WEBVTT - AI's 'Big Bang' Moment 0:00:13.920 --> 0:00:17.079 Hello, and welcome to What Goes Up, a weekly markets podcast. 0:00:17.360 --> 0:00:20.280 My name is Mike Eagan. I'm a senior editor at Bloomberg. 0:00:20.040 --> 0:00:22.480 And numbldna hire a market support at Bloomberg. 0:00:23.040 --> 0:00:25.560 And this week on the show, you probably heard about this, 0:00:25.760 --> 0:00:28.760 but the Federal Reserve signal this week that even though 0:00:28.920 --> 0:00:33.400 they paused this month, central bankers are expecting to lift 0:00:33.600 --> 0:00:37.720 interest rates again this year. Yet the stock market took 0:00:37.760 --> 0:00:40.960 it all in stride and is continuing its riproaring twenty 0:00:41.040 --> 0:00:45.239 twenty three rally that's been largely driven by hype around 0:00:45.360 --> 0:00:49.040 artificial intelligence. So what are we to think about a 0:00:49.040 --> 0:00:52.320 week like this? Is the equity market right to fight 0:00:52.360 --> 0:00:56.400 the Fed this time given all of the optimism around AI, 0:00:57.240 --> 0:01:00.520 or is it time to sober up and get with 0:01:00.640 --> 0:01:02.720 the feds program. We're going to get into it with 0:01:02.760 --> 0:01:07.840 a fund manager who manages a global equity fund. But first, Voldana, 0:01:07.959 --> 0:01:12.360 I'm very excited for our Craziest Things segment because. 0:01:12.680 --> 0:01:15.480 Can I give a hand in giving a spoiler? 0:01:16.760 --> 0:01:19.280 All right, that joke's not going to make sense till 0:01:19.360 --> 0:01:22.399 later in the podcast, but I will confirm it's a good. 0:01:22.319 --> 0:01:26.880 Joke and listeners, Yeah, I'm really sticking my neck out. 0:01:26.760 --> 0:01:28.720 Here also a very off color joke, but. 0:01:28.800 --> 0:01:33.440 Yeah, it's actually really terrible. You know, our guest, he's 0:01:33.480 --> 0:01:35.800 joining us for the first time ever, and he probably 0:01:35.800 --> 0:01:38.160 thinks we're just two big weirdos. 0:01:37.840 --> 0:01:38.960 Which is true. 0:01:39.000 --> 0:01:40.960 Yeah, it's true, but I really don't want to keep 0:01:41.040 --> 0:01:44.199 him waiting. It's Mark Barribow. He's the head of Global 0:01:44.240 --> 0:01:48.040 Equity at Jennison Associates, which is the fundamental equity business 0:01:48.200 --> 0:01:51.000 of p Jim. Mark, thank you so much for joining us. 0:01:51.360 --> 0:01:52.240 It's great to be here. 0:01:52.520 --> 0:01:56.240 I promise our little intro will make a little more 0:01:56.280 --> 0:01:58.880 sense later, but maybe just to start out, you can 0:01:58.920 --> 0:02:02.200 tell us about your at Jennison and what you do there. 0:02:02.680 --> 0:02:05.520 I'm the head of Global Equities at Jennison, so we 0:02:05.600 --> 0:02:12.000 managed global equity portfolios, international equity portfolios, and emerging market portfolios, 0:02:12.400 --> 0:02:16.679 both small, MidCap and large caps, so that whole spectrum 0:02:16.960 --> 0:02:20.639 and our specialty at Jennison is growth equities, and all 0:02:20.680 --> 0:02:22.960 of our global products are growth oriented. 0:02:23.400 --> 0:02:26.800 So Mark, did what we heard from Jrome Pow this 0:02:26.880 --> 0:02:30.000 week change your thinking at all about what took spect 0:02:30.040 --> 0:02:30.880 for the rest of the. 0:02:30.919 --> 0:02:34.080 Year, Not at all. The big hit the equity markets 0:02:34.120 --> 0:02:37.160 took last year was in response to the change in 0:02:37.240 --> 0:02:41.400 Fed policy. We got the big rate increases, unprecedented really 0:02:41.480 --> 0:02:45.639 for any rate cycle in the post war era, and 0:02:47.040 --> 0:02:50.639 that speed led to valuation declines across the board last year, 0:02:50.680 --> 0:02:55.560 but particularly growth stocks, which dropped relative to value stocks 0:02:56.160 --> 0:03:00.400 to their lowest level since the crisis eight. So the 0:03:00.440 --> 0:03:02.799 setup coming into the year is pretty good on a 0:03:02.880 --> 0:03:06.560 value from evaluation perspective. And now the markets are just 0:03:06.639 --> 0:03:10.680 reacting to earnings news and normal fundamental things, and that's 0:03:10.720 --> 0:03:12.760 why I think it's looking pretty constructive. 0:03:13.480 --> 0:03:16.320 Mark how difficult is it for the Fed to get 0:03:16.320 --> 0:03:20.239 its messaging right going forward? Like they didn't hike this time, 0:03:20.520 --> 0:03:22.840 but then they came out saying we do want to 0:03:22.919 --> 0:03:27.960 continue potentially hiking further later on this year. They see 0:03:28.360 --> 0:03:31.560 growth actually being better than they had anticipated prior to 0:03:31.680 --> 0:03:36.280 yesterday's meeting. It's such a like, how difficult is it 0:03:36.320 --> 0:03:39.120 going to be for them to actually message this to 0:03:39.160 --> 0:03:40.720 the market and investors. 0:03:41.320 --> 0:03:44.200 They overshot on the downside, they're probably going to oversheet 0:03:44.240 --> 0:03:47.400 on the upside. That's typically what the Fed does. Let's 0:03:47.440 --> 0:03:49.800 say eighty to ninety percent of it's behind us, So 0:03:50.160 --> 0:03:52.200 I think that's why the markets are moving on. 0:03:52.880 --> 0:03:56.480 You, Mark, As I mentioned in the introduction, artificial intelligence, 0:03:56.760 --> 0:03:59.960 following the release of the latest versions of chat Cheap 0:04:00.440 --> 0:04:04.920 is really captivated investors' attention. But I do think what's fascinating. 0:04:05.000 --> 0:04:06.680 There's a lot of hype, but there does seem to 0:04:06.720 --> 0:04:12.000 be some fundamentals attached to the theme, almost immediately when 0:04:12.000 --> 0:04:14.560 you look at the outlook from a company like Nvidia. 0:04:14.680 --> 0:04:16.839 I know, one of the top holdings in your Global 0:04:16.839 --> 0:04:23.080 Opportunities fund Oracle last week saying their cloud revenue is 0:04:23.120 --> 0:04:26.680 really getting juiced by AI as well. Yeah, I'm sort 0:04:26.680 --> 0:04:29.560 of reminded of that old cliche that in the gold Rush, 0:04:29.760 --> 0:04:32.240 most people that got rich were the merchants selling the 0:04:32.240 --> 0:04:34.960 picks and shovels. And to me, I feel like you know, 0:04:35.040 --> 0:04:38.400 in this gold rush, it's the chip makers, the cloud 0:04:38.440 --> 0:04:42.240 companies that are the picks and shovel merchants of this. 0:04:42.760 --> 0:04:46.440 I'm just curious, though, with that all said, how you're 0:04:46.520 --> 0:04:51.320 thinking about AI as far as separating the hype from 0:04:51.440 --> 0:04:56.719 where the true prospects are the potential for fundamental improvement 0:04:56.800 --> 0:04:58.640 for various companies and various sectors. 0:04:59.040 --> 0:05:01.960 Sure, I mean, well, at first I would absolutely agree 0:05:01.960 --> 0:05:07.000 with you that the infrastructure layer that allows for this 0:05:07.160 --> 0:05:11.240 accelerated computing to go on is the way to play 0:05:11.320 --> 0:05:14.839 AI right now, because we're in the R and D phase. 0:05:15.120 --> 0:05:18.719 The applications are just getting developed, and it is going 0:05:18.800 --> 0:05:22.880 to be a tectonic shift in technology for the next decade. 0:05:23.279 --> 0:05:26.360 It's the biggest thing to happen since the mobile Internet, 0:05:27.160 --> 0:05:30.400 and so we're very excited about it. But again, the 0:05:30.400 --> 0:05:33.599 best way to play it is through the infrastructure required 0:05:33.760 --> 0:05:39.080 to do this computing. So that starts with high end semiconductors, 0:05:39.120 --> 0:05:44.120 it starts with cloud based computing workloads, and I think 0:05:44.160 --> 0:05:47.960 investors will do quite well in that. And then as 0:05:48.000 --> 0:05:51.640 we move forward, you're going to see more and more 0:05:51.920 --> 0:05:57.960 software applications embed this technology that's already starting, but it's 0:05:58.040 --> 0:06:01.000 going to accelerate over the next year. This isn't a 0:06:01.080 --> 0:06:02.880 long term thing. You're not going to have to wait 0:06:02.920 --> 0:06:05.800 three to five years to see what happens. It's going 0:06:05.839 --> 0:06:09.840 to start to come into every application that's important for 0:06:09.920 --> 0:06:14.360 productivity purposes in the next four quarters, and then we'll 0:06:14.400 --> 0:06:17.960 start to see separation like who's got the winning formula, 0:06:18.520 --> 0:06:21.840 who's developing unique applications that we couldn't even dream of. 0:06:22.800 --> 0:06:25.920 Maybe old companies that maybe new companies, we don't know. 0:06:26.880 --> 0:06:31.960 But what's important, this is a real advancement in technology. 0:06:32.040 --> 0:06:35.599 It's going to be utilized aggressively, and so I think 0:06:35.640 --> 0:06:38.839 investors should definitely try to position for it. 0:06:39.080 --> 0:06:41.960 Yeah, and Mark, the other narrative of the year that 0:06:42.040 --> 0:06:44.800 sort of has gone hand in hand with AI is 0:06:45.200 --> 0:06:47.839 what I refer to the top heaviness of the rally 0:06:47.880 --> 0:06:51.440 that we've seen this year. The big megacap tech stocks 0:06:51.880 --> 0:06:55.200 are really dominating the gains. And I'm curious how you 0:06:55.279 --> 0:06:58.080 approach that as a fund manager. You know, as I mentioned, 0:06:58.160 --> 0:07:01.200 Nvidia's one of your top holdings, do you have any 0:07:01.240 --> 0:07:04.440 limits on sort of how big of an allocation you 0:07:04.480 --> 0:07:07.000 can give to one stock? Does it worry you at all? 0:07:07.040 --> 0:07:09.520 This top heaviness? How do you think about that when 0:07:09.560 --> 0:07:10.640 you're managing a fund like this? 0:07:11.160 --> 0:07:13.080 First, I would say, if you own these stocks in 0:07:13.120 --> 0:07:17.400 your portfolio, you're really happy. Yeah, So I have no 0:07:17.480 --> 0:07:21.520 complaints about the concentration of the market. So there's a 0:07:21.560 --> 0:07:24.000 couple of reasons behind it. One, we started the year 0:07:24.000 --> 0:07:28.200 at very low valuations because of what happened last year. Secondly, 0:07:28.920 --> 0:07:32.720 these companies are generating among the highest levels of free 0:07:32.720 --> 0:07:35.560 cash flow you can find in the global stock market, 0:07:36.040 --> 0:07:39.400 and that's one of the reasons investors are flocking to them. 0:07:39.880 --> 0:07:41.880 It's because you don't have to take a lot of 0:07:41.960 --> 0:07:47.720 risk to participate in a market rally. And investors still 0:07:47.760 --> 0:07:50.360 are a little wary about what's happening out there because 0:07:50.400 --> 0:07:54.679 the FED is tightened so much. So I'm not saying 0:07:54.720 --> 0:07:57.560 there's a flight to safety, but there's a flight to quality, 0:07:57.800 --> 0:08:02.040 and so they're benefiting from that. And then of course 0:08:02.120 --> 0:08:07.000 the AI boom has ignited a catalyst for future growth, 0:08:07.560 --> 0:08:10.880 and that catalyst really wasn't here a year ago. We 0:08:10.960 --> 0:08:14.559 didn't know where the next wave of investment spending would occur, 0:08:15.280 --> 0:08:19.120 and now we know, and so that clarity is leading 0:08:19.200 --> 0:08:23.280 the true companies that benefit from it to lead the market. 0:08:23.640 --> 0:08:26.760 And then other things are participating. And so what I 0:08:26.800 --> 0:08:29.440 would say right now is as we go into earning 0:08:29.480 --> 0:08:32.200 season the summer and go into the fall, you've got 0:08:32.240 --> 0:08:35.400 to be careful because you don't want to be exposed 0:08:35.440 --> 0:08:38.760 in stocks that participated in the rally but in reality 0:08:39.679 --> 0:08:43.000 have nothing new to offer the marketplace, because those are probably. 0:08:42.640 --> 0:08:46.760 Correct and mark broadly speaking, what is the base case 0:08:46.840 --> 0:08:50.079 on AI for the average investor, for instance, So why 0:08:50.160 --> 0:08:53.080 might somebody be buying stocks right now based on the 0:08:53.280 --> 0:08:56.839 AI thme. Is it the idea that these companies have 0:08:57.120 --> 0:09:00.120 so much cash and they, as you said, maybe will 0:09:00.160 --> 0:09:03.240 be putting some of it towards research and development, et cetera. 0:09:03.640 --> 0:09:07.480 Well, you want to be in the ones that one 0:09:07.520 --> 0:09:10.959 are positioned in. The infrastructure build out in Video is 0:09:11.000 --> 0:09:12.079 an easy example. 0:09:12.760 --> 0:09:13.319 We refer to. 0:09:13.360 --> 0:09:16.440 Their earnings release on May twenty fourth is the big 0:09:16.520 --> 0:09:21.480 bang because in my history of doing growth equities since 0:09:21.520 --> 0:09:25.320 the nineties, I've never seen a company raised guidance for 0:09:25.400 --> 0:09:30.520 a quarter by four billion dollars. That's unprecedented. So their 0:09:30.600 --> 0:09:33.720 data center revenue is effectively going to double quarter over 0:09:33.840 --> 0:09:37.839 quarter from four billion to eight billion. And again these 0:09:37.840 --> 0:09:42.559 are numbers that are staggering. So in Video's valuation, ironically, 0:09:43.040 --> 0:09:46.640 it has been declining the last month, not going up, 0:09:46.920 --> 0:09:50.120 even though the stock is because the power of that 0:09:50.200 --> 0:09:55.960 earnings revision is so huge. With fundamental strength there, it 0:09:56.040 --> 0:10:00.400 gives investors more confidence that you're not buying into hype, 0:10:00.440 --> 0:10:04.640 you're actually buying into real demand strength, and that's very good. 0:10:05.520 --> 0:10:09.520 Other beneficiaries, of course, are Microsoft because of their asure 0:10:09.800 --> 0:10:14.280 cloud and their big investment and chat GPT, and of 0:10:14.320 --> 0:10:17.360 course you have Google Cloud, and Google of course has 0:10:18.040 --> 0:10:23.440 deep learning. It's also an AI expert, and Amazon's aws 0:10:23.600 --> 0:10:28.559 will probably benefit as well. So you have different ways 0:10:29.120 --> 0:10:32.840 where you're going to see positive revenue and earnings revisions 0:10:32.840 --> 0:10:36.559 hopefully as the year goes on. From that pure investment spending. 0:10:37.120 --> 0:10:39.600 I think that's why the stocks are doing well, and 0:10:39.880 --> 0:10:43.360 you don't have to get ahead over your skis yet 0:10:43.400 --> 0:10:45.840 thinking about what are the new applications that are going 0:10:45.920 --> 0:10:48.959 to come out that are very exciting I can't miss. 0:10:49.720 --> 0:10:52.120 You don't have to worry about that yet. That'll develop 0:10:52.200 --> 0:10:54.040 over the next year mark. 0:10:54.200 --> 0:10:57.520 Earlier in the year and late last year, it felt 0:10:57.600 --> 0:11:03.120 like the consensus really believe that a recession was inevitable. 0:11:03.240 --> 0:11:05.959 Now's the year goes on, I think it's much more 0:11:06.000 --> 0:11:10.760 debatable whether this proverbial soft landing can actually perhaps maybe 0:11:10.760 --> 0:11:13.920 be achieved. But I'm wondering how much of that plays 0:11:13.960 --> 0:11:17.800 into the outlook for growth stocks. If we do see 0:11:17.840 --> 0:11:21.800 a deterioration in the data, rise in joblessness, lower GDP, 0:11:22.000 --> 0:11:24.960 or even negative GDP, how big of a risk is 0:11:24.960 --> 0:11:28.640 that to this whole AI theme and the capital spending 0:11:28.679 --> 0:11:31.079 that goes along with it, that is propelling it. 0:11:31.760 --> 0:11:35.320 Okay, First, on the recession outlook. I mean, the recession 0:11:35.360 --> 0:11:38.000 has been pre announced four or five times every quarter. 0:11:38.080 --> 0:11:42.240 Here maybe it happens. But we had a big downturn 0:11:42.320 --> 0:11:45.200 in home construction last year. We had a big downturn 0:11:45.280 --> 0:11:49.040 in Silicon Valley last year, big layoffs as you know. 0:11:49.840 --> 0:11:53.200 So you've had these rolling recessions and different segments of 0:11:53.200 --> 0:11:57.720 the marketplace over the last year and so far this year. 0:11:57.760 --> 0:11:59.680 I don't know what if we created one point seven 0:11:59.720 --> 0:12:03.640 million new job that's not a recession. It's steady state, 0:12:03.840 --> 0:12:07.680 slow growth, so fueled by a powerful job market. So 0:12:07.800 --> 0:12:10.520 we probably do get a soft landing. I think that's 0:12:10.520 --> 0:12:14.000 what the market is coming around to believe in. Now, 0:12:14.000 --> 0:12:17.120 what does it mean for growth stocks. It's really bullish 0:12:17.120 --> 0:12:19.760 for growth if you go into a soft landing, because 0:12:19.920 --> 0:12:23.080 the average company is seeing a slowdown in its earnings, 0:12:23.559 --> 0:12:27.400 whereas growth companies will be putting up hopefully on average, 0:12:27.440 --> 0:12:31.240 double digit earnings growth. And that's quite a differentiator in 0:12:31.280 --> 0:12:36.280 a slowing, uncertain market environment. And that's indeed what we're 0:12:36.320 --> 0:12:40.280 seeing in our portfolios. We looked at this data the 0:12:40.320 --> 0:12:43.160 other day because we've just gone through a big earning 0:12:43.240 --> 0:12:46.439 season and for the first quarter, that weighted average growth 0:12:46.480 --> 0:12:49.679 in the portfolio was around fifteen percent. For the S 0:12:49.760 --> 0:12:53.320 and P five hundred, it's three point two. You're finally 0:12:53.360 --> 0:12:57.360 getting rewarded for that growth again once that big reevaluation 0:12:57.480 --> 0:12:59.520 reset occurred last year. 0:13:06.800 --> 0:13:09.560 So your funds obviously are doing well this year. But 0:13:09.600 --> 0:13:12.640 at the same time, you said today's markets are among 0:13:12.679 --> 0:13:16.240 the most challenging we have seen in several decades. There's 0:13:16.240 --> 0:13:20.160 a lack of visibility, contradictory indicators. Can you talk about that. 0:13:20.960 --> 0:13:23.280 Yeah, it all starts with the pandemic, right, So we 0:13:23.360 --> 0:13:26.840 had the V shaped recovery during the pandemic. It shocked 0:13:26.840 --> 0:13:30.600 the global economy. The growth companies did very well during 0:13:30.640 --> 0:13:35.360 the pandemic because they were supplying everything from streaming entertainment 0:13:35.480 --> 0:13:40.720 to laptops needed to work remotely. Digital transformation of companies 0:13:40.720 --> 0:13:44.959 as they accelerated their cloud deployments to make everything work. 0:13:45.559 --> 0:13:50.719 And so we had a big demand surge and then 0:13:50.960 --> 0:13:55.480 the hangover post pandemic as you adjusted to more normal 0:13:55.800 --> 0:13:59.360 rates of spending growth and for the whole economy, of course, 0:13:59.400 --> 0:14:02.120 we had this apply chain problem which led to the 0:14:02.200 --> 0:14:06.960 inflation and that's eason. Now as supplies come into the market, 0:14:07.160 --> 0:14:10.480 you're no longer constrained on any number of products, right, 0:14:11.120 --> 0:14:15.280 and goods inflation has turned negative, services inflation still positive. 0:14:16.320 --> 0:14:20.200 That's a very complicated environment with the FED being as 0:14:20.240 --> 0:14:23.840 aggressive as they are, because the Yell curve would suggest 0:14:23.920 --> 0:14:26.800 we go we might have a recession, but of course 0:14:26.840 --> 0:14:29.720 the Yell curve predicts lots of recessions that never happen, 0:14:30.720 --> 0:14:35.600 so that's not a certainty. And then you have different 0:14:35.640 --> 0:14:40.160 economies around the world doing different things, which is actually beneficial. 0:14:40.480 --> 0:14:43.320 So the US might be slowing, whereas China's coming out 0:14:43.360 --> 0:14:47.200 of the pandemic finally, so that's a good offset to 0:14:47.360 --> 0:14:50.800 might slow down here. Europe seems to be doing okay 0:14:50.840 --> 0:14:54.840 for Europe, not a problem. There's a lot of cross 0:14:54.880 --> 0:14:59.320 currents that are very challenging. Now, getting back to one 0:14:59.360 --> 0:15:03.280 of the other point that was raised earlier questions the 0:15:03.320 --> 0:15:06.360 other thing that's likely to happen we think in the 0:15:06.400 --> 0:15:10.280 next couple of years is a lot of good support 0:15:10.600 --> 0:15:14.600 for a number of US investment areas. And the reason 0:15:14.760 --> 0:15:20.680 is we have this unprecedented combination of public industrial policy, 0:15:20.800 --> 0:15:24.680 which we've never had before. So we have the US 0:15:24.800 --> 0:15:27.920 Chips Act, which is going to lead to the onshing 0:15:28.000 --> 0:15:32.920 of semiconductor manufacturing in the United States. That's tens and 0:15:32.960 --> 0:15:36.280 tens of billions of dollars of capex that will occur 0:15:36.400 --> 0:15:41.440 here on top of the Inflation Reduction Act, which is 0:15:41.600 --> 0:15:46.240 again leading to multi billion dollar build out of electric 0:15:46.360 --> 0:15:52.000 vehicle and battery manufacturing as well as alternative energy systems. 0:15:52.640 --> 0:15:59.000 So we have tremendous structural support in certain areas of 0:15:59.040 --> 0:16:02.160 capital spending wich we've typically not had in the US, 0:16:03.080 --> 0:16:06.880 which is structural and secular and has years to run, 0:16:06.920 --> 0:16:09.120 and we're in the early innings of it, so that's 0:16:09.160 --> 0:16:13.680 also very exciting. These are very positive trends that are occurring, 0:16:14.240 --> 0:16:18.359 maybe as the overall economy slows, but if you're invested 0:16:18.400 --> 0:16:22.440 in those segments of the economy, you're actually seeing strength. 0:16:23.040 --> 0:16:27.240 It's really important from a stock selection perspective to weed 0:16:27.320 --> 0:16:30.600 through those all of the different parts of the market 0:16:30.840 --> 0:16:34.520 and just focus on those that have really good secular 0:16:34.560 --> 0:16:36.840 demand strength, because I think that's going to work. 0:16:37.320 --> 0:16:39.680 You know, Mark, there was a chart I must have 0:16:39.760 --> 0:16:43.600 seen about a thousand times this year that basically showed 0:16:44.280 --> 0:16:49.800 the Nasdaq one hundred and the inverse of some treasure yield, 0:16:49.800 --> 0:16:51.920 whether it's the ten year yield or the real yield, 0:16:52.480 --> 0:16:54.800 and the thinking being that a lot of people thought 0:16:54.840 --> 0:16:57.960 there was this negative correlation. As interest rates go up, 0:16:58.360 --> 0:17:01.840 growth stocks should suffer for her. That's obviously if that 0:17:01.880 --> 0:17:05.880 correlation existed, it's been demolished in the past month or two. 0:17:06.000 --> 0:17:09.160 I think there's many cliff Astness and others who would 0:17:09.200 --> 0:17:11.920 argue that that was a bogus correlation to begin with, 0:17:12.000 --> 0:17:15.320 that we're being fooled by a simple overlay chart like that. 0:17:15.840 --> 0:17:18.760 I'm just curious how you're thinking about that relationship between 0:17:18.880 --> 0:17:22.600 interest rates and growth. Is it a valid headwind to 0:17:22.760 --> 0:17:26.240 growth stocks as an asset class? And I know you 0:17:26.359 --> 0:17:28.840 like to focus on the quality with the strong balance 0:17:28.880 --> 0:17:31.320 sheets and the strong cash flow. If you're thinking of 0:17:31.359 --> 0:17:35.159 growth as a factor on its own, does interest rates 0:17:35.320 --> 0:17:36.560 worry you at all about it? 0:17:37.160 --> 0:17:41.359 Historically the correlation wasn't there, but it was there with 0:17:41.440 --> 0:17:43.400 a bullet in twenty twenty two. 0:17:43.600 --> 0:17:44.440 Yeah, as you. 0:17:44.400 --> 0:17:47.600 Said, it's broken down this year, so it's not working anymore. 0:17:48.359 --> 0:17:52.679 I think the only important part about that correlation is 0:17:52.840 --> 0:17:56.840 just the step function change. So if you do go 0:17:57.000 --> 0:18:00.520 from an interest rate environment that's been there for a 0:18:00.560 --> 0:18:04.960 long time and then you jump rates up several hundred 0:18:05.000 --> 0:18:10.399 basis points pretty quickly. That's a lot to ask for 0:18:10.720 --> 0:18:14.199 from evaluation perspective. You are going to get compression, and 0:18:14.240 --> 0:18:18.840 we did get that. But once that happens, it's over. Now. 0:18:18.880 --> 0:18:21.200 It's just the way we look at it. It's made 0:18:21.240 --> 0:18:25.080 the best company win, right because you reset valuation across 0:18:25.080 --> 0:18:28.600 the system globally, and now we'll see who has the 0:18:28.640 --> 0:18:31.200 best growth and earnings growth, and that stock's going to win. 0:18:31.760 --> 0:18:32.399 That's our you. 0:18:33.880 --> 0:18:35.399 I need to give a shout out to our colleague 0:18:35.520 --> 0:18:38.679 Katie Greifeld, who sometimes fills in as co host on 0:18:38.720 --> 0:18:41.760 this show, for thinking of the next question. But I 0:18:41.760 --> 0:18:43.920 want to pose it to you as well. I'm wondering 0:18:44.000 --> 0:18:46.920 what you think of the two areas of the market 0:18:46.920 --> 0:18:50.680 that are super hot right now, being totally polar opposite. 0:18:51.040 --> 0:18:54.119 One is AI and the other is money market funds, 0:18:54.119 --> 0:18:56.120 which are still seeing tons of cash coming in. 0:18:58.240 --> 0:19:01.520 Yeah. I mean, if you can get at four percent 0:19:01.640 --> 0:19:04.720 or five percent yield and then the taxi jumpt ones 0:19:05.240 --> 0:19:08.560 even better on a tack s adjusted basis, that's stiff 0:19:08.600 --> 0:19:12.800 competition for stocks. So I think it's really hard for 0:19:12.880 --> 0:19:17.240 the average stock to compete against that, for sure. But 0:19:17.480 --> 0:19:20.520 one of the reasons AI related names are doing so 0:19:20.640 --> 0:19:24.000 well is they do offer good competition because they have 0:19:24.400 --> 0:19:29.040 the prospects for perhaps very strong growth going forward and 0:19:29.840 --> 0:19:35.159 very strong current demand. So that looks relatively safe. So 0:19:36.080 --> 0:19:38.400 that's how I would explain that. And then you're right, 0:19:38.440 --> 0:19:40.640 you have that deep void in the middle that's not 0:19:40.680 --> 0:19:41.680 really doing anything. 0:19:42.040 --> 0:19:44.000 Yeah, well, it kind of goes to what you said 0:19:44.040 --> 0:19:48.040 earlier about it really being you know, when you look 0:19:48.080 --> 0:19:50.920 at a market that NASDAQ one hundreds up what thirty 0:19:50.920 --> 0:19:53.560 percent this year, you think, yeah, you think, oh, it's 0:19:53.560 --> 0:19:56.720 this speculative frenzy, but it really is a chase for 0:19:56.800 --> 0:19:58.879 quality and maybe safety on the other end of the 0:19:58.920 --> 0:20:02.200 barbell with the money mark funds. But I've got to 0:20:02.240 --> 0:20:05.159 confess this is one of those nightmare scenarios for me 0:20:05.400 --> 0:20:08.120 when I have to pronounce the name of a company 0:20:08.160 --> 0:20:11.560 that I'm not sure how to produce in the video. 0:20:11.800 --> 0:20:14.400 In video, I can say in video, this is one 0:20:14.400 --> 0:20:17.399 of those companies I've read. I've read the name a 0:20:17.440 --> 0:20:20.160 million times is, and I'm not sure I've ever said 0:20:20.160 --> 0:20:24.399 it out loud. I'm going to say Hermes Ermez is 0:20:24.400 --> 0:20:25.800 that how you say, Mark. 0:20:25.600 --> 0:20:28.080 Is she right about easier than the video? 0:20:28.440 --> 0:20:33.960 I'm gonna you say Hermie, you say Sayers International, Yeah, 0:20:34.680 --> 0:20:41.920 I purely in French. It's whereas we say in Philly Ermes. 0:20:45.480 --> 0:20:48.679 I did want to ask you about Ermez and another 0:20:48.800 --> 0:20:51.800 top holding of the fund, lv m H two sort 0:20:51.840 --> 0:20:56.679 of luxury good famous luxury European luxury good goods providers. 0:20:56.760 --> 0:21:00.840 I mean there's two fcs surrounding companies like this that 0:21:00.880 --> 0:21:03.399 I've heard this year. One is the China reopening will 0:21:03.480 --> 0:21:06.000 unlock a lot of demand from China. The other is 0:21:06.720 --> 0:21:12.560 high end consumers like Vildana over there are so many 0:21:13.000 --> 0:21:15.600 they are immunes to inflation. They'll keep spending. They're not 0:21:15.640 --> 0:21:21.639 pinching pennies because cpis Ferrari another one, another one. You know, 0:21:21.640 --> 0:21:26.639 I'm curious your rationale for having these Ferrari, LVMH, Air Miz. 0:21:26.800 --> 0:21:29.800 What's the rationale with having a heavyweighting in these guys. 0:21:30.080 --> 0:21:33.960 Sure, it's very interesting because side by side with Nvidia 0:21:34.160 --> 0:21:37.919 and Microsoft and Apple and Broadcom, we have LVMH and 0:21:38.680 --> 0:21:44.440 Airs and Ferrari. So what makes them appealing? First? Their 0:21:44.480 --> 0:21:48.120 business models, they're direct to consumer models. In other words, 0:21:48.119 --> 0:21:52.320 you can only buy their product from their stores or 0:21:52.359 --> 0:21:57.280 their website, So Louis Bhutan or air Man or Ferrari, 0:21:57.880 --> 0:22:01.160 and you can't get access all their products. They'll sell 0:22:01.160 --> 0:22:04.960 out very quickly because they ration their most popular products 0:22:05.000 --> 0:22:10.600 to maintain exclusivity and protect pricing and margins, and they 0:22:10.600 --> 0:22:14.440 control the distribution so they don't get into inventory problems. 0:22:14.600 --> 0:22:20.760 They have pricing power and direct to consumer brand models 0:22:20.920 --> 0:22:23.840 are the best in the world and they just happen 0:22:23.920 --> 0:22:27.560 to have developed them over time. And so what you've 0:22:27.600 --> 0:22:31.119 seen is the return on invested capital for these companies 0:22:31.600 --> 0:22:36.119 has been rising quite significantly over the last decade, particularly 0:22:36.119 --> 0:22:41.480 compared to say European market average, and that's because of 0:22:41.520 --> 0:22:45.760 the business model superiority. Then you get to the economics 0:22:45.760 --> 0:22:49.159 of their customer and yes, it's true higher and consumers 0:22:49.200 --> 0:22:54.200 are less exposed to inflation problems and pinched paychecks and 0:22:54.240 --> 0:22:58.280 all of that, but the majority of the customers for 0:22:58.400 --> 0:23:03.240 luxury are actually Neil and gen Z around the world. 0:23:03.320 --> 0:23:08.119 It's not your old wealthy people, and so there is 0:23:08.200 --> 0:23:11.800 a fashion element, there's a social element we don't quite understand, 0:23:11.880 --> 0:23:16.679 but the spending is quite strong, so we like the 0:23:16.800 --> 0:23:20.760 customer mix. They do a very good job managing their business, 0:23:20.960 --> 0:23:27.239 keeping supplies tight, maintaining that exclusivity and pricing power, and 0:23:27.320 --> 0:23:32.000 for that reason you generate really strong margins and cash flow. 0:23:32.160 --> 0:23:36.440 And again it's hard to find that consistently anywhere else, 0:23:36.920 --> 0:23:40.040 but we have found it here. We really like the 0:23:40.119 --> 0:23:44.080 industry from that perspective. But again we only go with 0:23:44.119 --> 0:23:47.320 the big leaders. We don't go across the industry. There's 0:23:47.320 --> 0:23:50.719 only a few brands that have this capture the moment 0:23:51.560 --> 0:23:54.840 with consumers, and we just like to stick with those brands. 0:23:55.720 --> 0:23:59.359 Interesting millennial angle there. It confirms my image of Wildana. 0:24:01.640 --> 0:24:05.480 Drive it around in your Ferrari with yorks Vatan bag 0:24:05.600 --> 0:24:09.040 filled with I did have it ermes Thai one time, 0:24:09.200 --> 0:24:11.480 hermes Thai one time, but it was actually a hand 0:24:11.520 --> 0:24:13.440 me down from my older brotherhood. Very much more of 0:24:13.480 --> 0:24:31.439 a passionate stuff than my Joseph A. Beggs mark. I 0:24:31.440 --> 0:24:33.760 think we've established that I did not take French in 0:24:33.840 --> 0:24:35.720 high school, but I did take Spanish, so I can 0:24:35.720 --> 0:24:39.280 pronounce another stock in your top ten. I don't think 0:24:39.320 --> 0:24:42.000 a lot of us listeners are familiar with this one, 0:24:42.080 --> 0:24:44.520 so maybe you can talk to us a little bit 0:24:44.640 --> 0:24:46.080 about Mercado Libre. 0:24:46.960 --> 0:24:50.879 Oh yeah, that's one of our favorites. So there, you know, 0:24:51.000 --> 0:24:54.800 think of them as the Amazon of Latin America or 0:24:54.840 --> 0:24:58.919 the Ali Baba of Latin America. So they span the 0:24:59.080 --> 0:25:02.159 entire region with an e commerce platform which is the 0:25:02.280 --> 0:25:07.480 largest and in Latin America, even in the biggest market, Brazil, 0:25:07.760 --> 0:25:11.199 e commerce is very underpenetrated. We estimate, for example, in 0:25:11.240 --> 0:25:15.560 Brazil it might be around ten percent penetration of the market, 0:25:16.000 --> 0:25:19.280 whereas in the US we're well above twenty China is 0:25:19.320 --> 0:25:23.840