WEBVTT - Examining the Equity Rally and Presidential Immunity 0:00:00.080 --> 0:00:07.200 Bloomberg Audio Studios, Podcasts, radio news. 0:00:11.960 --> 0:00:15.560 This is the Bloomberg Surveillance Podcast. I'm Tom Keene along 0:00:15.600 --> 0:00:18.960 with Paul Sweeney. Join us each day for insight from 0:00:18.960 --> 0:00:23.160 the best in economics, finance, investment, and international relations. You 0:00:23.160 --> 0:00:26.520 can also watch the show live on YouTube. Visit the 0:00:26.520 --> 0:00:31.280 Bloomberg Podcast channel on YouTube to see the show weekday 0:00:31.280 --> 0:00:34.320 mornings from seven to ten am Eastern from our global 0:00:34.360 --> 0:00:39.000 headquarters in New York City. Subscribe to the podcast on Apple, Spotify, 0:00:39.360 --> 0:00:42.920 or anywhere else you listen and always I'm Bloomberg Radio, 0:00:43.080 --> 0:00:47.280 the Bloomberg Terminal, and the Bloomberg Business App. A victim 0:00:47.320 --> 0:00:51.080 out of the Emory University, Julian Emmanuel joins us. Right now, 0:00:51.080 --> 0:00:52.879 what was it like at Emery in Atlanta? Did you 0:00:52.960 --> 0:00:55.480 like cut class and go out to braves Ball. 0:00:55.600 --> 0:00:57.760 Well, we certainly went to the old the day now 0:00:57.840 --> 0:01:01.160 and there were five thousand people in the stands and 0:01:01.200 --> 0:01:01.720 you could. 0:01:01.560 --> 0:01:04.000 Sit right down, You could sit right. 0:01:03.880 --> 0:01:05.200 Down next to Ted Turner, and. 0:01:06.880 --> 0:01:08.440 Yeah, wonderful to have you here. 0:01:08.520 --> 0:01:11.039 You have the honor, you have the coolest equity job 0:01:11.040 --> 0:01:14.600 on the planet to hang with Ed Hyman every day 0:01:14.880 --> 0:01:17.920 at every Core SR is your shop in Ed linking 0:01:17.920 --> 0:01:21.160 into your work in equities, are you some two percent 0:01:21.240 --> 0:01:22.560 real GDP forward? 0:01:22.760 --> 0:01:27.319 Well, look, so Ed has been on the inflation slowing 0:01:27.440 --> 0:01:32.520 more than anticipated years and he's on the eventual the 0:01:32.560 --> 0:01:36.520 economy is going to slow more than anticipated towards the 0:01:36.640 --> 0:01:39.399 end of the year and into twenty twenty five. And 0:01:39.480 --> 0:01:42.280 so you know, when you put that all together, the 0:01:42.360 --> 0:01:46.360 conclusion is pretty obvious with regard to. 0:01:47.120 --> 0:01:51.960 What okay, economics dam phenomenal GDP? Why do stocks go 0:01:52.320 --> 0:01:54.280 up if the economy's slower. 0:01:55.520 --> 0:01:59.720 So there are a lot of moving parts at this 0:01:59.800 --> 0:02:03.040 point point, and the first is that there's lots and 0:02:03.080 --> 0:02:05.840 lots of liquidity out there, and no surprise to anyone, 0:02:06.240 --> 0:02:10.120 whether it's Corporate America throwing off as you sort of reference, 0:02:10.480 --> 0:02:13.560 you know, huge amounts of free cash flow. Obviously we 0:02:13.680 --> 0:02:17.320 know where that's centered, whether it's you know, households really 0:02:17.360 --> 0:02:24.519 flush with cash still. And frankly, there's this idea that 0:02:24.639 --> 0:02:28.959 the Fed will not necessarily when and the degree to 0:02:29.000 --> 0:02:31.720 which they're going to cut although we certainly heard this 0:02:31.800 --> 0:02:34.880 morning that the story get reiterated, but that they're actually 0:02:34.960 --> 0:02:38.120 going to do the right thing. So if inflation stays 0:02:38.160 --> 0:02:40.840 sticky for a number of more months. They'll be patient. 0:02:41.240 --> 0:02:43.960 If the economy starts to turn down, they will be 0:02:44.080 --> 0:02:48.160 less patient. Mistakes will not be made. Roll that all 0:02:48.240 --> 0:02:53.720 into the enthusiasm around AI and the potential for what 0:02:53.840 --> 0:02:59.160 we've seen as high multiple regimes can stay elevated, and 0:02:59.560 --> 0:03:01.600 you have a market that continues to rally. 0:03:01.680 --> 0:03:04.200 Paul, you got to Lisa does such a good job 0:03:04.240 --> 0:03:06.920 with that. You know, data check the Bloomberg Business Flash 0:03:07.360 --> 0:03:11.200 Tesla two oh nine, make it two ten is up 0:03:11.360 --> 0:03:12.800 nine dollars to nineteen. 0:03:12.840 --> 0:03:13.240 There you go. 0:03:13.400 --> 0:03:16.000 Okay, very good friend's tesla Lisa. 0:03:16.240 --> 0:03:19.280 Here's some nice round numbers for you, Tom, mister Manuel 0:03:19.360 --> 0:03:21.160 here he raised his year end twenty four s and 0:03:21.200 --> 0:03:24.680 P five hundred price target to six thousand from forty 0:03:24.960 --> 0:03:28.880 seven fifty and maybe saying seven thousand by year end 0:03:28.919 --> 0:03:31.680 twenty twenty five. Those are numbers you can sink your 0:03:31.720 --> 0:03:33.320 teeth into. What's driving that. 0:03:33.280 --> 0:03:38.360 At So so, really, what this was is some introspection 0:03:38.840 --> 0:03:43.400 on our parts, because it's very difficult to sort of 0:03:43.840 --> 0:03:48.680 set aside the valuation discipline because when you look at 0:03:48.720 --> 0:03:53.040 the long sweep of history, you know, buying low and 0:03:53.480 --> 0:03:57.480 you know, perhaps trimming high has been a pretty robust 0:03:57.520 --> 0:04:01.720 strategy to complement buy and hold. But what we found, 0:04:01.920 --> 0:04:06.120 and we have been proponents of AI underpinning the broader 0:04:06.160 --> 0:04:08.680 equity market for well over a year, I think we 0:04:08.680 --> 0:04:11.240 were pretty early to that party. We think it's still 0:04:11.480 --> 0:04:16.520 very early on in this theme is that these high 0:04:16.640 --> 0:04:22.440 valuation regimes can persist, and valuation alone is not a 0:04:22.480 --> 0:04:23.680 reason to sell stocks. 0:04:23.880 --> 0:04:24.800 And when we look at. 0:04:24.760 --> 0:04:29.920 The barbells right, the probability of recession the economy deteriorating, 0:04:30.040 --> 0:04:33.960 you know, materially in the near term, we don't see it. 0:04:34.360 --> 0:04:37.840 And then the probability of a bubble inflating, we certainly 0:04:37.880 --> 0:04:38.440 don't see. 0:04:38.880 --> 0:04:40.600 At this point. We're a long way from that. 0:04:41.120 --> 0:04:44.000 How much of those of that significant I'm talking to 0:04:44.040 --> 0:04:46.960 twenty five percent increase in your twenty four price target. 0:04:47.240 --> 0:04:48.680 You don't see the ell on the street today. You 0:04:48.680 --> 0:04:51.600 see other banks raising at bout two hundred, you know, 0:04:51.680 --> 0:04:54.560 just slightly three or four or five percent. How much 0:04:54.600 --> 0:04:57.360 of that was earnings? How much of that was expectation 0:04:57.440 --> 0:04:59.880 of FED cutting, what was kind of the driver's. 0:05:00.000 --> 0:05:02.400 He was really a mix of all of it. Okay, again, 0:05:02.440 --> 0:05:05.320 I go back to what I said earlier. Our confidence 0:05:05.520 --> 0:05:08.880 is whatever the right thing to do the FED is 0:05:09.120 --> 0:05:10.600 likely going to do the right thing. 0:05:10.640 --> 0:05:12.560 And that explains why we. 0:05:12.480 --> 0:05:14.919 Started the year at six and a half cuts priced 0:05:14.960 --> 0:05:17.760 in and came down to here where it basically we're 0:05:17.760 --> 0:05:21.080 at one and a half and stocks have not faltered 0:05:21.160 --> 0:05:26.960 materially during that time. We increased our earnings with the 0:05:27.040 --> 0:05:30.640 idea that even if a downturn hits later this year 0:05:30.720 --> 0:05:33.560 or early next, you still are in a robust cycle. 0:05:34.080 --> 0:05:36.880 So to your people in everqure Isi, sector by sector, 0:05:36.920 --> 0:05:42.080 you're the over strategists and that when you look at 0:05:42.279 --> 0:05:46.680 the big tech companies, is the risk of revenue shortfall? 0:05:47.000 --> 0:05:49.600 Is that really the sweat. 0:05:49.240 --> 0:05:53.279 Out there about the magnificent seven maintaining the excellence of 0:05:53.360 --> 0:05:54.360 thirty multiples? 0:05:54.400 --> 0:05:58.240 Well, so you hit the nail on the head on 0:05:58.279 --> 0:06:02.359 this tom. If we've been having this conversation four or 0:06:02.360 --> 0:06:06.360 five years ago, the idea that a large kept technology 0:06:06.440 --> 0:06:12.400 stock could persistently trade at thirty times would have been foolish, foolish. 0:06:12.480 --> 0:06:15.159 Why is it now not? This is critical. 0:06:15.760 --> 0:06:20.520 Essentially because there's a view and we share it that 0:06:20.680 --> 0:06:25.040 the way the economy is developing, the way technology is developing, 0:06:25.440 --> 0:06:29.320 is that you're going to have you know, revenue underpinnings. 0:06:29.320 --> 0:06:31.400 In the other part of that is, if you think 0:06:31.440 --> 0:06:34.880 about it right, you go back to late twenty twenty 0:06:34.920 --> 0:06:40.440 two when several of the Magnificent Seven basically disclosed that yes, 0:06:40.800 --> 0:06:45.120 they could in fact cut costs because they were stockpiling labor. 0:06:45.520 --> 0:06:49.320 The fact is is that corporate America has been getting 0:06:49.400 --> 0:06:53.200 ready for a recession that fortunately hasn't arrived yet for 0:06:54.000 --> 0:06:55.880 a year and a half, almost two years. 0:06:55.920 --> 0:06:57.839 So, Julian, I mean, Tom and I are still trying 0:06:57.839 --> 0:06:59.080 to wrap our heads around AI. 0:06:59.440 --> 0:07:00.159 What is it? 0:07:01.279 --> 0:07:03.040 I guess we start there, what is it? But anyway, 0:07:03.320 --> 0:07:04.919 how do we get exposure to it? Do we just 0:07:04.960 --> 0:07:08.920 buy Nvidia? How are you talking to your clients about AI? 0:07:08.960 --> 0:07:10.960 And maybe how to get exposure to it over time? 0:07:11.080 --> 0:07:15.480 So what we think is important because again, look, it's 0:07:15.760 --> 0:07:19.840 very difficult to buy stocks that have moved several hundred 0:07:19.920 --> 0:07:24.080 percent psychologically if you don't have a core position. You know, 0:07:24.240 --> 0:07:26.560 we think you should have a core position in those 0:07:26.680 --> 0:07:29.040 kinds of stocks. But when you look at it right, 0:07:29.360 --> 0:07:35.400 there is a number of companies that are proactively building 0:07:35.520 --> 0:07:39.520 competitive motes, both on the cost reduction side, which we 0:07:39.560 --> 0:07:42.320 all know that that will be part of the story 0:07:43.000 --> 0:07:49.960 as jobs transform, but also importantly on the customer interaction, retention, 0:07:50.520 --> 0:07:54.600 loyalty side. And these types of companies are very upfront 0:07:54.640 --> 0:07:58.680 about talking about it in they're quarterly earnings calls. And 0:07:58.800 --> 0:08:02.360 that's probably the most important thing that we as investors 0:08:02.400 --> 0:08:05.360 can do is listen to what they say about AI 0:08:05.680 --> 0:08:08.440 on the earnings calls. Those are the companies that you 0:08:08.520 --> 0:08:10.000 want to be thinking about. 0:08:10.000 --> 0:08:10.720 What's so important? 0:08:10.760 --> 0:08:12.680 You're Julian and this goes back to the great work 0:08:12.720 --> 0:08:14.800 of Ed your Denny and I'm calling this bull market 0:08:14.840 --> 0:08:17.200 that your Denny at Kompora Bullmarket. 0:08:17.400 --> 0:08:19.320 Edheimen will know who both those people are. 0:08:19.680 --> 0:08:22.240 But the answer is this goes back to the optimism 0:08:22.280 --> 0:08:27.040 to participate in the market. Allah, what CJ. Lawrence did 0:08:27.120 --> 0:08:30.880 years ago and what you do it? Evercore and Evercore 0:08:31.000 --> 0:08:35.280 Isi is well, I want you to speak to people 0:08:36.000 --> 0:08:39.079 under the siren call. Barry Ridolts has been on fire 0:08:39.200 --> 0:08:44.120 on this, the siren call of trying to time the market. 0:08:45.000 --> 0:08:48.000 Please you want to add on, you gotta play if 0:08:48.000 --> 0:08:48.680 you want to win. 0:08:49.360 --> 0:08:53.240 My ninety three year old father in law recently departed, 0:08:53.360 --> 0:08:58.040 lived a great life basically was in stocks until the 0:08:58.400 --> 0:09:02.120 end as much is in stocks as he could possibly 0:09:02.440 --> 0:09:05.080 because he believed that when you look at it and 0:09:05.120 --> 0:09:09.400 the data supports this, through economic cycles, through you know, 0:09:09.800 --> 0:09:15.480 political turmoil, through geopolitics, wars, all of these things that 0:09:15.640 --> 0:09:21.440 stocks are the long term income producing asset, and frankly, 0:09:21.480 --> 0:09:23.640 when you think about the things that we're trying to 0:09:23.679 --> 0:09:25.800 hedge inflation. 0:09:27.200 --> 0:09:28.920 Again some of these uncertainties. 0:09:29.120 --> 0:09:31.440 The other fact is is that if you look at it, 0:09:31.840 --> 0:09:34.920 the price chart of the S and P five hundred 0:09:35.480 --> 0:09:38.360 mirrors the growth in earnings. And if you're going to 0:09:38.440 --> 0:09:42.480 get long term earnings growth, which we do believe and fundamentally, 0:09:42.880 --> 0:09:44.280 you must be in stocks. 0:09:44.920 --> 0:09:46.480 Can you a year before? 0:09:46.720 --> 0:09:50.359 I would like probably quit, But I mean the surveillance 0:09:50.400 --> 0:09:53.280 casket folks, is I bet can you see me doing 0:09:53.320 --> 0:09:53.800 this show? 0:09:54.160 --> 0:09:54.319 Oh? 0:09:54.400 --> 0:10:02.719 Yes, yes, I absolutely, no questions, exactly, no problem there, 0:10:02.920 --> 0:10:04.000 one hundred. 0:10:05.120 --> 0:10:07.000 So Julian, all. 0:10:06.960 --> 0:10:10.360 Right, do I have to be I mean, tech has 0:10:10.480 --> 0:10:13.680 led this market for twenty five years? You have to 0:10:13.720 --> 0:10:15.800 be in tech, don't you? 0:10:15.800 --> 0:10:16.280 You do? 0:10:16.320 --> 0:10:19.440 You have to I mean, and it's almost like you 0:10:19.480 --> 0:10:21.240 throw out the valuation. I hate to say that, but 0:10:22.800 --> 0:10:23.800 how else do you play it? 0:10:23.840 --> 0:10:27.439 So we talked about this earlier. There will come a time. 0:10:28.400 --> 0:10:32.320 That time is not now when trimming a position in 0:10:32.360 --> 0:10:37.079 technology and communication services, which are the only two sectors 0:10:37.120 --> 0:10:39.520 out performing the S and P five hundred this year. 0:10:39.720 --> 0:10:42.480 And you would think that on balance, that would be 0:10:42.520 --> 0:10:46.440 a negative statement about the market. It is not looking 0:10:46.480 --> 0:10:47.960 out on a twelve month basis. 0:10:47.960 --> 0:10:50.400 We just got some hedge fund results and you know, 0:10:50.440 --> 0:10:53.199 they're like like Sentinel, seems like they're getting it done. 0:10:53.240 --> 0:10:55.240 And there's others as well, and you know, I mean, 0:10:55.280 --> 0:10:57.480 the Mets are playing better, soer point seven to two. 0:10:57.400 --> 0:10:59.240 Must be doing okay. 0:10:58.960 --> 0:11:03.480 And the answer, Julian is these are fee base a 0:11:03.640 --> 0:11:05.280 point two points. 0:11:04.880 --> 0:11:07.920 Two and twenty whatever the math is. I'm looking at 0:11:07.960 --> 0:11:10.520 a blended fund skewed to high tech. I'm gonna leave 0:11:10.559 --> 0:11:11.360 the name out of it. 0:11:12.080 --> 0:11:16.480 And their fee is zero point three three percent running 0:11:16.520 --> 0:11:20.720 billions of dollars. I mean, I'm sorry. The fees add up, 0:11:20.840 --> 0:11:25.480 don't they? To your equity return, particularly when dividends are reinvested. 0:11:25.679 --> 0:11:25.960 They do. 0:11:26.280 --> 0:11:30.239 Look Jack Bogel's entire career was built on that concept, 0:11:30.720 --> 0:11:34.199 Tom founding Vanguard, and fees do add up. 0:11:34.200 --> 0:11:35.960 But what I would say about. 0:11:35.640 --> 0:11:40.000 That is, again, there are times in our lives when 0:11:40.160 --> 0:11:45.680 diversifying away from stocks in a portfolio where stocks are 0:11:45.760 --> 0:11:50.520 the bedrock actually allows you to buy more stock into weakness, 0:11:50.640 --> 0:11:54.480 and frankly, a hedge fund that does well in all 0:11:54.559 --> 0:11:58.320 weathers of market. There are certainly a number of them 0:11:58.360 --> 0:11:58.800 out there. 0:11:59.400 --> 0:11:59.640 You know. 0:12:00.080 --> 0:12:03.000 That's part of a prudently built portfolio as well, and 0:12:03.120 --> 0:12:07.000 there are a number of managers that have justified decades 0:12:07.040 --> 0:12:08.400 of that kind of fee structure. 0:12:09.320 --> 0:12:11.760 What is your quantitative strategy team telling you. 0:12:12.760 --> 0:12:15.760 So interestingly enough, and if you think about it, this 0:12:15.800 --> 0:12:20.600 is going to make sense. The last week we've certainly seen, 0:12:20.679 --> 0:12:25.679 let's say politely, a good deal more political volatility, and 0:12:25.800 --> 0:12:28.120 when you think about how the second half of the 0:12:28.200 --> 0:12:32.319 year is likely to get underway, what we found is 0:12:32.800 --> 0:12:39.920 that the valuation factor buying cheaper relatively stocks amongst sectors 0:12:40.040 --> 0:12:45.000 versus being the more expensive stocks actually hasn't worked. And 0:12:45.040 --> 0:12:47.679 that's not just a large cap tech concept. This is 0:12:47.720 --> 0:12:51.600 across all sectors. Our view is that when you think 0:12:51.640 --> 0:12:55.640 about in committing more capital stocks right now, you're probably 0:12:55.679 --> 0:12:59.800 going to be more inclined to be more valuation sensitive, 0:13:00.360 --> 0:13:03.520 considering that there's more political risk out there than normal. 0:13:03.960 --> 0:13:05.880 Julian, thank you so much. This has been great. 0:13:05.920 --> 0:13:10.440 Please really really appreciated. 0:13:18.960 --> 0:13:23.079 We need no translation on the debate and the fractious 0:13:23.200 --> 0:13:27.640 constructive debate at Morgan Stanley that, among others, Stephen Roach 0:13:28.120 --> 0:13:31.880 invented it is a different house. Joining us now for 0:13:31.920 --> 0:13:36.600 this half hour. Jim carron Cio, Cross Asset Solutions, Senior Officer, 0:13:36.760 --> 0:13:38.280 argument at Morgan Stanley. 0:13:38.320 --> 0:13:39.240 What is the distinction? 0:13:39.760 --> 0:13:42.920 What is the number one point of debate at your shop? 0:13:43.800 --> 0:13:46.040 I think what it is and by the way, I 0:13:46.080 --> 0:13:49.439 think what it really is is the question of when 0:13:49.679 --> 0:13:53.240 will the unemployment rates start to rise fast enough to 0:13:53.360 --> 0:13:57.559 give the Fed confidence in order to cut interest rates? Right, 0:13:57.600 --> 0:14:00.760 Because where the debate is today is there are various 0:14:00.800 --> 0:14:02.920 forms of inflation that are out there. Right, You've got 0:14:02.920 --> 0:14:05.960 the supercore which is running too hot. You've got core CPI, 0:14:06.080 --> 0:14:08.720 which has made a lot of progress. You've got core PCE, 0:14:09.200 --> 0:14:10.959 which is kind of like in the sweet spot. And 0:14:11.400 --> 0:14:14.440 the FED would go on that. But the question, though, is, 0:14:14.559 --> 0:14:18.240 with those three data points somewhat conflicting, where does the 0:14:18.280 --> 0:14:20.360 FED have confidence to actually go. Now we think that 0:14:20.440 --> 0:14:23.760 maybe the Fed will cut interest rates, it'll start in September, 0:14:24.240 --> 0:14:28.000 but what's required for that to happen is for the 0:14:28.120 --> 0:14:30.880 unemployment rate to actually start to show some progress higher. 0:14:30.920 --> 0:14:34.880 And why that's important is because the declining trend in inflation, 0:14:35.000 --> 0:14:38.360 and it is declining, will be viewed by the FED 0:14:38.560 --> 0:14:43.960 as sustainable and anchored decline in inflation. If the unemployment 0:14:44.040 --> 0:14:47.720 rate rises, which would then put pressure downwards on wages, 0:14:48.120 --> 0:14:52.360 wage inflation slowing should create a more stable inflation environment. 0:14:52.640 --> 0:14:55.040 So it's really a question about jobs creation, and it's 0:14:55.040 --> 0:14:59.880 a question about the path and pace at which inflation falls. 0:15:00.560 --> 0:15:04.280 That's interesting because again, I think most folks we talk 0:15:04.360 --> 0:15:06.280 to just say the Fed's focused on inflation, the focus 0:15:06.360 --> 0:15:11.200 on inflation and focused, but really it's labor component of inflation, 0:15:11.320 --> 0:15:14.320 which is key here. Is there a kind of a 0:15:14.560 --> 0:15:17.320 range and number of inflation that you think the FED 0:15:17.360 --> 0:15:20.680 will kick them into saying okay, we've got some movement here. 0:15:20.760 --> 0:15:22.760 Is at four point two percent? Is a four and 0:15:22.800 --> 0:15:23.400 a half percent? 0:15:23.840 --> 0:15:26.160 Yeah, so that's the output, right, So that's like I 0:15:26.160 --> 0:15:28.600 would almost think of that as the residual, ok right, 0:15:28.680 --> 0:15:31.600 I wouldn't really think of that as as as the appsolue. 0:15:31.600 --> 0:15:33.440 I mean yes, I mean ultimately it will come down 0:15:33.480 --> 0:15:35.720 to that number, and it's easiest way to understand it. 0:15:35.760 --> 0:15:38.840 But the FED invented something called the super core for inflation, 0:15:38.920 --> 0:15:41.360 and this is corehousing X services. This is really a 0:15:41.400 --> 0:15:44.600 measure of inflation that's focused on more of the labor 0:15:44.640 --> 0:15:48.400 intensive segments of the economy. So you're barber, you know 0:15:48.440 --> 0:15:51.200 a janitor, you know somebody who's labor intensive in terms. 0:15:51.560 --> 0:15:54.360 So basically it's really a way of measuring inflation that 0:15:54.480 --> 0:15:58.360 is being contributed by wages. So you know that number 0:15:58.440 --> 0:16:00.680 right now is still running pretty high at four point 0:16:00.760 --> 0:16:03.760 eight percent, but it is but it is likely to decline. 0:16:04.120 --> 0:16:08.200 So I would say that that to me is I 0:16:08.240 --> 0:16:11.200 would I would think of that as as really the 0:16:11.240 --> 0:16:13.840 measure that the Fed's going to watch. If that starts 0:16:13.840 --> 0:16:16.520 to come down, the natural output of that, or the 0:16:16.560 --> 0:16:19.360 residual of that, will be that the unemployment rate should 0:16:19.400 --> 0:16:22.000 start to move up towards four point two four point three. 0:16:22.080 --> 0:16:24.320 So I mean, if I simplified it, yeah, I'd say that, 0:16:24.400 --> 0:16:27.200 you know, around four point three four point two, I 0:16:27.240 --> 0:16:29.360 think the FED would feel comfortable. 0:16:29.120 --> 0:16:32.760 In your process at universe, does sixty forty work or 0:16:32.840 --> 0:16:36.640 is there a sixty forty amendment to not so much 0:16:36.640 --> 0:16:39.000 a enhance return goose return. 0:16:39.320 --> 0:16:42.040 But to avoid challenges? 0:16:42.120 --> 0:16:44.480 What's the Karen sixty forty. 0:16:44.640 --> 0:16:47.080 Yeah, no, that's a great question, and it's going to 0:16:47.120 --> 0:16:49.560 be debated for a long time. But so it's not 0:16:49.560 --> 0:16:52.280 that the sixty forty doesn't work. It's just I think 0:16:52.280 --> 0:16:54.960 that the sixty forty will be suboptimal. And the reason 0:16:55.000 --> 0:16:57.880 why the sixty forty portfolio will be suboptimals we have 0:16:57.920 --> 0:16:59.880 to take a little bit of a trip through history. 0:17:00.160 --> 0:17:01.920 If you go back to nineteen eighty one to twenty 0:17:01.920 --> 0:17:03.640 twenty one, if you look at that forty year period 0:17:03.680 --> 0:17:07.359 of time, bonds did very well during that period. Thirty 0:17:07.359 --> 0:17:09.640 seven out of forty years, they made money so very stable, 0:17:09.800 --> 0:17:13.800 very good returns. Your sharp ratio or your risk adjusted 0:17:13.840 --> 0:17:17.280 return if you had a sixty forty portfolio was roughly 0:17:17.359 --> 0:17:20.439 seven percent, which is great, you know, passive investing sixty 0:17:20.520 --> 0:17:22.520 You know, sixty forty did really well for that forty 0:17:22.600 --> 0:17:25.560 year period of time. If you look from twenty twenty two, 0:17:25.720 --> 0:17:28.760 twenty three and into twenty four, what you're seeing is 0:17:28.760 --> 0:17:32.439 that bonds are becoming less stable, less reliably you know, 0:17:32.560 --> 0:17:35.480 producing good, solid returns, and that's likely. 0:17:35.240 --> 0:17:36.960 To occur into the future. 0:17:37.320 --> 0:17:39.399 So what it would suggest is that now the sixty 0:17:39.480 --> 0:17:41.920 forty might not give you passive might not give you 0:17:41.960 --> 0:17:44.919 seven percent, but it might actually only give you five, 0:17:45.560 --> 0:17:48.760 and that's a meaningful difference in types of return. So 0:17:48.920 --> 0:17:51.560 I would say that the new way of thinking about 0:17:51.600 --> 0:17:54.840 how do we use bonds to hedge our portfolio needs 0:17:54.840 --> 0:17:56.560 to be a lot more flexible. So it could be 0:17:56.600 --> 0:18:00.240 seventy thirty, it could be thirty seventy in some instances. Really, 0:18:00.240 --> 0:18:02.760 what we're trying to account for is the volatility of 0:18:02.800 --> 0:18:05.760 returns in bonds, which we think will start to follow 0:18:05.760 --> 0:18:08.560 the business cycle more than just being a forty year 0:18:09.040 --> 0:18:12.160 downward trending rates and strong performance for that period of time. 0:18:12.440 --> 0:18:14.800 So we have to account for the variability in bonds 0:18:14.840 --> 0:18:18.040 going forward to make the adjustments in terms of the 0:18:18.320 --> 0:18:20.719 allocation sixty forty. So it's not as simple as a 0:18:20.800 --> 0:18:23.240 passive I would say that. And you might even want 0:18:23.240 --> 0:18:25.600 to add alternative investments into the equation too. 0:18:26.400 --> 0:18:27.200 Well, I mean, I'm. 0:18:27.080 --> 0:18:29.520 Telling you because what it does is it creates a 0:18:29.560 --> 0:18:32.959 diversification element that is attracting returns. 0:18:33.119 --> 0:18:36.479 Jim Carreen, Cross Assets Solution, CIO, Morgan Stanley Investment Management. 0:18:36.520 --> 0:18:39.199 Hey Jim, At least in Tom, they've both been in 0:18:39.200 --> 0:18:41.840 the Magnificent seven stocks they're just laughing all the way 0:18:41.880 --> 0:18:44.480 to the bank. I unfortunately have not What do you 0:18:44.560 --> 0:18:49.359 tell equity investors to do? Who is it okay just 0:18:49.400 --> 0:18:52.159 to belong these Magnificent seven or do we actually have 0:18:52.200 --> 0:18:52.959 to do some homework? 0:18:53.080 --> 0:18:55.200 Well, you know, Look, I mean the way I think 0:18:55.240 --> 0:18:58.280 about this is follow the money. The Magnificent seven or 0:18:58.320 --> 0:19:00.400 the Magnificent ten or whatever it is. 0:19:01.200 --> 0:19:03.160 They're doing well because. 0:19:02.840 --> 0:19:06.480 Their earnings and their earnings revisions have been exceptionally strong. 0:19:06.960 --> 0:19:09.119 If you look at the S and P four ninety, 0:19:09.200 --> 0:19:11.520 so if you x out those seven or ten stocks, 0:19:12.000 --> 0:19:16.000 if you look at the earnings revisions in that category, 0:19:16.040 --> 0:19:17.399 it's been pretty close to flat. 0:19:17.440 --> 0:19:18.600 It's been relatively dismal. 0:19:18.640 --> 0:19:21.960 So so it's not that the broadening or the broader 0:19:22.000 --> 0:19:25.840 sectors of the market are these great opportunities that are 0:19:25.880 --> 0:19:28.520 just minting cash and earnings are going up. I think 0:19:28.600 --> 0:19:30.919 the market's rightfully so looking at it. So if you 0:19:30.920 --> 0:19:33.520 look at the if you look at the equity market, 0:19:33.560 --> 0:19:37.280 the SMP five hundred x the Magnificent seven, it's up 0:19:37.320 --> 0:19:40.040 about seven percent year to date, which is pretty good. 0:19:40.080 --> 0:19:41.080 I mean, that's not bad. 0:19:41.640 --> 0:19:44.520 If you look at the SP five hundred total with 0:19:44.640 --> 0:19:46.840 the magnificent seven in it. Then it's up, you know, 0:19:46.920 --> 0:19:48.400 closer to fifteen percent. 0:19:48.160 --> 0:19:51.680 Year to date. So you know, it's really a question 0:19:51.720 --> 0:19:52.560 of following the money. 0:19:52.560 --> 0:19:54.639 So I would have to say that the way that 0:19:54.680 --> 0:19:56.880 I would look at this is that you still want 0:19:56.880 --> 0:20:00.080 to look at the cap weighted SMP five hundred. I 0:20:00.160 --> 0:20:03.439 want to incorporate that overweight to those, you know, to 0:20:03.520 --> 0:20:06.920 those bigger stocks, because that's really what's capturing the earnings, 0:20:06.920 --> 0:20:09.640 that's what's driving the markets mostly right now, I think 0:20:09.680 --> 0:20:12.239 it's too early to say that we're going to have 0:20:12.280 --> 0:20:16.080 this cyclical recovery, that that everything's going to start to 0:20:16.080 --> 0:20:18.320 move higher, and therefore you can broaden out to the 0:20:18.320 --> 0:20:21.240 other four ninety with a lot of confidence. That's really 0:20:21.280 --> 0:20:24.520 not been the case for the last year plus, and 0:20:24.720 --> 0:20:27.760 I don't think that that's changing anytime soon because a 0:20:27.800 --> 0:20:31.960 big broad cyclical acceleration and recovery is not in our 0:20:32.080 --> 0:20:33.160 it's not our base case. 0:20:33.640 --> 0:20:36.520 How about evaluation here, I have earnings kept up with 0:20:36.600 --> 0:20:39.399 this move we've seen off that I guess October twenty 0:20:39.440 --> 0:20:40.960 three kind of level here. 0:20:41.119 --> 0:20:43.240 Yeah, I mean, look, I mean, you know, you mentioned 0:20:43.280 --> 0:20:45.919 in Vidia earlier, you know, and Jess, but but in 0:20:46.000 --> 0:20:48.040 Vidia is a thirty pe stock. You know, it's not 0:20:48.160 --> 0:20:50.360 like I mean, yeah, is that high. Sure it's high, 0:20:50.440 --> 0:20:53.119 but it's not a but it's not something that is 0:20:53.240 --> 0:20:56.480 astronomically high. A lot of the companies that are doing 0:20:56.560 --> 0:20:59.560 well are actually making money. So people make parallels back 0:20:59.600 --> 0:21:02.439 to the year twenty nineteen ninety nine, the dot com bubble. 0:21:02.880 --> 0:21:06.520 Back then, these companies weren't making money. Today, these big 0:21:06.520 --> 0:21:09.120 companies that are doing well are actually making a lot 0:21:09.119 --> 0:21:09.480 of money. 0:21:09.440 --> 0:21:11.480 Their ears are there to justify. So it's a big difference. 0:21:11.480 --> 0:21:13.119 Oh, I want to talk here about free cash. So 0:21:13.160 --> 0:21:15.440 I've been reading Michael Mobis and I've been going back 0:21:15.560 --> 0:21:19.000 the credit spec he's now Morgan Stanley. Do you guys 0:21:19.040 --> 0:21:23.119 talk Karen and Mobison talking talk about NERD Patrol. 0:21:23.880 --> 0:21:24.760 I invest with them. 0:21:24.800 --> 0:21:26.359