Speaker 1: Hello, and welcome to What Goes Up, a Bloomberg Weekly
Speaker 1: Markets podcast. I'm Sarah Ponzak, a reporter on the Cross
Speaker 1: Asset team, and I'm Mike Reagan, a senior editor on
Speaker 1: the Markets team. This week on the show, a Phase
Speaker 1: one trade deal between the U. S and China is
Speaker 1: signed at last, and earning season has begun, with the
Speaker 1: banks the first to report. Our guests share their takes,
Speaker 1: and of course we'll close out the episode with our tradition,
Speaker 1: the craziest thing I saw in markets this week, So
Speaker 1: I've got some bad news for you about the crazy
Speaker 1: things I want again, I don't even have to hear yours.
Speaker 1: I know. As soon as you said bad news, I knew.
Speaker 1: I knew that's what you would say. But we'll see
Speaker 1: about that. Last week you really brought it. We'll see
Speaker 1: by at this time. And remember you can always give
Speaker 1: us a call at our very own Bloomberg Podcast outline.
Speaker 1: That number is six or six three to four, read
Speaker 1: for nine zero. Tell us about the craziest things you've
Speaker 1: seen in Marcus or ask us a question, and maybe
Speaker 1: we'll even play your message on the show. Yeah, Sarah,
Speaker 1: as you said, it was quite a busy week UH
Speaker 1: in newsflow and markets this week. So luckily we have
Speaker 1: some very great guests to to break it all down
Speaker 1: for us. Joining us for the first time on the
Speaker 1: show is the chief US equity strategists at Credit Swiss,
Speaker 1: Jonathan Gallup. John, Welcome to the show. Thanks very much, Sarah. Also,
Speaker 1: it was a big bank earnings week, as you mentioned.
Speaker 1: I will tell you this, I did not really pay
Speaker 1: much attention to them. And you know why that is
Speaker 1: because we have a great guest who's going to tell
Speaker 1: you all about them right now. That's right, because our
Speaker 1: own Bloomberg reporter Lenan Newe UH covers banks very closely,
Speaker 1: and I figured I just let her read the bank earnings,
Speaker 1: so I don't have to help, all right, So you're
Speaker 1: here for right, So John, let's start with you. What
Speaker 1: are the notes you had out recently? Caught my eye.
Speaker 1: You're talking about this new product you have at the
Speaker 1: research desk at Credit Swiss. Let me just read the
Speaker 1: introduction to it. UH. Over a hundred fifty years ago,
Speaker 1: British mathematician Ada Lovelace introduced the world what would later
Speaker 1: become computer programming. First of all, I did not realize
Speaker 1: that a hundred and fifty years ago. That's amazing that
Speaker 1: that was the seeds of computer program and the fact
Speaker 1: that it was a female mathematician is quite amazing as well,
Speaker 1: ahead of her times, fascinating. So in her honor, we
Speaker 1: introduced ADA, the next generation of factor research. What makes
Speaker 1: ADA different is the sophistication of her methods and the
Speaker 1: simplicity of her insights in the market behavior. So you
Speaker 1: and then you went on to write a big report
Speaker 1: about some of the findings of this. I'm curious if
Speaker 1: I'm if I'm a client, is my relationship with Ada
Speaker 1: basically your reports or is it is there an interface
Speaker 1: people will be able to use eventually? At this point
Speaker 1: it's almost a personal relationship. Or what I mean by
Speaker 1: that is it depends on what your your take. So
Speaker 1: the way this whole thing started was that investors were
Speaker 1: calling and said, I'm an energy investor. I've gotten my
Speaker 1: calls right on the earnings, i got my call right
Speaker 1: on the price of oil, and I'm under performing the market.
Speaker 1: My socks aren't doing what they're supposed to do. What
Speaker 1: gives here? And so what we we did is we
Speaker 1: took factor research and we applied it at the company
Speaker 1: level to say, what is the market actually rewarding in energy,
Speaker 1: or in value stocks or in a dividend yield portfolio.
Speaker 1: And that's what the genesis of this was, and it's
Speaker 1: the reception has been fantastic. You hinted at what makes
Speaker 1: you different, and he said the reception has been fantastic.
Speaker 1: But before we get into some of the more macro findings, uh,
Speaker 1: the points of what you found with ADA, do you
Speaker 1: find that it's difficult? Right now? We've heard time and
Speaker 1: again that quant investing, factor investing is really difficult. We've
Speaker 1: seen the likes of a q R cutting some of
Speaker 1: its workforce. We've seen redemptions from some of the most
Speaker 1: popular quant funds out there. I mean, how can you
Speaker 1: actually go about using factors and and do it well.
Speaker 1: I'm not expecting people to simply say ada, or which
Speaker 1: is kind of way we talked about it. AID is
Speaker 1: telling me to be in high dividend yielding stocks. So
Speaker 1: that's what I'm gonna do. What it's what it's saying
Speaker 1: is all us being equal. This is where the market's
Speaker 1: going to pay you. Here are the companies that are
Speaker 1: the most levered or most exposed to those characteristics. Now
Speaker 1: let's start a conversation from these are the high dividend
Speaker 1: paying stocks within the stable space, the markets rewarding it.
Speaker 1: Here's why. Now go and start to do your work.
Speaker 1: So you're starting where the wind is in your sales.
Speaker 1: So in in many ways it's it's very different than
Speaker 1: when you would get from an a q R where
Speaker 1: they're really depending on using you using them as an example,
Speaker 1: but they're where they're really depending on the quad to
Speaker 1: be the portfolio. This is really a tool. One line
Speaker 1: in this report I really struck home with me is
Speaker 1: you talk about sector biases. You say sectors are naturally
Speaker 1: exposed to specific characteristics. For examples, utilities tend to have
Speaker 1: higher higher dividend yields in the broad market, and by
Speaker 1: extension of high dividend yield basket will tend to be
Speaker 1: overweight utilities. I think this is really important because all
Speaker 1: throughout last year, you know, when people are rotating from
Speaker 1: growth to value. You know, as kind of an old
Speaker 1: man looking at the market, I was gonna, no, they're
Speaker 1: they're they're rotating out of tech and into banks or
Speaker 1: into energy. So I'm curious, like how much of the
Speaker 1: market's motivations do you think of investors motivations, still cling
Speaker 1: to those old sort of ideas of I'm going to
Speaker 1: buy the sector rather than I'm going to buy the factor. Well,
Speaker 1: you're you're you're actually asking several questions. So let me
Speaker 1: so so let me let me you know, if we
Speaker 1: started at the more, maybe you know, the biggest issue
Speaker 1: is that we have this perception that certain investment characteristics
Speaker 1: are good and others are bad. So we like high
Speaker 1: quality portfolios, we like stocks that don't have a lot
Speaker 1: of debt, we like stocks with growth and big global footprints.
Speaker 1: But every one of those characteristics does well or poorly
Speaker 1: in certain situations. I'll give you an example. Um right now,
Speaker 1: companies with deteriorating fundamentals that are heavily shorted are outperforming
Speaker 1: the market. Um And And you wouldn't normally think that
Speaker 1: because it would sound like their negative characteristics. And what
Speaker 1: the key here is is to say, I'm not coming
Speaker 1: in with any boy. Let me you know, you know,
Speaker 1: if I have an opinion on what what types of
Speaker 1: things I think are gonna happen, or if I'm looking
Speaker 1: at trends, I want to start by saying that I
Speaker 1: I don't care all I want to do here is
Speaker 1: make money in the markets. Now tell me what the
Speaker 1: best way to do that is. So that phenomenon you
Speaker 1: just mentioned, is that a function of shortcovering you think,
Speaker 1: or is it the notion that the economic aid is
Speaker 1: turning around, gonna start firming up a little bit, or
Speaker 1: maybe a combination of both. No, No, it's it's the
Speaker 1: ladder point. And I think that people misss think about.
Speaker 1: A short company is a company that in some way
Speaker 1: is broken. It's some hedge funds somewhere things. This is
Speaker 1: a company that may go bankrupt. And if the economy
Speaker 1: is weak, which it was let's say, you know, for
Speaker 1: the majority of the last eighteen months or so, then
Speaker 1: a broken company and a weak economy bad news. All
Speaker 1: of a sudden. If the economy is getting better, they're
Speaker 1: gonna get pulled away from the precipice and things are
Speaker 1: gonna get better for them, and they're going to actually
Speaker 1: improve more than a really healthy company. And this is
Speaker 1: really frustrating for investors with a quality biased like I
Speaker 1: bought the best company. They don't have, you know, dead
Speaker 1: on their balance sheet. Their businesses run really clean and
Speaker 1: everything right, and and in improving economy and they're getting
Speaker 1: less in the dust by this broken company with band management.
Speaker 1: And that's the whole point. They're bias towards quality is
Speaker 1: a dangerous bias if it's if it's not put in context.
Speaker 1: I do want to pick up on a point of
Speaker 1: one of the questions then, Mike, Yeah, but about the
Speaker 1: fact that factors don't necessarily equate to particular sectors. In fact,
Speaker 1: across sectors you can find different factors, and you have
Speaker 1: a very interesting chart. And I find it interesting because
Speaker 1: in my reporting last year about low volatility, people constantly,
Speaker 1: constantly looked at low volatility and said, well, low volatility
Speaker 1: is doing well because utilities, real estate, consumer stables are
Speaker 1: doing well. But what you actually find is that the
Speaker 1: areas of low volatility, the pockets of that factor that
Speaker 1: actually did well, we're in cyclical areas the likes of
Speaker 1: financials energy. Can you maybe dive a bit deeper into
Speaker 1: this difference, breakdown the idea that factors aren't just sectors
Speaker 1: you can't go across. So so, sarahly, one of the
Speaker 1: things that we that we start with is that we
Speaker 1: look at the factor or these basically, what's the factor.
Speaker 1: It's just companies that are tilted towards a certain behavior,
Speaker 1: and we we look at them and say, I want
Speaker 1: to eliminate the sector issues. So if we're looking at
Speaker 1: low vall as what a low ball banks do compared
Speaker 1: to high ball banks, what a low vall um staples
Speaker 1: do compared to you know, other staples. And what we
Speaker 1: found was is that the area that low Vall did
Speaker 1: the best in were the most high vall parts of
Speaker 1: the market. So so in energy and materials and discretionary
Speaker 1: in banks, we would say, well, Lovall didn't do well there,
Speaker 1: but in fact that's where really the juice was on
Speaker 1: this trade. So yes, utilities and staples and telco's did well.
Speaker 1: But if you were a professional investor um who was
Speaker 1: looking at this kind of work, you you would have
Speaker 1: played it entirely differently. You know, John, when I walked
Speaker 1: in here, you were going through some charts with Sarah.
Speaker 1: I think you predicted the I s M manufacturing could
Speaker 1: could hit fifty two and a few months and there's
Speaker 1: a trade involved in that. Yeah. So so here's what
Speaker 1: here's what the background is that the what we call
Speaker 1: the I s M is a serving and so they
Speaker 1: ask a bunch of people who buy equipment for factories
Speaker 1: that they're purchasing managers and they say, how do you
Speaker 1: think it's going. Are you seeing demand for equipment? Are
Speaker 1: you able to get the equipment or the parts that
Speaker 1: you need? And from that they derive this score on
Speaker 1: how good the economy is. And typically what they're reading
Speaker 1: is lines up pretty well with how the industrial data
Speaker 1: is coming in, you know, shipments and things like that.
Speaker 1: And right now the economy is saying that things are
Speaker 1: okay and the I s M survey is saying things
Speaker 1: are totally broken. There the gap is about as wide
Speaker 1: as it's ever been, and so the question is why
Speaker 1: and how does that resolve? Because these gaps they're gonna close,
Speaker 1: either because the economy is going to follow the I
Speaker 1: s M down and do to poorly, or the I
Speaker 1: M is magically to go up. The guy who buying
Speaker 1: the equipment for his factory is totally freaked out by
Speaker 1: trade issues, so when he's asked, how do you think
Speaker 1: it's going all these things is I'm never going to
Speaker 1: get these parts because they were manufactured in China. So
Speaker 1: I'm really concerned now that we have this trade deal done,
Speaker 1: now that we're starting to see a pick up in
Speaker 1: in in some of the economic data, especially in Europe
Speaker 1: and China in their domestic economies. My belief in the
Speaker 1: data says that it's not that the industrial data is
Speaker 1: gonna get worse. It's that the survey day is going
Speaker 1: to get better. And what does that do is it
Speaker 1: pushes stocks up, and it pushes more cyclical companies, and
Speaker 1: it pushes lower quality companies like those short um kind
Speaker 1: of stocks that we're talking about. Those end up bleeding
Speaker 1: in that environment. Lennon, I want to bring you in
Speaker 1: here because we did hear from the likes of the
Speaker 1: largest US banks, the sleek JPMR Game, Morgan, Stanley, Engleman,
Speaker 1: stacked Bank of America, you name it um on a
Speaker 1: macro level to start off, do you get the sense, uh,
Speaker 1: similar to what Jonathan is saying that the macro outlook
Speaker 1: is still strong and the consumers still looks strong, at
Speaker 1: least from the bank's perspective. Yes, definitely, Sarah. So throughout
Speaker 1: this whole period when everyone's freaking about and freaking out
Speaker 1: about trade or recession concerns, and bank CEO's have all
Speaker 1: been very bullish. They've all talked about the positive US
Speaker 1: consumer driving a lot of business UM still not really
Speaker 1: being harmed by all the uncertainties and the macro sort
Speaker 1: of concerns. So yeah, they've been pretty optimistic and they
Speaker 1: haven't really turned more pessimistic as a as of this quarter.
Speaker 1: One thing I love to look at BANC earnings for
Speaker 1: is the credit quality trends. Uh, And I don't know,
Speaker 1: for years now, everyone had and their brother has been predicting, oh,
Speaker 1: that they're about to turn and they're about the you know,
Speaker 1: the credit qualities. Yeah, what are you saying? As far
Speaker 1: as you know, delinquencies and that sort of thing, it's
Speaker 1: still very good credit quality UM, not a huge deterioration.
Speaker 1: We are looking at those very closely. At Bank of America,
Speaker 1: the consumer business started to do a little bit worse,
Speaker 1: but that's not really a credit issue. It's more that
Speaker 1: they're earning less because of interest rate cuts by the FED.
Speaker 1: So we're keeping an eye on it, but so far
Speaker 1: they've done pretty well with credit. Just a quick question
Speaker 1: as because we've been we do a lot of work
Speaker 1: looking at UM earnings data cross banks. But if you
Speaker 1: break the banks into two groups, which is the big
Speaker 1: money center banks and then the regional banks, and putting
Speaker 1: aside some company specific issues, but the big money center
Speaker 1: banks to Wall Street banks are expected to deliver much
Speaker 1: much better results and the regional banks UM not as much.
Speaker 1: Any thoughts on what's causing those those differences and how
Speaker 1: that plays out, the big banks would be so happy
Speaker 1: that you said that. So I think a lot of
Speaker 1: it comes down to digital and to technology. The big
Speaker 1: banks have a lot of money to spend on these tools.
Speaker 1: They have a lot of money to really dive into
Speaker 1: that digital mobile app stuff, and so they're really making
Speaker 1: the bank much more efficient. They're making sure that consumers
Speaker 1: don't call, you know, a phone line to ask for
Speaker 1: their balance and instead or doing everything by phone, um,
Speaker 1: you know, by their mobile app. And so they're really
Speaker 1: pushing into a lot of efficiency because they can make
Speaker 1: that investment in technology. So I would have guessed the
Speaker 1: interest rate scenario is part of it too. You know,
Speaker 1: your regional banks are more sort of saving loan type
Speaker 1: of businesses and and the big ones are more diversified.
Speaker 1: Is that m I just definitely more diversified, and UM
Speaker 1: for now have not seen a massive impact from the
Speaker 1: fed's rate cuts, but that's coming well. You also even
Speaker 1: just look at this past quarter, for example, and you
Speaker 1: saw such a major boost from trading desks at the
Speaker 1: major banks, which isn't necessarily something that your regional banks
Speaker 1: would be doing either. Right, No, And we've been talking
Speaker 1: a long time about the structural decline in trading and
Speaker 1: whether you know this is just a trend that's going
Speaker 1: to keep continuing. But the fick trader has got to
Speaker 1: break this quarter. So bond traders, let me just give
Speaker 1: you a few metrics here. JP Morgan came in a
Speaker 1: billion dollars higher than analysts predicted, Goldman Sacks six, Surgeon
Speaker 1: fictuating um and Morgan Stanley more than doubled from a
Speaker 1: year earlier. So that's a huge easy comparison to eighteen right.
Speaker 1: I mean the narrative then was that all the clients
Speaker 1: were sitting on their hands, not trading anything. Does it
Speaker 1: looked like the world was ending? Yeah, And now they've
Speaker 1: run to the other side of the boat and they said, oh,
Speaker 1: everything's fine. Trade, it's going to be worked out, and
Speaker 1: so let's trade. Let's do a lot of business. Let's
Speaker 1: trade a lot of bonds, rates, mortgages. John, I'm gonna
Speaker 1: packing about five questions off of what well, non just
Speaker 1: had to say, all right, so you ready want to
Speaker 1: take notes like you know, you see pal take notes
Speaker 1: in the Nope. But I I wonder if you do
Speaker 1: buy into that notion that credits sort of leads the
Speaker 1: the equity market. Um, it's one of these common tropes
Speaker 1: you hear all the time. I'm curious if it's it's
Speaker 1: one that's worth believing, and if so, sort of where
Speaker 1: do you look first for that deterioration? You know, is
Speaker 1: it in the consumer end? When if you start to
Speaker 1: see Joba's claims pick up? Is it sort of something
Speaker 1: that you just can't predict? Uh, you're right. You asked
Speaker 1: five questions. But so if you said let me, let me,
Speaker 1: let me so, let me go and reframe it into
Speaker 1: the question I want to answer, which is i've intermedia trading,
Speaker 1: so but the you know so you're not and pivot
Speaker 1: so but the um, the question is what would basically
Speaker 1: make things deteriorate from here? What what can go wrong
Speaker 1: that we're problematic? And I think that there's two things
Speaker 1: and we're seeing neither one of them. But the first
Speaker 1: thing is is that everyone's assuming right now that inflation
Speaker 1: will not be a problem over the next year, and
Speaker 1: that even though we have a tight labor market, and
Speaker 1: even though we're probably going to see an incremental pickup
Speaker 1: and inflation, it's gonna be nothing, which is going to
Speaker 1: freak the fat out a really spooked market. Now, if
Speaker 1: you ask me whether I agree with that consensus view,
Speaker 1: sometimes I do. I don't, but right now I absolutely do.
Speaker 1: I think that we're it's going to stay contained and
Speaker 1: that's gonna be really healthy. The second issue is if
Speaker 1: you look at and there's two different kinds of jobs data.
Speaker 1: There's are we hiring people and are we firing people?
Speaker 1: We care about both, but we really care about the
Speaker 1: fires um. And so what we're seeing is the weekly
Speaker 1: jobless claims, which is that read just keeps getting lower
Speaker 1: and lower, and all indications are that that it's going
Speaker 1: to stay healthy. But if that turned, it's you know,
Speaker 1: if we look at the two things that typically tell
Speaker 1: you this there's a real problem. The first one everybody
Speaker 1: focuses on is the yel curve, and we talked about
Speaker 1: that last year quite a bit, but probably the one
Speaker 1: that's more important. If you see the weekly jobless claims
Speaker 1: kind of spike up, watch out, that's a problem. But
Speaker 1: right now we're not seeing that. So those are the
Speaker 1: things that matter. You know. It's funny about inflation. I
Speaker 1: I everyone came out saying, oh, this was a weaker
Speaker 1: than expected CPI report this week. Of course CPI was
Speaker 1: still two point three percent, you know. Um, So I
Speaker 1: wonder if part of it is that everyone has sort
Speaker 1: of recalibrated their expectations of the Fed to some degree,
Speaker 1: the symmetry of that target that U they will allow
Speaker 1: to run a little hot. And I know they look
Speaker 1: at PC more than than c p I, but they will,
Speaker 1: you know, allow a breach of two percent, maybe a
Speaker 1: little higher than what people have previous previously expected. Well
Speaker 1: if if if first of all, as you said, you know,
Speaker 1: PC is is what the Fed looks at. And for
Speaker 1: those people here don't like follow the jargon on what's
Speaker 1: PC and c p I. So you go to the
Speaker 1: grocery store and you realize that butter is doubled in price,
Speaker 1: So you know, is that inflation? It is if you
Speaker 1: actually buy butter at twice the price. But if you
Speaker 1: do what most of us do, would say, wow, but
Speaker 1: it is expensive. I'll buy olive oil, which has not
Speaker 1: gone up in price, Then you actually you didn't experience
Speaker 1: any inflation. You substitute things out and and so there's
Speaker 1: if you look at it in that context, which is overall,
Speaker 1: am I paying more money when I go to the
Speaker 1: grocery store to get the groceries that I need? That
Speaker 1: number is still a really low number. And the FED
Speaker 1: if they say not that the two percent, and we
Speaker 1: think that two percent is a ceiling, it's not. If
Speaker 1: it's kind of a central tendency or or you know
Speaker 1: your target, then we we were not even close to
Speaker 1: two let alone that being an average over over purity
Speaker 1: of years. So there's really at this point not a
Speaker 1: lot of threat, even though some of these readings are
Speaker 1: tipping up a little bit. All right. So if we
Speaker 1: set the backdrop based on this conversation we're having, the
Speaker 1: economy is healthy, turning to the upside, Inflation is muted,
Speaker 1: interest rates are low. So at the end of last year,
Speaker 1: as we were discussing earlier, we saw the value trade
Speaker 1: take off. This year so far it's been completely squashed.
Speaker 1: It's as if we're back to the beginning of Bigger
Speaker 1: is better. You see the things doing well, Apple doing
Speaker 1: well from your point of view, especially using the technology
Speaker 1: that you guys have been using to dissect all of
Speaker 1: this is the value trade? Over? Can you know yet?
Speaker 1: And if not, where can you squeeze some more juice
Speaker 1: out of it? Right? So I think that there So
Speaker 1: I think there's there's two issues here. Um, when you
Speaker 1: call it the value trade, you're kind of taking a
Speaker 1: whole bunch of things and you're squishing into value. So
Speaker 1: so so if you said our low pe stocks that
Speaker 1: that under are formed by ten percent over the less
Speaker 1: you know, let's say year to eighteen months that have
Speaker 1: jumped in the fourth quarter by roughly ten percent, is
Speaker 1: that part of the trade mostly over? I think the
Speaker 1: answers yes. However, if you look at the same issue
Speaker 1: with small caps, it looks like they have a lot
Speaker 1: more room to run if you look at non US companies,
Speaker 1: so Europe relative to the US more to run, emerging
Speaker 1: markets more to run. Um, So you almost need to
Speaker 1: not you almost you absolutely need to look at this
Speaker 1: in more more individual slices because they're not all the same.
Speaker 1: But in terms of how long does this continue to
Speaker 1: go for our take is probably something in the three
Speaker 1: to six months range. This is not a new world
Speaker 1: where where the economy is gonna take off, and and
Speaker 1: and the like. This is a near term trade. It's
Speaker 1: a bounce. If you're a stock trader, this is super important.
Speaker 1: If you're a long term investor, probably less. So, you know,
Speaker 1: I think one consensus or near consensus from a lot
Speaker 1: of the sort of look ahead pieces I read at
Speaker 1: the end of the year from people like you was
Speaker 1: uh uh, And I'm not sure if you came out
Speaker 1: and said this yourself. But then the numbers kind of
Speaker 1: imply that valuation expansion was a big story last year.
Speaker 1: From the next level. Not a lot of people expect
Speaker 1: more expansion and ps this year. Um from the macro level.
Speaker 1: Is there a chance of that surprising people? You know?
Speaker 1: Is that is and is a trade deal kind of
Speaker 1: a catalyst for for some more frauthy valuations. So one
Speaker 1: of the things that we try to do is to
Speaker 1: to take what we call the consensus narrative, this thing
Speaker 1: that we all believe not because we actually ran the numbers,
Speaker 1: but because it sounds large. So the market was up
Speaker 1: twenty nine and a half percent last year, you had,
Speaker 1: dividends is up thirty one and a half. Stocks must
Speaker 1: be expensive, and we do know in that environment we
Speaker 1: actually had near zero EPs growth, so obviously something was
Speaker 1: going on. However, if you if you look, what really
Speaker 1: happened was you had a really horrible fourth quarter of
Speaker 1: eighteen and the majority of last year's return was simply
Speaker 1: reversing the fourth quarter. So if you instead looked at
Speaker 1: eighteen and nineteen combined, what you actually found was the
Speaker 1: entire market run over the two years was driven by earnings,
Speaker 1: and multiples are actually were down a tiny bit. Now,
Speaker 1: if you look at that really great return that you
Speaker 1: had over eighteen and nineteen coming from earnings, about of
Speaker 1: it was there'll maybe a little less than fifty, but
Speaker 1: about it was from the tax cuts, which is not
Speaker 1: gonna repeat itself. So if you take out the tax cuts,
Speaker 1: you're left with something which was like five percent a
Speaker 1: year on earnings. So it's so I think that people
Speaker 1: are misframing it because it's convenient to do. Now if
Speaker 1: you if you look at why, and we we believe
Speaker 1: actually the multiples are going to drift, not immediately but
Speaker 1: over twenty Right now, at forward, PE is about eighteen.
Speaker 1: And the reason is, first of all, interest rates are
Speaker 1: super low, and the second thing is that companies are
Speaker 1: returning a crazy amount of cash back to shareholders. What
Speaker 1: they're being rewarded for is not hoarding the money and
Speaker 1: making bad investments with it, but simply returning it back.
Speaker 1: And I think that that many are making mistake to
Speaker 1: be concerned that higher than average multiples does not mean
Speaker 1: that they can't go higher anyway, right, right, Yeah, The
Speaker 1: valuations don't ever sort of bring the top of the market.
Speaker 1: I guess, yeah. I mean, there's going to come a
Speaker 1: certain level that you're gonna say, listen, I'm just uncomfortable
Speaker 1: with this. But if normally p's running fifteen and now
Speaker 1: they're running at eighteen, but companies are returning twice as
Speaker 1: much capital and interest rates are half the level, I
Speaker 1: just I just think that we're really far away from
Speaker 1: where multiples are going. Can I make a point on
Speaker 1: tax cuts? Also? One of our colleagues wrote a great
Speaker 1: story about how the bank's got eighteen billion in tax
Speaker 1: cuts from the Trump tax plan last year. Pretty amazing.
Speaker 1: So do we know how that Well, obviously it would
Speaker 1: have helped profits, but and so now the total effect
Speaker 1: is thirty two billion tax for the big experience. Speaking
Speaker 1: of benefits to banks, I do just want to get
Speaker 1: your take because something that was very noticeable this week
Speaker 1: while we were awaiting the signing of the Phase one
Speaker 1: trade deal between the U S and China UH and
Speaker 1: President Trump was running through the role call of everyone
Speaker 1: who was at the event to witness the signing. There
Speaker 1: are a lot of big bank executives. There are a lot,
Speaker 1: at least a lot of people in the financial services industry.
Speaker 1: So I want to get your take. Is there something
Speaker 1: about the trade deal that is supposed to really help
Speaker 1: or will it actually benefit the financial services industry. Yeah,
Speaker 1: it was a funny moment when Trump asked or said
Speaker 1: that the banks should say thank you to him. He
Speaker 1: was speaking to a JP Morgan executive. That was hilarious. Um. Yeah,
Speaker 1: I mean the banks are all very keen to get
Speaker 1: bigger in China. UM. Golden Sact prior to the trade
Speaker 1: deal was already saying that it wanted to double its
Speaker 1: amount of staffing in China. The question now is whether
Speaker 1: they can deepen their impact because they already have to
Speaker 1: have these kind of JV structures. So if you were
Speaker 1: in a j j V with a big American bank,
Speaker 1: which is just be like okay, fine, I'll sell everything
Speaker 1: and you can take over you know that that's a negotiation.
Speaker 1: Theoretically they can now have a wholly owned subsidiary exactly.
Speaker 1: And so the question is whether the partners are actually
Speaker 1: going to be okay with that, whether the banks can
Speaker 1: kind of you know, broaden or widen their steak in
Speaker 1: some of these entities. So does the partnership kind of
Speaker 1: get gained them entrance into the exactly. There is something
Speaker 1: to be said for a local partnership because it gives
Speaker 1: you local trust and a name brand and something that
Speaker 1: you can kind of get your toll holding. So our
Speaker 1: Chinese consumer is going to be happy with, you know,
Speaker 1: Golden sax brand or do they want a local firm
Speaker 1: that kind of opens the door. Maybe they buy one
Speaker 1: percent and go Yeah. It reminds me see, and I'm
Speaker 1: sure that everyone is kind of looking at their looking
Speaker 1: at their businesses and figuring out what to do, trying
Speaker 1: to start those negotiations because now it's green light. I
Speaker 1: think that's our green light for the craziest thing of
Speaker 1: the week. John's impressed with that, Segway, I can tell
Speaker 1: every because he said media training. He knows all right,
Speaker 1: lad Lot already told me that her craziest thing is
Speaker 1: one of her own stories, which I'll allow so self serving,
Speaker 1: but I gotta do it because this story really touched
Speaker 1: a nerve. I wrote a story about how Wall Street's
Speaker 1: bonus culture is dying because of the quants, right, because
Speaker 1: you're catering to quant clients, I'm sure. And so these days,
Speaker 1: you know, the quantz and the robots and automation doing
Speaker 1: much more of the work that the traditional old school
Speaker 1: trader used to do. And so that kind of means
Speaker 1: that cost pressure and team team dynamics now are really
Speaker 1: important rather than just the one trader saying I'm gonna
Speaker 1: make a big bet and I'm gonna make tons of money. Um.
Speaker 1: Really touched a nerve. Got a lot of reader emails
Speaker 1: lamenting the good old days, saying, oh no, I need
Speaker 1: to go and take a coding class. Um. So that
Speaker 1: was that was the craziest thing. I just didn't I
Speaker 1: didn't anticipate this type of reaction that people really, you know, unleash.
Speaker 1: They're kind of angst on me after I I think
Speaker 1: when you're telling someone, uh that part of their job
Speaker 1: or part of their pay is that threat, um, they
Speaker 1: might not be too happy with you. They were not
Speaker 1: happy alright, sir, can you beat that? Alright? So this
Speaker 1: week I'm leaning back on just some of the old
Speaker 1: classics because how could I not If you look at
Speaker 1: shares of Tesla or you look at shares of Beyond
Speaker 1: Meat this year, it's really just unbelievable. So shares a
Speaker 1: Beyond Meat up about fifty this year, shares of Tesla
Speaker 1: up about year to date um. And these are companies
Speaker 1: that had had some struggles a couple of months back up,
Speaker 1: but now they're back and they're very hot. And yes
Speaker 1: there has been news flow to help these gains, uh
Speaker 1: and kind of inspire these games. But at the same time,
Speaker 1: just the sheer strength of what we've seen has been
Speaker 1: pretty crazy. Yeah, they're just classics that you can run
Speaker 1: with Johnna. They tell you about our gibbick. Here the
Speaker 1: craziest thing we saw in markets this week, well, I'll
Speaker 1: wing it. Um. We we didn't analysis of the fourth
Speaker 1: quarter expected earnings. This is just consensus um expectations and
Speaker 1: for the fourth quarter and then all of and the
Speaker 1: expectation is that is going to be a massive rebound.
Speaker 1: And everyone kind of wrote off the the earning story
Speaker 1: because you had no earnings to speak of in and
Speaker 1: what the um and and so, first to your point
Speaker 1: on trade, the biggest um changes those SMP companies that
Speaker 1: are doing the majority of their business outside of the US.
Speaker 1: The numbers are like double digit growth expectations for for
Speaker 1: UH for next year. However, the current quarter is going
Speaker 1: to see none of that because we are still seeing
Speaker 1: and you talked about things being good in the banks,
Speaker 1: but the industrial companies and the material companies and the
Speaker 1: energy companies, um and and even some of the big
Speaker 1: tech companies are really expect expected to have a week quarter.
Speaker 1: So this is going to be a you know, surprisingly
Speaker 1: week quarter with unbelieve probably strong expectations for next year.
Speaker 1: And what I'm hearing when I talk to investors is
Speaker 1: they're struggling with buying into this story. They want to
Speaker 1: believe things are going to get better, but they're hugely skeptical,
Speaker 1: which to me is actually an opportunity. So you think,
Speaker 1: is it possible we actually see double digit earnings growth
Speaker 1: for the benchmark this year? No, you're not gonna see
Speaker 1: for that. You're not gonna be double digit for the
Speaker 1: bench book, but you will see is so take energy
Speaker 1: for example, it's abtracted like two from earnings last year
Speaker 1: for the whole SMB and had a horrible number. It's
Speaker 1: going to have super easy comps. So Energy is gonna
Speaker 1: put up in a relative growth rate compared to the
Speaker 1: prior year huge numbers. The big tech companies um that
Speaker 1: we're faced with either a semiconductor cycle or internet issues,
Speaker 1: had really huge margin pressures and costs in and so
Speaker 1: they're set up to put up really really big relative
Speaker 1: gains in the year. So the delta on this is
Speaker 1: going to be Energy, megacap tech are going to be
Speaker 1: just They're They're going to be double digit winners. And
Speaker 1: I think that there's this skepticism of people buying into
Speaker 1: that success plenty. All right, Mike, you talked to big games.
Speaker 1: Now time for the winning entry and the craziest thing. Well, first,
Speaker 1: before I get to that, let me start with a
Speaker 1: friend of mine texted me with his entry. Uh. He
Speaker 1: worn though that I can't think of a market angle
Speaker 1: on this one. So maybe, uh, if if anyone always
Speaker 1: have a friend who calls in with but so if anyone,
Speaker 1: if anyone can think of a market angle for this story,
Speaker 1: it is crazy. Yeah, but called the hotline if you
Speaker 1: got a market angle. But it's a man. This says
Speaker 1: a story from the Des Moines Register. I think I
Speaker 1: saw a few other places too. Man going through a
Speaker 1: nasty divorce with his wife. He uh petitioned the judge
Speaker 1: uh to do it by trial by combat. He basically
Speaker 1: wants to have a sword fight with his wife. And
Speaker 1: according to this guy, trial by combat has never officially
Speaker 1: been outlawed. You can still requested. I don't know. I
Speaker 1: think he's watching too much Game of Thrones. I think
Speaker 1: their friend wins, so the market I go first. I
Speaker 1: allow him to win if we can, going back before duels.
Speaker 1: He's going way way back trading by combat. But here's
Speaker 1: here's my craziest thing of the week, courtesy of the
Speaker 1: Coin Desk website via the Money Stuff newsletter, which I
Speaker 1: find a lot of crazy things, and some people have
Speaker 1: launched a new cryptocurrency backed by tins of sardines. First,
Speaker 1: the reporter, I think thought it was a joke because
Speaker 1: it's UH mentioned April one in the in the White
Speaker 1: paper about it. But no, this is the real thing,
Speaker 1: and I looked it up. I did some research, and
Speaker 1: by that I mean I googled sardine vintage sardines. Apparently
Speaker 1: John sardines are an appreciating asset. There are some aficionados,
Speaker 1: aficionados if you follow me. Yeah, it's like sardines appreciate
Speaker 1: they taste better after a few years, tins of sardines
Speaker 1: appreciating value like a fine wine. I know it sounds
Speaker 1: crazy until when and um, I don't know. It's it's
Speaker 1: got to be an ex expiration day. But so this
Speaker 1: cryptocurrency would buy tens of sardines swore them, and that's
Speaker 1: that's what underpins the value that it actually might be
Speaker 1: the first cryptocurrency that makes sense to me too. Sadly, Look,
Speaker 1: I'm going to say that as crazy, but considering the
Speaker 1: fact that when we first started this podcast you flat
Speaker 1: out said to me we cannot talk about crypto, I
Speaker 1: think you might be disqualified. We've already broken the role
Speaker 1: many times there you're a sardina aficionado. But with that said,
Speaker 1: Jonathan golob Lynn and New and thank you so much
Speaker 1: for joining us today. Thank you what goes up. We'll
Speaker 1: be back next week. Until then, you can find us
Speaker 1: on the Bluebog Terminal website and app or wherever you
Speaker 1: get your podcasts. We'd love it if you took the
Speaker 1: time to rate interview the show on Apple Podcast. Some
Speaker 1: more listeners can find us, and you can find us
Speaker 1: on Twitter. Follow me at at Sarah Ponzeck. Mike is
Speaker 1: a Reaganonymous our guest. Lenan Newen is at Lenan T. Newen.
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Speaker 1: Up is produced by topor Foreheads and edited by Darrell Dillard.
Speaker 1: The head of Bloomberg Podcast is Francesco Levie. Thanks for listening,
Speaker 1: See you next time.