Welcome back and welcome aboard. It's a shortened trading week here in the U.S. due to the Martin Luther King Jr. Holiday, but investors are riding in on another week of gains. The S&P 500 and the Nasdaq each posted their second consecutive positive week and best weekly performances since November. The Nasdaq popped 4.8% on the week, while the S&P rose 2.6%, and the Dow added 2%. The December Consumer Price Index (CPI) showed that inflation continues to slow, with consumer prices rising just 0.1% from November and clocking in at a 6.5% annual rate. That's the slowest pace of inflation, and the lowest annual rate of inflation, since October of 2021.
It's yet another sign that those aggressive interest rate hikes of 2022 are working their way through the economy—especially the goods part of the economy. Gas and fuel oil prices led the declines last month, but inflation is still sticky high across food, shelter, and transportation prices—that's the services side of the economy. The problem is: the U.S. economy is 70% services.
Still, a slowing pace of inflation is good news for consumers and really good news for investors who are hoping that the Federal Reserve will cool down its aggressive rate hiking campaign sooner rather than later, and maybe even start to cut rates later this year. Fed funds futures are now pricing in an 87% probability of a 25 basis point rate hike at the Feb. 1 meeting of the Federal Open Market Committee (FOMC). That's up from 77% earlier last week, 63% a week ago, and 35% just a month ago. Remember—the Fed hiked rates by 0.5% at its last meeting in December, following four straight hikes of 0.75% throughout 2022.
While rate cuts, or a pivot, as everyone is calling it, are by no means a certainty, more market watchers and economists are starting to warm up to the idea. According to the Wall Street Journal's most recent survey of economists, 31% think the Fed will start cutting rates in the fourth quarter of this year, another 37% expect that to happen in the first quarter of 2024, and 8% expect it to happen in the second quarter of next year.
But keep this in mind—when a central bank cuts interest rates, it's usually because something is wrong either in the macro economy or in the capital markets. While stocks usually bounce when the Fed starts to cut rates, the euphoria can fade fast if there are structural problems that could bring the whole house down, like what happened in 2001 and 2007. The S&P 500 tumbled over the next six months after both of those rate-cutting campaigns.
If we spent too much time hand-wringing at the steep losses we may have suffered in 2022, we are probably missing a pretty aggressive bull market happening in some sectors and regions, and potentially the beginning of a few others. As our pal JC Parets at All Star Charts points out, financials, on a market cap-weighted basis, are up almost 20% since the lows—that's nearly a bull market. Industrials are up over 21%—bull market right there. Even energy stocks, despite their recent losses, are up 20% since June.
Health care and materials are both up 14% and 13%, respectively. Emerging markets are at a six month high, and Europe is knocking on the door of a new 52-week high, and it's supposed to be in recession, which just hammers home the point that the stock market and the economy are not the same—never were, never will be. Even homebuilding stocks here in the U.S. are pushing new ten month highs, and we've seen declining sales and building permits for 12 straight months.
All of these sectors rallying at the same time, when the storm clouds are gathering around the economy, is tough to process—I know. But don't ignore the good breath. According to market watcher Walter Diemer, when market breadth is this strong across this many sectors, the overall market is up more than 20% one year later 23 out of 24 times.
And one more thing—and this comes to us from Fidelity's Jurrien Timmer—despite the 35% pandemic crash in 2020, and the 28% valuation reset in 2022, the ten-year compound annual growth rate (CAGR) for the stock market is still a healthy 10.5% in inflation-adjusted terms. The next time someone says they're afraid to look at their 401(k) or their portfolio, tell them to lengthen their time horizon.
The Looming U.S. Debt Ceiling Crisis
We're going to hear a lot of headlines and hand-wringing over the U.S. debt ceiling in the next few days. So let's make sure everyone knows what we're talking about and why it matters—if it matters at all—to educated individual investors like us. First of all, what is the debt ceiling?
According to my favorite website, the debt ceiling is the maximum amount of money that the United States can borrow cumulatively by issuing bonds. The debt ceiling was created under the Second Liberty Bond Act of 1917, and is also known as the debt limit, or statutory debt limit. If the U.S. government's national debt level bumps up against that ceiling, the Treasury Department must resort to other extraordinary measures to pay government obligations and expenditures until the debt ceiling is raised again, or run the risk that it will default on its debt.
Since we're always spending in more than we can take in as a country, we have to keep raising the debt ceiling or come up with extraordinary measures so that the U.S. Treasury can keep paying its bills. The problem is Congress needs to agree to raise the debt ceiling. On Friday, Treasury Secretary Janet Yellen warned that the U.S. is on track to reach the debt limit by this Thursday. The ceiling was last raised by $2.5 trillion in December of 2021, to a total of $31.4 trillion.
In the past, Congress has avoided breaching the debt limit by simply raising it or kicking the can down the road. But House Republicans said they will not support increasing the debt ceiling this time around—not unless they get spending cuts or other concessions. In a letter to congressional leaders, Janet Yellen said deadlock around the debt ceiling can cause "irreparable harm to the economy and even global financial stability." She cited 2011 when the U.S. reached its debt limit, wreaking havoc on the stock market.
The concern for Yellen and for big investors is that if the debt limit isn't raised, which has never happened, the U.S. credit rating could get lowered, and that, my friends, is a very big deal. Since U.S. Treasurys are considered the safest, most stable investment on the planet because of the United States' stellar credit rating, a downgrade could cause those yields to spike. Since so many critical credit instruments and financial products like corporate bonds are based on the 10-year Treasury bond, a downgrade due to a debt ceiling impasse would be very dangerous for global markets.
Plus, the U.S. Treasury would have to suspend contributions to pensions for veterans and other government workers, and stop paying other important bills that keep the government running. That's why the debt ceiling is important, but it gets tossed around like a political football every time that limit gets reached, and it's going to keep happening because the U.S. is over $31 trillion in debt.
Meet William D. Cohan
William D. Cohan is a bestselling author who has written several books on American business and finance. He is the New York Times bestselling author of three non-fiction narratives about Wall Street: Money and Power: How Goldman Sachs Came to Rule the World, House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, and The Last Tycoons: The Secret History of Lazard Frères & Co. Cohan is also the author of The Price of Silence, Why Wall Street Matters, and Four Friends.
His newest book, recently published in November of 2022, is titled Power Failure: The Rise and Fall of an American Icon. It is about the astounding rise and precipitous fall of General Electric, once the world’s most valuable and respected company.
What's in this Episode
American businesses have been dominated by mega-corporations for the past two centuries, many of them led by high-profile CEOs with outsized personalities, who become symbols of capitalism, power, and influence. The cult of the CEO is as American as football and a Sunday barbecue, and no one has studied it more, and written about it so eloquently as William D. Cohan. He's a New York Times bestselling author, a contributor to the Puck Substack, and a shoo-in for the Business Journalism Hall of Fame one day. And he's out with a new book, Power Failure: The Rise and Fall of an American Icon, and he is our very special guest on the Investopedia Express this week. Welcome, Bill. So good to have you here.
William: "Caleb, thank you for having me. It's an honor."
Caleb: "We crossed paths a little bit in our Bloomberg days, and I was always so admiring of your work and your access, and your ability to write about it so well. You're a former investment banker-turned-financial journalist. How did that happen? That's not a typical path, although some people have gone down it."
William: "Well, first thing to the story is that I was a journalist before I went back and got my MBA at Columbia, so I did have my roots in journalism. I'd gone to Columbia Journalism School. I was working as a reporter on the daily paper in Raleigh, North Carolina. So it wasn't a complete fantasy 'slash out of left field' kind of situation."
"There was some basis for returning to journalism after Wall Street, and basically, I was given no choice in January of 2004, because JPMorgan Chase fired me as part of a ongoing round of firings that occurred in the years after September 11, in their investment banking group. So I found myself 44 years old, two young kids, with no career anymore. So I had to pivot, as they say, and figure out what it is I could do that would no longer require me to have a boss who could decide whether or not I would be fired or hired."
Caleb: And you knew the way Wall Street worked. You knew the inner workings of investment banking and you knew the language of Wall Street. You grew up in it. You were a journalist-turned-investment banker, as you say. But what attracted you to the storytelling, since there is this through line, as you know, in all of your books. This is the power and the powerful, and unwrapping the myths that surround them. What brought you to that through line?"
William: "It was pretty much exactly that. I was one of the few people ever who had spent a significant chunk of time—17 years is not insignificant—time on Wall Street, and rose from the bottom, as an associate, to the top, to the role of managing director and group head. And I'd worked at a variety of different banks—Lazard, Merrill, JPMorgan Chase, and its various pieces. So I had seen many different perspectives, had met many different people, knew intimately how Wall Street worked—both the plumbing of Wall Street as well as the deal side, as well as the politics of Wall Street, and became a victim of the politics of it."
"I asked myself, what can I do that is in my power that won't require me to get hired by somebody, and then I can control everything that I do and have equity? And that came down to this idea of writing a book. And I thought, well, there hadn't been a good book about Lazard since Kerry Reich wrote The Financier about Andre Mayer in the late seventies, early eighties. And so, I had worked there ten years earlier—I knew the firm and knew the people there, and knew I could get to the bottom of this incredible story that was Lazard."
"And so that's how it started; I just had this crazy idea that I could write a book about Lazard, and I wrote a proposal and I sold it to Doubleday, and the rest is history. I mean, that first book won the FT/Goldman Sachs Business Book of the Year award in 2007. And of course, that opened up all sorts of doors."
Caleb: "Yeah, way to knock it out of the park on your first step up to the plate. But I got to know you through House of Cards, which is really your telling of the unraveling of the mortgage market and how, basically, the Global Financial Crisis tipped so steeply—and we did a little bit of work on that at CNN, producing a couple of feature pieces and some documentaries. So House of Cards, Why Wall Street Matters, The Last Tycoons, and now, Power Failure. Power Failure—this is a doorstop of a book—about 800 pages."
"It's a nose breaker, as I like to call it, because if you're reading it in bed and you drop it on your nose as you fall asleep, you're going to break something. This is deep research, great reporting, and great storytelling as usual, unpacking what happened to General Electric and how the seeds of that unraveling were actually planted over a hundred years ago in the late 19th century. I get that you're into power and the powerful, and nobody was more powerful than General Electric, and Jack Welch especially, in the late 20th century. But why General Electric—why now?"
William: "Well, first of all, you're very kind and I appreciate those thoughts. There's a through line to all my books in that I had some experience with pretty much everything that I've written about. Obviously I worked at Lazard, I competed against Bear Stearns and Goldman Sachs. I wrote a book about the Duke lacrosse scandal. I went to Duke, I wrote a book about my four friends at Andover, and my first job out of Columbia business school was at GE Capital, financing leveraged buyouts in the late 80s, so I had tangential experience working at GE Capital. I knew some of the people involved, and I had met Jack, of course. I had not met Jeffrey Immelt, but I met many of the senior executives there."
"And another thing that made it interesting is basically I wanted to know what the hell happened! You had this company that was the greatest American company ever, or among the greatest American companies ever—it had been around since 1892, it was the most valuable company in the world when Jack basically turned it over to Jeff Immelt. Under Jack, it was the most admired company. It was management, producing great managers and CEOs of other companies; Jack was the most admired CEO of the 20th century."
"And I had worked there, I had seen what it was all about to some extent, and certainly on the GE Capital side. And next thing you know, it's like there's a dead body on the floor. How did it get there? So, my narrative juices were flowing, and I wanted to know how this actually happened, and I didn't see a good reason yet. And so, once again, it was journalistic juices kicking in, and I took a blank sheet of paper and tried to figure out what happened, resulting in this long book, but I think hopefully a good read."
Caleb: "It's a great read. Once you start, you really can't stop, and there's a lot of myth busting going on in there—a lot of perceptions about General Electric that the general public and I have. And I'm a business journalist just like you, with a lot of years on my back, but I learned a lot right out of the gate."
"Myth number one: Thomas Edison created General Electric. Not true. He created a company, and many companies, in fact—he was a serial company creator. He had a lot of companies under his name. But that's not true. Unpack that myth for us. What happened there? Tell us about Charles Albert Coffin, Henry Villard, and J.P. Morgan, the man—not the bank—the man himself, so heavily involved in the creation of what became General Electric."
William: "Caleb, what was so incredibly interesting to me is I thought that Thomas Edison created the company like everybody else thought, because that's what we've been told for 100-plus years. And the first thing that I discovered, upon starting to research, is that, yes, he created a predecessor company, Edison General Electric, but by the time the 1890s rolled around, the company wasn't doing particularly well. He was no longer the CEO—Henry Villard was the CEO, and J.P. Morgan the man who was calling the shots. And these moneymen, Henry Miller and J.P. Morgan, were both looking for a way out of this thing."
"Thomas Edison was, at this point, a small shareholder, and there was a competitor called the Thompson Houston Company, which had been bought out of bankruptcy by this guy, Charles Coffin, and moved to Lynn, Massachusetts. The Thompson Houston Company was basically eating Edison General Electric's lunch—about the same amount of revenues, $10 million, but much more profitable and increasingly dominant."
"And so, essentially, J.P. Morgan and Henry Lazard initiated merger talks with Charles Coffin and his moneymen, and that led to the merger of the company in 1892—the two companies in 1892—which created General Electric with Charles Kaufman as the CEO. And Edison was against it from the very beginning. He thought he had blocked it from happening once, and then they went around his back and made it happen without him, and then he basically slipped away, sold his shares, and was gone."
"The other interesting thing was that literally a year later, after the merger, was the Panic of 1893. GE was over-leveraged, and they hadn't been able to buy their debt back at a discount. They probably would have gone into bankruptcy. So right off the bat, they almost went into bankruptcy, and number two, engaged in some serious financial engineering to survive and then created their own version of a balance sheet until—120 years later—the same damn thing happened again, but they succumbed to it this time."
Caleb: "That's what blows me away, Bill, is that this was happening in the 1890s. There was financial generation of products. It was almost like they were creating, in a sense, what looks like modern-day finance, but this was happening in the late 19th century. J.P. Morgan, Henry Villard—they were acting like financiers, finding companies to acquire, to bolster the balance sheet, looking for life rafts wherever they could, and then using very creative financing that I thought was invented in the 20th century."
"But no, they were doing this over a hundred years ago to create what then became the modern-day General Electric. But it didn't work out, and then it didn't ultimately work out over the past decade, where GE is basically falling apart and is now being sold off in parts. That's so fascinating to me. When you were doing the research on this, and how much information was available on the kinds of financial shenanigans that were going on?"
William: "You mean back in the early days?"
Caleb: "Yeah, back in the early days. Where's the record on all this stuff?"
William: "Believe it or not, it's out there. And that's what made writing this book even more challenging, because, basically, GE had been a public company since 1892, and so they had to make reports, shareholder letters, and things like that. And by the way, I found all this without the help of GE, because GE did not help me in any way, except for one day when they let me go to Crotonville and they let me go to their research lab in Niskayuna, just north of Albany. And other than that, they just tried to shut me down completely."
Caleb: "That's shocking. Let's get into Jack Welch, Chairman and CEO of General Electric from 1981 to 2001, created hundreds of billions of dollars of shareholder value, was named CEO of the century by Fortune magazine, changed management and the perception of what a corporate leader should be like. You spent a lot of time with Jack before he passed away. What were his regrets? What was that like spending time with him? You start the book talking about meeting him at the golf course and him taking you on a harrowing car ride, where he's driving down in the middle of the road, not buckling a seatbelt. What were those conversations like with Jack Welch?"
William: "Oh, it was truly great. Right up until the end, he was extremely charming, extremely open, extremely gregarious. One of my favorite stories during our last visit, he was back at the golf club again, he basically invited my son and his friend to come visit and meet him, knowing that probably was going to be the last time I was going to see Jack, and it was. People would come up to him—and he was like a rock star, literally. He was a corporate rock star and maybe the first one."
"And people, whether it was Phil Mickelson or CEOs of other companies, would come up and introduce themselves, and for me, journalistically, just to have him be so open and so honest, and of course, sharing right off the bat his biggest regret being his selection of Jeff Immelt as his successor, and being so open and candid about it was fascinating to me. And even though that was, of course, his biggest decision that he had to make, any he kind-of blew it, and was willing to admit that he blew it, on the record to me, was just riveting."
Caleb: "Yeah, And the breakdown of GE—a lot of it gets pinned on Jeff Immelt, but as your book describes, a lot of these seeds were planted a long time ago. Maybe Jeff didn't manage the company as well, but he was in that seat for a very long time. It wasn't like he was there for two years, made a bunch of mistakes, and that is why the company is being sold off in pieces today. He was in the CEO chair for, I believe 18 years—that's quite a while to admit to having made a mistake, but Jack Welch was out of the company by then."
"But also, Jack Welch has disciples all over business. If you look, there's hundreds of CEOs, or people in the executive suites that came through the GE Six Sigma system, learned his management style, and tried to be like him. Yet there can be only one. He is a one-of-a-kind type of individual. The cult of the CEO, Bill, is not new, but it may have hit extremes with leaders like Elon Musk, Jeff Bezos, Steve Jobs, Richard Branson, just to name a few. You have kids, I have kids, I have teenage kids. Do young people care about these people the way that our generation did? Does money and power, Bill, carry the swagger that it used to?"
William: "Absolutely. I mean, the cult of the CEO and the cult of personality is probably more prevalent today. Once upon a time, as we all know, there was The Wall Street Journal and Barron's that covered business, and over time The New York Times discovered business and started covering it. And then, slowly but surely, there was CNBC and Bloomberg and Fox Business, etc."
"So through my time on Wall Street, which was during the 80s, 90s, and early 2000s, that sort-of developed the cult of the Wall Street banker as a rock star. I mean, Bruce Wasserstein, Joe Parella as rock star investment bankers, Michael Milken as a rock star investment banker/trader and Wall Street genius/Wall Street villain. They became popularized, but again, in a relatively narrow niche of the population."
"I think with the rise of the Internet and social media, you take on Elon Musk at your own peril on Twitter. And I have written a lot about Elon, not always positively, obviously, on Puck. And every time you do that, you get sandblasted on Twitter. So I think, in a weird way, more than ever—I mean, you've got Walter Isaacson writing a big bestseller about Steve Jobs and now doing the same thing with Elon Musk."
"I mean, when you've got some of our best nonfiction writers writing about these people—Michael Lewis now with Sam Bankman-Fried, I mean, you're going to be talking about making them into iconic figures. So in a weird way, it's now almost more than ever. I mean, Jack was, of course, a rock star, but GE was also a rock star, and he had the GE jersey. Elon Musk, SBF, Jeff Bezos, Steve Jobs—they're kind-of like iconic figures, regardless of what they've accomplished, or in spite of what they've accomplished."
Caleb: "I'd love to know what your list is. What are the top three business books, in your opinion, of all time? Which ones are just sitting up there on the mantle, like treasures, that you really admired that you did not write? You mentioned some great authors out there. What are your top three?"
William: "It's hard to limit it to just three, and I think one's a novel by Theodore Dreiser called The Financier. That's just a wonderful book of fiction. Another favorite of mine is Liaquat Ahamed's The Lords of Finance, which is nonfiction. And then I've got to mention Michael Lewis somewhere, and I think my favorite book of his is The Big Short. He's a fine reporter and a fine writer, and he's a friend and I admire him greatly. But his ability to take a different perspective on something and write a story from a different angle really blows me away. Now, he might not be doing that with SBF this time, but he did do that with the financial crisis."
"So I wrote House of Cards, which is about the collapse of Bear Stearns, and then Money and Power. It was a history of Goldman, but also of how they avoided the fate of Bear Stearns because they did something very different than Bear Stearns did. So that's sort-of like a conventional, straightforward approach. Michael and The Big Short took the approach of let me find the people who saw trouble coming and tried to do something about it."
"And I have to say, I cribbed from him a little bit in this mini series I just did on Puck with SBF, for stories about people who saw trouble coming with SBF and tried to do something about it. So, he's had a great influence on me and I admire him greatly and I only wish that my books were as successful as his, but he's a real talent. Maybe a lifetime achievement award for Michael Lewis."
Caleb: "Yeah, he deserves that, and more definitely in the Hall of Fame—probably already—and you're going to be there very soon. Well, let's go out on this. You know Investopedia is built on our terms and definitions. I'm wondering, both as a banker and as a business journalist, what's your favorite business, investing, or finance term. What's the one that just rings true in your soul and just makes you feel good?"
William: "There's only one, and we talk about it all the time, and it's crucial and it's total jargon and it's Wall Street 101. It's got to be EBITDA. Where would we be without EBITDA? Nowheres—as Steve Golub used to say to me, former Lazard partner."
Caleb: "Absolutely, and it's one of the most popular terms on Investopedia for a reason. And guess what? We get to concentrate on it every single quarter, because companies have to report their earnings and their EBITDA results—earnings before interest, taxes, depreciation, and amortization, or earnings before everything else. Such a great term."
William: "Let me just interject, though, with one of my major pet peeves about what's happened to EBITDA. EBITDA I'm fine with. What's happened, of course, as you know all too well and your readers know, is this wave of adjusted EBITDA, which I really hate and disdain, and is extremely misleading, and it's really taken hold, unfortunately, like wildfire. It completely dilutes the meaning of EBITDA and totally obfuscates what's really going on. And companies try to use adjusted EBITDA now to get away with misleading investors, to me, and that should be outlawed, if you ask me."
Caleb: "I agree. That's another one of those made-up Wall Street terms, and there's a lot of them. Maybe we need a book on that, or Investopedia needs its list of community engagement. WeWork used to use that, And you see companies coming out with their own interesting terms to describe their results, especially when they're not making money."
Caleb: "Fascinating term. Great book, folks. William D. Cohan, with his new book, Power Failure: The Rise and Fall of an American Icon. That is out now, we're going to link to it in the show notes along with the rest of your books. You can also find Bill's work on the Puck Substack, and there's great stuff there, from you and your colleagues. Such a pleasure to have you on the Investopedia Express. I'm an enormous fan, if you haven't been able to tell by now. Thank you so much for joining us."
William: "Thank you, Caleb. I really appreciate it."
Term of the Week: Discount Rate
It's terminology time. Time for us to get smart with the investing term we need to know this week. This week's term comes to us from Sahimi Navid, who hit us up on Instagram with their suggestion. Sahimi suggests the 'discount rate' this week, and we like that term, given all the noise around the Federal Reserve's next moves on interest rates.
According to Investopedia, the discount rate refers to the interest rate charged to commercial banks and other financial institutions for short-term loans they take from the Federal Reserve. The discount rate is applied at the Fed's lending facility, which is also called the discount window. Discount lending is a key tool of monetary policy and a part of the Fed's function as the lender of last resort.
A discount rate can also refer to the interest rate used in discounted cash flow analysis to determine the present value of future cash flows. The discount rate expresses the time value of money and discounted cash flows, and can make the difference between whether an investment project is financially viable or not. You can calculate the discount rate and discounted cash flow as long as you know the future and present values and the total number of years.
I love terms that have more than one meaning. It's like cracking an egg and finding two yolks inside. Good suggestion, Sahimi. You look like a runner or a speed walker, based on your Instagram profile. So we're sending you some snazzy Investopedia socks to keep you looking stylish on the trail.