Speaker 1: Hello, and welcome to What Goes Up, a Bloomberg Weekly
Speaker 1: Markets podcast. I'm Sarah pont Zach, a reporter on the
Speaker 1: Cross Asset team, and I'm Mike Reagan, a senior editor
Speaker 1: on the Markets team. This week on the show, old
Speaker 1: risks are alive and well your common culprits like trade
Speaker 1: and slowing global growth. But there's one new one to
Speaker 1: now throw into the mix, the prospects for presidential impeachment.
Speaker 1: What if anything at all does this mean for markets?
Speaker 1: And if you only came here to hear the craziest
Speaker 1: things that happened in markets this week, don't worry. We
Speaker 1: will not disappoint Sarah. I'll give you one hint on
Speaker 1: what my craziest thing is Switzerland. Switzerland. All right, I
Speaker 1: guess we'll have to wait like usual, and as always,
Speaker 1: remember we have our very own Bloomberg Podcast hotline. Give
Speaker 1: us a call, ask us a question, leave us a
Speaker 1: message saying the craziest things that you guys have seen
Speaker 1: in market, and maybe we'll even play your message on
Speaker 1: the show. That number is six or six three two
Speaker 1: four three for nine zero. So Sarah, I have to say, uh,
Speaker 1: I just met our first guest today for the first time,
Speaker 1: but I like them already and I'll tell you why,
Speaker 1: because I was reading the notes he sent over with
Speaker 1: sort of the thought his thoughts on the market, and
Speaker 1: they jibe with my own very very much. There's a
Speaker 1: lot of a lot of common ideas there. You love
Speaker 1: to hear your own. I'm the hot above a little
Speaker 1: confirmation bias, but he's the chief market strategist at New Texas.
Speaker 1: He's also the chair of the steering committee for the
Speaker 1: Active Managers Council, so we expect him to be very
Speaker 1: active in this podcast. And uh, he's right about everything,
Speaker 1: as we've we've already said. His name is Dave Lafferty. Dave,
Speaker 1: welcome to the show. Thank you for having me, and
Speaker 1: I appreciate the confirmation bias right wrong with a little
Speaker 1: pat yourself on the back right our other guests. I
Speaker 1: kind of like him too, even though I rarely agree
Speaker 1: with him. Yeah, he is a cross asset reporter for Bloomberg.
Speaker 1: He is I would call him the cal Ripkin of
Speaker 1: finance Twitter. I might have to explain that, explain explain
Speaker 1: for the kids that it means he shows up every
Speaker 1: day swinging. He shows up every day swinging and as
Speaker 1: we just discovered he's an intermittent faster. Luke, how tell
Speaker 1: us about that? I mean, I think it's pretty necessary
Speaker 1: if you can you can eat whatever the heck you
Speaker 1: want for eight hours a day and then do nothing
Speaker 1: for the other sixteen I think it's it's really smart.
Speaker 1: It's working. I can tell you. I sit next to
Speaker 1: Luke and I can start tell you he does not
Speaker 1: eat whatever he wants for the other sixteen hours of
Speaker 1: the day. I hate you know, some of us weren't
Speaker 1: fitting into suits we bought, you know, a year ago,
Speaker 1: and now we do again. You know, well, I fast
Speaker 1: for about twenty minutes out of time. That counts counts.
Speaker 1: You have to raise a number of daughters, though I'm
Speaker 1: sure you know that's a lot of calorie burning and
Speaker 1: a dog. Don't forget about that one. So Dave, let's
Speaker 1: start with you. Um. Obviously, the big story of the
Speaker 1: week is Nancy Pelosi, uh, sort of finally pulling the
Speaker 1: trigger on the impeachment inquiry of President Donald Trump. Um.
Speaker 1: We saw a little bit of altility around the announcement
Speaker 1: and before it, as as the rumors started swirling. Walk
Speaker 1: us through how you're thinking about this? Is this a
Speaker 1: risk that sort of the average investor has to worry
Speaker 1: about in the long term or even the short term. Uh,
Speaker 1: how are you thinking about impeachment? Well, I think when
Speaker 1: you bring up the horizon, that is the right way
Speaker 1: to think about it. And when I think in the
Speaker 1: near term, it doesn't strike me as something that's very tradeable,
Speaker 1: I think it's gonna be a lot of he said,
Speaker 1: she said, we don't know what we don't know at
Speaker 1: this point. We don't know what the revelations will be,
Speaker 1: So I think it's really tough to kind of trade
Speaker 1: around this. Uh. I do think that in the long run. Uh,
Speaker 1: this is really setting up the key debate around the election.
Speaker 1: And I think it's pretty clear that Speaker Pelosi has
Speaker 1: kind of been dragged, kicking and screaming into this, and
Speaker 1: I think she has some pretty good instincts. Uh. The
Speaker 1: the Democrats can either make a really compelling, concise and
Speaker 1: coherent argument and really put the pressure on the president,
Speaker 1: or they could present a very mixed and muddled and
Speaker 1: confused presentation to the American public and really help out
Speaker 1: the president's chances. So if I was a Democratic strategist,
Speaker 1: I wouldn't be hiring lawyers. I'd be hiring a PR
Speaker 1: firm because the they need to wrap this up in
Speaker 1: a real good sound bite, a real good bumper sticker,
Speaker 1: and then I think it has real market implications going
Speaker 1: into the election. But right now it feels like a
Speaker 1: lot of much ado about nothing. I know, you guys
Speaker 1: covered some Shakespeare on last week's podcast, so like like
Speaker 1: like most people who have never read it, I love
Speaker 1: to quote Shakespeare. So much ado about nothing. In the meantime,
Speaker 1: we could do the Macbeth full of sound and fury
Speaker 1: signifying nothing too if we want. That isn't done for
Speaker 1: the moment. I think that was last week. We've heard,
Speaker 1: I've heard many times from investors this past week that
Speaker 1: it's not about politics, it's about policies. So when we
Speaker 1: talk about what this could mean for markets when it
Speaker 1: comes to impeachment or at least the proceedings, um and
Speaker 1: the sound and fury of it is where it really
Speaker 1: matters what it does for actual policies like trade or
Speaker 1: other policies in that matter. Yeah, I would certainly think so,
Speaker 1: and I'd agree, And that's why it's interesting to see
Speaker 1: market moves just based on you know, I'm refreshing predicted
Speaker 1: like every other crazy person in markets because they predicted
Speaker 1: and UH and SMP five futures were for a point
Speaker 1: in time this week, they were moving in tandem perfectly.
Speaker 1: What's been interesting throughout this though, is that even as
Speaker 1: the odds of just impeachment by the House have certainly
Speaker 1: gone up this week, you haven't seen a corresponding decline
Speaker 1: and online prediction markets about Donald Trump's chances of winning
Speaker 1: the elections. That's a big part of policy. So what
Speaker 1: is a policy that could change and still not have
Speaker 1: those odds changed. Certainly, trade, I think would be would
Speaker 1: be the top one. And in talking with people about
Speaker 1: you know, market reactions to these uh, these kind of
Speaker 1: political hijinks we've had, seems everyone wants to treat it
Speaker 1: as potential buying opportunity. And the part of the thinking
Speaker 1: here is, well, if you know Trump's engaged and full
Speaker 1: out war against the Democrats, then you know it's gonna
Speaker 1: be harder to fight a two front war really aggressively
Speaker 1: there with China. He might have to play more to
Speaker 1: his Republican base, make sure a lot of senators stay
Speaker 1: on his side. And you know, the Republican senators, although
Speaker 1: they have not been a huge check on the President
Speaker 1: on trade. They certainly do not uh share all of
Speaker 1: his hawkish leanings on that subject. Dave. I was listening
Speaker 1: to TV interview you did on this subject, and you
Speaker 1: brought up the notion of game theory. And I gotta say,
Speaker 1: whenever I hear a financial type start talking about game theory,
Speaker 1: I'm like, all right, okay, son zoo take it easier,
Speaker 1: but but I know you have to do it. Um.
Speaker 1: The problem I see is that the star of this
Speaker 1: game is Donald Trump, who plays what's the word for it, sarah,
Speaker 1: an unorthodox game. We'll go with that. Um. So everyone's
Speaker 1: doing sort of a similar mental exercise on game theory.
Speaker 1: But how how confident can you be, Um, in what
Speaker 1: you you conclude when you think about the trade tensions.
Speaker 1: It's a great point, not very confident. The point that
Speaker 1: I was trying to make was that there's been a
Speaker 1: view that we've heard that basically this will kind of
Speaker 1: impede the timeline, that all this impeachment talk will kind
Speaker 1: of push push policy out into the future. There won't
Speaker 1: be have enough enough time to get any of this done.
Speaker 1: And all I was sort of bringing up was you
Speaker 1: also have to think about what the reaction function is.
Speaker 1: That's sort of the link to game theory, and what
Speaker 1: I'm thinking about there is how did the Chinese react
Speaker 1: to this? Is this a chance for them to uh?
Speaker 1: Do they see the president as weak and more willing
Speaker 1: to cut a deal, so maybe they offer an olive branch.
Speaker 1: So what I was really getting at was kind of
Speaker 1: the reaction function. I don't think we can be a
Speaker 1: we can have confidence in any outcome. I think that
Speaker 1: is kind of the underlying message of the entire Trump presidency.
Speaker 1: Don't don't bank on anything. But I do think it's
Speaker 1: not simply uh. Is easy as saying, well, this is
Speaker 1: going to delay everything it's gonna make, as Luke was saying,
Speaker 1: and as all kinds of policy implications, maybe these will
Speaker 1: will get delayed. The other side of this coin is
Speaker 1: it might give an opportunity for some people to step in.
Speaker 1: We did get a trade deal this week with Japan.
Speaker 1: It kind of got glossed over, lost in the fray. However,
Speaker 1: we still have not really seen much movement on the
Speaker 1: U S m c A. Is there anything that we
Speaker 1: can take away from other trade jewel deals that are
Speaker 1: moving through the system to get a sense of what
Speaker 1: might be coming with China, I don't know. I really
Speaker 1: think these all progressive at their own pace. I I
Speaker 1: have had for a long time now very limited expectations
Speaker 1: around some type of grand bargain between the US and China.
Speaker 1: I think what the US ultimately wants is for the
Speaker 1: Chinese not to be China. Uh. We we sort of
Speaker 1: we're asking them to do something that really isn't in
Speaker 1: their nature. And I think that was always going to
Speaker 1: make a really grand bargain. I mean, when it comes
Speaker 1: to ip the AFT right again into law. Yes, domestic subsidies,
Speaker 1: industry champions, all of those things that they really feel
Speaker 1: are inherent to their industrial policy. It's it's uh, they
Speaker 1: might they might give us, uh, you know, they might
Speaker 1: buy some more soybeans from US, But I don't think
Speaker 1: they're gonna change who they fundamentally are. That's a bridge
Speaker 1: too far from me. Uh. The way I've always thought
Speaker 1: about it is the uh, the impact of this deal
Speaker 1: will be proportional to how long it takes to get done.
Speaker 1: The faster it gets done, the less it really means.
Speaker 1: I wanted to talk about sort of what the ground
Speaker 1: zero of the trade war seems to be and it's
Speaker 1: it's manufacturing. Uh. And I was gonna read from from
Speaker 1: one of your notes. Uh. Globally, manufacturing is probably in recession,
Speaker 1: but we're watching for signs that it may spill over
Speaker 1: into broader consumption trends. It hasn't happened yet. This is
Speaker 1: a theme we've talked about a few times on this show. Um,
Speaker 1: this concern of when do we start to see this
Speaker 1: manufacturing weakness bleed into the consumer space. You know, we
Speaker 1: did see the Conference boards consumer Confidence index take a
Speaker 1: pretty big dip uh this week, granted still at a
Speaker 1: very elevated level expectations. Uh, an even bigger dip again,
Speaker 1: still elevated level. UM. I was reading a note from Nicholas,
Speaker 1: who we had on the show, and he he finds
Speaker 1: the craziest stats. But he was talking about Halloween consumption
Speaker 1: and how the National Retail Federation is expecting a dip
Speaker 1: in Halloween purchases and people actually believe it or not
Speaker 1: blaming it on the trade ward. I mean, is this
Speaker 1: enough to start worrying about the consumer? Obviously the job
Speaker 1: markets still strong, but where where would you look forward
Speaker 1: to see that sort of infection into the consumer space. Well,
Speaker 1: from my standpoint, it's really about how long it takes
Speaker 1: and and sort of coming back to your point, if
Speaker 1: you look at the size of the US external sector,
Speaker 1: you know, the the x sports sectors about ten twelve
Speaker 1: of the U s economy, manufacturing sector something like a
Speaker 1: just under under twenty. In isolation, those don't seem big
Speaker 1: enough to bring down the US economy, but it is
Speaker 1: the spillover effects. How long until the lock up in
Speaker 1: trade and supply chains spills over into manufacturing while we're
Speaker 1: seeing it, How long until the manufacturing slowdown spills over
Speaker 1: into now they you know that that person that works
Speaker 1: on the factory floor isn't going out to dinner. Now
Speaker 1: we've got waiters and waitresses being laid off. When does
Speaker 1: this begin to hit the consumption side? When does it really,
Speaker 1: in my mind, hit sort of labor and wage trends.
Speaker 1: We don't see that yet, but at the front end
Speaker 1: of some of the labor markets we don't see it.
Speaker 1: And say the weekly jobless claims which have remained very strong,
Speaker 1: but we do see it in some of the survey
Speaker 1: data where uh jobs hard to get minus easy to get. Uh,
Speaker 1: that's beginning to deteriorate the employment components of some of
Speaker 1: the surveys are beginning to deteriorate. So we're not in
Speaker 1: the recession camp. We don't see a ton of spill over,
Speaker 1: but we might be at the very front tip of
Speaker 1: that iceberg. And so that's what we're kind of keeping
Speaker 1: an eye on. That weekly jobless claims number, to me,
Speaker 1: is kind of the thing I look for first on
Speaker 1: Thursday mornings. I think there's kind of two interesting points
Speaker 1: to piggyback off of that in terms of the data
Speaker 1: and the divide between hard and soft data, or almost
Speaker 1: at the diametrically opposite position that we were at the
Speaker 1: start of the Trump presidency, when it's essentially consumer confidence
Speaker 1: gauges CEO confidence gauges were absolutely shooting up in the
Speaker 1: hard data didn't match if you actually look at what
Speaker 1: US industrial production is doing and the deceleration, which it's
Speaker 1: been real. Uh, it's nowhere near the level of deceleration
Speaker 1: and contraction you would assume is happening if you just
Speaker 1: looked at I S M and then to kind of use, well,
Speaker 1: what barometer could we use to maybe see when we
Speaker 1: get the spell over from manufacturing to services. I think
Speaker 1: they've made a great point look at the size of
Speaker 1: the US external sector. Why not look at economies that
Speaker 1: have a much bigger manufacturing and external sector and see
Speaker 1: when it spells over there, because it's not reasonable to
Speaker 1: suggest it's really going to hit US consumers before it
Speaker 1: materially hits European consumers, in particular Germany. It seems like
Speaker 1: we're constantly talking about these headwinds, either sentiment deteriorating or
Speaker 1: you think about the oil spike, Middle East tensions over
Speaker 1: caused by Iran. Also, we've talked about slowing economic growth overseas,
Speaker 1: particularly this week we sell weaker economic data out of Europe.
Speaker 1: Now you're dealing with all this impeachment talk. Trade continues,
Speaker 1: but the market is still near its record highs. I mean,
Speaker 1: the market has been very resilient. Do you get the
Speaker 1: sense that that's actually the tone from underlying investors that
Speaker 1: people feel good right now or do people still feel
Speaker 1: pretty downtrodden and that means there's room to move further? Well,
Speaker 1: I think again, coming back to the sentiment indicators, I
Speaker 1: do feel like they've weakened, and I think people are
Speaker 1: very worried. I think even people that don't understand or
Speaker 1: even know what an inverted yield curve. Ore could still
Speaker 1: stop you on the street and ask you what this
Speaker 1: means for their four oh one K. So I do
Speaker 1: think sentiment has has clearly uh deteriorated in that sense. Uh.
Speaker 1: I think more important, though, is what are the underlying trends?
Speaker 1: And I think this really has people concerned because because frankly,
Speaker 1: for all the news that's been buffeting the stock market,
Speaker 1: what we aren't talking a lot about are the earning strends,
Speaker 1: which frankly haven't been that great. It's been positive, but
Speaker 1: they've been the forward earnings estimates have been gradually deteriorating
Speaker 1: for about three or four quarters now, and valuations which
Speaker 1: we don't see as as exorbitant, but they're certainly not cheap.
Speaker 1: So all this stuff is buffeting the equity markets, but
Speaker 1: it's buffeting it in a context where those two kind
Speaker 1: of drivers of equity returns margin expansion or contraction in
Speaker 1: the underlying earnings, neither of those variables is really in
Speaker 1: the favor right now of equity holders. So I think
Speaker 1: you need to sort of look underneath the way and
Speaker 1: everything that's happening to see kind of those underlying trends,
Speaker 1: and they're stable, but they're not great. One really interesting
Speaker 1: point you brought up in your notes was, uh, and
Speaker 1: I'm quoting you here, you say we think central banks
Speaker 1: have run out of real ammunition. Uh. And you talk
Speaker 1: about the credit impulse, which and correct me if I'm
Speaker 1: bungling this definition. But it's basically the year over year
Speaker 1: growth in credit as a percentage of growth in GDP,
Speaker 1: and it's really been pinned at a very low level.
Speaker 1: The trend of it seems to just have flatlined, uh
Speaker 1: and and gone lower over the years, despite the FED
Speaker 1: returning to an easy posture. What do you think is
Speaker 1: behind that? So what you described as an even better
Speaker 1: definition of the credit impulse than what I would think,
Speaker 1: I I actually think a bit much. For me, the
Speaker 1: credit impulse is just the the uh, the impetus to
Speaker 1: want to take on more debt as interest rates get lower.
Speaker 1: So how much credit will really be sort of uh
Speaker 1: demanded as rates go lower? And so the point that
Speaker 1: I was really making is, you know, when interest rates
Speaker 1: go from four percent to two percent, CEO say, hey,
Speaker 1: I can fund that new plant, I can buy that
Speaker 1: new software, maybe I can hire some more workers. But
Speaker 1: when rates are pretty close to zero in some parts
Speaker 1: of the world if you haven't gone out and borrowed yet.
Speaker 1: As you get closer to the zero bound, does lowering
Speaker 1: interest rates really create this new demand for credit? That
Speaker 1: was really what I was getting at. And so I
Speaker 1: think the idea, you know, we we've heard this constantly,
Speaker 1: and this is one of the narratives I've pushed back
Speaker 1: on for about a year and a half now, was
Speaker 1: the idea that more a committy of central banks would
Speaker 1: somehow be good for the stock market. I don't necessarily
Speaker 1: think it's bad, but I think we've lost more credit impulse,
Speaker 1: and I actually think we're reaching a point where, uh,
Speaker 1: the more accommodative and the more frantic this begins to
Speaker 1: look super accommodative policy at ten years on now serves
Speaker 1: to undermine investor and consumer confidence more than it does
Speaker 1: to instill it. And those are the two reasons why
Speaker 1: I'm a little bit hesitant about thinking. I certainly think, hey,
Speaker 1: if you take rates lower and do a bunch of quwi, yeah,
Speaker 1: at the margin, we get some stimulus. I just don't
Speaker 1: think it looks anything like it did in previous episodes
Speaker 1: of this super accommodative policy. Sticking with the topic, of debt.
Speaker 1: I want to get your take on this phenomenon that
Speaker 1: we've been seeing. So Goldman Sacks has these two different
Speaker 1: baskets of stocks. One has stocks that are extremely highly levered,
Speaker 1: the other has stocks that have extremely strong and healthy
Speaker 1: balance sheets. And since June we've actually seen this sudden
Speaker 1: outperformance of these highly levered stocks right before the FED
Speaker 1: cut interest rates. To you, when you see these stocks
Speaker 1: that might be seen as low quality stocks doing better,
Speaker 1: I should say, then your higher quality a strong balance
Speaker 1: sheet companies. Is that sustainable or does it seem more
Speaker 1: like a head fake it will look. I think it's
Speaker 1: probably unsustainable in the sense that we're still going to
Speaker 1: have an economic cycle, and ultimately, when the credit cycle turns,
Speaker 1: those names are going to get punished the most. I
Speaker 1: do think that as you take interest rates lower and
Speaker 1: lower than natural compounding companies that aren't as strong financially
Speaker 1: but they have sort of this growth bent, that that
Speaker 1: growth is is further out there into the future. You know. Uh,
Speaker 1: the unicorns have all been kind of taking it on
Speaker 1: the chin in recent weeks. Uh. The idea that you're
Speaker 1: not discounting those cash flows as much gives these levered
Speaker 1: companies more leeway. I think investors give them a little
Speaker 1: bit more leeway. But Sarah, that can't last forever. Ultimately,
Speaker 1: we don't know when the credit cycle will begin to bite,
Speaker 1: but it will come back at some point, So no,
Speaker 1: it can't last forever. It's probably important to note that
Speaker 1: this isn't necessarily being validated by the bond market right now.
Speaker 1: For instance, the you know, the riskiest credits triple cs,
Speaker 1: they've been underperforming in high yield UH you know, a
Speaker 1: clear lagger this year, but especially in the last few weeks,
Speaker 1: so credits supposed to be the smart money, and those
Speaker 1: guys are going, hey, like, maybe you're just reevaluating the
Speaker 1: upside prospects and the equity. But we aren't necessarily very
Speaker 1: convinced here as the ones first in the UH first
Speaker 1: in the recoup line. Luke, you write a lot about
Speaker 1: options in the volatility market, and we're talking a little
Speaker 1: bit earlier about it, and you're saying that there's there's
Speaker 1: just really nothing to talk about there. There's this heightened
Speaker 1: uncertainty with the impeachment and the trade tensions. The VIX
Speaker 1: is still kind of where it's been fifteen sixteen, you know,
Speaker 1: I was looking at the skew the option skew on
Speaker 1: the spy ETF a little elevated, not really anything to
Speaker 1: write home about. Is that surprising to you? Um? And
Speaker 1: how would you you know, how would you explain a
Speaker 1: given uh, the scary headlines floating around. So the fun
Speaker 1: thing about looking at skew now is it's been sticky
Speaker 1: high for a while. Just looking at put call skew
Speaker 1: out of the money. And this is because just how
Speaker 1: especially in and this is especially acute for the SMP five,
Speaker 1: just very like market structure has mattered a ton. And
Speaker 1: what we have more and more, especially as we're in
Speaker 1: a very choppy range bound market, is institutional call overwriting.
Speaker 1: You know, you own the stock, then you sell the
Speaker 1: you know, five percent out of the money call to
Speaker 1: collect some premium along the way. So that's something that's
Speaker 1: going to keep a lid on the applied volatility of
Speaker 1: calls relative to put that's been a pretty steady dynamic.
Speaker 1: What you have, then, on the other side, is look
Speaker 1: at wings pricing, So look at essentially the implied volatility
Speaker 1: of way out of the money calls or puts versus
Speaker 1: closer to the money stuff. And that's where you see,
Speaker 1: and I think this is also a reflection of that
Speaker 1: we've been trading in a arrange. People are essentially pricing
Speaker 1: and well, we're trading in a arrange. I'm going to
Speaker 1: protect against the next five percent, not in the next
Speaker 1: ten percent, because that's the way the market's been lately.
Speaker 1: So I think it's really a market structure story why
Speaker 1: options have been as not exciting as you might expect
Speaker 1: them to be in this instance. But it makes sense
Speaker 1: when you put these pieces together. Dave Spending up forwards,
Speaker 1: I like how you describe something earlier. You said you
Speaker 1: need to look underneath the wave. So look underneath the
Speaker 1: headline risks, and look at what the economy is actually doing,
Speaker 1: the fundamentals, the corporate profits. How much of a risk
Speaker 1: do earnings downgrades revisions to the downside actually present going forwards?
Speaker 1: I mean, sure, we always see this trend at the
Speaker 1: end of the year where you start to see company's
Speaker 1: guide lower for but we're still expecting double digit at
Speaker 1: ten percent growth for So is it possible that markets
Speaker 1: or investors will be taken by surprise should this come? Uh,
Speaker 1: that's actually what I think will happen. I don't think
Speaker 1: they'll be taken by surprise. I think it's going to
Speaker 1: be much more gradual than that. So when we look
Speaker 1: at kind of the year over year numbers for the SNP,
Speaker 1: it looks like plus two to plus four for calendar
Speaker 1: year two thousand nineteen. As you mentioned, ten percent is
Speaker 1: about the bottom up estimate for next year and another
Speaker 1: ten percent. This strikes me as a bit optimistic, and
Speaker 1: for me, the basic math is when you take companies,
Speaker 1: you know, these these megacap companies, multinational companies uh generally inaggregate,
Speaker 1: I don't see how they grow top line revenue growth
Speaker 1: significantly faster than nominal global growth. Remember, revenue and earnings
Speaker 1: is a nominal concept, so nominal global growth is probably
Speaker 1: in the five percent neighborhood. We're probably growing at three
Speaker 1: percent reel and call it two percent inflation. So to me,
Speaker 1: top line revenue growth is probably five or six percent.
Speaker 1: Then you have to look at profit margins. You can
Speaker 1: grow earnings much faster than the bottom line if margins
Speaker 1: are expanding expanding, but if margins are already fairly high.
Speaker 1: So I don't see how we translate relatively slow top
Speaker 1: line revenue growth into significantly higher bottom line earnings growth.
Speaker 1: So my guest this year again we're at two to
Speaker 1: four percent, will probably come in around that, maybe just
Speaker 1: light of that. For next year ten percent, the year
Speaker 1: after that ten percent. My guess is they'll behalf of
Speaker 1: both of those. I think earnings are gradually grinding higher,
Speaker 1: but I don't think they're going to be anywhere near
Speaker 1: what the bottom up estimates are in the next two years.
Speaker 1: And this all leads to sort of one of your
Speaker 1: main thesis is right now thesis is scs. Okay, all right,
Speaker 1: I was an English major. I should know suffing. But Dave,
Speaker 1: you say that we think equity allocations should be positioned cautiously,
Speaker 1: but we don't like the term defensives. Obviously, utilities, consumer
Speaker 1: staples are peered very much like crowded trades, very high
Speaker 1: valuations earlier this year. So how how do you be cautious, uh,
Speaker 1: with an equity portfolio? Now if those sort of you know, textbooks,
Speaker 1: safe avens are kind of a little risky right now. Yeah,
Speaker 1: so the caution really comes not from our base case, which,
Speaker 1: like I said, I think the market probably goes higher,
Speaker 1: grinds higher, but I don't like the risk adjusted trade off.
Speaker 1: I don't like the idea that I always ask the
Speaker 1: question what happens if I'm wrong, and I usually assume
Speaker 1: that I'm wrong. So if our if our base case
Speaker 1: is wrong and things turn out to be better than
Speaker 1: we expect, there's some upside to the market. But again,
Speaker 1: valuations are already elevated, not exorbitant, but elevated. Profit margins
Speaker 1: are already elevated. So how much upside is there? There's
Speaker 1: probably some there, but not a not an enormous amount.
Speaker 1: What about the downside? What if we're wrong and we
Speaker 1: do go into recession. It's not our base case, but
Speaker 1: it's what's something we've we've become much more worried about.
Speaker 1: If we're wrong and we do go into recession, there's
Speaker 1: far more downside than there is upside, And so that's
Speaker 1: kind of why we're cautious. When you get back to
Speaker 1: those sector plays. What I was really kind of getting
Speaker 1: at is I like cautious better than defensive, because when
Speaker 1: you say defensive, people here staples and utilities, and I
Speaker 1: always think it's really hard to be defensive by buying
Speaker 1: the most expensive thing in the market. That's not kind
Speaker 1: of the you know, the classic notion of margin of
Speaker 1: safety and I worry that again, this is one of
Speaker 1: the by products of central bank policy. You suppress rates,
Speaker 1: and you make anything that has yield or or looks
Speaker 1: stable or bond like you elevate. It's its valuations. And
Speaker 1: I think it's a little worrisome when investors ask us, hey,
Speaker 1: should I be replacing my bond portfolios with utilities? Because
Speaker 1: I can pick up an extra fifty basis points or
Speaker 1: a hundred basis points. But you're fundamentally moving from high
Speaker 1: quality bonds which have four or five percent fall two
Speaker 1: equities that have even low volatility equities might be twelve
Speaker 1: to fifteen. You're fundamentally changing your risk profile and picking
Speaker 1: up fifty basis points to do it. That that's dangerous
Speaker 1: to me. So how do we look at it? Uh?
Speaker 1: Low ball equity, maybe some options selling a return back
Speaker 1: to value. Perhaps there are ways to be cautious in
Speaker 1: your equity portfolio with outloading into sort of the defensive names.
Speaker 1: All right, one last thing before we get to the
Speaker 1: crazy things, uh, Dave, and this is to put your
Speaker 1: hat on as chair of the steering committee for the
Speaker 1: Active Managers Council. So you're in an elevator A short
Speaker 1: elevator trip with a retiree who's loaded up on on
Speaker 1: passive index funds. What's what's your pitch? Uh, Well, it's
Speaker 1: important to note that the Active Managers Council, it's an
Speaker 1: adversary group underneath the Investment Advisors Association, but it is
Speaker 1: in no way sort of uh anti passive, where we
Speaker 1: we think passive is great. What we're really pushing back
Speaker 1: against is sort of this unbalanced narrative, Uh, that sort
Speaker 1: of active management has been vilified, and we would say
Speaker 1: unjustifiably been vilified. We we think that this is a
Speaker 1: false dichotomy that's presented to investors, that kind of passive
Speaker 1: is good and active is bad. And I think when
Speaker 1: you look at the key arguments, and we've done some
Speaker 1: research on this, people will say, well, active management hasn't worked,
Speaker 1: and they'll point to some scorecards, and we would say
Speaker 1: the results of the scorecards are very mixed. Yes, in
Speaker 1: large cap us equities it's been quite a struggle, but
Speaker 1: it's a much more mixed result in in other categories. Uh.
Speaker 1: You'll hear that active management on average can't outperform because
Speaker 1: of sort of this zero sum argument. And it turns
Speaker 1: out that the zero sum argument doesn't really apply given
Speaker 1: the way that we measure the number of managers who outperformed.
Speaker 1: The average dollar can't generate excess return, but the average
Speaker 1: manager could. And then the third narrative that we pushed
Speaker 1: back on is this idea that even if active managers
Speaker 1: could outperform, they're really hard to pick. And we don't
Speaker 1: think that that it's a needle in the haystack exercise.
Speaker 1: There are some key uh indicators that you can look
Speaker 1: at that will not guarantee you pick a great manager.
Speaker 1: Both certainly will improve your odds. So the idea of
Speaker 1: the active Managers counsels to is to make a more
Speaker 1: balanced narrative. But it's in no way to throw passive
Speaker 1: under the bus, which many of the council members are
Speaker 1: big fans of, including us. We have passed exposure good stuff.
Speaker 1: I will say it's a little bit long for an
Speaker 1: elevator pictures. I think, I don't. I don't even think
Speaker 1: he's talking to the older tyree. That's just twenty years
Speaker 1: of commissions. He's walking right by looking well, we're glad
Speaker 1: to have him. Uh. Now for the crazy stuff, Uh, Sarah,
Speaker 1: what is the craziest thing you ever saw in markets
Speaker 1: this week. Alright, I have to give a hat tip
Speaker 1: to Bildonna high Arch who was on the show before,
Speaker 1: because she did help me out with this one. It
Speaker 1: was just it was pretty crazy, so I had to
Speaker 1: go with it. Um. So, this is the headline of
Speaker 1: a story from the New York Post. It says, bond
Speaker 1: King Bill Gross and postage stamp feud with rocker sons.
Speaker 1: So for one thing, now rocker son, now you know
Speaker 1: his son. His son is a rocker, So now you
Speaker 1: know that Bill Gross is son. Um is actually a
Speaker 1: pretty big rocker. He's a musician who has do songs
Speaker 1: for Whiz Khalifa, so that can be appreciated. Um. But
Speaker 1: he is in a fight with him over a collection
Speaker 1: of postage stamps. Um. So not exactly. I wish Bill
Speaker 1: was still writing in his monthly commentaries that would be
Speaker 1: able to read about that. Yeah, he was writing monthly
Speaker 1: commentaries about his feud with his quote unquote rockers son.
Speaker 1: Be pretty good, Luke, Can you top Bill Gross in
Speaker 1: a no? But I but I will give a shout
Speaker 1: out to us. One of the best things I've read
Speaker 1: this week from Bloomberg's Best Stanton, and it's essentially saying,
Speaker 1: you know, what is the price of a treasury? Well,
Speaker 1: it depends on whom you ask. And she pointed out
Speaker 1: that at three big bond mutual funds had three different
Speaker 1: values for one bond. UH. You know, the Bond Fund
Speaker 1: of America had priced at one oh one point two
Speaker 1: essentially another fund at one oh one point one eight
Speaker 1: to another fund at one oh one point one seven
Speaker 1: five eight. So it's essentially showing that, you know, the
Speaker 1: little bit of discretion that has allowed in markets will
Speaker 1: allow you know, UH funds to to value things differently.
Speaker 1: If I had to do something different, I'd be it's
Speaker 1: not quite in markets. But Joe Wisenhal's explanation of how
Speaker 1: repo markets are a lot like trying to buy marijuana
Speaker 1: when you don't have any cash on you would have
Speaker 1: been my runner up and not quite Mark. That one
Speaker 1: was pretty good. Dave. How about you, you've seen anything
Speaker 1: crazy this week? Well? I think Sarah's one is pretty crazy.
Speaker 1: If if Bill Gross is fighting tooth and nail over stamps,
Speaker 1: then we know interest rates are pretty well not a
Speaker 1: lot of yield out there, not a lot of yield
Speaker 1: out there to find If we're fighting over stamps at
Speaker 1: this point was a collection of postage stamps. He's got
Speaker 1: the most valuable collection in the world. I believe that's
Speaker 1: he is a collector, right, that's right. Remember. Uh So
Speaker 1: one of the things that sort of crossed my terminal
Speaker 1: was I think it was a Bloomberg article and maybe
Speaker 1: you've discussed it. It's been in the water supply. But
Speaker 1: it was announced earlier this week that uh, Facebook has
Speaker 1: entered into an agreement to buy a firm called Ctrl Labs.
Speaker 1: And you you may have seen this. What what's crazy
Speaker 1: and sort of interesting about Ctrl Labs is that it's
Speaker 1: a firm that basically uses software and hardware. I think
Speaker 1: it's a bracelet kind of a wearable to monitor kind
Speaker 1: of the neurons and the neurological activity in your brain
Speaker 1: and then use that to send a signal to your computer.
Speaker 1: Uh and the use of an avatar, so basically sending
Speaker 1: a signal uh to your computer kind of through your
Speaker 1: thought waves. That's a little crazy, But then I had
Speaker 1: to put it in the context of what Facebook is
Speaker 1: going through. Facebook on a daily basis is being dragged
Speaker 1: up to Capitol Hill, uh to deal with antitrust, privacy issues,
Speaker 1: election interference and everything else, and they're basically going to
Speaker 1: have to go back to their same regulators and ask
Speaker 1: them for permission to buy a company that is basically
Speaker 1: leading in the space of thought control. This strikes me
Speaker 1: as perhaps a little bit worried. Yeah, and so the
Speaker 1: way that I think about it, and I should put
Speaker 1: the compliance disclosure in, we don't do buy soil and
Speaker 1: individual stocks. I have no idea what it means for Facebook.
Speaker 1: I don't I don't pretend to even have a Facebook account,
Speaker 1: but I do think it's it's sort of fascinating to
Speaker 1: see a company like Facebook beginning to get into sort
Speaker 1: of the realm of kind of mind control. And I
Speaker 1: don't for one second believe right now it's initially your
Speaker 1: mind controls the computer. I suspect at some point that
Speaker 1: highway will go in the other direction. When I think
Speaker 1: within the context of what Facebook is going through, I
Speaker 1: think it's a pretty crazy and brash move. Absolutely. I
Speaker 1: wonder if those brain signals get sent to advertisers to
Speaker 1: Wonder wants potato chips. Again. I don't remember the name
Speaker 1: of it, but it sounds like I remember early on
Speaker 1: the show we talked about a startup that Tesla was
Speaker 1: a part of and they did a very similar thing.
Speaker 1: It's a brave new world, all right, I'll do mine quickly. Uh.
Speaker 1: Credit Swiss stock has had a rough week. I mean
Speaker 1: all European bank stocks have had a rough week, to
Speaker 1: be honest, most week so rough for European bank talks.
Speaker 1: Credits with Swiss is one of the leaders on the
Speaker 1: down side, and I have to think it has something
Speaker 1: to do with this crazy story. They had a top
Speaker 1: banker who defected over to UBS, and then the guy
Speaker 1: figured out that they had hired a private detective to
Speaker 1: follow him around and make sure he wasn't poaching any
Speaker 1: of this. So it's turned into this big scandal that
Speaker 1: they're worried the CEO might have to step down over it.
Speaker 1: It's uh, it's pretty esting, Sarah. I think we chip in.
Speaker 1: Maybe we could get a detective to follow Luke around.
Speaker 1: I think we could see if he's really fast, pretty
Speaker 1: easy to follow, you don't know what looks doing outside
Speaker 1: of the office, and get a detective to check on it.
Speaker 1: I think that's it for the week. I think it is.
Speaker 1: Dave Blafferty Lucalla, thanks so much for joining us. What
Speaker 1: goes up We'll be back next week. Until then, you
Speaker 1: can find us on the Bloomberg Terminal website and app,
Speaker 1: or wherever you get your podcasts. We'd love it if
Speaker 1: you took the time to rate interview the show on
Speaker 1: Apple podcast so more listeners can find us. And you
Speaker 1: can find us on Twitter. Follow me at at Sarah Ponzeck,
Speaker 1: Mike is at reag Anonymous, Our guest Dave Lapperty is
Speaker 1: at Lapperty the Texas, and Luke Kawa is at l
Speaker 1: j Kawa. You can also follow Bloomberg Podcasts at podcasts.
Speaker 1: What Goes Up is produced by topur Foreheads. The head
Speaker 1: of Bloomberg podcast is Francesca Levie. Thanks for listening, See
Speaker 1: you next time.