Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast.
Speaker 1: My name is Mike Reagan. I'm a senior editor at
Speaker 1: Bloomberg DNA hawk Across as it reported with Bloomberg at
Speaker 1: this week on the show, Well, for the last few weeks,
Speaker 1: we've been focused on the train wreck in the crypto market,
Speaker 1: but there's been some pretty interesting developments in the traditional markets.
Speaker 1: The SMP five hundred is up almost thirteen pcent from
Speaker 1: its bear market low in October. Interest rates have stopped
Speaker 1: their alarming surge higher, and there seems to be some
Speaker 1: cautious optimism that the worst of the inflation shock, not
Speaker 1: to mention, the worst of the monetary policy tightening by
Speaker 1: the Federal Reserve, maybe behind us. But is that really
Speaker 1: the right take? Right now, we'll talk to a global
Speaker 1: macro strategist who isn't quite convinced that inflation will fall
Speaker 1: completely back to Earth anytime soon. But Volta, Before we
Speaker 1: get into that, I have to ask, have you seen
Speaker 1: the movie e T Of course? Of course, okay, you never,
Speaker 1: I never know, you know. As an eighties child, of
Speaker 1: course I had to see it. But so many eighties
Speaker 1: movies in retrospect are problematic now the whole John Hughes
Speaker 1: series of movies are have all been canceled, I think
Speaker 1: by by the problematic. I don't know that's what. That's what.
Speaker 1: I don't you know. We were dumb in the eighties.
Speaker 1: We didn't know how problematic some of those movies were.
Speaker 1: But I guess that's a little teaser for my craziest
Speaker 1: Thing in the Market segment. I will say. I'm also
Speaker 1: excited because this week's guest is a native French speaker,
Speaker 1: and I know you've been taking French lessons, so yes,
Speaker 1: but I'm so bad. Don't call me out, No, I
Speaker 1: want you to. You got to introduce them in my
Speaker 1: French is horrible. What's that mean? It's horrible? Obviously, Hello,
Speaker 1: Hi horrible. We have Vincent Tellut. I hope I did
Speaker 1: a really good job with that pronunciation. He's the director
Speaker 1: of Global micro Strategy at Stone ex Financial. Vincent, welcome
Speaker 1: back to the show. Letter to be back, but maybe
Speaker 1: just to start out. So you just had this this
Speaker 1: note doubt about the seven deadly sins within the market,
Speaker 1: and you focus on tech specifically, and I'm thinking that
Speaker 1: actually is a really good view into how you're viewing
Speaker 1: the market and everything that's been going on, especially with
Speaker 1: some of the froth and speculation that we've seen over
Speaker 1: the last year. So maybe could you just go over
Speaker 1: how you're seeing things right now. I think, you know,
Speaker 1: this really reminds me of of what happened um in
Speaker 1: the summer when we also had a slightly positive INFACI
Speaker 1: and surprise and you know, all the strategies that had
Speaker 1: issued the peak Inflacian note in January, February, March April
Speaker 1: manager got this one, uh and we had a same
Speaker 1: story monster rally, a little bit of mean stock friend
Speaker 1: z that was bad, bath and beyond back then, and
Speaker 1: then the view that all right, you know, just just
Speaker 1: a couple of more hikes and will be done, and
Speaker 1: inflation is gonna go away, and it's time to to
Speaker 1: to go back in the hyper growth highly valued unicorn
Speaker 1: that we're soaring in in in You know, again, we
Speaker 1: we've seen the movie before. The main difference between this
Speaker 1: rally and and this summers is I do believe the
Speaker 1: path of this inflation is more valid now. I mean,
Speaker 1: I was probably one of the earlier strategies to come
Speaker 1: out with the view that would have eight nine percent
Speaker 1: in fish in the US in two and even I
Speaker 1: I have to admit, yes, the economy is disinflating, inflashing
Speaker 1: is going to slow. Um Where I disagree with the
Speaker 1: markets view is that it's not going to slow back
Speaker 1: to I think that if you look at a one
Speaker 1: year swap, we're probably looking at two point nine by
Speaker 1: next year and then slowly going down to two percent
Speaker 1: after that. This is the part that I disagree with.
Speaker 1: I think we're going to look at a sustainably higher
Speaker 1: plateau of inflation around four point four or five percent.
Speaker 1: And I would actually argue that's a good thing. Uh,
Speaker 1: And that's something that the market is still not pricing. Um.
Speaker 1: So I do think that this will eventually end in tears,
Speaker 1: which is one of the reasons why I wrote this
Speaker 1: piece on on the seven. That is enough secon value
Speaker 1: to show that a lot of the behaviors that we
Speaker 1: had during double years are still there. If anything, they're
Speaker 1: even more prevalent because the business is deteriorating. So a
Speaker 1: lot of the kind of funny accounting being employees and
Speaker 1: start over hiring, buying, fake growth, we've ad all that
Speaker 1: is still happening. You know. Again, things never go in
Speaker 1: a straight line. And now it's it's kind of a
Speaker 1: time where the deflation work inflation worries of taking a
Speaker 1: step back, but I expect that they will eventually return. Yeah,
Speaker 1: I was reading that uh seven Deadly Sins note, Vincent,
Speaker 1: and let me just read out one line here because
Speaker 1: it really uh stuck with me. It's it's sort of
Speaker 1: towards the end of the note, kind of kind of
Speaker 1: where your conclusion is, and you say, the real Fed
Speaker 1: pivot will not be to cut rates in three, but
Speaker 1: to accept that a decade, a decade of five percent
Speaker 1: inflation is the least painful way to de leverage the economy,
Speaker 1: reduce inequalities, and restore sustainable growth, while a decade of
Speaker 1: five percent inflation or I guess to your point, you know,
Speaker 1: maybe four and a half five. How does that play
Speaker 1: out in the markets and with the Fed? You know,
Speaker 1: right now the Fed funds futures are are pricing at
Speaker 1: a terminal rate of right around five would this course
Speaker 1: the Fed even higher than that? And and what's really
Speaker 1: driving that five percent for a decade in inflation? You
Speaker 1: know what? What's what? Let's unpack this whole note a
Speaker 1: little bit so, and my view is that the true
Speaker 1: people of three will will not so be be so
Speaker 1: much the two or three rate cuts of the market
Speaker 1: currently has priced. So I do think we raised to
Speaker 1: five per cents, and the pace of it ultimately is irrelevant, right,
Speaker 1: I mean maybe the seventy you know bibs monster hikes
Speaker 1: are over right, So yeah, we can probably you know,
Speaker 1: afford to do a couple of fifty even twenty five.
Speaker 1: But then I think rates do not drop after you know,
Speaker 1: mid twenty three, like the futures market has it, because
Speaker 1: inflation doesn't redrop. And the reason inflation doesn't drop is
Speaker 1: because that by then inflation will be mostly about wages,
Speaker 1: and wages are I would expect will be around four
Speaker 1: or five percent by then, and I think we'll get
Speaker 1: to a point where the third will be in the
Speaker 1: position of George W. Bush after the invasion of Iraq.
Speaker 1: So you remember two thousand three, right, Well, we're going
Speaker 1: looking for w M. D Uh. We don't find them. Um,
Speaker 1: So the war is not going well, the occupation is
Speaker 1: not going well. So what do we do? We declare victory? Right,
Speaker 1: and we never talked about it after again, right, this
Speaker 1: is when you had George W. On the aircraft carry
Speaker 1: the big sign. Mission accomplished. Right. If I were J Power,
Speaker 1: I would do the exact same thing. I'd say, Hey,
Speaker 1: mission accomplished. Right. But by May I think we we'll
Speaker 1: get to maybe four or five percent inflation. We'll have
Speaker 1: four or five percent fat funds rate. So so he's
Speaker 1: done it. He's the volcan time. He's raised the fat
Speaker 1: funds rate above the you know, the rate of inflation.
Speaker 1: Mission accomplished. And then we should never talk again about
Speaker 1: what happened in one when the feed was buying you know,
Speaker 1: thirty five billion of mrtgage backed securities when we had
Speaker 1: the massive housing bubble. That that we can forget, just
Speaker 1: like we forgot about the UMD Dolph. Just get rid
Speaker 1: of that supercent target. Yes, now put that on on hold.
Speaker 1: That wouldn't be the worst thing in the world. And
Speaker 1: that's my point. I mean, if you look back at
Speaker 1: the history of the two percent target, it's it's amazed number.
Speaker 1: It came, I think from a press conference in New
Speaker 1: Zealand in the late eighties. They had a problem inflasion
Speaker 1: back then, and they had an economist on TV and
Speaker 1: you know, he was asked, what what what is I
Speaker 1: think inflation is good target? For inflation is two percent,
Speaker 1: why too, you know, not too high, not too low.
Speaker 1: I mean, there was no there's no scientific backing behind
Speaker 1: the two percent. If you look at the distribution of
Speaker 1: inflation and growth in the US, will actually notice that
Speaker 1: growth has been actually faster, Really economic growth has been faster.
Speaker 1: Inflation has been in the four to five percent range.
Speaker 1: And you can very much, very well make the case
Speaker 1: that what really hurts is when you have inflation at
Speaker 1: above ten percent or really unpredictable inflation, because this is
Speaker 1: when agents complan for the future, Investments don't get made,
Speaker 1: people wore stuff. But as long as you have stable,
Speaker 1: somewhat moderate inflation, whether it's two or four or five percent,
Speaker 1: doesn't really change things. And I think that's the way
Speaker 1: most Americans also feel like the most Americans don't don't
Speaker 1: even know what the FED does. They don't know about
Speaker 1: the two percent faction, and they just think of inflation
Speaker 1: as as whatever happened in the past, So that that's
Speaker 1: where the inflasion expectation channel comes in. So a decade
Speaker 1: of four or five percent in facition is is really
Speaker 1: not bad. I think we are in a period where
Speaker 1: we have a structurally tighter labor market, mostly because of demography,
Speaker 1: uh and also because we no longer have access to
Speaker 1: Mexican labor um. A lot of the great moderation of
Speaker 1: the past thirty years was with the product of free forces.
Speaker 1: On the labor side, you had about twelve million Mexicans
Speaker 1: that across the border between UM basically the under the
Speaker 1: tecular crisis n four and two thousand seven, and that
Speaker 1: this flow is stopped and even reversed since COVID, so
Speaker 1: we no longer have cheap labor. On the good side,
Speaker 1: it was a China shock, right, We had this massive
Speaker 1: evaluation on the RMB about at that the station crisis,
Speaker 1: the entry of China and t o them subsidizing all
Speaker 1: sorts of productions. So suddenly we have access to the
Speaker 1: supply Chaine courtesy of of Amazon and First World more
Speaker 1: than Amazon obviously. You know, if you follow what's been
Speaker 1: happening in China right now, this is maybe not why
Speaker 1: you want to supply chain and and this is not
Speaker 1: you know, if you just to get a demography of China,
Speaker 1: we'll have a massive crunch in the population of young
Speaker 1: workers in China because of the one child policy, So
Speaker 1: we don't have cheap goods from China. We don't have
Speaker 1: cheap labor from Mexico. And then the last the last
Speaker 1: part was cheap capital as the US of these massive
Speaker 1: deficits in the late nineties. But that meant is that
Speaker 1: you had all these countries that as a very large
Speaker 1: troopers Europe, Germany, Japan, uh and then Saudi Arabia, Commari,
Speaker 1: polus in countries, and these these services would flow back
Speaker 1: into the U S treasury market get a capital account
Speaker 1: because all these countries were trying to under undercat their
Speaker 1: currencies so that they could get more exports. So for
Speaker 1: the U S it worked great, right because we basically
Speaker 1: send people treasuries, send them treasuries, and then we got
Speaker 1: goods from them. So it was it was it was
Speaker 1: fantastic that channel is also clogged now Japan and Germany
Speaker 1: in Afroanic count deficits, China actually selling treasuries. So the
Speaker 1: three factors that boosted univation low. And then maybe it's
Speaker 1: so easy for us to achieve that two percent inflation
Speaker 1: are gone cheap labor, cheap good, cheap capital, so it
Speaker 1: would be a lot harder to get down to two percent.
Speaker 1: I mean, I'm sure we could like if if if
Speaker 1: Power wanted to be Vulcan and he gets the fat
Speaker 1: funds right percent, we get to two percent. You know, why,
Speaker 1: why would you want to destroy the labor market when
Speaker 1: we are seeing the gap for minority wages actually closing,
Speaker 1: We're seeing young people do better. Finally, we are seeing
Speaker 1: asset prices go down, which is a good thing. You
Speaker 1: want people to be able to buy homes. You are
Speaker 1: seeing the real value of the dead being wiped out.
Speaker 1: I mean inflation, if it doesn't go above seven eight
Speaker 1: percent is actually the medicine that we need. And we
Speaker 1: need to let that run out for a couple of
Speaker 1: years and will be in a much better place. And
Speaker 1: by the way, it's not just me saying that there
Speaker 1: was a very good outped I think in the ft
Speaker 1: about the same thing. So I think you'll see a
Speaker 1: lot more of that next year as central bankers realized
Speaker 1: that the cost of going back to back to two
Speaker 1: greatly exceed the scenario. To me sounds though like a
Speaker 1: nightmare for profit margins and US corporate profits EPs for
Speaker 1: the span is that is that the sort of bottom
Speaker 1: line conclusion from from that type of outcome. I think
Speaker 1: for now we are steal in the first order concept
Speaker 1: once of infaction when in facial invades everything, including profits,
Speaker 1: Like there's the money illusion in in terms of Kanes,
Speaker 1: everybody thinks they're getting richer. Uh And and and also
Speaker 1: because of how accounting works with with inventories, like if
Speaker 1: you if you value inventory at the lower pre infaction costs,
Speaker 1: which actually shows very very high profits. So I think
Speaker 1: that's one of the reasons why we saw profit margin
Speaker 1: spike in But as some passes, You're absolutely right, I mean,
Speaker 1: the cost of everything goes up, right, Your cost of
Speaker 1: energy goes up, the cost of labor is going up.
Speaker 1: Wages are not slowing. Maybe they're hitting a plateau, but
Speaker 1: there's something not slowing in service is and then you
Speaker 1: supply chains getting a lot more complex. If you can
Speaker 1: produce in China, you cannot do the just in time anymore. So, yes,
Speaker 1: margins would need to come down, but I mean, unless
Speaker 1: you're an owner, I would argue that's a good thing.
Speaker 1: I mean, one of the issue we had for four
Speaker 1: years is this steady expansion of margins um at the
Speaker 1: expense of labor. Uh and that contributed to the concentration
Speaker 1: of wealth one percent. Inequality issues and I think that
Speaker 1: the pendulum is finally swinging the other way in terms
Speaker 1: of sharing the you know, the value added by by
Speaker 1: the economy was being captured by a handful of monopolies
Speaker 1: and and and and their capital owners. And now the
Speaker 1: dependulm sushing back and power is swishing back towards towards labor.
Speaker 1: And I would argue that's a healthy thing after four
Speaker 1: years of concentration. I like your caveat there, unless you're
Speaker 1: an owner of stock, which might be one or two
Speaker 1: listeners out there, I hope more than two three, very
Speaker 1: hopefully vincent. I'm wondering how likely it would be for
Speaker 1: for the FED to give up on its two percent
Speaker 1: inflation target, because with that not absolutely destroy their credibility. Well,
Speaker 1: that's why they would have to be smart about it,
Speaker 1: and I think they can. There are many ways you
Speaker 1: can do it quietly without actually acknowledging. And I do
Speaker 1: agree that, you know, my whole plan only works if
Speaker 1: people believe the two percent target is still a reality, right,
Speaker 1: because what are we talking about, funny, is ultimately fincial repression. Right,
Speaker 1: So you need to convince bond holder to keep buying
Speaker 1: bonds and are at low yield and then you constantly
Speaker 1: kind of stealthily defaulting on them, but by this highly inflation.
Speaker 1: So you I don't think you know, J. Powell is
Speaker 1: going to come out and say, you know, guys, you
Speaker 1: know five years on YouTube, but there are many ways
Speaker 1: you can do it. One days is one way you
Speaker 1: could do it is called hedonic adjustment. So hedonic adjustment
Speaker 1: is something that the FEDS has developed over time to
Speaker 1: address for the fact houses get bigger, cars get better,
Speaker 1: TVs get smaller and larger story uh and and that
Speaker 1: the quality of the product increases. So they only apply
Speaker 1: that to I think about six percent on the index
Speaker 1: right now. And it's it's um it has a very
Speaker 1: strong deflational impact, right because the two thousand, for example,
Speaker 1: the phone. You know, the price of an iPhone is
Speaker 1: you know, a thousand, one thousand bucks now, but if
Speaker 1: you look in the CPI you see it come downtown
Speaker 1: down because the fat is I think correctly saying well,
Speaker 1: an iPhone is incomparably better than the the old Nokia
Speaker 1: that I'm sure Michael still uses. That's such a good
Speaker 1: dig I did have one of them. Yes, he doesn't
Speaker 1: know how to open it though he doesn't know how
Speaker 1: to plup it open. So yeah, so the so the
Speaker 1: fat has been hedonically adjusted at certain time series and
Speaker 1: others not for example, Men's out where his head on
Speaker 1: the clear justice, but our underwear is not so And
Speaker 1: I could go on with the list. Cars are hedonically adjusted,
Speaker 1: meaning when cars do get better, the price in the
Speaker 1: CPI is adjusted down, but motorcycle or not. So you
Speaker 1: have a lot of leeway. And this is like a
Speaker 1: really tiny technical thing, like you don't even need to
Speaker 1: issue a press release that you know that they could
Speaker 1: just do that that the b RS could just do
Speaker 1: that overnight, no one would notice. Uh. Another way, you
Speaker 1: could kind of adjust the index in the infasionary way, sorry,
Speaker 1: in a defasionary way, so that you actually tolerate a
Speaker 1: higher level of infation while still showing that you're technically
Speaker 1: meeting the two percent target. Would be on the rents
Speaker 1: um and the onn recurrent rents. So there's this huge
Speaker 1: debate right now about you know the way the FED
Speaker 1: computes rent and especially oh e R so shelter as
Speaker 1: a whole is about thirty percent the CPI. You have
Speaker 1: seven percent in ran on rent. These are horrible statistical
Speaker 1: monsters that the BRS computes and really and it's lagging
Speaker 1: a lot, right that that's that's what people are complaining about,
Speaker 1: is that the FED is driving in the review mirror
Speaker 1: that the real estate market is already turning, has already turned.
Speaker 1: We can see those data. But because of the way
Speaker 1: it's computing, the BS compute renting faction, that's going to
Speaker 1: keep increasing for the next twelve months. Well, maybe they
Speaker 1: could revise that, say, you know what, we just wanted
Speaker 1: to make it better closer to reality. And what that
Speaker 1: would do is that it would are you know, it
Speaker 1: wouldn't change the reality, but it would make that what
Speaker 1: would have been five pre cientifation becomes stuporcentifaction and being metric.
Speaker 1: I'd love to hear the rationale for the underwear not
Speaker 1: being adjusted. Just there's just no innovation in underwear underwear anymore.
Speaker 1: I guess maybe maybe that's it. But but but so,
Speaker 1: how does one position their investments for this type of
Speaker 1: environment you're describing, Uh, you know, it sounds like maybe
Speaker 1: take advantage of real yields if if you get if
Speaker 1: you're able to get some to boil it down in
Speaker 1: the equity market, Is it as simple as a growth
Speaker 1: versus value trade to stick with, stick with value over growth,
Speaker 1: that sort of thing. You're generally correct, Um, you know,
Speaker 1: short duration. If my scenari is correct, I would expect
Speaker 1: the yield care to steep and quite aggressively next year. Yeah.
Speaker 1: I find some of the short term rates to be
Speaker 1: quite attractive. I mean, we now have positive rear rates
Speaker 1: in the US for the first time, tips rates, you know,
Speaker 1: one five one point six percent time. I actually, if
Speaker 1: you really want to get crazy with tips going Brazil,
Speaker 1: they're like six to seven percent inflation adjusted yield on
Speaker 1: on on short term Brazilian bonds. In terms of equities,
Speaker 1: the portfolio that I've been recommending is what I call
Speaker 1: the Holy Trinity uh and it's three equity sectors with
Speaker 1: very simpol ty of to trade, Energy, healthcare, financials. That
Speaker 1: portfolio just equally spit one third one third, one third
Speaker 1: is up sixteen percent for the year. Your sixty four
Speaker 1: portfolio is down sev I would stick with that, you know,
Speaker 1: because with what I love about that Holy Trinity re
Speaker 1: portfolio is that it hedges against the free macro ris
Speaker 1: that we're facing. One, of course, is still inflation. In
Speaker 1: my opinion. You need your energy there. Energy is kind
Speaker 1: of your dark horse, you know scenario or I go
Speaker 1: if we have something that happening in Russia or trying
Speaker 1: to reopening Song suddenly whatever your cities. Energy a weapon.
Speaker 1: That's how it works. In energy was your risk off asset.
Speaker 1: So energy helges against inflation. Healthcare hedgies against recessionary risk.
Speaker 1: Healthcare is actually the most defensive sector, performs best in recession,
Speaker 1: better than utilities, especially now that you know the problem
Speaker 1: is that with a recession with higher rates, right, so,
Speaker 1: you don't want to go in your utilities or consumer stable.
Speaker 1: You want to go in a sector that actually has
Speaker 1: some potential for secular growth in addition to being defensive,
Speaker 1: which is what health care is. Uh. And then the
Speaker 1: third pillar of my holy Trinity portfolio is financials, which
Speaker 1: which I'm very excited going into Tree. If my scenario
Speaker 1: is correct. Um, so I will see is your curule
Speaker 1: step and and that's very good for banks. You'll have
Speaker 1: you know, you have about one point five tree and
Speaker 1: in reserves access reserve right now. I mean they're just
Speaker 1: gonna sit just sitting at the FED. They're gonna connect
Speaker 1: five recent from from zero. So that's about like cant
Speaker 1: readio the math. I think that's about only fifty billion subsidiy,
Speaker 1: just increasing pure profit, just for for the banks to
Speaker 1: have excess cause of the FED. Uh. And then if
Speaker 1: I'm correct that the economy is actually doing quite well,
Speaker 1: you know, like the labor market is very resilient, wedges
Speaker 1: are still growing, people are not going to default. Um,
Speaker 1: So I think the market is somewhat expricing a bit
Speaker 1: of a repeat of two thousand eight. Oh, like you know,
Speaker 1: create card bounces are going up, the you know, the
Speaker 1: housing market is including. I do not believe these things
Speaker 1: are going to happen in twenty twenty three. And as
Speaker 1: a result, think banks are going to be the leader
Speaker 1: in my holy trenity portfolio in twenty three. How about
Speaker 1: the US versus rest of the world inequities? You know,
Speaker 1: it's uh some outperformance. Uh you know global x US
Speaker 1: type of the next is these days? Is that? Uh?
Speaker 1: Is that going to continue? I think when the market
Speaker 1: starts to understand that the FED will people on inflation, um,
Speaker 1: that trend of our performance of the US will stop.
Speaker 1: It will be back to kind of the reflation trade
Speaker 1: like what we saw in two thousand three. Two thousand
Speaker 1: seven week dollar. So you want to be long emerging market,
Speaker 1: I would say emerging markets outside of China, which I've
Speaker 1: already done very well. By the way, that the one
Speaker 1: issue with with you know, global investing is is Europe.
Speaker 1: So okay, forget about Europe, forget about Japard, forget about China.
Speaker 1: Now the problem is this is really the big pieces
Speaker 1: of Europe. You know, if you look at the MSCI index,
Speaker 1: these are the three big pieces. But once you've dropped,
Speaker 1: the things that have gone down your left were actually
Speaker 1: pretty good stuff. So I call that the bim chip.
Speaker 1: It's Brazil, Indonesia, Mexico, Chile, India, and Peru. Uh. These
Speaker 1: are seven countries that are actually up on the year. UH,
Speaker 1: and they are emerging markets. And these are not the
Speaker 1: count of countries that you would expect to do well
Speaker 1: in a year. And when the fedest tightened by about
Speaker 1: four hundred basis point and the US dollar has you know,
Speaker 1: dollar in excess as radied by twenty points, these these
Speaker 1: used to be thought as these kind of weak, vulnerable
Speaker 1: emerging markets, and they actually doing very well. There there
Speaker 1: is still a very strong case for global investing. You
Speaker 1: just don't want to do it for an index, because
Speaker 1: the index is gonna get you into places you don't
Speaker 1: necessarily want to be, which is mostly Europe or China's
Speaker 1: big deck, which you know, who knows what's going to
Speaker 1: happen there? And what I do. Want to go back
Speaker 1: to your seven Deadly Sins note and talk about number
Speaker 1: one and six because they're kind of two sides of
Speaker 1: the same coin, one being uh paying employees with stock
Speaker 1: instead of cash, and the other being uh, what you
Speaker 1: call bad buy backs buy backs that incinerate value for
Speaker 1: share shareholders. You you mentioned uh Meta in particular, metas
Speaker 1: by back program incinerated seventy five billion of shareholder wealth
Speaker 1: or thirty of its current capitalization. So how do you
Speaker 1: see both of those issues playing out in the next
Speaker 1: few years? You know, the this massive buy back binge
Speaker 1: that US market spent on for I don't know a
Speaker 1: decade or longer, and that notion of silicon value using
Speaker 1: you know, stock as a currency to pay employees. Are
Speaker 1: both of them sort of jump the shark, if you will,
Speaker 1: or both of those things kind of taboo going forward?
Speaker 1: Do you think, well, first of all, a muslag a
Speaker 1: complaint because you gave my craziest thing. Um, so I'm
Speaker 1: gonna think of something else on the fly. So in
Speaker 1: the case of Facebook, is sweet to uh so I
Speaker 1: want is just you You multiply the price that which
Speaker 1: here rebushes the shares by the quantity, and then you
Speaker 1: compare to where they are today. So that that's about
Speaker 1: betting lost right there. And the other one is it
Speaker 1: is by really saying that you know, if if you
Speaker 1: if you do a buy back because you issued yourself
Speaker 1: some you know, some stocks, you're not really doing a
Speaker 1: buy back. You're just taking your shareholders money and putting
Speaker 1: in your pocket. So I had the stock based compensation.
Speaker 1: It's about thirty five billion in the past five years
Speaker 1: of Facebook. So half half of that came from from
Speaker 1: totally timing to buy back and the stock price declining
Speaker 1: last year, and then half of that came from stock
Speaker 1: based conversation, which by the way, is the norm. Like
Speaker 1: in another example would be Google. So in the past
Speaker 1: three years, Google as we purchased about eleven percent of
Speaker 1: its uh of its share of sending if you just
Speaker 1: get number, but the shares of sending haven't changed. Why
Speaker 1: is that because because they've been issuing that too. To shareholders.
Speaker 1: So you know that that that's long been going on,
Speaker 1: and I think investors have used to have a somewhat
Speaker 1: of the benign neglect on on the practice when sock
Speaker 1: price going up because technical to buyback made money, right,
Speaker 1: I mean if the sockpwrice higher next year, you can say, oh,
Speaker 1: look at back a hundred nurse hundred twenties. So I
Speaker 1: it's been a wise use of share all the money,
Speaker 1: even though really what it is it's just a trick
Speaker 1: to save cash. And then um, you know it's tax
Speaker 1: advantage also a little bit um and then it makes
Speaker 1: you look better on certain metrics like free cash flow
Speaker 1: or in cash flow. All that looks a lot better
Speaker 1: because you're paying. In most big tech companies about half
Speaker 1: of your salary is paid in stock. So yeah, when
Speaker 1: when when the bubble was going, everybody was happy with that.
Speaker 1: And and now I think, you know, we're seeing the
Speaker 1: reality bike right, I think the the interest of the
Speaker 1: shareholders and that of of workers are not aligned. Uh.
Speaker 1: And you see a lot of companies that you know,
Speaker 1: now that the stock price have cone down, they actually
Speaker 1: have to give out more stock, right because they want
Speaker 1: to give X dollars to their employee to be competitive
Speaker 1: with the Google, the Facebook, whatever. And now that you
Speaker 1: know stock prices you have dropped by eight percent, they
Speaker 1: have to give five times stock as they used to.
Speaker 1: So the amount of delution that people are taking from
Speaker 1: from this is enormous. UM and I do expect that,
Speaker 1: you know, next year there will be somewhat of a
Speaker 1: shareholder revolt because not only are is the company not
Speaker 1: not performing? Um, you know, you've seen this kind of
Speaker 1: slow down in in in deck and social media, but
Speaker 1: on top of that, whatever earnings is left has diluted
Speaker 1: across you know, much many more shades. Well, so if
Speaker 1: that's if a company is actually reducing its number of
Speaker 1: shares outstanding with buy backs, is that, uh do they
Speaker 1: get sort of a pass on the deadly sin of
Speaker 1: bad buy backs? Yeah? Apple would be a case where
Speaker 1: you have about a one to one ratio between buy
Speaker 1: back and flow drink. I think, by the way, that's
Speaker 1: that's insane that I think Apple recrut is more than
Speaker 1: five hundred billion in stock since he started to buy back.
Speaker 1: I mean five hundred billion. Can you imagine this? This?
Speaker 1: I mean this, this would have been the largest company
Speaker 1: in this and five just a couple of years ago. Yeah,
Speaker 1: I mean you have always don't less they want to
Speaker 1: go in the you know, the buy back debate. Some
Speaker 1: some people you know hate them. I mean it's if
Speaker 1: you make a lot of money the way Apple does,
Speaker 1: if you don't return cash your shareholder, you'll end up,
Speaker 1: as you know, having more and more equity and less
Speaker 1: and less debt. Right, And you may want to keep
Speaker 1: your fincial structure the same, and the buy back is
Speaker 1: a way to do that. And it's a way to
Speaker 1: do that in a way that's more flexible than the dividend, right,
Speaker 1: because if you get the dividend, people are going to
Speaker 1: get back mad at you. Buy back is a bit different.
Speaker 1: But so I'm not like philosophically against the use of
Speaker 1: buy backs. I'm philosophically against the use of buy backs
Speaker 1: if it's a trick to hide lavish stock option packages
Speaker 1: to employees that basically just you know, use the company
Speaker 1: as a stock printing machine and run away the cash.
Speaker 1: But in theory, there's nothing wrong with the buybacks. What
Speaker 1: I will say, however, is that the market has become
Speaker 1: very reliant on these buy backs. Um So over the
Speaker 1: past year we had about a tree Dan dollar in
Speaker 1: buy back in the past year. That is a lot.
Speaker 1: It's a lot that that is a record, and I
Speaker 1: doubt that this is going to keep happening because you know,
Speaker 1: it's a lot harder to issue that you have a lot,
Speaker 1: a lot more to pay on that um a lot
Speaker 1: of company of conserving cash. We also have a buy
Speaker 1: back tax that's coming as part of the Inflasion Reduction Act,
Speaker 1: is a one percent tax on your buy back. So
Speaker 1: one of my concerns that we could see a fall
Speaker 1: in buy backs next year, also because the big tech
Speaker 1: companies are not going to get away with these take
Speaker 1: buy backs anymore. And maybe you could see dropped from
Speaker 1: one trillion to five billion. And then the question is
Speaker 1: what replaced that five billion equity demand. I don't have
Speaker 1: a good answer for that. I think Goldman is estimating
Speaker 1: something like eight billion. But I want to ask about
Speaker 1: one of your other since, which is over hiring. And
Speaker 1: obviously we've seen a bunch of tech layoffs, obviously a
Speaker 1: ton of crypto layoffs. There's seemingly a new company in
Speaker 1: crypto announcing layoffs just about every day. So I'm just
Speaker 1: wondering if that's sort of representative of what you think
Speaker 1: potentially we could be seeing going forward in the labor
Speaker 1: market because we're not seeing it yet, right, Yes, that's
Speaker 1: a good question. So I want to put the tech
Speaker 1: layoffs in in perspective. And of course, you know we
Speaker 1: all have friends and I mean led in San Francisco,
Speaker 1: So I want have friends who are you're concerned with
Speaker 1: it or so it's it's unfortunate when when that happens.
Speaker 1: But um, if you look at the MAGA stock, the
Speaker 1: Big textalks head count doubled since uh pre Covid you
Speaker 1: had this insane hiring boom one. I mean, I have
Speaker 1: you know, friends who are like you know who told
Speaker 1: me I couldn't even Google, I couldn't do my job
Speaker 1: because I spend my days just interviewing candidates. And what
Speaker 1: the panemic did? It created this once in a lifetime
Speaker 1: flood of demand for device online entertainment, U cloud services
Speaker 1: and another big tech firms. I thought that this was
Speaker 1: going to be permanent in some way. That kind of
Speaker 1: reminded me of what happened in oh six or or
Speaker 1: five or six with the big banks. You know when
Speaker 1: that that's when I started. I remember that you had
Speaker 1: these lavish cocktail parties at US universities where you know,
Speaker 1: the class of seven was twice the class of for
Speaker 1: the new analysts and UM and of course the hangover
Speaker 1: lasted for ten years in the banks. UM. So I
Speaker 1: think what we're seeing in tech is very similar UM.
Speaker 1: And it's unfortunately just the tip of the iceberg. So
Speaker 1: it doubles into thousand nineteen. Right, so we could technically
Speaker 1: all have the Twitter treatment of firing fifty percent the
Speaker 1: workforce and we would only be back but by three years. UM. Now,
Speaker 1: as far as what that means for the labor market,
Speaker 1: I really would not UM um over emphasize the relevance
Speaker 1: of the tech layoff for the economy. I mean, is
Speaker 1: still a very small sector, and it's it's not a
Speaker 1: very working inventive sector. I mean, you know, the bulk
Speaker 1: of your workers in the US are cashiers, UH, wires,
Speaker 1: factory workers. UM. And and this is where the inflation
Speaker 1: problem is. Like if you look at the job openings data,
Speaker 1: the wage cool of data, you you'll see that the
Speaker 1: pressure is at the low end. UM. It's very hard
Speaker 1: to get a roofer, it's very hard to get a
Speaker 1: waiter that's gonna stick around for more than a month. Uh,
Speaker 1: it's very very hard to get, um, someone to work
Speaker 1: in the kitchen. And I don't really see how you know,
Speaker 1: laying off somewhat overpaid, you know, twenty five year old
Speaker 1: product managers at a LinkedIn who you know used to
Speaker 1: go to the office to do yoga and eat avocado
Speaker 1: toasts is really going to address then shame the millennials.
Speaker 1: I don't shame in the zoomers here. Hey, I eat
Speaker 1: avocado toast and I'm a well, not getting what generation,
Speaker 1: but but Fince, it's your point on all that. You know,
Speaker 1: every time that Jolts job openings number comes out, I'm
Speaker 1: just my mind kind of boggles at the fact that
Speaker 1: there's still this ten million job openings. How big of
Speaker 1: a deal is that or are they gonna just sort
Speaker 1: of evaporate? Um? Were they just going to keep stay
Speaker 1: there and keep this unemployment rate low regardless of how
Speaker 1: many Silicon Valley layoffs we've seen, you know, to your point,
Speaker 1: you know, maybe a twenty five year old avocado toast
Speaker 1: eater at Lincoln doesn't want to go be a waiter,
Speaker 1: but at some point maybe they want to have a choice.
Speaker 1: We'll see. There's been some debate about the quality of
Speaker 1: that jolt data, because if you do, I mean where
Speaker 1: we are is absurd, right, I mean if you plant
Speaker 1: the series over time, I mean the prior peaks in
Speaker 1: you know, seven, we had about five million job openings
Speaker 1: and now we at ten, basically because it's it's free
Speaker 1: now to post the job opening somewhere. That is one
Speaker 1: argument that people have made. Also because of the work
Speaker 1: from home movement. Uh, you're no longer you know, if
Speaker 1: you're a Google you you only advertised in Mountain View
Speaker 1: or Silicon Valley, right, But now since your your labor
Speaker 1: pool is potentially uh can be spread across the country
Speaker 1: or then the world, maybe you're gonna have ten job
Speaker 1: posting for a single position. It's possible that there is
Speaker 1: some of that. But to me, the real labor shortage,
Speaker 1: and I think any labor economies would agree, is not
Speaker 1: product manager at at at LinkedIn or or Facebook or
Speaker 1: one more data scientists at Twitter. Uh, it's it's kind
Speaker 1: of the old economy boring job that you know, I'm
Speaker 1: going back to retail cash ears waiters and these are
Speaker 1: not the kind of jobs that are posted on LinkedIn.
Speaker 1: That with a son in bonus, um so I actually
Speaker 1: do believe that the labor market is going to remain
Speaker 1: tight um. And I'm not sure that we we want
Speaker 1: to destroy it. I mean sure, you know, like like
Speaker 1: I said, if if we get the fat forms rate
Speaker 1: at ten percent, uh, we'll solve it. Wow, We'll have
Speaker 1: you know, ten percent employment rate, we'll have food riots, uh,
Speaker 1: and will undo the past few years we've actually seen
Speaker 1: gains for young workers, for minority workers, for workers paid hourly,
Speaker 1: for workers of our college degrees. I mean, this is
Speaker 1: what we want it. Right for ten years, you know,
Speaker 1: every double Summit was about, oh, how do we solve inequality?
Speaker 1: You know, you know, because they care? Right? Uh, now
Speaker 1: we have it. So why would we want to destroy that?
Speaker 1: Especially as inflation is slowing naturally, like even even you know,
Speaker 1: like why is inflation slowing because of commodities and US
Speaker 1: cars and playing tickets? Um, So just because of its
Speaker 1: own inertia, inflation is going to slow. So why would
Speaker 1: you want to kill the labor market on top of
Speaker 1: that event? And I want to go back to the
Speaker 1: point you made about China because you mentioned China, but
Speaker 1: we haven't really talked about and how what your views
Speaker 1: are on what's going on there? Or what we can
Speaker 1: expect from China and any potential reopening they have. I'm
Speaker 1: wondering how hard it is to have conviction in your
Speaker 1: views right now when China is such a big part
Speaker 1: of the equation and we don't quite know what's going
Speaker 1: to be happening with China, that that isn't an excellent point.
Speaker 1: Uh And that's difficult, especially in commodity sectors right where
Speaker 1: you know it's copper, iron ore, I mean, you know,
Speaker 1: China famously consumes half of everything um and and the
Speaker 1: fact that you know, Chinese policy is so erratic right
Speaker 1: now makes it very hard to plan. Uh So in
Speaker 1: the short term, unfortunately, I think there is no good
Speaker 1: answer other than how would argue kind of avoiding it
Speaker 1: and focusing on on non China I am the beamship
Speaker 1: countries I mentioned. Um. In the long term, I actually
Speaker 1: do think that that what we're seeing is is a
Speaker 1: trap for the deflation is crowd to the pick inflation crowd, right,
Speaker 1: because what's going on really is, you know, China is
Speaker 1: looking down much harder than people thought. Uh And as
Speaker 1: a result, that gets all your your iron or your copper,
Speaker 1: your steel, or all the comedy prices are are falling
Speaker 1: off a cliff and that makes you feel like, oh,
Speaker 1: it's working. You know, infaction is slowing down, the fret
Speaker 1: is the fet is solving the problem. No, it's not
Speaker 1: the real problem. And I would argue it's not a problem,
Speaker 1: but it's a problem if you want to go back
Speaker 1: to the personal problem in the US is wages in
Speaker 1: the labor market. But because of the China situation, we
Speaker 1: are seeing this this air pocket that that inflation isn't
Speaker 1: dropping very rapidly. But that's temporary, right, I mean, at
Speaker 1: some point we know that China is going to reopen,
Speaker 1: so whatever we are getting now in terms of deflation
Speaker 1: will be tomorrows inflation. And then also what what the
Speaker 1: China situation does is that it further messages up your
Speaker 1: supply chained. It made the global economy less efficient, and
Speaker 1: at the end of the day, that is a long
Speaker 1: term problem with inflation is you know, if we cannot
Speaker 1: you know, manufacture everything in China anymore and have the
Speaker 1: super efficient supply chain with your inventory, we'll have to
Speaker 1: pay more for stuff. So the more messed up China is,
Speaker 1: the more inflation we have here. Eventually, So I think,
Speaker 1: what what China is doing is laying out almost a
Speaker 1: perfect trap for the uh. He always told you that
Speaker 1: infection was going to beat crowd. Uh and and we'll
Speaker 1: we'll get the second effect consequences in points only three.
Speaker 1: Vincent tell Ward of Stone as always a real treat
Speaker 1: to get your views. And I apologize that I front
Speaker 1: ran your craziest thing there. That's that's bad bad etiquette
Speaker 1: on my part. I do feel bad now. The data
Speaker 1: trivia question about Et. Do you know the name of
Speaker 1: the actor who actually played Et? No, I have no coal.
Speaker 1: Do you think there was an actor inside the suit
Speaker 1: playing Et? I don't know how they did it about it.
Speaker 1: It was not a small, little skinny neck actor inside
Speaker 1: of it. It was actually a mechatronic model. It's really cool.
Speaker 1: I wish you know on the podcast you can't. I
Speaker 1: can't really describe it. But it's this sale bundle of
Speaker 1: cables and circuits and metal and it is for sale.
Speaker 1: Mecatronic model used is going up for auction at Julian's auction.
Speaker 1: Let me tell you a little bit about it before
Speaker 1: the bidding starts in our Prices precise segment, which Vincent,
Speaker 1: by the way, I regret to inform you you are
Speaker 1: a contestant on our game show. The prices precise, precise.
Speaker 1: It's made from Dora aluminum. Try. I don't even not
Speaker 1: insure what that is. It has eighty five points of movement.
Speaker 1: It can blink, make abdomen rotations. Uh. It's enabled through
Speaker 1: both electric and mechanical cables. Takes twelve people. By the
Speaker 1: way it's operate the ET model UM one disupporting A
Speaker 1: hole in the story from art net where I got
Speaker 1: this is. They don't tell you if it's still operating
Speaker 1: the way it should. I assume it is, I thought,
Speaker 1: I think. I assume it probably is. I don't know.
Speaker 1: You know, these things are built to last. There's uh,
Speaker 1: you know, it looks like it is anyway. However, this
Speaker 1: ET mechatronic model is considered his masterpiece. So the question
Speaker 1: for you two is what do you think the auction
Speaker 1: house expects to get the winning bid for the mechatronic
Speaker 1: model of ET. You're ready to bid, You're ready to bid.
Speaker 1: I'm gonna go with three point eight million. Three point
Speaker 1: eight million. Vincent's making big eyes. I'm gonna say one above,
Speaker 1: what do you have three point eight three point It
Speaker 1: seems like a lot, honesty. Do you know what I'm
Speaker 1: gonna No, No, the FED height rates, Uh you know comies. No,
Speaker 1: I'm I'm going to go to I'm gonna go at
Speaker 1: one two million, one point two million, I think, given
Speaker 1: the rules of the game. Unfortunately, Vincent Juan Villdonna, when
Speaker 1: you were closer, you were closer. But but Vincent Winds
Speaker 1: given uh you Bob over three million. It's what they're expecting.
Speaker 1: I can kind of see that for you know, a movie,
Speaker 1: you know, I can kind of see it. Okay, should
Speaker 1: I go? Mine is very good too? But I love
Speaker 1: your teeth? So that was really good. Okay, And we
Speaker 1: have to talk about crypto. What's a week this year
Speaker 1: without crypto? So this this story is from the Ft.
Speaker 1: It's about all the lavish spending that happened at f
Speaker 1: t X. First, the story says Amazon didn't deliver to
Speaker 1: the Bahamas, so f TX actually hired a private air
Speaker 1: carrier to fly in orders. They's been three d million
Speaker 1: dollars in real estate in the Bahamas, and the Ft
Speaker 1: says most of those purchases related to homes and vacation
Speaker 1: properties used by senior executives. Then they had round the
Speaker 1: clock catering. They had free groceries, a barbershop pop up,
Speaker 1: bi weekly massages. They had a full street of cars
Speaker 1: and gas covered for all employees, and also unlimited, full
Speaker 1: expense covered trips to any office globally. That sounds cool.
Speaker 1: Staff at f t X US, So that's the US
Speaker 1: arm of f t X. Separate, separate arm. But they
Speaker 1: were allowed two hundred dollars a day indoor dash delivery credits.
Speaker 1: That's all that stood out to me. Two who could
Speaker 1: spend two hundred like I would spend thirty bucks? And
Speaker 1: and then the last one is Almita Research owed Margaritaville
Speaker 1: in Nassau nine open Jimmy Buffett restaurant, Yes, exactly, yep,
Speaker 1: my goodness. But they were told to be good tippers
Speaker 1: because of the whole altruism thing. So there's that. I
Speaker 1: don't know they're gonna miss them down there in the Bahamas.
Speaker 1: The bartenders of the Bahamas and the waiters and waitresses
Speaker 1: might be the hardest hit, uh, victims of this unbelievable then,
Speaker 1: So have you ever spent two hundred a day on DoorDash?
Speaker 1: He's shaking his head, no, yeah, speechless. That's good, right,
Speaker 1: how's it going? That was a good good stuff? Hey
Speaker 1: they I don't know. I don't know what to say
Speaker 1: anymore about F t X. The minute you think you've
Speaker 1: heard it all, it just keeps getting stranger and stranger.
Speaker 1: Well I'm gonna add my own strange thing to that.
Speaker 1: And again, apologies, I'm going on the fly here. But
Speaker 1: so this is more of a question than a crazy thing. Um.
Speaker 1: I still on Twitter, and apparently there's already a movie. Um,
Speaker 1: of course there's always a movie being ready, you know,
Speaker 1: like Netflix now will come out with movies before the event.
Speaker 1: Actually take the case. And one thing that really puzzled
Speaker 1: me was they had rhyme Goslings SBF. Have you guys
Speaker 1: seen that? And was that? Was that like a fake?
Speaker 1: Or who thought that would be a good idea? I
Speaker 1: did not see Ryan Gosling being started SPF. Is there
Speaker 1: is there truth to this rumor? Maybe we should ask
Speaker 1: the audit? You never know. I mean they did give
Speaker 1: him like a weird uh wig and they tried their
Speaker 1: best to to to hide our attractive he is. But um,
Speaker 1: we still very far from you know, the original cast.
Speaker 1: I actuously await that movie regardless of who it is.
Speaker 1: Where was that guy Seth Rogan. I think I could
Speaker 1: play him right with the curly hair. Yes, Seth rog
Speaker 1: would be a much better pick. Yeah up to Uh.
Speaker 1: But but if if I may use this like as
Speaker 1: as you know, an opportunity to kind of make a
Speaker 1: broader social case. UM. I think if you look at
Speaker 1: the list of the top grossing movies or documentaries of
Speaker 1: the past couple of years, it's all about fraud. You know,
Speaker 1: you got your your Tinder swindler, your Anna you know
Speaker 1: is so good paraos. Uh, of course it's going to
Speaker 1: be the crypto stuff. And I think it says something
Speaker 1: about U, you know, the time we live in um
Speaker 1: compared to you know when when I was growing up.
Speaker 1: You know, it's your your rambos and rockies, you know,
Speaker 1: kind of manly matchual man and and now we have
Speaker 1: this really weird sub general that is highly popular of
Speaker 1: all fire festival like you know, documentaries about epic frauds um.
Speaker 1: And I think it, you know, it speak to the
Speaker 1: zygas of our time. That's pretty good observation. Actually, So
Speaker 1: someone Vell Donna could uh cough make a story out
Speaker 1: of that. Perhaps I could, Perhaps this is a good idea,
Speaker 1: but no, It's true when you when you log into Netflix,
Speaker 1: it tells you what's trending on Netflix, and it is
Speaker 1: always tender Swindler, a couple of like those Love Is
Speaker 1: Blind shows, which I'm gonna admit I love those films.
Speaker 1: They're so fun to watch. And then yeah, the rest
Speaker 1: is like stuff that's happened. That's real life stories where
Speaker 1: somebody got swindled out of a lot of money. Yeah,
Speaker 1: there you go. Oh with the Hollywood, who were the
Speaker 1: two that were breaking in all the Hollywood stars? That
Speaker 1: was a big one too, And what was the name
Speaker 1: of that? I don't remember, you know they were they
Speaker 1: became famous for breaking in all the Hollywood I don't
Speaker 1: I'll buy duxt Holmes. Was that the name of it?
Speaker 1: Bling Ring, Our producer Stacy says, it's ring, Thank you,
Speaker 1: Stacy bling Ring. You know, they would go on social
Speaker 1: media and if some a list celebrity was like looking
Speaker 1: forward to a vacation in Hawaii, they'd be like, all right,
Speaker 1: they'd head to their house and rip them off. Not
Speaker 1: quite fraud, but smart criminals. That's a good observation. Vincent
Speaker 1: tell Ward Uh, director of Global macro Strategy at stone X,
Speaker 1: always fascinating to hear how you thinking about markets and
Speaker 1: movies too, So we appreciate it and hope we can
Speaker 1: bring you back again someday soon. Yeah, thank you, Vincent,
Speaker 1: What Goes Up We'll be back next week and so
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Speaker 1: the show on Apple Podcasts, so more listeners can find us.
Speaker 1: And you can find us on Twitter follow me at
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Speaker 1: can also follow Bloomberg Podcasts at podcasts. What Goes Up
Speaker 1: is produced by Stacy Wong. Thanks for listening, See you
Speaker 1: next time. Wh