Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: A treat on this special edition of Bloomberg Surveillance. Ed
Speaker 2: Yard Denny for an extended conversation, Ed. I read your
Speaker 2: note carefully yesterday, folks. I can't say enough about the
Speaker 2: value of subscribing to Yard Denny's Quick Takes. You assessed
Speaker 2: the bond market. Should people that own shares be afraid
Speaker 2: of higher yields?
Speaker 1: I think they should be concerned, But all in all,
Speaker 1: I think bond yields of normalized. I think that's important
Speaker 1: to keep that in mind. They were abnormally low between
Speaker 1: the Great Financial Crisis and the Great Virus Crisis because
Speaker 1: the Fed was manipulating rates. It was rigging the bond
Speaker 1: market with the short term rate, the Federal funds rate
Speaker 1: being down to zero, and then of course quantitative easing.
Speaker 1: And now the bond market has been sort of liberated,
Speaker 1: free to tell us what the line demand and the
Speaker 1: credit markets really is. And I think we're back to
Speaker 1: where we were before the Great Financial Crisis, when bondyls
Speaker 1: range between four and five percent. So I don't think
Speaker 1: we should freak out about that. I think we should
Speaker 1: actually welcome it because it's a sign that the economy
Speaker 1: is doing just quite well.
Speaker 2: You think parts for people on the planet the degree
Speaker 2: with doctor.
Speaker 3: So Ed, I mean, given that backdrop, I mean, how
Speaker 3: do you think this Federal Reserve is going to proceed
Speaker 3: for the remayner of twenty twenty five.
Speaker 1: Well, it's interesting, you know, the faedis they just won't
Speaker 1: listen to me. I don't won't I understand why I
Speaker 1: have been Back in August of last year, we were saying,
Speaker 1: my collie Eric Waterstein and I were saying that the
Speaker 1: economy is resilient, it's strong, it's demonstrated that it could
Speaker 1: withstand a tightening of monetary policy. And again, I think
Speaker 1: the FED not only tightened the monetary policy when they
Speaker 1: took the Fed funds right zero of five and a
Speaker 1: half percent between twenty twenty two and twenty twenty three,
Speaker 1: I think they also normalized interest rates, both the Federal
Speaker 1: funds rate and the bond deal.
Speaker 4: They're kind of back to normal.
Speaker 1: But so in August we thought there was no need
Speaker 1: for the Fed to act, but they didn't listen. So
Speaker 1: they did not just twenty five basis points. They did
Speaker 1: fifty basis points in September eighteenth, and we argued that
Speaker 1: that would probably lead to higher bond yields. And that's
Speaker 1: exactly what's happened. We've had the FED funds rate down
Speaker 1: one hundred basis points.
Speaker 4: This is brilliant.
Speaker 2: Paul, I can't say enough about this overnight on LinkedIn,
Speaker 2: Paul Dunovan of UBS and he'll be with us folks
Speaker 2: in the coming days. Like doctor Yar Dunny was collegially
Speaker 2: scathing by to FED and the recent decisions exactly so.
Speaker 4: And I mean, Harry, let me just.
Speaker 1: Answer your question. The bottom line is I think they're
Speaker 1: definitely on pause. That's the message we're getting from the Fed.
Speaker 1: I think it may be done and done, or maybe
Speaker 1: one or two and done.
Speaker 4: But I think the PAD doesn't have to lower interest rates.
Speaker 3: Anymore as we just complete two years twenty twenty three,
Speaker 3: twenty twenty four of north of twenty percent returns in
Speaker 3: s and P five hundred index. And how do you
Speaker 3: think about twenty twenty five stocks, bonds, all that kind
Speaker 3: of stuff. How are you talking to your clients this year?
Speaker 1: Well, I go terms roaring twenty twenties, baby, yeah, I mean,
Speaker 1: so far, so good. Back in twenty nineteen, we suggested
Speaker 1: that the decade ahead. The twenty twenties could be the
Speaker 1: Roaring twenty twenties. That we noticed that there's a shortage
Speaker 1: of labor skill, labor especially, and that there was a
Speaker 1: tremendous plethora of technological innovations that were actually useful, that
Speaker 1: actually work, and are relatively inexpensive to implement, and that
Speaker 1: these technologies would lead to a productivity growth boom we've
Speaker 1: had before. This one seems to be much more sustainable
Speaker 1: and potentially much more significant.
Speaker 2: Ed Yard Denny with us folks a special edition of
Speaker 2: Bloomberg Savannahs We're with you till nine o'clock, where am
Speaker 2: Mariy Horden and David Gura will join from Washington with
Speaker 2: the services at the National Cathedral for James Earl Carter. Thrilled,
Speaker 2: tot ann Mary Horden and David Gurrow will give us
Speaker 2: their perspective on that. We are thrilled as well to
Speaker 2: give you ed Yard Denny this morning. I can't say
Speaker 2: enough about in October. I think it was two years ago,
Speaker 2: ed Yard Denny, and ed I'm going to give credit
Speaker 2: to the great technician Ralph N. Kemport as well, said
Speaker 2: climb on board equities. You maintain your enthusiasm, Doctor Yard Denny.
Speaker 2: I looked at the lineup of hedge fund performance, and
Speaker 2: everybody hedged last year. Very few people were full Yard
Speaker 2: Denny describe full Yard Denny.
Speaker 1: Well fully ARDNNI right now is to stay invested. It's
Speaker 1: hard for me to tell people who've been in cash
Speaker 1: to jump in here because the market isn't cheap. But
Speaker 1: if you've been fully invested, particularly in technology, communication services, industrials, financials,
Speaker 1: which is the sectors we favored, we would actually stay
Speaker 1: with them. I know they're not cheap, but on the
Speaker 1: other hand, their earnings outlook is really quite quite good
Speaker 1: for the year.
Speaker 4: For the current year, we.
Speaker 1: Have two hundred and eighty five dollars a share for
Speaker 1: the S and P five hundred. That beats all the
Speaker 1: other strategists on the street. And that's consistent with the
Speaker 1: roaring twenty twenties idea of a productivity led economic boom.
Speaker 3: And it seems like for twenty twenty five, you know,
Speaker 3: given where the FED is ie probably a little bit,
Speaker 3: you know, maybe a couple of cuts at most, for
Speaker 3: twenty twenty five, it sounds like it's a year where
Speaker 3: earnings really have to push this market. Higher earnings have
Speaker 3: to come through it. Do you have concerns about some
Speaker 3: of the earnings sessments out there for this market?
Speaker 1: Well, look, not only does the Fed not listen to me,
Speaker 1: but the market doesn't listen to me. I would love
Speaker 1: to have a nice, civilized, gradual bull market from here
Speaker 1: that's driven just by earnings and not valuations. Valuations are
Speaker 1: not cheap. The buffet ratio is at an all time
Speaker 1: record high. The forward pe is around twenty two. Back
Speaker 1: right before the tech wreck of two thousand, it was
Speaker 1: twenty five, so we're not far from that. I mean,
Speaker 1: information technology and communication services account for a hop forty
Speaker 1: percent of the S and P five hundred, and we
Speaker 1: know the thirty percent of the S and P five
Speaker 1: hundred is the magnificent seven. Look, I don't think these
Speaker 1: stocks are going to magnificent seven are going to go away.
Speaker 1: I think they're here to stay. I think they're going
Speaker 1: to continue to account for high valuation multiple. I think
Speaker 1: they're going to continue to perform. But I'm also accounting
Speaker 1: on the SMP four hundred and ninety three to do well.
Speaker 1: So a year on target is seven thousand on the
Speaker 1: S and P five hundred which I think can be
Speaker 1: driven mostly up by earnings.
Speaker 2: Tell us about the linkashire of nominal GDP into revenue
Speaker 2: which supports your earnings, call the margin called the development
Speaker 2: of free cash flow. Do we have a buoyancy of
Speaker 2: five percent nominal GDP sustained?
Speaker 4: I think so.
Speaker 1: I think again, consistent with a roaring twenty twenties scenario.
Speaker 1: I think the productivity, which is currently quadrupled from zero
Speaker 1: point five percent at an annual rate on a five
Speaker 1: year trailing basis. It was zero point five percent back
Speaker 1: at the end of twenty fifteen, and now we're at
Speaker 1: two percent, so we've already seen a significant productivity growth boom.
Speaker 1: But two percent is kind of average for the historical average.
Speaker 1: So what we're counting on is productivity to do a
Speaker 1: bit better than that, maybe three, three and a half
Speaker 1: even four percent, which to some people might sound delusional,
Speaker 1: but if you look at previous productivity growth booms, that's
Speaker 1: what we get to, and we think we're going to
Speaker 1: get to that handily by the end of the decade
Speaker 1: because of the technologies that are available out there. So yeah,
Speaker 1: I think three percent growth is kind of what we're
Speaker 1: at right now. Maybe a little less than that on
Speaker 1: a year over your basis, three and a half to
Speaker 1: four percent real GDP is possible. Add two percent wow inflation,
Speaker 1: and you get five to six percent.
Speaker 2: I can't emphasize enough. Paul how a lone yard Denny
Speaker 2: is on this. There's some bulls out there, John stofis.
Speaker 4: I'm alone. I'm alone, but I don't feel lonely. Don't
Speaker 4: feel lonely.
Speaker 2: But the idea that we're going to sustain three percent
Speaker 2: real GDP, how many guests are telling it's.
Speaker 3: Pretty loan call exactly? Hey, Ed, what are you suggesting
Speaker 3: folks doing a fixed and can market Because a lot
Speaker 3: of folks feel pretty comfortable with four point two five
Speaker 3: percent into your treasury. Do they need to take credit risk?
Speaker 4: They don't really need to take credit risk, and I
Speaker 4: welcome that. I think that's again normalization.
Speaker 1: We should have an economy where if investors don't want
Speaker 1: to take risk, they shouldn't be punished with zero to
Speaker 1: two percent yields on their money market funds. I think
Speaker 1: they should be getting a reasonable return, and four four
Speaker 1: and a half percent is certainly a reasonable.
Speaker 4: Return on a two year On the other.
Speaker 1: Hand, people who want to lock it in can certainly
Speaker 1: go for the four and a half and higher percents
Speaker 1: that are available in the capital markets, so you don't
Speaker 1: have to take risk, but there's greater reward obviously if
Speaker 1: you're willing to go extend into the bond market, going
Speaker 1: to the corporates, maybe even into the high yields.
Speaker 2: Edgar Denny, thank you so much, greatly, greatly appreciate it.
Speaker 2: This morning, Edward Jardnney there with a call of seven
Speaker 2: thousand XPX, I didn't in my head. I'm sorry. I
Speaker 2: can't like interpolate the extra late on the Dow Jones
Speaker 2: ridest average.
Speaker 4: But it's a big number.