WEBVTT - Surveillance: Aggressive Cuts with Luzzetti 0:00:05.120 --> 0:00:08.480 This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along 0:00:08.520 --> 0:00:12.319 with Jonathan Farrow and Lisa Abramowitz. Join us each day 0:00:12.400 --> 0:00:16.880 for insight from the best and economics, geopolitics, finance and investment. 0:00:17.280 --> 0:00:22.079 Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and 0:00:22.320 --> 0:00:26.600 anywhere you get your podcasts, and always on Bloomberg dot Com, 0:00:26.640 --> 0:00:30.840 the Bloomberg Terminal, and the Bloomberg Business App. Matthew Lizzetti 0:00:30.920 --> 0:00:33.479 joins us now with Deutsche Banking. Away from your Arch 0:00:33.600 --> 0:00:36.720 recession call, you let on that among I think all 0:00:36.760 --> 0:00:41.800 of market economics, your call for interest rates is like 0:00:41.920 --> 0:00:45.479 Richard Claared is the former vice chair writing in The Economists, No, 0:00:45.520 --> 0:00:47.479 we're not going to get back to two percent, not 0:00:47.560 --> 0:00:50.120 back to one. But what does our world look like 0:00:50.200 --> 0:00:52.760 with an inflation that gets back to two point six 0:00:52.920 --> 0:00:56.160 three point two that kind of level the clarita level. 0:00:56.280 --> 0:00:58.760 Yeah, so I think that's closer to where we expect 0:00:58.760 --> 0:00:59.720 to be by the end of this year. We have 0:00:59.720 --> 0:01:02.040 corpse around three and a half percent. You know, that 0:01:02.160 --> 0:01:03.920 is a lot of progress from where we are today. 0:01:04.360 --> 0:01:06.680 I would agree with Governor Waller's comments recently that over 0:01:06.680 --> 0:01:09.440 the past year you've basically seen very little progress, and 0:01:09.440 --> 0:01:11.560 we can point to different components that have moved back 0:01:11.600 --> 0:01:14.000 and forth, but the reality is we haven't seen much 0:01:14.040 --> 0:01:17.039 progress over the past year. I think getting back down 0:01:17.080 --> 0:01:19.880 to three and a half percent for the FED that matters. 0:01:19.480 --> 0:01:21.520 In the context of what the labor market looks like. 0:01:21.600 --> 0:01:23.640 So if you still have a four percent or below 0:01:23.920 --> 0:01:26.199 unemployment rate, you have a FED where the FED funds 0:01:26.240 --> 0:01:28.880 rate is probably higher, certainly not as cutting rates, but 0:01:28.959 --> 0:01:31.880 if that's occurring within the context of a recession where 0:01:31.880 --> 0:01:33.360 the unoplunt rate has ers into four and a half 0:01:33.360 --> 0:01:35.840 for five percent, which is the context that we expect, 0:01:36.200 --> 0:01:38.000 is that that'll be what triggers the FED to be 0:01:38.040 --> 0:01:38.640 cutting rates there. 0:01:38.640 --> 0:01:41.039 And then to add that into your GDP call, do 0:01:41.120 --> 0:01:46.240 you have a diminished inflation a disinflation into a slowing 0:01:46.600 --> 0:01:50.360 real GDP level or quarter to quarter movement that gets 0:01:50.440 --> 0:01:54.120 us down to a new diminished nominal GDP? 0:01:54.760 --> 0:01:57.320 We do, you know, we have modestly positive growth in 0:01:57.400 --> 0:01:59.600 Q three, we have negative growth beginning in Q four 0:01:59.640 --> 0:02:01.840 into this the first half of next year. 0:02:01.720 --> 0:02:03.600 Sub four percent nominal GDP. 0:02:03.840 --> 0:02:06.840 It is when you add in where inflation is we 0:02:06.840 --> 0:02:09.520 only ape point six percent growth for this year, so 0:02:09.560 --> 0:02:12.560 it is sub four percent nominal GDP. But I think 0:02:12.560 --> 0:02:14.560 really for the Fed, it's, you know, the context of 0:02:14.560 --> 0:02:15.799 what is happening with the labor market. 0:02:15.840 --> 0:02:17.360 I think that's been the key area of debate. 0:02:17.360 --> 0:02:19.440 We've seen slowing there, but I think across most of 0:02:19.480 --> 0:02:22.880 the metrics, still four million more job openings and unplayed individuals. 0:02:22.919 --> 0:02:25.560 The private quits rate actually ticked up recently. The Atlanta 0:02:25.600 --> 0:02:28.120 Fed wage growth tracker hasn't shown any progress in coming down. 0:02:28.320 --> 0:02:29.799 I think that's really the crux for the Fed. 0:02:29.880 --> 0:02:31.600 A lot of people lean on the projections coming from 0:02:31.639 --> 0:02:35.320 the Federal Reserve, the Cordly SCP, the Summary of Economic projections. 0:02:35.440 --> 0:02:38.120 There's not much daylight between your rates call and their 0:02:38.200 --> 0:02:40.120 rates call for this year. In fact, there's no daylight 0:02:40.240 --> 0:02:42.480 at all. Where is the some daylight between you and 0:02:42.520 --> 0:02:45.040 the Federal Reserve when you look at that outlook, Yeah. 0:02:45.160 --> 0:02:46.960 I would note I think they've come a little bit 0:02:46.960 --> 0:02:49.880 closer to us over time, Yeah, and that too, but 0:02:50.000 --> 0:02:52.120 at the moment, there is, you know, for this year, 0:02:52.280 --> 0:02:53.080 very little daylight. 0:02:53.480 --> 0:02:54.880 There is greater daylight. 0:02:54.639 --> 0:02:57.679 Into twenty twenty four, and they have their path, which 0:02:57.680 --> 0:03:00.680 I think is this gradual cutting path under something that 0:03:00.720 --> 0:03:02.880 looks somewhat like a soft landing, even with the unployment 0:03:02.919 --> 0:03:05.040 rate rising by one percentage points, and they're just kind 0:03:05.040 --> 0:03:07.880 of gliding back towards neutral. Our expectations that they have 0:03:07.960 --> 0:03:09.919 to cut more aggressively that you get a recession the 0:03:09.960 --> 0:03:11.919 unployment rate rises. We have two hundred and twenty five 0:03:11.919 --> 0:03:14.680 basis points of cuts between Q one and Q three 0:03:14.760 --> 0:03:17.400 of next year. There is, you know, no doubt, a 0:03:17.440 --> 0:03:19.800 gap between us and where the FED is in the 0:03:19.800 --> 0:03:21.240 market at the moment by the end of the year, 0:03:21.480 --> 0:03:23.360 but that gap has been diminished. You know, we're at 0:03:23.400 --> 0:03:25.360 a four point six percent or so FED funds rate 0:03:25.360 --> 0:03:27.120 at the end of this year, and that seems quite 0:03:27.160 --> 0:03:28.840 reasonable to me within the context of, you know, you 0:03:28.919 --> 0:03:31.000 might have a recession beginning in Q four. 0:03:31.080 --> 0:03:33.320 Can you dove tell that idea of more aggressive rate 0:03:33.360 --> 0:03:36.160 cuts in twenty twenty four with what we've heard from 0:03:36.160 --> 0:03:38.320 the banks just now, which was supposed to be really 0:03:38.320 --> 0:03:41.000 telling from an economic perspective, we would finally know how 0:03:41.000 --> 0:03:43.440 bad this credit crunch or credit kurf, fufflow or whatever 0:03:43.440 --> 0:03:45.760 you want to call it was. Now we're living in 0:03:45.800 --> 0:03:47.520 this sort of like, man, what did we learn We're 0:03:47.560 --> 0:03:49.480 not sure. I mean, how much have you learned from this? 0:03:49.920 --> 0:03:51.080 Yeah, I think not much yet. 0:03:51.720 --> 0:03:53.720 You know, we're hearing from a lot of the larger banks, 0:03:53.840 --> 0:03:56.400 which were anticipated to be a beneficiary of some of 0:03:56.400 --> 0:03:59.640 the stress in the smaller and medium sized banks. In 0:03:59.680 --> 0:04:02.160 terms of of you know, the fed's H four and 0:04:02.280 --> 0:04:04.680 H eight data. We've seen decreasing stress in the Fed's 0:04:04.720 --> 0:04:06.960 balance sheet, which I think has been a positive. It's 0:04:06.960 --> 0:04:09.560 giving us some sense that we're beyond, hopefully beyond the 0:04:09.640 --> 0:04:12.160 acute phase of what's been hanging happening in the banking sector. 0:04:12.520 --> 0:04:14.760 But I think everybody's anticipating that we're still going to 0:04:14.840 --> 0:04:17.560 have this tightening of lending conditions, tightening of credit conditions 0:04:17.600 --> 0:04:18.520 that takes place. 0:04:18.640 --> 0:04:19.600 That reduces growth. 0:04:19.640 --> 0:04:22.279 That is part of our baseline expectation, but at the 0:04:22.279 --> 0:04:24.960 moment it's mostly scenario analysis. We really can't have a 0:04:25.000 --> 0:04:27.159 great idea of how much things are going to titan. 0:04:27.400 --> 0:04:29.760 We'll get the FED Senior Loan Officer Survey in early May. 0:04:30.000 --> 0:04:32.400 I expect that's going to be quite negative, just given 0:04:32.880 --> 0:04:35.279 when that was occurring, kind of around the peak stress 0:04:35.279 --> 0:04:36.599 that we were seeing going back. 0:04:36.440 --> 0:04:38.920 To twenty twenty four. In your belief that the Fed's 0:04:38.920 --> 0:04:42.000 going to cut much more aggressively. What's the threshold, what's 0:04:42.040 --> 0:04:44.640 the bar going to be for them to be more 0:04:44.640 --> 0:04:46.039 aggressive with rate cuts? 0:04:46.320 --> 0:04:48.440 Yeah, I think it's you know, are we seeing a 0:04:48.480 --> 0:04:51.240 recession take place? You know, their forecast for the unemployment 0:04:51.360 --> 0:04:53.480 rate is that it rises up to four point six 0:04:53.520 --> 0:04:56.680 percent and stays there. You don't ever really see that 0:04:57.000 --> 0:04:59.680 in a recession. You know, these things are nonlinear. If 0:04:59.680 --> 0:05:01.600 a rise fifty basis points, you get a recesion, it 0:05:01.640 --> 0:05:04.000 rises by at least two percentage points. And so I 0:05:04.040 --> 0:05:06.240 think if you have something that looks more like a 0:05:06.279 --> 0:05:08.880 typical recession, which is basically our forecast, you get a 0:05:08.880 --> 0:05:11.479 two percentage point rise in the unemployment rate, then I 0:05:11.480 --> 0:05:13.440 think we should expect that they will be cutting rates. 0:05:13.839 --> 0:05:15.960 I think they've been very clear they're not going to 0:05:16.040 --> 0:05:18.599 repeat the mistakes of the nineteen seventies the way that 0:05:18.640 --> 0:05:21.320 I would kind of view the mistakes of the nineteen seventies, 0:05:21.320 --> 0:05:24.120 where that they cut the real rate from very positive 0:05:24.200 --> 0:05:28.320 territory to very negative real territory very quickly. We don't 0:05:28.320 --> 0:05:29.880 expect them to do that this time around. They can 0:05:29.880 --> 0:05:32.720 cut rates pretty materially and still have a positive real 0:05:32.720 --> 0:05:33.160 FAED funds. 0:05:33.200 --> 0:05:35.039 Right, It's so unfair of me to ask this, But 0:05:35.600 --> 0:05:38.880 is that forecast a political forecast? Do you think there's 0:05:38.880 --> 0:05:41.840 a political element to it to say four point five 0:05:41.920 --> 0:05:44.760 year round four six four six, next two years? How 0:05:44.839 --> 0:05:47.000 much I'll phrase it differently because I know you've don't 0:05:47.000 --> 0:05:51.120 want answer this. How much political heat would they get 0:05:51.279 --> 0:05:53.920 if they were forecasting anything higher than four and a 0:05:53.960 --> 0:05:56.680 half percent and described exactly what you think is going 0:05:56.760 --> 0:05:57.400 to play out? 0:05:57.560 --> 0:05:59.719 Yeah, I don't know if it's as much politics as 0:05:59.839 --> 0:06:03.039 there's a confidence channel from how the Fed is forecasting things, 0:06:03.080 --> 0:06:05.120 and so they have a different role to play than 0:06:05.160 --> 0:06:08.840 I do. They can impact sentiment in the economy, They 0:06:08.839 --> 0:06:12.560 can impact I think overall confidence and therefore can impact 0:06:12.640 --> 0:06:14.880 what the actual outcome for the economy is. And so 0:06:14.920 --> 0:06:17.800 I think you know that should be viewed within that. 0:06:17.960 --> 0:06:20.320 You know, both their inflation forecast, but also what they're 0:06:20.320 --> 0:06:23.960 showing with the unemployment rate. It's notable, I think, nonetheless, 0:06:23.960 --> 0:06:26.440 that they're showing the unemployment rising as much as it has. 0:06:26.680 --> 0:06:29.120 It's notable that in the minutes the Fed staff you know, 0:06:29.240 --> 0:06:33.520 very clearly has a baseline mild recession. You know, these 0:06:33.560 --> 0:06:35.599 things don't happen very often from the Fed's perspective. So 0:06:35.600 --> 0:06:37.800 I think it is a commitment in showing that they 0:06:37.839 --> 0:06:40.440 are willing to take the necessary actions to get inflation down. 0:06:40.440 --> 0:06:43.559 So it's almost soros poper esque that you can shape 0:06:43.560 --> 0:06:47.320 the events you anticipate. It's almost something sol fulfilling about 0:06:47.760 --> 0:06:49.800 unemployment forecasts at a feder reserve. 0:06:49.960 --> 0:06:52.839 One of the best conversations I ever had was the 0:06:52.920 --> 0:06:56.200 younger George Soros talking about Carl Popper in the early 0:06:56.279 --> 0:07:01.480 nineteen fifties at LSE. This is economic epistol, homology, religion, 0:07:01.600 --> 0:07:04.920 I say at UCLA, and the ideas you get out 0:07:04.960 --> 0:07:08.520 front and then can you reframe things as you go along? 0:07:09.120 --> 0:07:11.760 That's the narratives reframing if you will. 0:07:11.800 --> 0:07:15.040 And Matt, this was smart, always says thought you. I 0:07:15.040 --> 0:07:16.880 thought we'd get there on a full cost. Here we 0:07:16.920 --> 0:07:18.520 are at the Federal Reserve. Matt, thank you. 0:07:29.240 --> 0:07:29.520 Right now. 0:07:29.560 --> 0:07:31.800 Gerard Cassidy joins us. He's been such a friend of 0:07:31.800 --> 0:07:34.640 the show to give us perspective across these many different 0:07:34.640 --> 0:07:37.640 types of banks, not all pooled together and gered. I 0:07:37.680 --> 0:07:39.800 want to start with a sentence buried in their very 0:07:39.800 --> 0:07:43.320 clear press release, which is all about Morgan Stanley all 0:07:43.360 --> 0:07:45.960 about what you and I have witnessed over decades. In 0:07:46.000 --> 0:07:49.680 all this turmoil, down down, down, down down, wealth Management 0:07:49.800 --> 0:07:53.840 moved from a five point nine billion revenue stream to 0:07:53.960 --> 0:07:57.440 six point six billion. Boy, Gerard, is that talk about 0:07:57.440 --> 0:08:00.480 why everybody wants to copy Morgan's Stanley? 0:08:02.480 --> 0:08:06.000 Tom, You're absolutely right. You know, the wealth management business 0:08:06.240 --> 0:08:10.120 is a more predictable, steady, any type of business versus 0:08:10.160 --> 0:08:13.760 the more volatile institutional business that you guys have been 0:08:13.800 --> 0:08:18.120 talking about. Tom, you mentioned about how amongst the investment 0:08:18.120 --> 0:08:21.080 banking revenues have declined, not just for Morgan Standing but 0:08:21.120 --> 0:08:24.720 for the group, but wealth management. You're right that differentiates 0:08:25.200 --> 0:08:29.240 well Morgan Standing from his peers, and under Gorman's leadership, 0:08:29.400 --> 0:08:31.920 he's the one that drove this over the last ten years. 0:08:32.240 --> 0:08:34.640 Jeff, we've had all the big banks report. Now who 0:08:34.720 --> 0:08:35.320 won the quarter? 0:08:37.040 --> 0:08:39.680 I would say that, you know, the JP Morgan numbers 0:08:39.760 --> 0:08:43.439 probably stand out out, John as winning the quarter. They 0:08:43.559 --> 0:08:46.959 certainly drove those numbers through that net interest revenue line. 0:08:47.720 --> 0:08:52.679 Certainly they also had you know, relatively decent capital markets businesses, 0:08:52.920 --> 0:08:55.480 but it was all against expectations. The numbers, as you 0:08:55.520 --> 0:08:58.040 guys have pointed out, relative to a year ago, is 0:08:58.080 --> 0:09:00.760 still very weak, especially in investment banking. But I'm going 0:09:00.840 --> 0:09:02.440 to put Jack Morgan at the top of the list. 0:09:02.679 --> 0:09:05.880 We've been focusing very closely on total deposits some of 0:09:05.880 --> 0:09:08.760 the regional banks here in Morgan Stanley reports first quotal 0:09:08.840 --> 0:09:12.240 total deposits been low. The estimate three hundred and forty 0:09:12.240 --> 0:09:14.520 seven point five billion versus the estimate of three hundred 0:09:14.559 --> 0:09:17.400 and fifty two point two billion. Does that matter or 0:09:17.480 --> 0:09:20.120 is this basically not a question? It's a rounding error 0:09:20.120 --> 0:09:24.000 that we don't have to pay attention to Gerrard, I think. 0:09:23.840 --> 0:09:26.600 It's I don't want to say we don't pay attention 0:09:26.880 --> 0:09:29.680 don't pay attention to it, since we pay attention to everything. 0:09:29.720 --> 0:09:31.840 But I think you're going down the right path least 0:09:32.200 --> 0:09:36.480 that it's not a material issue of deposits. We have 0:09:36.559 --> 0:09:39.959 to remember that, you know, the Feederal Reserve is implementing 0:09:40.080 --> 0:09:44.559 quantitative tightening with the intention of reducing deposits out of 0:09:44.600 --> 0:09:48.840 the banking system after they created over three trillion under QE. 0:09:49.200 --> 0:09:52.120 So the entire banking system is going to see their 0:09:52.160 --> 0:09:55.600 deposit shrink. And the real question is the mix of 0:09:55.640 --> 0:09:58.560 your deposits and the regional banks, and the big money 0:09:58.600 --> 0:10:02.760 center banks as well as Morgan's have good core consumer deposits, 0:10:02.800 --> 0:10:03.600 which are critical. 0:10:04.080 --> 0:10:06.320 What's going to be the profit driver at a firm 0:10:06.360 --> 0:10:09.640 like Morgan Stanley if investment banking doesn't pick back up, 0:10:09.720 --> 0:10:16.319 if you are seeing transactions in the capital markets atrophy. 0:10:14.559 --> 0:10:19.120 Yeah, Lisa, it's really the critical question for these investment banks. 0:10:19.640 --> 0:10:22.040 You know, it's out of their control, of course, in 0:10:22.120 --> 0:10:25.040 dictating how the market's going to behave in investment banking. 0:10:25.280 --> 0:10:29.480 So hopefully the first checkpoint will be monetary policy. The 0:10:29.559 --> 0:10:31.760 FED has to stop raising rates. So if we get 0:10:31.800 --> 0:10:35.440 to that terminal rate in the second quarter, hopefully the 0:10:35.480 --> 0:10:37.440 second half of the year, you'll see a pick up 0:10:37.440 --> 0:10:42.840 in the investment banking activity because it's a more stabled landscape. 0:10:42.760 --> 0:10:43.120 Ji Ed. 0:10:43.480 --> 0:10:47.440 I look at the twenty thirteen letter of Morgan Stanley 0:10:47.440 --> 0:10:52.560 written by mister Gorman, and there's a subtitle investing in 0:10:52.600 --> 0:10:57.360 our businesses, How's he advanced doing, How's he trade doing? 0:10:57.679 --> 0:11:01.000 And all the other things he pieced together to win 0:11:01.400 --> 0:11:04.120 wealth management in managing people's money. 0:11:05.760 --> 0:11:06.000 Tom. 0:11:06.200 --> 0:11:09.480 It's a very good point because they have not only 0:11:09.520 --> 0:11:13.600 grown organically, but inorganically through the acquisitions that you just 0:11:13.760 --> 0:11:17.959 identified and as we know in the asset management business, 0:11:18.000 --> 0:11:22.440 which is of course EAT, advanced economies of scale are critical. 0:11:22.760 --> 0:11:25.920 And so as they built their economies of scale, including 0:11:26.160 --> 0:11:29.360 their organic growth as well as other acquisitions in the 0:11:29.400 --> 0:11:33.080 asset management business, that has obviously helped them on the 0:11:33.240 --> 0:11:37.480 E trade. It's also given them a diversity of customers. 0:11:37.880 --> 0:11:40.040 As you know, E trade is more of a self 0:11:40.240 --> 0:11:45.440 directed product line versus the traditional Morgan Stanley wealth management business, 0:11:45.640 --> 0:11:48.240 so it diversifies their revenues and you have to give 0:11:48.520 --> 0:11:50.800 Gorman credit from doing those acquisitions. 0:11:51.360 --> 0:11:53.080 Just to wrap things up, just one question to you. 0:11:53.080 --> 0:11:55.200 We've asked this to investors, I'd love it from a 0:11:55.240 --> 0:11:57.560 bank countless just to answer it. Do you see the 0:11:57.600 --> 0:12:00.439 banking events of the last month as a one event 0:12:00.559 --> 0:12:02.680 that we can leave behind or the beginning of a 0:12:02.679 --> 0:12:04.960 process that leads to time of financial conditions? How does 0:12:04.960 --> 0:12:06.920 a bank can list answer that question? 0:12:08.360 --> 0:12:10.920 I you know, from the get go, John I was 0:12:10.920 --> 0:12:13.280 saying to myself it was a one off event, and 0:12:13.320 --> 0:12:17.360 the reason being is that those business models that Silicon 0:12:17.440 --> 0:12:20.840 Valley Signature had were so different. Now that doesn't mean 0:12:20.840 --> 0:12:24.160 we're not going to see somewhat tighter lending conditions, Not 0:12:24.240 --> 0:12:27.400 so much because of what happened in March, as it 0:12:27.480 --> 0:12:30.080 might be called March madness. It really has to do 0:12:30.160 --> 0:12:33.000 with what the outlook is for the economy. And as 0:12:33.120 --> 0:12:35.400 Jamie Diamond said on his call, you know it's not 0:12:35.480 --> 0:12:38.400 a credit crunch. Yes, maybe there's a thumb on the scale. 0:12:38.720 --> 0:12:41.640 But banks are into business to lend money at risk 0:12:41.720 --> 0:12:44.720 adjusted rates of return, and if they see good risk 0:12:44.960 --> 0:12:47.320 adjusted rates of return, they're going to lend money. So 0:12:47.360 --> 0:12:50.199 that's the real critical question, what is the outlook, Not 0:12:50.240 --> 0:12:51.760 necessarily what happened in March. 0:12:51.880 --> 0:12:53.720 Jared, thanks for bamb but it's so much through much 0:12:53.800 --> 0:12:56.200 match and ascent through aankful as well to break down 0:12:56.200 --> 0:12:59.200 somebody's earnings. JERRH. Cassidy of MBC Capital Market. 0:13:03.360 --> 0:13:07.360 Lizanne Saunders joins us now with Charles schraub Lizen. The 0:13:07.400 --> 0:13:11.600 clear and present for you is factor analysis. My problem 0:13:11.720 --> 0:13:14.560 is maybe I've got five ideas or ten ideas. Torsten 0:13:14.640 --> 0:13:18.360 Slock over to Apollo says, maybe there's twenty ideas. How 0:13:18.400 --> 0:13:21.839 do you find the twenty first security to own? I mean, 0:13:21.880 --> 0:13:24.960 it's just really difficult out there to do stock selection 0:13:25.520 --> 0:13:28.920 towards quality and positive free cash flow. 0:13:29.880 --> 0:13:33.520 Well, interestingly, the last couple of weeks you have seen 0:13:33.720 --> 0:13:37.840 a more definitive bias from a factor perspective toward and 0:13:37.880 --> 0:13:40.439 this may seem obvious, but it's finally working its way 0:13:40.440 --> 0:13:44.760 into factors. Is interest coverage? So and by the way, 0:13:45.240 --> 0:13:48.880 second to that would be strength of profit margins. So 0:13:48.920 --> 0:13:51.079 I think this is really a story of who can 0:13:51.120 --> 0:13:57.200 maintain profit margins in a declining nominal inflation environment, which 0:13:57.200 --> 0:14:00.959 had been a real support for pricing power. Now we're 0:14:00.960 --> 0:14:03.679 going to have to see who's actually got the pricing 0:14:03.760 --> 0:14:07.040 power and who can come cover that interest. But as 0:14:07.080 --> 0:14:11.280 we've always said, you can apply factor based screening across 0:14:11.320 --> 0:14:13.920 the spectrum of markets. Too many people think you have 0:14:14.000 --> 0:14:16.760 to start with a sector or two and then apply 0:14:16.880 --> 0:14:22.600 screening within You can find value characteristics or factors within 0:14:23.200 --> 0:14:27.560 stocks and areas that might be perceived as just in 0:14:27.600 --> 0:14:28.320 the growth area. 0:14:28.960 --> 0:14:32.840 What you just heard their folks bottle This is off 0:14:32.880 --> 0:14:36.480 of Tuo share Schande of the Massachusetts Institute of Technology 0:14:36.960 --> 0:14:40.600 a million years ago. I can't say enough about the 0:14:40.720 --> 0:14:45.400 need to go cross sector in analysis as within sector. 0:14:45.480 --> 0:14:49.280 This is gospel for me in Lizan. Okay, Lizanne, I've 0:14:49.320 --> 0:14:52.200 gone cross sectors. Let's go type two negative. What do 0:14:52.240 --> 0:14:53.120 I want to avoid? 0:14:54.480 --> 0:14:57.560 I think you want to avoid to some degree the opposite. 0:14:57.600 --> 0:15:00.280 You want to avoid the companies that are not self funding, 0:15:00.320 --> 0:15:04.080 the zombie companies that don't have the EBITDAH to cover 0:15:04.440 --> 0:15:08.440 interest expense, that can only fund their operations on the 0:15:08.480 --> 0:15:14.120 back of additional leverage. We had I think close to 0:15:14.720 --> 0:15:17.240 thirty percent of the Russell two thousand at one point 0:15:17.400 --> 0:15:20.760 last year could be classified as zombie. Are pretty close 0:15:20.800 --> 0:15:24.080 to zombie companies, So I would certainly avoid those, and 0:15:24.160 --> 0:15:26.040 you do get a lift like we saw in January 0:15:26.080 --> 0:15:29.040 down the quality spectrum in the nonprofitable area. But I 0:15:29.120 --> 0:15:32.120 think this is decidedly a place where you want to 0:15:32.240 --> 0:15:35.600 focus on what's deer, you know, positive earning to revisions, 0:15:36.400 --> 0:15:40.200 the interests covered, strength of balance sheet, high cash, low debt. 0:15:40.640 --> 0:15:44.200 The opposite represents where you want to avoid right now. 0:15:44.240 --> 0:15:46.280 Is the pain trade just higher even among some of 0:15:46.280 --> 0:15:48.120 these zombies at a time where a lot of people 0:15:48.160 --> 0:15:50.840 point to stimulus that hasn't been fully worked out of 0:15:50.840 --> 0:15:51.800 the system yet. 0:15:52.240 --> 0:15:55.240 I think the pain trade probably is still a bit higher. 0:15:55.240 --> 0:15:59.800 If you look at institutional speculators recently, they did hit 0:15:59.840 --> 0:16:03.000 a pretty extreme short position in the S and P 0:16:03.160 --> 0:16:06.720 five hundred that, by the way, hasn't always been a 0:16:06.760 --> 0:16:11.560 contraring indicator. Sometimes they're sort of dead on, as was 0:16:11.600 --> 0:16:15.240 the case in September of two thousand and seven. But 0:16:15.320 --> 0:16:18.440 I do think some of the short term rallies that 0:16:18.440 --> 0:16:22.160 we've seen in this market, particularly concentrated in January, did 0:16:22.200 --> 0:16:25.440 represent a lot of short covering and the pain associated 0:16:25.480 --> 0:16:29.360 with that. So there is still a decent amount of 0:16:29.360 --> 0:16:32.720 bearish positioning and that could provide some support for the market. 0:16:32.800 --> 0:16:34.720 But I also think the market has recently gotten a 0:16:34.760 --> 0:16:37.920 little bit overbought, not to mention the fact that we've 0:16:37.960 --> 0:16:41.840 reverted back short term anyway to a negative correlation between 0:16:41.840 --> 0:16:44.840 bond yields and stock prices. So this recent move up 0:16:44.880 --> 0:16:47.120 in bond yields has been met, certainly on a day 0:16:47.200 --> 0:16:48.960 like today with a little bit more weakness in the 0:16:48.960 --> 0:16:52.760 equity market, and I think that negative correlation is likely 0:16:52.800 --> 0:16:57.040 to persist, maybe even in a secular way. 0:16:57.200 --> 0:16:59.200 Wait, this is important lis in because a lot of 0:16:59.200 --> 0:17:01.560 people are wondering, okay, can we go back to sixty forty. 0:17:01.560 --> 0:17:04.879 Black Rock Investment Institute said please don't not yet, it 0:17:04.920 --> 0:17:06.959 isn't time, And what you just pointed to what you 0:17:07.000 --> 0:17:09.240 just said in terms of a secular change, would suggest 0:17:09.520 --> 0:17:10.400 you agree. 0:17:10.960 --> 0:17:14.800 So from the sixties to nineties, kind of mid to 0:17:14.880 --> 0:17:17.920 late sixties to the mid to late nineties, you almost 0:17:17.920 --> 0:17:20.680 the entire period, on a rolling one hundred and twenty 0:17:20.760 --> 0:17:23.960 day basis, had a negative correlation between bond yields and 0:17:23.960 --> 0:17:27.320 stock prices because that was an era of more inflation volatility, 0:17:27.359 --> 0:17:29.840 so often when yields were going up, it was reflecting 0:17:30.440 --> 0:17:33.200 inflation having been let out of the bag. Again negative 0:17:33.200 --> 0:17:36.080 for the equity market. Then fast forward to the Great 0:17:36.119 --> 0:17:40.480 Moderation era as coined by Larry Summers, basically the twenty 0:17:40.760 --> 0:17:44.880 plus years heading into the pandemic, almost an entire period, 0:17:45.000 --> 0:17:47.000 save for a brief period in two thousand and eight, 0:17:47.119 --> 0:17:50.040 you had a positive correlation because even during that era, 0:17:50.160 --> 0:17:52.960 when yields were going up, it was typically not reflecting 0:17:53.000 --> 0:17:56.919 an inflation problem but stronger growth, positive for the equity market. 0:17:57.000 --> 0:18:00.280 I think we're going back to that environment life the 0:18:00.359 --> 0:18:03.640 thirty years prior to the Great Moderation, which is more 0:18:03.640 --> 0:18:06.560 inflation volatility. That is not the same thing as saying 0:18:06.640 --> 0:18:09.480 inflation is going to stay high in a secular way, 0:18:09.800 --> 0:18:13.320 but just more volatility and inflation. And for the newbies 0:18:13.359 --> 0:18:15.680 out there who haven't been around as long as I have, 0:18:15.920 --> 0:18:21.119 it's just a different investing backdrop. It's not necessarily significantly worse, 0:18:21.320 --> 0:18:24.840 it's just different relative to the air of the Great moderation. 0:18:25.240 --> 0:18:29.200 The era we're in. Leazan and Schwab is a guilty 0:18:29.280 --> 0:18:32.080 victim of this is selling us on index funds and 0:18:32.080 --> 0:18:35.560 we're all indexed up to our eyeballs, and we're particularly 0:18:36.160 --> 0:18:40.320 indexed up to broad indexes. Are we over indexed and 0:18:40.359 --> 0:18:44.640 we have to go more specific narrow index or dare 0:18:44.680 --> 0:18:47.160 I say, even individual stock selection. 0:18:48.200 --> 0:18:52.520 So we've alwaysous the benefit of having both passive strategies 0:18:52.560 --> 0:18:56.320 within a portfolio and active strategies. And as you all know, 0:18:56.600 --> 0:18:59.520 last year was a year where active had its best 0:18:59.560 --> 0:19:03.439 year relative to benchmarks since two thousand and five. And 0:19:03.520 --> 0:19:06.240 I do think in general that the playing field is 0:19:06.280 --> 0:19:10.520 getting more level, that active has the ability to operate 0:19:10.640 --> 0:19:14.520 relative to passive in a beneficial way on like what 0:19:14.560 --> 0:19:18.280 we have seen in the recent decade or two. And 0:19:18.560 --> 0:19:20.320 I think in part that has to do with the 0:19:20.359 --> 0:19:22.400 return of the risk free rate, the fact that when 0:19:22.440 --> 0:19:25.080 you had rates at zero and negative in other parts 0:19:25.119 --> 0:19:29.200 of the world. It kind of mucked with price discovery 0:19:29.280 --> 0:19:33.800 and capital misallocation, and I think we are reconnecting fundamentals 0:19:34.359 --> 0:19:37.560 to prices. And I think that that price discovery that 0:19:37.680 --> 0:19:41.400 is allowed by the return of the risk free rate, 0:19:42.560 --> 0:19:45.760 I think is to the benefit of active That does 0:19:45.800 --> 0:19:50.040 not mean sell all your passive funds and you know, 0:19:50.119 --> 0:19:52.480 become a stock picker. I think there's still a home 0:19:52.560 --> 0:19:58.280 for both. But I think active managers are just operating 0:19:58.320 --> 0:20:01.679 on a a better field right now in terms of 0:20:01.720 --> 0:20:03.320 being able to outperform benchmarks. 0:20:03.440 --> 0:20:05.760 Listen a clinic from you as a whites Thanks for 0:20:05.800 --> 0:20:08.720 bamitis this morning. Lassan sounds a child swab on this 0:20:08.800 --> 0:20:09.960 secuity market. 0:20:20.119 --> 0:20:21.840 Right now. And this is a joy because Lisa and 0:20:21.880 --> 0:20:24.600 I have no idea what we're talking about. It is 0:20:24.640 --> 0:20:27.880 the guy who changed the airline business. Yes, it came 0:20:27.920 --> 0:20:30.840 over to the United States, but more than anything, Michael 0:20:30.880 --> 0:20:33.480 O'Leary is someone that the United Kingdom and all of 0:20:33.520 --> 0:20:36.359 continental Europe knows. I learned this from my daughter the 0:20:36.400 --> 0:20:39.960