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 and umbled on a higher across asset reported Bloomberg
Speaker 1: this week on the show. Well, as Yogi Barrow once said,
Speaker 1: it's tough to make predictions, especially about the future. That's
Speaker 1: the quote that leads a research report from this week's
Speaker 1: guest on what he and his team expected the markets
Speaker 1: in two And you know what, We're actually gonna listen
Speaker 1: to him and maybe even let him gloat a little
Speaker 1: bit since his predictions for last year were pretty good. Well, Bill,
Speaker 1: do I have to define pretty good in the world
Speaker 1: of predictions? And you know it's gonna sound a little
Speaker 1: bit like I sounded, you know, explaining my report card
Speaker 1: to my dad in college, that that it's it's better
Speaker 1: than it sounds. You know this this was a semester
Speaker 1: where the Grateful Dead had six tour stop within driving
Speaker 1: distance of campus. You gotta you gotta grade me on
Speaker 1: the curve here, But on his predictions, uh, is really
Speaker 1: pretty good. I mean, I'll compare that to our own
Speaker 1: Cameron Chris, I think, one of our most respected columnists
Speaker 1: who grades his predictions every year as well. He was
Speaker 1: seventy as well. Um, he said, that's the best he's
Speaker 1: ever been in making predictions. And that's a guy who
Speaker 1: had like a perfect s a T math score. Um,
Speaker 1: I think anything about fifty is in a in the
Speaker 1: predictions game, Buil Dona, what do you think in the
Speaker 1: predictions game? Probably not for when you're in high school.
Speaker 1: That's like not that good, I would say, But sevent
Speaker 1: when I read that, I also was impressed because last
Speaker 1: year was, as you know, so hard to predict given
Speaker 1: everything that was going on. But so, speaking of our guest,
Speaker 1: I want to introduce Chris Harvey. He's the head of
Speaker 1: equity strategy at Wells Fargo, and Chris, I want to
Speaker 1: welcome you back to the show. Then thank you and
Speaker 1: happy New Year and Chris, before we get to the
Speaker 1: predictions and the way, everyone, I'm I'm I'm recording this
Speaker 1: podcast in my bathroom with a blanket over my head
Speaker 1: for very complicated reasons involving a gas Maine replacement on
Speaker 1: my streets. So if you hear Vildana and Chris just
Speaker 1: first out laughing that that's that's the reason why most
Speaker 1: likely it's quite a spectacle to see something. This is
Speaker 1: a new I've I've you know, I'm no stranger to humiliation,
Speaker 1: but I gotta say this, this is uh, this is
Speaker 1: a high high water mark for me, or maybe low
Speaker 1: water mark. I don't know. But but Chris, I want
Speaker 1: to unpack some of your predictions for two. But I
Speaker 1: want to talk first about the f OMC minutes that
Speaker 1: came out this week. Uh. You know, we're recording this
Speaker 1: podcast on Wednesday, about an hour after the minutes at
Speaker 1: the tape, and we kind of a nasty reaction, you know.
Speaker 1: The tone of it seems to be that not only
Speaker 1: will the rate hikes come a little earlier than people
Speaker 1: were expecting, but also I think the bigger surprise that
Speaker 1: the Fed sounds like they're they're gonna want to wind
Speaker 1: down their balance sheet, let their balance sheet reduce a
Speaker 1: little bit, uh, you know, rather than reinvesting proceeds of
Speaker 1: their holdings like they have in the past. What's your
Speaker 1: takeaway from the minutes? Is this um? Is this a
Speaker 1: reasonable reaction to the market. You know, last time I
Speaker 1: looked SMP down more than one percent in the minutes
Speaker 1: after after the moments after the minutes, and you know,
Speaker 1: NAVSTAC was already getting hurt there down composite down a
Speaker 1: two and a half percent. I think is this a
Speaker 1: rational reaction or what do you think? Like? I think
Speaker 1: it's a reasonable reaction. So there's a couple of things
Speaker 1: that take away. For a while, people have been questioning
Speaker 1: whether the FED had had to wherewithal the will to
Speaker 1: to fight inflation. There's talk about transitory for for some
Speaker 1: period of time, actually too long a period of time.
Speaker 1: Powell recently retired that phrase or said he was going
Speaker 1: to retire that phrase. And then when you listen to
Speaker 1: the minutes, they mean business. And I think people are
Speaker 1: finally realizing that the FED will need will do what
Speaker 1: they need to do to fight inflation. And that's troubling.
Speaker 1: But more importantly, what's really happening underneath the surface and
Speaker 1: behind the scenes real rates. You have to keep a
Speaker 1: very very sharp eye on real rates. If you look
Speaker 1: at ten year real rates, they're up almost twenty five
Speaker 1: basis points from the start of the year. What we've
Speaker 1: been saying to clients and what we've noticed all of
Speaker 1: last year is as real rates go, much of the
Speaker 1: relative price in the achary market goes, so real rates
Speaker 1: go up, that cyclical trade works, real rates go down,
Speaker 1: and that long duration or that tech growth trade works.
Speaker 1: And what's happening right now is real rates are going higher.
Speaker 1: Tech in high growth of rolling over. That's a big
Speaker 1: part of the market. And so we were down earlier
Speaker 1: today this is just an acceleration. Is it the right magnitude?
Speaker 1: I think it's reasonable. Yeah. You know what's such truing
Speaker 1: to me is you know, we got this today on Wednesday.
Speaker 1: On on Tuesday, we got that blog post from Neil
Speaker 1: Cash carry uh long considered sort of the biggest of
Speaker 1: in the FED, not a voter this year, but even
Speaker 1: him expecting two hikes in two I guess that's got
Speaker 1: to be kind of the floor of of expectations. Now.
Speaker 1: You know, the market was pricing into maybe three. But
Speaker 1: I think when even the dovish, most dovish member of
Speaker 1: the FED is expecting to that boy that it's a
Speaker 1: bit of a cold water in the face to some degree. Yeah,
Speaker 1: I think that's right. And what I also think is
Speaker 1: I was a little dump fout last year, was a
Speaker 1: little dunk bounded because we were looking and we're listening
Speaker 1: to transcripts, we're looking at pricing. I had never seen
Speaker 1: in in my two decades and more than two decades
Speaker 1: on Wall Street this kind of pricing environment. At one
Speaker 1: time I had asked one of my associates, Hey, give
Speaker 1: me a handful of stocks that are raising price. He said,
Speaker 1: just pick any three, And at the end of the
Speaker 1: day I was surprised that it's taken this long for
Speaker 1: the FED to react. But now the FED is reacting
Speaker 1: and you're seeing break evens and you're seeing inflation expectations
Speaker 1: come down. The other thing that I think is also
Speaker 1: happening is there was a lot of talk about stack
Speaker 1: inflation two three, four months ago. Well you have to
Speaker 1: take stackflation off the table because the FED is fighting inflation.
Speaker 1: The other thing that's happening is we have February first
Speaker 1: coming up. February first is Chinese kicks off Chinese New Years.
Speaker 1: That's when goods start to slow into the US. Not
Speaker 1: saying that supply chain is going to be fixed, but
Speaker 1: really what the market is latching onto, or what we
Speaker 1: think it will last onto, is have we seen peak
Speaker 1: pressure or peak congestion? Are we going to be able
Speaker 1: to get rid of some of those logger heads? Will
Speaker 1: we be able to make some improvements and if so,
Speaker 1: that's really important because that has significant ramifications for pricing,
Speaker 1: multiples and margins. So, Chris, speaking of all of these
Speaker 1: expectations and everything that's coming up, you and your team
Speaker 1: come out with price targets for the SMP five Mike
Speaker 1: mentioned in your intro years was spot on for last year.
Speaker 1: So I'm hoping you can sort of walk us through
Speaker 1: your calls for and all of the factors behind it
Speaker 1: and what you're thinking is behind your price target and
Speaker 1: anything else you see coming up. Sure, sir, certainly. Maybe
Speaker 1: I'll just give you the big picture overview. One of
Speaker 1: the things we've been saying is this year, as you
Speaker 1: roll into it's really about risk first and return second.
Speaker 1: When you're looking at a peakish multiples on top of
Speaker 1: peakish growth, that's not a really bullish scenario. In addition
Speaker 1: to that, growth is decelerating, whether you're looking at us
Speaker 1: GDP or whether you're looking at earning. His growth fed
Speaker 1: as we now are are very aware of, is going
Speaker 1: to become more aggressive and accommodations coming off the table.
Speaker 1: We're lapping some very difficult comps and we may be
Speaker 1: hitting peak pricing and again peak margins, which which would
Speaker 1: put pressure downward on multiples. So we've talked about a
Speaker 1: temperacent sell off. We've talked about up and quality, down
Speaker 1: and risk. We've talked about margins multiples. Where would you
Speaker 1: like to start? Well, well, Chris Love, I'll start here.
Speaker 1: You know, I'm I'm just a guy sitting in his
Speaker 1: bathroom with a blanket over said, so, you know, far
Speaker 1: be it for me to say. But I would also
Speaker 1: great predictions on sort of the boldness of predictions. And
Speaker 1: I want to start with your prediction temper cent correction
Speaker 1: by summertime. Now, in most years, I think if you
Speaker 1: took any average years and made that prediction at the
Speaker 1: beginning of it, it's perhaps not that bold, you know.
Speaker 1: It's something that tends to happen I think more than
Speaker 1: half the time in most years, if if I'm correct,
Speaker 1: But it certainly feels like a very bold predict prediction
Speaker 1: these days, given the fact that boy, it's been so
Speaker 1: long since we've had a real teen percent prediction correction
Speaker 1: in the market. They seem to have gone extinct, you know,
Speaker 1: But it is walks through You're thinking about why, uh,
Speaker 1: we're likely to see one by summertime, And I'm assuming
Speaker 1: the FED plays a role to some degree, but uh,
Speaker 1: you know what makes you confident enough to make that
Speaker 1: you're sort of your first prediction for yea. So a
Speaker 1: couple of things. First, let me say, you're really pulling
Speaker 1: this blanket thing off very very well. It's it's people.
Speaker 1: It's impressive, it's really impressive. A lot of guys would
Speaker 1: have turned their video off. But but now back to
Speaker 1: our show ten percent pullback. Uh, there's a couple of
Speaker 1: things there, and I'm gonna be scattered, I'll be all
Speaker 1: over the place. But I want to bring you back
Speaker 1: to the late nineties, early two thousand's, late nineties, early
Speaker 1: two thousand's, Mike, you probably remember this. There's a company
Speaker 1: called c mg I. C mg I had the naming
Speaker 1: rights to Fox Burger Stadium in two thousand. Stock was
Speaker 1: one sixty at that point in time. I believe in
Speaker 1: two thousand and two the stock was sixty sixty cents
Speaker 1: and they gave back the naming rights. What just happened
Speaker 1: at the Staples Center Crypto dot com no longer the
Speaker 1: Staples Center Crypto dot com. Gosh, that's really familiar. Right.
Speaker 1: There is a whether it's the Matt and curse or
Speaker 1: whether it's the stadium curse, it's telling you we're getting
Speaker 1: close to the top in times of fraud. Those are
Speaker 1: those are signs that we use and we look at right.
Speaker 1: The the other thing that we say, we talked about
Speaker 1: a lot, and you're also absolutely repositively right. This ten
Speaker 1: percent correction in normal times not a big boat call,
Speaker 1: but here, since we haven't had a correction a long time,
Speaker 1: it is a much bigger boulder call. And that gets
Speaker 1: to the second point. The second point is there's pervasive
Speaker 1: belief that the market can bend but not break right.
Speaker 1: Market can go down five percent, we can break through
Speaker 1: the fifty day, we can break through, we can hit
Speaker 1: the hundred day, but we really can't collapse. Well, again,
Speaker 1: we're in the second year recovery. Typically in a second
Speaker 1: year recovery you have multiple compression and you have a
Speaker 1: lot of other interesting things happening. What you have is
Speaker 1: growth decelerating, you have a more aggressive bed. You you
Speaker 1: have your laughing very difficult comps, and you have the
Speaker 1: speculation and when people turn down right. So one of
Speaker 1: the things that that's helped a lot of these names
Speaker 1: is you've had money chasing performance when the performance isn't there,
Speaker 1: then the money goes away. And we think that people
Speaker 1: are going to sell weakness for the first time in
Speaker 1: a while for fundamental reasons, for technical reasons. And I
Speaker 1: think the operative another operative word for two is normalization.
Speaker 1: We're going to use this this word time and time again.
Speaker 1: We're going to get back to more normal times, whether
Speaker 1: it's consumers spending, whether it's latility, or whether it's valuation.
Speaker 1: I love the point about the stadium naming right and
Speaker 1: even before the subprime crisis. I'm trying to remember that.
Speaker 1: I think there were a few players in that who
Speaker 1: got some naming rights right before. I want to say
Speaker 1: it was three Com Stadium with play. And we also
Speaker 1: have the f t X Arena, which is uh which
Speaker 1: has been renamed It's the Miami Heat Arena down in
Speaker 1: in Miami. That was another recent rename. Yeah, yeah, great,
Speaker 1: great indicator. Who knows if it's really true? Is someone's
Speaker 1: got to do a deep dive on that foot. I
Speaker 1: I nominate you to. I'll take care of them. So
Speaker 1: all the stadium names throughout history, yeah, I'll take care
Speaker 1: of it. So, Chris, so you have this call for
Speaker 1: a ten correction. That's in the first half of the
Speaker 1: year and then for the second half of the year.
Speaker 1: I know I was reading one of your recent notes
Speaker 1: and you talked about how how important the midterm elections are,
Speaker 1: and so I actually really haven't been hearing very much
Speaker 1: about this from people I I talked to. So maybe
Speaker 1: you can walk us through your thinking there as well,
Speaker 1: and in relation to the market. So so another thing
Speaker 1: before before we get into that and we get into
Speaker 1: politics a little bit, we're going to talk about religion. No,
Speaker 1: um no, what or what we're gonna do is I
Speaker 1: want to lay the groundwork and I want to level
Speaker 1: set things. What what we're saying and what we think
Speaker 1: we need is we need a repricing of risk, the
Speaker 1: systematic risk. This is not O seven a way where
Speaker 1: systematic root risk was through the roof. What this is
Speaker 1: is we think that we need a repricing of risk
Speaker 1: to bring in new investors. Things have got a little
Speaker 1: bit too frothy. Once that occurs, the consumer still has money.
Speaker 1: What we argue is that spending is going to normalize,
Speaker 1: but balance sheets are still strong. There's some some risk there,
Speaker 1: but overall we just need a more attractive level to
Speaker 1: get aggressive. If and when we get that, we'll want
Speaker 1: to buy the more could or will want to add
Speaker 1: risk into the portfolio. How However, your possess um one
Speaker 1: of the things that we've noticed, and we were looking
Speaker 1: for a catalysts in the second half of the year.
Speaker 1: We're going to have midterm elections. One of things. One
Speaker 1: of my associates does a very nice job on the
Speaker 1: political front, and and it's done a good job over
Speaker 1: the last couple of years. Now it's kind of obvious,
Speaker 1: but not that long ago, we were talking about a
Speaker 1: shift right, a shift from from blue to red. And
Speaker 1: we've seen what happened in Virginia. I can't believe how
Speaker 1: close the race was in in New Jersey for the governorship,
Speaker 1: and it's really telling you something. And so I think
Speaker 1: it's pretty consensus at this point in time, and I
Speaker 1: think most people believe there's going to be a red
Speaker 1: wave and with that, you're going to have a split government.
Speaker 1: And typically when you have a split government, not a
Speaker 1: lot of things get done. And the lack of government
Speaker 1: is good government as far as the markets are concerned.
Speaker 1: UM Traditionally, Republicans controlling that government, controlling the Senate is
Speaker 1: a good thing as well. We can argue about why
Speaker 1: that is, why that might be, but but just say
Speaker 1: we think this is going to be midterm elections will
Speaker 1: be the catalyst that we need to pull us out
Speaker 1: of the slump or the malaise that that we expect
Speaker 1: to see over the summertime. So that call, it's based
Speaker 1: on history basically in the way the market performs with
Speaker 1: the Republican control. Because I look at this particular setup
Speaker 1: and I'm thinking, well, okay, and I you're right, you know,
Speaker 1: all the pundits seem to think there's gonna be a
Speaker 1: red sweep and and Republicans will control most likely the
Speaker 1: House and and quite possibly the Senate. Yeah, but I wonder,
Speaker 1: you know, fundamentally, uh, that seems to take stimulus completely
Speaker 1: off the off the table. I also would think, you know,
Speaker 1: any further tax reductions would be pretty unlikely, uh you know,
Speaker 1: given the Democrats still in the White House with with
Speaker 1: veto power. So that sense of history, she was enough
Speaker 1: to to overcome sort of the fundamentals that are a
Speaker 1: little bit cloudier with with the Republican controlled Congress, you know,
Speaker 1: given you know what a tail when stimulus was leading
Speaker 1: up to this year. So so what one thing I
Speaker 1: would just add to that is, and the Finn talks
Speaker 1: about this a lot. It's planning. Right. If you go
Speaker 1: back to when we had the tax cuts, If I
Speaker 1: remember correctly, M and A slowed down because people didn't
Speaker 1: know what the tax situation was going to be. When
Speaker 1: you have a situation where it's pretty placid and people
Speaker 1: people really know what the tax situation is going to be,
Speaker 1: fiscal stimulus, monetary stimulus, they can plan better and they
Speaker 1: can move back. Then well, once I wants to pay more,
Speaker 1: once I wants to pay less. But when you have
Speaker 1: a more stable type situation, the bit aspread narrows and
Speaker 1: things can get done. So I don't you know, I
Speaker 1: think about it a couple of different ways. But one
Speaker 1: way it could be positive is you just know that
Speaker 1: the tax situation is not going to change very much.
Speaker 1: And now one of the things that we keep saying
Speaker 1: is you've got a lot of cash on hand. Rates
Speaker 1: are still incredibly low. Credit markets for now are wide open,
Speaker 1: and as growth slow, as an opportunity is more selective,
Speaker 1: that pushes people into that M and A. And again,
Speaker 1: if there's not much coming out of the government regulation wise,
Speaker 1: tax wise, we can see a lot more m and
Speaker 1: A activity, and eventually that's usually a pretty good positive
Speaker 1: for the market. And then, Chris, I think for a
Speaker 1: while now you had been saying that investors have been
Speaker 1: gaining confidence in the feds um willingness to an ability
Speaker 1: to find inflation. I think that was in one of
Speaker 1: your notes a couple of weeks ago, and then earlier
Speaker 1: this week you read reiterated that you think the Fed
Speaker 1: will avoid a policy error. So I'm wondering what makes
Speaker 1: you confident in that and how you're thinking about it. Right, So,
Speaker 1: when we first started talking about it, it was a
Speaker 1: non consensus thought and one of the things that we
Speaker 1: began to seeze we began to see the curve flatten,
Speaker 1: and we also saw break evens or inflation expectations come
Speaker 1: down before the Fed even talked about retiring. You know,
Speaker 1: what we were saying back then is either the markets
Speaker 1: going to push the Fed or the Fed will eventually
Speaker 1: do what they need to do. Now, what we think
Speaker 1: is the Fed is very open to doing what they
Speaker 1: need to do, the markets believing it. The curve has flattened,
Speaker 1: break evens are coming down, our inflation expectations are coming down,
Speaker 1: and you see from the minutes that they mean business.
Speaker 1: And you know, a lot of people have brought this up.
Speaker 1: I don't know how to handicap this. I don't know
Speaker 1: what this means. But it's funny that Chairman Powell, right
Speaker 1: after it was announced who was going to be reappointed,
Speaker 1: got a lot more aggressive and a lot of people
Speaker 1: point that out and say that's really interesting, and maybe
Speaker 1: that has something to do with it. But at the
Speaker 1: end of the day, they're saying all the right things,
Speaker 1: they're doing all the right things, they're doing what they
Speaker 1: would you would expect them to do. Labor markets in
Speaker 1: a decent spot, and they really do have to fight inflation.
Speaker 1: The funny thing now for us is we're beginning to
Speaker 1: see things that we think are transitory. We think that
Speaker 1: we're either at keep pricing, were possibly very close to
Speaker 1: peak pricing. We think at the beginning of February you've
Speaker 1: got a shot at improving the supply chain, which puts
Speaker 1: downward pressure on pricing. And so as they get more aggressive,
Speaker 1: and as the market and some of the market dynamics
Speaker 1: play out, they may not have to be as aggressive
Speaker 1: as a lot of people think. Well, we will see.
Speaker 1: And the last thing I would point to and this
Speaker 1: this comes from our economics team. They did a really
Speaker 1: nice job on this. It's not all supply. One of
Speaker 1: the things they pointed out if you look at retail sales,
Speaker 1: retail sales is up from the pre pandemic peak in
Speaker 1: twenty months post grade financial crisis. It took years for
Speaker 1: that to occur. So the demand side has been off
Speaker 1: the charts. And we used to joke around with people
Speaker 1: that last year what the consumer would say is if
Speaker 1: you raise prices teen percent, we'll take two. Now they
Speaker 1: didn't actually say that, but it gives you an indication
Speaker 1: of how price. They didn't care about price at that
Speaker 1: point in time, and now we think they will be
Speaker 1: a lot more price conscious and many of these factors
Speaker 1: will lead to lower inflation. And I think again, many
Speaker 1: more people now that they see the curve flattening, break
Speaker 1: evens coming down, and things beginning to slow, more confidence
Speaker 1: in the FED and the fetacing all the things you
Speaker 1: would expect them to say as you start to a
Speaker 1: tightening cycle. Chris one prediction. I've really found interesting. Uh
Speaker 1: number eight on the list. I think we're jumping around
Speaker 1: here counting down like David Letterman style, but let me
Speaker 1: just read it to you and uh talk about this
Speaker 1: a little bit. With about one quarter of US household
Speaker 1: assets invested in equities and the FED retiring the transitory phase,
Speaker 1: the Fed's implied put is lower, while the equity markets
Speaker 1: economic real impact is higher. This that's a good one
Speaker 1: to me. I think it's you know, to some degree,
Speaker 1: you know, question one I guess would be, you know,
Speaker 1: is that time part of that time percent correction trying
Speaker 1: to sort of price figure out where the price of
Speaker 1: that put is and walk us through what you you know,
Speaker 1: what you mean about their economic real impact is higher? Um,
Speaker 1: you know what it would a really weak stock market,
Speaker 1: sort of depressed consumer spending, consumer confidence, and eventually you know,
Speaker 1: put that FED put into play, walk us through how
Speaker 1: that you see all that playing out this year. So
Speaker 1: so the first thing I'll say is that that's a
Speaker 1: savory veteran market call out, that that that is really
Speaker 1: one of the things that we've been harping on, and
Speaker 1: it's kind of you know, people aren't quite grasping it
Speaker 1: just yet, because what we're saying is, hey, balance sheets
Speaker 1: are a lot stronger, no doubt about it. Right. House
Speaker 1: prices are up, Equity prices are up, people have more cash.
Speaker 1: Balance sheets are fantastic. But what they're missing is there's
Speaker 1: a lot more equity risk on the balance sheet today
Speaker 1: than there's ever been. If you look back to the
Speaker 1: percentage of the balance sheet a decade ago is about
Speaker 1: it's now about um depending on the day, but let's
Speaker 1: just say close to a quarter. As the equity market
Speaker 1: waxes and waynes, that's going to influence sentiment a lot
Speaker 1: more today than it did a decade ago. So in
Speaker 1: any sort of equity market sell off, sentiment should get
Speaker 1: a lot heavier or not be all that attractive, and
Speaker 1: that should spill over into discretion ory spending. People don't
Speaker 1: feel as rich, and so now all of a sudden,
Speaker 1: the stock market plays a much bigger component into spending
Speaker 1: and economic growth than it did before. And there's this
Speaker 1: kind of vicious cycle. Now as far as the put,
Speaker 1: if the market falls apart, and we're not expecting the
Speaker 1: market to fall apart, we're expecting a market correction, but
Speaker 1: you wouldn't expect a lot of people always believe that
Speaker 1: the Fed will step in and save the market. We're
Speaker 1: not in that opinion. You know what, the FED tries
Speaker 1: to do. It tries to keep the liquidity flowing. It
Speaker 1: tries to keep the machine greased. But a lot of
Speaker 1: people will say, wow, the FEN is always trying to
Speaker 1: save the equity market. That's not our opinion, that's not
Speaker 1: our belief. But at the end of the day, the
Speaker 1: more conventional wisdom is the FED will not react to
Speaker 1: the equity market, or the FED will react to the
Speaker 1: more equity market later rather than sooner. And that's basically
Speaker 1: because they're heading into a tightening cycle. If the market
Speaker 1: falls apart. The market falls apart, they have a dual mandate.
Speaker 1: That dual mate is price stability and maximum employment. And
Speaker 1: we pretty much satisfied both equations. Because the equity market
Speaker 1: goes down, that's really not their problem. It becomes a
Speaker 1: bit more than problem because of this relationship and because
Speaker 1: the allocation to equities. But we really just don't think
Speaker 1: that the Fed's going to tighten raise. The Feds are
Speaker 1: going to take accommodation off. And you know, buyers beware,
Speaker 1: and everyone's a big boy or big girl. Figure out
Speaker 1: what kind of risk you're willing to sleep with or
Speaker 1: or what kind of risk you're comfortable within the portfolio.
Speaker 1: Because we're going to have a lot more volatility or
Speaker 1: to go forward in time. This is not again, this
Speaker 1: is no longer the market can bend but not break.
Speaker 1: The market will break at some point in time. We
Speaker 1: will have bigger pullbacks and it will feel a lot
Speaker 1: worse than actually is because we haven't had that in
Speaker 1: a long time. So then what do you recommend for
Speaker 1: clients or you know, when people are asking you what
Speaker 1: they should be favoring in this environment and for the
Speaker 1: remainder of this year, what do you recommend to them?
Speaker 1: Because I feel like one big question that popped up
Speaker 1: this week was like, Ken, what happens with tech if
Speaker 1: we do continue to see higher yields? And so, so
Speaker 1: what do you tell them? So what we tell them
Speaker 1: so from the five thousand foot level is what you
Speaker 1: want to do is you want to go up in quality,
Speaker 1: you want to go down and risk. And when we
Speaker 1: talk about qualities, companies with better balance sheets, you want
Speaker 1: cash on the balance sheet. You can want less leverage,
Speaker 1: you want better management teams, good stewart of capital, so
Speaker 1: companies that have higher r o I C or r
Speaker 1: o E s And then you want to stay away
Speaker 1: from the poor secular stories. So you want to focus
Speaker 1: on more attractive profit margins as far as risk, we
Speaker 1: we just want to stay away from the more risky
Speaker 1: um type type stories because we just don't think you're
Speaker 1: getting paid a year and a half ago, that was
Speaker 1: a different story. Right now, you're not getting paid for that.
Speaker 1: You can exploit this or you can institute this philosophy
Speaker 1: with this belief and I think almost any portfolio, and
Speaker 1: it really just depends on your risk tolerance and and
Speaker 1: your tax situation how you do that. We're much more
Speaker 1: focused on factors in style. And one of the things
Speaker 1: that we like about quality is one you're not paying
Speaker 1: up right, You're not paying through the nose for higher
Speaker 1: quality to your late in the cycle, and usually late
Speaker 1: in the cycle is the right time for quality. Quality
Speaker 1: does better when growth is slowing down as opposed to
Speaker 1: early in the cycle where growth is really accelerating. You
Speaker 1: hear the phrase dash for trash and and so and
Speaker 1: so forth lateness cycle, it's it's it's great, we're much
Speaker 1: better the last thing. And this is something that's that's
Speaker 1: near and to our heart. We find the return distribution.
Speaker 1: In other words, quality does much better to the downside.
Speaker 1: You can participate to the upside, but really our focus
Speaker 1: is on the downside, and quality should help you in
Speaker 1: that downtape and should help you protect that portfolio game. So,
Speaker 1: you know, however you do it, however you institute it.
Speaker 1: You know, we can talk about different ways, but really
Speaker 1: you want to take on more quality. You want to
Speaker 1: reduce the risk in the portfolio. It's time to start
Speaker 1: building up some dry powder for a rainy day. Yeah,
Speaker 1: that reminds me of Uh. One of the things we
Speaker 1: talked about the last time you were on the show
Speaker 1: about a year ago was uh, and you sort of
Speaker 1: nailed this one on the head. I think we're one
Speaker 1: is you know, you really talked about how the growth
Speaker 1: at any price type of trade is it was just
Speaker 1: done last year, and that that came true in kind
Speaker 1: of a dramatic fashion. Uh later in the year. I wonder,
Speaker 1: is that dead for good? Do you think? I mean,
Speaker 1: what would the condition we would need to see to
Speaker 1: get people talking about the high flying uh you know,
Speaker 1: longer ration sort of growthy names again? Is it is
Speaker 1: it as simple as a tighten versus loosening monetary policy?
Speaker 1: Do you think? Yeah, Yeah, there's there's a couple of
Speaker 1: things and and I'll try and PISA sinc. But it
Speaker 1: probably won't be because it's not so much about a level,
Speaker 1: but it's more about I think an event. Well, what
Speaker 1: you need to see is a couple of things, just
Speaker 1: on the monetary policy side. Again, what I think is
Speaker 1: going on is as real rates go higher, inflation expectations
Speaker 1: come down, the probability of stack flation comes off the table. Right.
Speaker 1: These high flyers do much better in a stack flationary
Speaker 1: environment than in a more benign economic compartment. The other
Speaker 1: thing is, as we pointed out, is real rates are
Speaker 1: tied to relative pricing, or have been tied to relative pricing.
Speaker 1: In the gray market, real rates were negative hundred on
Speaker 1: the tenure, negative a hundred and twenty basis points, which
Speaker 1: was historically low. Um, they're up to a five basis
Speaker 1: points from the start of the year, so I think
Speaker 1: they're in the mid eighties at this point in time.
Speaker 1: If you see real rates continue to ratch and higher,
Speaker 1: you know at some point we've got to make a
Speaker 1: call where rates are going to level out. But I
Speaker 1: don't think they get too flat this year. They could,
Speaker 1: but definitely if they get the flat, it's another conversation
Speaker 1: because if they get the flat. What that means is
Speaker 1: a fed and all life. They got very aggressive and
Speaker 1: the economy is going to slow down. And what's happened
Speaker 1: is you've probably had a bigger sell off in these
Speaker 1: names and more important and last thing that we're looking
Speaker 1: at is and I'll throw another blast from the past
Speaker 1: out there, there was a cop There was a fund
Speaker 1: called them under net Net fund. So in the late nineties,
Speaker 1: it was a high flying internet um stock portfolio. And
Speaker 1: a friend of mine and for our associate was was
Speaker 1: a trader there. And every day in the sell off,
Speaker 1: the PM would come in and give him more to
Speaker 1: Cell and more to Cell, and he would just knock
Speaker 1: things down and knock things down. And it wasn't until
Speaker 1: those Cell orders until basically that capital is rehallocated. So
Speaker 1: what happens in the equity market, whether you like it
Speaker 1: or not, money chases performance and then when performance isn't,
Speaker 1: their money leaves. So you need to see that wash out.
Speaker 1: So what we'd like to see is we'd like to
Speaker 1: see a repricing of real rates. We'd like to see
Speaker 1: us move further in time. We'd like to see another
Speaker 1: push down in valuation. Is not so much valuations, but
Speaker 1: just performance, and then we'd like to see that I'll
Speaker 1: use a very nice graphic phrase, that cathartic puke, where
Speaker 1: finally we see that the seller's exhausted and the final liquidations,
Speaker 1: you know, and it's just hard to it's hard to get.
Speaker 1: Is it's it's going to happen on this date at
Speaker 1: this time. No, we don't know, but these are the
Speaker 1: signposts that we're using. So you kind of you kind
Speaker 1: of know when you see it. You know that that
Speaker 1: that one real ugly day at the end of our correction,
Speaker 1: I guess is uh, you know, the capitulation day that
Speaker 1: that everyone waits for. That That's exactly it. And what
Speaker 1: we said this year is we think the growth at
Speaker 1: any price type UM stocks are going to have a
Speaker 1: heavy first half because real rates are gonna go higher
Speaker 1: and because of what you're seeing today. But we left
Speaker 1: the door open to the second half because you could
Speaker 1: see the slowing economy, you could see that repricing, and
Speaker 1: you could see that that cathartic up chuck, or you
Speaker 1: could see the seller's exhausted. Chris, one of the big
Speaker 1: things that we were just talking about in one of
Speaker 1: the big stories from this week is this yield spike,
Speaker 1: and I'm wondering if if the what we're seeing this
Speaker 1: week is any different from what we've seen in the past, Like,
Speaker 1: is there any reason to believe that this won't be
Speaker 1: over by next week? For instance, thought or two there um,
Speaker 1: some people were asking asking me, hey, is it is
Speaker 1: it a good time to buy growth in tech and
Speaker 1: so and so forth. Let's just talk short term, let's
Speaker 1: talk long term. The move down has been very aggressive.
Speaker 1: It wouldn't have This is not a prediction, but it
Speaker 1: wouldn't be surprising too someday or the next couple of
Speaker 1: days to see a snap back all of a sudden,
Speaker 1: raids start to fall because you know, pick a reason
Speaker 1: and we see a snap back. But at the end
Speaker 1: of the day, the FED is going to be more aggressive.
Speaker 1: I think we have a fair amount of confidence in
Speaker 1: that if the FED. Our belief is, if the FED
Speaker 1: is going to be more aggressive, then we should continue
Speaker 1: to see that lift in real rates. Now, as we
Speaker 1: look longer term, a lot of our clients are saying, well,
Speaker 1: interest rates are going to go through the roof, and this,
Speaker 1: that and the other thing. If you let look at
Speaker 1: the last two tightening cycles, the tenure actually went lower.
Speaker 1: Wants the FED or tenure yields actually went lower for
Speaker 1: at least a year once the Feds started raising rates.
Speaker 1: And so it's not clear to me that as a
Speaker 1: FED starts raising rates that that tenure nominals are going
Speaker 1: to go higher, right, they may begin to stall out,
Speaker 1: And I think that that's important to note. And then
Speaker 1: the last thing is what we think is the FED
Speaker 1: will push the front end to wherever they need to go.
Speaker 1: But eventually what's going to happen where late in the
Speaker 1: cycle the economy is already slowing down as you take
Speaker 1: stimulus off, that's going to slow things down more. I'm
Speaker 1: not sure how aggressive they can be at this point
Speaker 1: in time. And so when we get a more stable environment,
Speaker 1: when we get a slower environment, then we can start
Speaker 1: talking about moving back into those secular growth stories. But
Speaker 1: for now we think it's especially as you go out
Speaker 1: on the risk curve, it's still a little bit too risky.
Speaker 1: And we still haven't seen, you know, the events of
Speaker 1: the situations that we need to see playoffs to ship
Speaker 1: tiden up your straight jackets. It's time for the craziest
Speaker 1: things we saw in markets this week. Well that I
Speaker 1: agree with Chris. I'm not sure how aggressive the FED
Speaker 1: can get. I'm gonna tell you, Aldana, though, I'm going
Speaker 1: to get very aggressive with my craziest thing of the week,
Speaker 1: possibly a little too aggressive. I'm actually a little worried
Speaker 1: about this one. Um. So if this is the last
Speaker 1: time we talk because of the reaction to my crazy things,
Speaker 1: it's been nice knowing you guys, I will say, though,
Speaker 1: to be true to the craziest thing I saw in weeks,
Speaker 1: I gonna have to stick with it and follow through
Speaker 1: and tell you what it is. But I want to
Speaker 1: hear yours first. What do you got first? Fell down?
Speaker 1: It minus courtesy of Matt Levine, who wrote about this
Speaker 1: in one of his columns this week, and he pointed
Speaker 1: out that the UK branch of Santander Bank is trying
Speaker 1: to recover a hundred seventy five million dollars that they
Speaker 1: accidentally sent to tens of thousands of people on Christmas Day.
Speaker 1: And so Matt matt Levin's suggestion is just put out
Speaker 1: a press release and say sent in their UK just
Speaker 1: gave out a hundred seventy five million in Christmas presents
Speaker 1: to thousands of people. You know, Wow? What what? Have
Speaker 1: people say, Wow, what a good good bank this is,
Speaker 1: and I really like that. I doubt that they'll follow
Speaker 1: follow through with the suggestion, but it's a really good one.
Speaker 1: I think the assumption being that the marketing value of
Speaker 1: hundreds they earned media as they say, from exactly, that's
Speaker 1: it's in thing and he might be onto something there
Speaker 1: that's a big spend, though I don't know, we'll see
Speaker 1: regardless or not. I think I might open an account
Speaker 1: with sintender just just in case, in case it happens again. Yeah,
Speaker 1: how about you, Chris, what's the craziest thing you saw
Speaker 1: this week? You know, I've been racking my brain over
Speaker 1: this and I've come up with a whole lot of nothing.
Speaker 1: But the coolest craziest thing I have seen in recent
Speaker 1: I will say recent weeks, they've girl did a cover
Speaker 1: a Barry Manilow's Copa Cabana. So if you haven't seen it,
Speaker 1: you gotta check it out. It is fantastic. I will
Speaker 1: check that out. You can pull it up on YouTube.
Speaker 1: It's super cool, and it's something as equity markets melt
Speaker 1: or or you know, rollover. It's something that could brent
Speaker 1: you up or cheer you up. So it's pretty good.
Speaker 1: We'll leave it on that one. That's pretty good. Anything else, Chris,
Speaker 1: that that's a pretty good one. I'll let you live
Speaker 1: with that. Unless you got something better. That's that's a
Speaker 1: good one, all right, I'll give you mine. And again,
Speaker 1: you know, if this sends up getting me canceled, it
Speaker 1: was nice knowing you guys. Best of luck to the
Speaker 1: new co host of of What Goes Up. But I
Speaker 1: have to be true to revealing the craziest thing I
Speaker 1: saw in markets in the weekend. This is courtesy of
Speaker 1: The New York Post, which right there, you know, brace yourself,
Speaker 1: adjust your chin strap as they say. Um, it's about
Speaker 1: a reality TV star named Stephanie Mato or Matto, I'm
Speaker 1: not sure how you pronounced it. She was the star
Speaker 1: of a show called ninety Day Fiancee on t l C.
Speaker 1: I've never seen Have you seen the show, Bilda? I
Speaker 1: have you have seen this? Unluckily I've seen it as well.
Speaker 1: My wife has watched a few times and I've been
Speaker 1: stuck watching it. It draws you in. Okay, all right,
Speaker 1: so you guys are are familiar. So this woman, apparently
Speaker 1: after the show, gained a very strong following of fans
Speaker 1: on social media. Uh, and she started, I can't even
Speaker 1: I'm so in trouble for this, but I need to
Speaker 1: get it up. I read this story was tw Yeah.
Speaker 1: Some some fans suggested, uh that if she were to
Speaker 1: pass gas into a jar, they would just that jar
Speaker 1: of flatulence. Uh. As The York Post put it, she
Speaker 1: launched launched a guest adventure, peddling her fancy flash lence
Speaker 1: to strangers and blew awaye people on social media. When
Speaker 1: she recently announced that she makes more than blank a
Speaker 1: week doing this. So it's time to play prices, right, guys,
Speaker 1: how much do you think this woman makes per week
Speaker 1: with this business endeavor I came in by. This is
Speaker 1: a pretty high margin product. When you think about it,
Speaker 1: you know, it's it's the Uh, it's just the jar. Really,
Speaker 1: just potentially, what's your guest per per week weekly income? Yeah,
Speaker 1: not a not a per a jar basis, but but
Speaker 1: per week. They don't think they gave the per jar cost.
Speaker 1: I'll see dollars. That's that's that's not bad, fifty grand
Speaker 1: a week. But here's the problem. She did it too much.
Speaker 1: She did she the debate. The demand was so high
Speaker 1: that she had to adjust her her diet to accommodate
Speaker 1: both demands, so so she started eating it. Said her
Speaker 1: her diet included black bean salad, I mean in ham
Speaker 1: and pepper omelets. I gotta say, not that far different
Speaker 1: from my normal diet, as which tells you something. And
Speaker 1: what happened is she suddenly was overcome with chest pains
Speaker 1: and she thought she was having a heart attack. Got
Speaker 1: rushed to the hospital and the doctor said, no, it's
Speaker 1: not a heart attack. You've just been eating too many
Speaker 1: guessy foods and we recommend you you stop this and
Speaker 1: take some some gas alleviating medicine. So her it only
Speaker 1: lasted a few weeks. I think she netted two thousand
Speaker 1: dollars doing this. But here's my favorite part and what
Speaker 1: really qualifies it for the craziest thing I've seen in
Speaker 1: markets this week, she said, final quote of the story.
Speaker 1: I think everything happens for a reason. And although my
Speaker 1: fart selling days are over, I am going to save
Speaker 1: the money I made and I'll put something in the
Speaker 1: crypto perfect two story and and ending to a story Yes, yes,
Speaker 1: but I think I don't know it was a false
Speaker 1: form on that heart attack. I worry that if she
Speaker 1: puts all this money into crypto, that you may in
Speaker 1: do some actual heart attack given the volatility. I don't know.
Speaker 1: I died. Not a financial advisor here, just a guy
Speaker 1: with a blanket over his head, sipped in the bathroom.
Speaker 1: But if she's listening, I would I would advise maybe,
Speaker 1: I don't know, some quality, some quality stocks like Chris suggests,
Speaker 1: and not putting that up, that very hard earned money
Speaker 1: into crypto. Just me, Mike, this is your this is
Speaker 1: your weirdest week. You're hiding under a blanket, and your
Speaker 1: weirdest thing is the weirdest thing that you've potentially ever flagged.
Speaker 1: Something's gone wrong, very wrong in my life. Blah dada.
Speaker 1: I don't know what it is, but it can only
Speaker 1: go off from here. Let's hope we'll see anyway. Chris,
Speaker 1: great to talk, Kia. I can understand if you never
Speaker 1: want to associate with with me again after that one.
Speaker 1: So sorry. I asked you to come on. If you
Speaker 1: can look past it, we we love to be back
Speaker 1: on against it. Thanks guys, and as always, very informative
Speaker 1: and very entertaining. Much appreciated. Thank you for coming back
Speaker 1: on what goes up. We'll be back next week. Until then,
Speaker 1: you can find us on the Bloomberg Terminal website and app,
Speaker 1: or wherever you get your podcasts. We'd love it if
Speaker 1: you took the time to rate and review the show
Speaker 1: on Apple Podcasts so more listeners can find us. And
Speaker 1: you can find us on Twitter, follow me at Reaganonymous.
Speaker 1: The Dotta Hirich is at the Fildtta Hirich. You can
Speaker 1: also follow Bloomberg Podcasts at Podcasts and thank you to
Speaker 1: Charlie Paulla Bloomberg Radio. What Goes Up is produced by
Speaker 1: Laura Carlson. The head of Bloomberg Podcast is Francesco Leavy.
Speaker 1: Thanks for listening, See you next time. That n