Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller. Every business day we bring
Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
Speaker 1: at Bloomberg dot com slash podcast. All right, so I'm
Speaker 1: looking at my screen here, I look at my two
Speaker 1: tens on the treasuries. Uh five at seventy basis points
Speaker 1: of inversion on the twos and tens. And you know,
Speaker 1: I paid attention most days in business school when I
Speaker 1: was at Duke, and I remember learning that when the
Speaker 1: yield curve is inverted, that means a recession. And in fact,
Speaker 1: our next guest did some some pretty good work on
Speaker 1: that when he was a PhD guy at Universe Chicago.
Speaker 1: Professor Cam Harvey joins the He's a finance professor at
Speaker 1: Duke University, the Fucal school there. Uh he was my
Speaker 1: professor when I was there at Duke camp. Thanks so
Speaker 1: much for joining us here. I mean, you, more than
Speaker 1: anybody have written about and showed the merits of this
Speaker 1: inverted yield curve really signaling recessions? How about these days,
Speaker 1: because it's been inverted for a while. Here my economy
Speaker 1: seems pretty strong here on the East side of New York.
Speaker 1: What say you on that yield curve thing? Yeah, so
Speaker 1: it's interesting. So I guess, as you said, I'm the
Speaker 1: one that came up with the idea in my dissertation
Speaker 1: and at the time, UM, looking at data from night
Speaker 1: it was four out of four and predicting recessions and uh,
Speaker 1: it even got the double dip, which nobody got. And
Speaker 1: then out a sample it's had four inversions and followed
Speaker 1: by four recessions, including the global financial crisis. And now, um,
Speaker 1: the tenure MONTHUS three months, that's the one that I
Speaker 1: look at. Um, it's inverted, and I'm basically making the
Speaker 1: case that this is a situation where it's likely a
Speaker 1: fall signal, and there's a number of reasons behind that. Okay,
Speaker 1: So just to sound up, you're the one who found
Speaker 1: this indicator and you've proved it to be UM reliable
Speaker 1: in terms of predicting a recession. But now you're the
Speaker 1: one saying this indicator is not telling us that a
Speaker 1: recession is coming. So why well, the indicator is suggesting
Speaker 1: a recession. But the reason is fairly simple, uh, and
Speaker 1: that is that the economy is very complex, and to
Speaker 1: think that you've got this model that is going to
Speaker 1: be perfect forever is really naive. The model looks at
Speaker 1: a single variable, uh, the difference between long term meals
Speaker 1: and short term meals, and and to think that that
Speaker 1: single indicator is going to be perfect forever, Uh, that's
Speaker 1: just not very scientific. So we know the world is complex,
Speaker 1: and this particular situation we're in, I think is is
Speaker 1: far different than previous recessions. So we know that, um,
Speaker 1: this time is different every time, but the degree of
Speaker 1: difference is pretty stark. So what's what's what's different now,
Speaker 1: Kim in the economy that may make this less predicted
Speaker 1: this time. Yeah, So there are basically six things that
Speaker 1: that I look at. So number one, and there's been
Speaker 1: much discussion about this, is the excess demand for labor.
Speaker 1: So that means that there's more job openings than people unemployed,
Speaker 1: and the gap is large. And what that means is
Speaker 1: that even if the economy slows down even more, UM,
Speaker 1: we'll be able to absorb those that get laid off.
Speaker 1: And even though unemployment will likely go up, it's not
Speaker 1: going to go up by that much. And that's a
Speaker 1: key indicator for dating the business cycle. So we know that, uh,
Speaker 1: that unemployment is a lagging indicator for the business cycle.
Speaker 1: So you just can't say, well, unemployment is low, therefore
Speaker 1: it isn't a recession. It's always low before recession. And
Speaker 1: that's not my point. My point is the excess capacity,
Speaker 1: the ability to absorb people that are laid off, um
Speaker 1: is way different than past recessions. The second thing is
Speaker 1: the sort of layoffs that we're already seeing are like
Speaker 1: layoffs from for example, the tech sector, and if you
Speaker 1: get laid off with the technology job at Twitter or Facebook, uh,
Speaker 1: you can easily get replaced in the workforce, so you
Speaker 1: can get another placement, and the duration of your unemployment
Speaker 1: is very short. Uh. So I think that that is
Speaker 1: also an issue. Number three, Consumers are in a far
Speaker 1: better position today than let's say, before the global of
Speaker 1: financial crisis. So if you look, for example, in the
Speaker 1: housing sector, the amount of equity versus debt or mortgage
Speaker 1: is really high. So so again we can absorb a
Speaker 1: decrease in housing without causing the same sort of issues
Speaker 1: like in the global financial crisis. Number four is the
Speaker 1: financial sector is much stronger than it was, for example,
Speaker 1: before the Global Financial crisis, so the financial sector is
Speaker 1: unlikely to make things worse. UM. And number five has
Speaker 1: kind of an interesting one. My model, UH at the
Speaker 1: Anniversity of Chicago is about real yields, so not nominal yields.
Speaker 1: And we've got a situation today where the term structure
Speaker 1: of inflation expectations is very inverted, meaning the short term
Speaker 1: expectations are far higher than the long term and that's
Speaker 1: kind of contributing to UM the inversion of the Yeld curve.
Speaker 1: And number six is very subtle, but it's very important
Speaker 1: given that my model is talked about now and featured
Speaker 1: on Bloomberg Radio. Um, it affects people's behavior. So you
Speaker 1: would not have had me on the show in two
Speaker 1: thousand and six because it was a real niche sort
Speaker 1: of indicator, not that well known, and were talking about
Speaker 1: on Bloomberg television as well. Yeah, for a long time,
Speaker 1: it was every day for like three months, that's right,
Speaker 1: But that did not happen when the Yeel curve was
Speaker 1: inverted for like a year before the global financial crisis.
Speaker 1: And yeah, so think about how it changes behavior. So
Speaker 1: suppose you're like a CEO going before shareholders in the
Speaker 1: middle of the global financial crisis, and you basically say, well,
Speaker 1: I was blindsided. We had no idea this recession was coming,
Speaker 1: and and nor did my peers, competitors, everybody was blindsided. Uh.
Speaker 1: Now today that is pretty well impossible to do. So
Speaker 1: people know that the old curve indicators a out of eight.
Speaker 1: So uh, if we do go into a recession, it's
Speaker 1: really hard for CEO to make the case, well, I
Speaker 1: was totally surprised. We made this major investment thinking everything
Speaker 1: was going to be okay. No, you can't do that
Speaker 1: in front of a record like eight out of eight.
Speaker 1: So what happens. Uh, Businesses and consumers are more likely
Speaker 1: to engage and risk management when the Yelk curve is inverted,
Speaker 1: so they take actions before a recession actually happens. And
Speaker 1: we're seeing this like small layoffs, Um, you know here
Speaker 1: and there where companies are getting ready for a slow
Speaker 1: down or basically stuff. We don't see that this happening.
Speaker 1: Companies deciding not to make major investments, delaying until there's
Speaker 1: more clarity in terms of, uh, you know what's going
Speaker 1: to happen in terms of the business cycle. So all
Speaker 1: of this, just just giving that background, what do you
Speaker 1: think our Federal Reserve could do should do over the
Speaker 1: next couple of meetings here? Yeah, So, so given that
Speaker 1: this is happening, that the deal curve is actually impacting
Speaker 1: behavior people are engaging in risk management, it actually reduces
Speaker 1: the chance that the signal, the inverted real curve is
Speaker 1: actually accurate in forecasting a recession. So the major wild
Speaker 1: card here is the FED. And the FED was late
Speaker 1: to the game with all of this talk about transitory inflation,
Speaker 1: and it didn't make any sense to so many people,
Speaker 1: including me. So they're very late to the game. And
Speaker 1: the major wild card here is whether the FIT is
Speaker 1: going to be late again. And what I mean by
Speaker 1: that is that they don't see that inflations under control.
Speaker 1: They've slowed the economy and this continue, Uh, the rate hikes.
Speaker 1: You have no reason to continue the rate hikes right now.
Speaker 1: So think the last six months inflation has been essentially zero.
Speaker 1: It's been like point three over six months, So there's
Speaker 1: no we're talking about basis points. No. Um. Indeed, I
Speaker 1: thought the last hike was unnecessary. They need to back
Speaker 1: off the backup is now, Yeah, we understand that. Cam,
Speaker 1: thanks so much for joining. Cam Harvey, Professor Finance at
Speaker 1: the Fucal School of Business at Duke University. He taught me.
Speaker 1: I learned a thing or two. I tried to you know,
Speaker 1: it's some tough stuff. He had man lots of math
Speaker 1: and I was taught they woudn't givena be math in
Speaker 1: this course. Last week out in Vegas, they had what's
Speaker 1: probably the biggest convention they have every year out there.
Speaker 1: It's got to be close to it Consumer Electronics Show.
Speaker 1: Cees like a couple hundred thousand tech geeks from literally
Speaker 1: all over the world to send upon Vegas to see
Speaker 1: all the new technology. But what it's really evolved into
Speaker 1: over the last ten fifteen years has been an auto
Speaker 1: show with some gadgets around it. UM and the auto
Speaker 1: manufacturers are really taken over because really the auto companies
Speaker 1: have become technology companies. UM. Kevin Tynan our auto analyst.
Speaker 1: He was out there with Michael Dean New Covers Autos
Speaker 1: as well. From London. There are Kevin Tynan's our senior
Speaker 1: automotive analyst and Bloomberg Intelligence. He's calling in from our
Speaker 1: beautiful Princeton campus. It's a campus down there, Matt, It's
Speaker 1: not just a building. Uh. Kevin talked to us about Vegas,
Speaker 1: the auto companies, c E S. What's your big takeaway
Speaker 1: from what Detroit is doing? Uh in the desert of
Speaker 1: Las Vegas. Yeah, it was wasn't a huge domestic manufacturer
Speaker 1: presence there, unless I would say the two biggest were Mercedes,
Speaker 1: Benz and UM the Stilantis brands, which you could argue
Speaker 1: are still still Dodge, Chrysler, UM, you know, but they
Speaker 1: they they did show a lot of international stuff, the
Speaker 1: new RAM pick up. So uh it was connected, autonomous
Speaker 1: and electric focused. But those are really the two biggest
Speaker 1: presentations or displayed that you saw there. UM similar to
Speaker 1: Detroit back in September. You know, there was about five
Speaker 1: automakers total there, and I think the markets really changed
Speaker 1: a little bit. And uh, you know that presence is
Speaker 1: down significantly. Have you driven the t RX speaking of Ram,
Speaker 1: I have, yeah, but back a while ago. Production that
Speaker 1: is thoroughly American truck. You're a truck guy, I'm a
Speaker 1: car guy. I look even if you're not a truck guy,
Speaker 1: it has horse power. Yeah. Um, Now electric vehicles will
Speaker 1: have that much and more. Really, frankly, yes, I think
Speaker 1: the I don't know about the So you still the Ford,
Speaker 1: you still measure it as horsepower, but I know that
Speaker 1: the Chevy Silverado EV has almost seven horse power and
Speaker 1: almost as much Torcas anyway, doesn't it doesn't matter. It's
Speaker 1: neither here nor there. The thing is to me today,
Speaker 1: the story Kevin Tesla cutting prices is like the first
Speaker 1: sign that the damn is breaking. Can all of these automakers,
Speaker 1: because they're all falling in sympathy with Tesla, can they
Speaker 1: hold or will they all have to start cutting prices.
Speaker 1: I don't think any of the legacy automakers are really
Speaker 1: concerned about what Tesla is doing with their pricing. I
Speaker 1: think break even UM in the key regions, certainly in
Speaker 1: North America is considerably lower. And when I say break even,
Speaker 1: I mean in terms of a total market value you know, uh,
Speaker 1: market share number. You know that that could be as
Speaker 1: low as twelve million units. Now, um, so look at
Speaker 1: the when this market was at its peak, When the
Speaker 1: US was at its peak in twenty sixteen, it was
Speaker 1: seventeen and a half million units. Uh, we're talking about
Speaker 1: maybe fourteen million for twenty three marks the difference. Right,
Speaker 1: in twenty seven, sixteen, average transaction price was thirty five
Speaker 1: thousand dollars. In December, average transaction price was forty eight five. Right,
Speaker 1: We're heading to a fifty thousand dollar uh transaction price
Speaker 1: market here. So when you look at that revenue pool,
Speaker 1: it's actually eighty two a hundred billion dollars larger now
Speaker 1: than what it was at its volume peak. So I
Speaker 1: think everybody focuses on, oh my gosh, the market smaller
Speaker 1: by three and a half million units. Here comes prices
Speaker 1: falling through the floor. And I don't think that's the case,
Speaker 1: because the revenue pool is actually bigger the better mix.
Speaker 1: But other prices following. Is Tesla cutting prices because they
Speaker 1: were simply wildly overpriced or are they cutting prices because
Speaker 1: they have a specific demand problem that's not industree wide. Well,
Speaker 1: look what they've done with capacity additions, right, they're opening factories.
Speaker 1: You know, essentially, if you rewind, you take your free
Speaker 1: capital that you got for being a trillion dollar automaker
Speaker 1: and you start opening factories or building factories all over
Speaker 1: the world, and I would argue, you don't really have
Speaker 1: the demand for that kind of capacity at this point so, um,
Speaker 1: where they would argue they were supply constraint for all
Speaker 1: this time. It looks like that is not the case anymore.
Speaker 1: Where other automakers have gone the other way, right, they've
Speaker 1: they've either converted production capacity from internal combustion to electrification
Speaker 1: or they've taken those costs out completely. Kevin, just you know,
Speaker 1: I don't know much about this business, But do I.
Speaker 1: If I'm GM and I've got a internal combustion engine
Speaker 1: factories plants somewhere, can I convert that to electric? And
Speaker 1: if so, how long does it take and what's the cost?
Speaker 1: And are they in fact doing that? Yeah? Well, Ham
Speaker 1: Trammic in Michigan is you know, was uh you know,
Speaker 1: a traditional internal combustion plant that'll supposedly be all electric. Um, yeah,
Speaker 1: so certainly possible. Look to Tesla's Freemont plant was a
Speaker 1: Toyota and General Motors joint venture, right, uh, New United Manufacturing,
Speaker 1: which Tesla probably got for less than you paid for
Speaker 1: your house and uh, you know, and becomes tense and
Speaker 1: evs rolling around all over the place. Definitely less than
Speaker 1: Paul paid for his probably a little more than I
Speaker 1: paid for my house. Hey, is there any chance that
Speaker 1: Porsche is gonna cut prices on the leven because I
Speaker 1: would like that. I think absolutely not. I think everybody
Speaker 1: you know, I was just looking at the December numbers,
Speaker 1: and you know, in the US, at least average transaction
Speaker 1: price for Mercedes Benzes up in the seventies accurate is
Speaker 1: fifty five thousand dollars, which was where Mercedes and BMW
Speaker 1: were not that long ago, you know, maybe one, yeah,
Speaker 1: exactly right. So any of that stuff that was affordable,
Speaker 1: low margin or unprofitable is just dead. You know. So
Speaker 1: if there's a finite amount of chips, where are you
Speaker 1: going to put them in your highest trim levels or
Speaker 1: your most profitable vehicles. Is there still a finite number
Speaker 1: of chips out there? Haven't We saw the chip thing? Yeah?
Speaker 1: I never thought it was a thing, but I think
Speaker 1: I always thought it was an excuse to say, like, hey,
Speaker 1: we're enriching our mix to our most profitable stuff if
Speaker 1: we could only get more of those darn chips. We know, Okay,
Speaker 1: but there's still there is still a finite amount of chips.
Speaker 1: It's the car chips are deal in short supply. PC
Speaker 1: chips were like puking them up. Um so, but Are
Speaker 1: there any carmakers that you think are at risk, who
Speaker 1: you know have raised prices too far, too fast other
Speaker 1: than the e V guys. No, No, I don't. It's Rivan,
Speaker 1: you know. I I've used the configurator and occasionally put
Speaker 1: together a nice R one. S love the look, would
Speaker 1: love to drive one. They're pretty pricey? Are they overpriced?
Speaker 1: For the lightning that Paul was in? Awesome? Awesome truck,
Speaker 1: but very expensive. You know. Um GM's hummer is like
Speaker 1: a hundred I don't know how much it is. It's
Speaker 1: like Kevin Kevin, just to reiterate, I did drive a
Speaker 1: pickup truck. There you go. Are any of those prices
Speaker 1: gonna come down? Well? Look, here's the question is which
Speaker 1: you know, what's your supply demand balance? Right? So it's
Speaker 1: in in in a vacuum. Prices are what prices are,
Speaker 1: but the the you're supply demand balance is what's going
Speaker 1: to determine that. And my argument is if you're a
Speaker 1: pure play e V builder right now, you might have
Speaker 1: a problem with that balance. If you're anybody else internal combustion,
Speaker 1: you don't have a problem with that balance. All right,
Speaker 1: All right, good stuff. I mean we can talk to
Speaker 1: Kevin all Day on this good point car stuff. Kevin Tynan,
Speaker 1: senior Automotive analyst for Bloomberg Intelligence. Uh he and uh
Speaker 1: Michael Dean in London. They are just all over the
Speaker 1: global auto space. They were out in Vegas, uh last
Speaker 1: week for the CS conference again, a lot of the
Speaker 1: auto companies out there showing off the technology platforms that
Speaker 1: they have that also sit on four wheels, so they're autos.
Speaker 1: It is banks day, so that means it is Alison
Speaker 1: Williams day. She covers all the banks for Bloomberg Intelligence.
Speaker 1: So Allison. The stocks had traded off on the news
Speaker 1: here kind of turning a little bit positive here. I
Speaker 1: don't know. I kind of was looking through some of
Speaker 1: the some of the notes and some of the some
Speaker 1: of your research and some of the reporting. I mean,
Speaker 1: the businesses cranking. Yes, they're being a little cautious going forward,
Speaker 1: but as Matt was just noting, they're pulling in huge
Speaker 1: amounts of net interest income. The income wasn't great. I
Speaker 1: know it's all relative to expectations, but the absolute number
Speaker 1: seems staggering. The numbers are good, and I think um
Speaker 1: to your point, it is the net interest income expectations um.
Speaker 1: That has investors a little bit disappointed, and you know,
Speaker 1: to some extent, management could be being conservative. Jamie Diamond said,
Speaker 1: they're not being conservative, but there's a lot of questions
Speaker 1: out there, um, and that's why, you know, the cause
Speaker 1: are being dominated by questions around what are your assumptions
Speaker 1: for deposit pricings, what are your assumptions for the economy, etcetera.
Speaker 1: Because you know, the good news that we had this
Speaker 1: year it was several fed hikes. Um. You know, now
Speaker 1: we're starting to see banks getting pressure to raise what
Speaker 1: they're paying depositors and and that's the squeeze what we're
Speaker 1: going to be getting in and it's tough to estimate.
Speaker 1: So I think the banks are trying to be conservative,
Speaker 1: are trying to get one quarter of guidance and getting
Speaker 1: boxed into a full year out. You ever play you
Speaker 1: or spades, because it seems to me like Jamie Diamond
Speaker 1: is sandbagging all the time. That guy is sandbagging. You know,
Speaker 1: there's a hurricane common, we've got to batten down the hatches.
Speaker 1: This is gonna be a horrible recession. Under promise and
Speaker 1: over delivered, right, that's more than under promise. That's like
Speaker 1: he's always setting us up for a lower bar. Is
Speaker 1: that is he doing that now? Because hasn't he walked
Speaker 1: back the hurricane comments. Well, I think I think it
Speaker 1: is um. You know, I think it's prudent for banks, right,
Speaker 1: you want them to be prudent and conservative. You don't
Speaker 1: want them to giving a pine sky estimates. I mean
Speaker 1: that was a little interesting last year, how quickly he
Speaker 1: changed his you know, quote weather forecast. I think that,
Speaker 1: you know, I think the point he was trying to
Speaker 1: make um even though we all were all focused on
Speaker 1: the weather forecast, but you know, he was making the
Speaker 1: point that look, we had we're fine, Like whatever happens,
Speaker 1: we're fine. And I think that's you know, if you
Speaker 1: look at the pretexts, pre provision profits, so what they're
Speaker 1: earning outside of those credit costs, Uh, they're well covered.
Speaker 1: And in fact, this quarter returned on tangible equity. That's
Speaker 1: that's pretty remarkable in a tough environment. They beat their
Speaker 1: return on equity target um this year. They could probably
Speaker 1: beat that next year. And and to me, that is
Speaker 1: really the area of focus versus um you know, versus
Speaker 1: cyclical pressures. But much has been said Alison about all
Speaker 1: of the bad leverage loan debt that these banks have.
Speaker 1: Paul and I talked about it all year, So if
Speaker 1: anybody was blindsided, they weren't watching Bloomberg TV or listening
Speaker 1: to Bloomberg Radio. Um, do we see that borne out
Speaker 1: in these earnings? Has anyone come out and said, man,
Speaker 1: we got crushed by all this horrible Tesla debt? Um
Speaker 1: or have they edged? Have they dealt with it? They have?
Speaker 1: I think they have dealt with it. Um. You know,
Speaker 1: there's there's likely some hit somewhere that we're not we're
Speaker 1: not seeing. Um. Just you know, banks have to report
Speaker 1: things depending on the degree of importance for their earnings, right,
Speaker 1: and so we did see them call out some things
Speaker 1: in the second quarter, in the third quarter, so you know,
Speaker 1: mostly radio silent um. This quarter, we're not hearing much
Speaker 1: of anything. Keep in mind that the credit markets in
Speaker 1: general were very good last quarters, so there were opportunities
Speaker 1: to hedge, there were opportunities to to do some things,
Speaker 1: and maybe that's how they managed down some of the risks.
Speaker 1: We did see jeffreyes um in the beginning of this week,
Speaker 1: which seems a long time ago now. Um, they did
Speaker 1: report a sort of a thirty eight million dollar you
Speaker 1: know hit in their quarter ending November, so a small hit,
Speaker 1: but in general, the business is so much smaller for
Speaker 1: the banks than it was at the time of the
Speaker 1: financial crisis. It's probably about of that size, and bags
Speaker 1: have been aggressively managing it down all year. Sorry, Twitter
Speaker 1: dead is what I meant. I mean, yeah, of course
Speaker 1: billion dollars of bad Twitter loans can write those down,
Speaker 1: and it seems like that could be a story, but
Speaker 1: we haven't seen it yet. It hasn't been all right,
Speaker 1: JP Morgan Chase chief executive officer Jamie Diamond called the
Speaker 1: firm's botched acquisition of college financial planning website Frank a
Speaker 1: quote huge mistake, a vow to share takeaways at a
Speaker 1: later date. I didn't know what that meant. I went
Speaker 1: back to read Matt Levine's Money Stuff column, which is
Speaker 1: a must read every day set and alert for that
Speaker 1: as I do, and he was basically just just fraud here.
Speaker 1: But the question I have is, you know, basically buying
Speaker 1: this company Frank was to get access to, you know,
Speaker 1: basically lists of you know, teenagers, college age kids. Is
Speaker 1: that a big issue for banks to attract some new customers? Here.
Speaker 1: I mean, I can't think how they do it. I mean,
Speaker 1: you try to get these teenagers and young adults. I
Speaker 1: think the banks are always trying to you know, get
Speaker 1: consumers as soon as they can in their in their
Speaker 1: life cycle. Uh. Some of the way that they do
Speaker 1: that sometimes is in the credit card business. UM. Definitely
Speaker 1: with the rise of fintech and digital offerings. UM, these
Speaker 1: banks that have run around a long time want to
Speaker 1: make sure that they are on top of you know,
Speaker 1: anything that knew that it's coming out there. They're the
Speaker 1: incumbents and they want to stay that way. UM. Disruption
Speaker 1: tends not to come from the incumbents. So I think
Speaker 1: that they're just you know, they're they're careful and they're watching.
Speaker 1: Jamie Diamond and has said that they want to do acquisitions,
Speaker 1: but they've done very few. They've done a lot of
Speaker 1: these small little acquisitions. UM. This one working out is
Speaker 1: is not giving them very good press. But but you know,
Speaker 1: we think that they still they still have an appetite
Speaker 1: for next year. Just all right. So for retail banking,
Speaker 1: here in our Bloomberg h Q headquarters of fifty nine,
Speaker 1: elect the Capital one to open up a new quote
Speaker 1: unquote branch and it is a beautiful space. There's a
Speaker 1: lot of space, but I would say of the space
Speaker 1: is a coffee shop with couches and maybe I can
Speaker 1: actually go up to a teller and I don't know,
Speaker 1: cash your check or something. I ang did that as well.
Speaker 1: I know, and there were no tellers. It was just
Speaker 1: a coffee shop. I didn't get it. It is it
Speaker 1: is the changing nature of branches. So you know two
Speaker 1: things on that, one of which is we know that
Speaker 1: branches have been shrinking the number of branches, and then
Speaker 1: the branches that the banks do keep are more more
Speaker 1: sales focused, right, so they don't want you necessarily, they
Speaker 1: don't want you coming in and uh cashing a check.
Speaker 1: They want you to do that on your phone. They
Speaker 1: do want you to come in and you know, think
Speaker 1: about a private banking account or wealth services and things
Speaker 1: like that. So um and and the other part of
Speaker 1: it is banks. And this was actually something that uh,
Speaker 1: Charles Schwab I think learned this lesson and taught us
Speaker 1: this lesson along time ago, which is people do want
Speaker 1: to see the name, They do want to see the branch.
Speaker 1: They want to see the name, They want to maybe
Speaker 1: have coffee there, but they want to they want something
Speaker 1: solid to know where their money is, and so it's
Speaker 1: very difficult, I think, to be all digital, and that's
Speaker 1: how they're keeping their brand down. What's interesting on another
Speaker 1: thing that I know that your banks that you cover
Speaker 1: are are dealing with at this time of year plus
Speaker 1: with the slowing economy, is layoffs and the Watsher journals
Speaker 1: out with a story right now. The Bank of New
Speaker 1: York Melon plans to cut about three of its workforce
Speaker 1: this year, or some fift jobs. We've seen it before
Speaker 1: from Goldman, SAX and what's the feeling is the banking
Speaker 1: system just just too big, too bloated in terms of
Speaker 1: head count. I think it's just it's you know, as
Speaker 1: you know at that time of year. And it is interesting,
Speaker 1: you know, Bank of New York Melon and black Rock,
Speaker 1: those are sort of a couple of announcements that we've
Speaker 1: had over the past week. We also had the Goldman news,
Speaker 1: but obviously that's that's a little broad and going into
Speaker 1: businesses outside the core. So asset managers making some cuts,
Speaker 1: investment banks, you know, a couple of percent here and
Speaker 1: there is something that we would expect. It's it's interesting
Speaker 1: that the head count has actually gone up at a
Speaker 1: couple of the banks. Again, we're gonna want to dig
Speaker 1: through and see, you know where they're adding heads because
Speaker 1: that that that sometimes it's a symbol for growth and
Speaker 1: sometimes it's it is related to acquisitions. Goldman Sachs had
Speaker 1: over five thousand jobs added this year. A lot of
Speaker 1: those were due to acquisitions. Um and now they're coming back.
Speaker 1: All right, good stuff. Alison Williams busy, busy day, covering
Speaker 1: all the research on all the conference calls, making herself
Speaker 1: available Bloomberg Television, Bloomberg Radio, Bloomberg News, sharing her analysis. Boy,
Speaker 1: after a bruising people are looking for what strategies, what actors,
Speaker 1: maybe the way to go in three and some folks
Speaker 1: talk about value investing, so we want to break that
Speaker 1: down within the roundtable this thing. Francis Oh, CEO of
Speaker 1: Craft Technologies, and Seawan O'Hara, president of pacer et F
Speaker 1: s Uh. They joined us via the phone here. Francis, Uh,
Speaker 1: thanks for joining us. Want to start with you here.
Speaker 1: Talk to us about how you guys are Craft Technologies,
Speaker 1: how you're viewing after what was for most investors, whether
Speaker 1: you're equity or fixed income, was just a brutal two. Yeah,
Speaker 1: it's totally like the twining was was a little bad
Speaker 1: market for both equity and fixed income. And I still
Speaker 1: believe the I mean the worst may be over um
Speaker 1: compared to the the literally worst point of compared all
Speaker 1: the twenty second but they still the chuge amount of
Speaker 1: uncertainty is is around the market, and especially if you
Speaker 1: talk about the equity um the strategies of what factors,
Speaker 1: maybe I'm delivering better performance this year, I still the
Speaker 1: way on the value could be better delivering against the
Speaker 1: growth strategies. For the last one year the period the
Speaker 1: value actually out performing large gaw value perspectives are performing
Speaker 1: the per same point over the large gap growth strategy. Uh,
Speaker 1: it is because of the fundamental changes while you're seeing
Speaker 1: the macro or the market of the obvious ending of
Speaker 1: the general interests of police environments for the first time
Speaker 1: over the last fifteen years. And we are still like
Speaker 1: if we like it or now we have to embrace
Speaker 1: the macro environments in the quite the time, at least
Speaker 1: in thee then it probably be either better um deposing
Speaker 1: um the interest or the eyesight into the value strategy
Speaker 1: and decision as well. Okay, Sean, what's what's your take
Speaker 1: on What's what's your outlook here? Well, thanks for having me.
Speaker 1: First off, it's great to be with you guys. We
Speaker 1: had a really a solid and our value suite. The
Speaker 1: cash cows in the US version was essentially flat for
Speaker 1: the year, which if you think about the backdrop, you know,
Speaker 1: being the broad market down nineteen and traditional value being
Speaker 1: down double digits as well or maybe high single digits,
Speaker 1: our view isn't really changing. We follow free cash flow
Speaker 1: and free cash flow yield, and free cash flow yield
Speaker 1: is just a measure of how much you pay for
Speaker 1: a company in total versus how much cash return you
Speaker 1: get on an annual basis. We think the higher that yield,
Speaker 1: or the more money for the amount you pay, is
Speaker 1: the way to identify cheap stocks in this world today.
Speaker 1: You know, the composition of the U S stock market
Speaker 1: has been changing for four decades. It's mostly based now
Speaker 1: on intangible assets, not tangible assets, and so traditional value
Speaker 1: uses price to book, but there's no real solid book
Speaker 1: value left anymore, and so free cash flow, we think,
Speaker 1: is a better way to do that, and it's shifted
Speaker 1: our portfolios last year away from tech and consumer discretionary
Speaker 1: and into energy and into healthcare, um and materials are
Speaker 1: picked up the inflation trade. There on all sides, we're
Speaker 1: entering the same exact way. We're overweight energy, we're overwright materials,
Speaker 1: and we're overweight healthcare. We have started to move a
Speaker 1: little bit higher on tech, but but on names that
Speaker 1: you know, like intell and things like that, not on
Speaker 1: the big sort of mammoth tech names. I'm hoping that
Speaker 1: they get, you know, cheap enough, you know, as this
Speaker 1: market sort of settles down, that we get a chance
Speaker 1: to include some of them in the portfolios. But in
Speaker 1: this environment, not much is changing, so you have still
Speaker 1: have to be careful. The fet is still committed to
Speaker 1: raising rates. Inflation is still a problem, a little less
Speaker 1: of a problem today, and so whenever you have those
Speaker 1: two things going on, the overall market pee has to shrink.
Speaker 1: It's been shrinking for a year now, there's still potentially
Speaker 1: some room to shrink. And so using this free cash
Speaker 1: one free cash flow yield screen allows you to buy
Speaker 1: companies at single digit pees that actually earn more than
Speaker 1: the broad market in terms of earnings, grow pay competitive dividends,
Speaker 1: and so that's a place where we think investors would
Speaker 1: be better served than buying the broad market going into
Speaker 1: and maybe even beyond. Hey, for instance, I know in
Speaker 1: your e t F it's the craft AI enhanced us
Speaker 1: next value of the cibols n v Q in January
Speaker 1: and the rebalance you added financials at a consumer discretionary
Speaker 1: and remove the allocation to energy. It gives a sense
Speaker 1: of kind of what you're thinking they're in January. Yeah,
Speaker 1: um so um the I literally loved to um. The
Speaker 1: was echoing the uh lot to show said about the
Speaker 1: intens of lessens um in terms of the how to
Speaker 1: evaluate the company's intrinsic value. UM the conventional the value
Speaker 1: approaching only like the productift ratios, It only not only
Speaker 1: is mustly capturing the the tangiblest set which is able
Speaker 1: to easily able to be taken out the information from
Speaker 1: the book um the But as the our the daily
Speaker 1: life is changing and the corporativity changing, how the people
Speaker 1: are seeing the company's valuation, the metrics are changing right now.
Speaker 1: The much bigger part of the company's valuation is coming
Speaker 1: from intangible asset and we are using the artificial intelligence
Speaker 1: to try to tackle down to evaluate the better estimation
Speaker 1: of the corporates UH the intrinsing value, utilizing the maxive
Speaker 1: amount of the big data at the same time trying
Speaker 1: to focus on the company's I P and the brand loyalty, etcetera. UM,
Speaker 1: which can be applied to the most of tech companion utics.
Speaker 1: But anyway, the our model is we do the balancing
Speaker 1: on monthly basis. We do take people's tangible and intangible
Speaker 1: asset into the core metrics of our The AM models
Speaker 1: of this is making process. But in this month, by
Speaker 1: processing the macro data and the fundamentally the price data,
Speaker 1: the R A M will make some bold move UM.
Speaker 1: The one of the UM, the the core contributor contributing
Speaker 1: sector of our m v q et of Lasia was
Speaker 1: the energy. But this month, after the re balancing, our
Speaker 1: modal is of pretty much of the UH doing the
Speaker 1: profit taking previous. But at the same time we started
Speaker 1: to increase substantially into the financial sector, especially into regional
Speaker 1: banking UM under the environment of the higher interest rate regime.
Speaker 1: So and so sean on it on, you guys do
Speaker 1: something a little bit different energy at the December rebounds,
Speaker 1: you increase your energy allocation. Why because the free cash
Speaker 1: flow and the energy sector is continuing to grow. Like
Speaker 1: you know, if you look at Chevron as an example,
Speaker 1: Chevron's free cash flow and earnings are still grow going
Speaker 1: up faster than their stock price. Um so we had
Speaker 1: a very nice performance in our energy sector last year.
Speaker 1: We made a lot of money. But we continue to
Speaker 1: make a lot of money in this energy sector because
Speaker 1: in spite of the price of oil, the amount of
Speaker 1: free cashualties energy companies are generating because of the reduction
Speaker 1: in capital expenditure, it's not poking holes in the ground anymore,
Speaker 1: kind of randomly, that money all flows to the bottom line.
Speaker 1: And so until that formula changes for us, until their
Speaker 1: earnings in their free cash flow go up slower than
Speaker 1: their stock price, or until their stock price catches up
Speaker 1: to that free cash flow and earnings growth, will probably
Speaker 1: remain overweight energy. We're also overweight healthcare, and we're overweight
Speaker 1: healthcare again because they're generating a lot of free cash flow.
Speaker 1: But healthcare as a sector is a pretty nice defensive
Speaker 1: play because it's one of the only sectors the last
Speaker 1: ten years where their earnings and free cash flow went
Speaker 1: up faster than their overall stock prices and earnings the
Speaker 1: last decade or so went up about a hundred and
Speaker 1: sixty seven on healthcare, and the stock prices only went
Speaker 1: up about a dent, whereas if you look at tech,
Speaker 1: the earnings went up a d eighty five percent, but
Speaker 1: the stock prices went up to fifty. So in an
Speaker 1: environment where we're not sure about the economy and we're
Speaker 1: still going to have an aggressive FED and inflation is
Speaker 1: still going to be a problem, it's it may be
Speaker 1: a better place to be from a defensive perspective to
Speaker 1: own stocks and sectors who have not outpaced their free
Speaker 1: cash flow growth and have not outpaced their earnings growth.
Speaker 1: And that's essentially what the col Z t F C
Speaker 1: O w Z does on a quarterly basis. And Sean,
Speaker 1: you know, I noticed in your holdings Meta is one
Speaker 1: of your top ten holdings and I'll love to get
Speaker 1: your call there. But why there's so much noise around
Speaker 1: that name? Do you guys try to tune out that
Speaker 1: noise and kind of just focus on the free cash
Speaker 1: flow that that's it? I mean, you know, like, um,
Speaker 1: you know, am I I'm hoping the whole you know,
Speaker 1: mega tech sector actually comes to us like Meta did,
Speaker 1: because like you know, they're high quality names. I mean
Speaker 1: Mega generates huge me Meta not Megameta generates a huge
Speaker 1: amount of free cash flow. So that's why it's screened in.
Speaker 1: We don't even look at you know what the company does.
Speaker 1: If it's in the RUSSO one thousand and it's not
Speaker 1: a financial and it's profitable, it has a chance of
Speaker 1: screening into our hundred stock portfolio based on that free
Speaker 1: cash flow yield. And that's how the metal wound up
Speaker 1: in the portfolio. And you know what's interesting is that,
Speaker 1: you know, this is a strategy that tends to trade
Speaker 1: at a lower p to the market, But whenever we
Speaker 1: get to this bottom of the market, typically we wind
Speaker 1: up picking up even more high quality names that grow
Speaker 1: faster than their peers, and so we tend to bounce
Speaker 1: better off these bottoms because of the selection process by
Speaker 1: using free cash flow and free cash flow yield. All right,
Speaker 1: good stuff, guys talking value investing on the E t
Speaker 1: F front Shawn O'Hara, president of Pacer E t F
Speaker 1: and Francis oh CEO of Craft Technologies. But we've all
Speaker 1: been talking about inflation, inflation, inflation, and you step back
Speaker 1: and say, oh, there should be an e t F
Speaker 1: for that and guess what there is and our next
Speaker 1: guest has it. David Schasler, portfolio manager and head of
Speaker 1: Quantitative Investment Solutions at Van Eck. He joins us here
Speaker 1: in a Bloomberg Interactive Brokers studio. David talked to us
Speaker 1: about your e t F that kind of tracks this
Speaker 1: inflation thing lane with are A a X. We created
Speaker 1: that e t F based on the view that we
Speaker 1: were going to eventually have a period of high inflation.
Speaker 1: So we went back, we went we were talking about
Speaker 1: inflation before inflation was cool, when inflation was one point
Speaker 1: four percent, with the extreme montary debasement. We were saying that, listen,
Speaker 1: we think inflation is gonna gonna come, and we think
Speaker 1: it's gonna be out of control. Um that happened. We
Speaker 1: think now inflation is likely to fall from here, but
Speaker 1: we think it's going to stay elevated for a long
Speaker 1: period of time. Are we break with consensus and the
Speaker 1: sense that once inflation materializes at the levels that has now,
Speaker 1: it typically sticks around for a very very long period
Speaker 1: of time. The idea that it goes to two percent
Speaker 1: tomorrow not very likely based off historical standards. So think
Speaker 1: about buying assets that can benefit from that regime. Commodities
Speaker 1: benefit from supply demand and balances. We believe that we're
Speaker 1: likely in the early stages of an extended commodity supercycle.
Speaker 1: Commodities run an extended periods of time, so I think
Speaker 1: twenty years cycles. We think we're in the early stages
Speaker 1: of that. So we have significant exposure up to around
Speaker 1: fifty what we call resource assets. So about in commodity futures.
Speaker 1: The rest of it in resource equities. These are companies
Speaker 1: that benefit from higher commodity prices. Think of exploration, production companies,
Speaker 1: companies that benefit from extracting, sourcing, distributing commodities. Right, that's
Speaker 1: about half of the fund. Let's talk about the other
Speaker 1: half financial assets gold, bullion, gold equities. Gold equities are
Speaker 1: obviously a more speculative play on gold, but if you
Speaker 1: find yourself in a situation where governments are debased in
Speaker 1: their currencies like mad historically, that's store value assets being gold.
Speaker 1: People got really bummed out about gold because gold hasn't
Speaker 1: performed as well as a lot of people would have hoped.
Speaker 1: But if you look back at historical cycles, gold actually
Speaker 1: performs a lot better at the later end of the cycle.
Speaker 1: Meaning that it takes a while for people to realize
Speaker 1: that they have a problem at first. When when you're
Speaker 1: faced with it with a new regime, a new a
Speaker 1: new event, your tendency is to think, well, it's gonna
Speaker 1: go away, back down how it used to be, Well
Speaker 1: what if? Right? It actually just takes a few years
Speaker 1: to change our psyche to understand we actually have a
Speaker 1: pretty significant inflation problem and history tells us it's not
Speaker 1: likely to go away. Right. We've seen gold rally from
Speaker 1: uh I think it was like sixteen hundred in November
Speaker 1: two over today. Um, what what I'm looking at racks
Speaker 1: and I see seventy four basis points expense ratio. It's
Speaker 1: pretty punchy. Um, what's your competition? Where are where's our comfortable?
Speaker 1: Who is competition? Yeah? What's your competition? You know? And
Speaker 1: what are you doing to best them? Our competition our
Speaker 1: commodity funds, straight natural resource equity funds, and people that
Speaker 1: invest in individual securities that maybe aren't commodity related, but
Speaker 1: people that believe can maintain strong profit margins. Right, Our
Speaker 1: differentiation point is really simple, own the broad based key
Speaker 1: categories and diversify and be able to maintain a constant
Speaker 1: inflation hedge throughout the cycle. So that's why we're about
Speaker 1: half resource assets financial assets, goal bling gold equities and
Speaker 1: the rest and income generating real assets. So and why
Speaker 1: owned this over PIT? Because you have a commodities fund,
Speaker 1: right The p I T is your van Eck Commodity
Speaker 1: Strategy fund. I also managed PIT, which is our actively
Speaker 1: managed commodity TF that just recently launched. So I don't
Speaker 1: think it's just launched last month. Yes, I don't think
Speaker 1: it's either or I think it's both. Commodities are great
Speaker 1: during a period of supply demand and balances. Listen, the
Speaker 1: war between Russian Ukraine took the inflation problem. We were
Speaker 1: on one trajectory. Now weren't completely different. Once you have
Speaker 1: massive commodity producers and their powerful allies at odds with
Speaker 1: each other. The structural imbalances because the underinvestment commodities are
Speaker 1: likely to live on for an extended period of time.
Speaker 1: So we're not saying don't buy one or the other.
Speaker 1: We're saying by both, RAX is a great way to
Speaker 1: buy both because when you buy it, you're getting right
Speaker 1: now around a tent allocation to PIT, which is the
Speaker 1: commodities fund. So but I mean, the narrative now is
Speaker 1: that inflation has slowed, still high, and like you said,
Speaker 1: we're gonna go to two percent tomorrow, but you know,
Speaker 1: we're freaking out about it before. We're raising seventy five
Speaker 1: bases points at a meeting. Now we're looking at and
Speaker 1: expecting the plateau at some point. So hasn't that kind
Speaker 1: of calmed down? It has, and we think inflation is
Speaker 1: going to continue to fall. And we think that this
Speaker 1: is pretty much par for the historical book in the
Speaker 1: sense of inflation runs hot and cold, peaks and troughs.
Speaker 1: If you look at the historical inflation cycles, look at
Speaker 1: the forties, look at the nine seventies, you get peaks
Speaker 1: of inflation, and then you get troughs. You could even
Speaker 1: go into disinflationary deflationary events, and then it pops back up.
Speaker 1: What we're saying is that we believe based off of
Speaker 1: history and what we're seeing today, because right now we're
Speaker 1: fighting inflation through demand destruction. That's not a long term
Speaker 1: game plan given how much debt that we have, so
Speaker 1: we don't think we can keep interest rates at these
Speaker 1: levels for an extended period of time. So we think eventually, unfortunately,
Speaker 1: not soon, but eventually we roll into recession triggered by
Speaker 1: higher interest rates. Were forced to pivot down the inflationary
Speaker 1: forces that are still there, boil back up high performing
Speaker 1: or excuse me, highly sensitive inflation fighting assets. Those that
Speaker 1: actually benefit continue to outperform. That's our basic alright. So
Speaker 1: we got racks, we got pit what else do we
Speaker 1: have a been in? We are firm believers right now
Speaker 1: and this is an exact opposite view of what we had.
Speaker 1: So so, I, for one, was particularly barished on yielding
Speaker 1: assets because super low yields and a lot of interest
Speaker 1: rates adjustments on the way that's changed. So when I
Speaker 1: sit here and I think about inflation likely peaked and
Speaker 1: continuing to fall, and I look at the yields offer
Speaker 1: in the market, I get excited. And that's why we
Speaker 1: have INC, which is the dynamic high income et F
Speaker 1: that I also manage, which invests across the board trying
Speaker 1: to find diversified high yield solutions. So think of equities
Speaker 1: that are high yielding, think of high yield bonds, think
Speaker 1: of internationally international high yield bonds. So what we're trying
Speaker 1: to do is give you a diversified allocation of yielding
Speaker 1: assets and remain remain flexible right adjust those allocations over
Speaker 1: time based off the risk and rewards in the market.
Speaker 1: And every when I say risk and rewards, we are
Speaker 1: we run everything from a quantitative tilt, meaning that observed
Speaker 1: risks in the market. So assets acting up being very
Speaker 1: very volatile, those make us nervous. Assets that are more stable,
Speaker 1: more consistent, those make us more excited. And that's basically
Speaker 1: how we BUI as our portfolios too, and from different assets.
Speaker 1: But it's still a very juicy yield. I see I
Speaker 1: m C as the ticker net indicated yield of more
Speaker 1: than eight percent. And you're saying limited risk with this
Speaker 1: e t F as much as we can we we
Speaker 1: we limit risk on all of this strategy that we
Speaker 1: offer with within our group through diversification. At the end
Speaker 1: of the day, we express views and we expressed them firmly,
Speaker 1: but at the end of the day we're always well diversified.
Speaker 1: And this has a pretty low expense ratio for the
Speaker 1: class of e t F forty three basis points. Yes,
Speaker 1: we're excited about it. We think it's super competitive. What's
Speaker 1: the next thing you guys are thinking about in terms
Speaker 1: of maybe some advantages here, break the news here. Yes,
Speaker 1: we're our Our founder Jan Vanek and started with his
Speaker 1: father always talks about our shop as a macro shop.
Speaker 1: So it's not a coincidence that high yielding assets, right, INC,
Speaker 1: commodities PIT. We just launched the inflation all case ETF,
Speaker 1: which has been out there for some time. Those are
Speaker 1: out there because we think that that's the regime. So
Speaker 1: the funds that we're working on have been focused towards that,
Speaker 1: how do we generate this high yield to generate a
Speaker 1: positive real yield and how do we benefit from real
Speaker 1: assets and expansion of commodities. So that's the stuff that
Speaker 1: we're working on. Good stuff. David Schah, portfolio managing head
Speaker 1: of Quantitative Investment Solutions at van Neck. We got racks,
Speaker 1: we got PIT, and we got INC right now, maybe
Speaker 1: some more to come looking at these markets. And he
Speaker 1: joined some real legendary I mean music and his father
Speaker 1: started really legendary shop. Good stuff, so we appreciate that.
Speaker 1: David Commen and Bloomberg Inactive Workers Studio. Thanks for listening
Speaker 1: to the Bloomberg Markets podcast. You can subscribe and listen
Speaker 1: to interviews with Apple Podcasts or whatever podcast platform you prefer.
Speaker 1: I'm Matt Miller, I'm on Twitter at Matt Miller V three.
Speaker 1: And I'm fall Sweeney. I'm on Twitter at pt Sweeney.
Speaker 1: Before the podcast, you can always catch us worldwide at
Speaker 1: Bloomberg Radio