Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast.
Speaker 1: My name is Mike Reagan. I'm a senior editor at Bloomberg.
Speaker 2: And Umbildana Hi Across Asset reported with Bloomberg and this
Speaker 2: week on the show.
Speaker 1: Well, we've heard it a million times this year from
Speaker 1: strategists and fund managers and pretty much everyone else. Don't
Speaker 1: trust this rally in stocks that has pushed the S
Speaker 1: and P five hundred up more than eight percent year
Speaker 1: to date at its highs. Well, finally, this week we
Speaker 1: saw a bit of a dip following a really slow
Speaker 1: grind higher for more than a month following March's regional
Speaker 1: bank drama. So what should we make of that? Is
Speaker 1: it time to once again buy the dip or is
Speaker 1: this the start of a serious correction that so many
Speaker 1: have warned us about? And if that's the case, what
Speaker 1: are the best areas of the market to hide out
Speaker 1: in until the coast is clear. We'll get into it
Speaker 1: all with the chief investment officer of equity strategies at
Speaker 1: a major investment firm. But first of Filbata, you know,
Speaker 1: I think people that listen to this podcast assume we're
Speaker 1: all sitting around a table together or something like that.
Speaker 1: But you've actually fled, You've fled the state I did.
Speaker 2: Yeah, I mean typically we are sitting around a table together.
Speaker 1: Yeah.
Speaker 2: True, which is which can be fun. It has its downsides, too, well,
Speaker 2: tell tell us why you fled. It might have had
Speaker 2: something to do with you. Now, I'm kidding. It's I'm
Speaker 2: in Chicago for the annual morning Star Investment Conference. I'm
Speaker 2: having so much fun.
Speaker 1: Yeah, what's so? What's so fun about morning Star?
Speaker 2: I'm at the well today, I'm at the Bloomberg office
Speaker 2: because we have a wonderful office here and it's on
Speaker 2: the forty nine floor and has really nice views. But
Speaker 2: I get, I don't know, scared, I get some sort
Speaker 2: of fright as soon as I approach one of the
Speaker 2: windows to look out, because you look down and it's
Speaker 2: so it's just so scary to me. But the views
Speaker 2: from further away are nice.
Speaker 1: That's too high for me.
Speaker 2: Forty nine forty nine, Yeah, entirely wild, too high. But
Speaker 2: the conference is really nice too. It faces the lake,
Speaker 2: which is beautiful and the waters are green, and then
Speaker 2: another side of the conference center faces the Chicago skyline.
Speaker 1: It's very nice.
Speaker 2: Yeah, my views this week are really nice.
Speaker 1: You're You're never coming back, are you?
Speaker 2: Nah? Actually our guests used to live here as well,
Speaker 2: even though she's in New York City now, but I
Speaker 2: do want to introduce her. It's Quay Win, CIO of
Speaker 2: Equities at Research Affiliates. Quay, I'm so happy you could
Speaker 2: join us. Welcome to the show.
Speaker 3: Thank you very much, happy to be here.
Speaker 2: Maybe we can start with a bit of your background
Speaker 2: and how you ended up at Research Affiliates.
Speaker 3: I really started out my career right out of college
Speaker 3: in quantitative research at Barra, which is now part of MSCI,
Speaker 3: and that was really my introduction to finance. I had
Speaker 3: actually studied math in college, you know, like a lot
Speaker 3: of college students, I didn't know what I could do
Speaker 3: or wanted to do, and bar gave me the opportunity
Speaker 3: to learn something new, apply math to an area that
Speaker 3: I'd never really looked at before, and it really stuck.
Speaker 3: And so from there I made my way into the
Speaker 3: asset management world at stag Street Globe Advisors, then Morgan
Speaker 3: Stanley Investment Management, and then finally at Numeric and Investors,
Speaker 3: which is now part of Man Group. During that time,
Speaker 3: I had my first child and one of the things
Speaker 3: I realized was that being a new parent trading and
Speaker 3: being active in the markets. Trading in the markets was
Speaker 3: not exactly easy, and I really lucked out because a
Speaker 3: former client of mine for my Morgan Stanley days had
Speaker 3: become chief investment officer at University of Chicago's endowment and
Speaker 3: he contacted me, said he was expanding his team, and
Speaker 3: one thing led to another, went through a formal search,
Speaker 3: but ultimately it gave me the opportunity to do investing
Speaker 3: from the other side of the table as an asset owner,
Speaker 3: not just as an asset manager, and gave me a
Speaker 3: whole new perspective on what it is that investors need,
Speaker 3: what they want, and what they're trying to achieve. With that,
Speaker 3: I stayed on the asset owner side for about ten years,
Speaker 3: and when I was finally ready to go back into
Speaker 3: asset management, I contacted several people I knew, some of
Speaker 3: whom were at research affiliates. Chris Brightman and Rob are
Speaker 3: Not were people that I'd known in the industry for
Speaker 3: a number of years, and it was a small firm.
Speaker 3: It was the kind of thing that I really wanted
Speaker 3: to join. It was quantitative investing, but with really a
Speaker 3: fundamental twist to it. And also one of the things
Speaker 3: that Research Affiliates really stands for is value investing. And
Speaker 3: one of the things that I saw a few years
Speaker 3: ago was the large gap between value and growth stocks,
Speaker 3: something that had never really been seen before and something
Speaker 3: that I felt could not be sustained and that there
Speaker 3: would be a quick snap back towards value and that
Speaker 3: value would likely see a renaissance over the next few years.
Speaker 3: So with that opportunity in mind, I joined Research Affiliates.
Speaker 1: Great Quai, I'd love to just get into sort of
Speaker 1: how you're thinking about the market over call it the
Speaker 1: last five or six weeks, you know, because early mid
Speaker 1: March we started to see the problems with the Bank's
Speaker 1: Silicon Valley Bank, collapsed, Signature Bank, Silver Core Capital, First Republic.
Speaker 1: We started looking weak and has been hanging on. But
Speaker 1: you know, at the time, it really felt like, well,
Speaker 1: this is it. The Fed's tightening campaign. Finally quote unquote
Speaker 1: broke something, you know, and here we'll get this sort
Speaker 1: of cathartic final leg lower inequities that so many people
Speaker 1: have been bracing for. But it didn't turn out that way. Obviously,
Speaker 1: the FED reacted very quickly the FDIIC reacted, a lot
Speaker 1: of liquidity added to this system. We saw the market
Speaker 1: rebound at least from the index level. A lot of
Speaker 1: the regional banks are still struggling, obviously their share prices,
Speaker 1: but now again First republics back in focus this week,
Speaker 1: it does feel like we're rolling over a little bit
Speaker 1: in the s and P. Five hundred. So I'm just curious,
Speaker 1: you know, how you've thought about this whole episode in
Speaker 1: the last five or six weeks. Did it make sense
Speaker 1: to you? You know, was it all about the liquidity
Speaker 1: sort of? Let us just pick your brain about what
Speaker 1: we just witnessed over the last six weeks.
Speaker 3: Yeah, So when the banking crisis first emerged, the thing
Speaker 3: that I really thought about was how bad is this
Speaker 3: going to get? Is it going to be like the
Speaker 3: Great Financial Crisis? How is it going to be? And
Speaker 3: I think that we're in a much better place than
Speaker 3: we were in two thousand and seven, two thousand and eight.
Speaker 3: Banks in general, you know, with a few exceptions, are
Speaker 3: in a much stronger place. That being said, you know,
Speaker 3: when the FED raises rates and it breaks something that
Speaker 3: something doesn't usually just it rarely happens that it's a
Speaker 3: very small break. Usually it's a very big break. And
Speaker 3: so while I'd never thought that we would get to
Speaker 3: a great financial crisis level of a breakdown, I did
Speaker 3: believe and I still believe that there would be more
Speaker 3: things that break that came along, whether that continue to
Speaker 3: be in the small regional banks or whether that bled
Speaker 3: over to something else such as real estate lending, private credit. Definitely,
Speaker 3: I think those dangers still remain out there.
Speaker 2: And can you talk about what you actually foresee for
Speaker 2: the economy, because for me being at the conference this
Speaker 2: week and hearing the morning Star economists talk about what
Speaker 2: they're projecting, they're actually foreseeing a soft landing, but in
Speaker 2: your view, you're saying that that may be a bit
Speaker 2: of an optimistic projection. So can you give us your
Speaker 2: outlook and how you're seeing things evolving with the economy.
Speaker 3: Sure, I mean, I guess I'm biased because I started
Speaker 3: in this industry in the early nineties, and every single
Speaker 3: cycle that comes through, everybody says we're going to have
Speaker 3: a soft land They're going to have a soft land
Speaker 3: We're going to have a soft landing. And I don't
Speaker 3: really know what a soft landing is, because no landing
Speaker 3: that I've ever experienced, has ever really felt soft, and
Speaker 3: so I'm not really sure what that really means. There's
Speaker 3: always going to be something that breaks a little bit
Speaker 3: worse than you expect. It's very, very difficult to engineer
Speaker 3: that soft landing, and so I don't see, you know,
Speaker 3: why a soft landing is what people call for when
Speaker 3: we hardly ever achieve it. Perhaps they have achieved it
Speaker 3: before when I was a child, but certainly, you know,
Speaker 3: not since I've been in this industry. And at the
Speaker 3: same time, one of the things I would say is
Speaker 3: that we are also not just seeing a withdrawal of
Speaker 3: monetary support, but we're also seeing a withdrawal of fiscal support.
Speaker 3: Things that we're seeing such as extra snap benefits coming
Speaker 3: to an end, also the likelihood that student loan forgiveness
Speaker 3: is not going to happen and that people will have
Speaker 3: to start paying those loans again. All of these small,
Speaker 3: piecemeal withdrawal of fiscal support will make everything a little
Speaker 3: bit more tricky as well, because the consumer, it really
Speaker 3: is seventy percent of the US economy, and we really
Speaker 3: can't have a soft landing without having the consumer remain
Speaker 3: somewhat comfortable. And then you know, we're now beginning to
Speaker 3: see job losses spill over. At first it was just technology,
Speaker 3: then small pieces of the financial services industry, and now
Speaker 3: we're being to see other firms start laying off people Disney,
Speaker 3: for example, and then also additional rounds of job losses
Speaker 3: within technology continue to roll on. So, having said that,
Speaker 3: though you know, the question is this happens in the economy,
Speaker 3: We have economic cycles. It happens all the time. How
Speaker 3: should we think about it in the equity markets? It's
Speaker 3: really not unusual for equity markets to already bottomed by
Speaker 3: the time we know that we're in a recession, or
Speaker 3: by the time that the recession comes around. We already
Speaker 3: had a big draw down last year twenty percent in
Speaker 3: the SMP. I think Pete de trough last year. I
Speaker 3: think it was down almost as much as twenty five percent.
Speaker 3: That's a normal level of decline for equities preceding a recession.
Speaker 3: And so this year, as equities meander around, it could
Speaker 3: be that regardless of how soft or hard the landing is,
Speaker 3: we've already seen the worst of what there is to come,
Speaker 3: what there is to be in the equity markets overall.
Speaker 2: And can you talk about when you're for seeing this
Speaker 2: because another part of the discussion at the conference was
Speaker 2: that potentially we could even be in a recession right now.
Speaker 2: Is that what you're seeing or is it something down
Speaker 2: the line.
Speaker 3: Oh, I definitely think that we could already be in
Speaker 3: the beginning stages of recession right now. You know, typically
Speaker 3: we don't know that we're in a recession until six
Speaker 3: months after started. By the time that we know that
Speaker 3: we're in a recession, we may already be in recovery.
Speaker 1: You know. I think if you look at the short
Speaker 1: term interest rate market, people are basically pricing in as
Speaker 1: many as two rate cuts by the end of the
Speaker 1: year from the FED, which you know, leads me to
Speaker 1: believe a lot of people are agree with you that
Speaker 1: a soft landing is going to be pretty hard, if
Speaker 1: not impossible, in this occasion, and that the FED is
Speaker 1: going to have to react to prop up the economy
Speaker 1: by the end of the year. But one thing I
Speaker 1: wonder is if it's possible that we're looking at something
Speaker 1: in between, like a stagflationary environment where growth does slow,
Speaker 1: maybe it doesn't go deeply negative for a full blown recession,
Speaker 1: but that we still regardless of that, don't tame this
Speaker 1: inflation problem to the satisfaction of the FED, so that
Speaker 1: that pricing for rate cuts later in the years is mispriced,
Speaker 1: and that even if the Fed's done hiking, that they're
Speaker 1: going to hold at those this higher level for a
Speaker 1: longer period.
Speaker 3: Is that a.
Speaker 1: Possibility in your mind? You know, something between you know,
Speaker 1: a heart and soft landing, more of a stagflation type
Speaker 1: of environment, you.
Speaker 3: Know, I wouldn't call a stack plation somewhere between a
Speaker 3: hard and soft landing. I would say stagflation is sort of,
Speaker 3: you know, a fork in the road where we fork
Speaker 3: into something that weird, you know, that we just haven't
Speaker 3: seen in a really, really long time. I definitely think
Speaker 3: the stag plation is a possibility. I thought the stag
Speaker 3: plation was a possibility for a while. Two rate cuts
Speaker 3: by the end of the year. I wouldn't be surprised
Speaker 3: if the FED started to accommodate. Depending on how hard
Speaker 3: the landing is, how quickly the job losses mount, how
Speaker 3: how quickly spending slows. You know, member of the FED
Speaker 3: has a dual mandate both price stability and full employment,
Speaker 3: and they are at odds with each other, and the
Speaker 3: FED has to has to ride that balance. So depending
Speaker 3: on how the numbers evolve through the end of the year,
Speaker 3: two rate cuts are are still a possibility. But at
Speaker 3: the same time, one of the things that we are
Speaker 3: seeing is that inflations come down. It's come down significantly,
Speaker 3: you know, I think it peeked out at over eight percent.
Speaker 3: It's now running above four, right below five. If the
Speaker 3: Fed does cut through the end of the year, we're
Speaker 3: not going to get back to that two percent goal
Speaker 3: that they have. If they do cut, it will be
Speaker 3: because the underlying economic fundamentals aside from inflation, require that,
Speaker 3: and so as they accommodate, it wouldn't be surprising to
Speaker 3: see inflation go back up, and therefore the FED is
Speaker 3: going to either have to hold at a higher level
Speaker 3: or resume hiking, right which could send us into you know,
Speaker 3: the classic double dip, which is what had to happen
Speaker 3: before inflation was finally tamed in the early eighties.
Speaker 2: And so where do you see inflation topping out? Is
Speaker 2: it still above four percent?
Speaker 3: Yes? I do think that if the FED has to
Speaker 3: ease through the end of the year, I think inflation
Speaker 3: is going to stay above four percent in this intermediate cycle.
Speaker 3: I think ultimately, the FED will succeed in getting it
Speaker 3: back down to two percent. It's just that what we're
Speaker 3: going to have to do to get there could be
Speaker 3: either very very arduous in the short term or less
Speaker 3: arduous but spread out over a longer cycle.
Speaker 1: So how would you break it down as far as
Speaker 1: what are the areas of the stock market that are
Speaker 1: most attractive right now given sort of all these uncertainties
Speaker 1: and this very real chance of a hard landing. I
Speaker 1: know you focus exclusively on equities, so I want to
Speaker 1: ask you about actual portfolio allocation unless you want to
Speaker 1: get into that. You know, it is an interesting time
Speaker 1: for you know, cross asset allocations, with money market funds
Speaker 1: finally offering a real yield, even bank savings accounts offering
Speaker 1: in some cases above four percent. But you know, how
Speaker 1: are you thinking about allocation within equities and within the
Speaker 1: whole portfolio in this environment?
Speaker 3: You know, let's talk about equities first. I think with inequities,
Speaker 3: what I would focus are in the areas that really
Speaker 3: got beaten up, because when you buy something cheap, you
Speaker 3: buy yourself a lot of downside protection. And if you
Speaker 3: take a look at what's got beaten up, there are
Speaker 3: really two areas right now. The first is financials. The
Speaker 3: banking crisis or the mini crisis in March really led
Speaker 3: to that, and what you're getting in financials is a
Speaker 3: lot of high quality banks that got beaten down because
Speaker 3: the baby got thrown out with the bathwater. Right So,
Speaker 3: I think interesting ideas might be, you know, certain banks
Speaker 3: that are trading at eight times earnings, you know that
Speaker 3: are very high quality. City bank Wells Fargo fit that
Speaker 3: bill for example. Insurance companies were also some of the
Speaker 3: companies that were collateral damage along the way. But it's
Speaker 3: not as if people are going to go out there
Speaker 3: and start canceling insurance. You know, Insurance is one of
Speaker 3: these things that everybody needs, just like banks or things
Speaker 3: that everybody needs. And again, if they're priced well, they
Speaker 3: become reasonable investments, and you know in the short and
Speaker 3: the medium term. So MetLife, for example, is trading at
Speaker 3: seven times earnings and AIG's treating something like EAT. So
Speaker 3: when you get single digit multiples like that in name brand,
Speaker 3: high quality companies, they tend to offer some upside potential
Speaker 3: as well as some stability in the event of a
Speaker 3: downturn because they've already priced so much of that in
Speaker 3: other cyclical areas have also got beaten down. So within technology,
Speaker 3: for example, we're seeing some attractive names in semiconductors. A
Speaker 3: lot of this has to do with the trade war
Speaker 3: with China, but the reality is that nobody's giving up
Speaker 3: their phones, nobody's giving up their computers. You know, even
Speaker 3: speakers need to have cars, and so semiconductors there's a
Speaker 3: structural growing demand there. And what you're seeing is you're
Speaker 3: seeing a lot of high quality companies again getting up
Speaker 3: and there could be opportunities to invest there for long
Speaker 3: term growth. A company like Qualcom, for example, it's treating
Speaker 3: it twelve times. And then within the consumer segment, the
Speaker 3: home builders, right the ultimate cyclical play. The home builders
Speaker 3: are priced very attractively right now. So both Pulti Group
Speaker 3: and Toll Brothers are, you know, treating at seven times earnings,
Speaker 3: and Lenar's a little more expensive there eleven times. You know,
Speaker 3: you do have to be volatility tolerant every time you
Speaker 3: go into equities, and this is going to have the
Speaker 3: normal equity volatility, but to some extent, if you're afraid
Speaker 3: of a recession, then go and buy the stocks that
Speaker 3: are already priced for a recession, you know, don't necessarily
Speaker 3: buy the stocks that are optimistic that there's not going
Speaker 3: to be a recession. And then the other thing that
Speaker 3: I would add to that is that given what happened
Speaker 3: last year the megacap stars, the fang stocks, I think
Speaker 3: there are opportunities to pick up some very high quality
Speaker 3: stocks at reasonable multiples. So a good example of that
Speaker 3: might be a Meta, Right. Meta used to be one
Speaker 3: of those great glamour stocks that really beaten up, is
Speaker 3: now trading at fifteen times. I wouldn't necessarily say that
Speaker 3: it was outright cheap, but for a company that just
Speaker 3: generates so much cash flow and then so profitable, you know,
Speaker 3: it looks like it looks like an interesting play. Of course,
Speaker 3: it would have been mettered by this thing in January, right,
Speaker 3: because it's up seventy eighty percent this year already, But
Speaker 3: still even so, it still represents I think an interesting
Speaker 3: and interesting entree into a high quality name.
Speaker 1: That's a fascinating point about the insurance companies that you
Speaker 1: bring up, because we don't hear people talking about them
Speaker 1: a lot, and you mentioned how cheap they got. What
Speaker 1: do you think explains why that happened? Is it just
Speaker 1: a matter of them being loaded up with low yielding
Speaker 1: treasury similar to the way that the banks are. Is
Speaker 1: that the main area of concern, do you think?
Speaker 3: Yeah, so, I think there are really two areas of concern.
Speaker 3: I think that is one area for concerns. Their investment
Speaker 3: portfolio is how are they doing? And you definitely see
Speaker 3: a separation between certain insurance companies and other insurance companies
Speaker 3: depending on the mix. Add to that the fact that
Speaker 3: many insurance companies over the last ten to fifteen years
Speaker 3: have increased their allocation to private investments a lot, specifically
Speaker 3: venture and the failure of SPB and the story of
Speaker 3: venture are very interrelated, right. The slowdown adventure cause, you know,
Speaker 3: led to some of the issues SVB. The unwining of
Speaker 3: SVB is going to undermine the funding of venture. It
Speaker 3: becomes a negative cycle. And so depending on what the
Speaker 3: insurance portfolio is in there could be some ramifications from that.
Speaker 3: But ultimately what we're seeing, you know, what I'm reading
Speaker 3: about in the insurance industry is that they are are
Speaker 3: all able to hold their premium rates. Their loss ratios
Speaker 3: are not significantly worse than what has historically been. Yes,
Speaker 3: last year was a really bad year for investment portfolios.
Speaker 3: This year is a lot better. This is what happens
Speaker 3: to investment portfolios. You know, it's not an unusual thing.
Speaker 3: What you really do want to do, is you really
Speaker 3: want to you know, as Warren Buffett says, by when
Speaker 3: others are fearful and.
Speaker 2: I'm curious about your methodology, Like what are you looking
Speaker 2: for when you're looking at these different stocks. Is it
Speaker 2: just the cheapness factor that you're singling out or what
Speaker 2: are some of the other components.
Speaker 3: So we definitely try to identify stocks that are fundamentally undervalued,
Speaker 3: but some of the stocks that are cheap, as they say,
Speaker 3: are stocks that deserve to be cheap because they're going
Speaker 3: out of business. A classic example of that last year
Speaker 3: was bed Back and Beyond. Right, we know that bed
Speaker 3: Bath and Beyond recently five for chapter eleven, but it
Speaker 3: was a long road to that, and during that time
Speaker 3: time it would always show up on any sort of
Speaker 3: value screen a very very cheap stock. And so what's
Speaker 3: important to us is to pair that with two things,
Speaker 3: is to pair that with a quality screen where we're
Speaker 3: really trying to avoid the companies that are close to
Speaker 3: distress as well as avoid companies that have what we
Speaker 3: would consider less capital discipline. And then we also look
Speaker 3: at the recent momentum because there could be news flow,
Speaker 3: there could be something else that is not yet in
Speaker 3: the financials that is causing the stock to move one
Speaker 3: way or the other. What we like to see is
Speaker 3: we like to see strong risk adjusted returns or moderate
Speaker 3: risk adjusted returns. Right. We don't want something spiking up
Speaker 3: or spiking down. If something is spiking down, what we
Speaker 3: would probably do is just try to either avoid it
Speaker 3: until the volatility settles down, or just own less of it.
Speaker 3: And really, they're all we're trying to say is, you know,
Speaker 3: the markets can be irrational for far longer than you
Speaker 3: can remain solvent, so you know, take steps to protect yourselves.
Speaker 3: Those are the things that we that we look at.
Speaker 1: One area everyone's fearful about is commercial real estate these days,
Speaker 1: you know, especially you look at the publicly traded office
Speaker 1: ruts just been destroyed. There are, at least on paper,
Speaker 1: some some pretty attractive yields on a lot of those stocks.
Speaker 1: But I wonder if it's you know, sometimes it pays
Speaker 1: to be fearful to what everyone else is fearful. So
Speaker 1: I'm wondering how you're thinking about about commercial real estate specifically,
Speaker 1: both you know, the public equities involved in the space,
Speaker 1: but also sort of it's macro influence on the rest
Speaker 1: of the economy and the banks and the credit credit situation.
Speaker 3: Sure, I mean, one of the things that I think
Speaker 3: is very interesting about commercial real estate is that these
Speaker 3: things do show up on our value screens, but they
Speaker 3: it's hard for them to make it past their quality screens,
Speaker 3: and so so we haven't really been involved heavily in
Speaker 3: commercial real estate in our portfolios. But having said that,
Speaker 3: I think one of the things about value investing is
Speaker 3: that it is a bet on mean reversion, or is
Speaker 3: a bet on stability. Right then you generally have this
Speaker 3: very stable situation and that things get really out of whack,
Speaker 3: and then you buy when others are fearful because that
Speaker 3: fear is out of whack, and then you just ride
Speaker 3: the convergence back to stability or normalcy. The problem with
Speaker 3: commercial real estate right now, as specifically office, is that
Speaker 3: we could be in the midst of a secular change,
Speaker 3: and that's not something that value investing adequately addresses. And
Speaker 3: so that is something that is addressed through for example, momentum. Right,
Speaker 3: you look at the momentum of these things, they look awful.
Speaker 3: Having said that, you know, I don't know. I mean,
Speaker 3: we're all sitting here around a virtual table, yeah, and
Speaker 3: our conversation is extremely effective. It's not like video conferencing
Speaker 3: was twenty years ago. And so is there really a
Speaker 3: need to have an office? I think it's nice to
Speaker 3: have an office. I like going to the office and
Speaker 3: seeing other humans and interacting with them and chatting. But
Speaker 3: it's not necessary like it was. It's not as much
Speaker 3: of a necessity. And so the use of office I
Speaker 3: think will still be there. I just think that people
Speaker 3: will use less of it.
Speaker 1: That's the secular change. What you mean by secular change,
Speaker 1: I assume exactly.
Speaker 3: And so I think that we all have to go
Speaker 3: through an adjustment on that, and you know, both in
Speaker 3: terms of professionals as well as in terms of how
Speaker 3: we invest. I do worry about the lack of full
Speaker 3: return to office, not necessarily for myself personally, but really,
Speaker 3: how does it affect new entrance into the white collar workforce?
Speaker 3: How do they get integrated into a firm culture, or
Speaker 3: how do they get trained. I was speaking to a
Speaker 3: friend of mine whose firm has basically gone mostly virtual,
Speaker 3: and one of the things that he said is that
Speaker 3: it's actually very difficult to hire the younger analysts because
Speaker 3: they don't want to work in a virtual office. They
Speaker 3: want to work with real people from whom they can learn.
Speaker 1: I think it's all about sweatpants, Phil Dona. If they
Speaker 1: could remove the stigma of wearing sweatpants in the office,
Speaker 1: I think.
Speaker 2: Everything, then you'd be more happy to come in back
Speaker 2: five days a week. Honestly, I wouldn't mind it either.
Speaker 2: Yoga pants, Lula Lemon pin Way, if we can just
Speaker 2: go back to that point, because that the remote work point,
Speaker 2: or you know, the lack of the return to office
Speaker 2: is something that you're also is one of the factors
Speaker 2: in your economic outlook, right, because your thought is it's
Speaker 2: changing everything not just from you know, how offices are utilized,
Speaker 2: but also transportation, et cetera, et cetera.
Speaker 3: Yeah, so it is changing how how transportation is organized.
Speaker 3: And so that's one of the secular headwinds against something
Speaker 3: like oil right, gas right, People just aren't filling up
Speaker 3: their cars as much as they used to. It also
Speaker 3: puts pressure on a lot of metropolitan transportation situations. Such
Speaker 3: as New York's ridership remains pretty low on the subway
Speaker 3: compared to pre pandemic. But having said that, you know,
Speaker 3: one of the things that it does do is it
Speaker 3: does put more money back into the pockets of families.
Speaker 3: And so this could be something that cushions the blow
Speaker 3: in terms of when people have to start repaying student loans,
Speaker 3: for example. And one of the things that somebody else
Speaker 3: pointed out to me was that, you know, he used
Speaker 3: to come to work in Midtown every day, and he
Speaker 3: would have lunch in Midtown every day, and now he
Speaker 3: works from home two to three days a week and
Speaker 3: in Brooklyn, in his neighborhood. All of a sudden, there
Speaker 3: are so many more options for lunch than there used
Speaker 3: to be. And so one of the things that he's
Speaker 3: saying is that it's not just about are the people
Speaker 3: returning to offices, it's also about the migration of different
Speaker 3: types of business to different neighborhoods. Right, So you may
Speaker 3: actually see what looks like a depressed downtown area, but
Speaker 3: then you actually have more vibrant residential areas from a
Speaker 3: business point of view. So there gives and takes to
Speaker 3: that I don't necessarily see the return to office as
Speaker 3: being an economic negative for the economy as a whole. Definitely,
Speaker 3: it will impact certain regions, certain cities more than others,
Speaker 3: But as a whole, I don't necessarily think that it
Speaker 3: is an overall negative.
Speaker 1: You mentioned and your preference for value, and you know,
Speaker 1: last year it really looked like value was finally having
Speaker 1: that moment in the sun where it was outperforming growth again.
Speaker 1: I mean, it's kind of a tricky subject, I think
Speaker 1: because the composition of what's in the value indexes versus
Speaker 1: the growth indexes has changed pretty dramatically. But if you
Speaker 1: think of the old school growth, you know, if you
Speaker 1: use the Nasdaq one hundred as a sort of a
Speaker 1: proxy for it, it looks like growth is back in
Speaker 1: the leadership again. What do you think explains that and
Speaker 1: is not going to last? I mean, is the value
Speaker 1: trade gonna return this year? Do you think it's a
Speaker 1: favor and what would drive that? If so?
Speaker 3: The NASTAK one hundred, remember I think has something over
Speaker 3: twenty percent in its top two stocks.
Speaker 1: It's kind of it's getting ridiculous.
Speaker 3: All right, And so when you talk about Nasdaq one hundred,
Speaker 3: you know you're really talking about some of your narrow sets, right,
Speaker 3: those stocks happen to be what I consider to be
Speaker 3: a very high quality stocks. Apples one of them, very
Speaker 3: you know, very strong consumer based, very loyal consumer base,
Speaker 3: lots of cash generation, high profit margins, strong capital discipline.
Speaker 3: I know that everybody made fun of Tim Cook when
Speaker 3: he started paying a dividend on the stock many years ago,
Speaker 3: but you know, that's just an example of you know,
Speaker 3: he's got good capital discipline. He knows he's not going
Speaker 3: to invest in something silly, he's going to return it
Speaker 3: to shareholders. What I saw was not necessarily a return
Speaker 3: to growth, but really people going in and buying high
Speaker 3: quality stocks at more reasonable valuations and having a preference
Speaker 3: for these very high quality stocks in the face of
Speaker 3: continued market and economic uncertainty.
Speaker 1: They're the new new defensives almost.
Speaker 3: You know, yes, yes, the new defensives almost right, And
Speaker 3: then they were you know, it's just that before at
Speaker 3: the beginning of twenty twenty two, they were trading at
Speaker 3: ridiculous multiples, and all of a sudden, at the beginning
Speaker 3: of twenty twenty three, it was a completely different story.
Speaker 3: It was a much more reasonable place to start buying
Speaker 3: these stocks. We metas just one example, but definitely Apple,
Speaker 3: Google are other examples of that. I mean. One of
Speaker 3: the things that value does though, is that it's not
Speaker 3: meant to be static, right, It's not meant to say
Speaker 3: value always buy this company, or value always buy that company.
Speaker 3: Value will buy what is what is cheap in the market.
Speaker 3: And then in addition to that, one of the things
Speaker 3: that we try to do is not just take a
Speaker 3: look at absolute cheapness. Absolute cheapness is great, we also
Speaker 3: try to take a look at a more comprehensive, well
Speaker 3: rounded valuation, right, which is one of the reasons where
Speaker 3: we find stocks like Meta to be interesting.
Speaker 1: Well, Qui Gwen of Research Affiliates quite a treat to
Speaker 1: pick your brain here today on What Goes Up. We
Speaker 1: really appreciate your time, can't let you go just yet.
Speaker 1: We do have a tradition on this show where we
Speaker 1: have to discuss the craziest things we saw in markets
Speaker 1: this week.
Speaker 2: So drum roll on my little laptop.
Speaker 1: Yeah, well, why do you get us started?
Speaker 2: Okay, this is another Marella special. Marale is my sister.
Speaker 2: She's our new craziest thing. Corresponded, I would say, right,
Speaker 2: she sends me a bunch of stuff, and I asked
Speaker 2: her for something specific. I was like, what have you
Speaker 2: seen that's weird? And she pointed out, and this is
Speaker 2: from a couple of days ago, that there's this new
Speaker 2: viral song from Drake and The Weekend. Yeah, you probably
Speaker 2: don't know who those who those two are.
Speaker 1: Yeah, I do. Come on, I've got I've got teenage daughters, females.
Speaker 2: Oh right, okay, okay, you get a path. And it
Speaker 2: was created entirely by AI.
Speaker 3: Wow.
Speaker 1: Yeah, that's that's a bizarre one.
Speaker 2: Yeah, and I think it was like one of the
Speaker 2: top streaming They even had to pull it from Apple
Speaker 2: and Spotify because Drake obviously wasn't very happy. But it
Speaker 2: was totally created by AI.
Speaker 1: I feel like, if there's a way to go long
Speaker 1: on copyright lawyers quite I think AI, Yeah this is it.
Speaker 3: Yeah, I think that would be a private investment.
Speaker 1: Yeah, out of your wheelhouse. But I feel like there's
Speaker 1: we're going to be seeing a lot of cases over
Speaker 1: this stuff. You know, really, what does chat GPT do
Speaker 1: but go out to the internet and copy and paste
Speaker 1: some information from other websites. Well that's pretty good. That
Speaker 1: is a good one. Really not market related. Vildona but
Speaker 1: I'll allow it.
Speaker 3: It's the potential for vastly increased productivity from drake.
Speaker 2: There you go.
Speaker 1: Yeah, it was pretty productive to start with, So that's
Speaker 1: pretty good. All right. QUI, how about you? Have you
Speaker 1: seen anything crazy recently?
Speaker 3: Yes? I saw a story earlier this week about a
Speaker 3: crypto wallet that was dormant for something like eight or
Speaker 3: nine years, and I guess back then it participated in
Speaker 3: the initial coin offering of and so it was allocated
Speaker 3: just a few thousand dollars of etherium at thirty one
Speaker 3: cents per coin. And then for whatever reason, the owner
Speaker 3: of this wallet just sort of went away and didn't
Speaker 3: do anything, and Rip van Winkle wakes up wallets now
Speaker 3: beginning to be active. It's had essentially a six hundred
Speaker 3: thousand percent return.
Speaker 1: Wow.
Speaker 3: Right, of course they missed the giant run up also
Speaker 3: the big massive draw down. But are you really that
Speaker 3: unhappy that you missed the giant run up? I mean,
Speaker 3: aren't you pretty happy with a six hundred thousand percent return?
Speaker 2: It's it's me I'm not all own.
Speaker 3: One of the things that really struck me about this
Speaker 3: is that, you know, this is really an example of
Speaker 3: the Rip van Winkle. You know philosophy of investing right,
Speaker 3: you buy it for the long term. If you say
Speaker 3: you're going to buy it for the long term, just
Speaker 3: buy it for the long term, hold it and then
Speaker 3: look at it many many years later and you'll do line.
Speaker 3: But not many of us have that kind of patience.
Speaker 3: But here's an example of a person who did.
Speaker 1: And yeah, really interesting, what was it. Jack Bogol used
Speaker 1: to joke about you should burn your password to to
Speaker 1: Vanguard and just go have them reboot it when it's
Speaker 1: time to.
Speaker 2: Return, not burn your crypto passwords.
Speaker 1: That's true, it doesn't work to that. Well, kway you
Speaker 1: you brought it up. So we get to ask you
Speaker 1: what do you think of crypto? Are you a believer?
Speaker 1: You skeptic? How do you? How do you think about crypto?
Speaker 3: To me, crypto is really an expression of sentiment, you know,
Speaker 3: it's it's something that trades off of sentiment. There's no
Speaker 3: intrinsic value necessarily related to crypto. Where crypto does derive
Speaker 3: value is in the community that is enthusiastic about it.
Speaker 3: And so if the community is really enthusiastic about it,
Speaker 3: it's great. If the enthusi If the community loses interest
Speaker 3: in it, it just goes away. So you know, that's
Speaker 3: where it is today. Now, can we take crypto and
Speaker 3: make something more out of it? Make something more out
Speaker 3: of the technology the blockchain. Certainly people are trying, but
Speaker 3: thus far, I haven't necessarily seen anything that you know,
Speaker 3: makes that application real.
Speaker 1: I think that's uh, that's a smart way to think
Speaker 1: about it. I'm gonna delve into the non encrypted currency markets,
Speaker 1: the good old fashioned currency markets Feldanna coins. And this
Speaker 1: is courtesy I don't do you follow Stephen Dennis, the
Speaker 1: Senate reporter at Bloomberg.
Speaker 2: Oh, he had he posts like the houses.
Speaker 1: In the He posts, yeah, Zillow, he does Sunday nights.
Speaker 1: He posts like the nicest and weirdest houses on zillo.
Speaker 1: But he posted what he calls an eye popping stat
Speaker 1: from the US men mints, and it's regarding sitting in
Speaker 1: jars somewhere two hundred billion pennies sitting in jars. But
Speaker 1: probably because of that lost circulation, the mint has to
Speaker 1: keep making new pennies, millions, billions of pennies every year. Okay,
Speaker 1: And he brought up the cost for the US Mint
Speaker 1: to actually mint a penny. So it's time to play
Speaker 1: the prices precise. Quay, you're on a game show now.
Speaker 1: I hate to inform you. I want you, guys to
Speaker 1: guess the cost of the US mint to make a
Speaker 1: penny and put it in circulation one one cent, one US.
Speaker 2: Penny, Okay, I'm going to say it's slightly above one cent.
Speaker 1: What should give me a number?
Speaker 2: I don't know. How do you measure slightly above one
Speaker 2: cent one point?
Speaker 1: I don't know you need Satoshi's I think you do.
Speaker 2: One point zero one zero, so it will be zero
Speaker 2: points zers. I really don't know how to do this.
Speaker 2: I'm just gonna go slightly above one cent, all right?
Speaker 1: QUI, how about you? What do you think it costs
Speaker 1: to mint a penny?
Speaker 3: I think it's going to cost two cents.
Speaker 1: That's pretty good. That's pretty close two point seven cents
Speaker 1: to make a penny. Why are we bothering at this
Speaker 1: point to bink? Oh my gosh, it's ridiculous. And when's
Speaker 1: the last time either of you actually spent a penny?
Speaker 1: Have you? I can't even think of the last time
Speaker 1: I spent one.
Speaker 2: Well, I don't keep cash in my wallet to begin with,
Speaker 2: so it'd be very hard.
Speaker 3: Yeah, aside from my day job. I'm also the treasurer
Speaker 3: for my son's school, PTAH, and they had a bank.
Speaker 3: They had a bake sale, and so then I had
Speaker 3: to gather the cash and actually deposited at the bank.
Speaker 3: And in that stack of cash was a whole bunch
Speaker 3: of pennies.
Speaker 1: You put it in the bank, not into a value,
Speaker 1: not in some value stocks lay.
Speaker 3: I don't think that our PTA is allowed to make investment.
Speaker 1: Your mandates are strict mandates. And for a nickel, how
Speaker 1: about this, a nickel ten point four cents to a nickel,
Speaker 1: I say, get rid of get rid of all of them.
Speaker 3: Well, we all have digital wallets now anyway, right Fenmosal Yeah,
Speaker 3: apple pie, yep, yeah.
Speaker 1: Although I guess they like to have those pennies. They
Speaker 1: can they can make their pennies off of their transactions,
Speaker 1: so digital pennies carry on.
Speaker 3: You know, I think that the main thing about getting
Speaker 3: rid of the penny is I think the state of
Speaker 3: Illinois might get annoyed. Lincoln, now you're there, you're a little.
Speaker 2: Land of Lincoln. A penny for your thoughts. That's a
Speaker 2: penny for your thoughts.
Speaker 3: Right, you still do the five dollar, but you're right,
Speaker 3: like things like that like a penny for your thoughts.
Speaker 3: Those sort of witticisms will sort of go away and
Speaker 3: our grandchildren won't know what we mean. What are you
Speaker 3: talking about? Kind of thing?
Speaker 2: I literally didn't know what really what happened? Like, I
Speaker 2: know people use that phrase, but I always.
Speaker 1: Was like, who what penny for your thoughts? Good reason
Speaker 1: to keep the penny around? I guess fair point. But
Speaker 1: I think that is all our time for this week.
Speaker 1: Gwig Gwen of Research Affiliates. I really appreciate your time
Speaker 1: and your wisdom, and hopefully we can talk to you
Speaker 1: again someday soon.
Speaker 2: Yes, thank you for coming on What Goes Up. We'll
Speaker 2: be back next week. Until then, you can find us
Speaker 2: on the Bloomberg Terminal website and app, or wherever you
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Speaker 2: can find us. And you can find us on Twitter,
Speaker 2: follow me at bildana Hire. Mike Reagan is at Reaganonymous.
Speaker 2: You can also follow Bloomer Podcasts at podcasts. What Goes
Speaker 2: Up is produced by Stacy Long and our head of
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Speaker 2: you next week,