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Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside

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Speaker 1: my co host Matt Miller. Every business day we bring

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Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along

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Speaker 1: with essential market moving news. Find the Bloomberg Markets podcast

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Speaker 1: called Apple Podcasts or wherever you listen to podcasts, and

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Speaker 1: at Bloomberg dot com slash podcast. All right, let's get

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Speaker 1: to a topic that is near and dear to my heart,

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Speaker 1: and that is E t F s. We have Sean

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Speaker 1: o'harroll with us president of Pacer E t F s

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Speaker 1: irish much Oh, happy St. Patrick's day, Shawn. Yeah, good

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Speaker 1: timing on that. Wherever book me today? Me on the

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Speaker 1: right day? Right, Yeah, I didn't even remember that it was.

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Speaker 1: Normally I have one and a half beers every day

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Speaker 1: after work when I go home, but today one and

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Speaker 1: a half. It's gonna be too go crazy, Yeah, Sean,

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Speaker 1: talk to me about your business. I mean it's huge, right,

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Speaker 1: The the E t F boom has been going on

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Speaker 1: since before the long before the pandemic, but this just

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Speaker 1: boosted I think um interest in exchange traded funds. Well,

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Speaker 1: I mean, I'm not sure I would tie it to

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Speaker 1: the pandemic. The momentum has been building for a number

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Speaker 1: of years, and you know, markets evolve, and you know,

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Speaker 1: improvements get made. And perhaps the biggest thing in terms

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Speaker 1: of the improvement to what would be traditionally the way

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Speaker 1: people would invest, which is a you know, the traditional

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Speaker 1: forty act mutual fund. The e t F is sort

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Speaker 1: of a cousin of that structure, except it has some

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Speaker 1: inherent advantages that I think UH investors find UH more attractive.

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Speaker 1: You can trade during the day as opposed to deciding

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Speaker 1: to sell and having to wait to the close. There's

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Speaker 1: some tax efficiencies that go along with e t s.

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Speaker 1: You can get sort of more targeted exposures, and and

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Speaker 1: on average, the the average cost of owning an e

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Speaker 1: t F in terms of the management fee is lower.

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Speaker 1: So I think there's been this evolution that sort of

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Speaker 1: has been building. The momentum certainly has been picking up um,

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Speaker 1: you know, and if you look at the last you know,

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Speaker 1: five to seven years, you know, for every dollar that's

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Speaker 1: come out of traditional mutual funds, it seems to be

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Speaker 1: finding its place in its way into an exchange traded funds.

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Speaker 1: And and honestly, I still think we're fairly early in

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Speaker 1: the cycle. So Sean, given all the bricks in the

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Speaker 1: wall of worry, whether it's the geopolitical issues which are

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Speaker 1: relatively new, slowing economy, inflation, rising interest rates, what's your

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Speaker 1: market call here? I think that there's a an inverse

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Speaker 1: relationship between interest rates and inflation and PEA s the

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Speaker 1: price you're willing to pay for the amount of earnings

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Speaker 1: you get on the stock. And so for the last

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Speaker 1: decade or so, we've had very low inflation, very low

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Speaker 1: and declining interest rates and accommodative FED and so in

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Speaker 1: that environment, I think you could you could justify paying

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Speaker 1: above average market multiples for the earnings that you're getting.

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Speaker 1: And then what sort of is distorted it in the

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Speaker 1: middle was COVID because we're you know, we went through

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Speaker 1: a series of earnings announcements this quarter where you had

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Speaker 1: thirty and year over your increases. I don't think those

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Speaker 1: are organic. I think they are just uh an output

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Speaker 1: of you know, the economy being shut down and now

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Speaker 1: things opening back up. Um. So if we're going to

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Speaker 1: enter an environment where rache you're gonna rise and inflation

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Speaker 1: is going to rise, I think investors should expect the

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Speaker 1: p S will have to come down unless we continue

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Speaker 1: to get blowout earnings of thirty here, which I don't

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Speaker 1: think is likely. So then in this environment, I think

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Speaker 1: investors need to sort of shift their focus away from

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Speaker 1: the broad market and start to focus on putting their

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Speaker 1: money in places where they have a better chance of

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Speaker 1: getting the returns that they expect, given the way that

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Speaker 1: the individual stocks are. Structures like we love free cash

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Speaker 1: flow and free cash flow yield as a strategy to

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Speaker 1: screen broad market for a smaller group of names. And

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Speaker 1: so is the CEO w Z the cash house that's

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Speaker 1: your biggest products, and it's up here to date and

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Speaker 1: the markets down eight percent as of yesterday. So but

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Speaker 1: where are we positioned today? Are overweight energy and material

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Speaker 1: that's inflation and oil. We're overweight staples versus discretionary. That's

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Speaker 1: you know, people with inflation and with all of the

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Speaker 1: stimulus going away, the consumer is going to get squeezed

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Speaker 1: and so they're probably at some point gonna have to

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Speaker 1: make a decision to buy the things they need versus

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Speaker 1: the things that they want. We're overweight healthcare in this

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Speaker 1: environment because healthcare hasn't been one of those sectors that

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Speaker 1: has had this big run up even though their earnings

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Speaker 1: grow faster than the overall market, and so that in

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Speaker 1: this environment, I think you need to be more selective.

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Speaker 1: We've had a nice run. Acknowledge that and start thinking

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Speaker 1: about going forward. What kind of stocks will do better

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Speaker 1: in this environment? Will energy materials are your inflation play?

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Speaker 1: And then generally speaking, stocks that have a lot of

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Speaker 1: free cashle and a high free cash flow yield are

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Speaker 1: able to absorb those higher financing input costs that will

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Speaker 1: go along with rising rates. And so I think that's

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Speaker 1: why our portfolio sort of acting the way it is

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Speaker 1: right now. And you have a lot of products that

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Speaker 1: focus on those kind of stocks, not just the cows,

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Speaker 1: but the You've got a global um cash cow z

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Speaker 1: et F. You've got to developed markets. You a calf

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Speaker 1: which I like, which is a small cap, a little

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Speaker 1: a little baby cow. They got wall And to continue

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Speaker 1: this is silly naming conventions. We actually have a fund

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Speaker 1: of funds version of our cash cows which we have

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Speaker 1: give the ticker h E R D heard exactly. You

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Speaker 1: also have an American Energy Independence e t f UM. Yes,

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Speaker 1: and uh year to date return thirteen point two per

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Speaker 1: cent um. Yes, this has to be one of your

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Speaker 1: strongest products at least year to date. Yeah, it's I

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Speaker 1: think it's probably our best performing U E t F

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Speaker 1: year to date, followed by g Cow and then Cows.

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Speaker 1: But the U S Energy Independent is basically focused on

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Speaker 1: the midstream energy names, which is essentially storage and transportation

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Speaker 1: of energy, oil and gas. And you know, they had

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Speaker 1: a tough time for a while, but they're entering a

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Speaker 1: phase in the market where if you think about environmentally,

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Speaker 1: the shutting of the Keystone pipeline, so the discontinuation of

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Speaker 1: that progress made the on the ground existing pipe companies

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Speaker 1: by virtue of that more more more more valuable. Um,

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Speaker 1: they're basically just toll roads. They're they're pricing is tied

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Speaker 1: to p p I. So if we do have runaway inflormation,

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Speaker 1: the fees they're going to get for transport victory, it's

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Speaker 1: going to go up as well. All right, Sean, I'm

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Speaker 1: gonna have to leave it there just because of time.

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Speaker 1: Appreciate as always getting your thoughts. Shawn O'Hara, President PACER

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Speaker 1: E t F S. I'm gonna bring in a Bloomberg reporter, um,

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Speaker 1: but not just a Bloomberg reporter. Bachelor's degree from Stanford,

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Speaker 1: completed two years at Oxford, Rhodes Scholar Bloom j d.

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Speaker 1: From Harvard. Alright, not bad, uh, Asia back box, she

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Speaker 1: knows what she's talking about. Yeah, Asia, thanks so much

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Speaker 1: for joining us in the limited time we have you,

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Speaker 1: because I assume that you're off to a giant law

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Speaker 1: firm or Supreme court yourself very soon. Um, let's talk

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Speaker 1: a little bit about salt what uh, what is the

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Speaker 1: possibility that some legal action spurs the salt deduction cap

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Speaker 1: to be lifted. I would not say that the possibility

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Speaker 1: is huge. There are a couple lawsuits going on that

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Speaker 1: states have brought to try to either get the cap

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Speaker 1: struck down in court and get a court to say

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Speaker 1: it's un constitutional, or to allow workarounds for their residents

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Speaker 1: to try to get around the cap. But the biggest

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Speaker 1: one that's at the Supreme Court right now. The states

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Speaker 1: have lost at the lower courts. Uh, and for a

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Speaker 1: few different reasons. I think the Supreme Court is probably

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Speaker 1: not going to take up the lawsuits. So my guess

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Speaker 1: is a legislative remedy is going to be the state's

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Speaker 1: best option. But we're gonna have to wait and see

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Speaker 1: why are states saying that this tax law is unconstitutional?

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Speaker 1: They's pointed to a couple different arguments. Uh. You know.

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Speaker 1: One argument they make is they basically say that even

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Speaker 1: though the Constitution doesn't explicitly mandate that you get assaults

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Speaker 1: deduction for your your state and local taxes, UM, it's

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Speaker 1: kind of implicit in the Constitution. It's embedded in some

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Speaker 1: ideas around federalism, basically the breakup of power between the

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Speaker 1: federal and state governments. UM. They point to the history

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Speaker 1: around the salt deduction that Congress never repealed it until uh,

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Speaker 1: and they say that history really shows that this is

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Speaker 1: embedded in the Constitution itself. It's embedded and the taxing

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Speaker 1: powers the Constitution creates for Congress that they have to

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Speaker 1: provide this kind of deduction. And then they also point

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Speaker 1: to an amendment in the Constitution. It's the tenth Amendment,

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Speaker 1: and that basically reserves to the states all the powers

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Speaker 1: that aren't explicitly given to the federal government and the Constitution.

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Speaker 1: And they say part of that amendment is you can

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Speaker 1: coerce states um through federal tax policy, and that basically

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Speaker 1: the salt cap is doing it. It's affecting their fiscal

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Speaker 1: situations so much that they have to uh find ways

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Speaker 1: to um reduce the tax burden on their residents. It's

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Speaker 1: going to affect their fiscal policy in ways that the

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Speaker 1: federal government isn't allowed to to do to course them

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Speaker 1: to do. It does seem kind of nuts that I

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Speaker 1: have to pay my state and local income pacts with

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Speaker 1: after tax dollars. Would make more sense if I've paid

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Speaker 1: at all with pre tax dollars. M m um, yeah,

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Speaker 1: I mean, you know, part of the argument from people

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Speaker 1: who are suffering from this is that there's double taxation

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Speaker 1: going on. Um, if you live in a high tax state,

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Speaker 1: and those are the states that are disproportionately impacted by

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Speaker 1: the seventeen uh change in the tax laws. Um, it's

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Speaker 1: it's going to increase your burdens when you're already facing

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Speaker 1: higher burdens with in the state and local jurisdictions where

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Speaker 1: you live. So is there any argument here that hey,

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Speaker 1: for those of us, it was clear it was a

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Speaker 1: political issue, uh that the elimination or the reduction in

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Speaker 1: the saw tech deduction. Is there any you mean? Donald

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Speaker 1: Trump was punishing New York and New Jersey for in

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Speaker 1: California for not supporting it, So it was very clear

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Speaker 1: to many observers that that is actually what the driver

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Speaker 1: was here. Is there any legal recourse to that issue?

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Speaker 1: The states have raised that, They said that this was

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Speaker 1: politically targeting states that were primarily not states that voted

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Speaker 1: for Donald Trump, but so far courts have rejected that.

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Speaker 1: You know, there was a decision out of a New

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Speaker 1: York federal district court and then the appeals court that

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Speaker 1: UM governs both New York State and some other UM,

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Speaker 1: some other states, and it basically said, yes, it's true

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Speaker 1: that the cap disproportionately affected UM states that didn't mirror

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Speaker 1: the political already of people in power when the law

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Speaker 1: was passed. But one reason it's disproportionately impacting them is

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Speaker 1: is that the deduction that existed before disproportionately helped them.

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Speaker 1: And so the court didn't find that to be UM

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Speaker 1: persuasive argument and also basically said that formally speaking, UM,

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Speaker 1: the law applies to everyone, even if it ends up

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Speaker 1: impacting some states more than others based on the tax

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Speaker 1: policy they already have in place. And you're probably the

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Speaker 1: wrong person to ask this, but as a legal expert,

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Speaker 1: but why are my taxes so much higher? How come

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Speaker 1: New Jersey and New York residents are paying such massive

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Speaker 1: state and local income taxes almost a much as I

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Speaker 1: pay in federal income tax Good schools, Right, Well, you're

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Speaker 1: right that I'm mostly a legal expert, but there are

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Speaker 1: some answers to that. You know, now your state local

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Speaker 1: tax deduction on your federal taxes, it's it's capped at

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Speaker 1: ten tho dollars and you only get the deduction if

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Speaker 1: you itemize. This standard deduction right now is I think

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Speaker 1: between twelve and thirteen thousand, and the number depends on

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Speaker 1: what your tax here we're talking about UM, but you

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Speaker 1: have to have itemized deductions that exceed that for it

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Speaker 1: even to be worth your while. UM. As I recall,

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Speaker 1: I think one third of New York taxpayers were claiming

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Speaker 1: UM deduction before UM the change in the tax law.

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Speaker 1: So you can you can imagine how many people are

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Speaker 1: impacted by this, and I think it reflects how much

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Speaker 1: they're paying already in the state and local taxes. This

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Speaker 1: applies to property taxes, and it applies to either sales

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Speaker 1: or income taxes within said politics. There I shall bay

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Speaker 1: legal reporter for Bloomberg Industry Group Joinings here. Let's get

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Speaker 1: to UM. Mike vogel Song, He is the chief investment

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Speaker 1: officer and managing director for Cap Trust. I don't think

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Speaker 1: that's Miami beach, Mike. We had the FED begin the

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Speaker 1: well messaged interest rate rising regime yesterday. Can stocks perform

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Speaker 1: in that kind of environment? Well, first of all, it's

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Speaker 1: cold and raining here in north in Raleigh, North Carolina,

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Speaker 1: so not quite not quite Miami, No for sure. UM.

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Speaker 1: I'm sorry your your your question. Your question was about

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Speaker 1: the stock market. Yeah, just in a rising interest rate environment. Tough. Yeah,

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Speaker 1: I think that's that's the that's the sixty four all

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Speaker 1: the question, right, I mean, UM, In some ways, of course,

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Speaker 1: interest rates rising means that the economy is reflating and

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Speaker 1: that and that we have economic activity back to life

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Speaker 1: after a decade of quee UM, and in some ways

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Speaker 1: that that's that's a positive thing. But obviously the discounting

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Speaker 1: mechanism that the bonds create and and are really pushes

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Speaker 1: the other direction. So what we've seen is those those

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Speaker 1: stocks that are that are sensitive to that, that benefit

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Speaker 1: from higher interest rates. You think banks have generally done

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Speaker 1: quite well over the last six months. But of course,

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Speaker 1: the UM, the super aggressive money losing massively long duration

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Speaker 1: assets UH and stocks and companies have seen their prices

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Speaker 1: just get absolutely destroyed. So there's been a huge rotation

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Speaker 1: in the market over the last you know, six six

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Speaker 1: six months, maybe even a year if you go back

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Speaker 1: far enough to February of last year. UM and and

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Speaker 1: that's that's that's the that's the dynamic round interest rates, right,

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Speaker 1: it's helps someone hurts others. How much have the FED,

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Speaker 1: you know, talking tough but not really willing to to

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Speaker 1: go the full length in terms of rates. That's the

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Speaker 1: that's the that's the really important question. I think, you know,

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Speaker 1: the J. Powell came out yesterday and said that, you know,

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Speaker 1: there's no particular worry about going into recession next year.

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Speaker 1: And and it was, by the way, the same day

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Speaker 1: that the O E c D came out and said that,

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Speaker 1: you know, higher oil prices in the war in Ukraine

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Speaker 1: will take a percentage point off of global GDP. I mean,

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Speaker 1: that's that's a massive amount. Of course, the US is

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Speaker 1: the largest second artist, depending on how you menor economy

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Speaker 1: in the world, so a lot of that growth is

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Speaker 1: going to come from the US. So you're getting mixed

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Speaker 1: messages from different organizations and different different economic and governmental organizations. Uh.

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Speaker 1: We were having this conversation this morning among some of

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Speaker 1: our investment committee, and and the question is really, um,

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Speaker 1: does you know is power simply talking a good game?

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Speaker 1: So it gives him the freedom and flexibility to raise

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Speaker 1: interest rates higher than he would otherwise. UM. You know,

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Speaker 1: my my sense is that that he he kind of

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Speaker 1: chafes under the dual mandate that the Federal Reserve had.

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Speaker 1: Um that you know, this is this idea of full

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Speaker 1: employment and and stable stable dollar or stable purchasing power. Um.

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Speaker 1: And you know he's basically saying, look, we've got such

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Speaker 1: we've got the best employment picture in a generation. We're

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Speaker 1: going to get interest rates back to where they need

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Speaker 1: to be, regardless of what happens to the economy. UM.

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Speaker 1: Kind of his pull Volger moment, almost in a different

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Speaker 1: contexts at a different time, But that's sort of what

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Speaker 1: it felt like for us yesterday. UM. I'm not sure

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Speaker 1: he's gonna be able to get away with seven this

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Speaker 1: year and getting all the way up two and a

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Speaker 1: half Percentum. Ay I just about thirty seconds. It's recession,

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Speaker 1: recession and material risk to you. I think it is

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Speaker 1: We're we're concerned about it. Um. And that's that's why

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Speaker 1: we're trying to square what Paul said yesterday with some

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Speaker 1: of the data that we're seeing. Um. You know, there's

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Speaker 1: the books who are absolutely convinced we're going to be

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Speaker 1: in recession by first quarter. Uh. And and paula basically

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Speaker 1: too cold water on that. So um, that that is

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Speaker 1: the debate in the economic world. And I think that

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Speaker 1: has implications obviously for bond rates, that it has implications

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Speaker 1: to the equity mark. Hey, Mike, thanks so much for

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Speaker 1: joining us. I really appreciate getting your thoughts and insights.

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Speaker 1: Mike Voguson, chief investment Officer and managing director at Cap

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Speaker 1: Trust based in Raleigh, North Carolina. Let's dive in right

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Speaker 1: here with David Coodla. He is the founder, CEO and

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Speaker 1: c of Mainstay Capital Management. David, what's an investor to

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Speaker 1: do when we've got rising interest rates, we've got slowing growth,

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Speaker 1: we've got geopolitical tensions. Do I just throw in the

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Speaker 1: towel and go to cash? Good morning, Matt and Paul. Um.

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Speaker 1: I don't think that that's uh the best approach. And

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Speaker 1: and for a couple of reasons, Uh, you know, we

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Speaker 1: always say within our investment committee, we want to hedge

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Speaker 1: against risk, but we don't want to hedge against making money.

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Speaker 1: And when we go to cash, you went to FED

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Speaker 1: raising FED funds right yesterday. Cash still yields basically nothing,

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Speaker 1: and there's more creative. We just think there's more creative

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Speaker 1: ways to get at it. UM. One of our favorite

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Speaker 1: ways to diversify over the past several months and especially

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Speaker 1: this year, has been with commodities, which have just been

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Speaker 1: on a tear and and that's been important because have

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Speaker 1: been no help you know this year. Uh, you know,

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Speaker 1: we've got US aggregate bonda decks down more than five

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Speaker 1: percent year to date, but but commodities have done very well.

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Speaker 1: Now more recently, we've been through a bit of a

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Speaker 1: roller coaster ride because of the Ukraine War. We had

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Speaker 1: UM an even bigger risk premium priced into a lot

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Speaker 1: of commodities, let up oil, gas metals. That's somewhat come

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Speaker 1: back out and uh, come down quite a bit, but

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Speaker 1: we're back on that trend line of growth for commodities.

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Speaker 1: You look at the environment we're in, there's questions about

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Speaker 1: a recession in the offering, there's questions about you know

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Speaker 1: what happened economy. But what we know is in front

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Speaker 1: of us are the ingredients for stagflation. If you look

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Speaker 1: back in the nine seventies, where do you investoring stagflation commodities?

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Speaker 1: I want to ask your thoughts on the recession probability.

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Speaker 1: And by the way, you are the second Stanford grad

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Speaker 1: we've had on in the past hour. Everywhere, they're all

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Speaker 1: over the place. Um, we're a dime a dozen. What

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Speaker 1: what are your thoughts on the recession probability here, David?

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Speaker 1: Because we do have rising commodity prices, a commodity price shock. Really,

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Speaker 1: we do have a yield curve that looks like well

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Speaker 1: we saw the fives tens and the seven tens invert

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Speaker 1: already today. Um. And we do have a FED that

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Speaker 1: wants to raise interest rates about eleven twelve times over

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Speaker 1: the next twenty four months. So you know, do we slip? Yeah,

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Speaker 1: it gets to be a complicated picture. But here's how

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Speaker 1: we see it. Um. You know, we've got you know,

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Speaker 1: we typically looked at tues to tends. Is that recession indicator?

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Speaker 1: I know some some now are looking at I want

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Speaker 1: to look at three months it tends, but tues to

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Speaker 1: tens or you know, the spread on Tuesday tens is

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Speaker 1: down around twenty basis points, So we are getting very

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Speaker 1: close that collapsing down to yield curved version. That's been

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Speaker 1: a pretty good predictor of a recession out in twelve

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Speaker 1: to eighteen months. And I think the concern is, though,

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Speaker 1: besides you know those kind of um yield curve predictors,

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Speaker 1: is that the Fed has a very difficult task in

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Speaker 1: front of it. I mean, what if you look at

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Speaker 1: the the statements right from uh JEROMEE Pow yesterday. You

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Speaker 1: know he's talking about things if inflation doesn't calm down,

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Speaker 1: the Policy Committee will hammer it even harder. The labor

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Speaker 1: market has tightened to an unhealthy level. What does that mean?

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Speaker 1: Too many people have jobs. But what it means to

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Speaker 1: a policy maker is, uh, they know, they just know

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Speaker 1: that they've they've let this run too far. And they

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Speaker 1: at least they're talking tough, right, We got to see

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Speaker 1: if they'll walk the talk. But they're talking tough. And

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Speaker 1: I think if we get anywhere near seven rate hikes

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Speaker 1: that's in the dot plot and still on a lot

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Speaker 1: of the forecasts out there, Uh, there is a real

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Speaker 1: risk they could usher in a recession. At least at

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Speaker 1: least a significant slowdown. It's on our base case, but

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Speaker 1: the risk is definitely there. Hey David, we got the

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Speaker 1: oil ripping again today after a little bit of a

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Speaker 1: pullback w T I crude back over a hundred dollars

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Speaker 1: of barrel. Have I missed the energy trade? No, I

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Speaker 1: don't think so. UM, I think, you know, there's a

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Speaker 1: lot of runway ahead for energy. You know, our our

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Speaker 1: theme and energy is is our favored commodity of energy

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Speaker 1: and base metals. If you look at UM, you know

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Speaker 1: what's been happening in the energy patch unfortunate. It's it's

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Speaker 1: been exacerbated by the Ukraine War. But there's been the

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Speaker 1: you know, this push towards an energy transition, UH an

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Speaker 1: investment there under in fast under investment or disincentives for

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Speaker 1: UH the oil companies to invest further and fossil fuel infrastructure.

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Speaker 1: And now we do have this energy crunch, this energy shock,

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Speaker 1: and you know, the the energy companies are reluctant to

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Speaker 1: invest more. So as prices rise, they're increasing UH their

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Speaker 1: free cash fill, their profitability. You know, look at what happened.

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Speaker 1: You know, look at Occidental Petroleum today at about eight

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Speaker 1: percent UH so I think that there there's runway ahead

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Speaker 1: for several more months here UM and I think that

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Speaker 1: that we are significantly overweighting our portfolios. Think investors would

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Speaker 1: do well to continue to hold commodities and specifically UM

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Speaker 1: energy and their equity equities allocation. All right, David, thanks

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Speaker 1: so much for joining us. Pleasure to get your insight.

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Speaker 1: Always look forward to your interviews. David Coodlove, there is

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Speaker 1: the CEO of Mainstay Capital Management. Thanks for listening to

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Speaker 1: the Bloomberg Markets podcast. You can subscribe and listen to

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Speaker 1: interviews with Apple Podcasts or whatever podcast platform you prefer.

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Speaker 1: I'm Matt Miller. I'm on Twitter at Matt Miller. Three

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Speaker 1: p on Fall Sweeney. I'm on Twitter at pt Sweeney.

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Speaker 1: Before the podcast. You can always catch us worldwide at

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Speaker 1: Bloomberg Radio