Speaker 1: Brought you by Bank of America, Mary Lynch. Investing in
Speaker 1: local communities, economies and a sustainable future. That's the power
Speaker 1: of global connections, Mary Lynch, Pierce Fenner and Smith Incorporated
Speaker 1: Member s I p C. Welcome to the Bloomberg Surveillance Podcast.
Speaker 1: I'm Tom Keene with David Gura. Daily we bring you
Speaker 1: insight from the best in economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and
Speaker 1: of course on the Bloomberg. Dean Current's with us. He's
Speaker 1: the CEO of Macro Risk Advisors. He joins us on
Speaker 1: the Spectrum Enterprise phone line, Spectrum Entro price nationwide fiber
Speaker 1: based network and I infrastructure solutions, and deemed great to
Speaker 1: have you with us. Yes, good morning, Thank you. We'll
Speaker 1: get to Volatilion a moment, but let me start with
Speaker 1: the speech. I know that you, like so many others,
Speaker 1: were lending an ear to that speech, and I wonderstand
Speaker 1: how you interpreted how you, as an investor, interpreted what
Speaker 1: the President had to say last Friday. Well, it's a
Speaker 1: continuation of some of the more nationalist America First policies
Speaker 1: that he's espoused and the essentially that he believes is
Speaker 1: the mandate that got him into office. Um, what these
Speaker 1: policies mean for markets? Uh, clearly you can paint a
Speaker 1: picture of a negative outcome from markets. Of course, so far,
Speaker 1: there's really been very little materialization of risk. Um. And uh,
Speaker 1: you know, these these political type sources of volatility have
Speaker 1: been increasing with with bregnant last year, the Trump upset
Speaker 1: and a very heavy calendar of elections in Europe. It's
Speaker 1: very challenging to know how and when some of these
Speaker 1: risks will make their way into markets, and so investors
Speaker 1: are you know, it could be in for a bumpy
Speaker 1: ride this year. It's gonna be Uh, it's going to
Speaker 1: be challenging. When you look at sources of volatilities, you say,
Speaker 1: are the political type ones the largest? They looming, the largest,
Speaker 1: taking up the most space. They are there in this category.
Speaker 1: I like to call it non market market risks. In
Speaker 1: other words, it's it's not the typical kind of risk
Speaker 1: that that the investors are comfortable with discounting. Um, it's there. Uh.
Speaker 1: Sometimes things happen for reasons that even in advance, you
Speaker 1: believe that the economic outcome won't be a good one, UH.
Speaker 1: For for Brexit, folks argued very strenuously and I would UH,
Speaker 1: I would contend rightly that long term this was not
Speaker 1: the right outcome for the UK, for the EU, and
Speaker 1: yet the citizenry was enraged enough to, you know, to
Speaker 1: vote for the exit. And I think the same as
Speaker 1: is true UH for Trump. For investors and at Macro
Speaker 1: Risk Advisors, we help investors hedge very often. And when
Speaker 1: you're contemplating hedging, of course, you're trying to weigh the
Speaker 1: risks in the market versus the cost of the insurance
Speaker 1: that you're you're buying. And in the last six weeks
Speaker 1: or so, even though we've been consumed by tweets and
Speaker 1: uncertainty on the geopolitical UH landscape, the risks in the
Speaker 1: market that the day to day fluctuations have been quite minimal.
Speaker 1: And so for the folks that did buy hedges, that
Speaker 1: did expand option premium, UH, they've certainly not been rewarded.
Speaker 1: And what that's done is it's continued to weigh on
Speaker 1: the VIX index of Folatility levels continue to decline. When
Speaker 1: when you're looking at this particular type of risk, how
Speaker 1: challenging is it? What what what investor is saying, so, what's
Speaker 1: their biggest concern they're bringing to you when they're when
Speaker 1: they're wondering about how to navigate this kind of non
Speaker 1: market market risk as you call it. Yeah, I think, um,
Speaker 1: it's so unpredictable. He's unpredictable. Um, what version of Trump
Speaker 1: policies our market is going to get? And Uh, in
Speaker 1: the last six eight weeks we've seen uh refleationary enthusiasm
Speaker 1: almost where where the view of Trump is a tax cutter,
Speaker 1: as a source of deregulation, as someone who can rekindle
Speaker 1: animal animal spirits that may have been suppressed during the
Speaker 1: post crisis time frame. So that's the good side. And
Speaker 1: of course markets have priced in quite a bit of
Speaker 1: that already, and the investors I speak to are grappling
Speaker 1: with the question of is it too much too soon?
Speaker 1: Will some of the policies ultimately emerged in a protectionist fashion,
Speaker 1: a trade war with China? These are bigger picture issues
Speaker 1: that you know, certainly UH confound market participants. And then
Speaker 1: the other thing I would just add, I think this
Speaker 1: is really really important is the interaction between fiscal and
Speaker 1: monetary policy has become considerably more complicated. Trump makes Janet
Speaker 1: Yellen's job much harder than it already was. And for
Speaker 1: a long time, the central banks were the only game
Speaker 1: in town. Uh, there's an exhaustion I think among investors
Speaker 1: globally with a force of monetary policy. But already Yelling
Speaker 1: and her counterparts at the FED are trying to articulate
Speaker 1: that they need to anticipate potential inflation through some of
Speaker 1: the Trump policy and briss when JP Morgan said they
Speaker 1: were decidedly focused on the path to some form of
Speaker 1: fiscal stimulus. Good morning everyone, Bloomberg Surveillance from New York.
Speaker 1: David gurn Tom Keen in the same studio. It's been
Speaker 1: New York. It's been a while, like weeks months, den't
Speaker 1: current it with us? With a math of correlation and
Speaker 1: volatility with Macro Risk Advisor's Dean. One of my great
Speaker 1: themes in Davos was the uncertainty within, or the uncertainty
Speaker 1: upon or the uncertainty about the uncertainty. It's a little
Speaker 1: bit like the volatility of the volatility. Tell us about
Speaker 1: that relationship. What are pros trying to do when they
Speaker 1: trade the volvo? Right? This is a nuanced point, but
Speaker 1: I think it's actually quite important. UM. We we spend
Speaker 1: our time UH studying not just volatility, but the correlation
Speaker 1: profile of sectors of stocks in UM assets like the
Speaker 1: SMP five hundred and an important point is that the
Speaker 1: Trump administration has created a huge sector divergence. At least
Speaker 1: in the first eight weeks or so, you had your
Speaker 1: reflationary type sectors things like the XLF, which have skyrocketed
Speaker 1: post the post the wind along with interest rates. And
Speaker 1: then you have the other side of it, which is
Speaker 1: the more disinflation defensive UH sectors, things like consumer staples,
Speaker 1: things like UH utilities, and you know the the I
Speaker 1: R and d X and so again, the the underneath
Speaker 1: the hood of this very low VIX is a lot
Speaker 1: of sector action and UH. And I think that UM
Speaker 1: and this is where your quote vol of vol question
Speaker 1: comes in. Even though the VIX is at twelve, it's
Speaker 1: certainly not going to spike down to six. But I
Speaker 1: do think that investors are under appreciating the potential for
Speaker 1: a more correlated move in stock. And then math guy,
Speaker 1: I want you to take it over to uncertainty where
Speaker 1: you can't create the probability distribution, you can't do the mathematics.
Speaker 1: If we talk about Trump uncertainty. Whatever our politics is,
Speaker 1: is there uncertainty upon uncertainty from where you set. I
Speaker 1: really believe that's the key thing, and that's what's changed
Speaker 1: in the last eight weeks. And again that's what I
Speaker 1: would argue the low VIX does not properly account for.
Speaker 1: It's a little backward looking the vix. It's looking at
Speaker 1: realize volatility and pricing options as if that will continue
Speaker 1: the uncertainty factor with Trump. Again, I'll tie it back
Speaker 1: to how it complicates the complicates the mission of the
Speaker 1: central banks by introducing this potential reflation or even inflationary
Speaker 1: impulse at a time when the business cycle is so
Speaker 1: old and four point nine percent unemployment. Yelling said it herself.
Speaker 1: Is it appropriate to throw a trillion dollars of stimulus
Speaker 1: at a business uh, you know, during the late stages
Speaker 1: of a business cycle, when we're already at four point
Speaker 1: nine percent unemployment? And what does that do? What does
Speaker 1: it do for you know, potential inflationary impulse? And how
Speaker 1: might she have to react? I think that's very challenging
Speaker 1: for investors at this point. That was fabulous, Thank you
Speaker 1: so much to incredent. I don't know about you, David Bureau.
Speaker 1: But my answer is when I'm confused, I like to
Speaker 1: read a lot. I read three lengthy, balanced articles this
Speaker 1: weekend on the Affordable Care Act. Sitting with us is
Speaker 1: truly one of the most experts, whatever Democratic, Republican, whatever
Speaker 1: your politics are, Mike Leavitt has a perspective on the
Speaker 1: Affordable Care Act and what it means with his work
Speaker 1: as a state governor Utah and then as they secretary
Speaker 1: of Health and Humans Services is becoming called h h S.
Speaker 1: I like health and Human Services. Uh better? What's the
Speaker 1: Republican plan? I read a lot and I haven't seen one.
Speaker 1: Is it? Do you have it? Can you show it
Speaker 1: to us this morning? One thing I believe we can
Speaker 1: be certain of is that at some point that will
Speaker 1: be a bill past the Congress titled repeal and Replace.
Speaker 1: They have dined out politically for three different elections. They've
Speaker 1: been rewarded. It's an essential they have to act, and
Speaker 1: I think they're poised to what the actual definition of
Speaker 1: repeal will be and what the definition the place We
Speaker 1: don't know, do you as a grizzled politician? I mean,
Speaker 1: I mean, I know there's like three Democrats in Utah
Speaker 1: so it's not a normal thing. But as a grizzled politician,
Speaker 1: do you assume you can't get to replace and the
Speaker 1: Ryan m McDonald's plan, McConnell plan, you can't get to
Speaker 1: replace until you do the repeal. I find it very
Speaker 1: difficult to think they can do them simultaneously. I think
Speaker 1: that they met the method and the means by which
Speaker 1: Congress works makes that difficult. I think the logic of
Speaker 1: it makes it difficult. Uh. I think they can lay
Speaker 1: a framework out for what they mean by replace and
Speaker 1: do that in a very short order after they do repeal.
Speaker 1: But I think that you can actually begin to chart
Speaker 1: how this looks. I think they will pass a budget resolution.
Speaker 1: Then I think they'll go through a series of of
Speaker 1: executive orders that will have some impact. Then I think
Speaker 1: they'll start unrepeal, and then I think they'll have to
Speaker 1: break the replace down into a series of bills. And
Speaker 1: my own sense is they'll lay a framework out and
Speaker 1: then legislative against it, legislat against it. Secretary Levitt Thom's
Speaker 1: been reading. I've been reading. I'm sure you have as well,
Speaker 1: and you bring to that reading a more perspective on
Speaker 1: this than than we have. When you see President Trump
Speaker 1: signing the executive orders he signed over the weekend with
Speaker 1: regard to the Affordable character What do they mean? Give
Speaker 1: us a sense of what he thinks he's gonna lessen
Speaker 1: the burden on agencies. Uh. And there was a lot
Speaker 1: of commentary about how that was eroding the Affordable Care Act.
Speaker 1: What what's he done thus far? There were two executive
Speaker 1: orders that were signed immediately upon his entering office. One
Speaker 1: of is a fairly standard part of the playbook of transition.
Speaker 1: You want to get control of anything in the regulation
Speaker 1: pipeline that you can still take out before it becomes effective.
Speaker 1: And President Obama did something similar when he was inigated.
Speaker 1: Virtually every president does this, and it's anything after November
Speaker 1: that was put into that pipeline you can bring back
Speaker 1: and take a look at it. And so that was
Speaker 1: the first executive order. This the second basically said, uh,
Speaker 1: I want to repeal and replace the Affordable Care Act,
Speaker 1: and I am instructing all of those in my administration
Speaker 1: to aggressively begin to look at it. Had one piece
Speaker 1: of important information that hasn't been reported, and that is
Speaker 1: I want to go through a policy process before you
Speaker 1: do anything. But I'm telling you this is the direction
Speaker 1: we're going. It was a direction center, it was an enabler,
Speaker 1: and it did give them sufficient authority that in the
Speaker 1: gray area or where there are areas of uncertainty in
Speaker 1: the law, they can regulate. Now that's very significant because
Speaker 1: the Affordable Care Act had many I mean, I've heard
Speaker 1: the term two thousand different places where it said the
Speaker 1: Secretary shall pass regulation, and they have been busy for
Speaker 1: the last six years passing regulation that defined the granularity
Speaker 1: of the Affordable Care Act. Well, there's a lot of
Speaker 1: the tail there that once you take it out, it's
Speaker 1: like taking the thread out of the tapestry. Things begin
Speaker 1: to fall apart. And they can probably do quite a
Speaker 1: bit too restrict the usefulness or restrict the functionality by
Speaker 1: simply passing regulation. As the chairman of Loved Partners, you
Speaker 1: know the principles here. I'm actually no Congressman. Price said,
Speaker 1: the presidents picked to be the head of of HHS
Speaker 1: to be your your successor in that job. And I
Speaker 1: recall reading that he had a plan for replace in
Speaker 1: the Affordable Care Act. What what sense do you have
Speaker 1: from what he's proposed in the past of where he
Speaker 1: might take this going forward. This is a very good
Speaker 1: point because the Republican Congress actually acted with a bill,
Speaker 1: passed it through both the House and the Senate, and
Speaker 1: it was vetoed by President Obama. The best predictor of
Speaker 1: the future is what we can see, and I think
Speaker 1: you can see that there are a number of things
Speaker 1: that that they could and couldn't do. For example, I
Speaker 1: think we'll see a lot of activity on Medicaid. They
Speaker 1: would like to obviously send more of that to the
Speaker 1: states with discretion. Now there's it's a double sided uh coin.
Speaker 1: On one hand, it gives the states more flexibility. On
Speaker 1: the other, it begins to limit the amount of money
Speaker 1: that they receive. And if you're a budget maker, that's
Speaker 1: an appealing thing because it gives you certainty. One of
Speaker 1: the problems for budgeteers in Congress is that they don't
Speaker 1: know with certainty how much money will be spent on
Speaker 1: the entitlement program. How do you respond to the other
Speaker 1: side that says, look whichever way he has slice at,
Speaker 1: whatever the Republicans do. The working numbers I have correct
Speaker 1: me if I'm wrong, Governor, is seven to thirty million
Speaker 1: people go without healthcare with this replacement of the Affordable
Speaker 1: Care Act. Is your math seven to thirty million or
Speaker 1: do you have a different calculus. Well, like I think
Speaker 1: we have to remember the Republicans have made a commitment
Speaker 1: that they're not going to allow people to hang out there,
Speaker 1: which Mr Trump certainly has a excuse me, David, every
Speaker 1: time I say Mr Trump a dollar in the bucket,
Speaker 1: the President says he's going to be sure everybody's happy
Speaker 1: on healthcare. Well, the commitment is initially by the Congress
Speaker 1: that they're not going to allow the twenty million people
Speaker 1: to go without insurance. Now, that causes some problem for
Speaker 1: them on the budget side, because they have to pay
Speaker 1: for that uh while they transition to whatever they're going
Speaker 1: to put into place, and that will have impact on
Speaker 1: the tack that tax bills that they ultimately pass. But
Speaker 1: I think it's a big problem if they do allow
Speaker 1: if they were to break that promise, because they would
Speaker 1: clearly that would be the rallying cry for the next
Speaker 1: three elections by the Democrats. You know, I was talking
Speaker 1: with the head of a few months back, and he
Speaker 1: said the new president would have a few months to
Speaker 1: sort of write the ship here or these spirals were
Speaker 1: going to get out of control and something else he
Speaker 1: said was that when you look at how this law
Speaker 1: was implemented, there was't enough attention paid to the back end. Uh.
Speaker 1: He said, There's a lot that could be done in
Speaker 1: terms of moving healthcare forward, but the back end services
Speaker 1: are still not where they need to be. Do you
Speaker 1: agree with that? And how how do they begin to change?
Speaker 1: How do you begin to change the infrastructure surrounding healthcare?
Speaker 1: I do agree with that, and I also believe that
Speaker 1: there are great lessons for the Republicans to learn in
Speaker 1: this process from what the Democrats did. The first thing
Speaker 1: is they passed it were they strictly partisan vote, and
Speaker 1: that sets that that that makes it very difficult to
Speaker 1: have it sustained politically over time. They have committed publicly
Speaker 1: that they're not going to do that. One component of
Speaker 1: it is they have only a two vote margin in
Speaker 1: the Senate, which is going to essentially require that they
Speaker 1: have that. The second component is the second lesson I think,
Speaker 1: is it takes time to do this. You have to
Speaker 1: the logistics of rolling out a massive program like this
Speaker 1: go well beyond which what most people think about. So
Speaker 1: thinking they're going to immediately do this, it's been in
Speaker 1: place for six years, they need time. Weird from Greg
Speaker 1: Bellier that the Republicans meeting in Philadelphia this week is
Speaker 1: the oddest of oddest things, the GOP with a president who,
Speaker 1: um some would say as a populist, maybe a conservative.
Speaker 1: I'm going to go to the great philosopher Brigham Young.
Speaker 1: Remember a chip on the shoulder is a sure sign
Speaker 1: of would higher up. How big a chip on the
Speaker 1: shoulder does this president have? He's the most unlived president
Speaker 1: or for that matter, on Romney president I've ever seen.
Speaker 1: Is he a Republican? There's a lot that we don't
Speaker 1: yet know about a President Trump. We know Candidate Trump,
Speaker 1: but we're only two days into President Trump. I think
Speaker 1: that we have we have begun to. It's become clear
Speaker 1: that he's not going to be like other presidents. What
Speaker 1: that actually will look like we don't know yet. But
Speaker 1: there's a we don't have. You gotta come back, I mean,
Speaker 1: please try to get back. It would like to speak
Speaker 1: to you, m Bloomberg surveillance again. I think this will
Speaker 1: be evolving, as you say, three days in and a
Speaker 1: busy agenda for the president this morning. Michael Lovitt, thank
Speaker 1: you so much. Mike Lovitt, the former Secretary of Health,
Speaker 1: Human Services and of course Governor of Utah as well.
Speaker 1: Brought you by Bank of America. Mary Lynch. Dedicated to
Speaker 1: bringing our clients insights solutions to meet the challenges of
Speaker 1: a transforming world. That's the power of global connections. Marylynch,
Speaker 1: Pierce Federan Smith Incorporated, Member s I p C. The
Speaker 1: first quarter wasn't good, second quarter wasn't much better. By
Speaker 1: the third quarter, I think that our next guest was
Speaker 1: spitting out his cheese, kurds and culvers. David Harrow joins
Speaker 1: this now. He's partner and Chief Investment Officer at Harris Associates,
Speaker 1: joining us now on the Spectrum Enterprise, oh Human Football,
Speaker 1: Specium Enterprise, Nationwide, Fiber Bass Network, and I T Infrastructure Solutions.
Speaker 1: David Hair, there's a great deal to talk about. Who
Speaker 1: you want to talk about? The game? First of all,
Speaker 1: which game was Tom mentioned? You might play coy But again, well,
Speaker 1: I have to say, and I have mentioned this, the
Speaker 1: packard defense has been suspect for such a long time
Speaker 1: and it was really exposed. It was really exposed last night.
Speaker 1: It was just awful, really, I mean that's I mean,
Speaker 1: they just converted just about every third dial and they
Speaker 1: moved the ball at well, and then when the Packers
Speaker 1: look to be doing something while that phone was nasty.
Speaker 1: But yeah, let's talk about the patriots. They earned it,
Speaker 1: and you know, Tom and I've always been big Patriot fans,
Speaker 1: and we're just so prove that they are undogs. Get
Speaker 1: a chance. Yes, life will go on and the Packers
Speaker 1: will rebuild. Are you at a point in your international investment? No?
Speaker 1: Seriously after Mr Trump's speech, what is the response of
Speaker 1: the executives you speak to each and every day abroad? Well,
Speaker 1: it's kind of a wait and see approach. And it
Speaker 1: is interesting now you know, travel frequently meet we meet
Speaker 1: with our managements and they're all very, very interested. This
Speaker 1: is the first thing that anyone's looks really is is
Speaker 1: what the Trump administration going to do? And is it
Speaker 1: going to be positive? Is it going to be negative?
Speaker 1: And as I mentioned, I mean certainly there are there.
Speaker 1: There's both. There's some very strong positive policy implications and
Speaker 1: there's some negative. And the negative has to do with
Speaker 1: this trade and protectionism. And you know, he keeps claiming
Speaker 1: that they're free traders as long as it's fair trade.
Speaker 1: I think that has to be clearly defined because businesses, Uh,
Speaker 1: if they want to invest in places that will be
Speaker 1: exporting into the United States, I think they want to
Speaker 1: make sure that those assets and those investments aren't for
Speaker 1: not um. So it is something they're all very, very
Speaker 1: concerned about. But on the other hand, you know, the
Speaker 1: positives are pretty obvious. The deregulation. As you know, regulation
Speaker 1: has strangled certain sectors of the U. S economy for
Speaker 1: eight years. If you look at Mr Barrow's essays from
Speaker 1: a e I about one of the reasons why he
Speaker 1: believes the recovery from the Great Recession was so soft
Speaker 1: was because of the over burdensome regulation. And I think
Speaker 1: this is one thing Mr Trump is really the President Trump,
Speaker 1: I guess, is really working to alleviate what do you
Speaker 1: would be positive on trade and on protection? And what
Speaker 1: are you what are you hearing? Are you hearing anything
Speaker 1: that makes that clearer for you? When you hear Wilbur
Speaker 1: Ross testifies say, or Stephen Manuchin, are they giving you
Speaker 1: a better sense of where this administration might be headed.
Speaker 1: I think back of what Greg Valier was saying about
Speaker 1: Doris Kurrns Goodwin's team of rivals, and and the fact
Speaker 1: that maybe the cabinet here will have some robust disagreement
Speaker 1: and influence what the president does. Are are you closer
Speaker 1: to having more clarity? I don't. I don't really think so.
Speaker 1: I mean I think we just I think in the
Speaker 1: next couple of weeks that will be flushed out. Um.
Speaker 1: But just from what these people say in front of
Speaker 1: their congressional testimony, I mean, we know what these are like,
Speaker 1: a lot of the commerce people are just grandstanding, so
Speaker 1: they say the safe conservative thing pretty much just to
Speaker 1: get you know, then um, the appointment. So I mean,
Speaker 1: I just don't know how serious to take the this,
Speaker 1: this this testimony in front of these committees. Let's start
Speaker 1: David with a portfolio. Do you do you restructure your
Speaker 1: portfolio at the margin? Do you adapt your portfolio? Well,
Speaker 1: as you know, we tend to act in a very
Speaker 1: very evolutionary fashion. We priced businesses as as price moves
Speaker 1: to our evaluations of these businesses, we make adjustments. And
Speaker 1: so if you look at the third and fourth quarter,
Speaker 1: we had a tremendous rally and some of the sectors
Speaker 1: we were overweight consumer discretionary industrials, financials, and so maybe
Speaker 1: we've trimmed a little bit of this as they've reached
Speaker 1: their prices, their cell prices were still very much overweight
Speaker 1: these areas. Because the revaluation has begun, but it isn't
Speaker 1: anywhere near completion. The pricing differential between these sectors and
Speaker 1: say consumer staples and utility stelecoms is still way too large.
Speaker 1: So though we've trimmed a little bit um and maybe
Speaker 1: we look a little less overweight, were still over Wait, doctors,
Speaker 1: I would say we're on the third or fourth inning.
Speaker 1: We still have a long way to go before this
Speaker 1: this uh we get proper valuation differentials in these sector.
Speaker 1: What we're gonna do is come back and talk to
Speaker 1: David Harrow solely about investment. Everything seems to be tinged
Speaker 1: with politics, tinged with international relations. Can we do that,
Speaker 1: David Girl, Can well try and come back and just
Speaker 1: talk about investment investment management with David A It's probably
Speaker 1: a good first question. If is it possible to do
Speaker 1: that in this day and age value investor exclusive? Yeah?
Speaker 1: I mean, I mean, can we come back and not
Speaker 1: speak about Donald Trump? Can we come back and not
Speaker 1: speak about the Green Bay Packers? We will try that
Speaker 1: way to do that with David Harrow. Our stocks rich,
Speaker 1: David UH, certain places, I think it's hard to find value.
Speaker 1: In other places it's a a bit easier. And I
Speaker 1: think it's it's really hard to generalize and say stocks
Speaker 1: are rich. Stocks generally are richer than they were three
Speaker 1: quarters of a year ago. That is for sure, remember
Speaker 1: those loads of February. But um, yeah, they're still good
Speaker 1: places to find value. Do you find value abroad in
Speaker 1: the land of Arrow? Or is your foreign nation the
Speaker 1: United States? Where your value is this year? Which is it?
Speaker 1: You know? I actually still think that the valuation differential
Speaker 1: between internationalisted companies and the US domestic companies is still
Speaker 1: is still pretty large in favor of UH foreign stocks
Speaker 1: being a bit more attractively priced. Now, I have always
Speaker 1: argued that U S stocks should sell at some premium
Speaker 1: foreign stocks given the higher return characteristics of US equities
Speaker 1: over non US equities. But I think the valuation differentials,
Speaker 1: if you look at just kind of conventional price, the
Speaker 1: cash flow price to book, are a bit more expensive
Speaker 1: than they should be. So I do think if you
Speaker 1: look at the universe of equities, um, that foreign stocks
Speaker 1: look a bit more attractively priced than than US based stocks.
Speaker 1: I want to bide by Thomas Rules here for the segment.
Speaker 1: I want to talk about politics directly. But how difficult
Speaker 1: is it to be a value investor right now? There
Speaker 1: is so much noise, if we can call it that happening.
Speaker 1: Uh is it harder than it has been in the
Speaker 1: past to be a purely value based investor? You know,
Speaker 1: to be honest, it's it's never easy because as value investors,
Speaker 1: we really make investment decisions based on the intrinsic value
Speaker 1: of the businesses and which we're investing, and your shareholder base,
Speaker 1: your client base. The consultants, all they want to talk
Speaker 1: about is macro, macro, macro macro. Now we're not We
Speaker 1: don't believe macro economics is unimportant. We just believe it's
Speaker 1: only important to the degree which it impacts the medium
Speaker 1: and long term earnings and cash flow streams the businesses
Speaker 1: in which we're analyzing, and it tends to happen, is all.
Speaker 1: This macro noise seems to have very, very little as
Speaker 1: any impact on long term valuation, which is frustrating and
Speaker 1: dealing with your constituents, But it's actually better in terms
Speaker 1: of looking for opportunity because of the market prices move
Speaker 1: on factors that have very little impact on medium and
Speaker 1: long term valuation. That provides one with an opportunity to
Speaker 1: enhance return by and taking advantage of the markets short
Speaker 1: termism and focus on non fundamental factors. So it is
Speaker 1: frustrating and that you always have to talk about X,
Speaker 1: y Z and why it's underperformed, or why it's lagged,
Speaker 1: or why you're having a bad corner, or why you're
Speaker 1: having a bad half year. I do believe there's a tradeoff.
Speaker 1: There's a tradeoff between short term performance and medium and
Speaker 1: long term performance. And as you know, a good bottom
Speaker 1: of value investors tend to do is they'd rather perform
Speaker 1: over the medium and long term. And this is what
Speaker 1: we explain to our clients, but sometimes they don't quite
Speaker 1: get it that way. Now, I wonder if you could
Speaker 1: just walk us through how your positioning has changed here
Speaker 1: at the beginning of the year. I wonder when you
Speaker 1: look at consumer staples and utilities in particular, if if,
Speaker 1: if your outlook for those two sectors is markedly different
Speaker 1: this year than they were in two thousand sixteen. Yeah,
Speaker 1: the outlook isn't so different, but the valuations of course
Speaker 1: swing um now over Okay, the years about three or
Speaker 1: four weeks. So we live just a little change here
Speaker 1: and there is if there's an abrupt price movement somewhere,
Speaker 1: if there's a stock that you know, it's a large
Speaker 1: position that's keeps getting edging closer to our cell price,
Speaker 1: we might trem a little bit, but we we don't
Speaker 1: really um similar to changes in value being very slow
Speaker 1: paced over time. I mean a company should be creating eight,
Speaker 1: nine times eleven twelve percent value for share every year.
Speaker 1: So when we value a business, that value curve should
Speaker 1: have a positive slope. It's the price that's volatile, and
Speaker 1: we don't really move a lot unless their value moves
Speaker 1: a lot and underlying intrinsic value or price when so
Speaker 1: a lot in either direction, especially if one moves in
Speaker 1: the other dozen' that's what causes us to be more
Speaker 1: active in terms of portfolial positioning. If one of those
Speaker 1: lines moves a lot quicker than the other, and our
Speaker 1: weights might be a little off. Kilder David Harrell, thank
Speaker 1: you so much, greatly appreciate. He is with Harrison Scis
Speaker 1: shes Quinn, professor at the Booth School, Austin gils We
Speaker 1: joins us and of course with the service to the
Speaker 1: Obama administration. I guess we could try to avoid the
Speaker 1: politics here, Austin, let's do that. Avonage, Dick Say, Avanage, Dixit,
Speaker 1: and Bury Nilbo their classic book The Art of Strategy,
Speaker 1: and buried in it they pay homage to the late
Speaker 1: Tom Shelling, one of our great losses of two thousand sixteen,
Speaker 1: and Michael Porter, who was with us in Davos on
Speaker 1: the game theory of a zero some world. Here's the headline, Austin,
Speaker 1: we are going to be imposing a very major border tax,
Speaker 1: which implies, if there's a cake and they have too
Speaker 1: much of the cake, whether it's Canada or Mexico, I
Speaker 1: believe those are the borders, We're gonna get our piece
Speaker 1: of the cake at the expense of them. Are we
Speaker 1: back to neo mercantilism? With what you've observed in the
Speaker 1: last five days, Smith starting to smell like it doesn't it?
Speaker 1: And you know, I thought with the border adjustment tax
Speaker 1: they were calling it UH that they were going to
Speaker 1: reform the corporate income tax, it might be a creative
Speaker 1: way to get around the normal problems of putting in
Speaker 1: tariffs and trying to build up walls to to your
Speaker 1: advantage at the expense of the other guy. But I
Speaker 1: don't know it has seen. It seemed like from the
Speaker 1: Twitter feed that that President Trump isn't for that border
Speaker 1: adjustment tax anymore, that he's that he's literally just kind
Speaker 1: of talking back to the to the mercandilist side um.
Speaker 1: And that makes me nervous because, as you know, Tom,
Speaker 1: that's been tried hundreds of times. It's not like that
Speaker 1: has never been tried before. That has been tried, and
Speaker 1: we know it doesn't work. So if they do that, boy,
Speaker 1: I don't think the market's going to react well. The
Speaker 1: new president has whipped out his sharpie and signed a
Speaker 1: few executive orders, one of which is to renegotiate the
Speaker 1: North American Free Trade Agreement Austin, and I wonder if
Speaker 1: if you have any sympathy for doing that, if if,
Speaker 1: as many people say, this is an old agreement it
Speaker 1: could be revised, any common ground there between Democrats and
Speaker 1: Republicans revising that that deal at least, Yeah, though you
Speaker 1: know the negotiating parties in that are not Republicans and Democrats.
Speaker 1: As you know, it's you know, getting Canada and Mexico
Speaker 1: on board. I I do have some sympathy for it,
Speaker 1: And a little known aspect by those outside that world
Speaker 1: is that the TPP was a renegotiation of NAFTA. Both
Speaker 1: Mexico and the United States we're going to be parties
Speaker 1: to t p P and it changed a bunch of things,
Speaker 1: which you know, in the twenty years or so since
Speaker 1: we passed NAFTA, we've gotten better at trying to figure
Speaker 1: out ways to figure out what kind of things can
Speaker 1: go wrong. So I'm sympathetic that if they went at
Speaker 1: it with an open mind that they could revise us
Speaker 1: a whole series of things. I don't know. We're gonna
Speaker 1: have to see if that's what he intends. It feels
Speaker 1: more like what he intends is in the zero sum
Speaker 1: mentality that he's gonna have, you know, a collection of
Speaker 1: threats and a collection of demands and try to try
Speaker 1: to get our trading partners to give us more. And look,
Speaker 1: all power to him if he can do that, but
Speaker 1: just please don't start a series of trade wars that
Speaker 1: would be a disaster. A question about your Council of
Speaker 1: Economic Advisors. We talk a lot about trumponomics. How much
Speaker 1: of of defining a prison's economic policy is done by
Speaker 1: the Council, all of it. It's the most important job
Speaker 1: in the government. Look, the Council of Economic Advisors is
Speaker 1: the president's own personal think tank basically, and so it's
Speaker 1: influence and effectiveness depends critically on the relationship between especially
Speaker 1: the chair and the President. So the president is listening
Speaker 1: to the c a chair and and that chair is
Speaker 1: having an influence on them, then the then the CIA
Speaker 1: is powerful, is important, and and the arguments are being
Speaker 1: taken seriously. If the President is basically like thank you,
Speaker 1: you know, and uh, then the CIA's effectiveness is not
Speaker 1: there because it's not a cabinet It is a cabinet agency,
Speaker 1: but it's not one that has a bunch of regulatory
Speaker 1: oversight directly. So there's there's nothing you can do if
Speaker 1: nobody will listen to your argument. And now, folks, we
Speaker 1: go back to early Austin goes this is six weeks
Speaker 1: out of Milton Academy. What happens? What happens when you
Speaker 1: text the rich? Evidence from Executive Compensation Journal and Political
Speaker 1: Economy seventeen years ago. Mr Trump, I believe is gonna
Speaker 1: stop taxing the rich. Do they spend it? No? Look,
Speaker 1: look what what that paper showed and it's it's just
Speaker 1: one paper of a large, large literature that says the
Speaker 1: Laugher curve argument that if you cut taxes for rich
Speaker 1: people will pay for themselves. It's totally not true. That
Speaker 1: data is disproven that hundreds of times, uh, and so
Speaker 1: in that in that one paper, I was looking at
Speaker 1: corporate executives, and you saw around the time when Bill
Speaker 1: Clinton raised taxes on inh income people, there was a
Speaker 1: shifting of the timing of when they took their compensation.
Speaker 1: They tried to get as much as they could cash
Speaker 1: out stock options before he took office. But the longer
Speaker 1: run impacts were quite modest. Here's here's a basic question.
Speaker 1: Why why is tax reform so difficult? Why has it
Speaker 1: taken so long? Why is it proving to be so
Speaker 1: difficult time and time again? Well, you guys know why
Speaker 1: it's difficult. Tax cutting is easy. Tax reform I anything
Speaker 1: that broadens the base or rationalize the system. It's very
Speaker 1: difficult because some people have to pay more in that situation.
Speaker 1: And a lot of times the biggest advocates of tax
Speaker 1: reform are also the people who are advocating tax cuts.
Speaker 1: So whenever the Republicans come forward with a plan that is,
Speaker 1: we're going to lower the rates and broaden the base.
Speaker 1: You see the their their advocates say, wait, wait, wait,
Speaker 1: wait wait, don't raise our taxes. Let's just cut it.
Speaker 1: Let's leave it in the same system and cut And
Speaker 1: that's what I think they're gonna do again. Austin, don't
Speaker 1: be a stranger. Let's get you here. From much conversation
Speaker 1: Bloomberg servants, Austin goes to be the Boost School Chicago.
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
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