1 00:00:12,560 --> 00:00:15,840 Speaker 1: Hello, and welcome to What Goes Up, a Bloomberg Weekly 2 00:00:15,920 --> 00:00:19,079 Speaker 1: Markets podcast. I'm Sarah pont Zach, a reporter on the 3 00:00:19,120 --> 00:00:21,880 Speaker 1: Cross Asset team, and I'm Mike Reagan, a senior editor 4 00:00:21,920 --> 00:00:24,160 Speaker 1: on the Markets team. This week on the show, old 5 00:00:24,280 --> 00:00:27,560 Speaker 1: risks are alive and well your common culprits like trade 6 00:00:27,680 --> 00:00:30,880 Speaker 1: and slowing global growth. But there's one new one to 7 00:00:30,960 --> 00:00:34,840 Speaker 1: now throw into the mix, the prospects for presidential impeachment. 8 00:00:35,320 --> 00:00:38,839 Speaker 1: What if anything at all does this mean for markets? 9 00:00:39,400 --> 00:00:41,440 Speaker 1: And if you only came here to hear the craziest 10 00:00:41,479 --> 00:00:43,879 Speaker 1: things that happened in markets this week, don't worry. We 11 00:00:43,920 --> 00:00:46,280 Speaker 1: will not disappoint Sarah. I'll give you one hint on 12 00:00:46,360 --> 00:00:49,880 Speaker 1: what my craziest thing is Switzerland. Switzerland. All right, I 13 00:00:49,920 --> 00:00:54,600 Speaker 1: guess we'll have to wait like usual, and as always, 14 00:00:54,600 --> 00:00:58,400 Speaker 1: remember we have our very own Bloomberg Podcast hotline. Give 15 00:00:58,520 --> 00:01:01,040 Speaker 1: us a call, ask us a question, leave us a 16 00:01:01,080 --> 00:01:03,440 Speaker 1: message saying the craziest things that you guys have seen 17 00:01:03,440 --> 00:01:06,280 Speaker 1: in market, and maybe we'll even play your message on 18 00:01:06,319 --> 00:01:08,880 Speaker 1: the show. That number is six or six three two 19 00:01:08,959 --> 00:01:14,000 Speaker 1: four three for nine zero. So Sarah, I have to say, uh, 20 00:01:14,319 --> 00:01:18,039 Speaker 1: I just met our first guest today for the first time, 21 00:01:18,160 --> 00:01:19,760 Speaker 1: but I like them already and I'll tell you why, 22 00:01:20,000 --> 00:01:22,160 Speaker 1: because I was reading the notes he sent over with 23 00:01:22,400 --> 00:01:24,640 Speaker 1: sort of the thought his thoughts on the market, and 24 00:01:24,640 --> 00:01:28,280 Speaker 1: they jibe with my own very very much. There's a 25 00:01:28,319 --> 00:01:30,800 Speaker 1: lot of a lot of common ideas there. You love 26 00:01:30,880 --> 00:01:33,800 Speaker 1: to hear your own. I'm the hot above a little 27 00:01:33,840 --> 00:01:38,240 Speaker 1: confirmation bias, but he's the chief market strategist at New Texas. 28 00:01:38,760 --> 00:01:41,200 Speaker 1: He's also the chair of the steering committee for the 29 00:01:41,240 --> 00:01:44,080 Speaker 1: Active Managers Council, so we expect him to be very 30 00:01:44,080 --> 00:01:47,520 Speaker 1: active in this podcast. And uh, he's right about everything, 31 00:01:48,000 --> 00:01:51,800 Speaker 1: as we've we've already said. His name is Dave Lafferty. Dave, 32 00:01:51,840 --> 00:01:53,720 Speaker 1: welcome to the show. Thank you for having me, and 33 00:01:53,760 --> 00:01:58,320 Speaker 1: I appreciate the confirmation bias right wrong with a little 34 00:01:58,520 --> 00:02:00,680 Speaker 1: pat yourself on the back right our other guests. I 35 00:02:00,760 --> 00:02:02,639 Speaker 1: kind of like him too, even though I rarely agree 36 00:02:02,680 --> 00:02:06,360 Speaker 1: with him. Yeah, he is a cross asset reporter for Bloomberg. 37 00:02:07,120 --> 00:02:10,360 Speaker 1: He is I would call him the cal Ripkin of 38 00:02:10,480 --> 00:02:13,720 Speaker 1: finance Twitter. I might have to explain that, explain explain 39 00:02:13,840 --> 00:02:15,760 Speaker 1: for the kids that it means he shows up every 40 00:02:15,840 --> 00:02:18,799 Speaker 1: day swinging. He shows up every day swinging and as 41 00:02:18,800 --> 00:02:21,800 Speaker 1: we just discovered he's an intermittent faster. Luke, how tell 42 00:02:21,840 --> 00:02:24,320 Speaker 1: us about that? I mean, I think it's pretty necessary 43 00:02:24,360 --> 00:02:26,320 Speaker 1: if you can you can eat whatever the heck you 44 00:02:26,360 --> 00:02:28,320 Speaker 1: want for eight hours a day and then do nothing 45 00:02:28,320 --> 00:02:31,280 Speaker 1: for the other sixteen I think it's it's really smart. 46 00:02:31,320 --> 00:02:33,440 Speaker 1: It's working. I can tell you. I sit next to 47 00:02:33,480 --> 00:02:35,000 Speaker 1: Luke and I can start tell you he does not 48 00:02:35,040 --> 00:02:37,200 Speaker 1: eat whatever he wants for the other sixteen hours of 49 00:02:37,240 --> 00:02:40,480 Speaker 1: the day. I hate you know, some of us weren't 50 00:02:40,480 --> 00:02:42,800 Speaker 1: fitting into suits we bought, you know, a year ago, 51 00:02:42,880 --> 00:02:47,680 Speaker 1: and now we do again. You know, well, I fast 52 00:02:47,720 --> 00:02:50,000 Speaker 1: for about twenty minutes out of time. That counts counts. 53 00:02:50,600 --> 00:02:52,720 Speaker 1: You have to raise a number of daughters, though I'm 54 00:02:52,760 --> 00:02:56,640 Speaker 1: sure you know that's a lot of calorie burning and 55 00:02:56,680 --> 00:02:59,480 Speaker 1: a dog. Don't forget about that one. So Dave, let's 56 00:02:59,480 --> 00:03:02,720 Speaker 1: start with you. Um. Obviously, the big story of the 57 00:03:02,760 --> 00:03:07,079 Speaker 1: week is Nancy Pelosi, uh, sort of finally pulling the 58 00:03:07,120 --> 00:03:12,360 Speaker 1: trigger on the impeachment inquiry of President Donald Trump. Um. 59 00:03:12,520 --> 00:03:15,239 Speaker 1: We saw a little bit of altility around the announcement 60 00:03:15,240 --> 00:03:18,280 Speaker 1: and before it, as as the rumors started swirling. Walk 61 00:03:18,360 --> 00:03:20,240 Speaker 1: us through how you're thinking about this? Is this a 62 00:03:20,360 --> 00:03:23,000 Speaker 1: risk that sort of the average investor has to worry 63 00:03:23,000 --> 00:03:26,440 Speaker 1: about in the long term or even the short term. Uh, 64 00:03:27,240 --> 00:03:29,560 Speaker 1: how are you thinking about impeachment? Well, I think when 65 00:03:29,600 --> 00:03:31,440 Speaker 1: you bring up the horizon, that is the right way 66 00:03:31,440 --> 00:03:32,760 Speaker 1: to think about it. And when I think in the 67 00:03:32,840 --> 00:03:36,120 Speaker 1: near term, it doesn't strike me as something that's very tradeable, 68 00:03:36,920 --> 00:03:38,760 Speaker 1: I think it's gonna be a lot of he said, 69 00:03:38,840 --> 00:03:41,520 Speaker 1: she said, we don't know what we don't know at 70 00:03:41,560 --> 00:03:43,400 Speaker 1: this point. We don't know what the revelations will be, 71 00:03:43,440 --> 00:03:45,160 Speaker 1: So I think it's really tough to kind of trade 72 00:03:45,200 --> 00:03:50,360 Speaker 1: around this. Uh. I do think that in the long run. Uh, 73 00:03:50,400 --> 00:03:54,440 Speaker 1: this is really setting up the key debate around the election. 74 00:03:54,880 --> 00:03:57,120 Speaker 1: And I think it's pretty clear that Speaker Pelosi has 75 00:03:57,200 --> 00:03:59,480 Speaker 1: kind of been dragged, kicking and screaming into this, and 76 00:03:59,520 --> 00:04:02,360 Speaker 1: I think she has some pretty good instincts. Uh. The 77 00:04:02,640 --> 00:04:08,000 Speaker 1: the Democrats can either make a really compelling, concise and 78 00:04:08,120 --> 00:04:11,800 Speaker 1: coherent argument and really put the pressure on the president, 79 00:04:12,320 --> 00:04:15,920 Speaker 1: or they could present a very mixed and muddled and 80 00:04:16,000 --> 00:04:20,920 Speaker 1: confused presentation to the American public and really help out 81 00:04:20,960 --> 00:04:24,600 Speaker 1: the president's chances. So if I was a Democratic strategist, 82 00:04:24,600 --> 00:04:27,160 Speaker 1: I wouldn't be hiring lawyers. I'd be hiring a PR 83 00:04:27,240 --> 00:04:30,159 Speaker 1: firm because the they need to wrap this up in 84 00:04:30,200 --> 00:04:33,279 Speaker 1: a real good sound bite, a real good bumper sticker, 85 00:04:33,600 --> 00:04:36,279 Speaker 1: and then I think it has real market implications going 86 00:04:36,320 --> 00:04:40,039 Speaker 1: into the election. But right now it feels like a 87 00:04:40,080 --> 00:04:42,760 Speaker 1: lot of much ado about nothing. I know, you guys 88 00:04:43,120 --> 00:04:48,000 Speaker 1: covered some Shakespeare on last week's podcast, so like like 89 00:04:48,000 --> 00:04:50,240 Speaker 1: like most people who have never read it, I love 90 00:04:50,279 --> 00:04:54,400 Speaker 1: to quote Shakespeare. So much ado about nothing. In the meantime, 91 00:04:54,720 --> 00:04:56,400 Speaker 1: we could do the Macbeth full of sound and fury 92 00:04:56,520 --> 00:04:58,640 Speaker 1: signifying nothing too if we want. That isn't done for 93 00:04:58,680 --> 00:05:00,760 Speaker 1: the moment. I think that was last week. We've heard, 94 00:05:00,960 --> 00:05:03,560 Speaker 1: I've heard many times from investors this past week that 95 00:05:03,760 --> 00:05:08,039 Speaker 1: it's not about politics, it's about policies. So when we 96 00:05:08,160 --> 00:05:10,599 Speaker 1: talk about what this could mean for markets when it 97 00:05:10,640 --> 00:05:13,400 Speaker 1: comes to impeachment or at least the proceedings, um and 98 00:05:13,440 --> 00:05:16,000 Speaker 1: the sound and fury of it is where it really 99 00:05:16,040 --> 00:05:19,760 Speaker 1: matters what it does for actual policies like trade or 100 00:05:19,800 --> 00:05:22,800 Speaker 1: other policies in that matter. Yeah, I would certainly think so, 101 00:05:22,839 --> 00:05:25,560 Speaker 1: and I'd agree, And that's why it's interesting to see 102 00:05:26,120 --> 00:05:29,920 Speaker 1: market moves just based on you know, I'm refreshing predicted 103 00:05:30,120 --> 00:05:33,720 Speaker 1: like every other crazy person in markets because they predicted 104 00:05:33,800 --> 00:05:36,800 Speaker 1: and UH and SMP five futures were for a point 105 00:05:36,800 --> 00:05:39,680 Speaker 1: in time this week, they were moving in tandem perfectly. 106 00:05:39,960 --> 00:05:43,000 Speaker 1: What's been interesting throughout this though, is that even as 107 00:05:43,040 --> 00:05:45,760 Speaker 1: the odds of just impeachment by the House have certainly 108 00:05:45,800 --> 00:05:49,560 Speaker 1: gone up this week, you haven't seen a corresponding decline 109 00:05:49,560 --> 00:05:53,040 Speaker 1: and online prediction markets about Donald Trump's chances of winning 110 00:05:53,080 --> 00:05:57,479 Speaker 1: the elections. That's a big part of policy. So what 111 00:05:57,600 --> 00:05:59,720 Speaker 1: is a policy that could change and still not have 112 00:06:00,160 --> 00:06:03,159 Speaker 1: those odds changed. Certainly, trade, I think would be would 113 00:06:03,200 --> 00:06:05,720 Speaker 1: be the top one. And in talking with people about 114 00:06:05,720 --> 00:06:08,359 Speaker 1: you know, market reactions to these uh, these kind of 115 00:06:08,360 --> 00:06:12,560 Speaker 1: political hijinks we've had, seems everyone wants to treat it 116 00:06:12,920 --> 00:06:16,560 Speaker 1: as potential buying opportunity. And the part of the thinking 117 00:06:16,600 --> 00:06:19,720 Speaker 1: here is, well, if you know Trump's engaged and full 118 00:06:19,800 --> 00:06:23,360 Speaker 1: out war against the Democrats, then you know it's gonna 119 00:06:23,400 --> 00:06:26,080 Speaker 1: be harder to fight a two front war really aggressively 120 00:06:26,400 --> 00:06:29,040 Speaker 1: there with China. He might have to play more to 121 00:06:29,160 --> 00:06:32,279 Speaker 1: his Republican base, make sure a lot of senators stay 122 00:06:32,320 --> 00:06:35,039 Speaker 1: on his side. And you know, the Republican senators, although 123 00:06:35,040 --> 00:06:37,479 Speaker 1: they have not been a huge check on the President 124 00:06:37,480 --> 00:06:40,839 Speaker 1: on trade. They certainly do not uh share all of 125 00:06:40,880 --> 00:06:44,360 Speaker 1: his hawkish leanings on that subject. Dave. I was listening 126 00:06:44,440 --> 00:06:47,960 Speaker 1: to TV interview you did on this subject, and you 127 00:06:48,040 --> 00:06:50,760 Speaker 1: brought up the notion of game theory. And I gotta say, 128 00:06:50,760 --> 00:06:53,800 Speaker 1: whenever I hear a financial type start talking about game theory, 129 00:06:53,800 --> 00:06:56,279 Speaker 1: I'm like, all right, okay, son zoo take it easier, 130 00:06:56,920 --> 00:06:58,880 Speaker 1: but but I know you have to do it. Um. 131 00:06:59,279 --> 00:07:01,440 Speaker 1: The problem I see is that the star of this 132 00:07:01,480 --> 00:07:06,560 Speaker 1: game is Donald Trump, who plays what's the word for it, sarah, 133 00:07:06,600 --> 00:07:11,640 Speaker 1: an unorthodox game. We'll go with that. Um. So everyone's 134 00:07:11,680 --> 00:07:14,720 Speaker 1: doing sort of a similar mental exercise on game theory. 135 00:07:14,720 --> 00:07:17,720 Speaker 1: But how how confident can you be, Um, in what 136 00:07:17,800 --> 00:07:20,400 Speaker 1: you you conclude when you think about the trade tensions. 137 00:07:20,440 --> 00:07:22,560 Speaker 1: It's a great point, not very confident. The point that 138 00:07:22,600 --> 00:07:24,840 Speaker 1: I was trying to make was that there's been a 139 00:07:24,880 --> 00:07:28,680 Speaker 1: view that we've heard that basically this will kind of 140 00:07:28,720 --> 00:07:31,760 Speaker 1: impede the timeline, that all this impeachment talk will kind 141 00:07:31,760 --> 00:07:34,800 Speaker 1: of push push policy out into the future. There won't 142 00:07:34,800 --> 00:07:37,400 Speaker 1: be have enough enough time to get any of this done. 143 00:07:37,840 --> 00:07:40,080 Speaker 1: And all I was sort of bringing up was you 144 00:07:40,120 --> 00:07:42,520 Speaker 1: also have to think about what the reaction function is. 145 00:07:42,560 --> 00:07:44,880 Speaker 1: That's sort of the link to game theory, and what 146 00:07:44,920 --> 00:07:47,680 Speaker 1: I'm thinking about there is how did the Chinese react 147 00:07:47,720 --> 00:07:50,120 Speaker 1: to this? Is this a chance for them to uh? 148 00:07:50,160 --> 00:07:52,760 Speaker 1: Do they see the president as weak and more willing 149 00:07:52,800 --> 00:07:55,640 Speaker 1: to cut a deal, so maybe they offer an olive branch. 150 00:07:56,080 --> 00:07:57,760 Speaker 1: So what I was really getting at was kind of 151 00:07:57,800 --> 00:07:59,800 Speaker 1: the reaction function. I don't think we can be a 152 00:08:00,120 --> 00:08:03,040 Speaker 1: we can have confidence in any outcome. I think that 153 00:08:03,160 --> 00:08:06,520 Speaker 1: is kind of the underlying message of the entire Trump presidency. 154 00:08:07,240 --> 00:08:10,080 Speaker 1: Don't don't bank on anything. But I do think it's 155 00:08:10,080 --> 00:08:13,560 Speaker 1: not simply uh. Is easy as saying, well, this is 156 00:08:13,600 --> 00:08:16,160 Speaker 1: going to delay everything it's gonna make, as Luke was saying, 157 00:08:16,280 --> 00:08:18,800 Speaker 1: and as all kinds of policy implications, maybe these will 158 00:08:18,960 --> 00:08:21,600 Speaker 1: will get delayed. The other side of this coin is 159 00:08:21,680 --> 00:08:24,360 Speaker 1: it might give an opportunity for some people to step in. 160 00:08:25,000 --> 00:08:27,280 Speaker 1: We did get a trade deal this week with Japan. 161 00:08:27,360 --> 00:08:30,480 Speaker 1: It kind of got glossed over, lost in the fray. However, 162 00:08:30,520 --> 00:08:32,640 Speaker 1: we still have not really seen much movement on the 163 00:08:32,720 --> 00:08:35,040 Speaker 1: U S m c A. Is there anything that we 164 00:08:35,080 --> 00:08:38,719 Speaker 1: can take away from other trade jewel deals that are 165 00:08:38,800 --> 00:08:41,640 Speaker 1: moving through the system to get a sense of what 166 00:08:41,840 --> 00:08:46,079 Speaker 1: might be coming with China, I don't know. I really 167 00:08:46,080 --> 00:08:48,880 Speaker 1: think these all progressive at their own pace. I I 168 00:08:48,960 --> 00:08:52,439 Speaker 1: have had for a long time now very limited expectations 169 00:08:52,480 --> 00:08:55,559 Speaker 1: around some type of grand bargain between the US and China. 170 00:08:56,000 --> 00:08:59,400 Speaker 1: I think what the US ultimately wants is for the 171 00:08:59,480 --> 00:09:03,120 Speaker 1: Chinese not to be China. Uh. We we sort of 172 00:09:03,320 --> 00:09:07,040 Speaker 1: we're asking them to do something that really isn't in 173 00:09:07,120 --> 00:09:09,079 Speaker 1: their nature. And I think that was always going to 174 00:09:09,200 --> 00:09:11,240 Speaker 1: make a really grand bargain. I mean, when it comes 175 00:09:11,240 --> 00:09:15,640 Speaker 1: to ip the AFT right again into law. Yes, domestic subsidies, 176 00:09:15,679 --> 00:09:18,640 Speaker 1: industry champions, all of those things that they really feel 177 00:09:18,679 --> 00:09:22,720 Speaker 1: are inherent to their industrial policy. It's it's uh, they 178 00:09:22,800 --> 00:09:25,240 Speaker 1: might they might give us, uh, you know, they might 179 00:09:25,280 --> 00:09:27,120 Speaker 1: buy some more soybeans from US, But I don't think 180 00:09:27,120 --> 00:09:29,880 Speaker 1: they're gonna change who they fundamentally are. That's a bridge 181 00:09:29,920 --> 00:09:32,480 Speaker 1: too far from me. Uh. The way I've always thought 182 00:09:32,520 --> 00:09:35,520 Speaker 1: about it is the uh, the impact of this deal 183 00:09:35,600 --> 00:09:38,679 Speaker 1: will be proportional to how long it takes to get done. 184 00:09:38,880 --> 00:09:41,439 Speaker 1: The faster it gets done, the less it really means. 185 00:09:42,200 --> 00:09:45,760 Speaker 1: I wanted to talk about sort of what the ground 186 00:09:45,840 --> 00:09:48,000 Speaker 1: zero of the trade war seems to be and it's 187 00:09:48,040 --> 00:09:51,480 Speaker 1: it's manufacturing. Uh. And I was gonna read from from 188 00:09:51,480 --> 00:09:55,199 Speaker 1: one of your notes. Uh. Globally, manufacturing is probably in recession, 189 00:09:55,679 --> 00:09:57,880 Speaker 1: but we're watching for signs that it may spill over 190 00:09:57,920 --> 00:10:01,200 Speaker 1: into broader consumption trends. It hasn't happened yet. This is 191 00:10:01,200 --> 00:10:03,839 Speaker 1: a theme we've talked about a few times on this show. Um, 192 00:10:03,960 --> 00:10:06,280 Speaker 1: this concern of when do we start to see this 193 00:10:06,320 --> 00:10:10,680 Speaker 1: manufacturing weakness bleed into the consumer space. You know, we 194 00:10:10,679 --> 00:10:14,000 Speaker 1: did see the Conference boards consumer Confidence index take a 195 00:10:14,000 --> 00:10:17,160 Speaker 1: pretty big dip uh this week, granted still at a 196 00:10:17,240 --> 00:10:21,480 Speaker 1: very elevated level expectations. Uh, an even bigger dip again, 197 00:10:21,600 --> 00:10:25,280 Speaker 1: still elevated level. UM. I was reading a note from Nicholas, 198 00:10:25,280 --> 00:10:27,920 Speaker 1: who we had on the show, and he he finds 199 00:10:27,960 --> 00:10:31,280 Speaker 1: the craziest stats. But he was talking about Halloween consumption 200 00:10:31,800 --> 00:10:34,720 Speaker 1: and how the National Retail Federation is expecting a dip 201 00:10:35,120 --> 00:10:38,600 Speaker 1: in Halloween purchases and people actually believe it or not 202 00:10:38,640 --> 00:10:42,000 Speaker 1: blaming it on the trade ward. I mean, is this 203 00:10:42,200 --> 00:10:45,440 Speaker 1: enough to start worrying about the consumer? Obviously the job 204 00:10:45,480 --> 00:10:48,600 Speaker 1: markets still strong, but where where would you look forward 205 00:10:48,600 --> 00:10:51,560 Speaker 1: to see that sort of infection into the consumer space. Well, 206 00:10:51,600 --> 00:10:54,000 Speaker 1: from my standpoint, it's really about how long it takes 207 00:10:54,040 --> 00:10:56,000 Speaker 1: and and sort of coming back to your point, if 208 00:10:56,000 --> 00:10:58,679 Speaker 1: you look at the size of the US external sector, 209 00:10:59,040 --> 00:11:01,480 Speaker 1: you know, the the x sports sectors about ten twelve 210 00:11:01,840 --> 00:11:04,880 Speaker 1: of the U s economy, manufacturing sector something like a 211 00:11:05,160 --> 00:11:09,640 Speaker 1: just under under twenty. In isolation, those don't seem big 212 00:11:09,760 --> 00:11:12,480 Speaker 1: enough to bring down the US economy, but it is 213 00:11:12,559 --> 00:11:16,360 Speaker 1: the spillover effects. How long until the lock up in 214 00:11:16,480 --> 00:11:20,240 Speaker 1: trade and supply chains spills over into manufacturing while we're 215 00:11:20,240 --> 00:11:24,480 Speaker 1: seeing it, How long until the manufacturing slowdown spills over 216 00:11:24,559 --> 00:11:27,760 Speaker 1: into now they you know that that person that works 217 00:11:27,760 --> 00:11:30,440 Speaker 1: on the factory floor isn't going out to dinner. Now 218 00:11:30,480 --> 00:11:33,840 Speaker 1: we've got waiters and waitresses being laid off. When does 219 00:11:33,920 --> 00:11:37,120 Speaker 1: this begin to hit the consumption side? When does it really, 220 00:11:37,160 --> 00:11:40,080 Speaker 1: in my mind, hit sort of labor and wage trends. 221 00:11:40,400 --> 00:11:43,800 Speaker 1: We don't see that yet, but at the front end 222 00:11:43,800 --> 00:11:45,480 Speaker 1: of some of the labor markets we don't see it. 223 00:11:45,520 --> 00:11:48,440 Speaker 1: And say the weekly jobless claims which have remained very strong, 224 00:11:48,679 --> 00:11:50,559 Speaker 1: but we do see it in some of the survey 225 00:11:50,679 --> 00:11:54,960 Speaker 1: data where uh jobs hard to get minus easy to get. Uh, 226 00:11:55,000 --> 00:11:59,120 Speaker 1: that's beginning to deteriorate the employment components of some of 227 00:11:59,120 --> 00:12:01,800 Speaker 1: the surveys are beginning to deteriorate. So we're not in 228 00:12:01,800 --> 00:12:04,400 Speaker 1: the recession camp. We don't see a ton of spill over, 229 00:12:04,720 --> 00:12:07,120 Speaker 1: but we might be at the very front tip of 230 00:12:07,120 --> 00:12:09,680 Speaker 1: that iceberg. And so that's what we're kind of keeping 231 00:12:09,720 --> 00:12:12,240 Speaker 1: an eye on. That weekly jobless claims number, to me, 232 00:12:12,320 --> 00:12:14,839 Speaker 1: is kind of the thing I look for first on 233 00:12:14,880 --> 00:12:18,000 Speaker 1: Thursday mornings. I think there's kind of two interesting points 234 00:12:18,040 --> 00:12:21,559 Speaker 1: to piggyback off of that in terms of the data 235 00:12:21,600 --> 00:12:24,680 Speaker 1: and the divide between hard and soft data, or almost 236 00:12:24,720 --> 00:12:27,880 Speaker 1: at the diametrically opposite position that we were at the 237 00:12:27,920 --> 00:12:31,360 Speaker 1: start of the Trump presidency, when it's essentially consumer confidence 238 00:12:31,400 --> 00:12:34,440 Speaker 1: gauges CEO confidence gauges were absolutely shooting up in the 239 00:12:34,440 --> 00:12:37,240 Speaker 1: hard data didn't match if you actually look at what 240 00:12:37,440 --> 00:12:40,800 Speaker 1: US industrial production is doing and the deceleration, which it's 241 00:12:40,800 --> 00:12:44,480 Speaker 1: been real. Uh, it's nowhere near the level of deceleration 242 00:12:44,520 --> 00:12:47,200 Speaker 1: and contraction you would assume is happening if you just 243 00:12:47,280 --> 00:12:50,560 Speaker 1: looked at I S M and then to kind of use, well, 244 00:12:50,600 --> 00:12:53,680 Speaker 1: what barometer could we use to maybe see when we 245 00:12:53,800 --> 00:12:57,040 Speaker 1: get the spell over from manufacturing to services. I think 246 00:12:57,080 --> 00:12:58,719 Speaker 1: they've made a great point look at the size of 247 00:12:58,720 --> 00:13:01,360 Speaker 1: the US external sector. Why not look at economies that 248 00:13:01,440 --> 00:13:04,560 Speaker 1: have a much bigger manufacturing and external sector and see 249 00:13:04,559 --> 00:13:06,680 Speaker 1: when it spells over there, because it's not reasonable to 250 00:13:06,679 --> 00:13:09,720 Speaker 1: suggest it's really going to hit US consumers before it 251 00:13:09,800 --> 00:13:13,480 Speaker 1: materially hits European consumers, in particular Germany. It seems like 252 00:13:13,520 --> 00:13:17,960 Speaker 1: we're constantly talking about these headwinds, either sentiment deteriorating or 253 00:13:18,080 --> 00:13:20,640 Speaker 1: you think about the oil spike, Middle East tensions over 254 00:13:20,960 --> 00:13:25,120 Speaker 1: caused by Iran. Also, we've talked about slowing economic growth overseas, 255 00:13:25,160 --> 00:13:28,120 Speaker 1: particularly this week we sell weaker economic data out of Europe. 256 00:13:28,160 --> 00:13:30,880 Speaker 1: Now you're dealing with all this impeachment talk. Trade continues, 257 00:13:31,360 --> 00:13:33,800 Speaker 1: but the market is still near its record highs. I mean, 258 00:13:33,800 --> 00:13:36,160 Speaker 1: the market has been very resilient. Do you get the 259 00:13:36,240 --> 00:13:40,520 Speaker 1: sense that that's actually the tone from underlying investors that 260 00:13:40,559 --> 00:13:44,480 Speaker 1: people feel good right now or do people still feel 261 00:13:44,520 --> 00:13:48,000 Speaker 1: pretty downtrodden and that means there's room to move further? Well, 262 00:13:48,040 --> 00:13:50,840 Speaker 1: I think again, coming back to the sentiment indicators, I 263 00:13:50,880 --> 00:13:53,160 Speaker 1: do feel like they've weakened, and I think people are 264 00:13:53,320 --> 00:13:56,400 Speaker 1: very worried. I think even people that don't understand or 265 00:13:56,440 --> 00:13:59,400 Speaker 1: even know what an inverted yield curve. Ore could still 266 00:13:59,440 --> 00:14:01,200 Speaker 1: stop you on the street and ask you what this 267 00:14:01,240 --> 00:14:04,160 Speaker 1: means for their four oh one K. So I do 268 00:14:04,240 --> 00:14:10,560 Speaker 1: think sentiment has has clearly uh deteriorated in that sense. Uh. 269 00:14:10,679 --> 00:14:14,280 Speaker 1: I think more important, though, is what are the underlying trends? 270 00:14:14,760 --> 00:14:18,480 Speaker 1: And I think this really has people concerned because because frankly, 271 00:14:18,920 --> 00:14:21,880 Speaker 1: for all the news that's been buffeting the stock market, 272 00:14:22,040 --> 00:14:25,160 Speaker 1: what we aren't talking a lot about are the earning strends, 273 00:14:25,240 --> 00:14:28,360 Speaker 1: which frankly haven't been that great. It's been positive, but 274 00:14:28,440 --> 00:14:32,160 Speaker 1: they've been the forward earnings estimates have been gradually deteriorating 275 00:14:32,360 --> 00:14:36,040 Speaker 1: for about three or four quarters now, and valuations which 276 00:14:36,080 --> 00:14:39,400 Speaker 1: we don't see as as exorbitant, but they're certainly not cheap. 277 00:14:39,880 --> 00:14:43,040 Speaker 1: So all this stuff is buffeting the equity markets, but 278 00:14:43,120 --> 00:14:46,480 Speaker 1: it's buffeting it in a context where those two kind 279 00:14:46,480 --> 00:14:50,360 Speaker 1: of drivers of equity returns margin expansion or contraction in 280 00:14:50,400 --> 00:14:54,040 Speaker 1: the underlying earnings, neither of those variables is really in 281 00:14:54,080 --> 00:14:58,000 Speaker 1: the favor right now of equity holders. So I think 282 00:14:58,000 --> 00:15:00,720 Speaker 1: you need to sort of look underneath the way and 283 00:15:00,760 --> 00:15:03,320 Speaker 1: everything that's happening to see kind of those underlying trends, 284 00:15:03,480 --> 00:15:20,160 Speaker 1: and they're stable, but they're not great. One really interesting 285 00:15:20,200 --> 00:15:23,240 Speaker 1: point you brought up in your notes was, uh, and 286 00:15:23,400 --> 00:15:25,760 Speaker 1: I'm quoting you here, you say we think central banks 287 00:15:25,760 --> 00:15:28,440 Speaker 1: have run out of real ammunition. Uh. And you talk 288 00:15:28,520 --> 00:15:31,160 Speaker 1: about the credit impulse, which and correct me if I'm 289 00:15:31,240 --> 00:15:34,080 Speaker 1: bungling this definition. But it's basically the year over year 290 00:15:34,120 --> 00:15:37,880 Speaker 1: growth in credit as a percentage of growth in GDP, 291 00:15:38,440 --> 00:15:41,280 Speaker 1: and it's really been pinned at a very low level. 292 00:15:41,320 --> 00:15:44,560 Speaker 1: The trend of it seems to just have flatlined, uh 293 00:15:44,920 --> 00:15:48,600 Speaker 1: and and gone lower over the years, despite the FED 294 00:15:49,480 --> 00:15:52,440 Speaker 1: returning to an easy posture. What do you think is 295 00:15:52,480 --> 00:15:56,240 Speaker 1: behind that? So what you described as an even better 296 00:15:56,240 --> 00:15:58,720 Speaker 1: definition of the credit impulse than what I would think, 297 00:15:58,840 --> 00:16:06,400 Speaker 1: I I actually think a bit much. For me, the 298 00:16:06,440 --> 00:16:10,320 Speaker 1: credit impulse is just the the uh, the impetus to 299 00:16:10,360 --> 00:16:13,800 Speaker 1: want to take on more debt as interest rates get lower. 300 00:16:14,160 --> 00:16:17,280 Speaker 1: So how much credit will really be sort of uh 301 00:16:17,640 --> 00:16:20,640 Speaker 1: demanded as rates go lower? And so the point that 302 00:16:20,720 --> 00:16:22,960 Speaker 1: I was really making is, you know, when interest rates 303 00:16:23,000 --> 00:16:25,400 Speaker 1: go from four percent to two percent, CEO say, hey, 304 00:16:25,440 --> 00:16:28,120 Speaker 1: I can fund that new plant, I can buy that 305 00:16:28,200 --> 00:16:31,160 Speaker 1: new software, maybe I can hire some more workers. But 306 00:16:31,240 --> 00:16:33,560 Speaker 1: when rates are pretty close to zero in some parts 307 00:16:33,560 --> 00:16:36,280 Speaker 1: of the world if you haven't gone out and borrowed yet. 308 00:16:36,600 --> 00:16:39,000 Speaker 1: As you get closer to the zero bound, does lowering 309 00:16:39,040 --> 00:16:43,040 Speaker 1: interest rates really create this new demand for credit? That 310 00:16:43,160 --> 00:16:45,200 Speaker 1: was really what I was getting at. And so I 311 00:16:45,240 --> 00:16:47,600 Speaker 1: think the idea, you know, we we've heard this constantly, 312 00:16:47,640 --> 00:16:49,800 Speaker 1: and this is one of the narratives I've pushed back 313 00:16:49,840 --> 00:16:51,600 Speaker 1: on for about a year and a half now, was 314 00:16:51,640 --> 00:16:54,800 Speaker 1: the idea that more a committy of central banks would 315 00:16:54,880 --> 00:16:58,280 Speaker 1: somehow be good for the stock market. I don't necessarily 316 00:16:58,280 --> 00:17:01,840 Speaker 1: think it's bad, but I think we've lost more credit impulse, 317 00:17:02,120 --> 00:17:05,320 Speaker 1: and I actually think we're reaching a point where, uh, 318 00:17:05,359 --> 00:17:09,280 Speaker 1: the more accommodative and the more frantic this begins to 319 00:17:09,359 --> 00:17:14,240 Speaker 1: look super accommodative policy at ten years on now serves 320 00:17:14,280 --> 00:17:18,400 Speaker 1: to undermine investor and consumer confidence more than it does 321 00:17:18,480 --> 00:17:21,320 Speaker 1: to instill it. And those are the two reasons why 322 00:17:22,040 --> 00:17:24,639 Speaker 1: I'm a little bit hesitant about thinking. I certainly think, hey, 323 00:17:24,680 --> 00:17:27,120 Speaker 1: if you take rates lower and do a bunch of quwi, yeah, 324 00:17:27,119 --> 00:17:29,520 Speaker 1: at the margin, we get some stimulus. I just don't 325 00:17:29,520 --> 00:17:32,640 Speaker 1: think it looks anything like it did in previous episodes 326 00:17:32,880 --> 00:17:36,520 Speaker 1: of this super accommodative policy. Sticking with the topic, of debt. 327 00:17:36,560 --> 00:17:39,199 Speaker 1: I want to get your take on this phenomenon that 328 00:17:39,280 --> 00:17:42,000 Speaker 1: we've been seeing. So Goldman Sacks has these two different 329 00:17:42,040 --> 00:17:46,199 Speaker 1: baskets of stocks. One has stocks that are extremely highly levered, 330 00:17:46,320 --> 00:17:49,200 Speaker 1: the other has stocks that have extremely strong and healthy 331 00:17:49,200 --> 00:17:52,840 Speaker 1: balance sheets. And since June we've actually seen this sudden 332 00:17:52,920 --> 00:17:57,960 Speaker 1: outperformance of these highly levered stocks right before the FED 333 00:17:58,040 --> 00:18:01,119 Speaker 1: cut interest rates. To you, when you see these stocks 334 00:18:01,160 --> 00:18:04,560 Speaker 1: that might be seen as low quality stocks doing better, 335 00:18:04,840 --> 00:18:09,200 Speaker 1: I should say, then your higher quality a strong balance 336 00:18:09,200 --> 00:18:12,520 Speaker 1: sheet companies. Is that sustainable or does it seem more 337 00:18:12,600 --> 00:18:15,160 Speaker 1: like a head fake it will look. I think it's 338 00:18:15,200 --> 00:18:18,200 Speaker 1: probably unsustainable in the sense that we're still going to 339 00:18:18,280 --> 00:18:21,760 Speaker 1: have an economic cycle, and ultimately, when the credit cycle turns, 340 00:18:22,160 --> 00:18:24,840 Speaker 1: those names are going to get punished the most. I 341 00:18:24,920 --> 00:18:27,760 Speaker 1: do think that as you take interest rates lower and 342 00:18:27,840 --> 00:18:32,480 Speaker 1: lower than natural compounding companies that aren't as strong financially 343 00:18:32,600 --> 00:18:35,200 Speaker 1: but they have sort of this growth bent, that that 344 00:18:35,280 --> 00:18:38,919 Speaker 1: growth is is further out there into the future. You know. Uh, 345 00:18:39,000 --> 00:18:41,439 Speaker 1: the unicorns have all been kind of taking it on 346 00:18:41,480 --> 00:18:44,360 Speaker 1: the chin in recent weeks. Uh. The idea that you're 347 00:18:44,400 --> 00:18:48,159 Speaker 1: not discounting those cash flows as much gives these levered 348 00:18:48,200 --> 00:18:51,960 Speaker 1: companies more leeway. I think investors give them a little 349 00:18:52,000 --> 00:18:56,159 Speaker 1: bit more leeway. But Sarah, that can't last forever. Ultimately, 350 00:18:56,280 --> 00:18:58,680 Speaker 1: we don't know when the credit cycle will begin to bite, 351 00:18:58,680 --> 00:19:00,840 Speaker 1: but it will come back at some point, So no, 352 00:19:00,960 --> 00:19:03,640 Speaker 1: it can't last forever. It's probably important to note that 353 00:19:03,680 --> 00:19:07,480 Speaker 1: this isn't necessarily being validated by the bond market right now. 354 00:19:07,560 --> 00:19:10,480 Speaker 1: For instance, the you know, the riskiest credits triple cs, 355 00:19:10,520 --> 00:19:13,520 Speaker 1: they've been underperforming in high yield UH you know, a 356 00:19:13,600 --> 00:19:16,359 Speaker 1: clear lagger this year, but especially in the last few weeks, 357 00:19:16,400 --> 00:19:18,600 Speaker 1: so credits supposed to be the smart money, and those 358 00:19:18,640 --> 00:19:21,560 Speaker 1: guys are going, hey, like, maybe you're just reevaluating the 359 00:19:21,600 --> 00:19:25,320 Speaker 1: upside prospects and the equity. But we aren't necessarily very 360 00:19:25,359 --> 00:19:28,160 Speaker 1: convinced here as the ones first in the UH first 361 00:19:28,160 --> 00:19:30,760 Speaker 1: in the recoup line. Luke, you write a lot about 362 00:19:30,920 --> 00:19:33,760 Speaker 1: options in the volatility market, and we're talking a little 363 00:19:33,760 --> 00:19:36,280 Speaker 1: bit earlier about it, and you're saying that there's there's 364 00:19:36,320 --> 00:19:39,719 Speaker 1: just really nothing to talk about there. There's this heightened 365 00:19:39,760 --> 00:19:43,200 Speaker 1: uncertainty with the impeachment and the trade tensions. The VIX 366 00:19:43,280 --> 00:19:46,520 Speaker 1: is still kind of where it's been fifteen sixteen, you know, 367 00:19:46,560 --> 00:19:48,399 Speaker 1: I was looking at the skew the option skew on 368 00:19:48,440 --> 00:19:53,080 Speaker 1: the spy ETF a little elevated, not really anything to 369 00:19:53,119 --> 00:19:56,520 Speaker 1: write home about. Is that surprising to you? Um? And 370 00:19:57,960 --> 00:20:00,080 Speaker 1: how would you you know, how would you explain a 371 00:20:00,280 --> 00:20:04,400 Speaker 1: given uh, the scary headlines floating around. So the fun 372 00:20:04,440 --> 00:20:07,000 Speaker 1: thing about looking at skew now is it's been sticky 373 00:20:07,080 --> 00:20:09,880 Speaker 1: high for a while. Just looking at put call skew 374 00:20:09,920 --> 00:20:12,120 Speaker 1: out of the money. And this is because just how 375 00:20:12,240 --> 00:20:15,360 Speaker 1: especially in and this is especially acute for the SMP five, 376 00:20:16,040 --> 00:20:19,399 Speaker 1: just very like market structure has mattered a ton. And 377 00:20:19,440 --> 00:20:21,879 Speaker 1: what we have more and more, especially as we're in 378 00:20:21,880 --> 00:20:26,159 Speaker 1: a very choppy range bound market, is institutional call overwriting. 379 00:20:26,200 --> 00:20:28,080 Speaker 1: You know, you own the stock, then you sell the 380 00:20:28,119 --> 00:20:30,280 Speaker 1: you know, five percent out of the money call to 381 00:20:30,320 --> 00:20:33,200 Speaker 1: collect some premium along the way. So that's something that's 382 00:20:33,240 --> 00:20:35,919 Speaker 1: going to keep a lid on the applied volatility of 383 00:20:35,960 --> 00:20:40,159 Speaker 1: calls relative to put that's been a pretty steady dynamic. 384 00:20:40,400 --> 00:20:42,200 Speaker 1: What you have, then, on the other side, is look 385 00:20:42,200 --> 00:20:45,480 Speaker 1: at wings pricing, So look at essentially the implied volatility 386 00:20:45,480 --> 00:20:47,840 Speaker 1: of way out of the money calls or puts versus 387 00:20:47,840 --> 00:20:50,400 Speaker 1: closer to the money stuff. And that's where you see, 388 00:20:50,400 --> 00:20:52,320 Speaker 1: and I think this is also a reflection of that 389 00:20:52,400 --> 00:20:55,240 Speaker 1: we've been trading in a arrange. People are essentially pricing 390 00:20:55,280 --> 00:20:57,000 Speaker 1: and well, we're trading in a arrange. I'm going to 391 00:20:57,080 --> 00:20:59,520 Speaker 1: protect against the next five percent, not in the next 392 00:20:59,520 --> 00:21:02,280 Speaker 1: ten percent, because that's the way the market's been lately. 393 00:21:02,320 --> 00:21:05,040 Speaker 1: So I think it's really a market structure story why 394 00:21:05,080 --> 00:21:08,840 Speaker 1: options have been as not exciting as you might expect 395 00:21:08,880 --> 00:21:12,200 Speaker 1: them to be in this instance. But it makes sense 396 00:21:12,280 --> 00:21:14,840 Speaker 1: when you put these pieces together. Dave Spending up forwards, 397 00:21:14,880 --> 00:21:16,919 Speaker 1: I like how you describe something earlier. You said you 398 00:21:16,960 --> 00:21:19,240 Speaker 1: need to look underneath the wave. So look underneath the 399 00:21:19,240 --> 00:21:21,760 Speaker 1: headline risks, and look at what the economy is actually doing, 400 00:21:21,800 --> 00:21:24,600 Speaker 1: the fundamentals, the corporate profits. How much of a risk 401 00:21:24,760 --> 00:21:29,840 Speaker 1: do earnings downgrades revisions to the downside actually present going forwards? 402 00:21:29,840 --> 00:21:32,800 Speaker 1: I mean, sure, we always see this trend at the 403 00:21:32,880 --> 00:21:35,440 Speaker 1: end of the year where you start to see company's 404 00:21:35,480 --> 00:21:39,520 Speaker 1: guide lower for but we're still expecting double digit at 405 00:21:39,560 --> 00:21:43,720 Speaker 1: ten percent growth for So is it possible that markets 406 00:21:43,760 --> 00:21:47,120 Speaker 1: or investors will be taken by surprise should this come? Uh, 407 00:21:47,160 --> 00:21:49,240 Speaker 1: that's actually what I think will happen. I don't think 408 00:21:49,240 --> 00:21:51,159 Speaker 1: they'll be taken by surprise. I think it's going to 409 00:21:51,240 --> 00:21:53,440 Speaker 1: be much more gradual than that. So when we look 410 00:21:53,440 --> 00:21:55,960 Speaker 1: at kind of the year over year numbers for the SNP, 411 00:21:56,119 --> 00:21:59,199 Speaker 1: it looks like plus two to plus four for calendar 412 00:21:59,320 --> 00:22:02,320 Speaker 1: year two thousand nineteen. As you mentioned, ten percent is 413 00:22:02,359 --> 00:22:05,119 Speaker 1: about the bottom up estimate for next year and another 414 00:22:05,240 --> 00:22:10,480 Speaker 1: ten percent. This strikes me as a bit optimistic, and 415 00:22:10,680 --> 00:22:13,160 Speaker 1: for me, the basic math is when you take companies, 416 00:22:13,240 --> 00:22:20,200 Speaker 1: you know, these these megacap companies, multinational companies uh generally inaggregate, 417 00:22:20,280 --> 00:22:23,280 Speaker 1: I don't see how they grow top line revenue growth 418 00:22:23,560 --> 00:22:28,000 Speaker 1: significantly faster than nominal global growth. Remember, revenue and earnings 419 00:22:28,040 --> 00:22:31,680 Speaker 1: is a nominal concept, so nominal global growth is probably 420 00:22:31,720 --> 00:22:34,360 Speaker 1: in the five percent neighborhood. We're probably growing at three 421 00:22:34,440 --> 00:22:38,119 Speaker 1: percent reel and call it two percent inflation. So to me, 422 00:22:38,400 --> 00:22:41,840 Speaker 1: top line revenue growth is probably five or six percent. 423 00:22:42,440 --> 00:22:44,800 Speaker 1: Then you have to look at profit margins. You can 424 00:22:44,840 --> 00:22:47,640 Speaker 1: grow earnings much faster than the bottom line if margins 425 00:22:47,680 --> 00:22:52,040 Speaker 1: are expanding expanding, but if margins are already fairly high. 426 00:22:52,080 --> 00:22:56,040 Speaker 1: So I don't see how we translate relatively slow top 427 00:22:56,119 --> 00:23:00,960 Speaker 1: line revenue growth into significantly higher bottom line earnings growth. 428 00:23:01,280 --> 00:23:03,720 Speaker 1: So my guest this year again we're at two to 429 00:23:03,800 --> 00:23:06,800 Speaker 1: four percent, will probably come in around that, maybe just 430 00:23:06,960 --> 00:23:09,440 Speaker 1: light of that. For next year ten percent, the year 431 00:23:09,440 --> 00:23:11,879 Speaker 1: after that ten percent. My guess is they'll behalf of 432 00:23:11,960 --> 00:23:15,919 Speaker 1: both of those. I think earnings are gradually grinding higher, 433 00:23:16,200 --> 00:23:18,280 Speaker 1: but I don't think they're going to be anywhere near 434 00:23:18,480 --> 00:23:20,960 Speaker 1: what the bottom up estimates are in the next two years. 435 00:23:21,680 --> 00:23:23,280 Speaker 1: And this all leads to sort of one of your 436 00:23:23,320 --> 00:23:29,080 Speaker 1: main thesis is right now thesis is scs. Okay, all right, 437 00:23:33,560 --> 00:23:35,960 Speaker 1: I was an English major. I should know suffing. But Dave, 438 00:23:36,000 --> 00:23:39,800 Speaker 1: you say that we think equity allocations should be positioned cautiously, 439 00:23:39,920 --> 00:23:43,880 Speaker 1: but we don't like the term defensives. Obviously, utilities, consumer 440 00:23:43,920 --> 00:23:47,600 Speaker 1: staples are peered very much like crowded trades, very high 441 00:23:47,680 --> 00:23:52,200 Speaker 1: valuations earlier this year. So how how do you be cautious, uh, 442 00:23:52,359 --> 00:23:56,119 Speaker 1: with an equity portfolio? Now if those sort of you know, textbooks, 443 00:23:56,160 --> 00:23:59,360 Speaker 1: safe avens are kind of a little risky right now. Yeah, 444 00:23:59,400 --> 00:24:02,240 Speaker 1: so the caution really comes not from our base case, which, 445 00:24:02,280 --> 00:24:04,800 Speaker 1: like I said, I think the market probably goes higher, 446 00:24:04,840 --> 00:24:08,880 Speaker 1: grinds higher, but I don't like the risk adjusted trade off. 447 00:24:08,920 --> 00:24:11,200 Speaker 1: I don't like the idea that I always ask the 448 00:24:11,280 --> 00:24:14,240 Speaker 1: question what happens if I'm wrong, and I usually assume 449 00:24:14,320 --> 00:24:16,880 Speaker 1: that I'm wrong. So if our if our base case 450 00:24:17,000 --> 00:24:19,480 Speaker 1: is wrong and things turn out to be better than 451 00:24:19,520 --> 00:24:22,720 Speaker 1: we expect, there's some upside to the market. But again, 452 00:24:22,920 --> 00:24:27,560 Speaker 1: valuations are already elevated, not exorbitant, but elevated. Profit margins 453 00:24:27,560 --> 00:24:31,440 Speaker 1: are already elevated. So how much upside is there? There's 454 00:24:31,480 --> 00:24:34,240 Speaker 1: probably some there, but not a not an enormous amount. 455 00:24:34,560 --> 00:24:36,520 Speaker 1: What about the downside? What if we're wrong and we 456 00:24:36,600 --> 00:24:38,919 Speaker 1: do go into recession. It's not our base case, but 457 00:24:38,920 --> 00:24:41,639 Speaker 1: it's what's something we've we've become much more worried about. 458 00:24:42,000 --> 00:24:44,240 Speaker 1: If we're wrong and we do go into recession, there's 459 00:24:44,320 --> 00:24:47,600 Speaker 1: far more downside than there is upside, And so that's 460 00:24:47,680 --> 00:24:49,879 Speaker 1: kind of why we're cautious. When you get back to 461 00:24:49,920 --> 00:24:52,200 Speaker 1: those sector plays. What I was really kind of getting 462 00:24:52,240 --> 00:24:55,120 Speaker 1: at is I like cautious better than defensive, because when 463 00:24:55,119 --> 00:24:58,399 Speaker 1: you say defensive, people here staples and utilities, and I 464 00:24:58,440 --> 00:25:01,040 Speaker 1: always think it's really hard to be defensive by buying 465 00:25:01,040 --> 00:25:03,840 Speaker 1: the most expensive thing in the market. That's not kind 466 00:25:03,840 --> 00:25:06,199 Speaker 1: of the you know, the classic notion of margin of 467 00:25:06,280 --> 00:25:09,600 Speaker 1: safety and I worry that again, this is one of 468 00:25:09,600 --> 00:25:12,600 Speaker 1: the by products of central bank policy. You suppress rates, 469 00:25:12,760 --> 00:25:15,320 Speaker 1: and you make anything that has yield or or looks 470 00:25:15,520 --> 00:25:19,520 Speaker 1: stable or bond like you elevate. It's its valuations. And 471 00:25:19,560 --> 00:25:22,840 Speaker 1: I think it's a little worrisome when investors ask us, hey, 472 00:25:22,880 --> 00:25:28,040 Speaker 1: should I be replacing my bond portfolios with utilities? Because 473 00:25:28,160 --> 00:25:30,440 Speaker 1: I can pick up an extra fifty basis points or 474 00:25:30,440 --> 00:25:33,320 Speaker 1: a hundred basis points. But you're fundamentally moving from high 475 00:25:33,400 --> 00:25:36,360 Speaker 1: quality bonds which have four or five percent fall two 476 00:25:36,400 --> 00:25:40,480 Speaker 1: equities that have even low volatility equities might be twelve 477 00:25:40,560 --> 00:25:44,520 Speaker 1: to fifteen. You're fundamentally changing your risk profile and picking 478 00:25:44,600 --> 00:25:47,560 Speaker 1: up fifty basis points to do it. That that's dangerous 479 00:25:47,600 --> 00:25:50,520 Speaker 1: to me. So how do we look at it? Uh? 480 00:25:50,680 --> 00:25:55,000 Speaker 1: Low ball equity, maybe some options selling a return back 481 00:25:55,040 --> 00:25:58,600 Speaker 1: to value. Perhaps there are ways to be cautious in 482 00:25:58,600 --> 00:26:03,200 Speaker 1: your equity portfolio with outloading into sort of the defensive names. 483 00:26:03,560 --> 00:26:05,760 Speaker 1: All right, one last thing before we get to the 484 00:26:05,760 --> 00:26:09,359 Speaker 1: crazy things, uh, Dave, and this is to put your 485 00:26:09,400 --> 00:26:11,399 Speaker 1: hat on as chair of the steering committee for the 486 00:26:11,440 --> 00:26:14,720 Speaker 1: Active Managers Council. So you're in an elevator A short 487 00:26:15,000 --> 00:26:18,280 Speaker 1: elevator trip with a retiree who's loaded up on on 488 00:26:18,320 --> 00:26:21,840 Speaker 1: passive index funds. What's what's your pitch? Uh, Well, it's 489 00:26:21,840 --> 00:26:24,199 Speaker 1: important to note that the Active Managers Council, it's an 490 00:26:24,200 --> 00:26:27,679 Speaker 1: adversary group underneath the Investment Advisors Association, but it is 491 00:26:27,720 --> 00:26:30,880 Speaker 1: in no way sort of uh anti passive, where we 492 00:26:30,880 --> 00:26:33,920 Speaker 1: we think passive is great. What we're really pushing back 493 00:26:33,960 --> 00:26:37,560 Speaker 1: against is sort of this unbalanced narrative, Uh, that sort 494 00:26:37,600 --> 00:26:40,560 Speaker 1: of active management has been vilified, and we would say 495 00:26:40,640 --> 00:26:45,159 Speaker 1: unjustifiably been vilified. We we think that this is a 496 00:26:45,520 --> 00:26:49,280 Speaker 1: false dichotomy that's presented to investors, that kind of passive 497 00:26:49,400 --> 00:26:51,800 Speaker 1: is good and active is bad. And I think when 498 00:26:51,840 --> 00:26:53,760 Speaker 1: you look at the key arguments, and we've done some 499 00:26:53,840 --> 00:26:58,119 Speaker 1: research on this, people will say, well, active management hasn't worked, 500 00:26:58,160 --> 00:27:00,720 Speaker 1: and they'll point to some scorecards, and we would say 501 00:27:00,760 --> 00:27:03,679 Speaker 1: the results of the scorecards are very mixed. Yes, in 502 00:27:03,840 --> 00:27:06,520 Speaker 1: large cap us equities it's been quite a struggle, but 503 00:27:06,560 --> 00:27:10,639 Speaker 1: it's a much more mixed result in in other categories. Uh. 504 00:27:10,720 --> 00:27:14,359 Speaker 1: You'll hear that active management on average can't outperform because 505 00:27:14,400 --> 00:27:17,080 Speaker 1: of sort of this zero sum argument. And it turns 506 00:27:17,080 --> 00:27:20,240 Speaker 1: out that the zero sum argument doesn't really apply given 507 00:27:20,280 --> 00:27:23,639 Speaker 1: the way that we measure the number of managers who outperformed. 508 00:27:23,680 --> 00:27:28,400 Speaker 1: The average dollar can't generate excess return, but the average 509 00:27:28,440 --> 00:27:31,440 Speaker 1: manager could. And then the third narrative that we pushed 510 00:27:31,440 --> 00:27:33,800 Speaker 1: back on is this idea that even if active managers 511 00:27:33,880 --> 00:27:36,760 Speaker 1: could outperform, they're really hard to pick. And we don't 512 00:27:36,800 --> 00:27:39,800 Speaker 1: think that that it's a needle in the haystack exercise. 513 00:27:39,960 --> 00:27:43,680 Speaker 1: There are some key uh indicators that you can look 514 00:27:43,720 --> 00:27:46,400 Speaker 1: at that will not guarantee you pick a great manager. 515 00:27:46,560 --> 00:27:49,040 Speaker 1: Both certainly will improve your odds. So the idea of 516 00:27:49,280 --> 00:27:51,840 Speaker 1: the active Managers counsels to is to make a more 517 00:27:51,920 --> 00:27:55,000 Speaker 1: balanced narrative. But it's in no way to throw passive 518 00:27:55,080 --> 00:27:57,720 Speaker 1: under the bus, which many of the council members are 519 00:27:57,760 --> 00:28:01,560 Speaker 1: big fans of, including us. We have passed exposure good stuff. 520 00:28:01,720 --> 00:28:03,159 Speaker 1: I will say it's a little bit long for an 521 00:28:03,160 --> 00:28:08,879 Speaker 1: elevator pictures. I think, I don't. I don't even think 522 00:28:08,920 --> 00:28:11,040 Speaker 1: he's talking to the older tyree. That's just twenty years 523 00:28:11,080 --> 00:28:18,720 Speaker 1: of commissions. He's walking right by looking well, we're glad 524 00:28:18,760 --> 00:28:21,880 Speaker 1: to have him. Uh. Now for the crazy stuff, Uh, Sarah, 525 00:28:22,080 --> 00:28:24,760 Speaker 1: what is the craziest thing you ever saw in markets 526 00:28:24,800 --> 00:28:26,960 Speaker 1: this week. Alright, I have to give a hat tip 527 00:28:27,040 --> 00:28:29,280 Speaker 1: to Bildonna high Arch who was on the show before, 528 00:28:29,320 --> 00:28:30,960 Speaker 1: because she did help me out with this one. It 529 00:28:31,040 --> 00:28:32,960 Speaker 1: was just it was pretty crazy, so I had to 530 00:28:32,960 --> 00:28:35,840 Speaker 1: go with it. Um. So, this is the headline of 531 00:28:35,840 --> 00:28:38,520 Speaker 1: a story from the New York Post. It says, bond 532 00:28:38,600 --> 00:28:43,920 Speaker 1: King Bill Gross and postage stamp feud with rocker sons. 533 00:28:44,000 --> 00:28:48,240 Speaker 1: So for one thing, now rocker son, now you know 534 00:28:48,840 --> 00:28:52,280 Speaker 1: his son. His son is a rocker, So now you 535 00:28:52,360 --> 00:28:56,520 Speaker 1: know that Bill Gross is son. Um is actually a 536 00:28:56,560 --> 00:29:00,520 Speaker 1: pretty big rocker. He's a musician who has do songs 537 00:29:00,520 --> 00:29:04,040 Speaker 1: for Whiz Khalifa, so that can be appreciated. Um. But 538 00:29:04,120 --> 00:29:07,800 Speaker 1: he is in a fight with him over a collection 539 00:29:08,120 --> 00:29:11,600 Speaker 1: of postage stamps. Um. So not exactly. I wish Bill 540 00:29:11,680 --> 00:29:13,480 Speaker 1: was still writing in his monthly commentaries that would be 541 00:29:13,520 --> 00:29:16,040 Speaker 1: able to read about that. Yeah, he was writing monthly 542 00:29:16,080 --> 00:29:19,280 Speaker 1: commentaries about his feud with his quote unquote rockers son. 543 00:29:19,480 --> 00:29:21,880 Speaker 1: Be pretty good, Luke, Can you top Bill Gross in 544 00:29:21,920 --> 00:29:25,040 Speaker 1: a no? But I but I will give a shout 545 00:29:25,040 --> 00:29:28,040 Speaker 1: out to us. One of the best things I've read 546 00:29:28,080 --> 00:29:31,880 Speaker 1: this week from Bloomberg's Best Stanton, and it's essentially saying, 547 00:29:31,920 --> 00:29:33,960 Speaker 1: you know, what is the price of a treasury? Well, 548 00:29:34,000 --> 00:29:36,600 Speaker 1: it depends on whom you ask. And she pointed out 549 00:29:36,680 --> 00:29:41,200 Speaker 1: that at three big bond mutual funds had three different 550 00:29:41,280 --> 00:29:44,120 Speaker 1: values for one bond. UH. You know, the Bond Fund 551 00:29:44,120 --> 00:29:46,880 Speaker 1: of America had priced at one oh one point two 552 00:29:47,000 --> 00:29:49,920 Speaker 1: essentially another fund at one oh one point one eight 553 00:29:49,960 --> 00:29:52,360 Speaker 1: to another fund at one oh one point one seven 554 00:29:52,440 --> 00:29:55,280 Speaker 1: five eight. So it's essentially showing that, you know, the 555 00:29:55,400 --> 00:29:58,160 Speaker 1: little bit of discretion that has allowed in markets will 556 00:29:58,200 --> 00:30:00,959 Speaker 1: allow you know, UH funds to to value things differently. 557 00:30:01,000 --> 00:30:03,320 Speaker 1: If I had to do something different, I'd be it's 558 00:30:03,320 --> 00:30:06,680 Speaker 1: not quite in markets. But Joe Wisenhal's explanation of how 559 00:30:06,960 --> 00:30:10,280 Speaker 1: repo markets are a lot like trying to buy marijuana 560 00:30:10,320 --> 00:30:12,440 Speaker 1: when you don't have any cash on you would have 561 00:30:12,480 --> 00:30:15,840 Speaker 1: been my runner up and not quite Mark. That one 562 00:30:15,880 --> 00:30:18,000 Speaker 1: was pretty good. Dave. How about you, you've seen anything 563 00:30:18,000 --> 00:30:20,720 Speaker 1: crazy this week? Well? I think Sarah's one is pretty crazy. 564 00:30:20,760 --> 00:30:23,800 Speaker 1: If if Bill Gross is fighting tooth and nail over stamps, 565 00:30:23,800 --> 00:30:27,320 Speaker 1: then we know interest rates are pretty well not a 566 00:30:27,320 --> 00:30:29,200 Speaker 1: lot of yield out there, not a lot of yield 567 00:30:29,200 --> 00:30:31,320 Speaker 1: out there to find If we're fighting over stamps at 568 00:30:31,320 --> 00:30:36,240 Speaker 1: this point was a collection of postage stamps. He's got 569 00:30:36,280 --> 00:30:38,320 Speaker 1: the most valuable collection in the world. I believe that's 570 00:30:38,440 --> 00:30:41,560 Speaker 1: he is a collector, right, that's right. Remember. Uh So 571 00:30:41,800 --> 00:30:43,800 Speaker 1: one of the things that sort of crossed my terminal 572 00:30:43,960 --> 00:30:46,200 Speaker 1: was I think it was a Bloomberg article and maybe 573 00:30:46,240 --> 00:30:48,800 Speaker 1: you've discussed it. It's been in the water supply. But 574 00:30:48,840 --> 00:30:52,800 Speaker 1: it was announced earlier this week that uh, Facebook has 575 00:30:52,920 --> 00:30:57,480 Speaker 1: entered into an agreement to buy a firm called Ctrl Labs. 576 00:30:57,520 --> 00:31:00,400 Speaker 1: And you you may have seen this. What what's crazy 577 00:31:00,400 --> 00:31:04,120 Speaker 1: and sort of interesting about Ctrl Labs is that it's 578 00:31:04,120 --> 00:31:07,920 Speaker 1: a firm that basically uses software and hardware. I think 579 00:31:07,920 --> 00:31:11,200 Speaker 1: it's a bracelet kind of a wearable to monitor kind 580 00:31:11,200 --> 00:31:14,520 Speaker 1: of the neurons and the neurological activity in your brain 581 00:31:14,960 --> 00:31:17,960 Speaker 1: and then use that to send a signal to your computer. 582 00:31:18,480 --> 00:31:20,959 Speaker 1: Uh and the use of an avatar, so basically sending 583 00:31:20,960 --> 00:31:24,480 Speaker 1: a signal uh to your computer kind of through your 584 00:31:24,480 --> 00:31:27,480 Speaker 1: thought waves. That's a little crazy, But then I had 585 00:31:27,480 --> 00:31:30,400 Speaker 1: to put it in the context of what Facebook is 586 00:31:30,440 --> 00:31:33,680 Speaker 1: going through. Facebook on a daily basis is being dragged 587 00:31:33,760 --> 00:31:38,720 Speaker 1: up to Capitol Hill, uh to deal with antitrust, privacy issues, 588 00:31:38,920 --> 00:31:42,080 Speaker 1: election interference and everything else, and they're basically going to 589 00:31:42,160 --> 00:31:45,040 Speaker 1: have to go back to their same regulators and ask 590 00:31:45,120 --> 00:31:48,520 Speaker 1: them for permission to buy a company that is basically 591 00:31:48,880 --> 00:31:52,920 Speaker 1: leading in the space of thought control. This strikes me 592 00:31:53,000 --> 00:31:57,040 Speaker 1: as perhaps a little bit worried. Yeah, and so the 593 00:31:57,040 --> 00:31:58,680 Speaker 1: way that I think about it, and I should put 594 00:31:58,680 --> 00:32:02,120 Speaker 1: the compliance disclosure in, we don't do buy soil and 595 00:32:02,200 --> 00:32:04,960 Speaker 1: individual stocks. I have no idea what it means for Facebook. 596 00:32:04,960 --> 00:32:07,600 Speaker 1: I don't I don't pretend to even have a Facebook account, 597 00:32:08,440 --> 00:32:12,000 Speaker 1: but I do think it's it's sort of fascinating to 598 00:32:12,120 --> 00:32:15,160 Speaker 1: see a company like Facebook beginning to get into sort 599 00:32:15,200 --> 00:32:17,960 Speaker 1: of the realm of kind of mind control. And I 600 00:32:17,960 --> 00:32:21,080 Speaker 1: don't for one second believe right now it's initially your 601 00:32:21,120 --> 00:32:24,360 Speaker 1: mind controls the computer. I suspect at some point that 602 00:32:24,480 --> 00:32:27,080 Speaker 1: highway will go in the other direction. When I think 603 00:32:27,120 --> 00:32:29,880 Speaker 1: within the context of what Facebook is going through, I 604 00:32:29,920 --> 00:32:32,680 Speaker 1: think it's a pretty crazy and brash move. Absolutely. I 605 00:32:32,720 --> 00:32:35,040 Speaker 1: wonder if those brain signals get sent to advertisers to 606 00:32:36,320 --> 00:32:42,120 Speaker 1: Wonder wants potato chips. Again. I don't remember the name 607 00:32:42,160 --> 00:32:44,280 Speaker 1: of it, but it sounds like I remember early on 608 00:32:44,280 --> 00:32:46,400 Speaker 1: the show we talked about a startup that Tesla was 609 00:32:46,440 --> 00:32:48,360 Speaker 1: a part of and they did a very similar thing. 610 00:32:49,120 --> 00:32:53,680 Speaker 1: It's a brave new world, all right, I'll do mine quickly. Uh. 611 00:32:53,960 --> 00:32:56,400 Speaker 1: Credit Swiss stock has had a rough week. I mean 612 00:32:56,480 --> 00:32:59,080 Speaker 1: all European bank stocks have had a rough week, to 613 00:32:59,120 --> 00:33:01,520 Speaker 1: be honest, most week so rough for European bank talks. 614 00:33:01,720 --> 00:33:03,760 Speaker 1: Credits with Swiss is one of the leaders on the 615 00:33:03,800 --> 00:33:05,720 Speaker 1: down side, and I have to think it has something 616 00:33:05,760 --> 00:33:08,360 Speaker 1: to do with this crazy story. They had a top 617 00:33:08,400 --> 00:33:12,440 Speaker 1: banker who defected over to UBS, and then the guy 618 00:33:12,480 --> 00:33:14,800 Speaker 1: figured out that they had hired a private detective to 619 00:33:14,960 --> 00:33:17,640 Speaker 1: follow him around and make sure he wasn't poaching any 620 00:33:17,680 --> 00:33:20,800 Speaker 1: of this. So it's turned into this big scandal that 621 00:33:20,960 --> 00:33:23,640 Speaker 1: they're worried the CEO might have to step down over it. 622 00:33:23,640 --> 00:33:26,680 Speaker 1: It's uh, it's pretty esting, Sarah. I think we chip in. 623 00:33:26,720 --> 00:33:29,040 Speaker 1: Maybe we could get a detective to follow Luke around. 624 00:33:29,080 --> 00:33:32,280 Speaker 1: I think we could see if he's really fast, pretty 625 00:33:32,280 --> 00:33:36,400 Speaker 1: easy to follow, you don't know what looks doing outside 626 00:33:36,400 --> 00:33:38,360 Speaker 1: of the office, and get a detective to check on it. 627 00:33:39,640 --> 00:33:41,360 Speaker 1: I think that's it for the week. I think it is. 628 00:33:41,520 --> 00:33:49,200 Speaker 1: Dave Blafferty Lucalla, thanks so much for joining us. What 629 00:33:49,360 --> 00:33:52,120 Speaker 1: goes up We'll be back next week. Until then, you 630 00:33:52,160 --> 00:33:54,960 Speaker 1: can find us on the Bloomberg Terminal website and app, 631 00:33:55,080 --> 00:33:57,800 Speaker 1: or wherever you get your podcasts. We'd love it if 632 00:33:57,840 --> 00:34:00,040 Speaker 1: you took the time to rate interview the show on 633 00:34:00,080 --> 00:34:03,360 Speaker 1: Apple podcast so more listeners can find us. And you 634 00:34:03,400 --> 00:34:06,800 Speaker 1: can find us on Twitter. Follow me at at Sarah Ponzeck, 635 00:34:07,200 --> 00:34:10,759 Speaker 1: Mike is at reag Anonymous, Our guest Dave Lapperty is 636 00:34:10,840 --> 00:34:14,080 Speaker 1: at Lapperty the Texas, and Luke Kawa is at l 637 00:34:14,200 --> 00:34:18,359 Speaker 1: j Kawa. You can also follow Bloomberg Podcasts at podcasts. 638 00:34:18,719 --> 00:34:21,359 Speaker 1: What Goes Up is produced by topur Foreheads. The head 639 00:34:21,360 --> 00:34:24,640 Speaker 1: of Bloomberg podcast is Francesca Levie. Thanks for listening, See 640 00:34:24,640 --> 00:34:25,200 Speaker 1: you next time.