Speaker 1: Hello, and welcome to What Goes Up, a Bloomberg weekly
Speaker 1: market podcast. I'm Sara Ponzec, our porter on the Cross
Speaker 1: Asset team, and I'm Mike Reagan, a senior editor on
Speaker 1: the Markets Team. This week on the show, a respiratory
Speaker 1: virus spreads from China, stirring concerns and contributing to a
Speaker 1: slight pause in the equity rally. But how much may
Speaker 1: it actually affect your investments? Plus the global elite descend
Speaker 1: on Davos, Switzerland for the annual World Economic Forum. What
Speaker 1: some attendees have to say about markets, And of course
Speaker 1: we'll close out the episode with our tradition, the craziest
Speaker 1: thing I saw in markets this week? Sarah, I'm gonna
Speaker 1: just concede defeat up front. Okay, that's that's not what
Speaker 1: I was going Actually, I wear myself the winner of
Speaker 1: the crazy Usually we come right into the show, Mike says,
Speaker 1: you know what I'm gonna say right out front. You
Speaker 1: might as will not even share your craziest thing because
Speaker 1: I'm the winner. So the holiday shortened week I think
Speaker 1: threw me off my game. I had to go reach
Speaker 1: out to Vall Donna high Rich for my crazy thing
Speaker 1: that's how bad it was, and uh she came through,
Speaker 1: but it's it's it's no winner. Hopefully hopefully you can,
Speaker 1: uh you know, with something really crazy. I'll try my best,
Speaker 1: but uh, you know, as you said, crazy week in
Speaker 1: markets as far as the general news flow, and we've
Speaker 1: got some really good guests to break it down. Uh.
Speaker 1: First joining us from the Texas Investment Managers is their
Speaker 1: chief market strategist, David Lafferty. Dave, Welcome to the show,
Speaker 1: Thanks for having me on. Thanks And the guy we
Speaker 1: always turned to when markets and and China collide, our
Speaker 1: very own Yee She a blogger for Markets Live and
Speaker 1: a former reporter in uh China who will will tell
Speaker 1: us a little bit about how this latest health scare
Speaker 1: compares to the stars uh scared that he actually covered
Speaker 1: in in what two oh three? Right? Yes, yeah, glad
Speaker 1: to be good. And he also found some good pictures
Speaker 1: of the market where this all started. So I don't
Speaker 1: want to I don't want a front running your crazy thing?
Speaker 1: Was that is that your crazy thing? Okay? Good, good,
Speaker 1: we'll talk about that, no front running at all. That
Speaker 1: maybe you should steal that for your crazy thing, and
Speaker 1: you don't have to. I think it's pretty good. But Dave,
Speaker 1: let's start with you. I mean, everything I've read this
Speaker 1: week is that, oh, it's it's just another pandemic. As
Speaker 1: crazy as that sounds, you know, we've seen this before
Speaker 1: with the Bola scared about five years ago, uh, this
Speaker 1: Star scared day. The general consensus seems to be that,
Speaker 1: you know, these things cause a little bit of very
Speaker 1: short term uh selling in the market that seems to
Speaker 1: blow over in a couple of weeks. I mean, is
Speaker 1: it that simple uh this time? Do you think, uh,
Speaker 1: you know, I know you're no health expert, but is
Speaker 1: that a pretty base case scenario for you, that this
Speaker 1: is sort of just uh minor momentary distraction for investors.
Speaker 1: I mean, I think that the way the market usually
Speaker 1: handicaps it, and I think there's a reasonable reason for that,
Speaker 1: which is it's it's sort of assumes policy success that
Speaker 1: that government agencies, healthcare professionals will eventually be able to
Speaker 1: ring fence it. And it does make it. It tends
Speaker 1: to make it more of a short term story. Now
Speaker 1: we have to put sort of some caveat around short term.
Speaker 1: It could be a couple of weeks. The Stars story
Speaker 1: was about a six month long story so relatively short.
Speaker 1: We never know exactly what that means for me. Uh,
Speaker 1: we always want to see when it begins to spill
Speaker 1: into the real economy, and we don't exactly know when
Speaker 1: that will be. A lot depends on how well it's contained.
Speaker 1: So I always think there's always sort of two phases.
Speaker 1: There's the knee jerk sort of risk off markets go
Speaker 1: down one, two percent, three percent, something like that, and
Speaker 1: then there's a waiting period where we find out if
Speaker 1: it's actually a more systemic problem. By and large, in history,
Speaker 1: policy makers have gotten their arms around it. Market tends
Speaker 1: to rally back, you know. I I look back on
Speaker 1: the Stars uh episode, and you know, the market was
Speaker 1: kind of trying to find a bottom there after the
Speaker 1: dot com bubble and oh two oh three. On the
Speaker 1: other hand, here we are at what many people believe
Speaker 1: to be this sort of euphoric top. I mean, is
Speaker 1: it scarier when something like this hits at sort of
Speaker 1: this euphoric period in the in the markets compared to
Speaker 1: when the markets are bottoming like they were in oh three. Yeah,
Speaker 1: I mean, I guess the thing that worries me is that, uh,
Speaker 1: you know, there's so much optimism priced in and people
Speaker 1: are worried about valuations. But valuation in and of itself
Speaker 1: isn't a catalyst. So in that vacuum, people tend to
Speaker 1: look for catalysts, and may maybe some type of epidemic
Speaker 1: or pandemic becomes the excuse they've been looking for to
Speaker 1: either profit take or sell down assets that they think
Speaker 1: are expensive. So I don't think it's uh necessarily the
Speaker 1: thing that makes or breaks the market, but I would
Speaker 1: agree that these valuations, with the way the market has
Speaker 1: has run, it does make for kind of a convenient
Speaker 1: excuse to take a little bit of profit here here.
Speaker 1: So as it relates to the coronavirus, we did see
Speaker 1: airlines stocks a little bit, we saw casino operators hit
Speaker 1: just a tad uh. But looking at research that tried
Speaker 1: to really compare what we might see from the current
Speaker 1: events to different epidemics or pandemics of the past, I
Speaker 1: constantly kept coming across research or investors saying that it's
Speaker 1: really hard to isolate the ongoings and markets at that
Speaker 1: time and separate it from other events that were already
Speaker 1: going on. So, yeah, I'm really curious when you've been
Speaker 1: looking at epidemics past pandemics pass and trying to figure
Speaker 1: out what this current Wuhan virus could mean for markets.
Speaker 1: What have you really found? Dude? Is absolutely right in
Speaker 1: term impact on the US market is probably quite limited
Speaker 1: or short lived, but there's a apparent impact on the
Speaker 1: local market, particularly Asia. If you look at it, if
Speaker 1: you use the template of sauce into sound three, the
Speaker 1: Asian market on the performed when the sauce become really
Speaker 1: intensive by in February two sound three and the mark
Speaker 1: it down, the performed actually stopped and the market's bottom
Speaker 1: on the exact day when the number of the cases
Speaker 1: infection peaked, that was in late April two sound and three.
Speaker 1: So apparently is there's some localized impact, particularly on Asia,
Speaker 1: especially considered China now is mostly service and consumption driven.
Speaker 1: If MAXI they're like, OHI eleven million people lockdown, people
Speaker 1: cannot go out shopping, going to theaters, it's going to
Speaker 1: affect that economy at least in Q one, GDP is
Speaker 1: going to be hit. That's amazing to me. Eleven million
Speaker 1: people in Muhana, I mean it's bigger than New York,
Speaker 1: you know, and it's it's a city we've heard of,
Speaker 1: but you never think of it on on that sort
Speaker 1: of scale. But we're talking before the show e about
Speaker 1: sort of comparing and contrasting the Stars. How the China
Speaker 1: government handled the Stars episode in UH two thousand to
Speaker 1: two thousand and three, and how they're handling it now.
Speaker 1: Much more aggressive response this time, you know, but when
Speaker 1: you try to quarantine a whole city like that, as
Speaker 1: you said, I feel like this aggressive response almost threatens
Speaker 1: to do more damage to the economy than the than
Speaker 1: the Stars epidemic. Is that safe to say? Yeah? Yeah?
Speaker 1: In Q one two thousand three they comed down like
Speaker 1: two percentage points for eleven percent to nine percent, but
Speaker 1: economy quickly rebonded that when the when things get under control. Um,
Speaker 1: in q Q Q three they actually did pretty well. Um,
Speaker 1: it's that actually a question for you. Can you guess
Speaker 1: which year did the MSCI China performed did the best ever?
Speaker 1: Hurning the tables? I actually know because I've been following
Speaker 1: your report. I thought that maybe maybe data has to
Speaker 1: guess that probably close to them in two thou three.
Speaker 1: So that tells you these type of events tend to
Speaker 1: have very short, short term impact instead of the long
Speaker 1: lasting impact. So you mentioned how the Chinese economy now
Speaker 1: is more so services based, more so than it was
Speaker 1: back in two thousand and three, UH during the stars epidemic.
Speaker 1: But there was also a great rundown from Mark Cudmore,
Speaker 1: one of our macro strategist here at Bloomberg, and he
Speaker 1: alluded to a research note put out by Rabble Bank,
Speaker 1: and what they basically say is the fact that back
Speaker 1: in two thousand and three, China share of GDP was
Speaker 1: only four point three. Now it's closer to So if
Speaker 1: this were to go on longer, Dave, does that kind
Speaker 1: of show you that should we see more of an
Speaker 1: economic effect, more of an ecomic downturn on China, that
Speaker 1: we could see a larger feed through to the global economy.
Speaker 1: There's certainly a possibility. Obviously, with China being so much
Speaker 1: larger in the global economy, the bleed through of f
Speaker 1: effects obviously could be more significant. But again, as he said,
Speaker 1: they tend to be more temporary, because what's really going
Speaker 1: on here is it sort of inhibits behavior, you know,
Speaker 1: sort of demand gets pent up, but then after the
Speaker 1: scare passes, people usually go out and spend again. So
Speaker 1: more often than not, you have a pretty good rebound.
Speaker 1: So the question really becomes, how much of this is
Speaker 1: about these these type of pandemics or epidemics are about volatility,
Speaker 1: a bad quarter, a bad month, maybe even a bad
Speaker 1: two quarters, And how much is about real long term
Speaker 1: damage to the economy. I suspect that there's very little
Speaker 1: long term damage to the economy, but in the short
Speaker 1: run that loss of activity hits, but you get a
Speaker 1: lot of it back later. And if I was reading
Speaker 1: one of your recent notes, uh, great title, Confessions of
Speaker 1: a Reluctant Bull, and uh, the first sort of subtitle
Speaker 1: you you give is a party like it's I keep
Speaker 1: hearing that over and over again. I think Paul twitter
Speaker 1: Jones was out saying it it feels like this year.
Speaker 1: I think Cameron christ on our own Markets Live blog
Speaker 1: made a similar comparison. What about the current environment. I
Speaker 1: know we talked about the high value valuations and sort
Speaker 1: of this never ending grind higher? Is that basically it is?
Speaker 1: Is there anything else that really makes you start to
Speaker 1: bring out that comparison? So it's it's interesting, it's not
Speaker 1: really it's partially about the valuations. But I wasn't really
Speaker 1: making a historical comparison. I really just wanted a pully
Speaker 1: year that was sort of the end of a raging
Speaker 1: bull market. That was the only sort of historical thing,
Speaker 1: because what I was really posing was sort of this
Speaker 1: hypothetical question, which is, if you had the chance to
Speaker 1: get into the market at the beginning of knowing it
Speaker 1: was a good year, but you gave up all of
Speaker 1: those gains within the next eighteen months knowing what you
Speaker 1: know today, is that still a good time to invest?
Speaker 1: And I was trying to get at the idea that
Speaker 1: there are different types of investors out there. Some investors
Speaker 1: want to ride it to the end. Other investors, and
Speaker 1: this is probably closer to my way of thinking, would
Speaker 1: rather get off the train a little bit. I you know,
Speaker 1: a lot of people I think are kind of they
Speaker 1: want to Fellman Louise this thing right off the edge,
Speaker 1: and and I'm a little bit more, uh, you know,
Speaker 1: maybe I'm more risk averse than others. So, yes, valuation
Speaker 1: has similarity to the tech the idea that it's tech
Speaker 1: driven and it's mega cab driven. But I wasn't really
Speaker 1: making a historical comparison. I was really just saying, think
Speaker 1: back to a time when you got great returns close
Speaker 1: to the end. How does that make you feel if
Speaker 1: you and by the way, we're not barrish, I'm not
Speaker 1: saying we're at the end, but as the possibility rises
Speaker 1: and the damage could be worse because you're at higher valuations,
Speaker 1: how does that make you feel as an investor? That
Speaker 1: was sort of the behavioral issue I was trying to
Speaker 1: get at. It's kind of that, you know, are we
Speaker 1: picking up dimes in front of the steam roller? That'll
Speaker 1: cliche at at this point, and yeah, we are we
Speaker 1: picking up dimes that you know I mentioned in the
Speaker 1: research note, it's a little bit like chicken. When do
Speaker 1: you swerve? Is kind of the key and I was
Speaker 1: in is a great year to ask when when should
Speaker 1: you have swerved? Uh? Knowing that you never actually know
Speaker 1: when the market's going to turn down, But Sarah, I
Speaker 1: used to think I could outrun a steam roller. As
Speaker 1: I get older on that explains. But even you were
Speaker 1: wind back from and you saw evaluations maybe start to
Speaker 1: get stretched a couple of years before, and you had
Speaker 1: five years of double digit gains in the lead up.
Speaker 1: And there's another line in that same note that really
Speaker 1: stood out to me. You say, bowls will rightly point
Speaker 1: out that the valuation is a poor timing tool Confession
Speaker 1: number two, even as it died in the wool value proponent.
Speaker 1: This is hard to argue with. History shows that in
Speaker 1: the short run up cheap stocks can always get cheaper,
Speaker 1: and expensive stocks can always get more expensive. So when
Speaker 1: you're speaking with investors at this point in time, say
Speaker 1: they have been invested, they booked great profits so far,
Speaker 1: they were in had a great run, what's the tone like,
Speaker 1: our people still worry that this just can go on
Speaker 1: for years longer, like we saw in the late nineties,
Speaker 1: and you just don't want to miss out on that. Well,
Speaker 1: I think there's almost two mindsets here. There's sort of
Speaker 1: in the business the asset managers, financial strategists, economists. We
Speaker 1: look at the things that are driving the market, and
Speaker 1: those are things like you know, the FEDS one eight,
Speaker 1: the fact that all the other central banks, most of
Speaker 1: them are either on hold or of turned dovish. Every
Speaker 1: everybody talks about the suppression of interest rates. You know,
Speaker 1: this idea that there is no alternative, So there's a
Speaker 1: constant bid to equities because nobody loves bonds. And then
Speaker 1: you have things like technicals like momentum, and things like that.
Speaker 1: So when you talk in the business, you can come
Speaker 1: up with all these reasons why, hey, this this party
Speaker 1: could keep going on for a while. You go out
Speaker 1: and meet with clients and it's been talked about for
Speaker 1: a while. You know, the most unlovabull market. I hear
Speaker 1: a lot more of that today. The the You know,
Speaker 1: people were worried at seventeen times earnings, They're worried a
Speaker 1: little bit more at eighteen. They're worried a lot at
Speaker 1: nineteen times earnings. I think nobody wants to be the
Speaker 1: guy that jumps in kind of at the top. A
Speaker 1: lot of people learn that lesson and we're burned in
Speaker 1: the late nineties. So I I see, you know, two
Speaker 1: types of people out there. I see people in the
Speaker 1: business saying, hey, this can keep going for a little while.
Speaker 1: Expensive can get a little bit more expensive. This is
Speaker 1: uncharted territory. When you take into restrates down so low
Speaker 1: and so much policy accommodation, this can last longer than
Speaker 1: we all think. The average retail investor is a little
Speaker 1: bit more reticent than that. I think they they understand
Speaker 1: things like pe ratios and being eleven years into a
Speaker 1: bowl market. At some point, does it do you think
Speaker 1: it starts to we'll start to become a talking point
Speaker 1: for the FED. You know, we'll start hearing about irrational
Speaker 1: exuberance again. That that sort of thing I mean, And
Speaker 1: if so, is that um is that the type of
Speaker 1: thing that could sort of cause a pause in this rally?
Speaker 1: It could, But I I think you won't hear irrational
Speaker 1: exuberance again. They might have a different, different phrase. They
Speaker 1: like to be a little bit more original that. But
Speaker 1: but what I think has gone on in the last decade,
Speaker 1: largely since the financial crisis, is a subtle change at
Speaker 1: central banks, which is they now do pay explicit attention
Speaker 1: to financial conditions. So it's not that it's an addition
Speaker 1: to their mandate, but they certainly look at it. So
Speaker 1: instead of just you know, stable employment and stable prices,
Speaker 1: there is a there is a balancing act between systemic risk.
Speaker 1: Are they pumping up and creating bubbles? And uh, we
Speaker 1: know that investors and will naturally pull back when asset
Speaker 1: prices fall. When you see four ohn ks dropping in
Speaker 1: there are r a s dropping. So there is kind
Speaker 1: of this informal mandate at the FED to at least
Speaker 1: look at financial conditions. And so I think that more
Speaker 1: so than than in the past, and I think that
Speaker 1: naturally kind of leads them. I don't want to say that, uh,
Speaker 1: they might be less likely to talk down some of
Speaker 1: the systemic risk. I don't think they want markets going
Speaker 1: through the roof, but they kind of want to put
Speaker 1: a floor under it because financial conditions are more important
Speaker 1: in their thinking than they would have been ten or
Speaker 1: fifteen years ago. In a spinoff of a rational exuberance,
Speaker 1: you had a pieceless week that called to a Bank
Speaker 1: of America reports saying, irrationally bullish is the stock markets
Speaker 1: new catchphrase. I might be misunderstanding this potentially, but is
Speaker 1: it the idea that you almost feel like you have
Speaker 1: to be bullish at this point in time because you
Speaker 1: have a fed that it's extremely accommodative. Central banks around
Speaker 1: the world are extremely accommodative, and you have very low
Speaker 1: interest rate, low inflation, so it's almost as if what
Speaker 1: else are you gonna do? Yeah, exactly as Dave said earlier,
Speaker 1: that there's a few of missing out. That's a mental
Speaker 1: especially when you don't have apparent catalyst for the market
Speaker 1: to really scared of um in all these awash of
Speaker 1: liquidity in the markets, economic data seems to be turned
Speaker 1: into better and all these tail risk trade war bresent,
Speaker 1: all these tail risk is not to fade. You don't
Speaker 1: really see adding catalysts for people to really to to
Speaker 1: move with treat of on the stomackt to to put
Speaker 1: into the cash so at the media continue to play
Speaker 1: you have to get up and dance. Yeah, I wonder
Speaker 1: as you mentioned, during the Stars epidemic, Chinese gd GDP
Speaker 1: growth went from like eleven to nine percent um. You know,
Speaker 1: oh the horrors of nine percent GDP. But you know
Speaker 1: now we're looking at closer to six you shape two
Speaker 1: off of that, it's starting to get kind of dicey.
Speaker 1: Is there uh talk in the Chinese media and social media?
Speaker 1: I know you you followed pretty closely. Are people thinking, well,
Speaker 1: China's gonna throw a lot of money at this problem
Speaker 1: and and that will be a stimulu of reinforcement on
Speaker 1: the markets? Is that is it two early? For that
Speaker 1: second time? I think this is a still develop developing stories.
Speaker 1: UM the strategy China helping UM taking to uh trying
Speaker 1: to slow down this kind of growth moderation, is trying
Speaker 1: to avoid a large stimulus. They are pretty aware of
Speaker 1: all these leverage issues they had, so they have been
Speaker 1: trying into to take all these piecemeal steps instead of
Speaker 1: a large liquidity stimulus. So I think at this point
Speaker 1: is they seems to be still have a lot of
Speaker 1: the tools in their toolbox UM, fiscal spendings, UM, some
Speaker 1: of instruct projects to be probably moved ahead, but at
Speaker 1: this point it's probably too still too early to assess
Speaker 1: the damage. So he said, leverage issues. Uh. And I
Speaker 1: think some would hold a debate about how much debt
Speaker 1: has been built up, not just overseas but also on
Speaker 1: corporate balance sheets state side as well. And it reminds
Speaker 1: me of something we did here over at the Davos conference.
Speaker 1: And this came from Scott Minord over at Googanheide and
Speaker 1: I want to share two uh different lines with you,
Speaker 1: one from him on from someone else that is also
Speaker 1: very well known. So Scott Minord said, the market is
Speaker 1: a Ponzi scheme UM, saying that it's been built up,
Speaker 1: been up and up, and so much leverage. Central banks
Speaker 1: have provided so much liquidity, he said, the markets Ponzi scheme.
Speaker 1: Then on the other side you have the likes of
Speaker 1: Jamie Diamond at JP Morgan into talking about the markets
Speaker 1: being in a goldilocks place, And I just want to
Speaker 1: get your take, Dave, on how you can have too
Speaker 1: very well known names in the financial financial industry and
Speaker 1: you can just have to completely different takes in a way.
Speaker 1: Maybe sure you can find a link somewhere, but clearly
Speaker 1: Ponzi skiing Goldilocks not the same. Yeah, I think you
Speaker 1: know everybody. What makes markets is that we all approach
Speaker 1: them with different perspectives, right And I think if you're
Speaker 1: if you're of a cynical nature, you can always ask
Speaker 1: the question how did we get here? What imbalances were
Speaker 1: built up? And and frankly, there are plenty of things
Speaker 1: to point at right now. However, when you look at
Speaker 1: what central banks have done, the more the more optimistic
Speaker 1: side of that coin is to say, well, look at
Speaker 1: why things are so solid. Central banks have suppressed interest rates,
Speaker 1: markets have can continue to rise. Uh, the cost of
Speaker 1: capital is very low, inflation is muted, not doing much
Speaker 1: in places. So when you look at sort of a
Speaker 1: fundamental background, somebody can make a very good goldilocks case. Hey,
Speaker 1: I think of it as sort of contemporaneous right now, Hey,
Speaker 1: look at it, it's goldilocks. Somebody steps back from that
Speaker 1: and says, yeah, but look what's been going on around
Speaker 1: the goldilocks. Uh. And I think there's elements of truth
Speaker 1: to both. Again, I'm I'm sort of a bond guy
Speaker 1: by training. I leaned towards too, a little bit of
Speaker 1: the worried side. I wouldn't call it a Ponzi scheme.
Speaker 1: That's that's a little aggressive for for for for my
Speaker 1: style and the people that I report to, probably not
Speaker 1: great for business. But but to suggest that there are brewing, uh,
Speaker 1: systemic risks out there is not an outlier opinion by
Speaker 1: any stretch of the imagination. I prefer good Ponzac scheme.
Speaker 1: You know that. I will let you all in a
Speaker 1: little secret. My nickname somehow through every stage of life
Speaker 1: has been Ponzi. I wanted to call the pod podcast
Speaker 1: the puns People, but but so boil it all down
Speaker 1: to us from sort of an allocation perspective, I mean,
Speaker 1: what what should a portfolio given high valuations both in
Speaker 1: equities and bonds right now? What? What what should it
Speaker 1: look like? To you? Yeah? Well, this this was you
Speaker 1: know why we call the note, you know, confessions of
Speaker 1: a reluctant bull. I think the market and risk assets
Speaker 1: like a lot of people because of you know, there
Speaker 1: is no alternative central banks things like that. The momentum,
Speaker 1: I think the path of least resistance is we kind
Speaker 1: of grind higher from there. Uh he kind of hit
Speaker 1: the nail on the head. Where's the downside catalyst? And
Speaker 1: as we mentioned earlier, valuation is worrisome, but valuation isn't
Speaker 1: the catalyst. Valuation is the thing that you worry about. Well,
Speaker 1: when markets start to go down, how far can they
Speaker 1: go down? But valuation isn't the thing that makes them
Speaker 1: go down. So what I've been spending a lot of
Speaker 1: time thinking about is just the upside versus downside trade off.
Speaker 1: And I'm rare amongst strategists that I usually think my
Speaker 1: base case is not going to come true. Uh yeah,
Speaker 1: it's uh, you know, are we all have crystal balls
Speaker 1: and they've worked, And so I always ask the question,
Speaker 1: you know, our base cases, like a lot of people,
Speaker 1: market kind of grinds higher. Economy is okay but not great. Okay, Well,
Speaker 1: what if we're wrong and the global economy does much
Speaker 1: better than we expected? How much do equities rise? How
Speaker 1: much do credit spreads contract? Or if we're wrong and
Speaker 1: the economy is worse than what our base cases. How
Speaker 1: much do equities lose, how much do pees fall? How
Speaker 1: much to credit spreads widen? So when I look at
Speaker 1: risk assets, I don't like that trade off right now.
Speaker 1: I don't like the fact that when I'm wrong, and
Speaker 1: I may very well be wrong and the base case
Speaker 1: rarely turns out to be true. I don't like the
Speaker 1: fact that it costs me a lot more money on
Speaker 1: the downside than I make on the upside. So again,
Speaker 1: I'm bullish, but I'm reluctantly bullish, And directly to your question, Mike,
Speaker 1: what that is me is to be a little bit
Speaker 1: underweight risk. I think it's I think the goldilocks. As
Speaker 1: you mentioned, Sarah, there's an argument you want to be
Speaker 1: in markets, you want to participate, there's no reason it
Speaker 1: has to fall out of bed. But I think you
Speaker 1: just want to do it a little bit more cautiously.
Speaker 1: The later we get in the cycle, the higher these
Speaker 1: valuations get, and that this tradeoff doesn't seem really attractive
Speaker 1: to me. Frankly, and I'm not saying bail out of markets,
Speaker 1: but I might use the year end rally is a
Speaker 1: good time to kind of rebalance get back to where
Speaker 1: you were. If you're a you know, if you're a
Speaker 1: sixty forty portfolio, you probably don't want to be more
Speaker 1: than sixty forty, maybe fifty five, you know, forty five,
Speaker 1: something like that. Fifty fifty. I personally am kind of
Speaker 1: mildly underweight risk. You know, it's funny, I think I
Speaker 1: wrote a blog post on this expecting some kind of
Speaker 1: rebalancing in the new year. I mean, I obviously institutions
Speaker 1: and hedge funds rebalance monthly or quarly. You know, I
Speaker 1: kept reading notes advising retail investors to rebalance. It's at
Speaker 1: the year end, and you know, you wouldn't see any
Speaker 1: sign of it in the markets we've seen right now.
Speaker 1: So it makes me really think that those sixty portfolios
Speaker 1: are really, you know, skewing closer to right now. I
Speaker 1: mean for a lot of people, I think the evidence
Speaker 1: is is a little mixed because what I think, what
Speaker 1: I think you do see some rebalancing, because we've we've
Speaker 1: obviously noted that divergence as the stock market has kind
Speaker 1: of gone through the roof since October November, the bond
Speaker 1: market really hasn't gone anywhere, meaning meaning something like ten
Speaker 1: year treasury yield, and so what that tells me is
Speaker 1: is the market's going up. We always talk about this
Speaker 1: kind of relentless bid to equities, but as equities go
Speaker 1: up and people rebalance, the byproduct of that is that
Speaker 1: there's a relentless bid to bonds as well, which is
Speaker 1: basically sending both asset classes up in this sort of
Speaker 1: wonderful Goldilocks spiral when it ends. Who knows something that
Speaker 1: makes me curious those because you talk about the risk
Speaker 1: reward and the idea that if something's gone up more well,
Speaker 1: then if they have stretched valuations on the way down,
Speaker 1: they have further to fall. And in equities, you say
Speaker 1: that you guys like financials and banks, and you like
Speaker 1: healthcare stocks because they're relatively cheaper, but you still like tech.
Speaker 1: So what is it about tech right now? Because of
Speaker 1: course tech has had a pretty unbelievable ride. We'll hear
Speaker 1: from some of the big tech names next week when
Speaker 1: they are port earnings. But what is it about tech
Speaker 1: that you and many other investors just can't really shy
Speaker 1: away from quite yet? So for me, what what I happened?
Speaker 1: And I'm not buying the individual stocks. Those are our
Speaker 1: money managers underneath the NA Tixus umbrella. But what I
Speaker 1: love about the tech sector is, to me, it just
Speaker 1: looks like as the world becomes more sort of need
Speaker 1: for efficiencies, innovation scale, things like that, everyone wants to
Speaker 1: be more social, more digital, more virtual, more efficient, lower cost.
Speaker 1: So what happens is and when you think about just
Speaker 1: the sector breakdown, everybody else in the other ten sectors
Speaker 1: are taking their profits and funneling them to become the
Speaker 1: revenues of the tech sector. So so because because I mean,
Speaker 1: you've got cold companies that want to be more EFFICI
Speaker 1: and you've got automotive manufacturers want to be more efficient. Uh,
Speaker 1: you know, retail players want to be more efficient. What
Speaker 1: do we all do it? You know, asset managers, We're
Speaker 1: tapping technology, buying more software, big data, you you name it,
Speaker 1: you know, trying to build social media whatever it might be,
Speaker 1: tapping into advertising. So to me, that's that that you know,
Speaker 1: almost never ending bid for tech. The problem is is
Speaker 1: the valuations. And that's where I've really changed on tech,
Speaker 1: which is it's still one of our favorite sectors, but
Speaker 1: it's gone from being a beta play two and a
Speaker 1: half three years ago when the SMP Tech sector was
Speaker 1: trading it nine of the SMPS multiple. Today it's trading
Speaker 1: at a hundred and of the SMP multiple. So while
Speaker 1: I still like tech, I think you have to be
Speaker 1: far more selective. You know, I would have come in
Speaker 1: three years ago or two years ago and said we
Speaker 1: love tech sort of universally. We love tech Today, I
Speaker 1: would say we like tech for all the reasons I mentioned,
Speaker 1: but it's a much more selective. You really come down
Speaker 1: to security selection. Stocked by stock. Not my specialty, to
Speaker 1: be sure, but that's how I think about the tech sector.
Speaker 1: We like it, but it's not. I don't think it's
Speaker 1: the runaway. I think of these valuations the freight trains
Speaker 1: gotta slow down a little bit. You've gotta be a
Speaker 1: little bit more selective, and you sort of centered around
Speaker 1: the themes. I mean, obviously it feels like the cloud.
Speaker 1: The whole story about the software cloud is kind of
Speaker 1: early innings. Five G that game hasn't even started. AI
Speaker 1: and the Internet of Things, those are all sort of
Speaker 1: pretty early innings stories right now. Yeah, I think they
Speaker 1: can be. And I think this is where, you know,
Speaker 1: good security selection within tech is really going to start
Speaker 1: to matter because what we've what the what the Phase
Speaker 1: one trade deal and all the tariff arguments have really
Speaker 1: highlighted to me, is this fight between who's gonna win
Speaker 1: the global tech war between the Chinese and the US.
Speaker 1: The Europeans and the Japanese may play at the margin,
Speaker 1: but we really have a bifurcated tech world. And so
Speaker 1: if I was a tech analyst, I would be thinking
Speaker 1: a lot about is my is my company within the
Speaker 1: sector position and to win this war versus China? Or
Speaker 1: is it position to to not win? Uh? So, So
Speaker 1: that's one issue. The second issue is sort of around regulation,
Speaker 1: uh privacy, anti competitive, antitrust, anti competitive. So I would
Speaker 1: be spending a lot of time thinking about, Hey, is
Speaker 1: that tech name that I love more or less exposed
Speaker 1: to that? And I think they're very I think they're
Speaker 1: very different arguments. I worry a little bit less about
Speaker 1: the anti competitive. A lot of people are worried about
Speaker 1: these these mega tech names being broken up. It might
Speaker 1: be the case that their breakup value is as good,
Speaker 1: if not better than the sum of the parts. The
Speaker 1: privacy issues and the data integrity issues are more problematic
Speaker 1: because a lot of what these companies are doing is
Speaker 1: basically monetizing the data, your personal data, and if there
Speaker 1: are limits on that, there are real downstream implications for
Speaker 1: the way some of these companies make money. I'm a
Speaker 1: little bit more worried about the data issues than the
Speaker 1: anti competitive issues. Alright, Sorry, you know what I'm worried about.
Speaker 1: You're worried about losing. The craziest thing I think I
Speaker 1: was under it wasn't I undefeated because you award yourself
Speaker 1: to win every single week. That's where it worked. But
Speaker 1: you know, you should just go first to get out
Speaker 1: of the way. It's not a bad story, but it's
Speaker 1: a Vildata pointed out to me the story about Goldman
Speaker 1: Sachs chief executive officer David Solomon. I think we've talked
Speaker 1: about this before. He moonlights as a DJ spinning electronic music,
Speaker 1: and he got a gig at this big Sports Illustrated
Speaker 1: party at the super Bowl, which it's pretty crazy. I
Speaker 1: would love to DJ at the Super Bowl. I don't
Speaker 1: think I have any qualifications to do that whatsoever, but
Speaker 1: why not. I really want to see him djaying at
Speaker 1: like a Goldman Sachs party because I feel like everyone's
Speaker 1: got to dance. You know, you'd see these like managing
Speaker 1: directors with their Hermes ties tied around their head cutting
Speaker 1: it up on the floor. So that's that's I'm waiting
Speaker 1: for that. I want to get an invite to that party.
Speaker 1: But ye, how about you do you have a crazy story? First?
Speaker 1: Mis mom moon dang. So the SMP five hundre has
Speaker 1: being they had one percent down day since mid October.
Speaker 1: It's seventy three days and counting it's already the twenty
Speaker 1: five longest in the whole history. Um and also considering
Speaker 1: in the FX market, JP Morgan's FFX volative in the
Speaker 1: XT hit a new racer low and considering not only
Speaker 1: the rally of risk as being impressive, and the volutetive
Speaker 1: is so low. Consider you had the trade wall, the
Speaker 1: tension in the Middle East, impeachment, now the virus do
Speaker 1: you have to one? They're like, what could cause of
Speaker 1: volatinted to wake up again? It's quiet out there? Yeah,
Speaker 1: was breaking out there for a while. We didn't even
Speaker 1: get ex that's a good, good point. Okay, you beat me,
Speaker 1: I know that. Did they tell you about our craziest thing? Yeah?
Speaker 1: A couple this week. I have a runner up. Yeah,
Speaker 1: my runner up is always sort of the insanity of
Speaker 1: Davos and people probably seeing the story. I think there's
Speaker 1: a hundred nineteen billionaires at Davos in a you know,
Speaker 1: they're they're they're talking about income inequality, you know, after
Speaker 1: they flew in on their private jets and and and
Speaker 1: climate change. So there's that, and then you have the U. S.
Speaker 1: Treasury Secretary sort of going after Greta Tunberg and telling
Speaker 1: her she should I mean, this, this is just this
Speaker 1: doesn't seem like something that would have happened under Reagan
Speaker 1: or Carter. We were in a different with seventeen year
Speaker 1: old girl. But the thing that really caught my eye
Speaker 1: was really around sort of the Phase one trade deal,
Speaker 1: and I've kind of lost track of what the tariffs
Speaker 1: are and how much they're on and what percent, and
Speaker 1: we've just gone back and forth. And the Peterson Institute, uh,
Speaker 1: sort of had a great summary on this updated for
Speaker 1: the Phase one trade deal, noting that if you just
Speaker 1: go back two years, the average tariff on Chinese goods
Speaker 1: in the US used to be three percent and now
Speaker 1: it's nineteen percent, even after the Phase one deal, and
Speaker 1: the average tariff going the other way. Uh, you know,
Speaker 1: the tariff on US goods in China was eight percent
Speaker 1: and now it's twenty percent. So my craziest thing is
Speaker 1: kind of this idea that the Phase one trade deal
Speaker 1: just kind of put you know, the trade issue in
Speaker 1: the rear view mirror, when the reality is that the
Speaker 1: tariffs are still two to three times higher than they
Speaker 1: were just two years ago. So that was kind of
Speaker 1: my craziest thing for the week. That's pretty good. That's
Speaker 1: pretty good. That is a very good one. Speaking of
Speaker 1: that was the one headline that I caught. I think
Speaker 1: it was someone from Bridgewater said that the boom bust
Speaker 1: cycles over one d print that bit Bridgewater. Yeah, that
Speaker 1: that sounds a lot like Sarah's story about the Goldilocks,
Speaker 1: that they are kind that there are some people out
Speaker 1: there flashing the all clear sign, and I would submit
Speaker 1: that they'll be right for a while. But the but
Speaker 1: the for the while is the problem. Eventually a bust
Speaker 1: will come again. They always do one of these days.
Speaker 1: Um So my crazy thing this week, it's actually been
Speaker 1: a pretty big well reported story. Uh but just about
Speaker 1: the hacking potentially uh into Jeff Bezos's phone from Crown Press,
Speaker 1: Mohammed been someone pretty unbelievable. So now the United Nations
Speaker 1: is saying that this needs to be looked into. Supposedly,
Speaker 1: the idea is that Mohammed Been someone had sent a
Speaker 1: message to Bezos over WhatsApp, and shortly after that he
Speaker 1: was able to infiltrate his phone and extract tons and
Speaker 1: tons of data. Um. So, now there's so much conversation
Speaker 1: about one cybersecurity also operating systems on our phones. Is
Speaker 1: this possible if it could happen to Jeff Bezos, I mean,
Speaker 1: it can happen to any of us, right, but yeah,
Speaker 1: pretty crazy and two huge names. Uh so interesting, that's
Speaker 1: pretty crazy. And you know that, and the impeachment story.
Speaker 1: Everyone's on what's app, all these movers and shakers. I
Speaker 1: must be the last guy in the world not using what'sapp.
Speaker 1: I have it, but I don't use I only use
Speaker 1: it if someone is overseas. Really, it's either is it encrypted?
Speaker 1: Is that that? Well? Yeah, that's the appeal of it.
Speaker 1: It's supposed to be. I don't have it, I use it,
Speaker 1: And given all the evidence, I'm waiting for the Really,
Speaker 1: I'm waiting for the story of the really good thing
Speaker 1: that happened because you were on what's app But no
Speaker 1: one ever talks about the good things, so maybe things
Speaker 1: have happened in the past. We just never heard him, right,
Speaker 1: it would be fun to text with MSN videos and
Speaker 1: then whatever you have, have the most boring phone he
Speaker 1: can hack. All right, it's going to come your way.
Speaker 1: All right, Well, I think we're gonna just say this week,
Speaker 1: Mike comes in last. Yeah you, Dave Laberty, thanks so
Speaker 1: much for coming on the show today, Thanks for having thanks.
Speaker 1: What Goes Up will be back next week. Until then,
Speaker 1: you can find us on the Blueback Terminal website and app,
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Speaker 1: can find us on Twitter. Follow me at at Sarah Ponzack.
Speaker 1: Mike is a bag anonymous. Our guest, Dave Lafferty is
Speaker 1: at Lafferty in a, Texas and yes she is at
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Speaker 1: What Goes Up is produced by Tofur Foreheads and edited
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Speaker 1: Thanks for listening. See you next time.