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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. This is Masters in

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Speaker 1: Business with Barry Ritholts on Bloomberg Radio.

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Speaker 2: I'm Barry Ridholts on the latest Masters in Business podcast.

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Speaker 2: Another banger, I have Binki Chada. He's chief US strategist

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Speaker 2: for Deutsche Bank Securities. Fascinating career and approach to looking

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Speaker 2: at markets. He's an economist, but essentially operates as a

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Speaker 2: market strategist. He's been fairly constructive where he's supposed to be.

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Speaker 2: Started the year twenty twenty five with the seven thousand

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Speaker 2: target on the S and P five hundred brings in

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Speaker 2: a lot of different factors. That makes his work so

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Speaker 2: interesting at Deutsche Bank Securities, not just economics, but FX equities,

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Speaker 2: global perspective focused on US equities. I thought this conversation

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Speaker 2: was absolutely fascinating, and I think you will also with

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Speaker 2: no further ado, my interview of Deutsche Bank Securities Binkie Chada,

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Speaker 2: Binki Chada, Welcome to Bloomberg.

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Speaker 3: Thank you.

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Speaker 2: So. I have been looking forward to this conversation for

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Speaker 2: a long time, primarily because so many people when I

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Speaker 2: asked them who their mentors are, reference you. So you

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Speaker 2: have a lot of influence throughout the street.

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Speaker 3: That's very guind.

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Speaker 2: We'll come back to that a little later. Let's start

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Speaker 2: with your career. You get a bachelor's in mathematics and

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Speaker 2: computer science from Dennison and then a PhD in philosophy

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Speaker 2: focused on economics from Colombia. Is that right?

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Speaker 3: A PhD in economics?

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Speaker 4: So what was the career plan.

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Speaker 3: The career planned was, you know, to get a PhD

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Speaker 3: in economics and study development economics and alleviate poverty and

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Speaker 3: help the world. I went to graduates school and graduate school,

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Speaker 3: you know that out of here exactly, and.

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Speaker 2: There's a whole lot of debt, go into go do

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Speaker 2: some well somewhere.

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Speaker 3: Well, I mean I think that development economics is sort

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Speaker 3: of builds on is not necessarily core. You know, core

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Speaker 3: is micro and macro. And I ended up basically studying

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Speaker 3: macro and then went to basically work at the International

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Speaker 3: Monetary Fund and.

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Speaker 2: First in the first job right out of school. You

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Speaker 2: were there for a while, seventy seventeen years. So what

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Speaker 2: were the various positions you had. I saw a division

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Speaker 2: chief of the Euro Area and Global Markets.

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Speaker 3: Yeah, I was doing in chronological orders. So I started

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Speaker 3: basically in the So the IMAF has a grad program

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Speaker 3: just like any investment bank. It's called the Economist program.

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Speaker 3: And my second assignment was in research, and I stayed

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Speaker 3: in research for the next few years. It was the

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Speaker 3: heyday of the IMA to Research department under Jacob Frankel

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Speaker 3: and then Michael Musa, and we had all the world's

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Speaker 3: leading researchers visiting the IMF. And then the Iron Curtain

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Speaker 3: came down and the IMF suddenly had thirty new member

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Speaker 3: countries and we all got pulled into working on various

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Speaker 3: aspects of that. So I worked on Bulgaria pretty much

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Speaker 3: full time for a year.

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Speaker 2: So you were at IMF for almost two decades. How

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Speaker 2: did that experience shape your view about the economy and markets,

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Speaker 2: both domestically and internationally.

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Speaker 3: Yeah, so, you know, I started in the research department,

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Speaker 3: but I went from there to the Asian Department. And

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Speaker 3: even while in the Research department, like my participation in Bulgaria,

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Speaker 3: we always, oh, at least I always, you know, it

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Speaker 3: was eager to participate in the IMF's bread and butter work,

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Speaker 3: which is really country work. So I remember going to

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Speaker 3: Singapore in my very early days. Singapore is, you know,

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Speaker 3: obviously a small country, but because it's a small country,

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Speaker 3: has issues, especially from a development strategy point of view,

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Speaker 3: that are sort of key. You remember in the nineteen

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Speaker 3: seventies we used to talk about the knicks, you know,

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Speaker 3: So I mean I could talk quite a while about Singapore.

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Speaker 3: But Singapore started in the early nineteen seventies with a

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Speaker 3: ten to twelve percent unemployment rate, had low age, export

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Speaker 3: led growth model. By nineteen seventy nine, unemployment was two percent.

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Speaker 3: Health had been strong, and because of the peculiarities and

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Speaker 3: the politics of Singapore, it's ethnic Chinese that moved out

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Speaker 3: of Malaysia to have an independent country. When you want

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Speaker 3: to grow rapidly but you only have two percent unemployment,

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Speaker 3: you would end up sort of violating the principle what

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Speaker 3: you were formed because you would need basically lots of

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Speaker 3: important labor from Malaysia and Indonesia.

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Speaker 2: And a wild success story. Though Singapore's economy has done

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Speaker 2: really well.

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Speaker 3: Has so it has because they made a very concerned

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Speaker 3: push at the time to move basically towards higher value

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Speaker 3: added activities. And the first paper I ever wrote on

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Speaker 3: a country was really Singapore, and it's about Singapore's high

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Speaker 3: wage policy. They announced in the increase in real labor

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Speaker 3: costs or wages. It's also sort of the retirement plan

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Speaker 3: of six zero percent in nineteen seventy nine to work

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Speaker 3: through the system over the next three years, and it

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Speaker 3: was wildly successful in basically, you know, turning the economy

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Speaker 3: into sort of a much higher value added growth part.

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Speaker 3: I mean, finance was some of it, but it was

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Speaker 3: you know, the focus is more on sort of high

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Speaker 3: tech manufacturing.

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Speaker 2: So today you're overseeing asset allocation primarily for US based

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Speaker 2: investors for Deutsche Bank. I know you're global.

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Speaker 3: Also, yes, that is true my focus, partly because I'm

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Speaker 3: here and partly because the US is the most important

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Speaker 3: and biggest driver. I've been our equity strategist in two

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Speaker 3: different stints over periods, so I actually spent most of

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Speaker 3: my time basically on US equities.

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Speaker 2: I would say, so, how do the lessons from Singapore

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Speaker 2: and Bulgaria or just global perspectives via the IMF, how

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Speaker 2: does that translate into making better asset allocation decisions for

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Speaker 2: US investors.

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Speaker 3: I think those experiences are basically, you know, things that

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Speaker 3: sort of inform you about the bigger picture and forces

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Speaker 3: that are ongoing that you know, one may not sort

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Speaker 3: of see data day. Certainly not day to day but

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Speaker 3: week to week, but sort of you know, explains the

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Speaker 3: direction in which things are going. And I think Singapore

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Speaker 3: is sort of a good example for I mean, we

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Speaker 3: started talking about development economics, which was but it's about

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Speaker 3: growth economics and development economics and sort of like, you know,

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Speaker 3: does policy really have a rule a role or should

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Speaker 3: we just let the free markets keep going?

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Speaker 2: Really really interesting, So after seventeen years at the IMF,

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Speaker 2: what led you to Deutsche Bank in four.

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Speaker 3: So the IMF does not historically never really spoke about

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Speaker 3: exchange rates because the market sensitive variable. That was the

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Speaker 3: thinking at the time. But that didn't mean that the

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Speaker 3: IMF didn't spend a lot of energy working on FX.

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Speaker 3: We had an internal group that you know, some people

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Speaker 3: in the market knew, and basically because we used to

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Speaker 3: have a dialogue with the markets, there was an opening

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Speaker 3: basically in FX because a the FX strategists had been

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Speaker 3: around for quite a while, he had moved on or

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Speaker 3: retired basically, uh and and so they asked me because

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Speaker 3: they deutsch Bank at the time. So the strategist that

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Speaker 3: I'm referring to, his name is Mike Rosenberg. He really

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Speaker 3: did FX for me top down macro point of view.

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Speaker 3: Uh and and it's hard to find people like that.

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Speaker 3: But I was at the i m F. I was

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Speaker 3: trained as an economist, uh and I had done plenty

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Speaker 3: of work on FX.

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Speaker 2: So, given, given all your background in economics, currency development,

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Speaker 2: how do you end up eventually as an equity strategist

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Speaker 2: Because that seems like sure, it's it's adjacent to economic

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Speaker 2: and economists.

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Speaker 3: So so for a few years, uh, a last few

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Speaker 3: years at the IMF, I was actually part of a

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Speaker 3: small group that was responsible for developing and maintaining basically

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Speaker 3: a dialogue with the markets. I used to report to

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Speaker 3: Stanley Fisher, who said, I'm tired of reading in the

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Speaker 3: newspaper on the way to work that another country had

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Speaker 3: gone under and somebody should be having a dialogue.

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Speaker 4: And all the time where it was Fisher.

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Speaker 3: It was Stanley Fisher. He was the first Deputy Managing

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Speaker 3: Director of the IMF in the late nineties, which is

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Speaker 3: so this is soon after the Asian financial crisis, and

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Speaker 3: then sort of you could argue that the dominos continued

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Speaker 3: for the next few years.

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Speaker 2: When you reported to Stanley Fisher, was he at IMF

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Speaker 2: or he had or had he gone else He.

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Speaker 3: Was at the IMAF. He was the first deputy Managing director,

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Speaker 3: which would be the counterpart of being the CEO as

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Speaker 3: opposed to being the president of the So he ran

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Speaker 3: the IMF intellectually and otherwise. And it was a small

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Speaker 3: group of us that you know, basically was a financial

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Speaker 3: markets dialogue with an open license to go out there

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Speaker 3: and tell us about any and everything that you think

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Speaker 3: that matters.

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Speaker 2: So how do you transition from head of Foreign Exchange

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Speaker 2: Research to US chief US Equity Strategy.

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Speaker 3: So what I was going to say on that was

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Speaker 3: simply that you know, I came to do FX strategy

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Speaker 3: and research, but I really wanted to do things more

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Speaker 3: sort of close to the markets. And there was a

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Speaker 3: simple practical issue, which is if you want to be

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Speaker 3: here in the markets. Yeah, the center of liquidity was

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Speaker 3: really seven am to eight a m. London time, and

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Speaker 3: and so you either live in London or you know,

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Speaker 3: you find a US asset class. So I found US equity.

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Speaker 2: So yeah, it's purely opposed to covering FX and London

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Speaker 2: you did actually in stay in the middle of the night.

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Speaker 2: So so since we're talking about both equity and foreign exchange.

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Speaker 2: You've said, we have favorable investor positioning, a stable dollar investor,

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Speaker 2: animal spirits and robust buyback activity, lots of m and

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Speaker 2: A activity going on, and high business confidence. That sounds

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Speaker 2: like a fairly bullish set of factors.

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Speaker 3: It is a very bullish set of factors. What I

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Speaker 3: would point out is that, you know, equities historically are

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Speaker 3: really about the business cycle, and that's why people wrote

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Speaker 3: pieces that are well known on Wall Street there from

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Speaker 3: some time ago that you know, getting at what drives

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Speaker 3: the cycle. And once upon a time, the US business

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Speaker 3: cycle was just really the housing cycle. That's a very

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Speaker 3: famous paper with that title. And you know, if you

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Speaker 3: fast forward from there basically to do today, we have

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Speaker 3: a very very very peculiar cycle, is the way I

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Speaker 3: would put it. We've had for the last two almost

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Speaker 3: three years now, essentially full employment in the labor market.

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Speaker 3: And what is that odds with the traditional cycle is

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Speaker 3: that when unemployment is low, you're typically at the end

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Speaker 3: of the cycle and growth tends to be low. But

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Speaker 3: for the last two to three years, what we've had

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Speaker 3: is four percent approximately unemployment, but GDP growth, especially underlying

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Speaker 3: GDP roads running pretty steady at three percent. Showing some

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Speaker 3: signs of going even higher basically, and what I would

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Speaker 3: say is historically that is very very rare. It's happened

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Speaker 3: only six percent of the time if you do things

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Speaker 3: on a quarterly basis, six percent of the time since

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Speaker 3: World War Two. And it's no secret when those two

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Speaker 3: times were one was in the nineteen sixties. I would argue, basically,

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Speaker 3: that's really the takeoff. That's really the post World War

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Speaker 3: recovery with a big lag because people didn't know in

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Speaker 3: the fifties would exactly do because you could only extrapolate

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Speaker 3: the great you know, the Great Depression and World War Two,

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Speaker 3: so it took a while. But the sixties is really

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Speaker 3: the post World War two recovery. And the second time

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Speaker 3: that happened is more recently, and everybody is reminded of

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Speaker 3: that now, is the second half of the nineteen nineties.

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Speaker 3: But it goes without saying that both of those periods,

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Speaker 3: like the current period, have been very good basically for

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Speaker 3: equity markets. If when unemployment, so when you have a

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Speaker 3: job but growth is strong, risk appetite is going to

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Speaker 3: be high. I think that's not you know, surprising, and

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Speaker 3: that's kind of almost exactly where we are.

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Speaker 2: So you mentioned the sixties, you mentioned the nineties. I

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Speaker 2: have to ask you about the twenty twenties, which, on

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Speaker 2: the one hand, and we'll circle back to housing. I'm

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Speaker 2: fascinated by that. But this feels like a little bit

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Speaker 2: of a to use your word, peculiar cycle, because during

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Speaker 2: the pandemic we had the biggest after fifteen years of

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Speaker 2: more or less of monetary driven stimulus, we had the

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Speaker 2: single biggest fiscal stimulus at least as a percentage of

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Speaker 2: GDP since World War Two? Are we seeing that boom

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Speaker 2: that boom let I don't know what to call it,

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Speaker 2: on a bit of a lag or has it hit

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Speaker 2: the economy and is beginning to fade?

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Speaker 3: From what I look at, My reading would be that

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Speaker 3: this has been going on for a while. It's been

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Speaker 3: going on basically through a variety of policies, and so

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Speaker 3: I don't think it's really coming from the policies. I

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Speaker 3: might even go far enough to say that it's happening

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Speaker 3: despite the policies, because we had a massive hiccop this

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Speaker 3: year and it has to do so. You know, One

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Speaker 3: of the things about a cycle and how vulnerable or

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Speaker 3: strong it is has to do with basically you know

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Speaker 3: household and corporate balance sheets right, and so in sort

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Speaker 3: of a peculiar way, we are blessed in my view,

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Speaker 3: because of the global financial crisis, which created huge deleveraging

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Speaker 3: on the household side, and then we had COVID, and

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Speaker 3: you needed to have your balance sheets right if you

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Speaker 3: were a company, and you needed to basically get used

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Speaker 3: to dealing with new shocks, and arguably we got another

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Speaker 3: one today. So but what I would argue, this resilience

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Speaker 3: is partly a blessing of the two large shocks that

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Speaker 3: we already had, and.

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Speaker 2: Long before COVID, most of corporate America had refinanced all

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Speaker 2: the long term debt very favorably. So heading into this,

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Speaker 2: both households and companies pretty well.

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Speaker 3: Situated exactly that I would agree completely, and they remain

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Speaker 3: so I would say, right now, outside of a few pockets,

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Speaker 3: you don't really see any signs of excess. So there's

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Speaker 3: every reason to believe that it continues. And if you start,

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Speaker 3: you know, by looking just at like sort of near

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Speaker 3: term economic forecast, that's one idea. Basically everybody has a

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Speaker 3: pickup in growth next year, so.

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Speaker 2: Based on either fed cuts or we'll talk about the

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Speaker 2: policy is just coming up later. What I wanted to

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Speaker 2: ask you about. You mentioned housing is such a key

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Speaker 2: factor in cycles. Is it a leading factor or is

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Speaker 2: it a benefit of a positive business cycle? Because a

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Speaker 2: lot of people kind of grew up in the two thousands,

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Speaker 2: which felt very backward, right the first time we had

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Speaker 2: ultrao rates and a few generations, and so all the

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Speaker 2: refinance and helock home equity, loan withdrawals, all that stuff

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Speaker 2: felt like it was the real estate was driving the

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Speaker 2: economy as opposed to the economy benefiting real estate.

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Speaker 3: Right, So what I would point out is that the

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Speaker 3: housing market today is a much smaller part of the

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Speaker 3: US economy than it used to be. So if you

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Speaker 3: go back to the seventies, you know, we're talking six

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Speaker 3: seven eight percent of GDP is housing. Wow, Today it's

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Speaker 3: like more like two percent. I apologized the exact.

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Speaker 4: Decimal point, but it's a fraction of what it was.

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Speaker 3: It's a fraction of what it was, and so it's

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Speaker 3: I mean, and we were just talking about three percent

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Speaker 3: GDP growth for the last two two and a half years.

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Speaker 3: And housing has been in the dol drums for quite

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Speaker 3: a while.

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Speaker 2: We've been underbuilding single family homes since the financial crisis,

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Speaker 2: so it's not a big contributor there.

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Speaker 4: What are we doing fifty eight hundred.

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Speaker 3: But what is very peculiar about this cycle is that,

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Speaker 3: you know, so there is a very important fact when

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Speaker 3: you think about the three percent or three percent plus

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Speaker 3: GDP growth numbers, which is you know that it actually

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Speaker 3: and equities are about cyclicality and cyclical variation. So recessions are

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Speaker 3: big events, and recoveries are big events. But what I

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Speaker 3: think is easily missed is that two thirds of the

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Speaker 3: US economy is actually stable growth economy. It's like the

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Speaker 3: old days of consumer staples earnings, where every company analyst

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Speaker 3: in the room would get mad when I would say,

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Speaker 3: you don't need an analyst. They tell you just need

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Speaker 3: a ruler to what they're earnings are going to be

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Speaker 3: because I was so predictable in the same vein, two

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Speaker 3: thirds of US GDP is really stable growth GDP. Now

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Speaker 3: it's not rip roaring growth, but it's too you know,

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Speaker 3: two percent growth. What the cycle comes from the cyclical

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Speaker 3: arts basically, and that's a little bit over twenty percent

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Speaker 3: of GDP, so it's not really that huge, But all

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Speaker 3: the cyclicality really comes from there and when it gets going,

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Speaker 3: it's very powerful. And if you think about what is

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Speaker 3: the cyclical parts, I can go further. Basically it would

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Speaker 3: be number one is consumer durables, number two is corporate

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Speaker 3: cap X, number three is housing, and number four is structures.

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Speaker 3: And so what is extremely unusual about this recovery from

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Speaker 3: my point of view, is that stable growth is doing

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Speaker 3: what it's always doing. There's mostly services. It's really that.

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Speaker 3: You know, if you look at the cyclical part of

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Speaker 3: us GDP, yes it's growing, but it's at the bottom

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Speaker 3: of the channel basically, so it actually has a lot

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Speaker 3: of room to move the upside. Like the fifteen percent

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Speaker 3: I'm saying.

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Speaker 2: Does that include all of the tech investments in AI

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Speaker 2: and data centers that seem to be just full on booming.

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Speaker 3: Yeah, So the tech investment wouldn't be in here. I mean,

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Speaker 3: if you look at CAPAX, if you take out so

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Speaker 3: AI party, it's on the soft side. But so you

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Speaker 3: can take, as I always say, you can take a

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Speaker 3: various view on that, which is it's all coming from

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Speaker 3: this one part, or you can take a bullish part

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Speaker 3: that the other part's going to start to happen. So

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Speaker 3: and here what I would get say is that it's

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Speaker 3: hard to put your finger on exactly what the issue is.

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Speaker 3: But there's a lot of overlaps in the different aspects

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Speaker 3: of what's going on. So I just gave you the

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Speaker 3: list of the four parts that are not doing great, all.

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Speaker 2: Of which seems to be somewhat interest rates sensitive. And

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Speaker 2: I know you're looking for a few more cuts over

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Speaker 2: the next year or so. Sure is that what's going

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Speaker 2: to light the next leg, start the next leg moving higher?

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Speaker 3: I mean, I think interest rates are important for how saying.

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Speaker 2: And durables right by how should you fill it with

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Speaker 2: furniture and appliances and a car?

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Speaker 3: Sure, but what I would say is I don't think

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Speaker 3: that interest rates are absolutely the key because capex. We

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Speaker 3: were just talking about that a little bit earlier about

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Speaker 3: corporate balance sheets. Since the nineteen seventies, what corporate America

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Speaker 3: learned is that you don't spend beyond your means. I

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Speaker 3: would say most capacs, especially for S and P five

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Speaker 3: hundred companies, is coming from internally generated cash flow. And

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Speaker 3: if you look basically at the three uses of cash flow,

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Speaker 3: you know, dividends, capex, and buybacks, and you take their

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Speaker 3: total spending relative to their total cash flow. It's been

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Speaker 3: this side of one hundred percent forever.

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Speaker 4: Which sounds sounds pretty.

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Speaker 3: Exactly, And so I don't think that the interest rates

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Speaker 3: going to make plays such a big deal for corporates.

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Speaker 3: You could even argue you, I mean, for a long

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Speaker 3: time it was like, if interest rates go up after

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Speaker 3: the global financial crisis, corporates are going to get killed.

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Speaker 3: It was the reverse, and their earnings went up.

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Speaker 2: Wall Street Journal column, why why are corporate bonds on fire?

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Speaker 2: Because they seem like such a safe bet.

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Speaker 3: That is exactly right, And there's been you know, market

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Speaker 3: mechanisms that have in many cases actually improved the credit quality.

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Speaker 3: So when we look at indicies, you want to be

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Speaker 3: careful because they're not controlling for the historical credit quality.

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Speaker 3: I mean, S and P. Five hundred is different because

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Speaker 3: it's about earnings and your earnings power. But in terms

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Speaker 3: of credit quality, you know a lot of the indices,

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Speaker 3: I mean, the current composition is better than it used

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Speaker 3: to be. Now we're at a certain stage in the cycle,

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Speaker 3: so we've had to two and a half years basically

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Speaker 3: of you know, a fully employed labor force and strong growth.

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Speaker 3: But there's been If you think about those two and

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Speaker 3: a half years twenty twenty three is you know, everybody's

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Speaker 3: waiting for a recession and this never change. Use I

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Speaker 3: call that period the rolling VS. And we're kind of

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Speaker 3: going through a similar version of the same thing right now.

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Speaker 2: Meaning rolling so decreases. Do you think after a recessions

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Speaker 2: that quickly? So?

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Speaker 3: Actually, what I mean I call it when I say

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Speaker 3: the rolling VS. What I mean is that basically, if

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Speaker 3: you look back to late twenty twenty two and you

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Speaker 3: looked at, you know, the forward forecast that was in

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Speaker 3: the macro consensus, it was growth is here. Growth next

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Speaker 3: quarter is going to be lower, in two quarters will

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Speaker 3: be in a recession, and then of course we'll have

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Speaker 3: a recovery. And so if you look at almost or

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Speaker 3: so when the recession didn't come, well, the macro Consensus

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Speaker 3: did is simply rolled it forward. They said, no, we

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Speaker 3: are right, just wrong on timing, and then when that

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Speaker 3: didn't happen, we went and rolled it forward. And I

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Speaker 3: mean I have this chart. It's a little old now,

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Speaker 3: but on the same chart as you see the rolling VS.

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Speaker 3: You look at the actual data when it came in

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Speaker 3: and there's you know, we're like way above closer to

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Speaker 3: three percent, and people are forecasting a recession.

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Speaker 2: And so those recession forecasts, we heard those in twenty one,

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Speaker 2: twenty two, twenty three, like if they kept doubling down

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Speaker 2: and got it.

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Speaker 3: Yeah, so it's twenty twenty three and then the early

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Speaker 3: part of twenty twenty four. So Deutsche Bank was we

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Speaker 3: to single out our economists year excellent, but they were

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Speaker 3: some of the earliest on the street of a recession

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Speaker 3: is going to happen down the road. They didn't give

401
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Speaker 3: up the recession call, I believe, till the first quarter

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Speaker 3: of twenty twenty four. And so from a company point

403
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Speaker 3: of view, if you were listening to companies and you know,

404
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Speaker 3: analysts ask on learnings calls, why aren't you spending, They're like, no,

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Speaker 3: there is a recession coming, and the recession is coming.

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Speaker 3: So all through twenty twenty three, corporate America just waited

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Speaker 3: for the recession that never came. Early early twenty four

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Speaker 3: and they began to wait for the we had the election,

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Speaker 3: everybody got very very optimistic, very very constructive. We got

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Speaker 3: liberation Day. I think where we are now is those

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Speaker 3: two years basically of a waiting of created pent up

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Speaker 3: demand is a shortcut way of saying what I'm trying

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Speaker 3: to get at. And it's also you know, led to

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Speaker 3: the approach or strategy if you want to call it that,

415
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Speaker 3: that we just need to deal with it and get

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Speaker 3: on with it. And we're not waiting anymore. And and

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Speaker 3: so we are where we are, where we're having this

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Speaker 3: strong growth. But it's really the cycnical bods of the US,

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Speaker 3: you know, are either erratic and noisy or at the

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Speaker 3: bottom of the channel, so not exactly depressed and falling

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Speaker 3: out of the channel or going into recession, but growing

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Speaker 3: very modestly. That is the basically the challenge that it

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Speaker 3: creates for equity strategy or investment.

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Speaker 2: Really really really fascinating. Coming up, we continue our conversation

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Speaker 2: with Pinky Chata, US equity and global strategist and head

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Speaker 2: of asset Allocation at Deutsche Bank's Securities, talking about his

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Speaker 2: roles at Deutsche Bank. I'm Barry Ritults. You're listening to

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Speaker 2: Masters in Business on Bloomberg Radio. I'm Barry Ridults. You're

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Speaker 2: listening to Masters in Business on Bloomberg Radio. My extra

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Speaker 2: special guest today is Binki Chada. He's chief US equity

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Speaker 2: and global strategist as well. As Head of Asset Allocation

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Speaker 2: at Deutsche Bank. Although he's here in the US and

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Speaker 2: has a lot of US clients, he is also a

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Speaker 2: globetrotter and travels around the world Europe, Asia and elsewhere

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Speaker 2: advising clients of Deutsche Bank. So before we get into

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Speaker 2: what's going on today in more detail, I want to

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00:27:09,200 --> 00:27:11,720
Speaker 2: talk a little bit about your role at Deutsche Bank.

438
00:27:12,320 --> 00:27:16,160
Speaker 2: You've led US equity and global strategy for a couple

439
00:27:16,200 --> 00:27:20,680
Speaker 2: of decades. Now, how has your team, How has the

440
00:27:20,760 --> 00:27:23,919
Speaker 2: team's process evolved? What do you think of in terms

441
00:27:24,000 --> 00:27:29,280
Speaker 2: of tools and quantitative analysis as well as a broad

442
00:27:29,520 --> 00:27:31,080
Speaker 2: global macro overview.

443
00:27:31,200 --> 00:27:34,120
Speaker 4: What drives your decision making.

444
00:27:34,000 --> 00:27:36,560
Speaker 3: Sure, I mean, at the simplest level is to figure out,

445
00:27:37,240 --> 00:27:39,200
Speaker 3: you know, where the equity market is going to go.

446
00:27:40,600 --> 00:27:41,399
Speaker 4: That's all I need to do.

447
00:27:42,119 --> 00:27:44,480
Speaker 2: Once you figure that out, your gold.

448
00:27:45,760 --> 00:27:48,640
Speaker 3: We're pretty humble about that pursuit, but I would say

449
00:27:48,720 --> 00:27:52,680
Speaker 3: that is the number one objective in pursuit. And what

450
00:27:52,960 --> 00:27:58,640
Speaker 3: we do is basically we have developed over time, basically

451
00:27:58,880 --> 00:28:02,800
Speaker 3: a whole set of framework. They are not all you know,

452
00:28:04,080 --> 00:28:07,720
Speaker 3: I mean, they're meant to be non overlapping frameworks.

453
00:28:07,440 --> 00:28:10,960
Speaker 2: And quantitative or qualitative. Are they all models or is there.

454
00:28:10,920 --> 00:28:14,800
Speaker 3: Some they are quantitative frameworks. You could call some of

455
00:28:14,880 --> 00:28:19,439
Speaker 3: them models. So I would say the most important thing

456
00:28:19,560 --> 00:28:22,760
Speaker 3: for equities, and again my very humble opinion is what's

457
00:28:22,800 --> 00:28:24,879
Speaker 3: happening with earnings, And so you need to have a

458
00:28:24,920 --> 00:28:28,560
Speaker 3: good framework basically for earnings. If you could get earnings right,

459
00:28:28,760 --> 00:28:30,119
Speaker 3: I mean, and you need to do that well in

460
00:28:30,200 --> 00:28:33,920
Speaker 3: advance of the actual delivery. You know, you will know

461
00:28:34,119 --> 00:28:36,879
Speaker 3: what the markets are going to do. Basically, So what

462
00:28:37,119 --> 00:28:44,480
Speaker 3: we did and we revisit, revise, revamp, redo, throw out

463
00:28:44,560 --> 00:28:47,320
Speaker 3: whatever you want to call it. But at the moment,

464
00:28:47,440 --> 00:28:50,840
Speaker 3: basically what we have is we take a whole group

465
00:28:51,000 --> 00:28:55,520
Speaker 3: of stocks and sectors, we divide it up our way.

466
00:28:55,720 --> 00:28:58,160
Speaker 3: So there's megacap growth in tech I mean, and that

467
00:28:58,640 --> 00:29:01,200
Speaker 3: you know needs to include Visa and master Card because

468
00:29:01,280 --> 00:29:04,400
Speaker 3: it's they're not tech companies, but they behave very very

469
00:29:04,440 --> 00:29:07,080
Speaker 3: similarly in terms of their revenue streams. So you can

470
00:29:07,120 --> 00:29:11,680
Speaker 3: think about it as basically a trend and cycle framework

471
00:29:11,920 --> 00:29:15,520
Speaker 3: for each of the groups. And the question that the

472
00:29:15,640 --> 00:29:18,280
Speaker 3: trend is, you know, what has basically been prevailing for

473
00:29:18,400 --> 00:29:20,680
Speaker 3: quite a while, and then the question is what drives

474
00:29:20,760 --> 00:29:24,200
Speaker 3: the cycle in those So if you take megacap growth

475
00:29:24,240 --> 00:29:27,120
Speaker 3: in tech. For example, you would have the US dollar

476
00:29:28,080 --> 00:29:31,840
Speaker 3: and for some parts you could be looking basically for

477
00:29:32,680 --> 00:29:37,880
Speaker 3: you know, very specific things that matter which you're not

478
00:29:38,000 --> 00:29:41,400
Speaker 3: going to pick up. So for example, you know, for materials,

479
00:29:42,480 --> 00:29:45,560
Speaker 3: because of the way US materials are structured into two parts.

480
00:29:46,960 --> 00:29:50,720
Speaker 3: For chemicals, you need basically a chemicals later, which is

481
00:29:50,800 --> 00:29:52,880
Speaker 3: not something that most people tend to look at. So

482
00:29:53,040 --> 00:29:56,280
Speaker 3: this idiosyncratic, but it's cycle and trend and what drives

483
00:29:56,320 --> 00:29:59,720
Speaker 3: basically the cycle it would be, you know, ism manufacturing

484
00:30:00,040 --> 00:30:04,400
Speaker 3: US dollar. Ism manufacturing is an interesting one because that's

485
00:30:04,640 --> 00:30:07,960
Speaker 3: historically the one thing that explained SMP five hundred earnings

486
00:30:08,320 --> 00:30:11,360
Speaker 3: extremely well, and that's kind of like all you needed

487
00:30:11,520 --> 00:30:11,680
Speaker 3: to know.

488
00:30:11,840 --> 00:30:13,360
Speaker 2: Still today, does it still happen?

489
00:30:13,720 --> 00:30:16,600
Speaker 3: So basically for the last three years it hasn't been

490
00:30:16,640 --> 00:30:20,960
Speaker 3: the case. And why it's simply because of megacap growth

491
00:30:21,040 --> 00:30:23,160
Speaker 3: in tech. If you take the s and P five hundred,

492
00:30:23,640 --> 00:30:26,400
Speaker 3: you break up its earnings into megacap growth in tech

493
00:30:26,560 --> 00:30:29,800
Speaker 3: and everyone else, you'll see that everyone else is still

494
00:30:29,960 --> 00:30:34,080
Speaker 3: currently aligned with the ism manufacturing. ISM manufacturing has been

495
00:30:34,120 --> 00:30:38,240
Speaker 3: in a funk for three plus years now, and so

496
00:30:38,440 --> 00:30:40,960
Speaker 3: we haven't had growth. So I kind of hinted earlier.

497
00:30:41,160 --> 00:30:43,520
Speaker 3: You can look at the current you know, sort of

498
00:30:43,680 --> 00:30:46,280
Speaker 3: contact in a bearish way. That is, all the growth

499
00:30:46,400 --> 00:30:48,760
Speaker 3: is coming from ninety percent of S and P five

500
00:30:48,800 --> 00:30:51,280
Speaker 3: hundred earnings growth has come from megacap growth in tech.

501
00:30:53,000 --> 00:30:56,800
Speaker 3: Or you could take the view going forward that everybody

502
00:30:56,840 --> 00:30:59,200
Speaker 3: else is going to recover. That's the camp that we

503
00:30:59,320 --> 00:31:01,400
Speaker 3: are in because.

504
00:31:01,160 --> 00:31:03,600
Speaker 4: That everyone else will be catching up to tech.

505
00:31:03,480 --> 00:31:07,440
Speaker 3: Events exactly unless their earnings are completely aligned with the

506
00:31:07,560 --> 00:31:12,200
Speaker 3: ISM manufacturing. In the US, ISM manufacturings basically, and that's

507
00:31:12,400 --> 00:31:16,000
Speaker 3: historically the case for the entire indexes and earnings. We've

508
00:31:16,040 --> 00:31:20,280
Speaker 3: been in a funk for three plus years. M manufacturing

509
00:31:20,320 --> 00:31:23,360
Speaker 3: has been between forty six and fifty, so you know,

510
00:31:24,120 --> 00:31:27,040
Speaker 3: it's something that we've never seen historically. So if you

511
00:31:27,160 --> 00:31:30,560
Speaker 3: ask why are we sitting here, well, first thing to

512
00:31:30,600 --> 00:31:33,080
Speaker 3: note is that if you know things were bad, then

513
00:31:33,120 --> 00:31:35,240
Speaker 3: we should have been going down. We shouldn't be sitting

514
00:31:35,280 --> 00:31:37,840
Speaker 3: in mildly contractionary.

515
00:31:37,440 --> 00:31:39,880
Speaker 4: Fifty dividing point above fifty is.

516
00:31:39,880 --> 00:31:42,440
Speaker 3: The dividing point, but I mean I think the fair

517
00:31:42,760 --> 00:31:45,960
Speaker 3: or I mean conceptually it's the Intellectually it's meant to

518
00:31:45,960 --> 00:31:48,440
Speaker 3: be the dividing point. But this is still slightly positive

519
00:31:48,520 --> 00:31:51,560
Speaker 3: growth even below fifty. To get to negative growth, you

520
00:31:51,640 --> 00:31:54,360
Speaker 3: have to go quite a bit lower. And I would

521
00:31:54,440 --> 00:31:56,920
Speaker 3: argue in the first instance it was basically just the

522
00:31:57,040 --> 00:32:00,280
Speaker 3: hangover from the pandemic. So remember that as we came out,

523
00:32:00,440 --> 00:32:04,240
Speaker 3: you know, we had basically massive spending on goods and

524
00:32:04,320 --> 00:32:08,800
Speaker 3: that in some way involves manufacturing. And then we had

525
00:32:08,840 --> 00:32:10,960
Speaker 3: basically the slowdown and the rotation.

526
00:32:10,840 --> 00:32:13,120
Speaker 2: Reminds me a little bit of what took place in

527
00:32:13,200 --> 00:32:15,400
Speaker 2: the run up to Y two K in two thousand.

528
00:32:15,520 --> 00:32:19,040
Speaker 2: You had all this tech spending pulled forward and then

529
00:32:19,120 --> 00:32:20,520
Speaker 2: it was soft for a year or two.

530
00:32:20,680 --> 00:32:26,720
Speaker 3: Right, right, And it's been followed basically by a whole

531
00:32:26,840 --> 00:32:31,120
Speaker 3: set of things. Number two. So on the hangover, I

532
00:32:31,160 --> 00:32:36,000
Speaker 3: would say, you know, I don't think a hangover's killed anybody.

533
00:32:36,160 --> 00:32:40,120
Speaker 3: So a hangover is holding time basically, and it would

534
00:32:40,240 --> 00:32:46,840
Speaker 3: naturally basically, you know, a pass. But then in early

535
00:32:47,840 --> 00:32:51,080
Speaker 3: twenty twenty two we got the Russian invasion of Ukraine.

536
00:32:51,160 --> 00:32:53,240
Speaker 3: We had one hundred and twenty dollars oil, and if

537
00:32:53,280 --> 00:32:55,840
Speaker 3: you look at oil prices today, what we've had is

538
00:32:55,920 --> 00:32:58,640
Speaker 3: basically we've gone from one hundred and twenty to in

539
00:32:58,800 --> 00:33:02,120
Speaker 3: round number sixty. But it's taken three years to get there,

540
00:33:02,680 --> 00:33:06,120
Speaker 3: and what the three years to get there means is

541
00:33:06,240 --> 00:33:10,720
Speaker 3: that energy earnings on a year and year basis have

542
00:33:10,840 --> 00:33:15,880
Speaker 3: been negative basically or contracting for three years. Now. The

543
00:33:15,920 --> 00:33:18,640
Speaker 3: good news is that we are much closer now to

544
00:33:19,080 --> 00:33:22,040
Speaker 3: basically what I would think of as fair value for

545
00:33:22,080 --> 00:33:25,000
Speaker 3: oil prices. That's actually a little bit higher. It's not

546
00:33:25,080 --> 00:33:27,560
Speaker 3: a tradable difference right now, but fair value is probably

547
00:33:27,600 --> 00:33:32,520
Speaker 3: sixty four sixty five dollars, and so you know, this

548
00:33:32,880 --> 00:33:37,680
Speaker 3: drag should basically stop soon, even though for the third

549
00:33:37,760 --> 00:33:41,000
Speaker 3: quarter we're still looking for fifteen percent down so energy

550
00:33:41,280 --> 00:33:44,240
Speaker 3: energy in energy earning, so it's just mostly oil prices

551
00:33:44,320 --> 00:33:49,320
Speaker 3: and energy vertigo is important basically for various parts of manufacturing.

552
00:33:49,480 --> 00:33:53,120
Speaker 3: Then we have basically idiosyncratic issues in autos and Chinese

553
00:33:53,160 --> 00:33:56,400
Speaker 3: autos in particular, and of course, last but not least,

554
00:33:56,480 --> 00:34:00,800
Speaker 3: we have the tariffs this year, which impacts manufacturer. We're

555
00:34:00,840 --> 00:34:01,080
Speaker 3: going to.

556
00:34:01,080 --> 00:34:04,920
Speaker 2: Talk more about tariff shortly. I'm kind of fascinated because

557
00:34:04,960 --> 00:34:08,640
Speaker 2: I'm hearing in your laying out where we are today

558
00:34:08,880 --> 00:34:12,680
Speaker 2: a lot of different voices, and at a shop like

559
00:34:12,800 --> 00:34:18,080
Speaker 2: Deutsche Bank Securities, you have to have so many different perspectives,

560
00:34:18,160 --> 00:34:23,080
Speaker 2: opinions from different quarters, from the economists, from the FX traders,

561
00:34:23,120 --> 00:34:28,480
Speaker 2: from everybody. How do you navigate and organize all of

562
00:34:28,640 --> 00:34:32,040
Speaker 2: these different perspectives, some of which may be in conflict

563
00:34:32,120 --> 00:34:32,560
Speaker 2: with others.

564
00:34:33,000 --> 00:34:36,560
Speaker 3: Sure, I wouldn't describe it as conflict. I mean we

565
00:34:36,680 --> 00:34:39,719
Speaker 3: are encouraged to have our own different views, a.

566
00:34:39,760 --> 00:34:41,080
Speaker 4: Broad dispersion of views.

567
00:34:41,200 --> 00:34:41,320
Speaker 2: Is that?

568
00:34:41,440 --> 00:34:46,200
Speaker 3: Absolutely so what I was always told by our head

569
00:34:46,200 --> 00:34:52,279
Speaker 3: of research, David fogus Landau. You know, so if I

570
00:34:52,360 --> 00:34:53,840
Speaker 3: ask you at the end of the year, why did

571
00:34:53,920 --> 00:34:56,880
Speaker 3: you get your s and P five hundred, call you

572
00:34:57,080 --> 00:34:57,719
Speaker 3: not to tell me.

573
00:34:57,800 --> 00:34:59,879
Speaker 4: That the economist was there?

574
00:35:00,320 --> 00:35:01,840
Speaker 2: Right, that's as a work.

575
00:35:03,640 --> 00:35:07,080
Speaker 3: So you're responsible for everything that goes into your view

576
00:35:08,120 --> 00:35:11,680
Speaker 3: and so we discussed in debate. So as far as

577
00:35:12,120 --> 00:35:14,600
Speaker 3: the research aspect of it is concerned, in terms of

578
00:35:14,680 --> 00:35:18,360
Speaker 3: the strategists across all asset classes and economists, we have

579
00:35:18,480 --> 00:35:22,200
Speaker 3: a regular meeting. We just had one this morning actually.

580
00:35:23,000 --> 00:35:25,680
Speaker 2: So let me ask you a question you mentioned im

581
00:35:26,400 --> 00:35:29,360
Speaker 2: What leading indicators do you put the most amount of

582
00:35:29,400 --> 00:35:33,160
Speaker 2: weight on and what indicators do you think aren't all

583
00:35:33,200 --> 00:35:37,840
Speaker 2: that important for forecasting the economic and or market cycle.

584
00:35:38,600 --> 00:35:41,920
Speaker 3: So we always start with our economists forecast, and we

585
00:35:42,239 --> 00:35:45,359
Speaker 3: always ask the question of does this make sense to us?

586
00:35:45,560 --> 00:35:48,560
Speaker 3: Does this make sense to you know, the way of

587
00:35:48,719 --> 00:35:54,040
Speaker 3: various you know, economic data are behaving. So I mean,

588
00:35:54,040 --> 00:35:56,680
Speaker 3: if you think about the US, so and twenty twenty three,

589
00:35:56,880 --> 00:35:59,960
Speaker 3: when everybody's calling for a recession, there was this annoying

590
00:36:00,239 --> 00:36:06,279
Speaker 3: fact which if you simply said, okay, I just landed here,

591
00:36:06,520 --> 00:36:09,640
Speaker 3: so you know, okay, we're talking about the US potentially

592
00:36:09,680 --> 00:36:12,239
Speaker 3: going into a recession. You know, let me start by

593
00:36:12,280 --> 00:36:15,120
Speaker 3: looking at GDP and you would find that near seventy

594
00:36:15,160 --> 00:36:19,360
Speaker 3: percent of US GDP in real terms comes from personal

595
00:36:19,480 --> 00:36:22,880
Speaker 3: consumption spending. Everybody knows that, so why don't we just

596
00:36:23,160 --> 00:36:26,919
Speaker 3: draw a chart of it? And because I come from

597
00:36:27,920 --> 00:36:31,719
Speaker 3: a relatively volatile asset class, I don't do any growth

598
00:36:31,840 --> 00:36:34,440
Speaker 3: rate terms, So I just plot the level. You have

599
00:36:34,600 --> 00:36:37,360
Speaker 3: to take logs because of we all though why we

600
00:36:37,400 --> 00:36:40,320
Speaker 3: should take logs, And then I draw channels around it.

601
00:36:40,800 --> 00:36:45,040
Speaker 3: And if you look at real personal you know, personal

602
00:36:45,080 --> 00:36:48,360
Speaker 3: consumption spending in the US for the five years before

603
00:36:48,440 --> 00:36:52,239
Speaker 3: the pandemic, we're in this tight channel, growing steadily at

604
00:36:52,320 --> 00:36:56,040
Speaker 3: two and a half percent a year. Pandemic collapse, recovery

605
00:36:56,160 --> 00:37:00,960
Speaker 3: of pce back magically into exactly the same channel magic

606
00:37:01,040 --> 00:37:05,600
Speaker 3: And so this is twenty one, and the same applies

607
00:37:05,800 --> 00:37:08,840
Speaker 3: during twenty two, and the fat is hiking aggressively and

608
00:37:09,200 --> 00:37:12,200
Speaker 3: personal spending just continues in the middle of the channel,

609
00:37:12,360 --> 00:37:15,719
Speaker 3: and it was almost like there's nothing to see here, right.

610
00:37:15,680 --> 00:37:20,200
Speaker 2: Well, we had three handle on unemployment, wages were actually

611
00:37:20,520 --> 00:37:23,799
Speaker 2: rising as fast, almost as as fast as inflation other

612
00:37:23,840 --> 00:37:28,320
Speaker 2: than that nine percent peak. Why wouldn't the economy and

613
00:37:28,480 --> 00:37:32,200
Speaker 2: market do well? And she says, with perfect times to.

614
00:37:32,920 --> 00:37:36,719
Speaker 3: Fast forward to this morning, where is PC. It's right

615
00:37:36,960 --> 00:37:39,560
Speaker 3: in the middle of the channel. I would say, if

616
00:37:39,640 --> 00:37:42,400
Speaker 3: you you know, there's a couple of different variations of

617
00:37:42,520 --> 00:37:44,800
Speaker 3: looking at it, and the headline numbers actually at the

618
00:37:44,880 --> 00:37:47,800
Speaker 3: top of the channel and moving along, and you know,

619
00:37:47,920 --> 00:37:51,080
Speaker 3: we did have some slowing in the first quarter A

620
00:37:51,600 --> 00:37:53,600
Speaker 3: but it was at the risk of going a way

621
00:37:53,760 --> 00:37:56,160
Speaker 3: out of the channel and it just sort of moderated,

622
00:37:56,239 --> 00:37:59,959
Speaker 3: it went flat and since it got back to the channel.

623
00:38:00,840 --> 00:38:02,520
Speaker 3: So it's the same thing and that's why.

624
00:38:02,520 --> 00:38:06,760
Speaker 2: And PC is important because that's a key indicator us GDP.

625
00:38:07,040 --> 00:38:08,799
Speaker 3: Yeah, absolutely, I think.

626
00:38:08,760 --> 00:38:11,200
Speaker 4: That's Jerome Pal's favorite data point.

627
00:38:11,360 --> 00:38:14,719
Speaker 3: Yeah, so he focuses more on the inflation in there.

628
00:38:14,920 --> 00:38:17,560
Speaker 3: So I'm talking about really the real volume, or than

629
00:38:17,680 --> 00:38:20,560
Speaker 3: the measure that we have, which is in real terms,

630
00:38:20,880 --> 00:38:24,160
Speaker 3: I'm just saying, if that's seventy percent of GDP and

631
00:38:24,280 --> 00:38:27,360
Speaker 3: that's growing steadily and it's been doing, we're in the

632
00:38:27,440 --> 00:38:30,480
Speaker 3: same place that we've been in for ten years, growing

633
00:38:30,560 --> 00:38:33,080
Speaker 3: in you know, at what I would describe as a

634
00:38:33,120 --> 00:38:34,799
Speaker 3: two and a half percent trend rate, So.

635
00:38:34,880 --> 00:38:37,880
Speaker 2: That that sounds pretty bullish. I'm going to ask you

636
00:38:38,040 --> 00:38:41,920
Speaker 2: in a little bit about cautious issues and risks will

637
00:38:41,960 --> 00:38:45,360
Speaker 2: circle back to that. But given the relative strength of

638
00:38:45,400 --> 00:38:48,840
Speaker 2: the US over the past ten to fifteen years, and

639
00:38:49,000 --> 00:38:52,040
Speaker 2: the fact that you've just gotten back from Asia and

640
00:38:52,280 --> 00:38:54,879
Speaker 2: Europe before that, how do you look at the rest

641
00:38:54,960 --> 00:38:58,040
Speaker 2: of the global economy, what's happening in Asia, what's happening

642
00:38:58,120 --> 00:39:01,840
Speaker 2: in Developed X, last Europe and elsewhere.

643
00:39:02,040 --> 00:39:05,759
Speaker 3: Absolutely, So, you know, there's a chart that I'm going

644
00:39:05,840 --> 00:39:09,759
Speaker 3: to draw for you, or really two charts, and what

645
00:39:09,920 --> 00:39:13,319
Speaker 3: I would say I kind of already described the US chart,

646
00:39:13,440 --> 00:39:17,920
Speaker 3: which is, you know, a steady trend channel growth of

647
00:39:18,040 --> 00:39:21,440
Speaker 3: two and a half percent before the pandemic, steady you know,

648
00:39:21,640 --> 00:39:26,120
Speaker 3: two and a half percent growth since then. If you

649
00:39:26,160 --> 00:39:28,640
Speaker 3: look at the rest of the world, the trend rates

650
00:39:28,680 --> 00:39:32,000
Speaker 3: are different. So if you use Europe as an example,

651
00:39:32,160 --> 00:39:36,040
Speaker 3: but the same applies basically to various other regions were

652
00:39:36,160 --> 00:39:39,759
Speaker 3: growing steadily before the pandemic at sort of a two

653
00:39:39,840 --> 00:39:43,160
Speaker 3: percent rate. Then we have the pandemic collapse and just

654
00:39:43,320 --> 00:39:46,359
Speaker 3: like the US, recovering back basically to the trend line.

655
00:39:46,840 --> 00:39:49,399
Speaker 3: But that was in the first quarter of twenty twenty two.

656
00:39:49,680 --> 00:39:54,440
Speaker 3: So it is really Russia Ukraine that then basically arrested

657
00:39:54,520 --> 00:39:58,720
Speaker 3: that recovery back the trend and basically activity in Europe.

658
00:39:59,480 --> 00:40:03,239
Speaker 3: You know, it's essentially gone sideways to fairy slightly up

659
00:40:03,360 --> 00:40:07,000
Speaker 3: in the decimal points, I would say, and it's a

660
00:40:07,160 --> 00:40:11,120
Speaker 3: very large gap basically relative to trend. And so what

661
00:40:11,400 --> 00:40:14,120
Speaker 3: I would argue is that you know, there was nothing

662
00:40:14,320 --> 00:40:18,160
Speaker 3: exceptional happening in the US in absolute terms. It was

663
00:40:18,239 --> 00:40:21,120
Speaker 3: really in relative terms because the rest of the world

664
00:40:21,440 --> 00:40:24,240
Speaker 3: wasn't really growing. And I'm using Europe as an example.

665
00:40:24,560 --> 00:40:29,480
Speaker 3: You know, China, Japan is slightly different, but I think

666
00:40:29,520 --> 00:40:33,120
Speaker 3: the European example is sort of key. And so if

667
00:40:33,200 --> 00:40:35,839
Speaker 3: you think about things like fax and the US dollar,

668
00:40:36,200 --> 00:40:41,200
Speaker 3: I mean US dollar typically does long multi year cycles.

669
00:40:41,560 --> 00:40:43,200
Speaker 3: We were sitting at the top of the band for

670
00:40:43,400 --> 00:40:46,760
Speaker 3: three years, so I think about it as a multi

671
00:40:46,880 --> 00:40:52,239
Speaker 3: year trade or trend basically waiting for a catalyst, and

672
00:40:52,440 --> 00:40:54,600
Speaker 3: waiting for the catalyst is just you know, is the

673
00:40:54,680 --> 00:40:56,880
Speaker 3: rest of the world going to start to grow? And

674
00:40:57,000 --> 00:41:00,360
Speaker 3: in the case of Europe, you know what we had basically,

675
00:41:00,600 --> 00:41:03,319
Speaker 3: so we went a long European equities on the first

676
00:41:03,560 --> 00:41:07,440
Speaker 3: Monday of the year. All the credit goes to my colleague,

677
00:41:07,440 --> 00:41:12,520
Speaker 3: European equity strategist Max Uliar. That's a great, great call.

678
00:41:14,880 --> 00:41:17,880
Speaker 3: It was just the view that everybody was short Europe.

679
00:41:18,040 --> 00:41:20,920
Speaker 3: Everybody's going to cover their shorts, or at least some

680
00:41:20,960 --> 00:41:23,280
Speaker 3: people are going to cover their shorts going into the election,

681
00:41:23,520 --> 00:41:27,759
Speaker 3: given the platforms which they began to do, and after

682
00:41:27,880 --> 00:41:30,840
Speaker 3: they covered their shorts, it became a question of, you know,

683
00:41:30,920 --> 00:41:33,320
Speaker 3: from a fundamental point of view, you know, is this

684
00:41:33,480 --> 00:41:37,040
Speaker 3: going to happen? Now in terms of policies, is going

685
00:41:37,080 --> 00:41:38,919
Speaker 3: to happen? So if you look back for the last

686
00:41:39,000 --> 00:41:41,640
Speaker 3: few years, you know, as a policy maker, you want

687
00:41:41,680 --> 00:41:45,920
Speaker 3: to do something about this, but maybe that shock was

688
00:41:46,120 --> 00:41:50,080
Speaker 3: already gone and you're going to start growing anyway. And

689
00:41:50,760 --> 00:41:54,440
Speaker 3: so now you have that plus a whole set of

690
00:41:54,680 --> 00:42:01,680
Speaker 3: additional you know, incentives to basically to spend infrastructure. Then

691
00:42:01,760 --> 00:42:05,920
Speaker 3: there's the defense issue. So I would argue it happens.

692
00:42:06,160 --> 00:42:12,000
Speaker 2: And then is this early days in the resurrection of

693
00:42:12,280 --> 00:42:16,320
Speaker 2: European equities or is this a one year one time.

694
00:42:16,400 --> 00:42:18,839
Speaker 3: It depends on whether you believe the growth will happen

695
00:42:18,920 --> 00:42:22,560
Speaker 3: and sustain. I'm in that camp, so I would argue

696
00:42:22,760 --> 00:42:25,920
Speaker 3: still very early days. And so we are actually from

697
00:42:25,920 --> 00:42:29,080
Speaker 3: a positioning point of view, we overweight the US, which

698
00:42:29,120 --> 00:42:31,400
Speaker 3: is what we've been talking about, but we'll also overweight

699
00:42:31,600 --> 00:42:35,279
Speaker 3: Europe and overweight Europe not because I'm expecting it to

700
00:42:35,440 --> 00:42:37,719
Speaker 3: match the US and performance through just.

701
00:42:37,800 --> 00:42:40,480
Speaker 2: Doing so much better than to But.

702
00:42:40,520 --> 00:42:42,480
Speaker 3: I think it's important to keep in mind that so

703
00:42:42,600 --> 00:42:46,160
Speaker 3: far we have very little evidence that Europe is actually

704
00:42:46,280 --> 00:42:50,640
Speaker 3: growing and if anything, over the last few weeks the

705
00:42:50,760 --> 00:42:55,080
Speaker 3: data has kind of disappointed. It doesn't negate what it's

706
00:42:55,280 --> 00:42:59,280
Speaker 3: likely to come. And then you look at the Europe

707
00:42:59,480 --> 00:43:05,040
Speaker 3: I mean, you know, getting disappointment. We moved up because

708
00:43:05,160 --> 00:43:09,759
Speaker 3: Europe might grow and you know it hasn't. But you know,

709
00:43:09,960 --> 00:43:13,800
Speaker 3: we have trouble getting below one sixteen. So the market

710
00:43:13,920 --> 00:43:17,000
Speaker 3: is you know very much. I would say, you know,

711
00:43:17,400 --> 00:43:21,600
Speaker 3: concerned that the growth actually happens. So I'm staying overweight

712
00:43:21,719 --> 00:43:25,400
Speaker 3: because there you have to get in before it happens.

713
00:43:25,600 --> 00:43:29,520
Speaker 3: And giving the gap basically in the level of activity,

714
00:43:29,760 --> 00:43:34,480
Speaker 3: in the level of earnings relative to trend lines, you know,

715
00:43:34,680 --> 00:43:39,520
Speaker 3: you could gap up at some point, really, and so

716
00:43:39,840 --> 00:43:42,919
Speaker 3: it's not just about tomorrow's earnings numbers. So we started

717
00:43:42,960 --> 00:43:46,440
Speaker 3: getting positive growth news out of Europe, well that's off

718
00:43:47,520 --> 00:43:49,880
Speaker 3: exactly at that point. It's already half of it. It's

719
00:43:49,880 --> 00:43:50,640
Speaker 3: already happened.

720
00:43:51,480 --> 00:43:55,200
Speaker 2: So let's talk a little bit about US economic growth.

721
00:43:55,280 --> 00:44:02,160
Speaker 2: We earlier discussed Asia and Europe. You have said we

722
00:44:02,360 --> 00:44:07,759
Speaker 2: have resilient corporate earnings with forecasts that are in the

723
00:44:07,840 --> 00:44:12,719
Speaker 2: low double digits, robust risk appetite, and major buybacks that

724
00:44:12,800 --> 00:44:16,000
Speaker 2: are likely to rise as earnings rise.

725
00:44:16,680 --> 00:44:18,600
Speaker 4: What's not to like about the US market?

726
00:44:19,680 --> 00:44:23,400
Speaker 3: Not too much, I would say, I think that, you know,

727
00:44:23,680 --> 00:44:26,040
Speaker 3: going back to what I said earlier twenty twenty three,

728
00:44:26,120 --> 00:44:29,320
Speaker 3: we're waiting for the recession twenty twenty four, waiting for

729
00:44:29,400 --> 00:44:35,200
Speaker 3: the election. There's a lot basically of demand pentab demand

730
00:44:35,840 --> 00:44:38,400
Speaker 3: that for a variety of activities.

731
00:44:38,800 --> 00:44:42,000
Speaker 2: You're talking pre twenty twenty November twenty twenty four, so

732
00:44:42,120 --> 00:44:43,440
Speaker 2: the prior year, right.

733
00:44:44,360 --> 00:44:47,920
Speaker 3: But what I'm saying is that while you know, the

734
00:44:48,040 --> 00:44:50,879
Speaker 3: backdrop and the contacts has been very good, it's been

735
00:44:51,040 --> 00:44:54,879
Speaker 3: very strong, it hasn't really been there hasn't really been

736
00:44:54,960 --> 00:44:58,160
Speaker 3: buy into it because there's been something massive to worry about,

737
00:44:58,239 --> 00:45:02,239
Speaker 3: like a recession in twenty eighty three, and so I

738
00:45:02,280 --> 00:45:05,200
Speaker 3: would argue after the Liberation Day shocks, so I would

739
00:45:05,200 --> 00:45:08,239
Speaker 3: say around the election last year, there was a lot

740
00:45:08,320 --> 00:45:11,280
Speaker 3: of buy into a very optimistic take. So we spend

741
00:45:11,440 --> 00:45:13,239
Speaker 3: one of our frameworks that we spend a lot of

742
00:45:13,360 --> 00:45:17,600
Speaker 3: energy on is our equity positioning framework. And if you

743
00:45:17,719 --> 00:45:20,040
Speaker 3: look at where we are today, and that's what I'm saying,

744
00:45:20,040 --> 00:45:23,440
Speaker 3: there's limited buy in. Is my positioning measure. It's a

745
00:45:23,560 --> 00:45:26,600
Speaker 3: Z score measure, so typically having plus minus one, it's

746
00:45:26,600 --> 00:45:29,680
Speaker 3: sitting at plus point five. But what I would point out,

747
00:45:29,800 --> 00:45:36,000
Speaker 3: so market's clearly overweight. That entire overweight characterization is coming

748
00:45:36,120 --> 00:45:40,960
Speaker 3: from the positioning of systematic strategies who are not following

749
00:45:41,360 --> 00:45:45,240
Speaker 3: or thinking about fundamentals. If you think about the details.

750
00:45:45,239 --> 00:45:48,319
Speaker 2: When we say systematic, it's quantitative, its trend based, it's

751
00:45:48,360 --> 00:45:49,120
Speaker 2: earning scrow.

752
00:45:49,440 --> 00:45:53,239
Speaker 3: So I have three in particular in mind so there's

753
00:45:53,280 --> 00:45:57,120
Speaker 3: the VALL control, there's the ctias, and then there's risk parody.

754
00:45:56,800 --> 00:46:00,279
Speaker 2: Fund CTA is meaning mostly trend following commodities.

755
00:46:00,200 --> 00:46:05,879
Speaker 3: Exactly, So it's about trend involve UH is a good

756
00:46:06,000 --> 00:46:08,800
Speaker 3: summary of each of the three basically, I mean, and

757
00:46:08,880 --> 00:46:12,680
Speaker 3: if you look at systematic strategies positioning, you know, it's

758
00:46:12,719 --> 00:46:14,960
Speaker 3: hard to come up with an intuitive, simple measure of

759
00:46:15,080 --> 00:46:17,920
Speaker 3: what is the trend and that that that's what a

760
00:46:18,040 --> 00:46:21,520
Speaker 3: lot of that exercise is about. But the other part

761
00:46:21,640 --> 00:46:24,080
Speaker 3: is very easy, which is basically VALL. You can use

762
00:46:24,160 --> 00:46:26,640
Speaker 3: any measure of VALL that you like, and and and

763
00:46:26,920 --> 00:46:31,280
Speaker 3: and it explains basically their positioning. So we had Liberation

764
00:46:31,440 --> 00:46:35,760
Speaker 3: Day collapse, we had April to ninth when the cause

765
00:46:35,800 --> 00:46:40,440
Speaker 3: of the volatility basically diminished or went down, and so

766
00:46:40,560 --> 00:46:43,799
Speaker 3: we had the fastest recovery from a wall shock ever

767
00:46:45,000 --> 00:46:48,520
Speaker 3: and and and but there's been very limited buy in,

768
00:46:48,800 --> 00:46:51,840
Speaker 3: I would say from discretionary investors who are actually sitting

769
00:46:51,880 --> 00:46:56,000
Speaker 3: at neutral discretionary is as opposed to systematic, but discretionary

770
00:46:56,000 --> 00:46:57,880
Speaker 3: you want to think about as fundamentals based in.

771
00:46:58,520 --> 00:47:01,120
Speaker 2: Let's take that apart, because that's kind of fascinating because,

772
00:47:01,200 --> 00:47:06,719
Speaker 2: on the one hand, there's been a bubble in bubble forecasts.

773
00:47:06,800 --> 00:47:10,239
Speaker 2: That's an old joke. We've heard that, you know, for decades.

774
00:47:10,400 --> 00:47:13,560
Speaker 2: But really it seems like everybody is saying, oh, there's

775
00:47:13,560 --> 00:47:16,840
Speaker 2: an AI bubble, there's a market concentration bubble, and the

776
00:47:17,360 --> 00:47:20,160
Speaker 2: market seems to not care, and it just keeps powering

777
00:47:20,239 --> 00:47:26,200
Speaker 2: itself higher. Let's talk about the policy issues you just raised. So,

778
00:47:26,880 --> 00:47:31,120
Speaker 2: despite Trump won with some tariffs that were I don't

779
00:47:31,120 --> 00:47:34,200
Speaker 2: know about ten percent, and I'm tariff man. It's the

780
00:47:34,239 --> 00:47:37,160
Speaker 2: most beautiful word in the dictionary. Despite all of that,

781
00:47:38,520 --> 00:47:42,320
Speaker 2: a failure of imagination or on all our parts, April

782
00:47:42,440 --> 00:47:46,719
Speaker 2: second shocked everybody with one hundred percent tariffs. I don't

783
00:47:46,760 --> 00:47:49,880
Speaker 2: think anybody imagined it, and we had that very rapid

784
00:47:50,000 --> 00:47:53,279
Speaker 2: sell off over the next week, then the ninety day

785
00:47:53,480 --> 00:47:56,880
Speaker 2: pause and markets took off. But at the end of

786
00:47:56,920 --> 00:48:01,239
Speaker 2: the ninety day pause, markets just kind of came going going, yeah,

787
00:48:01,600 --> 00:48:05,040
Speaker 2: how do you how do you put this policy into context?

788
00:48:05,520 --> 00:48:08,240
Speaker 2: And when you say there's not buying from the discretionary

789
00:48:08,360 --> 00:48:12,440
Speaker 2: part of the equity markets, somebody's buying, is it just

790
00:48:12,760 --> 00:48:13,640
Speaker 2: systematic or.

791
00:48:13,880 --> 00:48:17,120
Speaker 3: So it's systematic strategies? And I would say, you know,

792
00:48:17,239 --> 00:48:19,080
Speaker 3: we are sitting here in the first week of October.

793
00:48:19,160 --> 00:48:22,359
Speaker 3: So if you think about September and just the very

794
00:48:22,480 --> 00:48:26,600
Speaker 3: very steady step, huge, huge games and society. So what

795
00:48:26,719 --> 00:48:31,000
Speaker 3: we got in September is basically big inflows.

796
00:48:31,040 --> 00:48:34,000
Speaker 2: Right, And I want to say Q three twenty twenty

797
00:48:34,040 --> 00:48:37,520
Speaker 2: five was like the seventh best quarter going back to

798
00:48:37,560 --> 00:48:39,320
Speaker 2: World War II, some crazy number like that.

799
00:48:41,280 --> 00:48:45,760
Speaker 3: So last month we had the highest inflow into bonds

800
00:48:45,800 --> 00:48:52,920
Speaker 3: and equities as a group ever, billion dollars into in

801
00:48:53,360 --> 00:48:54,040
Speaker 3: just one month.

802
00:48:54,560 --> 00:48:57,320
Speaker 2: Do you pay attention or care about the seven trillion

803
00:48:57,400 --> 00:48:59,040
Speaker 2: dollars in money market funds.

804
00:48:58,880 --> 00:49:00,200
Speaker 3: Or is that you know?

805
00:49:01,160 --> 00:49:01,200
Speaker 2: So?

806
00:49:01,360 --> 00:49:04,480
Speaker 3: I think that's partly a red herring in the sense

807
00:49:04,600 --> 00:49:09,000
Speaker 3: that basically it is a reallocation away from bank deposits.

808
00:49:09,080 --> 00:49:11,960
Speaker 3: So if you have sum of money market funds and

809
00:49:13,480 --> 00:49:17,160
Speaker 3: cash deposits, the line's kind of going up, but it's

810
00:49:17,239 --> 00:49:20,480
Speaker 3: going up in line with its trend because cash holdings

811
00:49:20,520 --> 00:49:22,759
Speaker 3: are going up. So the two things are just sort

812
00:49:22,760 --> 00:49:23,440
Speaker 3: of a wash.

813
00:49:24,000 --> 00:49:27,040
Speaker 2: Because some people have been claiming that is the next

814
00:49:27,200 --> 00:49:30,960
Speaker 2: source of fuel for equities, I'm in your camp. I

815
00:49:31,040 --> 00:49:34,640
Speaker 2: think that money mostly came from low yielding bonds or

816
00:49:34,880 --> 00:49:36,080
Speaker 2: checking in savings account.

817
00:49:36,920 --> 00:49:39,080
Speaker 3: I think it's like very important to keep in mind

818
00:49:39,120 --> 00:49:42,520
Speaker 3: that we're having a boom and inflows across all asset

819
00:49:42,560 --> 00:49:45,840
Speaker 3: classes really and it's been going on for two years,

820
00:49:46,000 --> 00:49:50,000
Speaker 3: if not longer. And you know, as to the question

821
00:49:50,160 --> 00:49:54,320
Speaker 3: of why we're having this boom, our take is basically that,

822
00:49:54,520 --> 00:49:57,759
Speaker 3: so you have to start historically first, so that we're

823
00:49:57,760 --> 00:50:01,400
Speaker 3: talking about, you know, how things check changed relative to history.

824
00:50:02,280 --> 00:50:08,280
Speaker 3: So the pattern was that US households would put about

825
00:50:08,560 --> 00:50:13,120
Speaker 3: fifty percent of the new savings. So you get a paycheck,

826
00:50:13,239 --> 00:50:16,239
Speaker 3: you spend, something is left in the bank account, and

827
00:50:16,280 --> 00:50:21,000
Speaker 3: then you allocate basically some of it. But historically about

828
00:50:21,360 --> 00:50:25,880
Speaker 3: half of all household savings it would stay in cash,

829
00:50:26,400 --> 00:50:31,000
Speaker 3: half would basically go into financial assets. And so if

830
00:50:31,080 --> 00:50:34,200
Speaker 3: you think about the cash holdings of households, it's very

831
00:50:34,320 --> 00:50:38,480
Speaker 3: very steady, clear trend line. What the pandemic did, partly

832
00:50:38,560 --> 00:50:43,800
Speaker 3: because people spent less, partly because they were getting checks

833
00:50:43,840 --> 00:50:46,560
Speaker 3: in the mail or directly deposited in their bank accounts,

834
00:50:47,160 --> 00:50:50,799
Speaker 3: their cash holdings went way way up relative to trend.

835
00:50:51,480 --> 00:50:54,000
Speaker 3: We then had a period where, because you just over

836
00:50:54,120 --> 00:50:59,360
Speaker 3: allocated relative to trend, a period of cash going sideways,

837
00:50:59,680 --> 00:51:02,560
Speaker 3: so that all new savings one percent of it was

838
00:51:02,600 --> 00:51:06,440
Speaker 3: going into financial assets and into all financial assets is

839
00:51:06,480 --> 00:51:09,200
Speaker 3: not just I mean bonds were actually the bigger beneficiary

840
00:51:09,320 --> 00:51:11,719
Speaker 3: than equities. Believe it or not. Really people to think

841
00:51:11,760 --> 00:51:16,840
Speaker 3: it's equities first, but it's across that so crypto, you know,

842
00:51:17,120 --> 00:51:22,959
Speaker 3: commodity funds, you name it a but but it goes

843
00:51:23,080 --> 00:51:26,759
Speaker 3: all the way back to the pandemic, and and and

844
00:51:27,040 --> 00:51:29,480
Speaker 3: and it's not done yet, is the way I would

845
00:51:29,480 --> 00:51:29,680
Speaker 3: put it.

846
00:51:29,800 --> 00:51:33,960
Speaker 2: Well, So you were talking about trade earlier. One of

847
00:51:34,040 --> 00:51:39,320
Speaker 2: the comments you made really I found fascinating markets often

848
00:51:39,400 --> 00:51:44,880
Speaker 2: price in trade deal hopes early. Are we over discounting

849
00:51:44,960 --> 00:51:48,000
Speaker 2: the impact of tariffs or our markets being too optimistic

850
00:51:48,719 --> 00:51:50,960
Speaker 2: or how do you contextualize?

851
00:51:51,600 --> 00:51:53,320
Speaker 4: You know, we've been waiting to hear about.

852
00:51:53,080 --> 00:51:56,080
Speaker 2: All these tariff deals we really haven't heard of. I

853
00:51:56,120 --> 00:51:59,000
Speaker 2: think we have one with the UK that's kind of

854
00:51:59,400 --> 00:52:06,399
Speaker 2: kind of it and Japan. Are are markets not paying

855
00:52:06,560 --> 00:52:11,760
Speaker 2: enough attention to tariffs? Or are market saying, hey, President

856
00:52:11,920 --> 00:52:14,080
Speaker 2: lost at the Court of Trade, he lost at the

857
00:52:14,120 --> 00:52:14,840
Speaker 2: Court of Appeals.

858
00:52:15,360 --> 00:52:16,919
Speaker 4: Maybe he's going to lose it to the Supreme Court.

859
00:52:17,160 --> 00:52:18,360
Speaker 4: How are we looking at tariffs?

860
00:52:18,520 --> 00:52:25,480
Speaker 3: So, so, first, you know, a confession, which is basically

861
00:52:26,120 --> 00:52:29,439
Speaker 3: after April the second, you know, if you thought through

862
00:52:30,000 --> 00:52:33,000
Speaker 3: the impact of the announced tariffs, you were to come

863
00:52:33,080 --> 00:52:36,880
Speaker 3: to a very very negative conclusion, right, And that's what

864
00:52:37,040 --> 00:52:39,960
Speaker 3: we did, And so we lowered our numbers. We always

865
00:52:40,040 --> 00:52:42,440
Speaker 3: built in that there would be what we call a

866
00:52:42,600 --> 00:52:45,920
Speaker 3: relent on policies. It's just like trade war one point. Oh,

867
00:52:46,440 --> 00:52:49,200
Speaker 3: when the market is up, you know, he would escalate.

868
00:52:49,280 --> 00:52:51,440
Speaker 3: When the market was down, he would de escalate.

869
00:52:51,640 --> 00:52:54,640
Speaker 4: People have hold that. I heard a couple of options.

870
00:52:54,760 --> 00:52:57,440
Speaker 2: Traders called that the Trump collar.

871
00:52:57,719 --> 00:53:01,279
Speaker 4: The Trump calls unlike the this is the Trump.

872
00:53:01,080 --> 00:53:04,640
Speaker 2: Collar when markets are high, he's embolden when they're low.

873
00:53:04,920 --> 00:53:06,319
Speaker 2: All right, we're going to pause this and.

874
00:53:06,480 --> 00:53:12,879
Speaker 3: Let exactly that's kind of you know, where we were.

875
00:53:13,200 --> 00:53:15,040
Speaker 3: And and so the call was that we would go

876
00:53:15,200 --> 00:53:18,319
Speaker 3: a lot higher, but a lot less than we had

877
00:53:18,440 --> 00:53:23,280
Speaker 3: originally thought, basically a and and we have since basically

878
00:53:23,800 --> 00:53:28,239
Speaker 3: raised both our earnings numbers and our target your seven

879
00:53:28,560 --> 00:53:30,960
Speaker 3: so on. On January first, it was seven thousand, and

880
00:53:31,080 --> 00:53:36,160
Speaker 3: today it's again back to seven thousand, and then raised

881
00:53:36,200 --> 00:53:39,800
Speaker 3: it in two steps. But your question on you know,

882
00:53:41,120 --> 00:53:43,399
Speaker 3: or the tariffs having an impact, what I would say

883
00:53:43,560 --> 00:53:49,600
Speaker 3: is that there's sort of different dimensions. So it's kind

884
00:53:49,640 --> 00:53:52,640
Speaker 3: of a big question because it impacts everything. So first

885
00:53:52,800 --> 00:53:55,359
Speaker 3: is growth. We kind of spoke about that a little bit,

886
00:53:56,280 --> 00:54:00,879
Speaker 3: macro growth, and what I would say is that so far,

887
00:54:01,040 --> 00:54:05,120
Speaker 3: there's i mean, the logical and intellectual case for slowing

888
00:54:05,239 --> 00:54:08,840
Speaker 3: because of very high tariffs or a new tax. You know,

889
00:54:09,040 --> 00:54:12,239
Speaker 3: it's impossible to refute, and I'm not refuting it, but

890
00:54:12,280 --> 00:54:15,120
Speaker 3: I'm just saying there's like no evidence of that because

891
00:54:15,640 --> 00:54:19,160
Speaker 3: what other things are basically dominating? So I talked about

892
00:54:19,280 --> 00:54:21,960
Speaker 3: the consumers are doing what they've always been doing, et cetera.

893
00:54:24,160 --> 00:54:26,479
Speaker 3: But if you look at macro growth. I also said

894
00:54:26,520 --> 00:54:28,560
Speaker 3: that what we're going through is mini version of twenty

895
00:54:28,640 --> 00:54:32,520
Speaker 3: twenty three because everybody took a negative view. That negativity

896
00:54:32,800 --> 00:54:36,560
Speaker 3: is extremely important part of the positivity in terms of

897
00:54:36,640 --> 00:54:39,960
Speaker 3: the price action. But climb a wall away exactly, and

898
00:54:40,320 --> 00:54:42,279
Speaker 3: and and you know, our equity is going to go

899
00:54:42,400 --> 00:54:45,359
Speaker 3: down if somebody raises their GDP growth numbers or their

900
00:54:45,440 --> 00:54:49,280
Speaker 3: earnings numbers. So it's so that negativity is a positive

901
00:54:49,400 --> 00:54:54,239
Speaker 3: force for now are economists. So Matt Lazetti has a

902
00:54:54,440 --> 00:54:58,000
Speaker 3: two point eight percent GDP growth number for the third quarter. That's,

903
00:54:58,160 --> 00:55:02,680
Speaker 3: you know, the highest numbers I've ever seen from now,

904
00:55:02,960 --> 00:55:08,920
Speaker 3: even close before before the data started to disappear. And

905
00:55:09,120 --> 00:55:12,479
Speaker 3: and and so you know a number one, no sign

906
00:55:12,560 --> 00:55:15,080
Speaker 3: of it in terms of growth if you do and

907
00:55:15,160 --> 00:55:17,919
Speaker 3: think about it in terms of earnings, So there should

908
00:55:17,920 --> 00:55:20,560
Speaker 3: have been a big impact in the second quarter. Earnings

909
00:55:20,600 --> 00:55:23,520
Speaker 3: growth in the second quarter actually picked up from where

910
00:55:23,520 --> 00:55:26,000
Speaker 3: it was in the first quarter. So even the sign

911
00:55:26,120 --> 00:55:30,160
Speaker 3: is wrong, it's going in the other direction. A number

912
00:55:30,239 --> 00:55:33,480
Speaker 3: three qualitative reado on earnings, which I would LaDue use

913
00:55:33,560 --> 00:55:37,160
Speaker 3: more important than just the numbers, and companies just basically

914
00:55:37,280 --> 00:55:39,880
Speaker 3: saying that, yes, this is a negative shock, Yes it's

915
00:55:39,920 --> 00:55:43,879
Speaker 3: a big deal, but it's you know, it's not way

916
00:55:44,120 --> 00:55:47,960
Speaker 3: out of basically the realm of in many cases even

917
00:55:48,040 --> 00:55:51,799
Speaker 3: for machinery copies, within the realm of you know, our

918
00:55:51,960 --> 00:55:55,279
Speaker 3: guidance range. So yes it's negative, but it's not having

919
00:55:55,400 --> 00:55:58,600
Speaker 3: such a huge impact. And and and that the impacts

920
00:55:58,600 --> 00:56:02,400
Speaker 3: are basically you know, modest and manageable, and there is

921
00:56:02,440 --> 00:56:04,200
Speaker 3: a level at which you know you can think about.

922
00:56:04,440 --> 00:56:10,760
Speaker 3: So the numbers, what are the numbers? So the effective

923
00:56:10,920 --> 00:56:16,239
Speaker 3: tariff rate defined as basically tariff revenue on the Treasury's website,

924
00:56:16,480 --> 00:56:21,480
Speaker 3: divided by the value of imported goods it was kind

925
00:56:21,520 --> 00:56:24,080
Speaker 3: of stuck at ten to eleven percent, and maybe it's

926
00:56:24,160 --> 00:56:27,319
Speaker 3: a little bit higher right now, So the market's working

927
00:56:27,440 --> 00:56:29,880
Speaker 3: with something like fifteen, so we still have a ways

928
00:56:29,960 --> 00:56:34,480
Speaker 3: to basically get there. And the underlying thesis has been

929
00:56:34,600 --> 00:56:37,320
Speaker 3: basically that if there's a problem, you will get relents

930
00:56:37,400 --> 00:56:41,839
Speaker 3: on exemption. So there's a lot of exemptions and that's

931
00:56:41,960 --> 00:56:42,839
Speaker 3: part of the whole thing.

932
00:56:43,239 --> 00:56:43,439
Speaker 1: Really.

933
00:56:43,520 --> 00:56:45,360
Speaker 3: Dimension of course is inflation.

934
00:56:46,200 --> 00:56:50,000
Speaker 2: So let's talk about yeah, yeah, you know it.

935
00:56:50,080 --> 00:56:52,359
Speaker 3: Did it already happen or is it still to come

936
00:56:53,280 --> 00:56:57,080
Speaker 3: one simple way. I mean, there's no way to answer

937
00:56:57,120 --> 00:56:59,080
Speaker 3: the question with one hundred percent certainty, But what I

938
00:56:59,080 --> 00:57:02,080
Speaker 3: would say is that if I take a look at

939
00:57:02,239 --> 00:57:06,680
Speaker 3: core goods prices or core CPI if you want, and

940
00:57:06,760 --> 00:57:08,520
Speaker 3: what you will see is that the norm is for

941
00:57:08,640 --> 00:57:12,000
Speaker 3: goods prices to be deflating. We have the post pandemic

942
00:57:12,200 --> 00:57:16,600
Speaker 3: ten percent increases a chart of the price level. We

943
00:57:16,760 --> 00:57:19,680
Speaker 3: jump up by ten to eleven percent in a relatively

944
00:57:19,760 --> 00:57:22,240
Speaker 3: short period of time, and then that's done with and

945
00:57:22,360 --> 00:57:25,840
Speaker 3: we start disinflating at the same historical trend rate is

946
00:57:25,960 --> 00:57:29,520
Speaker 3: a very modest mild deflation, and what we've had over

947
00:57:29,560 --> 00:57:32,840
Speaker 3: the last three months is a clear increase up. So

948
00:57:33,280 --> 00:57:37,440
Speaker 3: some impact of the tariffs has already happened. Question is

949
00:57:37,760 --> 00:57:42,280
Speaker 3: how much? And I would say relative to the trend line,

950
00:57:42,760 --> 00:57:45,400
Speaker 3: core goods prices are probably one one and a quarter

951
00:57:45,520 --> 00:57:49,160
Speaker 3: percent higher than they would have been if we had

952
00:57:49,240 --> 00:57:53,480
Speaker 3: just continued basically down that trend line. And so how

953
00:57:53,600 --> 00:57:57,200
Speaker 3: to basically, you know, handicap that one and a quarter percent.

954
00:57:57,640 --> 00:58:01,600
Speaker 3: We have in house from our rates strategist, a bottom

955
00:58:01,720 --> 00:58:05,960
Speaker 3: up measure basically of the direct impact of tariffs. So

956
00:58:06,120 --> 00:58:09,000
Speaker 3: you go sic code by sic code, you add it

957
00:58:09,120 --> 00:58:12,000
Speaker 3: up and then you calculate, and they calculate two two

958
00:58:12,000 --> 00:58:14,120
Speaker 3: and a half percent. So simple point I would make

959
00:58:14,280 --> 00:58:17,960
Speaker 3: is it looks like half of the direct impact already happened,

960
00:58:18,400 --> 00:58:21,919
Speaker 3: and if half of it, you know, it wasn't so bad,

961
00:58:22,600 --> 00:58:24,720
Speaker 3: how much should we fear the second half?

962
00:58:25,000 --> 00:58:28,680
Speaker 2: Coming up, we continue our conversation with Binkie Chata, chief

963
00:58:28,800 --> 00:58:32,240
Speaker 2: US equity and global strategist and head of asset Allocation

964
00:58:32,680 --> 00:58:37,720
Speaker 2: at Deutsche Bank's Securities, talking about his roles at Deutsche Bank.

965
00:58:38,160 --> 00:58:39,320
Speaker 4: I'm Barry Ritolts.

966
00:58:39,400 --> 00:58:58,360
Speaker 2: You're listening to Master's of Business on Bloomberg Radio. I'm

967
00:58:58,520 --> 00:59:02,040
Speaker 2: very redults. You're listening to Masters in Business on Bloomberg Radio.

968
00:59:02,360 --> 00:59:05,880
Speaker 2: My extra special guest today is Binkie Chada. He's chief

969
00:59:06,040 --> 00:59:09,720
Speaker 2: US equity and global strategist as well as head of

970
00:59:09,880 --> 00:59:15,440
Speaker 2: asset allocation at Deutsche Bank. You're very constructive about additional

971
00:59:15,840 --> 00:59:19,200
Speaker 2: Federal Reserve rate cuts this year and next year, and

972
00:59:19,360 --> 00:59:22,960
Speaker 2: the people who are a little bearish on that are saying, hey,

973
00:59:23,080 --> 00:59:27,080
Speaker 2: tariffs are going to be very inflationary. We're seeing a reacceleration.

974
00:59:27,280 --> 00:59:29,680
Speaker 2: This isn't a noisy blip, but it's a start of

975
00:59:29,760 --> 00:59:31,600
Speaker 2: something worse. We're gonna end up at four to four

976
00:59:31,600 --> 00:59:34,120
Speaker 2: and a half five percent inflation, which would put the

977
00:59:34,200 --> 00:59:37,960
Speaker 2: Fed on hold. Walk us through your thinking on how

978
00:59:38,040 --> 00:59:40,640
Speaker 2: many more rate cuts this year and next year. It

979
00:59:40,920 --> 00:59:44,280
Speaker 2: sounds like you've already given the game away, because no.

980
00:59:44,400 --> 00:59:47,480
Speaker 3: No, actually, you know I'm not counting on the rate cuts,

981
00:59:47,480 --> 00:59:50,640
Speaker 3: and I would argue the rate cuts, you know, much

982
00:59:50,680 --> 00:59:53,280
Speaker 3: more of a sideshow, basically real earnings.

983
00:59:53,960 --> 00:59:56,880
Speaker 2: We do. We're so hyper focused on them. At least

984
00:59:57,000 --> 01:00:01,840
Speaker 2: the media sure is on it's you know, everybody is.

985
01:00:01,960 --> 01:00:05,400
Speaker 2: If we get these rate cuts, it'll unfreeze the housing market,

986
01:00:05,840 --> 01:00:07,320
Speaker 2: it'll do all these great things.

987
01:00:07,440 --> 01:00:09,680
Speaker 3: No, I mean the one freeze the housing market. You

988
01:00:09,800 --> 01:00:11,840
Speaker 3: need longer hand yields to basically.

989
01:00:11,560 --> 01:00:12,960
Speaker 4: Go down, which have not happened.

990
01:00:13,160 --> 01:00:16,960
Speaker 3: Yeah, they are pretty much on the low side. I

991
01:00:17,000 --> 01:00:20,040
Speaker 3: would argue relative too, So we have a house of

992
01:00:20,120 --> 01:00:22,480
Speaker 3: view for the ten year by year end that's closer

993
01:00:22,520 --> 01:00:24,280
Speaker 3: to four and a half, so four forty five.

994
01:00:24,560 --> 01:00:27,480
Speaker 2: So we what does that mean for mortgage rates? So

995
01:00:27,520 --> 01:00:29,800
Speaker 2: we can see a five handle on mortgage rates.

996
01:00:29,960 --> 01:00:33,720
Speaker 3: That's a pretty wide so there is room if and

997
01:00:34,080 --> 01:00:37,560
Speaker 3: spreads depend on volatility rates. Volatility has been coming down

998
01:00:37,720 --> 01:00:41,360
Speaker 3: quite a lot because you know, brokers need to hedge

999
01:00:41,400 --> 01:00:44,400
Speaker 3: basically the interest rate risk. Well that's outstanding, so so

1000
01:00:44,640 --> 01:00:49,840
Speaker 3: I think it's supportive. But I'm not foreseeing any big

1001
01:00:50,000 --> 01:00:51,840
Speaker 3: decline in interest rates.

1002
01:00:51,760 --> 01:00:53,920
Speaker 2: So maybe another cuts this year, one or two more

1003
01:00:54,000 --> 01:00:54,440
Speaker 2: next year.

1004
01:00:54,440 --> 01:00:56,960
Speaker 3: It's also I mean, we don't have the data anymore,

1005
01:00:57,080 --> 01:00:57,600
Speaker 3: so it's.

1006
01:00:57,480 --> 01:01:01,920
Speaker 4: Gonna be well, well, there's that it needs data.

1007
01:01:02,120 --> 01:01:05,480
Speaker 3: But I wouldn't be surprised if the Fed misses one

1008
01:01:05,520 --> 01:01:07,920
Speaker 3: of those two meetings. In terms of the rape Cottson

1009
01:01:08,080 --> 01:01:09,919
Speaker 3: pushes it out. I mean this is sort of more

1010
01:01:10,080 --> 01:01:15,880
Speaker 3: a you know, fine tuning type exercise, either argue. I mean,

1011
01:01:15,960 --> 01:01:19,360
Speaker 3: if the Atlanta Fed GDP is right, and it's been

1012
01:01:19,480 --> 01:01:23,000
Speaker 3: pretty right for several years. Obviously not to all the decimals,

1013
01:01:23,080 --> 01:01:25,800
Speaker 3: but it was giving you some you know, that kind

1014
01:01:25,840 --> 01:01:28,280
Speaker 3: of growth. I mean, do we really need lower interest rate?

1015
01:01:28,560 --> 01:01:31,320
Speaker 4: So let me ask the Jerome pal question.

1016
01:01:32,720 --> 01:01:36,240
Speaker 2: We're seeing the labor market sort of soften, even though

1017
01:01:36,280 --> 01:01:40,120
Speaker 2: we're fairly close to to you know, as low as

1018
01:01:40,200 --> 01:01:44,040
Speaker 2: unemployment gets. At the same time, they're a shortage of workers.

1019
01:01:45,040 --> 01:01:48,600
Speaker 2: Twenty twenty five maybe the first year in history where

1020
01:01:48,720 --> 01:01:53,800
Speaker 2: US population actually declines. Less immigration, more deportations, a whole

1021
01:01:53,840 --> 01:01:58,600
Speaker 2: lot of other policy issues that are affecting that. How

1022
01:01:58,640 --> 01:02:00,640
Speaker 2: do you think about the labor market here and what

1023
01:02:00,680 --> 01:02:02,680
Speaker 2: does that mean for corporate earnings? What does it mean

1024
01:02:02,800 --> 01:02:05,000
Speaker 2: for interest rate policy?

1025
01:02:05,080 --> 01:02:08,520
Speaker 3: Yeah, I think we have a relatively fully employed labor

1026
01:02:08,600 --> 01:02:12,560
Speaker 3: for us in our baseline view basically sees, you know,

1027
01:02:12,680 --> 01:02:15,200
Speaker 3: if you ignore the decimals, a little bit abounts here

1028
01:02:15,400 --> 01:02:19,080
Speaker 3: and they're not really you know, changing very much. So

1029
01:02:19,880 --> 01:02:22,800
Speaker 3: the question becomes, you know, who's going to produce that

1030
01:02:23,000 --> 01:02:27,840
Speaker 3: three and four percent GDP? So it was pretty bearish

1031
01:02:28,120 --> 01:02:32,960
Speaker 3: take when we got the revisions basically to the payrolls numbers,

1032
01:02:33,080 --> 01:02:35,880
Speaker 3: the benchmark provision. But you know, if you're not changing

1033
01:02:35,920 --> 01:02:40,680
Speaker 3: the GDP numbers and base the level of productivity basically commensurately.

1034
01:02:41,160 --> 01:02:43,600
Speaker 2: It's not as much of a negative as it looks

1035
01:02:43,600 --> 01:02:47,480
Speaker 2: at first plus exactly, right, don't I know a lot

1036
01:02:47,520 --> 01:02:51,440
Speaker 2: of economists who look at growth as productivity plus inflation?

1037
01:02:52,000 --> 01:02:53,360
Speaker 2: Fair fair assessment.

1038
01:02:54,240 --> 01:02:58,720
Speaker 3: Yeah, I would say productivity plus employment. Then to get

1039
01:02:58,720 --> 01:03:02,760
Speaker 3: to the nominal part you would add inflation. And so

1040
01:03:03,960 --> 01:03:06,120
Speaker 3: I mean, if you think about so we talked a

1041
01:03:06,160 --> 01:03:09,240
Speaker 3: little bit about, you know, the parallels between today and

1042
01:03:09,360 --> 01:03:13,120
Speaker 3: the nineteen sixties and the second half of the nineteen nineties.

1043
01:03:14,040 --> 01:03:16,560
Speaker 3: That's the two periods since World War Two where we

1044
01:03:16,680 --> 01:03:19,400
Speaker 3: had basically productivity growing at three three and a half

1045
01:03:19,480 --> 01:03:24,040
Speaker 3: percent for sustained period of time. Normally it grows at

1046
01:03:24,120 --> 01:03:26,080
Speaker 3: one point one point five percent.

1047
01:03:26,320 --> 01:03:30,280
Speaker 2: What's the old line? I forget who I'm stealing this from?

1048
01:03:31,200 --> 01:03:34,720
Speaker 2: Productivity gains are seen everywhere except the productivity data.

1049
01:03:36,000 --> 01:03:40,160
Speaker 3: So that's because you know it's calculated as a residual. Right,

1050
01:03:40,280 --> 01:03:42,640
Speaker 3: So first you have to estimate GDP. Then you have

1051
01:03:42,800 --> 01:03:47,320
Speaker 3: the first revision, second vision, third revision. Then you have

1052
01:03:47,440 --> 01:03:50,000
Speaker 3: to estimate what we were just talking about, which is

1053
01:03:50,200 --> 01:03:54,240
Speaker 3: the labor input, which is revised then re revised benchmark,

1054
01:03:54,400 --> 01:03:57,600
Speaker 3: and then what's left over is productivity. But what I

1055
01:03:57,640 --> 01:04:00,440
Speaker 3: would argue is that if you look at a simple

1056
01:04:00,560 --> 01:04:04,160
Speaker 3: chart of reported productivity in the non foreign business sector,

1057
01:04:04,640 --> 01:04:08,440
Speaker 3: you know you'll see this growing in a trend channel

1058
01:04:08,520 --> 01:04:12,400
Speaker 3: of one point four percent, and basically what we've had

1059
01:04:12,480 --> 01:04:15,120
Speaker 3: over the last couple of years, we went way about the.

1060
01:04:15,240 --> 01:04:18,560
Speaker 2: Channel basically, and so post pandemic.

1061
01:04:19,640 --> 01:04:22,480
Speaker 3: That is right, So we got a pandemic jump, then

1062
01:04:22,520 --> 01:04:25,720
Speaker 3: a slow down back into the channel, and so over

1063
01:04:25,760 --> 01:04:29,440
Speaker 3: the last two years is what I'm saying. So officially,

1064
01:04:29,760 --> 01:04:34,160
Speaker 3: you know, yes, the immigration issue, but officially unemployment it's

1065
01:04:34,240 --> 01:04:36,280
Speaker 3: only been four percent, was even lower, so it was

1066
01:04:36,320 --> 01:04:39,840
Speaker 3: a tight Historically, a tight labor market has been a

1067
01:04:40,240 --> 01:04:44,400
Speaker 3: necessary condition for getting those productivity booms like we had

1068
01:04:44,440 --> 01:04:47,280
Speaker 3: in the nineteen sixties and in the second half of

1069
01:04:47,320 --> 01:04:49,480
Speaker 3: the nineties, and we've had a tight labor market for

1070
01:04:50,080 --> 01:04:51,320
Speaker 3: several years right now.

1071
01:04:51,760 --> 01:04:54,880
Speaker 2: Very interesting. One of the things I'm so fascinated about

1072
01:04:54,960 --> 01:04:58,920
Speaker 2: your work is that you're not just you know, a

1073
01:04:59,040 --> 01:05:02,080
Speaker 2: one way bull. You start the year as one of

1074
01:05:02,120 --> 01:05:05,600
Speaker 2: the most bullish forecasts for the S and P five hundred,

1075
01:05:06,080 --> 01:05:10,560
Speaker 2: but you're constantly bringing up the various macro risks investors'

1076
01:05:10,560 --> 01:05:16,760
Speaker 2: face that sort of full view and not being so

1077
01:05:19,920 --> 01:05:23,880
Speaker 2: just mindlessly bullish is kind of fascinating. So let's talk

1078
01:05:23,960 --> 01:05:27,520
Speaker 2: about some of the risks that you've been writing about

1079
01:05:27,560 --> 01:05:32,480
Speaker 2: and discussing. Have to start with froth and AI and

1080
01:05:33,320 --> 01:05:38,120
Speaker 2: capital spending. How do you respond to chargers that this

1081
01:05:38,280 --> 01:05:40,320
Speaker 2: market has become frothy A.

1082
01:05:40,520 --> 01:05:43,840
Speaker 3: What I would say is basically that you know, we

1083
01:05:44,080 --> 01:05:49,920
Speaker 3: do see signs basically of rampant speculation, but I would say,

1084
01:05:50,280 --> 01:05:55,560
Speaker 3: so far, it's only in basically relatively well defined pockets.

1085
01:05:56,200 --> 01:05:59,640
Speaker 2: So AI bitcoin hit one hundred and twenty five thousand

1086
01:05:59,680 --> 01:06:00,600
Speaker 2: over the wen.

1087
01:06:02,520 --> 01:06:05,840
Speaker 3: On AI, I would say, it's you know, what some

1088
01:06:06,040 --> 01:06:09,000
Speaker 3: companies and some deals are doing. You could put in

1089
01:06:09,160 --> 01:06:12,360
Speaker 3: that bucket, But I mean the stocks are not necessarily

1090
01:06:12,520 --> 01:06:16,080
Speaker 3: doing that, and so I would argue that we are

1091
01:06:16,120 --> 01:06:18,919
Speaker 3: still sort of in the early stages. I would say,

1092
01:06:20,000 --> 01:06:23,000
Speaker 3: there's a lot of focus on the retail investor. Now,

1093
01:06:23,240 --> 01:06:26,200
Speaker 3: the question I would ask about the retail investor is,

1094
01:06:27,440 --> 01:06:32,520
Speaker 3: you know, when you look at measures of retail participation

1095
01:06:32,920 --> 01:06:36,880
Speaker 3: or retail activity, you know, it's easy to sort of

1096
01:06:37,200 --> 01:06:40,800
Speaker 3: exaggerate relative to their own history. This is I mean,

1097
01:06:40,880 --> 01:06:44,320
Speaker 3: we don't have a history of retail participation participation in

1098
01:06:44,520 --> 01:06:48,240
Speaker 3: US equity since the nineties, so it's been more episodic basically,

1099
01:06:48,880 --> 01:06:51,240
Speaker 3: And so there is a tendency to put it in

1100
01:06:51,360 --> 01:06:53,760
Speaker 3: that light that this is an episode. But I mean,

1101
01:06:54,080 --> 01:06:57,440
Speaker 3: we were talking about Asia earlier. It's a long history

1102
01:06:57,680 --> 01:07:02,640
Speaker 3: of retail involvement in all markets. And so one of

1103
01:07:02,680 --> 01:07:05,040
Speaker 3: the things that is getting attention is the presence of

1104
01:07:05,120 --> 01:07:09,520
Speaker 3: retail investers. But from a quantitative point of view, I

1105
01:07:09,520 --> 01:07:13,080
Speaker 3: don't know. I was looking at statistics, So there's conflicting measures.

1106
01:07:13,160 --> 01:07:15,120
Speaker 2: It's fairly modest, and a lot of it seems to

1107
01:07:15,200 --> 01:07:16,120
Speaker 2: be four oh one k.

1108
01:07:16,280 --> 01:07:18,880
Speaker 3: And the whole thing about how you know, the volumes

1109
01:07:18,880 --> 01:07:21,240
Speaker 3: have taken off and they have skyrocketed and now they

1110
01:07:21,320 --> 01:07:27,440
Speaker 3: account for four percent tiny exactly. So everything is you know,

1111
01:07:27,760 --> 01:07:31,480
Speaker 3: consistent and correct. But I now you have to frame

1112
01:07:31,520 --> 01:07:34,680
Speaker 3: it appropriately. Yeah, and this is a cycle, and we're

1113
01:07:34,680 --> 01:07:37,680
Speaker 3: talking about now, but basically, and this is you know,

1114
01:07:37,800 --> 01:07:41,560
Speaker 3: me speaking has equities with it's a cyclical asset, okay.

1115
01:07:41,960 --> 01:07:44,919
Speaker 3: And and and so if the cycle continues the way

1116
01:07:45,080 --> 01:07:48,280
Speaker 3: that it's been continuing, all of this is going to grow.

1117
01:07:48,560 --> 01:07:50,520
Speaker 3: But today you're not there yet.

1118
01:07:51,840 --> 01:07:56,520
Speaker 2: What about market concentration that the magnificent seven or whatever

1119
01:07:56,560 --> 01:07:59,120
Speaker 2: you want to call the top ten? Is that as big?

1120
01:07:59,560 --> 01:08:01,840
Speaker 2: Is that real threat? Or is that? You know, this

1121
01:08:01,960 --> 01:08:05,200
Speaker 2: happens from time to time when a new technology attracts

1122
01:08:05,280 --> 01:08:05,960
Speaker 2: all this attention.

1123
01:08:06,600 --> 01:08:09,360
Speaker 3: So I mean, I would put it slightly differently. I

1124
01:08:09,400 --> 01:08:12,480
Speaker 3: would say the market concentration in megacap growth in tech

1125
01:08:12,720 --> 01:08:16,639
Speaker 3: reflects the concentration of S and P five hundred earnings

1126
01:08:17,040 --> 01:08:19,000
Speaker 3: in the megacap growth in what are they?

1127
01:08:19,080 --> 01:08:22,559
Speaker 2: Something like two trillion in revenue three hundred billion in profits?

1128
01:08:22,640 --> 01:08:26,400
Speaker 3: Some crazy they're responsible right now for about forty percent

1129
01:08:26,600 --> 01:08:29,800
Speaker 3: of S and P five hundred earnings, So.

1130
01:08:29,960 --> 01:08:32,280
Speaker 4: Why shouldn't they be forty percent of the market cap?

1131
01:08:33,560 --> 01:08:36,679
Speaker 3: Exactly? So they're actually thirty percent of earnings and forty

1132
01:08:36,680 --> 01:08:37,599
Speaker 3: percent of the market cap.

1133
01:08:37,640 --> 01:08:41,120
Speaker 2: I apologize, So why are they so overweight?

1134
01:08:41,479 --> 01:08:43,320
Speaker 4: Is it just future growth expectations?

1135
01:08:43,720 --> 01:08:48,120
Speaker 3: They're growing faster, so they should definitely have higher multiples. So,

1136
01:08:48,960 --> 01:08:51,280
Speaker 3: you know, people frame the question as focused on the

1137
01:08:51,360 --> 01:08:54,120
Speaker 3: megacap growth in tech, you can ask the equivalent question, Actually,

1138
01:08:54,160 --> 01:08:56,920
Speaker 3: it's a bigger part than sixty percent. Why isn't everybody

1139
01:08:56,960 --> 01:08:59,240
Speaker 3: else growing? I got into this a little bit earlier.

1140
01:08:59,360 --> 01:09:03,479
Speaker 3: It's very peculiar recovery where the cyclical parts basically haven't

1141
01:09:03,560 --> 01:09:06,559
Speaker 3: really kicked in in a big way, but it looks

1142
01:09:06,680 --> 01:09:07,920
Speaker 3: like they're kicking.

1143
01:09:07,680 --> 01:09:11,120
Speaker 2: In what other sectors are kicking and you we I

1144
01:09:11,280 --> 01:09:16,960
Speaker 2: know you've written about financials, consumer cyclicals, materials, and then

1145
01:09:17,040 --> 01:09:20,040
Speaker 2: we could talk about em and small cap and value.

1146
01:09:20,320 --> 01:09:23,559
Speaker 2: Sure what other sectors have been lagging that you find

1147
01:09:23,640 --> 01:09:24,639
Speaker 2: particularly interesting?

1148
01:09:26,000 --> 01:09:28,920
Speaker 3: So right now you know we have what I call

1149
01:09:29,160 --> 01:09:33,960
Speaker 3: simple cyclical tilt to our positioning because I talked about

1150
01:09:34,040 --> 01:09:37,080
Speaker 3: discretionary investors sitting at neutral? Why are they sitting at

1151
01:09:37,160 --> 01:09:39,800
Speaker 3: neutral because they're concerned about the cycle? What are they

1152
01:09:39,880 --> 01:09:42,800
Speaker 3: going to buy? If they get off and start participating

1153
01:09:42,840 --> 01:09:45,400
Speaker 3: in a bigger way? I would argue they will buy

1154
01:09:45,479 --> 01:09:48,599
Speaker 3: the cyclicals because that's their concern. They're unlikely to buy

1155
01:09:48,680 --> 01:09:51,760
Speaker 3: megacap growth in tech for well known reasons, all the

1156
01:09:51,840 --> 01:09:55,200
Speaker 3: reasons that you basically mentioned, So you know, if you

1157
01:09:55,280 --> 01:09:57,920
Speaker 3: phrase it form, you can phrase the question basically from

1158
01:09:58,040 --> 01:10:01,160
Speaker 3: who's actually going to buy this stuff? This group stands

1159
01:10:01,240 --> 01:10:04,640
Speaker 3: out and their concerns suggests that they would buy the

1160
01:10:04,680 --> 01:10:06,800
Speaker 3: cycling goals if they started to believe that the cycle

1161
01:10:06,920 --> 01:10:08,960
Speaker 3: is going to be fine if you look at it

1162
01:10:09,160 --> 01:10:12,080
Speaker 3: from a fundamental point of view. No, I mean, there

1163
01:10:12,120 --> 01:10:16,200
Speaker 3: aren't no signs of a huge uptick on the cignical side.

1164
01:10:16,280 --> 01:10:20,040
Speaker 3: But if you wait for those signs, equity market will

1165
01:10:20,080 --> 01:10:22,519
Speaker 3: price it far before. I mean, one of the lessons

1166
01:10:22,560 --> 01:10:24,599
Speaker 3: that I take away is you have to think about

1167
01:10:24,600 --> 01:10:27,200
Speaker 3: the S and P five recession. You know, this brick

1168
01:10:27,280 --> 01:10:31,160
Speaker 3: shaded period. Equity market falls twenty percent once the recessions

1169
01:10:31,600 --> 01:10:36,639
Speaker 3: you know, starts, but it robustly bottoms around the middle

1170
01:10:36,680 --> 01:10:40,719
Speaker 3: of the recession and before and recovers while you're still

1171
01:10:40,880 --> 01:10:43,559
Speaker 3: in this gray shaded area. So if you wait till

1172
01:10:43,640 --> 01:10:47,880
Speaker 3: payrolls turn negative, you will have missed the entire move

1173
01:10:48,200 --> 01:10:52,599
Speaker 3: and you will be back to, you know, basically catching

1174
01:10:52,760 --> 01:10:57,600
Speaker 3: that small exactly. So equities turn up when there's a

1175
01:10:57,640 --> 01:11:00,799
Speaker 3: positive probability that you're going to basically have a recovery.

1176
01:11:00,880 --> 01:11:03,040
Speaker 3: Because you've been in a recession for so long.

1177
01:11:03,240 --> 01:11:06,120
Speaker 2: You've identified a number of risks earlier in the year,

1178
01:11:06,200 --> 01:11:09,960
Speaker 2: and I'm curious if you still think they are significant.

1179
01:11:10,520 --> 01:11:16,080
Speaker 2: Protectionist trade policies and immigration policies. Are those still potential

1180
01:11:16,479 --> 01:11:19,200
Speaker 2: growth pressures or inflation pressures?

1181
01:11:20,280 --> 01:11:23,640
Speaker 3: I think on the tariffs basically they've proved to be

1182
01:11:26,360 --> 01:11:30,200
Speaker 3: exactly and so I don't worry about that. I don't

1183
01:11:30,240 --> 01:11:32,719
Speaker 3: think it closes the issue. I mean, they could still

1184
01:11:32,800 --> 01:11:34,760
Speaker 3: be negatives that come out of that that we're just

1185
01:11:34,920 --> 01:11:38,240
Speaker 3: not completely aware of yet. But in that event, you know,

1186
01:11:38,320 --> 01:11:40,400
Speaker 3: a big part of our thesis for this year has

1187
01:11:40,520 --> 01:11:44,800
Speaker 3: been that if things get bad, you know, at the

1188
01:11:44,880 --> 01:11:48,040
Speaker 3: end of the day, any administration cares about its approval ratings,

1189
01:11:48,080 --> 01:11:50,960
Speaker 3: the approved ratings about the economy, so they will relent,

1190
01:11:51,400 --> 01:11:53,559
Speaker 3: and especially if it's caused by one of the policies.

1191
01:11:53,600 --> 01:11:55,280
Speaker 3: So that's been a big part of our thesis for

1192
01:11:55,360 --> 01:12:02,559
Speaker 3: staying constructive through the year. So, you know, we talk

1193
01:12:02,560 --> 01:12:05,519
Speaker 3: about risks, and I am deeply aware of what most

1194
01:12:05,560 --> 01:12:08,519
Speaker 3: people mean when they talk about risks, but where we

1195
01:12:08,600 --> 01:12:13,799
Speaker 3: are sitting, I would argue that it is my duty

1196
01:12:13,920 --> 01:12:17,120
Speaker 3: to simply point out that right now I'm much more

1197
01:12:17,200 --> 01:12:20,280
Speaker 3: concerned about upside risks than downside.

1198
01:12:19,800 --> 01:12:22,880
Speaker 4: And melts up potential. A.

1199
01:12:23,160 --> 01:12:26,840
Speaker 3: Yes, because we don't we stop worrying about going into

1200
01:12:26,880 --> 01:12:30,920
Speaker 3: a recession, We stop worrying about the politics, and we

1201
01:12:30,960 --> 01:12:33,760
Speaker 3: stop worrying about the tariffs because companies are dealing.

1202
01:12:33,520 --> 01:12:36,200
Speaker 2: With it, and suddenly there are blue skies out there.

1203
01:12:37,960 --> 01:12:38,480
Speaker 3: Exactly.

1204
01:12:38,680 --> 01:12:42,120
Speaker 4: So last question before I get to my favorite questions.

1205
01:12:42,360 --> 01:12:45,559
Speaker 2: Okay, what do you think investors are not paying attention

1206
01:12:45,680 --> 01:12:49,200
Speaker 2: to or not talking about that perhaps they should, could

1207
01:12:49,200 --> 01:12:51,080
Speaker 2: be a policy, could be an asset class.

1208
01:12:51,680 --> 01:12:53,840
Speaker 4: What do you think is getting overlooked.

1209
01:12:54,360 --> 01:12:56,920
Speaker 3: The context that we are in? What I was talking

1210
01:12:56,960 --> 01:13:02,320
Speaker 3: about basically that a three percent growth with a four

1211
01:13:02,400 --> 01:13:06,160
Speaker 3: percent unemployment happens only five or six percent of the time,

1212
01:13:06,800 --> 01:13:12,439
Speaker 3: and it unleashes certain dynamics. And you know, it started

1213
01:13:12,960 --> 01:13:17,360
Speaker 3: during the previous administration and has continued in this administration.

1214
01:13:18,080 --> 01:13:21,080
Speaker 3: So it's not necessarily about the policies.

1215
01:13:21,320 --> 01:13:23,360
Speaker 2: So we've got a lot of noise and a lot

1216
01:13:23,439 --> 01:13:26,519
Speaker 2: of headlines and a lot of news coverage. Is that

1217
01:13:26,680 --> 01:13:32,280
Speaker 2: obscuring what is fundamentally underneath everything? A robust economy and

1218
01:13:32,320 --> 01:13:36,759
Speaker 2: a healthy market, I believe, So yeah, really interesting stuff.

1219
01:13:37,360 --> 01:13:41,800
Speaker 2: Let's jump to our favorite questions, starting with the question

1220
01:13:41,960 --> 01:13:45,640
Speaker 2: that brought me to you, which is who are your

1221
01:13:45,720 --> 01:13:49,240
Speaker 2: mentors who helped shape your career? So many people, so

1222
01:13:49,360 --> 01:13:52,880
Speaker 2: many guests of this show have mentioned you who helped

1223
01:13:52,880 --> 01:13:53,679
Speaker 2: shape your career.

1224
01:13:54,800 --> 01:13:58,080
Speaker 3: So I started my career at the research department at

1225
01:13:58,080 --> 01:14:01,599
Speaker 3: the IMF and the most important mentor, I would say

1226
01:14:02,240 --> 01:14:07,160
Speaker 3: was my boss is a gentleman called Michael Dooley, ex

1227
01:14:07,439 --> 01:14:11,559
Speaker 3: Federal Reserve, you know, at some of the highest levels,

1228
01:14:11,600 --> 01:14:16,360
Speaker 3: but was at the IMF then he I was just

1229
01:14:16,439 --> 01:14:19,720
Speaker 3: out of graduate school. He taught me basically how to

1230
01:14:20,400 --> 01:14:23,519
Speaker 3: think critically, how to stand on my own feet, and

1231
01:14:23,680 --> 01:14:27,400
Speaker 3: most importantly, how to communicate things or the essence of

1232
01:14:27,560 --> 01:14:29,320
Speaker 3: things in a very simple way.

1233
01:14:30,760 --> 01:14:33,000
Speaker 2: That's a great, great answer. Let's talk about books. What

1234
01:14:33,080 --> 01:14:35,000
Speaker 2: are some of your favorites? What are you reading currently?

1235
01:14:35,600 --> 01:14:38,000
Speaker 3: So, I'm definitely a fiction reader. It gives me a

1236
01:14:38,080 --> 01:14:40,200
Speaker 3: good break from where I live and what I do.

1237
01:14:41,200 --> 01:14:49,640
Speaker 3: I'm currently reading Isabelle Allende's books. I'm currently on a

1238
01:14:49,800 --> 01:14:52,320
Speaker 3: Long Pedal by the Sea, which is a book about Chile.

1239
01:14:53,240 --> 01:14:56,960
Speaker 2: Really interesting. What about streaming outside of this show? What

1240
01:14:57,040 --> 01:15:00,360
Speaker 2: are you watching listening to? What keeps you entertained when

1241
01:15:00,400 --> 01:15:01,400
Speaker 2: you have a little downtime?

1242
01:15:01,760 --> 01:15:04,160
Speaker 3: Given my background, I'm definitely big Bollywood fan.

1243
01:15:04,640 --> 01:15:05,320
Speaker 2: Oh really.

1244
01:15:06,760 --> 01:15:09,160
Speaker 3: Yeah, I'm very partial to Indian movies.

1245
01:15:10,120 --> 01:15:12,080
Speaker 4: And give us a title that some of them are.

1246
01:15:12,600 --> 01:15:15,760
Speaker 3: One that I really liked its own prime. Actually it's

1247
01:15:15,880 --> 01:15:17,320
Speaker 3: called Tonda t A.

1248
01:15:17,560 --> 01:15:20,240
Speaker 2: N d A v uh huh.

1249
01:15:20,320 --> 01:15:25,800
Speaker 3: What's that about it's about politics in political career, and

1250
01:15:26,080 --> 01:15:31,280
Speaker 3: unfortunately they did not allow the season two to be

1251
01:15:32,240 --> 01:15:36,320
Speaker 3: the authorities didn't allow season two to in India.

1252
01:15:36,360 --> 01:15:40,840
Speaker 4: They going off, Yeah, yeah, well, thank goodness, nothing like that.

1253
01:15:40,920 --> 01:15:42,599
Speaker 3: But you still watch season one?

1254
01:15:42,960 --> 01:15:46,920
Speaker 2: Yeah, all right. Our final two questions, what sort of

1255
01:15:47,000 --> 01:15:50,160
Speaker 2: advice would you give a recent college grad interest in

1256
01:15:50,240 --> 01:15:55,040
Speaker 2: a career in either economic policy analysis, asset allocation, or

1257
01:15:55,520 --> 01:15:56,160
Speaker 2: just investing.

1258
01:15:56,840 --> 01:16:00,439
Speaker 3: Yeah, I think that you know, a working on Wall

1259
01:16:00,520 --> 01:16:02,560
Speaker 3: Street or in finance. I mean, there's a lot of

1260
01:16:02,640 --> 01:16:05,599
Speaker 3: different things you can do, and I think for young

1261
01:16:05,680 --> 01:16:08,760
Speaker 3: people starting out, the biggest challenge is to figure out

1262
01:16:09,000 --> 01:16:12,040
Speaker 3: where you know, how do I match basically what I'm

1263
01:16:12,080 --> 01:16:16,960
Speaker 3: most interested in and where my abilities are. And my

1264
01:16:17,080 --> 01:16:19,920
Speaker 3: advice would be to go with where your interests are,

1265
01:16:20,080 --> 01:16:24,320
Speaker 3: the ability will come. I just went through recruiting process

1266
01:16:24,439 --> 01:16:28,639
Speaker 3: and just hired somebody from our grad program onto my team.

1267
01:16:29,120 --> 01:16:29,559
Speaker 4: Interesting.

1268
01:16:29,680 --> 01:16:31,720
Speaker 2: And our final question, what do you know about the

1269
01:16:31,760 --> 01:16:35,080
Speaker 2: world of economics and investing today? Would have been helpful

1270
01:16:35,120 --> 01:16:38,519
Speaker 2: when you were starting out back at the IMF in

1271
01:16:38,880 --> 01:16:40,160
Speaker 2: the nineteen nineties.

1272
01:16:41,320 --> 01:16:45,760
Speaker 3: To ignore everything except the economy. You all heard this

1273
01:16:45,960 --> 01:16:49,759
Speaker 3: expression right about presidential elections, it's about the economy stupid,

1274
01:16:51,040 --> 01:16:54,360
Speaker 3: it's still accurate, and the S and P five hundred

1275
01:16:54,439 --> 01:17:00,840
Speaker 3: is about earnings period positioning valuation. It all fits in,

1276
01:17:02,120 --> 01:17:05,679
Speaker 3: but the underlying trend is all basically coming from earnings.

1277
01:17:06,280 --> 01:17:10,240
Speaker 2: Totally, totally fascinating. Thank you, Binkie for being so generous

1278
01:17:10,320 --> 01:17:13,400
Speaker 2: with your time. We have been speaking with Binkie Chada.

1279
01:17:13,479 --> 01:17:16,920
Speaker 2: He is the chief US Equity and Global Strategist and

1280
01:17:17,120 --> 01:17:21,120
Speaker 2: head of asset Allocation at Deutsche Banks Securities. If you

1281
01:17:21,360 --> 01:17:23,920
Speaker 2: enjoy this conversation well, be sure to check out any

1282
01:17:24,000 --> 01:17:27,679
Speaker 2: of the five hundred and seventy seven we've done over

1283
01:17:27,760 --> 01:17:32,320
Speaker 2: the past eleven years. You can find those at iTunes, Spotify,

1284
01:17:32,520 --> 01:17:38,200
Speaker 2: Bloomberg YouTube, or wherever you get your favorite podcasts. Be

1285
01:17:38,320 --> 01:17:40,519
Speaker 2: sure and check out my new book How Not to

1286
01:17:40,720 --> 01:17:44,680
Speaker 2: Invest The Ideas, numbers, and behaviors that destroy wealth and

1287
01:17:44,800 --> 01:17:47,680
Speaker 2: how to avoid them How Not to Invest at your

1288
01:17:47,720 --> 01:17:48,640
Speaker 2: favorite bookseller.

1289
01:17:49,240 --> 01:17:50,600
Speaker 4: I would be remiss if I do not.

1290
01:17:50,680 --> 01:17:53,599
Speaker 2: Thank the track team that helps put these conversations together

1291
01:17:53,800 --> 01:17:58,639
Speaker 2: each week. Alexis Noriega is my video producer. Anna Luke

1292
01:17:58,880 --> 01:18:02,120
Speaker 2: is my producer. Sage Bauman is the head of podcasts

1293
01:18:02,479 --> 01:18:06,560
Speaker 2: at Bloomberg. Sean Russo is my researcher. I'm Barry Rudoltz.

1294
01:18:06,880 --> 01:18:10,880
Speaker 2: You've been listening to Masters in Business on Bloomberg Radio