WEBVTT - Getting Earnings Right with Deutsche Bank's Binky Chadha 0:00:02.480 --> 0:00:11.840 Bloomberg Audio Studios, podcasts, radio news. This is Masters in 0:00:11.920 --> 0:00:15.440 Business with Barry Ritholts on Bloomberg Radio. 0:00:16.440 --> 0:00:20.080 I'm Barry Ridholts on the latest Masters in Business podcast. 0:00:20.160 --> 0:00:24.120 Another banger, I have Binki Chada. He's chief US strategist 0:00:24.239 --> 0:00:30.600 for Deutsche Bank Securities. Fascinating career and approach to looking 0:00:30.720 --> 0:00:36.360 at markets. He's an economist, but essentially operates as a 0:00:36.400 --> 0:00:40.720 market strategist. He's been fairly constructive where he's supposed to be. 0:00:40.800 --> 0:00:43.839 Started the year twenty twenty five with the seven thousand 0:00:43.960 --> 0:00:47.200 target on the S and P five hundred brings in 0:00:47.320 --> 0:00:50.280 a lot of different factors. That makes his work so 0:00:50.440 --> 0:00:55.600 interesting at Deutsche Bank Securities, not just economics, but FX equities, 0:00:56.280 --> 0:01:00.600 global perspective focused on US equities. I thought this conversation 0:01:00.720 --> 0:01:04.120 was absolutely fascinating, and I think you will also with 0:01:04.240 --> 0:01:10.160 no further ado, my interview of Deutsche Bank Securities Binkie Chada, 0:01:10.840 --> 0:01:13.160 Binki Chada, Welcome to Bloomberg. 0:01:14.040 --> 0:01:14.399 Thank you. 0:01:14.920 --> 0:01:17.640 So. I have been looking forward to this conversation for 0:01:17.680 --> 0:01:22.280 a long time, primarily because so many people when I 0:01:22.400 --> 0:01:26.760 asked them who their mentors are, reference you. So you 0:01:26.840 --> 0:01:29.480 have a lot of influence throughout the street. 0:01:29.640 --> 0:01:30.680 That's very guind. 0:01:31.760 --> 0:01:34.320 We'll come back to that a little later. Let's start 0:01:34.360 --> 0:01:37.959 with your career. You get a bachelor's in mathematics and 0:01:38.000 --> 0:01:43.120 computer science from Dennison and then a PhD in philosophy 0:01:43.200 --> 0:01:45.479 focused on economics from Colombia. Is that right? 0:01:45.560 --> 0:01:46.840 A PhD in economics? 0:01:46.880 --> 0:01:49.120 So what was the career plan. 0:01:49.920 --> 0:01:53.040 The career planned was, you know, to get a PhD 0:01:53.080 --> 0:01:57.840 in economics and study development economics and alleviate poverty and 0:01:57.880 --> 0:02:02.040 help the world. I went to graduates school and graduate school, 0:02:02.240 --> 0:02:07.559 you know that out of here exactly, and. 0:02:07.600 --> 0:02:10.400 There's a whole lot of debt, go into go do 0:02:10.560 --> 0:02:11.440 some well somewhere. 0:02:11.480 --> 0:02:14.120 Well, I mean I think that development economics is sort 0:02:14.120 --> 0:02:18.520 of builds on is not necessarily core. You know, core 0:02:18.680 --> 0:02:22.560 is micro and macro. And I ended up basically studying 0:02:22.639 --> 0:02:28.320 macro and then went to basically work at the International 0:02:28.360 --> 0:02:29.320 Monetary Fund and. 0:02:29.720 --> 0:02:32.000 First in the first job right out of school. You 0:02:32.040 --> 0:02:34.680 were there for a while, seventy seventeen years. So what 0:02:34.720 --> 0:02:37.080 were the various positions you had. I saw a division 0:02:37.160 --> 0:02:39.400 chief of the Euro Area and Global Markets. 0:02:39.520 --> 0:02:42.200 Yeah, I was doing in chronological orders. So I started 0:02:42.240 --> 0:02:46.000 basically in the So the IMAF has a grad program 0:02:46.120 --> 0:02:50.200 just like any investment bank. It's called the Economist program. 0:02:51.040 --> 0:02:55.520 And my second assignment was in research, and I stayed 0:02:55.560 --> 0:02:58.720 in research for the next few years. It was the 0:02:58.880 --> 0:03:03.240 heyday of the IMA to Research department under Jacob Frankel 0:03:03.360 --> 0:03:07.000 and then Michael Musa, and we had all the world's 0:03:07.080 --> 0:03:13.040 leading researchers visiting the IMF. And then the Iron Curtain 0:03:13.080 --> 0:03:16.480 came down and the IMF suddenly had thirty new member 0:03:16.520 --> 0:03:22.119 countries and we all got pulled into working on various 0:03:22.160 --> 0:03:25.040 aspects of that. So I worked on Bulgaria pretty much 0:03:25.080 --> 0:03:26.760 full time for a year. 0:03:27.360 --> 0:03:30.839 So you were at IMF for almost two decades. How 0:03:30.880 --> 0:03:34.920 did that experience shape your view about the economy and markets, 0:03:34.960 --> 0:03:37.000 both domestically and internationally. 0:03:37.120 --> 0:03:41.440 Yeah, so, you know, I started in the research department, 0:03:41.520 --> 0:03:44.000 but I went from there to the Asian Department. And 0:03:44.560 --> 0:03:48.200 even while in the Research department, like my participation in Bulgaria, 0:03:48.640 --> 0:03:52.320 we always, oh, at least I always, you know, it 0:03:52.680 --> 0:03:56.000 was eager to participate in the IMF's bread and butter work, 0:03:56.040 --> 0:03:59.680 which is really country work. So I remember going to 0:04:00.080 --> 0:04:05.240 Singapore in my very early days. Singapore is, you know, 0:04:06.240 --> 0:04:09.360 obviously a small country, but because it's a small country, 0:04:09.800 --> 0:04:13.360 has issues, especially from a development strategy point of view, 0:04:13.400 --> 0:04:16.040 that are sort of key. You remember in the nineteen 0:04:16.080 --> 0:04:18.640 seventies we used to talk about the knicks, you know, 0:04:18.800 --> 0:04:21.440 So I mean I could talk quite a while about Singapore. 0:04:21.640 --> 0:04:27.200 But Singapore started in the early nineteen seventies with a 0:04:27.279 --> 0:04:31.160 ten to twelve percent unemployment rate, had low age, export 0:04:31.240 --> 0:04:37.440 led growth model. By nineteen seventy nine, unemployment was two percent. 0:04:37.640 --> 0:04:42.520 Health had been strong, and because of the peculiarities and 0:04:42.560 --> 0:04:47.360 the politics of Singapore, it's ethnic Chinese that moved out 0:04:47.360 --> 0:04:50.840 of Malaysia to have an independent country. When you want 0:04:50.880 --> 0:04:53.560 to grow rapidly but you only have two percent unemployment, 0:04:54.279 --> 0:04:58.479 you would end up sort of violating the principle what 0:04:58.560 --> 0:05:01.359 you were formed because you would need basically lots of 0:05:01.360 --> 0:05:05.640 important labor from Malaysia and Indonesia. 0:05:05.200 --> 0:05:08.520 And a wild success story. Though Singapore's economy has done 0:05:08.560 --> 0:05:08.960 really well. 0:05:09.040 --> 0:05:13.480 Has so it has because they made a very concerned 0:05:13.640 --> 0:05:18.560 push at the time to move basically towards higher value 0:05:18.600 --> 0:05:24.760 added activities. And the first paper I ever wrote on 0:05:24.880 --> 0:05:28.560 a country was really Singapore, and it's about Singapore's high 0:05:28.640 --> 0:05:33.880 wage policy. They announced in the increase in real labor 0:05:34.040 --> 0:05:37.640 costs or wages. It's also sort of the retirement plan 0:05:38.320 --> 0:05:43.400 of six zero percent in nineteen seventy nine to work 0:05:43.480 --> 0:05:47.240 through the system over the next three years, and it 0:05:47.400 --> 0:05:53.120 was wildly successful in basically, you know, turning the economy 0:05:53.320 --> 0:05:57.600 into sort of a much higher value added growth part. 0:05:57.760 --> 0:06:01.520 I mean, finance was some of it, but it was 0:06:01.680 --> 0:06:04.400 you know, the focus is more on sort of high 0:06:04.440 --> 0:06:05.400 tech manufacturing. 0:06:05.760 --> 0:06:10.320 So today you're overseeing asset allocation primarily for US based 0:06:10.360 --> 0:06:13.000 investors for Deutsche Bank. I know you're global. 0:06:13.080 --> 0:06:17.000 Also, yes, that is true my focus, partly because I'm 0:06:17.040 --> 0:06:20.480 here and partly because the US is the most important 0:06:20.520 --> 0:06:25.679 and biggest driver. I've been our equity strategist in two 0:06:25.720 --> 0:06:29.159 different stints over periods, so I actually spent most of 0:06:29.200 --> 0:06:31.600 my time basically on US equities. 0:06:31.600 --> 0:06:34.520 I would say, so, how do the lessons from Singapore 0:06:34.560 --> 0:06:39.640 and Bulgaria or just global perspectives via the IMF, how 0:06:39.680 --> 0:06:44.279 does that translate into making better asset allocation decisions for 0:06:44.440 --> 0:06:45.280 US investors. 0:06:47.000 --> 0:06:51.320 I think those experiences are basically, you know, things that 0:06:51.400 --> 0:06:54.800 sort of inform you about the bigger picture and forces 0:06:54.839 --> 0:06:58.680 that are ongoing that you know, one may not sort 0:06:58.720 --> 0:07:02.040 of see data day. Certainly not day to day but 0:07:02.200 --> 0:07:04.560 week to week, but sort of you know, explains the 0:07:04.600 --> 0:07:09.200 direction in which things are going. And I think Singapore 0:07:09.320 --> 0:07:11.640 is sort of a good example for I mean, we 0:07:11.800 --> 0:07:15.880 started talking about development economics, which was but it's about 0:07:16.000 --> 0:07:19.200 growth economics and development economics and sort of like, you know, 0:07:19.280 --> 0:07:22.480 does policy really have a rule a role or should 0:07:22.520 --> 0:07:24.640 we just let the free markets keep going? 0:07:24.920 --> 0:07:28.080 Really really interesting, So after seventeen years at the IMF, 0:07:28.440 --> 0:07:30.840 what led you to Deutsche Bank in four. 0:07:32.520 --> 0:07:37.280 So the IMF does not historically never really spoke about 0:07:37.320 --> 0:07:41.200 exchange rates because the market sensitive variable. That was the 0:07:41.240 --> 0:07:43.400 thinking at the time. But that didn't mean that the 0:07:43.400 --> 0:07:47.400 IMF didn't spend a lot of energy working on FX. 0:07:47.600 --> 0:07:50.600 We had an internal group that you know, some people 0:07:50.640 --> 0:07:54.280 in the market knew, and basically because we used to 0:07:54.320 --> 0:07:58.720 have a dialogue with the markets, there was an opening 0:07:58.800 --> 0:08:05.360 basically in FX because a the FX strategists had been 0:08:05.360 --> 0:08:10.720 around for quite a while, he had moved on or 0:08:10.760 --> 0:08:14.120 retired basically, uh and and so they asked me because 0:08:14.240 --> 0:08:18.840 they deutsch Bank at the time. So the strategist that 0:08:18.840 --> 0:08:22.640 I'm referring to, his name is Mike Rosenberg. He really 0:08:22.680 --> 0:08:26.840 did FX for me top down macro point of view. 0:08:27.520 --> 0:08:30.560 Uh and and it's hard to find people like that. 0:08:31.400 --> 0:08:33.320 But I was at the i m F. I was 0:08:33.360 --> 0:08:36.760 trained as an economist, uh and I had done plenty 0:08:36.800 --> 0:08:37.760 of work on FX. 0:08:37.840 --> 0:08:43.240 So, given, given all your background in economics, currency development, 0:08:44.240 --> 0:08:47.880 how do you end up eventually as an equity strategist 0:08:48.520 --> 0:08:52.559 Because that seems like sure, it's it's adjacent to economic 0:08:52.960 --> 0:08:53.800 and economists. 0:08:54.160 --> 0:08:58.080 So so for a few years, uh, a last few 0:08:58.160 --> 0:09:00.840 years at the IMF, I was actually part of a 0:09:00.920 --> 0:09:06.839 small group that was responsible for developing and maintaining basically 0:09:07.040 --> 0:09:10.880 a dialogue with the markets. I used to report to 0:09:11.000 --> 0:09:14.200 Stanley Fisher, who said, I'm tired of reading in the 0:09:14.240 --> 0:09:17.640 newspaper on the way to work that another country had 0:09:17.679 --> 0:09:20.800 gone under and somebody should be having a dialogue. 0:09:20.800 --> 0:09:22.240 And all the time where it was Fisher. 0:09:23.960 --> 0:09:28.120 It was Stanley Fisher. He was the first Deputy Managing 0:09:28.160 --> 0:09:31.920 Director of the IMF in the late nineties, which is 0:09:32.000 --> 0:09:37.640 so this is soon after the Asian financial crisis, and 0:09:37.679 --> 0:09:41.240 then sort of you could argue that the dominos continued 0:09:41.320 --> 0:09:42.600 for the next few years. 0:09:42.920 --> 0:09:45.880 When you reported to Stanley Fisher, was he at IMF 0:09:46.000 --> 0:09:47.760 or he had or had he gone else He. 0:09:48.040 --> 0:09:50.640 Was at the IMAF. He was the first deputy Managing director, 0:09:50.679 --> 0:09:53.480 which would be the counterpart of being the CEO as 0:09:53.480 --> 0:09:56.079 opposed to being the president of the So he ran 0:09:56.120 --> 0:10:01.760 the IMF intellectually and otherwise. And it was a small 0:10:01.760 --> 0:10:04.960 group of us that you know, basically was a financial 0:10:05.000 --> 0:10:09.880 markets dialogue with an open license to go out there 0:10:09.920 --> 0:10:13.160 and tell us about any and everything that you think 0:10:13.200 --> 0:10:13.920 that matters. 0:10:14.440 --> 0:10:18.600 So how do you transition from head of Foreign Exchange 0:10:18.640 --> 0:10:21.839 Research to US chief US Equity Strategy. 0:10:22.280 --> 0:10:23.840 So what I was going to say on that was 0:10:23.880 --> 0:10:28.520 simply that you know, I came to do FX strategy 0:10:28.559 --> 0:10:32.560 and research, but I really wanted to do things more 0:10:32.679 --> 0:10:35.680 sort of close to the markets. And there was a 0:10:35.760 --> 0:10:38.599 simple practical issue, which is if you want to be 0:10:38.679 --> 0:10:41.160 here in the markets. Yeah, the center of liquidity was 0:10:41.200 --> 0:10:45.120 really seven am to eight a m. London time, and 0:10:45.400 --> 0:10:48.480 and so you either live in London or you know, 0:10:48.679 --> 0:10:52.240 you find a US asset class. So I found US equity. 0:10:52.360 --> 0:10:55.480 So yeah, it's purely opposed to covering FX and London 0:10:55.880 --> 0:10:57.920 you did actually in stay in the middle of the night. 0:11:00.160 --> 0:11:07.679 So so since we're talking about both equity and foreign exchange. 0:11:07.960 --> 0:11:14.040 You've said, we have favorable investor positioning, a stable dollar investor, 0:11:14.320 --> 0:11:18.839 animal spirits and robust buyback activity, lots of m and 0:11:18.920 --> 0:11:24.760 A activity going on, and high business confidence. That sounds 0:11:24.800 --> 0:11:27.319 like a fairly bullish set of factors. 0:11:28.720 --> 0:11:31.440 It is a very bullish set of factors. What I 0:11:31.480 --> 0:11:36.120 would point out is that, you know, equities historically are 0:11:36.120 --> 0:11:38.880 really about the business cycle, and that's why people wrote 0:11:39.360 --> 0:11:43.000 pieces that are well known on Wall Street there from 0:11:43.040 --> 0:11:47.080 some time ago that you know, getting at what drives 0:11:47.080 --> 0:11:49.800 the cycle. And once upon a time, the US business 0:11:49.840 --> 0:11:52.600 cycle was just really the housing cycle. That's a very 0:11:52.600 --> 0:11:57.439 famous paper with that title. And you know, if you 0:11:57.600 --> 0:12:01.880 fast forward from there basically to do today, we have 0:12:01.920 --> 0:12:05.319 a very very very peculiar cycle, is the way I 0:12:05.360 --> 0:12:09.640 would put it. We've had for the last two almost 0:12:09.679 --> 0:12:14.040 three years now, essentially full employment in the labor market. 0:12:14.440 --> 0:12:17.840 And what is that odds with the traditional cycle is 0:12:17.880 --> 0:12:21.800 that when unemployment is low, you're typically at the end 0:12:21.800 --> 0:12:24.880 of the cycle and growth tends to be low. But 0:12:24.920 --> 0:12:26.959 for the last two to three years, what we've had 0:12:27.080 --> 0:12:32.840 is four percent approximately unemployment, but GDP growth, especially underlying 0:12:32.840 --> 0:12:36.520 GDP roads running pretty steady at three percent. Showing some 0:12:36.559 --> 0:12:40.240 signs of going even higher basically, and what I would 0:12:40.240 --> 0:12:46.160 say is historically that is very very rare. It's happened 0:12:46.320 --> 0:12:49.240 only six percent of the time if you do things 0:12:49.280 --> 0:12:52.240 on a quarterly basis, six percent of the time since 0:12:52.280 --> 0:12:57.200 World War Two. And it's no secret when those two 0:12:57.320 --> 0:13:01.400 times were one was in the nineteen sixties. I would argue, basically, 0:13:01.840 --> 0:13:05.000 that's really the takeoff. That's really the post World War 0:13:05.080 --> 0:13:07.880 recovery with a big lag because people didn't know in 0:13:07.920 --> 0:13:11.360 the fifties would exactly do because you could only extrapolate 0:13:11.400 --> 0:13:14.680 the great you know, the Great Depression and World War Two, 0:13:15.040 --> 0:13:18.800 so it took a while. But the sixties is really 0:13:18.880 --> 0:13:21.600 the post World War two recovery. And the second time 0:13:21.640 --> 0:13:26.400 that happened is more recently, and everybody is reminded of 0:13:26.440 --> 0:13:28.960 that now, is the second half of the nineteen nineties. 0:13:29.600 --> 0:13:32.280 But it goes without saying that both of those periods, 0:13:33.280 --> 0:13:37.120 like the current period, have been very good basically for 0:13:37.440 --> 0:13:42.719 equity markets. If when unemployment, so when you have a 0:13:42.800 --> 0:13:45.720 job but growth is strong, risk appetite is going to 0:13:45.720 --> 0:13:49.640 be high. I think that's not you know, surprising, and 0:13:50.320 --> 0:13:53.480 that's kind of almost exactly where we are. 0:13:53.679 --> 0:13:57.440 So you mentioned the sixties, you mentioned the nineties. I 0:13:57.480 --> 0:14:00.720 have to ask you about the twenty twenties, which, on 0:14:00.760 --> 0:14:03.679 the one hand, and we'll circle back to housing. I'm 0:14:03.760 --> 0:14:07.559 fascinated by that. But this feels like a little bit 0:14:07.600 --> 0:14:11.360 of a to use your word, peculiar cycle, because during 0:14:11.360 --> 0:14:15.720 the pandemic we had the biggest after fifteen years of 0:14:16.360 --> 0:14:19.920 more or less of monetary driven stimulus, we had the 0:14:20.000 --> 0:14:23.400 single biggest fiscal stimulus at least as a percentage of 0:14:23.400 --> 0:14:29.040 GDP since World War Two? Are we seeing that boom 0:14:29.040 --> 0:14:30.840 that boom let I don't know what to call it, 0:14:30.960 --> 0:14:33.280 on a bit of a lag or has it hit 0:14:33.320 --> 0:14:36.640 the economy and is beginning to fade? 0:14:36.760 --> 0:14:39.800 From what I look at, My reading would be that 0:14:39.840 --> 0:14:42.200 this has been going on for a while. It's been 0:14:42.240 --> 0:14:47.880 going on basically through a variety of policies, and so 0:14:48.120 --> 0:14:51.200 I don't think it's really coming from the policies. I 0:14:51.280 --> 0:14:54.400 might even go far enough to say that it's happening 0:14:54.680 --> 0:14:58.760 despite the policies, because we had a massive hiccop this 0:14:58.960 --> 0:15:05.720 year and it has to do so. You know, One 0:15:05.760 --> 0:15:09.960 of the things about a cycle and how vulnerable or 0:15:10.120 --> 0:15:13.800 strong it is has to do with basically you know 0:15:14.000 --> 0:15:20.320 household and corporate balance sheets right, and so in sort 0:15:20.320 --> 0:15:24.920 of a peculiar way, we are blessed in my view, 0:15:25.360 --> 0:15:29.800 because of the global financial crisis, which created huge deleveraging 0:15:30.240 --> 0:15:34.840 on the household side, and then we had COVID, and 0:15:34.880 --> 0:15:36.920 you needed to have your balance sheets right if you 0:15:37.000 --> 0:15:41.880 were a company, and you needed to basically get used 0:15:41.920 --> 0:15:45.080 to dealing with new shocks, and arguably we got another 0:15:45.120 --> 0:15:48.560 one today. So but what I would argue, this resilience 0:15:48.640 --> 0:15:52.920 is partly a blessing of the two large shocks that 0:15:53.000 --> 0:15:54.360 we already had, and. 0:15:54.720 --> 0:15:58.760 Long before COVID, most of corporate America had refinanced all 0:15:58.760 --> 0:16:02.280 the long term debt very favorably. So heading into this, 0:16:02.800 --> 0:16:05.000 both households and companies pretty well. 0:16:04.960 --> 0:16:10.760 Situated exactly that I would agree completely, and they remain 0:16:10.880 --> 0:16:15.400 so I would say, right now, outside of a few pockets, 0:16:15.480 --> 0:16:19.640 you don't really see any signs of excess. So there's 0:16:19.720 --> 0:16:24.640 every reason to believe that it continues. And if you start, 0:16:24.760 --> 0:16:27.720 you know, by looking just at like sort of near 0:16:27.800 --> 0:16:32.840 term economic forecast, that's one idea. Basically everybody has a 0:16:32.840 --> 0:16:34.680 pickup in growth next year, so. 0:16:35.360 --> 0:16:39.840 Based on either fed cuts or we'll talk about the 0:16:39.840 --> 0:16:42.800 policy is just coming up later. What I wanted to 0:16:42.840 --> 0:16:46.400 ask you about. You mentioned housing is such a key 0:16:46.480 --> 0:16:50.880 factor in cycles. Is it a leading factor or is 0:16:50.920 --> 0:16:55.120 it a benefit of a positive business cycle? Because a 0:16:55.160 --> 0:16:59.000 lot of people kind of grew up in the two thousands, 0:16:59.040 --> 0:17:02.320 which felt very backward, right the first time we had 0:17:02.800 --> 0:17:06.679 ultrao rates and a few generations, and so all the 0:17:06.800 --> 0:17:11.439 refinance and helock home equity, loan withdrawals, all that stuff 0:17:11.480 --> 0:17:14.800 felt like it was the real estate was driving the 0:17:14.840 --> 0:17:18.440 economy as opposed to the economy benefiting real estate. 0:17:18.600 --> 0:17:21.280 Right, So what I would point out is that the 0:17:21.320 --> 0:17:24.639 housing market today is a much smaller part of the 0:17:24.760 --> 0:17:27.000 US economy than it used to be. So if you 0:17:27.040 --> 0:17:29.440 go back to the seventies, you know, we're talking six 0:17:29.600 --> 0:17:33.320 seven eight percent of GDP is housing. Wow, Today it's 0:17:33.359 --> 0:17:36.920 like more like two percent. I apologized the exact. 0:17:36.600 --> 0:17:38.480 Decimal point, but it's a fraction of what it was. 0:17:38.720 --> 0:17:43.200 It's a fraction of what it was, and so it's 0:17:43.720 --> 0:17:46.280 I mean, and we were just talking about three percent 0:17:46.359 --> 0:17:49.800 GDP growth for the last two two and a half years. 0:17:50.160 --> 0:17:52.400 And housing has been in the dol drums for quite 0:17:52.440 --> 0:17:52.919 a while. 0:17:53.160 --> 0:17:57.399 We've been underbuilding single family homes since the financial crisis, 0:17:57.840 --> 0:17:59.280 so it's not a big contributor there. 0:17:59.320 --> 0:18:01.000 What are we doing fifty eight hundred. 0:18:01.440 --> 0:18:04.200 But what is very peculiar about this cycle is that, 0:18:05.080 --> 0:18:07.480 you know, so there is a very important fact when 0:18:07.520 --> 0:18:09.919 you think about the three percent or three percent plus 0:18:09.960 --> 0:18:14.800 GDP growth numbers, which is you know that it actually 0:18:15.640 --> 0:18:20.520 and equities are about cyclicality and cyclical variation. So recessions are 0:18:20.560 --> 0:18:24.159 big events, and recoveries are big events. But what I 0:18:24.200 --> 0:18:27.639 think is easily missed is that two thirds of the 0:18:27.760 --> 0:18:32.800 US economy is actually stable growth economy. It's like the 0:18:32.840 --> 0:18:36.720 old days of consumer staples earnings, where every company analyst 0:18:36.760 --> 0:18:38.399 in the room would get mad when I would say, 0:18:38.440 --> 0:18:40.119 you don't need an analyst. They tell you just need 0:18:40.160 --> 0:18:42.399 a ruler to what they're earnings are going to be 0:18:42.560 --> 0:18:47.120 because I was so predictable in the same vein, two 0:18:47.240 --> 0:18:51.359 thirds of US GDP is really stable growth GDP. Now 0:18:51.400 --> 0:18:54.480 it's not rip roaring growth, but it's too you know, 0:18:54.640 --> 0:18:59.720 two percent growth. What the cycle comes from the cyclical 0:19:00.080 --> 0:19:02.960 arts basically, and that's a little bit over twenty percent 0:19:03.040 --> 0:19:07.040 of GDP, so it's not really that huge, But all 0:19:07.119 --> 0:19:10.080 the cyclicality really comes from there and when it gets going, 0:19:10.240 --> 0:19:13.200 it's very powerful. And if you think about what is 0:19:13.240 --> 0:19:16.280 the cyclical parts, I can go further. Basically it would 0:19:16.280 --> 0:19:21.199 be number one is consumer durables, number two is corporate 0:19:21.359 --> 0:19:26.080 cap X, number three is housing, and number four is structures. 0:19:26.840 --> 0:19:30.280 And so what is extremely unusual about this recovery from 0:19:30.320 --> 0:19:32.720 my point of view, is that stable growth is doing 0:19:32.800 --> 0:19:38.879 what it's always doing. There's mostly services. It's really that. 0:19:39.119 --> 0:19:41.320 You know, if you look at the cyclical part of 0:19:41.600 --> 0:19:45.439 us GDP, yes it's growing, but it's at the bottom 0:19:45.520 --> 0:19:48.880 of the channel basically, so it actually has a lot 0:19:49.040 --> 0:19:52.679 of room to move the upside. Like the fifteen percent 0:19:52.840 --> 0:19:53.520 I'm saying. 0:19:53.760 --> 0:19:56.879 Does that include all of the tech investments in AI 0:19:57.200 --> 0:20:01.760 and data centers that seem to be just full on booming. 0:20:01.960 --> 0:20:05.680 Yeah, So the tech investment wouldn't be in here. I mean, 0:20:05.760 --> 0:20:09.119 if you look at CAPAX, if you take out so 0:20:09.520 --> 0:20:12.720 AI party, it's on the soft side. But so you 0:20:12.800 --> 0:20:15.720 can take, as I always say, you can take a 0:20:15.800 --> 0:20:18.040 various view on that, which is it's all coming from 0:20:18.119 --> 0:20:20.600 this one part, or you can take a bullish part 0:20:20.680 --> 0:20:22.840 that the other part's going to start to happen. So 0:20:23.440 --> 0:20:26.200 and here what I would get say is that it's 0:20:26.520 --> 0:20:30.560 hard to put your finger on exactly what the issue is. 0:20:31.040 --> 0:20:34.879 But there's a lot of overlaps in the different aspects 0:20:34.920 --> 0:20:36.760 of what's going on. So I just gave you the 0:20:36.880 --> 0:20:46.480 list of the four parts that are not doing great, all. 0:20:44.480 --> 0:20:48.040 Of which seems to be somewhat interest rates sensitive. And 0:20:48.200 --> 0:20:51.320 I know you're looking for a few more cuts over 0:20:51.359 --> 0:20:54.639 the next year or so. Sure is that what's going 0:20:54.720 --> 0:20:57.800 to light the next leg, start the next leg moving higher? 0:20:57.880 --> 0:21:00.480 I mean, I think interest rates are important for how saying. 0:21:01.000 --> 0:21:03.760 And durables right by how should you fill it with 0:21:03.920 --> 0:21:05.960 furniture and appliances and a car? 0:21:06.280 --> 0:21:10.520 Sure, but what I would say is I don't think 0:21:10.600 --> 0:21:14.840 that interest rates are absolutely the key because capex. We 0:21:14.960 --> 0:21:17.280 were just talking about that a little bit earlier about 0:21:17.320 --> 0:21:22.560 corporate balance sheets. Since the nineteen seventies, what corporate America 0:21:22.640 --> 0:21:26.200 learned is that you don't spend beyond your means. I 0:21:26.240 --> 0:21:28.880 would say most capacs, especially for S and P five 0:21:28.920 --> 0:21:32.720 hundred companies, is coming from internally generated cash flow. And 0:21:33.160 --> 0:21:36.760 if you look basically at the three uses of cash flow, 0:21:37.240 --> 0:21:42.160 you know, dividends, capex, and buybacks, and you take their 0:21:42.200 --> 0:21:45.040 total spending relative to their total cash flow. It's been 0:21:45.160 --> 0:21:48.200 this side of one hundred percent forever. 0:21:48.160 --> 0:21:49.680 Which sounds sounds pretty. 0:21:51.160 --> 0:21:54.320 Exactly, And so I don't think that the interest rates 0:21:54.400 --> 0:21:57.159 going to make plays such a big deal for corporates. 0:21:58.200 --> 0:21:59.640 You could even argue you, I mean, for a long 0:21:59.720 --> 0:22:01.640 time it was like, if interest rates go up after 0:22:01.680 --> 0:22:04.000 the global financial crisis, corporates are going to get killed. 0:22:04.000 --> 0:22:05.879 It was the reverse, and their earnings went up. 0:22:06.320 --> 0:22:10.119 Wall Street Journal column, why why are corporate bonds on fire? 0:22:10.280 --> 0:22:12.240 Because they seem like such a safe bet. 0:22:13.760 --> 0:22:16.520 That is exactly right, And there's been you know, market 0:22:16.600 --> 0:22:20.120 mechanisms that have in many cases actually improved the credit quality. 0:22:20.640 --> 0:22:22.240 So when we look at indicies, you want to be 0:22:22.359 --> 0:22:25.840 careful because they're not controlling for the historical credit quality. 0:22:25.880 --> 0:22:28.560 I mean, S and P. Five hundred is different because 0:22:28.640 --> 0:22:32.080 it's about earnings and your earnings power. But in terms 0:22:32.119 --> 0:22:36.360 of credit quality, you know a lot of the indices, 0:22:36.480 --> 0:22:40.080 I mean, the current composition is better than it used 0:22:40.119 --> 0:22:42.639 to be. Now we're at a certain stage in the cycle, 0:22:42.840 --> 0:22:45.360 so we've had to two and a half years basically 0:22:45.600 --> 0:22:49.520 of you know, a fully employed labor force and strong growth. 0:22:50.640 --> 0:22:52.920 But there's been If you think about those two and 0:22:52.960 --> 0:22:57.920 a half years twenty twenty three is you know, everybody's 0:22:57.960 --> 0:23:01.119 waiting for a recession and this never change. Use I 0:23:01.320 --> 0:23:04.080 call that period the rolling VS. And we're kind of 0:23:04.119 --> 0:23:07.000 going through a similar version of the same thing right now. 0:23:06.960 --> 0:23:11.200 Meaning rolling so decreases. Do you think after a recessions 0:23:11.280 --> 0:23:12.600 that quickly? So? 0:23:13.000 --> 0:23:14.640 Actually, what I mean I call it when I say 0:23:14.680 --> 0:23:17.280 the rolling VS. What I mean is that basically, if 0:23:17.320 --> 0:23:19.960 you look back to late twenty twenty two and you 0:23:20.119 --> 0:23:24.000 looked at, you know, the forward forecast that was in 0:23:24.119 --> 0:23:28.119 the macro consensus, it was growth is here. Growth next 0:23:28.240 --> 0:23:30.880 quarter is going to be lower, in two quarters will 0:23:30.920 --> 0:23:32.720 be in a recession, and then of course we'll have 0:23:32.840 --> 0:23:36.119 a recovery. And so if you look at almost or 0:23:37.600 --> 0:23:40.400 so when the recession didn't come, well, the macro Consensus 0:23:40.480 --> 0:23:42.639 did is simply rolled it forward. They said, no, we 0:23:42.760 --> 0:23:45.399 are right, just wrong on timing, and then when that 0:23:45.520 --> 0:23:48.920 didn't happen, we went and rolled it forward. And I 0:23:49.000 --> 0:23:51.920 mean I have this chart. It's a little old now, 0:23:53.119 --> 0:23:57.119 but on the same chart as you see the rolling VS. 0:23:57.280 --> 0:23:59.480 You look at the actual data when it came in 0:24:00.119 --> 0:24:03.520 and there's you know, we're like way above closer to 0:24:03.680 --> 0:24:06.080 three percent, and people are forecasting a recession. 0:24:07.400 --> 0:24:11.400 And so those recession forecasts, we heard those in twenty one, 0:24:11.520 --> 0:24:15.040 twenty two, twenty three, like if they kept doubling down 0:24:15.119 --> 0:24:15.560 and got it. 0:24:16.480 --> 0:24:19.160 Yeah, so it's twenty twenty three and then the early 0:24:19.280 --> 0:24:23.119 part of twenty twenty four. So Deutsche Bank was we 0:24:23.240 --> 0:24:27.879 to single out our economists year excellent, but they were 0:24:28.280 --> 0:24:30.520 some of the earliest on the street of a recession 0:24:30.720 --> 0:24:33.560 is going to happen down the road. They didn't give 0:24:33.640 --> 0:24:35.800