. But do I think it's big enough to be a problem for our society? No. This falls into a category that I kind of refer to as, and I don't like the way I do this, but people talk about bubbles being everywhere. Bubbles are supposed to be exceptionally rare. Bubbles are supposed to be, you know, once in a 70-year phenomena kind of thing.

But the reality is we've gotten to where we call, you know, anything that's seeming to be slightly overpriced, seeming to be slightly overpriced, a bubble, which is, I don't like that phraseology. But then you get down into oh that stocks in a bubble, a stock in a bubble? I don't think so. Oh. The Nasdaq's in a bubble. Oh, this isn't a bubble. That's in a bubble. The reality is, a bubble should be a bigger, more broad, fully macro across the global economy, phenomena that whacks you into a big downturn in the economy. And I certainly don't think crypto's big enough to have that in it.

The booming private capital market, which is concerned regulators for its opacity, is hoping to lobby the incoming administration for more widespread investor adoption. If the private capital market does become open to ordinary investors, will Fisher invest in the private market as a way of seeking even better returns? Eek! Let me just say I, I don’t like to talk about my firm on these things. You never hear me doing that. Secondarily, forgetting about my firm, private capital markets, which is basically three categories called alts. And that the buzzword “alt” , alternative investments, private credit, private equity, private real estate. That's the new cool guy thing to do. And I generally am not a fan of doing whatever the cool guys do.

I was never a cool guy. I always disliked the cool guys when I was growing up and whatever the cool guys want to do, I typically personally don't want anything to do with much. So I don't really know, but yes, the alts market is looking to try to get regulation to allow them to have funds that regular investors, that would normally be the kind of would buy into a mutual fund or an ETF, can buy into to own these three categories of alts. I could talk a lot about those three categories, but I don't really see that there's, that there are enough truly different in long term return when you get through with them on an after cost basis to justify doing something that a cool guy would do.

How has and how does the unrelenting bid from 401ks, 403Bs and other tax deferred retirement accounts impact long term investing? Let me say that this way. Retirement savings in total have grown hugely, in the last quarter century.

If you went back to the year 2000, IRAs and defined contribution plans, like 401Ks were more or less about the same size as the defined benefit pension plan market. That traditional pension plan that promised the retiree a benefit that the company or that entity had to pay, whether they had the money or not. And the standard concept of a corporate defined benefit plan is we promise you these retirement benefits, you get them and if we don't have enough money at the time to pay them, they come out of our earnings or our assets.

Governments did these, you know, things like California Public Employees Retirement System as a defined benefit plan. But starting in the late 90s, I mean, both these categories defined contribution plans like 401ks and IRAs, and defined benefit plans have been around for a long, long time. Defined benefit plans before defined contribution plans, but defined contribution plans long before they started to take off. And so the take off in defined contribution plans really started, in mass in the 1990s as corporations in particular in America. And I'm going to break my rule. I try not to talk too long about any one of these mailbag questions, but I'm going to talk longer about this a little bit.

Defined benefit plans put the corporation in the posture that if we don't have enough assets, having put enough money aside and managed it well enough, we have a liability, so if I'm the CEO and my predecessors did stupid stuff and then I become the CEO, it's on me to pay that defined benefit bill. So in the 90s, defined benefit plans, corporations would start saying, look, we're going to decrease your future employee future promised benefits. Your new employee,

we're not going to let you into a defined benefit plan. And as a new employee, we're going to put you into this defined contribution plan. We'll put in the money, you get these options to choose from to invest in, and what you pick becomes the return you get. You've got no guaranteed return like you do with the defined benefit plan, but you've got a guaranteed contribution.

That's the defined contribution plan versus the defined benefit plan. The defined benefit plan market has shrunk over the last 15 years, and particularly so on an inflation adjusted basis, because the defined benefit plan has shrunk, because corporations do want to be on the hook.

The defined benefit plans were created, are still there, but as people retire, they pay them down. They don't let new people in so much and instead they put new people into defined contribution plans which have grown instead. But even that which grew drastically between 2000 and 2015, in the last ten years, growing in dollars but on inflation adjusted basis, hasn't kept up with inflation, the growth of it. Now this is where it gets trickier, and this is why I'm going to take longer on this one than I normally take. I want to step back and just look at the world in a sense for a moment. America, the land of free and the home of the brave, has the biggest, most diverse and most sophisticated financial services market extant, offering more different things, innovating new things all the time, most of which don't end up becoming successful and popular, but some of which do.

Changing then the way everyone does things as they move to follow those successful innovations. And that's always been when I say, oh, it's that's been true for a really long time. The continent of Europe, for example, an economic bloc comparable to America, little bigger, is just very much less diverse, very much less sophisticated, not innovative. Britain, an island in between geographically, is also in between in those categories much more sophisticated than the continent, much more diverse than the continent, much more innovative than the continent, and less so than America. Outside of those with a few country exceptions, they've tended to be more backward still. But the whole world, with time, slowly starts doing things more the way the successful American innovations have. And today, when you look at defined contribution plans, you see them in slightly different formats in a lot of countries. Whereas if you went back a quarter century ago, you didn't.

The fact of the matter is, what happens in America tends over time, if it's successful in American financial services to trickle into these other countries and be done in across Europe, Britain before Europe, usually, and then around into other countries, and the less developed the countries are, the slower it is for them to take those adaptations. But eventually when you get there, therefore, there is this part that in the question was asked, i's unrelenting because it keeps increasing on a global basis. Is that good for stocks? I don't really know the answer to that because it depends on is it really growing faster than people that study this stuff, expect it to grow and put into their estimations of what prices will be. And I don't really know that. And again, I go back to the point that markets have done pretty darn well over the last ten years with some normal volatility and sometimes some extreme volatility.

And yet the growth in these assets has been smaller. In the global stock markets, about $125 trillion give or take a little at a given moment in time. It's a little hard to get it really precisely because in the smaller markets would still have a fair amount of money, a lot of it's illiquid and getting the exact pricing correctly and then adjusting for, you know, tertiary type currencies on a real time basis is something that's really hardly worth the effort. Unless you're really into trading a lot. And the U.S. defined contribution IRA market, another kind of a defined contribution, which are about the same size total together, you know, about 25 trillion compared to that 125 trillion, the U.S. retirement tax deferred market overall is more like about 45. But remember, a lot of that's in bonds and a lot of that's the other stuff, including private equity and all those things like alts, and bonds and I mean, a typical, defined contribution plan, 401 K is typically about, you know, 70% equity, 30% fixed income. And a lot of that's in target date funds aimed at, you know, here's your age, therefore we set your asset allocation at that. But I don't know if the growth ahead is more or less than what people expect it will be in this contributing to the markets or isn't and I wish I had a better answer for you. But it's a great question, and it's worth more time than I have to be able to allocate today, even though I've allocated more to this one than I normally do. Thank you for listening to this month's mailbag. I appreciate you listening. I hope to have a whole other set of questions and have you back next month.

Naj Srinivas
That was Ken Fisher answering listener questions as part of his monthly mailbag. Thanks to Ken for sharing his insights with us.

If you want to learn more about the topics discussed today, you can visit the episode page of our website, Fisher Investments.com. You'll find a link to that in the show description. While you’re on our website, you can also subscribe to our weekly digest, which rounds up our latest commentary and delivers it right to your inbox every week. And if you have questions about investing or capital markets that we can cover in a future episode of Market Insights, email us at marketinsights@fi.com.

We'd love to hear from you, and we'll answer as many questions as we can in a future episode.

Until then, I'm Naj Srinivas. Thanks for tuning in.

Disclosure:
Investing in securities involves the risk of loss. Past performance is no guarantee of future returns. The content of this podcast represents the opinions and viewpoints of Fisher Investments and should not be regarded as personal investment advice. No assurances are made we will continue to hold these views, which may change at any time based on new information, analysis, or reconsideration. Copyright Fisher Investments.