WEBVTT - Surveillance: In The Long Term, Cash Is Trash, Sowerby Says 0:00:00.080 --> 0:00:13.040 Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene 0:00:13.480 --> 0:00:17.560 Jay Lee. We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:34.000 Bloomberg dot Com, and of course on the Bloomberg. I'm 0:00:34.040 --> 0:00:35.600 really pleased to say that Kate Moore is in the 0:00:35.640 --> 0:00:38.879 studio with us here in New York, Blank Rock Investment Institute, 0:00:38.960 --> 0:00:42.880 chief equity strategist, Stocks over Bonds. I'm sure she does, 0:00:42.960 --> 0:00:44.360 and we're going to get into that in a moment. 0:00:44.400 --> 0:00:46.520 I just want to begin Kate with saying good morning, 0:00:46.880 --> 0:00:49.320 Good morning, welcome to the crazy house here in New 0:00:49.400 --> 0:00:52.960 York and Brussels, to Bloombag Surveillance right here. It's worth Tom, 0:00:53.000 --> 0:00:56.640 I don't always say stocks over bonds. There are environments 0:00:56.680 --> 0:01:01.240 where I can imagine fixing commertine return being okay. But 0:01:01.320 --> 0:01:03.440 you know, for most of the investors that we speak 0:01:03.480 --> 0:01:06.160 to you you over the time horizons they invest in, it 0:01:06.240 --> 0:01:09.640 pays to kind of weather their volatility in stocks and 0:01:09.720 --> 0:01:11.360 to really you know, if you're going to shift in 0:01:11.400 --> 0:01:14.280 sort of tilt your portfolio more towards quality and more 0:01:14.319 --> 0:01:17.360 in certain times it just still pays to stay invested. 0:01:17.440 --> 0:01:20.920 So um, you know, we are continuing to recommend stocks 0:01:20.920 --> 0:01:24.600 over bonds, although as we noted in the surveillance, lower conviction, 0:01:24.760 --> 0:01:27.039 let's just develop your framework for thinking about the global 0:01:27.040 --> 0:01:30.119 economy and the global market at the moment. This isn't 0:01:30.120 --> 0:01:32.520 the story of the last month. It's the story of 0:01:33.040 --> 0:01:36.840 eighteen for the global economy. Deceleration in Europe, deceleration in 0:01:36.920 --> 0:01:39.400 China as well. Do you see that catching up with 0:01:39.400 --> 0:01:41.360 the United States? I don't see it in the data yet. 0:01:41.360 --> 0:01:43.320 Do you see it in the data next year? Well, 0:01:43.520 --> 0:01:46.000 deceleration from some of the gride of growth we had 0:01:46.040 --> 0:01:48.160 in two thousand eighteen, but nothing that's going to really 0:01:48.240 --> 0:01:50.880 raise a flag. Look, you know, as much as people 0:01:50.920 --> 0:01:54.280 like to wring their hands and have great debate over 0:01:54.880 --> 0:01:57.880 you know, recession probabilities over the next twelve months, it 0:01:57.920 --> 0:02:01.360 seems extremely unlikely in our view and also in our 0:02:01.880 --> 0:02:05.320 analytical assessment that the U S could enter in any 0:02:05.320 --> 0:02:08.560 types of recession in the near term. That said, we 0:02:08.600 --> 0:02:11.520 are talking about a slower growth rate next year and 0:02:11.520 --> 0:02:14.760 that has implications. So you know, our view is that 0:02:15.120 --> 0:02:17.560 you have to be much more thoughtful about how you 0:02:17.560 --> 0:02:20.280 construct your portfolio over your head, that you need to 0:02:20.280 --> 0:02:22.560 be a little bit more tactical and that you're gonna 0:02:22.600 --> 0:02:25.000 have to be taking advantage of opportunities when prices and 0:02:25.000 --> 0:02:27.920 things get dislocated. Okay, but if you have a slower 0:02:27.960 --> 0:02:31.680 growth rate, which I would suggest of our audience agrees 0:02:31.720 --> 0:02:35.720 with you on Kate more, does that make growthiness of 0:02:35.800 --> 0:02:41.000 a greater premium and value? Look, our biases that yes, 0:02:41.000 --> 0:02:43.000 there's still going to be a bid for assets that 0:02:43.040 --> 0:02:45.760 can grow even in a slower growth environment. You know, 0:02:45.840 --> 0:02:47.840 the funny thing is that we've had this like almost 0:02:47.840 --> 0:02:51.400 ten year period where growth has continued to have a 0:02:51.400 --> 0:02:54.360 bid and value has not really been able to catch 0:02:54.360 --> 0:02:56.480 a lot of attention. The truth of the matter is 0:02:56.560 --> 0:02:59.200 that what falls into value today, some of it is 0:02:59.240 --> 0:03:03.080 structurally in hair and not everything that's cheap is cheap unfairly. 0:03:03.320 --> 0:03:05.240 Some of the stuff that's cheap deserves this. So let 0:03:05.240 --> 0:03:07.720 me ask you this question of banks part of that story. 0:03:07.760 --> 0:03:09.680 Do they deserve to be where they are? Because this 0:03:09.880 --> 0:03:12.440 quiet vicious sell off happening and I don't think enough 0:03:12.440 --> 0:03:15.400 people are talking about It's city is on a seven 0:03:15.480 --> 0:03:18.919 day losing streak coming into today's session. It's done about 0:03:18.919 --> 0:03:24.080 fourteen over those seven days. That is brutal. It's that justified. 0:03:24.440 --> 0:03:27.799 It's totally brutal, in part because I had been significantly 0:03:27.800 --> 0:03:30.840 overweight the banks and here, yeah, I know, I had 0:03:30.880 --> 0:03:33.800 good company and getting this dead wrong. And you know, 0:03:33.840 --> 0:03:36.000 it seemed like there was this perfect environment from growth 0:03:36.040 --> 0:03:38.840 and policy and less regulatory pressure and better cash return, 0:03:39.040 --> 0:03:42.120 and you know, none of that seemed to really matter. 0:03:42.560 --> 0:03:45.040 And today, you know, despite the fact that we are 0:03:45.080 --> 0:03:47.920 in what we think is the very worst case scenario, 0:03:48.000 --> 0:03:51.640 stable growth but likely I continue to expanding economy. The 0:03:51.680 --> 0:03:54.160 regulatory pressure is still easing. These banks are still in 0:03:54.280 --> 0:03:58.560 very good shape. Their balance sheets look awesome. No one cares, 0:03:58.560 --> 0:04:01.760 and they're getting sold off vision slee as the expectation 0:04:01.800 --> 0:04:04.200 that the FETE is going to pause that really takes 0:04:04.200 --> 0:04:06.520 hold across the investor base. So the story to be 0:04:06.520 --> 0:04:09.400 bullish the banks, I keep getting told the same story, 0:04:09.400 --> 0:04:11.920 to be bullish the banks. And my question really is 0:04:12.040 --> 0:04:14.320 when our investors are going to start responding differently to 0:04:14.360 --> 0:04:17.279 the same story they experienced in they don't necessarily have to. 0:04:18.560 --> 0:04:19.919 I think we're going to go back to the question 0:04:19.920 --> 0:04:21.880 you just asked me a moment ago. Does growth continue 0:04:21.920 --> 0:04:24.960 to get a bid in this in this environment. And 0:04:25.000 --> 0:04:27.120 I think that's right, Like, even though the banks are 0:04:27.120 --> 0:04:29.719 in good shape, they're not going to be shooting the 0:04:29.800 --> 0:04:31.800 lights out when it comes to growth. And so I 0:04:31.839 --> 0:04:33.719 think there's gonna be a preference for sectors and for 0:04:33.760 --> 0:04:37.800 industries and companies that can really put up stronger numbers, 0:04:38.120 --> 0:04:41.240 not just solid numbers, but stronger numbers at this point 0:04:41.279 --> 0:04:43.200 in the cycle. And I'm not sure banks are there 0:04:43.680 --> 0:04:46.760 kit more. What is a mergers and acquisitions type to do? 0:04:46.920 --> 0:04:49.440 What's a CFO to do? I mean, if you're gonna 0:04:49.440 --> 0:04:52.680 have slower growth, you've got to buy revenues. So this 0:04:52.800 --> 0:04:54.919 word synergy comes up for next year. I mean it 0:04:54.960 --> 0:04:56.880 just keeps on going, right. Well, I think if you 0:04:56.880 --> 0:04:58.680 have slower growth, you've got to do a couple of things. 0:04:58.800 --> 0:05:02.160 Maintain control of your costs, be really thoughtful about your 0:05:02.200 --> 0:05:06.320 investment program, make sure your allocated capital internally to those 0:05:06.880 --> 0:05:08.719 parts of your business that they had the ability to 0:05:08.800 --> 0:05:11.320 grow through all parts of the cycle. And You're right, 0:05:11.400 --> 0:05:13.760 in some cases you're gonna have to think about acquisitions. 0:05:14.080 --> 0:05:17.040 And valuations have come down across the board. I would 0:05:17.040 --> 0:05:20.040 suggest that valuations and private markets have not come down 0:05:20.520 --> 0:05:23.880 as much, so if you're thinking about acquiring assets, um, 0:05:23.920 --> 0:05:26.680 you'd have to think about you know, public looking at 0:05:26.720 --> 0:05:28.359 it a bit more of a discount than the private 0:05:28.400 --> 0:05:30.560 stuff at this point. Okay, more great to can't shop 0:05:30.600 --> 0:05:34.560 with you Blank Look Institute Investment Institute Chief Equity Strategists. 0:05:34.560 --> 0:05:36.479 You have a wonderful Christmas. If we don't see you before, 0:05:36.600 --> 0:05:52.360 Thank you, Mary, Mary. I want to bring in David 0:05:52.400 --> 0:05:57.159 Sowerby and Cora Managing director and portfolio manager. David, it 0:05:57.240 --> 0:06:02.080 feels like a growth scare. At how different is it? 0:06:02.080 --> 0:06:05.320 It's very similar to late two thousand fifteen early two 0:06:05.360 --> 0:06:09.640 thousand sixteen. Stock prices are trading about the same valuation 0:06:09.640 --> 0:06:12.039 as they were in February of sixteen at the bottom, 0:06:12.320 --> 0:06:14.640 whether it's on a price to earnings or as Tom 0:06:14.680 --> 0:06:16.919 knows quite well, how I want to value it on 0:06:16.960 --> 0:06:20.360 a free cash flow yield basis. Sentiment is getting very 0:06:20.440 --> 0:06:24.040 washed out. The dollar was strong in in two thousand 0:06:24.160 --> 0:06:27.560 fifteen and then it retreated. It is similar, and I 0:06:27.600 --> 0:06:31.680 think because it's similar, it's becomes an interesting buying opportunity. John. 0:06:31.720 --> 0:06:34.080 That's equity talk that you're hearing there. It's different than 0:06:34.120 --> 0:06:35.920 what you cover on the real we can can see 0:06:35.960 --> 0:06:38.200 the equity, so you can talk about you can do 0:06:38.240 --> 0:06:40.240 that with David Sarby. I also want to point out 0:06:40.279 --> 0:06:44.960 the press gathered here in Brussels awaiting Prime Minister May 0:06:45.040 --> 0:06:48.920 the British flags and one EU flag as well, position 0:06:49.000 --> 0:06:51.680 behind the lectern and a blue backdrop, and we'll look 0:06:51.680 --> 0:06:54.200 for that from Prime Minister May here in a moment. 0:06:54.279 --> 0:06:57.480 David Sarby, we always talk about the focus, focused, focus 0:06:57.560 --> 0:06:59.960 of all of the media, and that's the big stuff. 0:07:00.320 --> 0:07:02.400 You love to go mid you love to go small. 0:07:02.800 --> 0:07:05.680 I want to talk about mid caps. Have mid caps 0:07:05.680 --> 0:07:08.880 and joined the correction or have they shown their usual 0:07:09.080 --> 0:07:13.400 historic resiliency. They have more bruises this year than large 0:07:13.480 --> 0:07:16.520 cap the Russell two thousand to go even smaller down 0:07:16.680 --> 0:07:20.280 six percent year to date, mid caps a similar number. 0:07:21.360 --> 0:07:23.560 It's been a it's been a tough environment. Yet at 0:07:23.560 --> 0:07:26.520 the same time, when GDP growth is better than three 0:07:26.880 --> 0:07:30.480 on an inflation adjusted basis, that's a good backdrop for 0:07:30.560 --> 0:07:33.400 earnings and a good backdrop for the small caps to 0:07:33.600 --> 0:07:38.080 re emerge. Do you agree that cash is an asset? No, 0:07:38.960 --> 0:07:40.760 not in a long term and a long term time 0:07:41.160 --> 0:07:45.160 cash is trash. It is a dragon portfolios, but two 0:07:45.160 --> 0:07:48.600 thousand eighteen will be that year when cash beats everything 0:07:48.840 --> 0:07:53.080 large cap, small cap, US, non US bonds. Cash is 0:07:53.320 --> 0:07:54.960 a nice thing to have this year, but in the 0:07:55.040 --> 0:07:58.480 long term cash is trash. It's interesting the justice Payperl 0:07:58.600 --> 0:08:00.760 stots to fall in love with cash, and my colleague 0:08:00.920 --> 0:08:04.160 Luke Care of Bloomberg brought this up as well. Cash 0:08:04.240 --> 0:08:06.800 was heighted at the start of the year in January, 0:08:06.880 --> 0:08:10.400 and then that was the thing that outperformed. Now everyone's 0:08:10.400 --> 0:08:13.960 in love with cash, and now duration starts to outperform. 0:08:14.120 --> 0:08:18.120 So here's the here's the key. In January, investor sentiment, 0:08:18.280 --> 0:08:21.960 individual investor sentiment was more than fifty bullish when nobody 0:08:22.000 --> 0:08:27.080 liked cash. As of yesterday, investor sentiment was forty percent barrish, 0:08:27.160 --> 0:08:30.160 above the long term average. When people want more cash. 0:08:30.400 --> 0:08:33.840 From a contrarian perspective, it's a good time to be 0:08:33.960 --> 0:08:38.080 a selective, selective net buyer. So selective, Well, let's be 0:08:38.160 --> 0:08:40.520 more specific. Do you like the banks here? The banks 0:08:40.520 --> 0:08:42.960 have been totally hammet of the last couple of weeks 0:08:43.000 --> 0:08:47.480 has been pretty ugly mediocre. How's that for a portfolio 0:08:47.520 --> 0:08:51.120 manager view? Uh? Citizens financial? I think that that's a 0:08:51.200 --> 0:08:54.679 regional bank that has good loan growth, lower charge offs. 0:08:54.720 --> 0:08:57.360 That that's interesting. But for the most part, the bank 0:08:57.480 --> 0:08:59.840 story this year, which was to call everybody wanted to 0:08:59.840 --> 0:09:04.760 make hasn't worked. David, with with your experience and and 0:09:04.880 --> 0:09:09.120 particularly with your institutional service to pension funds and giving 0:09:09.160 --> 0:09:14.040 them advice. How do you handle a General Electric? Let's 0:09:14.080 --> 0:09:18.040 say you own it, you've enjoyed the losses, how do 0:09:18.080 --> 0:09:20.160 you do that. I'm not talking about some trade or 0:09:20.240 --> 0:09:23.000 somebody like Doug Casts. It's in and out and all that. 0:09:23.120 --> 0:09:27.880 I'm talking about mom and pop they own ge oops. 0:09:27.920 --> 0:09:32.360 How do you handle that? It's I think it's it 0:09:32.400 --> 0:09:35.839 goes back to two thousand when when a high profile 0:09:36.160 --> 0:09:39.840 CEO leaves a company on a high note, that's usually 0:09:39.920 --> 0:09:43.800 a better time to sell than buy hindsight, but that's 0:09:43.800 --> 0:09:45.720 been the story with General Electric. You and I have 0:09:45.760 --> 0:09:49.200 talked about other conglomerates which have been better return on 0:09:49.320 --> 0:09:53.959 capitol companies. Honeywell that that's been a so much better 0:09:53.960 --> 0:09:56.480 play than than General Electric. And I think that's still 0:09:56.520 --> 0:09:59.160 the story today. Okay, so u T Actually NIT of 0:09:59.160 --> 0:10:02.719 Technologies has to break up into three David Sowerby companies 0:10:03.080 --> 0:10:05.080 for you that's a good thing. Do you buy all three? 0:10:05.160 --> 0:10:07.280 What do you do well? One thing you want to 0:10:07.280 --> 0:10:10.400 watch is where does the CFO go in the breakup? 0:10:10.440 --> 0:10:13.440 And and where the CFO goes is usually because they're 0:10:13.440 --> 0:10:16.640 pretty got some good inside baseball that that's a good 0:10:16.679 --> 0:10:18.559 place to be. And in the case of Honeywell, they 0:10:18.559 --> 0:10:24.679 spun off their their home security business Residio symbol are easy. 0:10:24.800 --> 0:10:27.400 I I think that's an interesting play as a spinoff 0:10:27.480 --> 0:10:31.200 on on Honeywell. What do they do? What does residy 0:10:31.320 --> 0:10:34.560 they are? You can control your heat, you're you're lighting 0:10:34.600 --> 0:10:37.440 in from a remote in your house. They're very good 0:10:37.440 --> 0:10:40.760 on home security for a person like me who writes 0:10:40.880 --> 0:10:44.600 checks and doesn't do it himself. Residio uses professional service 0:10:44.640 --> 0:10:46.640 people to put that all together. And there are a 0:10:46.679 --> 0:10:50.360 recent spinoff out of Honeywell. When was the last time 0:10:50.400 --> 0:10:55.120 you can't about Brexit? I remember when Brexit the vote 0:10:55.160 --> 0:10:57.840 the day after the market went down initially and then 0:10:57.880 --> 0:10:59.880 and then it got right back on its bicycle and 0:11:00.080 --> 0:11:04.040 continue to do well. And I think this is maybe 0:11:04.040 --> 0:11:09.120 too simple. No wonder the UK wants to depart that 0:11:09.200 --> 0:11:13.079 they don't want to be dictated by uncompetitive countries. Whether 0:11:13.120 --> 0:11:17.120 it's Belgium, France, Italy, you name it, and the u 0:11:17.200 --> 0:11:20.520 K is is the eighth most competitive country on this 0:11:20.679 --> 0:11:23.760 planet and the rest of their peers there are simply 0:11:23.800 --> 0:11:27.320 not maybe Germany or Switzerland. That's what they have an 0:11:27.360 --> 0:11:30.680 issue with. John. The single most important conversation I've had 0:11:30.679 --> 0:11:33.160 on this junket was with a guy that runs the 0:11:33.280 --> 0:11:38.480 national health system. Uh. My recollection is Matthew Hancock is 0:11:38.520 --> 0:11:42.520 his name, and he was heated John that he's a remainer, 0:11:42.640 --> 0:11:45.640 he's an elitist London, you know, the usual thing in 0:11:45.679 --> 0:11:49.040 his case, directly supporting the Prime Minister. And he says 0:11:49.080 --> 0:11:53.560 the vast majority of his district, his constituency is leaf 0:11:54.320 --> 0:11:56.679 that's the problem the MPs half he was he has 0:11:56.720 --> 0:12:00.760 a single most important conversation I've had, other than trying 0:12:00.800 --> 0:12:03.480 to figure out Waterloo Street of Brussels. A very thin 0:12:03.559 --> 0:12:07.160 majority of the United Kingdom who did vote voted to leave. 0:12:07.520 --> 0:12:11.120 There is an overwhelming majority within Parliament to stay within 0:12:11.160 --> 0:12:14.880 the European Union. The officials don't seem to represent what 0:12:14.960 --> 0:12:18.040 their constituents want, and I think that's the political problem 0:12:18.080 --> 0:12:21.000 these parties have. On top of that, the parties themselves 0:12:21.040 --> 0:12:23.640 aren't just divided by party. They're divided by the one issue. 0:12:23.880 --> 0:12:27.119 So the Labor Party has divided, the Conservative Party is divided, 0:12:27.320 --> 0:12:30.080 and the Labor Party is offering very little alternative to 0:12:30.080 --> 0:12:32.720 what the Prime Minister is bringing home from Brussels again today, 0:12:32.760 --> 0:12:35.040 which is the same things she had last week, but 0:12:35.160 --> 0:12:37.480 not to run a survey here and they'll be pulling 0:12:37.520 --> 0:12:40.959 and all that coming up. With all this uproar, John Ferrell, 0:12:41.000 --> 0:12:45.160 would you suggest there could be even a greater Leave constituency. 0:12:45.400 --> 0:12:47.000 I've got no idea, to be honest with you, Tom, 0:12:47.440 --> 0:12:48.880 and I hate to call it. And every time I've 0:12:48.880 --> 0:12:50.720 offered a view on Brexit, I've been wrong five minutes 0:12:50.800 --> 0:12:55.240 later and have to Brexit. When you let our coverage 0:12:55.240 --> 0:12:58.240 the day after Brexit, was I wrong five minutes, every 0:12:58.240 --> 0:13:00.880 five minutes, every four minutes was I have to say 0:13:00.920 --> 0:13:03.240 that someone that did stand up and did lead was 0:13:03.320 --> 0:13:06.760 Governor Connie Um. It helped his reputation for about twenty 0:13:06.760 --> 0:13:08.360 four hours because he has had a tough time. I 0:13:08.360 --> 0:13:10.559 have a since tone well, I and this is so 0:13:10.600 --> 0:13:12.760 important and we can go to David sar beyond this 0:13:13.520 --> 0:13:16.160 right now, David, I thought Mr drog yesterday showed the 0:13:16.240 --> 0:13:21.480 limited degrees of freedom that central bankers have given global 0:13:21.559 --> 0:13:25.720 slowdown and given the realities of price change, do you 0:13:25.800 --> 0:13:29.240 look for next year Chairman Powell to have a limited 0:13:29.720 --> 0:13:32.880 choice se versus what was thought of six months ago. 0:13:33.559 --> 0:13:37.360 I had no problem with Chairman Paul's comments in October 0:13:37.400 --> 0:13:41.080 when he said my mission is FED chairs as it 0:13:41.160 --> 0:13:44.320 always should be, as low inflation and price stability. And 0:13:44.400 --> 0:13:47.160 maybe maybe he retreats from that somewhat, but as long 0:13:47.200 --> 0:13:49.040 as the FED is committed to that, I don't have 0:13:49.080 --> 0:13:52.640 a problem with two or three rate hikes, uh, even 0:13:52.679 --> 0:13:55.480 a little bit more, because real FED funds are still 0:13:55.520 --> 0:14:00.679 effectively zero and ultimately that's great for finance traw markets, 0:14:00.679 --> 0:14:04.040 but it hasn't showed up yet, but it can be inflationary. 0:14:04.240 --> 0:14:08.640 Are there mid caps David Sarby? In Europe? There are? 0:14:09.360 --> 0:14:12.079 I'm getting out of my wheelhouse a little bit in 0:14:12.080 --> 0:14:15.559 in uh in that space. So turning back to the US, 0:14:15.640 --> 0:14:20.120 I talked about Residio as an example, Windham Hotels, which 0:14:20.160 --> 0:14:24.160 has spun off. It's it's travel business there and they're 0:14:24.640 --> 0:14:27.640 right there, right in the sweet spot of Ramada days. 0:14:27.680 --> 0:14:31.960 In Howard Johnson's to go back in time, that is 0:14:32.000 --> 0:14:34.240 I think a good play in the mid cap space. 0:14:34.280 --> 0:14:37.120 It's about a five billion dollar market cap, and I 0:14:37.120 --> 0:14:41.640 think that's that's really interesting for again believing in the 0:14:41.680 --> 0:14:45.320 long term you're gonna make money buying spinoffs. Windham has 0:14:45.440 --> 0:14:48.440 nine analysts who follow it. I like that. You know, 0:14:48.520 --> 0:14:50.160 someone run into me yes today, Salm and I think 0:14:50.200 --> 0:14:52.000 it's a subject that we can perhaps talk about now 0:14:52.040 --> 0:14:53.880 between the three of us. And they said, the economy 0:14:53.880 --> 0:14:57.080 has been so strong through and if things have been 0:14:57.120 --> 0:14:59.680 as good as this administration and the Federals of site, 0:15:00.280 --> 0:15:02.840 why does this market fall out of bed every time 0:15:02.920 --> 0:15:07.160 real rights breach one percent? Why? Why is it should 0:15:08.240 --> 0:15:12.440 it shouldn't. I think the key is put interest rates 0:15:12.600 --> 0:15:16.320 and inflation together. And if interest rates are going up 0:15:16.360 --> 0:15:19.520 because the economy is stronger, loan demand is higher, I 0:15:19.760 --> 0:15:23.200 s M Index closer to sixty than fifty. That's not 0:15:23.280 --> 0:15:25.240 a bad thing. But when interest rates are going up 0:15:25.280 --> 0:15:28.119 because we're way behind a curve on inflation, and inflation 0:15:28.200 --> 0:15:30.840 is pushing not at not at two percent today, but 0:15:30.920 --> 0:15:33.880 closer to fork, then we've got serious problems. But I 0:15:33.920 --> 0:15:36.280 think it rises a much bigger issue since the financial 0:15:36.320 --> 0:15:39.240 crisis has our tolerance. There's a global economy and a 0:15:39.240 --> 0:15:42.440 global market place. Our tolerance for higher interest rates has 0:15:42.480 --> 0:15:46.280 it diminished to that degree that we can't get away 0:15:46.280 --> 0:15:51.960 from one percent real I think ultimately that as long 0:15:51.960 --> 0:15:55.080 as your return on capital is greater than your cost 0:15:55.120 --> 0:15:58.880 of capital, and return on capital is more like five percent, 0:15:58.960 --> 0:16:01.480 cost to capital is more like three, that's a good 0:16:01.480 --> 0:16:06.560 spread for the backdrop for equity investors, and good good 0:16:06.600 --> 0:16:10.080 luck forecasting interest rates. You're wrong more than you're right, 0:16:10.560 --> 0:16:12.560 but but I think they're still going to go higher. 0:16:13.000 --> 0:16:17.840 The expectations is incredibly dovish the economists that I'm reading 0:16:17.880 --> 0:16:20.440 ahead of next week's decision is a dovish interest rate hike. 0:16:20.560 --> 0:16:23.400 And my response to that is doubbish to what dovish 0:16:23.400 --> 0:16:27.520 relative to walk Because expectations right now are already so dovish. 0:16:27.560 --> 0:16:30.120 I would say it's a high bar govern into next 0:16:30.120 --> 0:16:33.560 week for the Federal Reserve and what we're to deliver 0:16:33.760 --> 0:16:38.200 already very very dovish expectations for what the Fed's going 0:16:38.200 --> 0:16:42.320 to deliver in nineteen chair, and I'll please keep your 0:16:42.320 --> 0:16:45.120 independence and don't pay attention to the tweets and know 0:16:45.200 --> 0:16:48.320 what your mission is and will do just fine, and 0:16:48.320 --> 0:16:51.200 and for and for interest rate forecasts. As a former 0:16:51.240 --> 0:16:55.280 bank economist, economists are notoriously wrong on forecasting interest rates. 0:16:55.360 --> 0:16:58.640 That's why I manage money, and I'm not an economist anymore. David, 0:16:58.640 --> 0:17:01.280 what's the polish you see away from the elites of 0:17:01.360 --> 0:17:04.760 New York City on the West coast and Washington the 0:17:04.800 --> 0:17:06.560 rest of it? What's the pulse you see out in 0:17:06.600 --> 0:17:10.199 your Midwest? It's what you affectionately refer to as the 0:17:10.240 --> 0:17:14.399 flyover zone in the Midwest. It's just fine. Michigan's unemployment 0:17:14.480 --> 0:17:18.719 rate is less than four percent, down from fourteen percent 0:17:18.960 --> 0:17:23.240 in two thousand and nine. Is this boy in economy 0:17:23.320 --> 0:17:26.280 filtered down to the broad part of America? Or has 0:17:26.320 --> 0:17:31.040 it been a make America great again? Elite growth, wage growth, 0:17:31.240 --> 0:17:34.720 income growth for the last year has started, has been 0:17:34.840 --> 0:17:38.520 better for middle income earners now growing better than three 0:17:38.960 --> 0:17:41.440 So it has it has filtered down. That's why I 0:17:41.480 --> 0:17:45.000 think a window name works because of the the properties 0:17:45.040 --> 0:17:48.359 they own. Ramadas right days in We're not talking about 0:17:48.359 --> 0:17:51.000 the Riz, Carlton, We're talking about more medium price points 0:17:51.040 --> 0:17:55.280 to stay at. That would sound wonderful. Thank you always 0:17:55.320 --> 0:18:12.720 always great to catch How you thank you didn't count it? 0:18:12.800 --> 0:18:16.480 Joining us Macro risk advises the volatility of the last 0:18:16.480 --> 0:18:19.359 couple of weeks day and what do you make of it? Yeah, 0:18:19.359 --> 0:18:22.520 I think it's the markets are grappling with a bunch 0:18:22.560 --> 0:18:25.800 of different cross currents at once. Um, You've obviously got 0:18:25.880 --> 0:18:29.399 tariffs as the overriding story with the markets, but you know, 0:18:29.480 --> 0:18:31.560 below the surface, there's a bunch of other things going 0:18:31.600 --> 0:18:35.119 on as well. There is concerns that the sort of 0:18:35.400 --> 0:18:38.880 firm handshake that the markets and the FED had agreed 0:18:38.920 --> 0:18:41.520 upon for for many years in the Bernankeian and Yelling 0:18:41.600 --> 0:18:44.800 era is is coming to a close in the sense 0:18:44.840 --> 0:18:49.919 that Jerome Powell is effectively having to take back some 0:18:50.000 --> 0:18:53.280 of the assurances that his predecessors were able to give 0:18:53.320 --> 0:18:57.359 markets because he just doesn't know. And so the markets 0:18:57.359 --> 0:19:01.400 are trying to understand where the FED is heading from here. Um, 0:19:01.440 --> 0:19:03.560 So that that's one of the markets and FED talking 0:19:03.600 --> 0:19:06.600 past each other. And then I'd say the second one is, Look, 0:19:06.640 --> 0:19:10.320 markets are discounting mechanisms, and there are concerns that global 0:19:10.320 --> 0:19:14.480 growth has peaked, and that some of the quote overbuilding 0:19:15.000 --> 0:19:18.440 that occurs during very benign cycles, especially in the credit markets, 0:19:18.920 --> 0:19:21.639 is starting to kind of come home to roost. So 0:19:21.720 --> 0:19:25.400 there's a lot of uh, sort of pricing of distress 0:19:25.480 --> 0:19:27.359 that's in markets, and and you know, we're gonna in 0:19:27.359 --> 0:19:30.400 some ways have to wait and see whether the economic 0:19:30.400 --> 0:19:32.920 fundamentals are strong enough or the markets right that things 0:19:32.920 --> 0:19:35.480 are actually starting to slow. Well, let's get into that day. 0:19:35.640 --> 0:19:37.879 The market is trying to get ahead of something. Some 0:19:37.920 --> 0:19:40.560 people are trying to figure out whether it's overshooting, is 0:19:40.600 --> 0:19:44.800 it it's it's so difficult to say. I would I 0:19:44.800 --> 0:19:48.080 would comment that the markets and the economy are very 0:19:48.119 --> 0:19:51.679 distinct things. And then for quite a long time, actually 0:19:51.760 --> 0:19:55.000 what the benefit to the market of a weak economy 0:19:55.119 --> 0:19:57.800 was that the Fed state in town for longer and longer, right, 0:19:57.880 --> 0:20:02.960 the justification for ongoing FED policy that was very supportive 0:20:02.960 --> 0:20:05.320 to the market was in fact a weak economy. And 0:20:05.359 --> 0:20:08.320 now it's almost that the reverse is occurring. That the 0:20:09.119 --> 0:20:11.080 at least for the U. S economy, that the strength 0:20:11.080 --> 0:20:14.520 of the economy, uh, that the Feds looking forward and 0:20:14.600 --> 0:20:19.000 trying to ascertain whether inflation is headed higher uh via um, 0:20:19.040 --> 0:20:22.240 you know, diminished slack in the economy. Um, that's Fed policy. 0:20:22.359 --> 0:20:25.560 That's um uh you know, indicates that things are actually 0:20:25.600 --> 0:20:27.480 going well, but it may not be supportive to the 0:20:27.520 --> 0:20:30.600 markets as we try to understand how much of you know, 0:20:30.600 --> 0:20:32.440 how much of asset prices were a function of low 0:20:32.520 --> 0:20:37.000 rates Dan currnet. How should our audience use the VIX? 0:20:37.160 --> 0:20:41.000 The VIX is n twenty long term average. Boy, these 0:20:41.000 --> 0:20:45.320 are odd times different times. Is the one VIX now 0:20:45.680 --> 0:20:47.919 the same as a twenty one VIX and two thousand 0:20:48.040 --> 0:20:53.440 six or One of the things that is important to 0:20:53.520 --> 0:20:55.919 understand is that the VIX has used to be just 0:20:56.000 --> 0:20:59.000 an index that we observed. The VIX is the price 0:20:59.680 --> 0:21:03.760 of insurance for one month options on the SMP five hundred. 0:21:03.800 --> 0:21:06.520 It's a measure of implied volatility, and it's something that 0:21:06.560 --> 0:21:09.320 we just looked at. It was a calculated figure. Uh. 0:21:09.480 --> 0:21:13.440 Now it is a vastly traded instrument. There are vixed futures, 0:21:13.480 --> 0:21:17.760 there are VIX options, all of which trade with substantial 0:21:18.080 --> 0:21:22.040 UH liquidity and find their way into the portfolios both 0:21:22.040 --> 0:21:25.400 from an offensive and defensive standpoint. Um if you look 0:21:25.440 --> 0:21:29.000 actually at the realized volatility of the VIX itself, so 0:21:29.080 --> 0:21:31.200 this is in some ways a measure of the vowel 0:21:31.359 --> 0:21:34.440 of the vol uh. It starts to rise right around 0:21:34.520 --> 0:21:37.760 two thousand four, and with some ups and downs along 0:21:37.800 --> 0:21:41.639 the way, it's it's generally risen for the last fourteen years, 0:21:41.760 --> 0:21:46.359 and it it almost corresponds exactly with the introduction of 0:21:46.440 --> 0:21:50.080 VIX futures and options. So the financialization of the product 0:21:50.160 --> 0:21:53.880 is what makes now different. It's not in an observation 0:21:54.280 --> 0:21:57.159 of index. It's a traded asset that people wanted to 0:21:57.280 --> 0:22:01.120 get into an out of what is de incurrent average VIX. 0:22:01.200 --> 0:22:05.240 I'm assuming it's not twenty anymore. Well, listen, the VIX 0:22:05.400 --> 0:22:09.000 is really just uh, it's very correlated to the the 0:22:09.080 --> 0:22:12.960 movement back and forth in in markets. UH, and by 0:22:12.960 --> 0:22:16.920 that I mean, UM, if if you look at realized volatility, 0:22:17.359 --> 0:22:21.040 so just the HVG function on on the terminal, you're 0:22:21.040 --> 0:22:26.520 going to see that. UM. Since October, the realized volatility 0:22:26.600 --> 0:22:30.040 SMP has been slightly north of twenty UM. So it's 0:22:30.040 --> 0:22:33.040 actually no surprise that the VIX is sitting here at twenty. 0:22:33.040 --> 0:22:35.800 In fact, many would say that options, even with the 0:22:35.880 --> 0:22:38.359 VIX up here, are actually a pretty good deal. They're 0:22:38.400 --> 0:22:42.639