WEBVTT - The Fed's Not Done Breaking Things 0:00:13.960 --> 0:00:17.400 Hello, and welcome to What Goes Up, a weekly markets podcast. 0:00:17.560 --> 0:00:20.600 My name is Mike Reagan. I'm a senior editor at Bloomberg. 0:00:20.200 --> 0:00:23.560 And Umbildana Hi Across Asset reported with Bloomberg and this 0:00:23.640 --> 0:00:24.360 week on the show. 0:00:24.520 --> 0:00:26.880 Well, we've heard it a million times this year from 0:00:27.000 --> 0:00:31.040 strategists and fund managers and pretty much everyone else. Don't 0:00:31.080 --> 0:00:33.479 trust this rally in stocks that has pushed the S 0:00:33.520 --> 0:00:36.080 and P five hundred up more than eight percent year 0:00:36.080 --> 0:00:38.960 to date at its highs. Well, finally, this week we 0:00:39.000 --> 0:00:42.360 saw a bit of a dip following a really slow 0:00:42.400 --> 0:00:46.120 grind higher for more than a month following March's regional 0:00:46.159 --> 0:00:49.199 bank drama. So what should we make of that? Is 0:00:49.240 --> 0:00:51.560 it time to once again buy the dip or is 0:00:51.600 --> 0:00:53.840 this the start of a serious correction that so many 0:00:53.840 --> 0:00:56.400 have warned us about? And if that's the case, what 0:00:56.440 --> 0:00:58.680 are the best areas of the market to hide out 0:00:58.680 --> 0:01:01.560 in until the coast is clear. We'll get into it 0:01:01.600 --> 0:01:05.760 all with the chief investment officer of equity strategies at 0:01:05.800 --> 0:01:09.320 a major investment firm. But first of Filbata, you know, 0:01:09.360 --> 0:01:11.920 I think people that listen to this podcast assume we're 0:01:11.920 --> 0:01:14.880 all sitting around a table together or something like that. 0:01:14.920 --> 0:01:18.199 But you've actually fled, You've fled the state I did. 0:01:18.280 --> 0:01:21.160 Yeah, I mean typically we are sitting around a table together. 0:01:21.480 --> 0:01:21.880 Yeah. 0:01:21.920 --> 0:01:25.720 True, which is which can be fun. It has its downsides, too, well, 0:01:25.800 --> 0:01:29.280 tell tell us why you fled. It might have had 0:01:29.319 --> 0:01:31.560 something to do with you. Now, I'm kidding. It's I'm 0:01:31.600 --> 0:01:36.560 in Chicago for the annual morning Star Investment Conference. I'm 0:01:36.560 --> 0:01:37.480 having so much fun. 0:01:37.560 --> 0:01:40.200 Yeah, what's so? What's so fun about morning Star? 0:01:40.720 --> 0:01:43.840 I'm at the well today, I'm at the Bloomberg office 0:01:44.400 --> 0:01:47.080 because we have a wonderful office here and it's on 0:01:47.160 --> 0:01:50.720 the forty nine floor and has really nice views. But 0:01:51.040 --> 0:01:53.720 I get, I don't know, scared, I get some sort 0:01:53.760 --> 0:01:55.360 of fright as soon as I approach one of the 0:01:55.400 --> 0:01:58.120 windows to look out, because you look down and it's 0:01:58.280 --> 0:02:02.040 so it's just so scary to me. But the views 0:02:02.080 --> 0:02:03.480 from further away are nice. 0:02:03.640 --> 0:02:04.560 That's too high for me. 0:02:04.680 --> 0:02:08.880 Forty nine forty nine, Yeah, entirely wild, too high. But 0:02:08.960 --> 0:02:11.560 the conference is really nice too. It faces the lake, 0:02:12.600 --> 0:02:15.359 which is beautiful and the waters are green, and then 0:02:15.520 --> 0:02:19.600 another side of the conference center faces the Chicago skyline. 0:02:19.680 --> 0:02:20.480 It's very nice. 0:02:20.960 --> 0:02:23.120 Yeah, my views this week are really nice. 0:02:23.400 --> 0:02:25.600 You're You're never coming back, are you? 0:02:25.720 --> 0:02:28.960 Nah? Actually our guests used to live here as well, 0:02:29.120 --> 0:02:30.840 even though she's in New York City now, but I 0:02:30.840 --> 0:02:33.600 do want to introduce her. It's Quay Win, CIO of 0:02:33.720 --> 0:02:36.639 Equities at Research Affiliates. Quay, I'm so happy you could 0:02:36.720 --> 0:02:37.920 join us. Welcome to the show. 0:02:38.120 --> 0:02:39.960 Thank you very much, happy to be here. 0:02:40.200 --> 0:02:43.120 Maybe we can start with a bit of your background 0:02:43.200 --> 0:02:45.480 and how you ended up at Research Affiliates. 0:02:45.840 --> 0:02:48.960 I really started out my career right out of college 0:02:49.120 --> 0:02:56.239 in quantitative research at Barra, which is now part of MSCI, 0:02:56.880 --> 0:03:00.440 and that was really my introduction to finance. I had 0:03:00.480 --> 0:03:03.880 actually studied math in college, you know, like a lot 0:03:03.919 --> 0:03:06.200 of college students, I didn't know what I could do 0:03:06.400 --> 0:03:08.679 or wanted to do, and bar gave me the opportunity 0:03:08.720 --> 0:03:11.040 to learn something new, apply math to an area that 0:03:11.080 --> 0:03:13.400 I'd never really looked at before, and it really stuck. 0:03:13.960 --> 0:03:16.040 And so from there I made my way into the 0:03:16.080 --> 0:03:19.440 asset management world at stag Street Globe Advisors, then Morgan 0:03:19.480 --> 0:03:23.400 Stanley Investment Management, and then finally at Numeric and Investors, 0:03:23.440 --> 0:03:26.639 which is now part of Man Group. During that time, 0:03:26.960 --> 0:03:30.440 I had my first child and one of the things 0:03:30.440 --> 0:03:34.680 I realized was that being a new parent trading and 0:03:34.720 --> 0:03:37.400 being active in the markets. Trading in the markets was 0:03:37.480 --> 0:03:41.640 not exactly easy, and I really lucked out because a 0:03:41.760 --> 0:03:45.600 former client of mine for my Morgan Stanley days had 0:03:45.640 --> 0:03:49.280 become chief investment officer at University of Chicago's endowment and 0:03:49.960 --> 0:03:53.160 he contacted me, said he was expanding his team, and 0:03:53.640 --> 0:03:56.680 one thing led to another, went through a formal search, 0:03:56.840 --> 0:04:01.280 but ultimately it gave me the opportunity to do investing 0:04:01.280 --> 0:04:03.360 from the other side of the table as an asset owner, 0:04:03.440 --> 0:04:05.280 not just as an asset manager, and gave me a 0:04:05.280 --> 0:04:09.640 whole new perspective on what it is that investors need, 0:04:09.680 --> 0:04:13.920 what they want, and what they're trying to achieve. With that, 0:04:14.520 --> 0:04:17.000 I stayed on the asset owner side for about ten years, 0:04:17.760 --> 0:04:20.159 and when I was finally ready to go back into 0:04:20.160 --> 0:04:24.800 asset management, I contacted several people I knew, some of 0:04:24.880 --> 0:04:28.560 whom were at research affiliates. Chris Brightman and Rob are 0:04:28.640 --> 0:04:30.960 Not were people that I'd known in the industry for 0:04:31.000 --> 0:04:34.279 a number of years, and it was a small firm. 0:04:34.440 --> 0:04:37.040 It was the kind of thing that I really wanted 0:04:37.080 --> 0:04:40.320 to join. It was quantitative investing, but with really a 0:04:40.320 --> 0:04:43.960 fundamental twist to it. And also one of the things 0:04:44.000 --> 0:04:47.039 that Research Affiliates really stands for is value investing. And 0:04:47.080 --> 0:04:48.680 one of the things that I saw a few years 0:04:48.720 --> 0:04:52.960 ago was the large gap between value and growth stocks, 0:04:53.400 --> 0:04:57.280 something that had never really been seen before and something 0:04:57.279 --> 0:05:01.040 that I felt could not be sustained and that there 0:05:01.080 --> 0:05:04.760 would be a quick snap back towards value and that 0:05:04.880 --> 0:05:08.240 value would likely see a renaissance over the next few years. 0:05:08.279 --> 0:05:12.480 So with that opportunity in mind, I joined Research Affiliates. 0:05:12.720 --> 0:05:15.800 Great Quai, I'd love to just get into sort of 0:05:15.800 --> 0:05:18.839 how you're thinking about the market over call it the 0:05:18.920 --> 0:05:22.279 last five or six weeks, you know, because early mid 0:05:22.360 --> 0:05:24.599 March we started to see the problems with the Bank's 0:05:24.839 --> 0:05:31.159 Silicon Valley Bank, collapsed, Signature Bank, Silver Core Capital, First Republic. 0:05:31.760 --> 0:05:35.400 We started looking weak and has been hanging on. But 0:05:35.760 --> 0:05:38.039 you know, at the time, it really felt like, well, 0:05:38.080 --> 0:05:43.200 this is it. The Fed's tightening campaign. Finally quote unquote 0:05:43.200 --> 0:05:45.920 broke something, you know, and here we'll get this sort 0:05:45.960 --> 0:05:50.800 of cathartic final leg lower inequities that so many people 0:05:50.800 --> 0:05:54.359 have been bracing for. But it didn't turn out that way. Obviously, 0:05:54.360 --> 0:05:58.760 the FED reacted very quickly the FDIIC reacted, a lot 0:05:58.800 --> 0:06:01.680 of liquidity added to this system. We saw the market 0:06:01.720 --> 0:06:04.320 rebound at least from the index level. A lot of 0:06:04.320 --> 0:06:07.679 the regional banks are still struggling, obviously their share prices, 0:06:07.720 --> 0:06:11.440 but now again First republics back in focus this week, 0:06:11.640 --> 0:06:13.720 it does feel like we're rolling over a little bit 0:06:13.800 --> 0:06:16.040 in the s and P. Five hundred. So I'm just curious, 0:06:16.240 --> 0:06:19.599 you know, how you've thought about this whole episode in 0:06:19.640 --> 0:06:21.920 the last five or six weeks. Did it make sense 0:06:21.960 --> 0:06:24.200 to you? You know, was it all about the liquidity 0:06:24.560 --> 0:06:26.560 sort of? Let us just pick your brain about what 0:06:26.600 --> 0:06:29.200 we just witnessed over the last six weeks. 0:06:29.560 --> 0:06:32.480 Yeah, So when the banking crisis first emerged, the thing 0:06:32.520 --> 0:06:35.200 that I really thought about was how bad is this 0:06:35.279 --> 0:06:37.240 going to get? Is it going to be like the 0:06:37.240 --> 0:06:40.159 Great Financial Crisis? How is it going to be? And 0:06:40.200 --> 0:06:41.840 I think that we're in a much better place than 0:06:41.839 --> 0:06:44.400 we were in two thousand and seven, two thousand and eight. 0:06:44.640 --> 0:06:47.839 Banks in general, you know, with a few exceptions, are 0:06:48.040 --> 0:06:51.560 in a much stronger place. That being said, you know, 0:06:51.600 --> 0:06:54.800 when the FED raises rates and it breaks something that 0:06:55.000 --> 0:06:58.320 something doesn't usually just it rarely happens that it's a 0:06:58.400 --> 0:07:01.360 very small break. Usually it's a very big break. And 0:07:01.440 --> 0:07:03.800 so while I'd never thought that we would get to 0:07:04.320 --> 0:07:09.200 a great financial crisis level of a breakdown, I did 0:07:09.240 --> 0:07:12.080 believe and I still believe that there would be more 0:07:12.160 --> 0:07:15.360 things that break that came along, whether that continue to 0:07:15.400 --> 0:07:18.920 be in the small regional banks or whether that bled 0:07:19.000 --> 0:07:24.800 over to something else such as real estate lending, private credit. Definitely, 0:07:24.880 --> 0:07:27.440 I think those dangers still remain out there. 0:07:28.080 --> 0:07:30.960 And can you talk about what you actually foresee for 0:07:31.640 --> 0:07:34.480 the economy, because for me being at the conference this 0:07:34.600 --> 0:07:39.320 week and hearing the morning Star economists talk about what 0:07:39.360 --> 0:07:43.280 they're projecting, they're actually foreseeing a soft landing, but in 0:07:43.320 --> 0:07:45.760 your view, you're saying that that may be a bit 0:07:45.800 --> 0:07:49.200 of an optimistic projection. So can you give us your 0:07:49.240 --> 0:07:52.160 outlook and how you're seeing things evolving with the economy. 0:07:52.360 --> 0:07:55.040 Sure, I mean, I guess I'm biased because I started 0:07:55.240 --> 0:07:58.840 in this industry in the early nineties, and every single 0:07:58.840 --> 0:08:00.920 cycle that comes through, everybody says we're going to have 0:08:00.920 --> 0:08:02.400 a soft land They're going to have a soft land 0:08:02.480 --> 0:08:04.520 We're going to have a soft landing. And I don't 0:08:04.520 --> 0:08:06.720 really know what a soft landing is, because no landing 0:08:06.720 --> 0:08:10.000 that I've ever experienced, has ever really felt soft, and 0:08:10.080 --> 0:08:13.080 so I'm not really sure what that really means. There's 0:08:13.120 --> 0:08:16.760 always going to be something that breaks a little bit 0:08:16.760 --> 0:08:21.240 worse than you expect. It's very, very difficult to engineer 0:08:21.320 --> 0:08:26.040 that soft landing, and so I don't see, you know, 0:08:26.120 --> 0:08:30.920 why a soft landing is what people call for when 0:08:31.200 --> 0:08:34.199 we hardly ever achieve it. Perhaps they have achieved it 0:08:34.679 --> 0:08:38.520 before when I was a child, but certainly, you know, 0:08:38.600 --> 0:08:41.160 not since I've been in this industry. And at the 0:08:41.200 --> 0:08:42.800 same time, one of the things I would say is 0:08:42.800 --> 0:08:46.880 that we are also not just seeing a withdrawal of 0:08:47.720 --> 0:08:52.720 monetary support, but we're also seeing a withdrawal of fiscal support. 0:08:53.040 --> 0:08:56.520 Things that we're seeing such as extra snap benefits coming 0:08:56.559 --> 0:09:01.440 to an end, also the likelihood that student loan forgiveness 0:09:01.760 --> 0:09:04.600 is not going to happen and that people will have 0:09:04.640 --> 0:09:08.679 to start paying those loans again. All of these small, 0:09:09.240 --> 0:09:15.640 piecemeal withdrawal of fiscal support will make everything a little 0:09:15.640 --> 0:09:18.480 bit more tricky as well, because the consumer, it really 0:09:18.559 --> 0:09:21.760 is seventy percent of the US economy, and we really 0:09:21.800 --> 0:09:25.000 can't have a soft landing without having the consumer remain 0:09:25.120 --> 0:09:28.360 somewhat comfortable. And then you know, we're now beginning to 0:09:28.400 --> 0:09:31.760 see job losses spill over. At first it was just technology, 0:09:32.000 --> 0:09:34.679 then small pieces of the financial services industry, and now 0:09:34.679 --> 0:09:39.360 we're being to see other firms start laying off people Disney, 0:09:39.400 --> 0:09:43.559 for example, and then also additional rounds of job losses 0:09:43.600 --> 0:09:48.560 within technology continue to roll on. So, having said that, 0:09:48.600 --> 0:09:51.719 though you know, the question is this happens in the economy, 0:09:51.840 --> 0:09:55.000 We have economic cycles. It happens all the time. How 0:09:55.000 --> 0:09:57.960 should we think about it in the equity markets? It's 0:09:58.000 --> 0:10:01.839 really not unusual for equity markets to already bottomed by 0:10:01.880 --> 0:10:04.360 the time we know that we're in a recession, or 0:10:04.360 --> 0:10:07.120 by the time that the recession comes around. We already 0:10:07.120 --> 0:10:10.960 had a big draw down last year twenty percent in 0:10:11.000 --> 0:10:13.560 the SMP. I think Pete de trough last year. I 0:10:13.559 --> 0:10:15.640 think it was down almost as much as twenty five percent. 0:10:16.240 --> 0:10:21.440 That's a normal level of decline for equities preceding a recession. 0:10:22.120 --> 0:10:27.120 And so this year, as equities meander around, it could 0:10:27.160 --> 0:10:31.840 be that regardless of how soft or hard the landing is, 0:10:32.760 --> 0:10:35.600 we've already seen the worst of what there is to come, 0:10:35.720 --> 0:10:39.480 what there is to be in the equity markets overall. 0:10:39.480 --> 0:10:42.320 And can you talk about when you're for seeing this 0:10:42.440 --> 0:10:45.680 because another part of the discussion at the conference was 0:10:45.840 --> 0:10:49.040 that potentially we could even be in a recession right now. 0:10:49.080 --> 0:10:50.839 Is that what you're seeing or is it something down 0:10:50.920 --> 0:10:51.360 the line. 0:10:51.400 --> 0:10:53.360 Oh, I definitely think that we could already be in 0:10:53.360 --> 0:10:56.360 the beginning stages of recession right now. You know, typically 0:10:56.400 --> 0:10:59.360 we don't know that we're in a recession until six 0:10:59.400 --> 0:11:02.720 months after started. By the time that we know that 0:11:02.760 --> 0:11:05.520 we're in a recession, we may already be in recovery. 0:11:05.920 --> 0:11:07.240 You know. I think if you look at the short 0:11:07.360 --> 0:11:11.120 term interest rate market, people are basically pricing in as 0:11:11.160 --> 0:11:12.800 many as two rate cuts by the end of the 0:11:12.880 --> 0:11:15.240 year from the FED, which you know, leads me to 0:11:15.280 --> 0:11:17.720 believe a lot of people are agree with you that 0:11:18.040 --> 0:11:20.440 a soft landing is going to be pretty hard, if 0:11:20.480 --> 0:11:24.760 not impossible, in this occasion, and that the FED is 0:11:24.760 --> 0:11:27.520 going to have to react to prop up the economy 0:11:27.559 --> 0:11:29.960 by the end of the year. But one thing I 0:11:30.040 --> 0:11:33.319 wonder is if it's possible that we're looking at something 0:11:33.320 --> 0:11:36.800 in between, like a stagflationary environment where growth does slow, 0:11:37.440 --> 0:11:41.360 maybe it doesn't go deeply negative for a full blown recession, 0:11:42.040 --> 0:11:46.720 but that we still regardless of that, don't tame this 0:11:46.800 --> 0:11:50.959 inflation problem to the satisfaction of the FED, so that 0:11:51.240 --> 0:11:55.000 that pricing for rate cuts later in the years is mispriced, 0:11:55.240 --> 0:11:58.680 and that even if the Fed's done hiking, that they're 0:11:58.679 --> 0:12:00.960 going to hold at those this higher level for a 0:12:01.000 --> 0:12:01.720 longer period. 0:12:02.160 --> 0:12:03.520 Is that a. 0:12:03.400 --> 0:12:07.480 Possibility in your mind? You know, something between you know, 0:12:07.640 --> 0:12:09.840 a heart and soft landing, more of a stagflation type 0:12:09.880 --> 0:12:10.839 of environment, you. 0:12:10.800 --> 0:12:13.520 Know, I wouldn't call a stack plation somewhere between a 0:12:13.559 --> 0:12:16.240 hard and soft landing. I would say stagflation is sort of, 0:12:16.280 --> 0:12:18.800 you know, a fork in the road where we fork 0:12:18.840 --> 0:12:21.319 into something that weird, you know, that we just haven't 0:12:21.320 --> 0:12:24.839 seen in a really, really long time. I definitely think 0:12:24.840 --> 0:12:27.560 the stag plation is a possibility. I thought the stag 0:12:27.640 --> 0:12:30.840 plation was a possibility for a while. Two rate cuts 0:12:30.840 --> 0:12:33.120 by the end of the year. I wouldn't be surprised 0:12:33.120 --> 0:12:35.880 if the FED started to accommodate. Depending on how hard 0:12:35.920 --> 0:12:39.000 the landing is, how quickly the job losses mount, how 0:12:39.120 --> 0:12:42.520 how quickly spending slows. You know, member of the FED 0:12:42.559 --> 0:12:45.720 has a dual mandate both price stability and full employment, 0:12:46.280 --> 0:12:48.160 and they are at odds with each other, and the 0:12:48.160 --> 0:12:51.640 FED has to has to ride that balance. So depending 0:12:51.640 --> 0:12:54.440 on how the numbers evolve through the end of the year, 0:12:55.080 --> 0:12:58.360 two rate cuts are are still a possibility. But at 0:12:58.400 --> 0:12:59.880 the same time, one of the things that we are 0:13:00.000 --> 0:13:03.640 seeing is that inflations come down. It's come down significantly, 0:13:03.800 --> 0:13:06.160 you know, I think it peeked out at over eight percent. 0:13:06.720 --> 0:13:11.080 It's now running above four, right below five. If the 0:13:11.080 --> 0:13:13.199 Fed does cut through the end of the year, we're 0:13:13.240 --> 0:13:16.640 not going to get back to that two percent goal 0:13:16.920 --> 0:13:20.160 that they have. If they do cut, it will be 0:13:20.160 --> 0:13:25.559 because the underlying economic fundamentals aside from inflation, require that, 0:13:26.120 --> 0:13:29.800 and so as they accommodate, it wouldn't be surprising to 0:13:29.800 --> 0:13:33.559 see inflation go back up, and therefore the FED is 0:13:33.600 --> 0:13:36.040 going to either have to hold at a higher level 0:13:36.640 --> 0:13:40.920 or resume hiking, right which could send us into you know, 0:13:40.960 --> 0:13:44.360 the classic double dip, which is what had to happen 0:13:44.600 --> 0:13:47.960 before inflation was finally tamed in the early eighties. 0:13:48.360 --> 0:13:51.240 And so where do you see inflation topping out? Is 0:13:51.240 --> 0:13:53.000 it still above four percent? 0:13:53.640 --> 0:13:56.000 Yes? I do think that if the FED has to 0:13:56.080 --> 0:13:58.760 ease through the end of the year, I think inflation 0:13:58.840 --> 0:14:01.720 is going to stay above four percent in this intermediate cycle. 0:14:02.160 --> 0:14:04.800 I think ultimately, the FED will succeed in getting it 0:14:04.840 --> 0:14:06.800 back down to two percent. It's just that what we're 0:14:06.800 --> 0:14:09.360 going to have to do to get there could be 0:14:09.880 --> 0:14:15.720 either very very arduous in the short term or less 0:14:15.840 --> 0:14:18.200 arduous but spread out over a longer cycle. 0:14:24.920 --> 0:14:27.360 So how would you break it down as far as 0:14:27.760 --> 0:14:30.760 what are the areas of the stock market that are 0:14:31.400 --> 0:14:34.840 most attractive right now given sort of all these uncertainties 0:14:35.040 --> 0:14:38.560 and this very real chance of a hard landing. I 0:14:38.560 --> 0:14:41.440 know you focus exclusively on equities, so I want to 0:14:41.440 --> 0:14:44.600 ask you about actual portfolio allocation unless you want to 0:14:44.600 --> 0:14:47.600 get into that. You know, it is an interesting time 0:14:47.680 --> 0:14:52.760 for you know, cross asset allocations, with money market funds 0:14:53.440 --> 0:14:56.760 finally offering a real yield, even bank savings accounts offering 0:14:57.200 --> 0:15:00.360 in some cases above four percent. But you know, how 0:15:00.400 --> 0:15:03.800 are you thinking about allocation within equities and within the 0:15:04.360 --> 0:15:06.560 whole portfolio in this environment? 0:15:06.760 --> 0:15:10.000 You know, let's talk about equities first. I think with inequities, 0:15:10.000 --> 0:15:12.280 what I would focus are in the areas that really 0:15:12.320 --> 0:15:15.120 got beaten up, because when you buy something cheap, you 0:15:15.160 --> 0:15:18.320 buy yourself a lot of downside protection. And if you 0:15:18.360 --> 0:15:20.760 take a look at what's got beaten up, there are 0:15:20.760 --> 0:15:24.520 really two areas right now. The first is financials. The 0:15:24.560 --> 0:15:27.760 banking crisis or the mini crisis in March really led 0:15:27.800 --> 0:15:30.360 to that, and what you're getting in financials is a 0:15:30.400 --> 0:15:33.800 lot of high quality banks that got beaten down because 0:15:33.840 --> 0:15:36.160 the baby got thrown out with the bathwater. Right So, 0:15:36.640 --> 0:15:40.280 I think interesting ideas might be, you know, certain banks 0:15:40.320 --> 0:15:42.800 that are trading at eight times earnings, you know that 0:15:42.840 --> 0:15:45.440 are very high quality. City bank Wells Fargo fit that 0:15:45.520 --> 0:15:49.000 bill for example. Insurance companies were also some of the 0:15:49.040 --> 0:15:52.680 companies that were collateral damage along the way. But it's 0:15:52.680 --> 0:15:54.120 not as if people are going to go out there 0:15:54.160 --> 0:15:56.480 and start canceling insurance. You know, Insurance is one of 0:15:56.480 --> 0:15:59.320 these things that everybody needs, just like banks or things 0:15:59.320 --> 0:16:02.880 that everybody needs. And again, if they're priced well, they 0:16:03.000 --> 0:16:07.240 become reasonable investments, and you know in the short and 0:16:07.280 --> 0:16:10.360 the medium term. So MetLife, for example, is trading at 0:16:10.400 --> 0:16:14.040 seven times earnings and AIG's treating something like EAT. So 0:16:14.200 --> 0:16:18.360 when you get single digit multiples like that in name brand, 0:16:18.640 --> 0:16:24.720 high quality companies, they tend to offer some upside potential 0:16:24.880 --> 0:16:28.160 as well as some stability in the event of a 0:16:28.200 --> 0:16:30.680 downturn because they've already priced so much of that in 0:16:31.320 --> 0:16:35.400 other cyclical areas have also got beaten down. So within technology, 0:16:35.440 --> 0:16:40.640 for example, we're seeing some attractive names in semiconductors. A 0:16:40.720 --> 0:16:43.120 lot of this has to do with the trade war 0:16:43.200 --> 0:16:46.840 with China, but the reality is that nobody's giving up 0:16:46.840 --> 0:16:50.240 their phones, nobody's giving up their computers. You know, even 0:16:50.280 --> 0:16:54.440 speakers need to have cars, and so semiconductors there's a 0:16:54.480 --> 0:16:57.200 structural growing demand there. And what you're seeing is you're 0:16:57.240 --> 0:17:00.440 seeing a lot of high quality companies again getting up 0:17:00.800 --> 0:17:03.800 and there could be opportunities to invest there for long 0:17:03.880 --> 0:17:07.159 term growth. A company like Qualcom, for example, it's treating 0:17:07.160 --> 0:17:12.000 it twelve times. And then within the consumer segment, the 0:17:12.040 --> 0:17:15.720 home builders, right the ultimate cyclical play. The home builders 0:17:16.040 --> 0:17:20.400 are priced very attractively right now. So both Pulti Group 0:17:20.440 --> 0:17:24.200 and Toll Brothers are, you know, treating at seven times earnings, 0:17:24.600 --> 0:17:28.919 and Lenar's a little more expensive there eleven times. You know, 0:17:29.000 --> 0:17:34.720 you do have to be volatility tolerant every time you 0:17:34.760 --> 0:17:37.240 go into equities, and this is going to have the 0:17:37.280 --> 0:17:41.720 normal equity volatility, but to some extent, if you're afraid 0:17:41.760 --> 0:17:45.439 of a recession, then go and buy the stocks that 0:17:45.520 --> 0:17:48.960 are already priced for a recession, you know, don't necessarily 0:17:48.960 --> 0:17:52.199 buy the stocks that are optimistic that there's not going 0:17:52.240 --> 0:17:54.200 to be a recession. And then the other thing that 0:17:54.240 --> 0:17:55.919 I would add to that is that given what happened 0:17:56.000 --> 0:18:00.800 last year the megacap stars, the fang stocks, I think 0:18:00.800 --> 0:18:03.960 there are opportunities to pick up some very high quality 0:18:03.960 --> 0:18:07.879 stocks at reasonable multiples. So a good example of that 0:18:07.960 --> 0:18:10.439 might be a Meta, Right. Meta used to be one 0:18:10.480 --> 0:18:14.159 of those great glamour stocks that really beaten up, is 0:18:14.160 --> 0:18:17.359 now trading at fifteen times. I wouldn't necessarily say that 0:18:17.400 --> 0:18:20.600 it was outright cheap, but for a company that just 0:18:20.720 --> 0:18:24.239 generates so much cash flow and then so profitable, you know, 0:18:24.280 --> 0:18:26.960 it looks like it looks like an interesting play. Of course, 0:18:27.440 --> 0:18:29.840 it would have been mettered by this thing in January, right, 0:18:29.880 --> 0:18:32.479 because it's up seventy eighty percent this year already, But 0:18:32.520 --> 0:18:37.359 still even so, it still represents I think an interesting 0:18:38.240 --> 0:18:42.960 and interesting entree into a high quality name. 0:18:43.440 --> 0:18:46.000 That's a fascinating point about the insurance companies that you 0:18:46.000 --> 0:18:49.560 bring up, because we don't hear people talking about them 0:18:49.680 --> 0:18:52.639 a lot, and you mentioned how cheap they got. What 0:18:53.080 --> 0:18:56.320 do you think explains why that happened? Is it just 0:18:56.359 --> 0:18:59.439 a matter of them being loaded up with low yielding 0:18:59.440 --> 0:19:02.879 treasury similar to the way that the banks are. Is 0:19:02.880 --> 0:19:04.880 that the main area of concern, do you think? 0:19:05.000 --> 0:19:06.960 Yeah, so, I think there are really two areas of concern. 0:19:07.000 --> 0:19:09.000 I think that is one area for concerns. Their investment 0:19:09.040 --> 0:19:11.680 portfolio is how are they doing? And you definitely see 0:19:11.680 --> 0:19:15.720 a separation between certain insurance companies and other insurance companies 0:19:15.800 --> 0:19:18.320 depending on the mix. Add to that the fact that 0:19:18.359 --> 0:19:21.320 many insurance companies over the last ten to fifteen years 0:19:21.880 --> 0:19:26.920 have increased their allocation to private investments a lot, specifically 0:19:27.000 --> 0:19:30.919 venture and the failure of SPB and the story of 0:19:31.040 --> 0:19:36.080 venture are very interrelated, right. The slowdown adventure cause, you know, 0:19:36.200 --> 0:19:39.480 led to some of the issues SVB. The unwining of 0:19:39.600 --> 0:19:42.960 SVB is going to undermine the funding of venture. It 0:19:43.000 --> 0:19:47.359 becomes a negative cycle. And so depending on what the 0:19:47.359 --> 0:19:52.080 insurance portfolio is in there could be some ramifications from that. 0:19:52.840 --> 0:19:56.360 But ultimately what we're seeing, you know, what I'm reading 0:19:56.440 --> 0:20:00.159 about in the insurance industry is that they are are 0:20:00.200 --> 0:20:05.119 all able to hold their premium rates. Their loss ratios 0:20:05.240 --> 0:20:09.720 are not significantly worse than what has historically been. Yes, 0:20:10.000 --> 0:20:13.120 last year was a really bad year for investment portfolios. 0:20:13.720 --> 0:20:16.040 This year is a lot better. This is what happens 0:20:16.040 --> 0:20:19.359 to investment portfolios. You know, it's not an unusual thing. 0:20:19.840 --> 0:20:21.480 What you really do want to do, is you really 0:20:21.480 --> 0:20:24.800 want to you know, as Warren Buffett says, by when 0:20:24.800 --> 0:20:26.520 others are fearful and. 0:20:26.480 --> 0:20:29.840 I'm curious about your methodology, Like what are you looking 0:20:29.880 --> 0:20:32.520 for when you're looking at these different stocks. Is it 0:20:32.680 --> 0:20:36.080 just the cheapness factor that you're singling out or what 0:20:36.560 --> 0:20:37.879 are some of the other components. 0:20:38.400 --> 0:20:43.320 So we definitely try to identify stocks that are fundamentally undervalued, 0:20:44.119 --> 0:20:46.560 but some of the stocks that are cheap, as they say, 0:20:46.960 --> 0:20:49.400 are stocks that deserve to be cheap because they're going 0:20:49.480 --> 0:20:52.320 out of business. A classic example of that last year 0:20:52.560 --> 0:20:55.280 was bed Back and Beyond. Right, we know that bed 0:20:55.280 --> 0:20:57.919 Bath and Beyond recently five for chapter eleven, but it 0:20:58.040 --> 0:21:00.000 was a long road to that, and during that time 0:21:00.040 --> 0:21:03.359 time it would always show up on any sort of 0:21:03.960 --> 0:21:07.680 value screen a very very cheap stock. And so what's 0:21:07.720 --> 0:21:09.760 important to us is to pair that with two things, 0:21:09.920 --> 0:21:12.320 is to pair that with a quality screen where we're 0:21:12.359 --> 0:21:14.840 really trying to avoid the companies that are close to 0:21:14.840 --> 0:21:20.359 distress as well as avoid companies that have what we 0:21:20.400 --> 0:21:25.080 would consider less capital discipline. And then we also look 0:21:25.160 --> 0:21:28.879 at the recent momentum because there could be news flow, 0:21:28.960 --> 0:21:31.280 there could be something else that is not yet in 0:21:31.320 --> 0:21:34.160 the financials that is causing the stock to move one 0:21:34.160 --> 0:21:36.399 way or the other. What we like to see is 0:21:36.440 --> 0:21:41.840 we like to see strong risk adjusted returns or moderate 0:21:41.920 --> 0:21:45.160 risk adjusted returns. Right. We don't want something spiking up 0:21:45.280 --> 0:21:48.439 or spiking down. If something is spiking down, what we 0:21:48.480 --> 0:21:52.719 would probably do is just try to either avoid it 0:21:52.840 --> 0:21:57.040 until the volatility settles down, or just own less of it. 0:21:57.920 --> 0:22:01.200 And really, they're all we're trying to say is, you know, 0:22:01.359 --> 0:22:05.600 the markets can be irrational for far longer than you 0:22:05.640 --> 0:22:09.480 can remain solvent, so you know, take steps to protect yourselves. 0:22:09.920 --> 0:22:12.480 Those are the things that we that we look at. 0:22:12.800 --> 0:22:17.359 One area everyone's fearful about is commercial real estate these days, 0:22:17.480 --> 0:22:19.880 you know, especially you look at the publicly traded office 0:22:20.080 --> 0:22:24.399 ruts just been destroyed. There are, at least on paper, 0:22:24.520 --> 0:22:27.960