WEBVTT - Learning to Love Lousy Stocks 0:00:12.600 --> 0:00:15.680 Hello, and welcome to What Goes Up, a Bloomberg Weekly 0:00:15.760 --> 0:00:19.320 Markets podcast. I'm Sarah Ponzak, a reporter on the Cross 0:00:19.320 --> 0:00:22.079 Asset team, and I'm Mike Reagan, a senior editor on 0:00:22.120 --> 0:00:24.440 the Markets team. This week on the show, a Phase 0:00:24.480 --> 0:00:26.560 one trade deal between the U. S and China is 0:00:26.560 --> 0:00:29.639 signed at last, and earning season has begun, with the 0:00:29.680 --> 0:00:32.800 banks the first to report. Our guests share their takes, 0:00:33.440 --> 0:00:35.960 and of course we'll close out the episode with our tradition, 0:00:36.040 --> 0:00:39.040 the craziest thing I saw in markets this week, So 0:00:39.240 --> 0:00:41.320 I've got some bad news for you about the crazy 0:00:41.400 --> 0:00:44.080 things I want again, I don't even have to hear yours. 0:00:44.080 --> 0:00:47.000 I know. As soon as you said bad news, I knew. 0:00:47.240 --> 0:00:50.280 I knew that's what you would say. But we'll see 0:00:50.320 --> 0:00:52.280 about that. Last week you really brought it. We'll see 0:00:52.320 --> 0:00:54.520 by at this time. And remember you can always give 0:00:54.600 --> 0:00:57.000 us a call at our very own Bloomberg Podcast outline. 0:00:57.280 --> 0:01:00.280 That number is six or six three to four, read 0:01:00.360 --> 0:01:03.240 for nine zero. Tell us about the craziest things you've 0:01:03.240 --> 0:01:05.800 seen in Marcus or ask us a question, and maybe 0:01:05.800 --> 0:01:08.440 we'll even play your message on the show. Yeah, Sarah, 0:01:08.480 --> 0:01:10.840 as you said, it was quite a busy week UH 0:01:11.080 --> 0:01:13.920 in newsflow and markets this week. So luckily we have 0:01:14.040 --> 0:01:17.280 some very great guests to to break it all down 0:01:17.840 --> 0:01:19.760 for us. Joining us for the first time on the 0:01:19.800 --> 0:01:23.520 show is the chief US equity strategists at Credit Swiss, 0:01:23.720 --> 0:01:27.080 Jonathan Gallup. John, Welcome to the show. Thanks very much, Sarah. Also, 0:01:27.160 --> 0:01:29.280 it was a big bank earnings week, as you mentioned. 0:01:29.640 --> 0:01:31.400 I will tell you this, I did not really pay 0:01:31.520 --> 0:01:33.480 much attention to them. And you know why that is 0:01:33.680 --> 0:01:35.240 because we have a great guest who's going to tell 0:01:35.240 --> 0:01:37.080 you all about them right now. That's right, because our 0:01:37.360 --> 0:01:41.080 own Bloomberg reporter Lenan Newe UH covers banks very closely, 0:01:41.120 --> 0:01:43.399 and I figured I just let her read the bank earnings, 0:01:43.400 --> 0:01:46.160 so I don't have to help, all right, So you're 0:01:46.200 --> 0:01:49.520 here for right, So John, let's start with you. What 0:01:49.600 --> 0:01:52.840 are the notes you had out recently? Caught my eye. 0:01:53.280 --> 0:01:55.760 You're talking about this new product you have at the 0:01:55.800 --> 0:01:58.160 research desk at Credit Swiss. Let me just read the 0:01:58.200 --> 0:02:01.280 introduction to it. UH. Over a hundred fifty years ago, 0:02:01.360 --> 0:02:05.000 British mathematician Ada Lovelace introduced the world what would later 0:02:05.080 --> 0:02:07.600 become computer programming. First of all, I did not realize 0:02:07.600 --> 0:02:09.520 that a hundred and fifty years ago. That's amazing that 0:02:09.520 --> 0:02:12.600 that was the seeds of computer program and the fact 0:02:12.639 --> 0:02:16.000 that it was a female mathematician is quite amazing as well, 0:02:16.160 --> 0:02:18.920 ahead of her times, fascinating. So in her honor, we 0:02:18.960 --> 0:02:22.399 introduced ADA, the next generation of factor research. What makes 0:02:22.440 --> 0:02:24.840 ADA different is the sophistication of her methods and the 0:02:24.880 --> 0:02:28.360 simplicity of her insights in the market behavior. So you 0:02:28.440 --> 0:02:30.400 and then you went on to write a big report 0:02:30.400 --> 0:02:32.200 about some of the findings of this. I'm curious if 0:02:32.200 --> 0:02:34.920 I'm if I'm a client, is my relationship with Ada 0:02:35.000 --> 0:02:37.600 basically your reports or is it is there an interface 0:02:37.840 --> 0:02:40.200 people will be able to use eventually? At this point 0:02:40.240 --> 0:02:42.880 it's almost a personal relationship. Or what I mean by 0:02:42.919 --> 0:02:45.680 that is it depends on what your your take. So 0:02:45.960 --> 0:02:49.400 the way this whole thing started was that investors were 0:02:49.440 --> 0:02:52.160 calling and said, I'm an energy investor. I've gotten my 0:02:52.200 --> 0:02:54.000 calls right on the earnings, i got my call right 0:02:54.040 --> 0:02:56.400 on the price of oil, and I'm under performing the market. 0:02:56.440 --> 0:02:58.120 My socks aren't doing what they're supposed to do. What 0:02:58.200 --> 0:03:00.760 gives here? And so what we we did is we 0:03:00.800 --> 0:03:03.240 took factor research and we applied it at the company 0:03:03.320 --> 0:03:08.679 level to say, what is the market actually rewarding in energy, 0:03:08.800 --> 0:03:11.680 or in value stocks or in a dividend yield portfolio. 0:03:12.120 --> 0:03:17.000 And that's what the genesis of this was, and it's 0:03:17.040 --> 0:03:19.959 the reception has been fantastic. You hinted at what makes 0:03:19.960 --> 0:03:22.160 you different, and he said the reception has been fantastic. 0:03:22.240 --> 0:03:25.640 But before we get into some of the more macro findings, uh, 0:03:25.800 --> 0:03:28.600 the points of what you found with ADA, do you 0:03:28.639 --> 0:03:31.640 find that it's difficult? Right now? We've heard time and 0:03:31.639 --> 0:03:35.960 again that quant investing, factor investing is really difficult. We've 0:03:36.000 --> 0:03:38.240 seen the likes of a q R cutting some of 0:03:38.280 --> 0:03:40.880 its workforce. We've seen redemptions from some of the most 0:03:40.880 --> 0:03:43.680 popular quant funds out there. I mean, how can you 0:03:43.720 --> 0:03:47.120 actually go about using factors and and do it well. 0:03:47.160 --> 0:03:50.480 I'm not expecting people to simply say ada, or which 0:03:50.520 --> 0:03:52.240 is kind of way we talked about it. AID is 0:03:52.280 --> 0:03:55.560 telling me to be in high dividend yielding stocks. So 0:03:55.640 --> 0:03:57.920 that's what I'm gonna do. What it's what it's saying 0:03:58.040 --> 0:04:00.760 is all us being equal. This is where the market's 0:04:00.800 --> 0:04:03.240 going to pay you. Here are the companies that are 0:04:03.240 --> 0:04:07.520 the most levered or most exposed to those characteristics. Now 0:04:07.600 --> 0:04:10.720 let's start a conversation from these are the high dividend 0:04:10.760 --> 0:04:14.160 paying stocks within the stable space, the markets rewarding it. 0:04:14.600 --> 0:04:17.240 Here's why. Now go and start to do your work. 0:04:17.279 --> 0:04:20.000 So you're starting where the wind is in your sales. 0:04:20.320 --> 0:04:23.080 So in in many ways it's it's very different than 0:04:23.120 --> 0:04:25.560 when you would get from an a q R where 0:04:25.560 --> 0:04:28.839 they're really depending on using you using them as an example, 0:04:29.080 --> 0:04:31.480 but they're where they're really depending on the quad to 0:04:31.640 --> 0:04:34.640 be the portfolio. This is really a tool. One line 0:04:34.640 --> 0:04:37.200 in this report I really struck home with me is 0:04:37.560 --> 0:04:40.159 you talk about sector biases. You say sectors are naturally 0:04:40.200 --> 0:04:44.240 exposed to specific characteristics. For examples, utilities tend to have 0:04:44.320 --> 0:04:46.880 higher higher dividend yields in the broad market, and by 0:04:46.880 --> 0:04:49.560 extension of high dividend yield basket will tend to be 0:04:49.680 --> 0:04:52.560 overweight utilities. I think this is really important because all 0:04:52.600 --> 0:04:55.040 throughout last year, you know, when people are rotating from 0:04:55.040 --> 0:04:58.479 growth to value. You know, as kind of an old 0:04:58.480 --> 0:05:00.720 man looking at the market, I was gonna, no, they're 0:05:00.800 --> 0:05:03.760 they're they're rotating out of tech and into banks or 0:05:03.800 --> 0:05:06.760 into energy. So I'm curious, like how much of the 0:05:06.839 --> 0:05:11.359 market's motivations do you think of investors motivations, still cling 0:05:11.440 --> 0:05:14.200 to those old sort of ideas of I'm going to 0:05:14.320 --> 0:05:16.960 buy the sector rather than I'm going to buy the factor. Well, 0:05:17.000 --> 0:05:19.799 you're you're you're actually asking several questions. So let me 0:05:21.560 --> 0:05:22.960 so so let me let me you know, if we 0:05:23.040 --> 0:05:25.800 started at the more, maybe you know, the biggest issue 0:05:25.839 --> 0:05:29.560 is that we have this perception that certain investment characteristics 0:05:29.760 --> 0:05:32.280 are good and others are bad. So we like high 0:05:32.320 --> 0:05:34.800 quality portfolios, we like stocks that don't have a lot 0:05:34.839 --> 0:05:38.520 of debt, we like stocks with growth and big global footprints. 0:05:38.520 --> 0:05:42.400 But every one of those characteristics does well or poorly 0:05:42.640 --> 0:05:45.680 in certain situations. I'll give you an example. Um right now, 0:05:45.800 --> 0:05:51.000 companies with deteriorating fundamentals that are heavily shorted are outperforming 0:05:51.000 --> 0:05:53.480 the market. Um And And you wouldn't normally think that 0:05:53.520 --> 0:05:56.520 because it would sound like their negative characteristics. And what 0:05:56.640 --> 0:05:59.280 the key here is is to say, I'm not coming 0:05:59.279 --> 0:06:01.360 in with any boy. Let me you know, you know, 0:06:01.400 --> 0:06:03.120 if I have an opinion on what what types of 0:06:03.160 --> 0:06:05.160 things I think are gonna happen, or if I'm looking 0:06:05.200 --> 0:06:07.719 at trends, I want to start by saying that I 0:06:07.720 --> 0:06:09.760 I don't care all I want to do here is 0:06:09.839 --> 0:06:11.880 make money in the markets. Now tell me what the 0:06:11.880 --> 0:06:14.080 best way to do that is. So that phenomenon you 0:06:14.120 --> 0:06:16.480 just mentioned, is that a function of shortcovering you think, 0:06:16.520 --> 0:06:19.080 or is it the notion that the economic aid is 0:06:19.080 --> 0:06:21.080 turning around, gonna start firming up a little bit, or 0:06:21.080 --> 0:06:22.720 maybe a combination of both. No, No, it's it's the 0:06:22.800 --> 0:06:25.360 ladder point. And I think that people misss think about. 0:06:25.400 --> 0:06:28.400 A short company is a company that in some way 0:06:28.480 --> 0:06:31.080 is broken. It's some hedge funds somewhere things. This is 0:06:31.080 --> 0:06:34.200 a company that may go bankrupt. And if the economy 0:06:34.440 --> 0:06:37.120 is weak, which it was let's say, you know, for 0:06:37.160 --> 0:06:39.920 the majority of the last eighteen months or so, then 0:06:40.400 --> 0:06:43.680 a broken company and a weak economy bad news. All 0:06:43.680 --> 0:06:46.200 of a sudden. If the economy is getting better, they're 0:06:46.200 --> 0:06:49.000 gonna get pulled away from the precipice and things are 0:06:49.000 --> 0:06:51.160 gonna get better for them, and they're going to actually 0:06:51.200 --> 0:06:54.080 improve more than a really healthy company. And this is 0:06:54.160 --> 0:06:58.240 really frustrating for investors with a quality biased like I 0:06:58.279 --> 0:07:00.520 bought the best company. They don't have, you know, dead 0:07:00.560 --> 0:07:04.760 on their balance sheet. Their businesses run really clean and 0:07:04.920 --> 0:07:07.640 everything right, and and in improving economy and they're getting 0:07:07.680 --> 0:07:10.520 less in the dust by this broken company with band management. 0:07:10.840 --> 0:07:15.120 And that's the whole point. They're bias towards quality is 0:07:15.200 --> 0:07:18.120 a dangerous bias if it's if it's not put in context. 0:07:18.320 --> 0:07:20.040 I do want to pick up on a point of 0:07:20.120 --> 0:07:24.840 one of the questions then, Mike, Yeah, but about the 0:07:24.880 --> 0:07:30.880 fact that factors don't necessarily equate to particular sectors. In fact, 0:07:30.880 --> 0:07:33.720 across sectors you can find different factors, and you have 0:07:33.920 --> 0:07:36.640 a very interesting chart. And I find it interesting because 0:07:36.640 --> 0:07:41.240 in my reporting last year about low volatility, people constantly, 0:07:41.440 --> 0:07:44.920 constantly looked at low volatility and said, well, low volatility 0:07:44.960 --> 0:07:47.640 is doing well because utilities, real estate, consumer stables are 0:07:47.640 --> 0:07:50.200 doing well. But what you actually find is that the 0:07:50.320 --> 0:07:53.360 areas of low volatility, the pockets of that factor that 0:07:53.400 --> 0:07:56.560 actually did well, we're in cyclical areas the likes of 0:07:56.680 --> 0:08:00.720 financials energy. Can you maybe dive a bit deeper into 0:08:00.760 --> 0:08:06.160 this difference, breakdown the idea that factors aren't just sectors 0:08:06.200 --> 0:08:08.200 you can't go across. So so, sarahly, one of the 0:08:08.200 --> 0:08:10.560 things that we that we start with is that we 0:08:10.600 --> 0:08:13.280 look at the factor or these basically, what's the factor. 0:08:13.440 --> 0:08:15.760 It's just companies that are tilted towards a certain behavior, 0:08:16.160 --> 0:08:18.080 and we we look at them and say, I want 0:08:18.080 --> 0:08:21.040 to eliminate the sector issues. So if we're looking at 0:08:21.040 --> 0:08:23.520 low vall as what a low ball banks do compared 0:08:23.560 --> 0:08:26.320 to high ball banks, what a low vall um staples 0:08:26.320 --> 0:08:29.560 do compared to you know, other staples. And what we 0:08:29.640 --> 0:08:32.199 found was is that the area that low Vall did 0:08:32.240 --> 0:08:35.240 the best in were the most high vall parts of 0:08:35.240 --> 0:08:38.800 the market. So so in energy and materials and discretionary 0:08:38.800 --> 0:08:41.040 in banks, we would say, well, Lovall didn't do well there, 0:08:41.360 --> 0:08:44.600 but in fact that's where really the juice was on 0:08:44.640 --> 0:08:49.200 this trade. So yes, utilities and staples and telco's did well. 0:08:49.640 --> 0:08:52.679 But if you were a professional investor um who was 0:08:52.720 --> 0:08:55.080 looking at this kind of work, you you would have 0:08:55.120 --> 0:08:57.720 played it entirely differently. You know, John, when I walked 0:08:57.720 --> 0:09:01.040 in here, you were going through some charts with Sarah. 0:09:01.080 --> 0:09:03.480 I think you predicted the I s M manufacturing could 0:09:03.559 --> 0:09:05.840 could hit fifty two and a few months and there's 0:09:05.840 --> 0:09:08.480 a trade involved in that. Yeah. So so here's what 0:09:08.640 --> 0:09:12.360 here's what the background is that the what we call 0:09:12.520 --> 0:09:14.840 the I s M is a serving and so they 0:09:14.840 --> 0:09:18.000 ask a bunch of people who buy equipment for factories 0:09:18.040 --> 0:09:20.439 that they're purchasing managers and they say, how do you 0:09:20.480 --> 0:09:22.959 think it's going. Are you seeing demand for equipment? Are 0:09:23.000 --> 0:09:24.840 you able to get the equipment or the parts that 0:09:24.880 --> 0:09:28.200 you need? And from that they derive this score on 0:09:28.240 --> 0:09:31.960 how good the economy is. And typically what they're reading 0:09:32.080 --> 0:09:35.240 is lines up pretty well with how the industrial data 0:09:35.280 --> 0:09:37.040 is coming in, you know, shipments and things like that. 0:09:37.320 --> 0:09:41.200 And right now the economy is saying that things are 0:09:41.240 --> 0:09:43.960 okay and the I s M survey is saying things 0:09:44.000 --> 0:09:46.840 are totally broken. There the gap is about as wide 0:09:46.960 --> 0:09:50.120 as it's ever been, and so the question is why 0:09:50.200 --> 0:09:53.160 and how does that resolve? Because these gaps they're gonna close, 0:09:53.240 --> 0:09:55.440 either because the economy is going to follow the I 0:09:55.559 --> 0:09:57.760 s M down and do to poorly, or the I 0:09:58.040 --> 0:10:00.360 M is magically to go up. The guy who buying 0:10:00.400 --> 0:10:04.040 the equipment for his factory is totally freaked out by 0:10:04.120 --> 0:10:06.679 trade issues, so when he's asked, how do you think 0:10:06.720 --> 0:10:08.719 it's going all these things is I'm never going to 0:10:08.760 --> 0:10:11.600 get these parts because they were manufactured in China. So 0:10:11.679 --> 0:10:14.480 I'm really concerned now that we have this trade deal done, 0:10:14.800 --> 0:10:16.839 now that we're starting to see a pick up in 0:10:16.840 --> 0:10:19.480 in in some of the economic data, especially in Europe 0:10:19.480 --> 0:10:23.280 and China in their domestic economies. My belief in the 0:10:23.360 --> 0:10:26.600 data says that it's not that the industrial data is 0:10:26.600 --> 0:10:28.840 gonna get worse. It's that the survey day is going 0:10:28.880 --> 0:10:30.960 to get better. And what does that do is it 0:10:31.000 --> 0:10:34.720 pushes stocks up, and it pushes more cyclical companies, and 0:10:34.760 --> 0:10:38.240 it pushes lower quality companies like those short um kind 0:10:38.280 --> 0:10:40.560 of stocks that we're talking about. Those end up bleeding 0:10:40.600 --> 0:10:55.600 in that environment. Lennon, I want to bring you in 0:10:55.640 --> 0:10:58.000 here because we did hear from the likes of the 0:10:58.120 --> 0:11:01.160 largest US banks, the sleek JPMR Game, Morgan, Stanley, Engleman, 0:11:01.200 --> 0:11:04.600 stacked Bank of America, you name it um on a 0:11:04.640 --> 0:11:07.440 macro level to start off, do you get the sense, uh, 0:11:07.640 --> 0:11:10.960 similar to what Jonathan is saying that the macro outlook 0:11:11.040 --> 0:11:13.440 is still strong and the consumers still looks strong, at 0:11:13.480 --> 0:11:16.880 least from the bank's perspective. Yes, definitely, Sarah. So throughout 0:11:16.920 --> 0:11:19.360 this whole period when everyone's freaking about and freaking out 0:11:19.400 --> 0:11:22.600 about trade or recession concerns, and bank CEO's have all 0:11:22.640 --> 0:11:25.720 been very bullish. They've all talked about the positive US 0:11:25.800 --> 0:11:29.040 consumer driving a lot of business UM still not really 0:11:29.080 --> 0:11:31.480 being harmed by all the uncertainties and the macro sort 0:11:31.480 --> 0:11:34.679 of concerns. So yeah, they've been pretty optimistic and they 0:11:34.720 --> 0:11:37.800 haven't really turned more pessimistic as a as of this quarter. 0:11:38.880 --> 0:11:40.719 One thing I love to look at BANC earnings for 0:11:40.880 --> 0:11:43.679 is the credit quality trends. Uh, And I don't know, 0:11:43.880 --> 0:11:47.280 for years now, everyone had and their brother has been predicting, oh, 0:11:47.320 --> 0:11:48.920 that they're about to turn and they're about the you know, 0:11:48.960 --> 0:11:52.160 the credit qualities. Yeah, what are you saying? As far 0:11:52.200 --> 0:11:54.080 as you know, delinquencies and that sort of thing, it's 0:11:54.080 --> 0:11:58.280 still very good credit quality UM, not a huge deterioration. 0:11:58.880 --> 0:12:02.480 We are looking at those very closely. At Bank of America, 0:12:02.559 --> 0:12:04.880 the consumer business started to do a little bit worse, 0:12:04.920 --> 0:12:06.960 but that's not really a credit issue. It's more that 0:12:06.960 --> 0:12:09.720 they're earning less because of interest rate cuts by the FED. 0:12:09.840 --> 0:12:12.120 So we're keeping an eye on it, but so far 0:12:12.240 --> 0:12:15.120 they've done pretty well with credit. Just a quick question 0:12:15.200 --> 0:12:16.640 as because we've been we do a lot of work 0:12:16.640 --> 0:12:19.520 looking at UM earnings data cross banks. But if you 0:12:19.559 --> 0:12:22.120 break the banks into two groups, which is the big 0:12:22.120 --> 0:12:25.760 money center banks and then the regional banks, and putting 0:12:25.760 --> 0:12:29.440 aside some company specific issues, but the big money center 0:12:29.480 --> 0:12:32.160 banks to Wall Street banks are expected to deliver much 0:12:32.240 --> 0:12:37.880 much better results and the regional banks UM not as much. 0:12:37.960 --> 0:12:42.199 Any thoughts on what's causing those those differences and how 0:12:42.240 --> 0:12:44.280 that plays out, the big banks would be so happy 0:12:44.280 --> 0:12:46.880 that you said that. So I think a lot of 0:12:46.920 --> 0:12:50.400 it comes down to digital and to technology. The big 0:12:50.400 --> 0:12:53.080 banks have a lot of money to spend on these tools. 0:12:53.080 --> 0:12:55.319 They have a lot of money to really dive into 0:12:55.360 --> 0:12:58.480 that digital mobile app stuff, and so they're really making 0:12:58.480 --> 0:13:01.720 the bank much more efficient. They're making sure that consumers 0:13:01.800 --> 0:13:04.839 don't call, you know, a phone line to ask for 0:13:04.880 --> 0:13:07.920 their balance and instead or doing everything by phone, um, 0:13:07.960 --> 0:13:10.360 you know, by their mobile app. And so they're really 0:13:10.559 --> 0:13:13.079 pushing into a lot of efficiency because they can make 0:13:13.080 --> 0:13:15.719 that investment in technology. So I would have guessed the 0:13:15.760 --> 0:13:17.880 interest rate scenario is part of it too. You know, 0:13:17.920 --> 0:13:21.240 your regional banks are more sort of saving loan type 0:13:21.240 --> 0:13:24.400 of businesses and and the big ones are more diversified. 0:13:24.480 --> 0:13:28.440 Is that m I just definitely more diversified, and UM 0:13:28.760 --> 0:13:31.400 for now have not seen a massive impact from the 0:13:31.400 --> 0:13:34.480 fed's rate cuts, but that's coming well. You also even 0:13:34.520 --> 0:13:36.920 just look at this past quarter, for example, and you 0:13:36.960 --> 0:13:39.920 saw such a major boost from trading desks at the 0:13:39.960 --> 0:13:42.680 major banks, which isn't necessarily something that your regional banks 0:13:42.720 --> 0:13:45.520 would be doing either. Right, No, And we've been talking 0:13:45.520 --> 0:13:48.760 a long time about the structural decline in trading and 0:13:48.800 --> 0:13:50.679 whether you know this is just a trend that's going 0:13:50.720 --> 0:13:53.000 to keep continuing. But the fick trader has got to 0:13:53.040 --> 0:13:55.319 break this quarter. So bond traders, let me just give 0:13:55.320 --> 0:13:57.840 you a few metrics here. JP Morgan came in a 0:13:57.920 --> 0:14:02.720 billion dollars higher than analysts predicted, Goldman Sacks six, Surgeon 0:14:02.800 --> 0:14:06.920 fictuating um and Morgan Stanley more than doubled from a 0:14:07.000 --> 0:14:10.760 year earlier. So that's a huge easy comparison to eighteen right. 0:14:10.800 --> 0:14:12.959 I mean the narrative then was that all the clients 0:14:13.000 --> 0:14:15.480 were sitting on their hands, not trading anything. Does it 0:14:15.480 --> 0:14:17.199 looked like the world was ending? Yeah, And now they've 0:14:17.280 --> 0:14:18.720 run to the other side of the boat and they said, oh, 0:14:18.720 --> 0:14:20.760 everything's fine. Trade, it's going to be worked out, and 0:14:20.800 --> 0:14:23.080 so let's trade. Let's do a lot of business. Let's 0:14:23.280 --> 0:14:27.000 trade a lot of bonds, rates, mortgages. John, I'm gonna 0:14:27.040 --> 0:14:29.600 packing about five questions off of what well, non just 0:14:29.640 --> 0:14:31.400 had to say, all right, so you ready want to 0:14:31.400 --> 0:14:34.480 take notes like you know, you see pal take notes 0:14:34.520 --> 0:14:37.040 in the Nope. But I I wonder if you do 0:14:37.240 --> 0:14:39.680 buy into that notion that credits sort of leads the 0:14:39.680 --> 0:14:42.240 the equity market. Um, it's one of these common tropes 0:14:42.280 --> 0:14:44.520 you hear all the time. I'm curious if it's it's 0:14:44.720 --> 0:14:47.800 one that's worth believing, and if so, sort of where 0:14:47.800 --> 0:14:50.400 do you look first for that deterioration? You know, is 0:14:50.440 --> 0:14:52.560 it in the consumer end? When if you start to 0:14:52.560 --> 0:14:55.600 see Joba's claims pick up? Is it sort of something 0:14:55.640 --> 0:14:59.320 that you just can't predict? Uh, you're right. You asked 0:14:59.320 --> 0:15:02.320 five questions. But so if you said let me, let me, 0:15:02.400 --> 0:15:03.880 let me so, let me go and reframe it into 0:15:03.920 --> 0:15:10.920 the question I want to answer, which is i've intermedia trading, 0:15:11.160 --> 0:15:16.240 so but the you know so you're not and pivot 0:15:17.240 --> 0:15:20.600 so but the um, the question is what would basically 0:15:20.600 --> 0:15:22.600 make things deteriorate from here? What what can go wrong 0:15:22.680 --> 0:15:25.440 that we're problematic? And I think that there's two things 0:15:25.520 --> 0:15:27.800 and we're seeing neither one of them. But the first 0:15:27.840 --> 0:15:31.680 thing is is that everyone's assuming right now that inflation 0:15:31.880 --> 0:15:34.800 will not be a problem over the next year, and 0:15:34.880 --> 0:15:37.040 that even though we have a tight labor market, and 0:15:37.080 --> 0:15:39.360 even though we're probably going to see an incremental pickup 0:15:39.360 --> 0:15:41.400 and inflation, it's gonna be nothing, which is going to 0:15:41.440 --> 0:15:44.360 freak the fat out a really spooked market. Now, if 0:15:44.400 --> 0:15:46.880 you ask me whether I agree with that consensus view, 0:15:47.120 --> 0:15:49.960 sometimes I do. I don't, but right now I absolutely do. 0:15:50.120 --> 0:15:52.120 I think that we're it's going to stay contained and 0:15:52.160 --> 0:15:55.720 that's gonna be really healthy. The second issue is if 0:15:55.760 --> 0:15:58.280 you look at and there's two different kinds of jobs data. 0:15:58.360 --> 0:16:01.160 There's are we hiring people and are we firing people? 0:16:01.360 --> 0:16:04.280 We care about both, but we really care about the 0:16:04.320 --> 0:16:08.000 fires um. And so what we're seeing is the weekly 0:16:08.080 --> 0:16:11.560 jobless claims, which is that read just keeps getting lower 0:16:11.600 --> 0:16:15.640 and lower, and all indications are that that it's going 0:16:15.680 --> 0:16:19.320 to stay healthy. But if that turned, it's you know, 0:16:19.440 --> 0:16:21.760 if we look at the two things that typically tell 0:16:21.800 --> 0:16:23.960 you this there's a real problem. The first one everybody 0:16:24.000 --> 0:16:26.160 focuses on is the yel curve, and we talked about 0:16:26.200 --> 0:16:28.520 that last year quite a bit, but probably the one 0:16:28.560 --> 0:16:31.600 that's more important. If you see the weekly jobless claims 0:16:31.800 --> 0:16:35.280 kind of spike up, watch out, that's a problem. But 0:16:35.400 --> 0:16:36.880 right now we're not seeing that. So those are the 0:16:36.880 --> 0:16:39.800 things that matter. You know. It's funny about inflation. I 0:16:39.800 --> 0:16:42.640 I everyone came out saying, oh, this was a weaker 0:16:42.640 --> 0:16:46.120 than expected CPI report this week. Of course CPI was 0:16:46.120 --> 0:16:49.440 still two point three percent, you know. Um, So I 0:16:49.440 --> 0:16:51.880 wonder if part of it is that everyone has sort 0:16:51.920 --> 0:16:54.960 of recalibrated their expectations of the Fed to some degree, 0:16:55.040 --> 0:16:58.360 the symmetry of that target that U they will allow 0:16:58.560 --> 0:17:00.640 to run a little hot. And I know they look 0:17:00.680 --> 0:17:03.200 at PC more than than c p I, but they will, 0:17:03.560 --> 0:17:05.920 you know, allow a breach of two percent, maybe a 0:17:05.920 --> 0:17:08.840 little higher than what people have previous previously expected. Well 0:17:08.960 --> 0:17:11.320 if if if first of all, as you said, you know, 0:17:11.400 --> 0:17:13.840 PC is is what the Fed looks at. And for 0:17:13.880 --> 0:17:16.520 those people here don't like follow the jargon on what's 0:17:16.560 --> 0:17:18.399 PC and c p I. So you go to the 0:17:18.440 --> 0:17:21.840 grocery store and you realize that butter is doubled in price, 0:17:22.400 --> 0:17:25.040 So you know, is that inflation? It is if you 0:17:25.080 --> 0:17:27.960 actually buy butter at twice the price. But if you 0:17:28.000 --> 0:17:30.240 do what most of us do, would say, wow, but 0:17:30.280 --> 0:17:33.000 it is expensive. I'll buy olive oil, which has not 0:17:33.040 --> 0:17:35.480 gone up in price, Then you actually you didn't experience 0:17:35.520 --> 0:17:39.240 any inflation. You substitute things out and and so there's 0:17:39.400 --> 0:17:42.159 if you look at it in that context, which is overall, 0:17:42.320 --> 0:17:44.639 am I paying more money when I go to the 0:17:44.640 --> 0:17:47.320 grocery store to get the groceries that I need? That 0:17:47.400 --> 0:17:49.520 number is still a really low number. And the FED 0:17:49.560 --> 0:17:51.720 if they say not that the two percent, and we 0:17:52.000 --> 0:17:54.760 think that two percent is a ceiling, it's not. If 0:17:54.760 --> 0:17:57.359 it's kind of a central tendency or or you know 0:17:57.440 --> 0:18:01.439 your target, then we we were not even close to 0:18:01.440 --> 0:18:04.679 two let alone that being an average over over purity 0:18:04.800 --> 0:18:07.960 of years. So there's really at this point not a 0:18:07.960 --> 0:18:09.760 lot of threat, even though some of these readings are 0:18:09.840 --> 0:18:11.359 tipping up a little bit. All right. So if we 0:18:11.400 --> 0:18:14.119 set the backdrop based on this conversation we're having, the 0:18:14.160 --> 0:18:17.879 economy is healthy, turning to the upside, Inflation is muted, 0:18:17.920 --> 0:18:20.480 interest rates are low. So at the end of last year, 0:18:20.760 --> 0:18:23.399 as we were discussing earlier, we saw the value trade 0:18:23.520 --> 0:18:26.880 take off. This year so far it's been completely squashed. 0:18:26.880 --> 0:18:29.080 It's as if we're back to the beginning of Bigger 0:18:29.200 --> 0:18:31.440 is better. You see the things doing well, Apple doing 0:18:31.480 --> 0:18:35.240 well from your point of view, especially using the technology 0:18:35.280 --> 0:18:37.840 that you guys have been using to dissect all of 0:18:37.880 --> 0:18:42.200 this is the value trade? Over? Can you know yet? 0:18:42.240 --> 0:18:45.200 And if not, where can you squeeze some more juice 0:18:45.240 --> 0:18:47.720 out of it? Right? So I think that there So 0:18:47.760 --> 0:18:49.919 I think there's there's two issues here. Um, when you 0:18:50.000 --> 0:18:52.720 call it the value trade, you're kind of taking a 0:18:52.720 --> 0:18:55.679 whole bunch of things and you're squishing into value. So 0:18:55.680 --> 0:18:59.480 so so if you said our low pe stocks that 0:18:59.480 --> 0:19:02.040 that under are formed by ten percent over the less 0:19:02.119 --> 0:19:04.000 you know, let's say year to eighteen months that have 0:19:04.119 --> 0:19:07.560 jumped in the fourth quarter by roughly ten percent, is 0:19:07.600 --> 0:19:10.840 that part of the trade mostly over? I think the 0:19:10.840 --> 0:19:14.359 answers yes. However, if you look at the same issue 0:19:14.400 --> 0:19:17.760 with small caps, it looks like they have a lot 0:19:17.840 --> 0:19:21.480 more room to run if you look at non US companies, 0:19:21.760 --> 0:19:25.320 so Europe relative to the US more to run, emerging 0:19:25.400 --> 0:19:28.520 markets more to run. Um, So you almost need to 0:19:28.680 --> 0:19:30.879 not you almost you absolutely need to look at this 0:19:31.359 --> 0:19:35.879 in more more individual slices because they're not all the same. 0:19:36.280 --> 0:19:38.639 But in terms of how long does this continue to 0:19:38.680 --> 0:19:42.440 go for our take is probably something in the three 0:19:42.480 --> 0:19:45.520 to six months range. This is not a new world 0:19:45.680 --> 0:19:48.800 where where the economy is gonna take off, and and 0:19:48.800 --> 0:19:52.040 and the like. This is a near term trade. It's 0:19:52.040 --> 0:19:55.440 a bounce. If you're a stock trader, this is super important. 0:19:55.640 --> 0:19:59.080 If you're a long term investor, probably less. So, you know, 0:19:59.119 --> 0:20:02.280 I think one consensus or near consensus from a lot 0:20:02.280 --> 0:20:04.320