Speaker 1: Bloomberg Audio Studios, podcasts, radio news. This is Masters in
Speaker 1: Business with Barry Ritholts on Bloomberg Radio.
Speaker 2: I'm Barry Ridholts on the latest Masters in Business podcast.
Speaker 2: Another banger, I have Binki Chada. He's chief US strategist
Speaker 2: for Deutsche Bank Securities. Fascinating career and approach to looking
Speaker 2: at markets. He's an economist, but essentially operates as a
Speaker 2: market strategist. He's been fairly constructive where he's supposed to be.
Speaker 2: Started the year twenty twenty five with the seven thousand
Speaker 2: target on the S and P five hundred brings in
Speaker 2: a lot of different factors. That makes his work so
Speaker 2: interesting at Deutsche Bank Securities, not just economics, but FX equities,
Speaker 2: global perspective focused on US equities. I thought this conversation
Speaker 2: was absolutely fascinating, and I think you will also with
Speaker 2: no further ado, my interview of Deutsche Bank Securities Binkie Chada,
Speaker 2: Binki Chada, Welcome to Bloomberg.
Speaker 3: Thank you.
Speaker 2: So. I have been looking forward to this conversation for
Speaker 2: a long time, primarily because so many people when I
Speaker 2: asked them who their mentors are, reference you. So you
Speaker 2: have a lot of influence throughout the street.
Speaker 3: That's very guind.
Speaker 2: We'll come back to that a little later. Let's start
Speaker 2: with your career. You get a bachelor's in mathematics and
Speaker 2: computer science from Dennison and then a PhD in philosophy
Speaker 2: focused on economics from Colombia. Is that right?
Speaker 3: A PhD in economics?
Speaker 4: So what was the career plan.
Speaker 3: The career planned was, you know, to get a PhD
Speaker 3: in economics and study development economics and alleviate poverty and
Speaker 3: help the world. I went to graduates school and graduate school,
Speaker 3: you know that out of here exactly, and.
Speaker 2: There's a whole lot of debt, go into go do
Speaker 2: some well somewhere.
Speaker 3: Well, I mean I think that development economics is sort
Speaker 3: of builds on is not necessarily core. You know, core
Speaker 3: is micro and macro. And I ended up basically studying
Speaker 3: macro and then went to basically work at the International
Speaker 3: Monetary Fund and.
Speaker 2: First in the first job right out of school. You
Speaker 2: were there for a while, seventy seventeen years. So what
Speaker 2: were the various positions you had. I saw a division
Speaker 2: chief of the Euro Area and Global Markets.
Speaker 3: Yeah, I was doing in chronological orders. So I started
Speaker 3: basically in the So the IMAF has a grad program
Speaker 3: just like any investment bank. It's called the Economist program.
Speaker 3: And my second assignment was in research, and I stayed
Speaker 3: in research for the next few years. It was the
Speaker 3: heyday of the IMA to Research department under Jacob Frankel
Speaker 3: and then Michael Musa, and we had all the world's
Speaker 3: leading researchers visiting the IMF. And then the Iron Curtain
Speaker 3: came down and the IMF suddenly had thirty new member
Speaker 3: countries and we all got pulled into working on various
Speaker 3: aspects of that. So I worked on Bulgaria pretty much
Speaker 3: full time for a year.
Speaker 2: So you were at IMF for almost two decades. How
Speaker 2: did that experience shape your view about the economy and markets,
Speaker 2: both domestically and internationally.
Speaker 3: Yeah, so, you know, I started in the research department,
Speaker 3: but I went from there to the Asian Department. And
Speaker 3: even while in the Research department, like my participation in Bulgaria,
Speaker 3: we always, oh, at least I always, you know, it
Speaker 3: was eager to participate in the IMF's bread and butter work,
Speaker 3: which is really country work. So I remember going to
Speaker 3: Singapore in my very early days. Singapore is, you know,
Speaker 3: obviously a small country, but because it's a small country,
Speaker 3: has issues, especially from a development strategy point of view,
Speaker 3: that are sort of key. You remember in the nineteen
Speaker 3: seventies we used to talk about the knicks, you know,
Speaker 3: So I mean I could talk quite a while about Singapore.
Speaker 3: But Singapore started in the early nineteen seventies with a
Speaker 3: ten to twelve percent unemployment rate, had low age, export
Speaker 3: led growth model. By nineteen seventy nine, unemployment was two percent.
Speaker 3: Health had been strong, and because of the peculiarities and
Speaker 3: the politics of Singapore, it's ethnic Chinese that moved out
Speaker 3: of Malaysia to have an independent country. When you want
Speaker 3: to grow rapidly but you only have two percent unemployment,
Speaker 3: you would end up sort of violating the principle what
Speaker 3: you were formed because you would need basically lots of
Speaker 3: important labor from Malaysia and Indonesia.
Speaker 2: And a wild success story. Though Singapore's economy has done
Speaker 2: really well.
Speaker 3: Has so it has because they made a very concerned
Speaker 3: push at the time to move basically towards higher value
Speaker 3: added activities. And the first paper I ever wrote on
Speaker 3: a country was really Singapore, and it's about Singapore's high
Speaker 3: wage policy. They announced in the increase in real labor
Speaker 3: costs or wages. It's also sort of the retirement plan
Speaker 3: of six zero percent in nineteen seventy nine to work
Speaker 3: through the system over the next three years, and it
Speaker 3: was wildly successful in basically, you know, turning the economy
Speaker 3: into sort of a much higher value added growth part.
Speaker 3: I mean, finance was some of it, but it was
Speaker 3: you know, the focus is more on sort of high
Speaker 3: tech manufacturing.
Speaker 2: So today you're overseeing asset allocation primarily for US based
Speaker 2: investors for Deutsche Bank. I know you're global.
Speaker 3: Also, yes, that is true my focus, partly because I'm
Speaker 3: here and partly because the US is the most important
Speaker 3: and biggest driver. I've been our equity strategist in two
Speaker 3: different stints over periods, so I actually spent most of
Speaker 3: my time basically on US equities.
Speaker 2: I would say, so, how do the lessons from Singapore
Speaker 2: and Bulgaria or just global perspectives via the IMF, how
Speaker 2: does that translate into making better asset allocation decisions for
Speaker 2: US investors.
Speaker 3: I think those experiences are basically, you know, things that
Speaker 3: sort of inform you about the bigger picture and forces
Speaker 3: that are ongoing that you know, one may not sort
Speaker 3: of see data day. Certainly not day to day but
Speaker 3: week to week, but sort of you know, explains the
Speaker 3: direction in which things are going. And I think Singapore
Speaker 3: is sort of a good example for I mean, we
Speaker 3: started talking about development economics, which was but it's about
Speaker 3: growth economics and development economics and sort of like, you know,
Speaker 3: does policy really have a rule a role or should
Speaker 3: we just let the free markets keep going?
Speaker 2: Really really interesting, So after seventeen years at the IMF,
Speaker 2: what led you to Deutsche Bank in four.
Speaker 3: So the IMF does not historically never really spoke about
Speaker 3: exchange rates because the market sensitive variable. That was the
Speaker 3: thinking at the time. But that didn't mean that the
Speaker 3: IMF didn't spend a lot of energy working on FX.
Speaker 3: We had an internal group that you know, some people
Speaker 3: in the market knew, and basically because we used to
Speaker 3: have a dialogue with the markets, there was an opening
Speaker 3: basically in FX because a the FX strategists had been
Speaker 3: around for quite a while, he had moved on or
Speaker 3: retired basically, uh and and so they asked me because
Speaker 3: they deutsch Bank at the time. So the strategist that
Speaker 3: I'm referring to, his name is Mike Rosenberg. He really
Speaker 3: did FX for me top down macro point of view.
Speaker 3: Uh and and it's hard to find people like that.
Speaker 3: But I was at the i m F. I was
Speaker 3: trained as an economist, uh and I had done plenty
Speaker 3: of work on FX.
Speaker 2: So, given, given all your background in economics, currency development,
Speaker 2: how do you end up eventually as an equity strategist
Speaker 2: Because that seems like sure, it's it's adjacent to economic
Speaker 2: and economists.
Speaker 3: So so for a few years, uh, a last few
Speaker 3: years at the IMF, I was actually part of a
Speaker 3: small group that was responsible for developing and maintaining basically
Speaker 3: a dialogue with the markets. I used to report to
Speaker 3: Stanley Fisher, who said, I'm tired of reading in the
Speaker 3: newspaper on the way to work that another country had
Speaker 3: gone under and somebody should be having a dialogue.
Speaker 4: And all the time where it was Fisher.
Speaker 3: It was Stanley Fisher. He was the first Deputy Managing
Speaker 3: Director of the IMF in the late nineties, which is
Speaker 3: so this is soon after the Asian financial crisis, and
Speaker 3: then sort of you could argue that the dominos continued
Speaker 3: for the next few years.
Speaker 2: When you reported to Stanley Fisher, was he at IMF
Speaker 2: or he had or had he gone else He.
Speaker 3: Was at the IMAF. He was the first deputy Managing director,
Speaker 3: which would be the counterpart of being the CEO as
Speaker 3: opposed to being the president of the So he ran
Speaker 3: the IMF intellectually and otherwise. And it was a small
Speaker 3: group of us that you know, basically was a financial
Speaker 3: markets dialogue with an open license to go out there
Speaker 3: and tell us about any and everything that you think
Speaker 3: that matters.
Speaker 2: So how do you transition from head of Foreign Exchange
Speaker 2: Research to US chief US Equity Strategy.
Speaker 3: So what I was going to say on that was
Speaker 3: simply that you know, I came to do FX strategy
Speaker 3: and research, but I really wanted to do things more
Speaker 3: sort of close to the markets. And there was a
Speaker 3: simple practical issue, which is if you want to be
Speaker 3: here in the markets. Yeah, the center of liquidity was
Speaker 3: really seven am to eight a m. London time, and
Speaker 3: and so you either live in London or you know,
Speaker 3: you find a US asset class. So I found US equity.
Speaker 2: So yeah, it's purely opposed to covering FX and London
Speaker 2: you did actually in stay in the middle of the night.
Speaker 2: So so since we're talking about both equity and foreign exchange.
Speaker 2: You've said, we have favorable investor positioning, a stable dollar investor,
Speaker 2: animal spirits and robust buyback activity, lots of m and
Speaker 2: A activity going on, and high business confidence. That sounds
Speaker 2: like a fairly bullish set of factors.
Speaker 3: It is a very bullish set of factors. What I
Speaker 3: would point out is that, you know, equities historically are
Speaker 3: really about the business cycle, and that's why people wrote
Speaker 3: pieces that are well known on Wall Street there from
Speaker 3: some time ago that you know, getting at what drives
Speaker 3: the cycle. And once upon a time, the US business
Speaker 3: cycle was just really the housing cycle. That's a very
Speaker 3: famous paper with that title. And you know, if you
Speaker 3: fast forward from there basically to do today, we have
Speaker 3: a very very very peculiar cycle, is the way I
Speaker 3: would put it. We've had for the last two almost
Speaker 3: three years now, essentially full employment in the labor market.
Speaker 3: And what is that odds with the traditional cycle is
Speaker 3: that when unemployment is low, you're typically at the end
Speaker 3: of the cycle and growth tends to be low. But
Speaker 3: for the last two to three years, what we've had
Speaker 3: is four percent approximately unemployment, but GDP growth, especially underlying
Speaker 3: GDP roads running pretty steady at three percent. Showing some
Speaker 3: signs of going even higher basically, and what I would
Speaker 3: say is historically that is very very rare. It's happened
Speaker 3: only six percent of the time if you do things
Speaker 3: on a quarterly basis, six percent of the time since
Speaker 3: World War Two. And it's no secret when those two
Speaker 3: times were one was in the nineteen sixties. I would argue, basically,
Speaker 3: that's really the takeoff. That's really the post World War
Speaker 3: recovery with a big lag because people didn't know in
Speaker 3: the fifties would exactly do because you could only extrapolate
Speaker 3: the great you know, the Great Depression and World War Two,
Speaker 3: so it took a while. But the sixties is really
Speaker 3: the post World War two recovery. And the second time
Speaker 3: that happened is more recently, and everybody is reminded of
Speaker 3: that now, is the second half of the nineteen nineties.
Speaker 3: But it goes without saying that both of those periods,
Speaker 3: like the current period, have been very good basically for
Speaker 3: equity markets. If when unemployment, so when you have a
Speaker 3: job but growth is strong, risk appetite is going to
Speaker 3: be high. I think that's not you know, surprising, and
Speaker 3: that's kind of almost exactly where we are.
Speaker 2: So you mentioned the sixties, you mentioned the nineties. I
Speaker 2: have to ask you about the twenty twenties, which, on
Speaker 2: the one hand, and we'll circle back to housing. I'm
Speaker 2: fascinated by that. But this feels like a little bit
Speaker 2: of a to use your word, peculiar cycle, because during
Speaker 2: the pandemic we had the biggest after fifteen years of
Speaker 2: more or less of monetary driven stimulus, we had the
Speaker 2: single biggest fiscal stimulus at least as a percentage of
Speaker 2: GDP since World War Two? Are we seeing that boom
Speaker 2: that boom let I don't know what to call it,
Speaker 2: on a bit of a lag or has it hit
Speaker 2: the economy and is beginning to fade?
Speaker 3: From what I look at, My reading would be that
Speaker 3: this has been going on for a while. It's been
Speaker 3: going on basically through a variety of policies, and so
Speaker 3: I don't think it's really coming from the policies. I
Speaker 3: might even go far enough to say that it's happening
Speaker 3: despite the policies, because we had a massive hiccop this
Speaker 3: year and it has to do so. You know, One
Speaker 3: of the things about a cycle and how vulnerable or
Speaker 3: strong it is has to do with basically you know
Speaker 3: household and corporate balance sheets right, and so in sort
Speaker 3: of a peculiar way, we are blessed in my view,
Speaker 3: because of the global financial crisis, which created huge deleveraging
Speaker 3: on the household side, and then we had COVID, and
Speaker 3: you needed to have your balance sheets right if you
Speaker 3: were a company, and you needed to basically get used
Speaker 3: to dealing with new shocks, and arguably we got another
Speaker 3: one today. So but what I would argue, this resilience
Speaker 3: is partly a blessing of the two large shocks that
Speaker 3: we already had, and.
Speaker 2: Long before COVID, most of corporate America had refinanced all
Speaker 2: the long term debt very favorably. So heading into this,
Speaker 2: both households and companies pretty well.
Speaker 3: Situated exactly that I would agree completely, and they remain
Speaker 3: so I would say, right now, outside of a few pockets,
Speaker 3: you don't really see any signs of excess. So there's
Speaker 3: every reason to believe that it continues. And if you start,
Speaker 3: you know, by looking just at like sort of near
Speaker 3: term economic forecast, that's one idea. Basically everybody has a
Speaker 3: pickup in growth next year, so.
Speaker 2: Based on either fed cuts or we'll talk about the
Speaker 2: policy is just coming up later. What I wanted to
Speaker 2: ask you about. You mentioned housing is such a key
Speaker 2: factor in cycles. Is it a leading factor or is
Speaker 2: it a benefit of a positive business cycle? Because a
Speaker 2: lot of people kind of grew up in the two thousands,
Speaker 2: which felt very backward, right the first time we had
Speaker 2: ultrao rates and a few generations, and so all the
Speaker 2: refinance and helock home equity, loan withdrawals, all that stuff
Speaker 2: felt like it was the real estate was driving the
Speaker 2: economy as opposed to the economy benefiting real estate.
Speaker 3: Right, So what I would point out is that the
Speaker 3: housing market today is a much smaller part of the
Speaker 3: US economy than it used to be. So if you
Speaker 3: go back to the seventies, you know, we're talking six
Speaker 3: seven eight percent of GDP is housing. Wow, Today it's
Speaker 3: like more like two percent. I apologized the exact.
Speaker 4: Decimal point, but it's a fraction of what it was.
Speaker 3: It's a fraction of what it was, and so it's
Speaker 3: I mean, and we were just talking about three percent
Speaker 3: GDP growth for the last two two and a half years.
Speaker 3: And housing has been in the dol drums for quite
Speaker 3: a while.
Speaker 2: We've been underbuilding single family homes since the financial crisis,
Speaker 2: so it's not a big contributor there.
Speaker 4: What are we doing fifty eight hundred.
Speaker 3: But what is very peculiar about this cycle is that,
Speaker 3: you know, so there is a very important fact when
Speaker 3: you think about the three percent or three percent plus
Speaker 3: GDP growth numbers, which is you know that it actually
Speaker 3: and equities are about cyclicality and cyclical variation. So recessions are
Speaker 3: big events, and recoveries are big events. But what I
Speaker 3: think is easily missed is that two thirds of the
Speaker 3: US economy is actually stable growth economy. It's like the
Speaker 3: old days of consumer staples earnings, where every company analyst
Speaker 3: in the room would get mad when I would say,
Speaker 3: you don't need an analyst. They tell you just need
Speaker 3: a ruler to what they're earnings are going to be
Speaker 3: because I was so predictable in the same vein, two
Speaker 3: thirds of US GDP is really stable growth GDP. Now
Speaker 3: it's not rip roaring growth, but it's too you know,
Speaker 3: two percent growth. What the cycle comes from the cyclical
Speaker 3: arts basically, and that's a little bit over twenty percent
Speaker 3: of GDP, so it's not really that huge, But all
Speaker 3: the cyclicality really comes from there and when it gets going,
Speaker 3: it's very powerful. And if you think about what is
Speaker 3: the cyclical parts, I can go further. Basically it would
Speaker 3: be number one is consumer durables, number two is corporate
Speaker 3: cap X, number three is housing, and number four is structures.
Speaker 3: And so what is extremely unusual about this recovery from
Speaker 3: my point of view, is that stable growth is doing
Speaker 3: what it's always doing. There's mostly services. It's really that.
Speaker 3: You know, if you look at the cyclical part of
Speaker 3: us GDP, yes it's growing, but it's at the bottom
Speaker 3: of the channel basically, so it actually has a lot
Speaker 3: of room to move the upside. Like the fifteen percent
Speaker 3: I'm saying.
Speaker 2: Does that include all of the tech investments in AI
Speaker 2: and data centers that seem to be just full on booming.
Speaker 3: Yeah, So the tech investment wouldn't be in here. I mean,
Speaker 3: if you look at CAPAX, if you take out so
Speaker 3: AI party, it's on the soft side. But so you
Speaker 3: can take, as I always say, you can take a
Speaker 3: various view on that, which is it's all coming from
Speaker 3: this one part, or you can take a bullish part
Speaker 3: that the other part's going to start to happen. So
Speaker 3: and here what I would get say is that it's
Speaker 3: hard to put your finger on exactly what the issue is.
Speaker 3: But there's a lot of overlaps in the different aspects
Speaker 3: of what's going on. So I just gave you the
Speaker 3: list of the four parts that are not doing great, all.
Speaker 2: Of which seems to be somewhat interest rates sensitive. And
Speaker 2: I know you're looking for a few more cuts over
Speaker 2: the next year or so. Sure is that what's going
Speaker 2: to light the next leg, start the next leg moving higher?
Speaker 3: I mean, I think interest rates are important for how saying.
Speaker 2: And durables right by how should you fill it with
Speaker 2: furniture and appliances and a car?
Speaker 3: Sure, but what I would say is I don't think
Speaker 3: that interest rates are absolutely the key because capex. We
Speaker 3: were just talking about that a little bit earlier about
Speaker 3: corporate balance sheets. Since the nineteen seventies, what corporate America
Speaker 3: learned is that you don't spend beyond your means. I
Speaker 3: would say most capacs, especially for S and P five
Speaker 3: hundred companies, is coming from internally generated cash flow. And
Speaker 3: if you look basically at the three uses of cash flow,
Speaker 3: you know, dividends, capex, and buybacks, and you take their
Speaker 3: total spending relative to their total cash flow. It's been
Speaker 3: this side of one hundred percent forever.
Speaker 4: Which sounds sounds pretty.
Speaker 3: Exactly, And so I don't think that the interest rates
Speaker 3: going to make plays such a big deal for corporates.
Speaker 3: You could even argue you, I mean, for a long
Speaker 3: time it was like, if interest rates go up after
Speaker 3: the global financial crisis, corporates are going to get killed.
Speaker 3: It was the reverse, and their earnings went up.
Speaker 2: Wall Street Journal column, why why are corporate bonds on fire?
Speaker 2: Because they seem like such a safe bet.
Speaker 3: That is exactly right, And there's been you know, market
Speaker 3: mechanisms that have in many cases actually improved the credit quality.
Speaker 3: So when we look at indicies, you want to be
Speaker 3: careful because they're not controlling for the historical credit quality.
Speaker 3: I mean, S and P. Five hundred is different because
Speaker 3: it's about earnings and your earnings power. But in terms
Speaker 3: of credit quality, you know a lot of the indices,
Speaker 3: I mean, the current composition is better than it used
Speaker 3: to be. Now we're at a certain stage in the cycle,
Speaker 3: so we've had to two and a half years basically
Speaker 3: of you know, a fully employed labor force and strong growth.
Speaker 3: But there's been If you think about those two and
Speaker 3: a half years twenty twenty three is you know, everybody's
Speaker 3: waiting for a recession and this never change. Use I
Speaker 3: call that period the rolling VS. And we're kind of
Speaker 3: going through a similar version of the same thing right now.
Speaker 2: Meaning rolling so decreases. Do you think after a recessions
Speaker 2: that quickly? So?
Speaker 3: Actually, what I mean I call it when I say
Speaker 3: the rolling VS. What I mean is that basically, if
Speaker 3: you look back to late twenty twenty two and you
Speaker 3: looked at, you know, the forward forecast that was in
Speaker 3: the macro consensus, it was growth is here. Growth next
Speaker 3: quarter is going to be lower, in two quarters will
Speaker 3: be in a recession, and then of course we'll have
Speaker 3: a recovery. And so if you look at almost or
Speaker 3: so when the recession didn't come, well, the macro Consensus
Speaker 3: did is simply rolled it forward. They said, no, we
Speaker 3: are right, just wrong on timing, and then when that
Speaker 3: didn't happen, we went and rolled it forward. And I
Speaker 3: mean I have this chart. It's a little old now,
Speaker 3: but on the same chart as you see the rolling VS.
Speaker 3: You look at the actual data when it came in
Speaker 3: and there's you know, we're like way above closer to
Speaker 3: three percent, and people are forecasting a recession.
Speaker 2: And so those recession forecasts, we heard those in twenty one,
Speaker 2: twenty two, twenty three, like if they kept doubling down
Speaker 2: and got it.
Speaker 3: Yeah, so it's twenty twenty three and then the early
Speaker 3: part of twenty twenty four. So Deutsche Bank was we
Speaker 3: to single out our economists year excellent, but they were
Speaker 3: some of the earliest on the street of a recession
Speaker 3: is going to happen down the road. They didn't give
Speaker 3: up the recession call, I believe, till the first quarter
Speaker 3: of twenty twenty four. And so from a company point
Speaker 3: of view, if you were listening to companies and you know,
Speaker 3: analysts ask on learnings calls, why aren't you spending, They're like, no,
Speaker 3: there is a recession coming, and the recession is coming.
Speaker 3: So all through twenty twenty three, corporate America just waited
Speaker 3: for the recession that never came. Early early twenty four
Speaker 3: and they began to wait for the we had the election,
Speaker 3: everybody got very very optimistic, very very constructive. We got
Speaker 3: liberation Day. I think where we are now is those
Speaker 3: two years basically of a waiting of created pent up
Speaker 3: demand is a shortcut way of saying what I'm trying
Speaker 3: to get at. And it's also you know, led to
Speaker 3: the approach or strategy if you want to call it that,
Speaker 3: that we just need to deal with it and get
Speaker 3: on with it. And we're not waiting anymore. And and
Speaker 3: so we are where we are, where we're having this
Speaker 3: strong growth. But it's really the cycnical bods of the US,
Speaker 3: you know, are either erratic and noisy or at the
Speaker 3: bottom of the channel, so not exactly depressed and falling
Speaker 3: out of the channel or going into recession, but growing
Speaker 3: very modestly. That is the basically the challenge that it
Speaker 3: creates for equity strategy or investment.
Speaker 2: Really really really fascinating. Coming up, we continue our conversation
Speaker 2: with Pinky Chata, US equity and global strategist and head
Speaker 2: of asset Allocation at Deutsche Bank's Securities, talking about his
Speaker 2: roles at Deutsche Bank. I'm Barry Ritults. You're listening to
Speaker 2: Masters in Business on Bloomberg Radio. I'm Barry Ridults. You're
Speaker 2: listening to Masters in Business on Bloomberg Radio. My extra
Speaker 2: special guest today is Binki Chada. He's chief US equity
Speaker 2: and global strategist as well. As Head of Asset Allocation
Speaker 2: at Deutsche Bank. Although he's here in the US and
Speaker 2: has a lot of US clients, he is also a
Speaker 2: globetrotter and travels around the world Europe, Asia and elsewhere
Speaker 2: advising clients of Deutsche Bank. So before we get into
Speaker 2: what's going on today in more detail, I want to
Speaker 2: talk a little bit about your role at Deutsche Bank.
Speaker 2: You've led US equity and global strategy for a couple
Speaker 2: of decades. Now, how has your team, How has the
Speaker 2: team's process evolved? What do you think of in terms
Speaker 2: of tools and quantitative analysis as well as a broad
Speaker 2: global macro overview.
Speaker 4: What drives your decision making.
Speaker 3: Sure, I mean, at the simplest level is to figure out,
Speaker 3: you know, where the equity market is going to go.
Speaker 4: That's all I need to do.
Speaker 2: Once you figure that out, your gold.
Speaker 3: We're pretty humble about that pursuit, but I would say
Speaker 3: that is the number one objective in pursuit. And what
Speaker 3: we do is basically we have developed over time, basically
Speaker 3: a whole set of framework. They are not all you know,
Speaker 3: I mean, they're meant to be non overlapping frameworks.
Speaker 2: And quantitative or qualitative. Are they all models or is there.
Speaker 3: Some they are quantitative frameworks. You could call some of
Speaker 3: them models. So I would say the most important thing
Speaker 3: for equities, and again my very humble opinion is what's
Speaker 3: happening with earnings, And so you need to have a
Speaker 3: good framework basically for earnings. If you could get earnings right,
Speaker 3: I mean, and you need to do that well in
Speaker 3: advance of the actual delivery. You know, you will know
Speaker 3: what the markets are going to do. Basically, So what
Speaker 3: we did and we revisit, revise, revamp, redo, throw out
Speaker 3: whatever you want to call it. But at the moment,
Speaker 3: basically what we have is we take a whole group
Speaker 3: of stocks and sectors, we divide it up our way.
Speaker 3: So there's megacap growth in tech I mean, and that
Speaker 3: you know needs to include Visa and master Card because
Speaker 3: it's they're not tech companies, but they behave very very
Speaker 3: similarly in terms of their revenue streams. So you can
Speaker 3: think about it as basically a trend and cycle framework
Speaker 3: for each of the groups. And the question that the
Speaker 3: trend is, you know, what has basically been prevailing for
Speaker 3: quite a while, and then the question is what drives
Speaker 3: the cycle in those So if you take megacap growth
Speaker 3: in tech. For example, you would have the US dollar
Speaker 3: and for some parts you could be looking basically for
Speaker 3: you know, very specific things that matter which you're not
Speaker 3: going to pick up. So for example, you know, for materials,
Speaker 3: because of the way US materials are structured into two parts.
Speaker 3: For chemicals, you need basically a chemicals later, which is
Speaker 3: not something that most people tend to look at. So
Speaker 3: this idiosyncratic, but it's cycle and trend and what drives
Speaker 3: basically the cycle it would be, you know, ism manufacturing
Speaker 3: US dollar. Ism manufacturing is an interesting one because that's
Speaker 3: historically the one thing that explained SMP five hundred earnings
Speaker 3: extremely well, and that's kind of like all you needed
Speaker 3: to know.
Speaker 2: Still today, does it still happen?
Speaker 3: So basically for the last three years it hasn't been
Speaker 3: the case. And why it's simply because of megacap growth
Speaker 3: in tech. If you take the s and P five hundred,
Speaker 3: you break up its earnings into megacap growth in tech
Speaker 3: and everyone else, you'll see that everyone else is still
Speaker 3: currently aligned with the ism manufacturing. ISM manufacturing has been
Speaker 3: in a funk for three plus years now, and so
Speaker 3: we haven't had growth. So I kind of hinted earlier.
Speaker 3: You can look at the current you know, sort of
Speaker 3: contact in a bearish way. That is, all the growth
Speaker 3: is coming from ninety percent of S and P five
Speaker 3: hundred earnings growth has come from megacap growth in tech.
Speaker 3: Or you could take the view going forward that everybody
Speaker 3: else is going to recover. That's the camp that we
Speaker 3: are in because.
Speaker 4: That everyone else will be catching up to tech.
Speaker 3: Events exactly unless their earnings are completely aligned with the
Speaker 3: ISM manufacturing. In the US, ISM manufacturings basically, and that's
Speaker 3: historically the case for the entire indexes and earnings. We've
Speaker 3: been in a funk for three plus years. M manufacturing
Speaker 3: has been between forty six and fifty, so you know,
Speaker 3: it's something that we've never seen historically. So if you
Speaker 3: ask why are we sitting here, well, first thing to
Speaker 3: note is that if you know things were bad, then
Speaker 3: we should have been going down. We shouldn't be sitting
Speaker 3: in mildly contractionary.
Speaker 4: Fifty dividing point above fifty is.
Speaker 3: The dividing point, but I mean I think the fair
Speaker 3: or I mean conceptually it's the Intellectually it's meant to
Speaker 3: be the dividing point. But this is still slightly positive
Speaker 3: growth even below fifty. To get to negative growth, you
Speaker 3: have to go quite a bit lower. And I would
Speaker 3: argue in the first instance it was basically just the
Speaker 3: hangover from the pandemic. So remember that as we came out,
Speaker 3: you know, we had basically massive spending on goods and
Speaker 3: that in some way involves manufacturing. And then we had
Speaker 3: basically the slowdown and the rotation.
Speaker 2: Reminds me a little bit of what took place in
Speaker 2: the run up to Y two K in two thousand.
Speaker 2: You had all this tech spending pulled forward and then
Speaker 2: it was soft for a year or two.
Speaker 3: Right, right, And it's been followed basically by a whole
Speaker 3: set of things. Number two. So on the hangover, I
Speaker 3: would say, you know, I don't think a hangover's killed anybody.
Speaker 3: So a hangover is holding time basically, and it would
Speaker 3: naturally basically, you know, a pass. But then in early
Speaker 3: twenty twenty two we got the Russian invasion of Ukraine.
Speaker 3: We had one hundred and twenty dollars oil, and if
Speaker 3: you look at oil prices today, what we've had is
Speaker 3: basically we've gone from one hundred and twenty to in
Speaker 3: round number sixty. But it's taken three years to get there,
Speaker 3: and what the three years to get there means is
Speaker 3: that energy earnings on a year and year basis have
Speaker 3: been negative basically or contracting for three years. Now. The
Speaker 3: good news is that we are much closer now to
Speaker 3: basically what I would think of as fair value for
Speaker 3: oil prices. That's actually a little bit higher. It's not
Speaker 3: a tradable difference right now, but fair value is probably
Speaker 3: sixty four sixty five dollars, and so you know, this
Speaker 3: drag should basically stop soon, even though for the third
Speaker 3: quarter we're still looking for fifteen percent down so energy
Speaker 3: energy in energy earning, so it's just mostly oil prices
Speaker 3: and energy vertigo is important basically for various parts of manufacturing.
Speaker 3: Then we have basically idiosyncratic issues in autos and Chinese
Speaker 3: autos in particular, and of course, last but not least,
Speaker 3: we have the tariffs this year, which impacts manufacturer. We're
Speaker 3: going to.
Speaker 2: Talk more about tariff shortly. I'm kind of fascinated because
Speaker 2: I'm hearing in your laying out where we are today
Speaker 2: a lot of different voices, and at a shop like
Speaker 2: Deutsche Bank Securities, you have to have so many different perspectives,
Speaker 2: opinions from different quarters, from the economists, from the FX traders,
Speaker 2: from everybody. How do you navigate and organize all of
Speaker 2: these different perspectives, some of which may be in conflict
Speaker 2: with others.
Speaker 3: Sure, I wouldn't describe it as conflict. I mean we
Speaker 3: are encouraged to have our own different views, a.
Speaker 4: Broad dispersion of views.
Speaker 2: Is that?
Speaker 3: Absolutely so what I was always told by our head
Speaker 3: of research, David fogus Landau. You know, so if I
Speaker 3: ask you at the end of the year, why did
Speaker 3: you get your s and P five hundred, call you
Speaker 3: not to tell me.
Speaker 4: That the economist was there?
Speaker 2: Right, that's as a work.
Speaker 3: So you're responsible for everything that goes into your view
Speaker 3: and so we discussed in debate. So as far as
Speaker 3: the research aspect of it is concerned, in terms of
Speaker 3: the strategists across all asset classes and economists, we have
Speaker 3: a regular meeting. We just had one this morning actually.
Speaker 2: So let me ask you a question you mentioned im
Speaker 2: What leading indicators do you put the most amount of
Speaker 2: weight on and what indicators do you think aren't all
Speaker 2: that important for forecasting the economic and or market cycle.
Speaker 3: So we always start with our economists forecast, and we
Speaker 3: always ask the question of does this make sense to us?
Speaker 3: Does this make sense to you know, the way of
Speaker 3: various you know, economic data are behaving. So I mean,
Speaker 3: if you think about the US, so and twenty twenty three,
Speaker 3: when everybody's calling for a recession, there was this annoying
Speaker 3: fact which if you simply said, okay, I just landed here,
Speaker 3: so you know, okay, we're talking about the US potentially
Speaker 3: going into a recession. You know, let me start by
Speaker 3: looking at GDP and you would find that near seventy
Speaker 3: percent of US GDP in real terms comes from personal
Speaker 3: consumption spending. Everybody knows that, so why don't we just
Speaker 3: draw a chart of it? And because I come from
Speaker 3: a relatively volatile asset class, I don't do any growth
Speaker 3: rate terms, So I just plot the level. You have
Speaker 3: to take logs because of we all though why we
Speaker 3: should take logs, And then I draw channels around it.
Speaker 3: And if you look at real personal you know, personal
Speaker 3: consumption spending in the US for the five years before
Speaker 3: the pandemic, we're in this tight channel, growing steadily at
Speaker 3: two and a half percent a year. Pandemic collapse, recovery
Speaker 3: of pce back magically into exactly the same channel magic
Speaker 3: And so this is twenty one, and the same applies
Speaker 3: during twenty two, and the fat is hiking aggressively and
Speaker 3: personal spending just continues in the middle of the channel,
Speaker 3: and it was almost like there's nothing to see here, right.
Speaker 2: Well, we had three handle on unemployment, wages were actually
Speaker 2: rising as fast, almost as as fast as inflation other
Speaker 2: than that nine percent peak. Why wouldn't the economy and
Speaker 2: market do well? And she says, with perfect times to.
Speaker 3: Fast forward to this morning, where is PC. It's right
Speaker 3: in the middle of the channel. I would say, if
Speaker 3: you you know, there's a couple of different variations of
Speaker 3: looking at it, and the headline numbers actually at the
Speaker 3: top of the channel and moving along, and you know,
Speaker 3: we did have some slowing in the first quarter A
Speaker 3: but it was at the risk of going a way
Speaker 3: out of the channel and it just sort of moderated,
Speaker 3: it went flat and since it got back to the channel.
Speaker 3: So it's the same thing and that's why.
Speaker 2: And PC is important because that's a key indicator us GDP.
Speaker 3: Yeah, absolutely, I think.
Speaker 4: That's Jerome Pal's favorite data point.
Speaker 3: Yeah, so he focuses more on the inflation in there.
Speaker 3: So I'm talking about really the real volume, or than
Speaker 3: the measure that we have, which is in real terms,
Speaker 3: I'm just saying, if that's seventy percent of GDP and
Speaker 3: that's growing steadily and it's been doing, we're in the
Speaker 3: same place that we've been in for ten years, growing
Speaker 3: in you know, at what I would describe as a
Speaker 3: two and a half percent trend rate, So.
Speaker 2: That that sounds pretty bullish. I'm going to ask you
Speaker 2: in a little bit about cautious issues and risks will
Speaker 2: circle back to that. But given the relative strength of
Speaker 2: the US over the past ten to fifteen years, and
Speaker 2: the fact that you've just gotten back from Asia and
Speaker 2: Europe before that, how do you look at the rest
Speaker 2: of the global economy, what's happening in Asia, what's happening
Speaker 2: in Developed X, last Europe and elsewhere.
Speaker 3: Absolutely, So, you know, there's a chart that I'm going
Speaker 3: to draw for you, or really two charts, and what
Speaker 3: I would say I kind of already described the US chart,
Speaker 3: which is, you know, a steady trend channel growth of
Speaker 3: two and a half percent before the pandemic, steady you know,
Speaker 3: two and a half percent growth since then. If you
Speaker 3: look at the rest of the world, the trend rates
Speaker 3: are different. So if you use Europe as an example,
Speaker 3: but the same applies basically to various other regions were
Speaker 3: growing steadily before the pandemic at sort of a two
Speaker 3: percent rate. Then we have the pandemic collapse and just
Speaker 3: like the US, recovering back basically to the trend line.
Speaker 3: But that was in the first quarter of twenty twenty two.
Speaker 3: So it is really Russia Ukraine that then basically arrested
Speaker 3: that recovery back the trend and basically activity in Europe.
Speaker 3: You know, it's essentially gone sideways to fairy slightly up
Speaker 3: in the decimal points, I would say, and it's a
Speaker 3: very large gap basically relative to trend. And so what
Speaker 3: I would argue is that you know, there was nothing
Speaker 3: exceptional happening in the US in absolute terms. It was
Speaker 3: really in relative terms because the rest of the world
Speaker 3: wasn't really growing. And I'm using Europe as an example.
Speaker 3: You know, China, Japan is slightly different, but I think
Speaker 3: the European example is sort of key. And so if
Speaker 3: you think about things like fax and the US dollar,
Speaker 3: I mean US dollar typically does long multi year cycles.
Speaker 3: We were sitting at the top of the band for
Speaker 3: three years, so I think about it as a multi
Speaker 3: year trade or trend basically waiting for a catalyst, and
Speaker 3: waiting for the catalyst is just you know, is the
Speaker 3: rest of the world going to start to grow? And
Speaker 3: in the case of Europe, you know what we had basically,
Speaker 3: so we went a long European equities on the first
Speaker 3: Monday of the year. All the credit goes to my colleague,
Speaker 3: European equity strategist Max Uliar. That's a great, great call.
Speaker 3: It was just the view that everybody was short Europe.
Speaker 3: Everybody's going to cover their shorts, or at least some
Speaker 3: people are going to cover their shorts going into the election,
Speaker 3: given the platforms which they began to do, and after
Speaker 3: they covered their shorts, it became a question of, you know,
Speaker 3: from a fundamental point of view, you know, is this
Speaker 3: going to happen? Now in terms of policies, is going
Speaker 3: to happen? So if you look back for the last
Speaker 3: few years, you know, as a policy maker, you want
Speaker 3: to do something about this, but maybe that shock was
Speaker 3: already gone and you're going to start growing anyway. And
Speaker 3: so now you have that plus a whole set of
Speaker 3: additional you know, incentives to basically to spend infrastructure. Then
Speaker 3: there's the defense issue. So I would argue it happens.
Speaker 2: And then is this early days in the resurrection of
Speaker 2: European equities or is this a one year one time.
Speaker 3: It depends on whether you believe the growth will happen
Speaker 3: and sustain. I'm in that camp, so I would argue
Speaker 3: still very early days. And so we are actually from
Speaker 3: a positioning point of view, we overweight the US, which
Speaker 3: is what we've been talking about, but we'll also overweight
Speaker 3: Europe and overweight Europe not because I'm expecting it to
Speaker 3: match the US and performance through just.
Speaker 2: Doing so much better than to But.
Speaker 3: I think it's important to keep in mind that so
Speaker 3: far we have very little evidence that Europe is actually
Speaker 3: growing and if anything, over the last few weeks the
Speaker 3: data has kind of disappointed. It doesn't negate what it's
Speaker 3: likely to come. And then you look at the Europe
Speaker 3: I mean, you know, getting disappointment. We moved up because
Speaker 3: Europe might grow and you know it hasn't. But you know,
Speaker 3: we have trouble getting below one sixteen. So the market
Speaker 3: is you know very much. I would say, you know,
Speaker 3: concerned that the growth actually happens. So I'm staying overweight
Speaker 3: because there you have to get in before it happens.
Speaker 3: And giving the gap basically in the level of activity,
Speaker 3: in the level of earnings relative to trend lines, you know,
Speaker 3: you could gap up at some point, really, and so
Speaker 3: it's not just about tomorrow's earnings numbers. So we started
Speaker 3: getting positive growth news out of Europe, well that's off
Speaker 3: exactly at that point. It's already half of it. It's
Speaker 3: already happened.
Speaker 2: So let's talk a little bit about US economic growth.
Speaker 2: We earlier discussed Asia and Europe. You have said we
Speaker 2: have resilient corporate earnings with forecasts that are in the
Speaker 2: low double digits, robust risk appetite, and major buybacks that
Speaker 2: are likely to rise as earnings rise.
Speaker 4: What's not to like about the US market?
Speaker 3: Not too much, I would say, I think that, you know,
Speaker 3: going back to what I said earlier twenty twenty three,
Speaker 3: we're waiting for the recession twenty twenty four, waiting for
Speaker 3: the election. There's a lot basically of demand pentab demand
Speaker 3: that for a variety of activities.
Speaker 2: You're talking pre twenty twenty November twenty twenty four, so
Speaker 2: the prior year, right.
Speaker 3: But what I'm saying is that while you know, the
Speaker 3: backdrop and the contacts has been very good, it's been
Speaker 3: very strong, it hasn't really been there hasn't really been
Speaker 3: buy into it because there's been something massive to worry about,
Speaker 3: like a recession in twenty eighty three, and so I
Speaker 3: would argue after the Liberation Day shocks, so I would
Speaker 3: say around the election last year, there was a lot
Speaker 3: of buy into a very optimistic take. So we spend
Speaker 3: one of our frameworks that we spend a lot of
Speaker 3: energy on is our equity positioning framework. And if you
Speaker 3: look at where we are today, and that's what I'm saying,
Speaker 3: there's limited buy in. Is my positioning measure. It's a
Speaker 3: Z score measure, so typically having plus minus one, it's
Speaker 3: sitting at plus point five. But what I would point out,
Speaker 3: so market's clearly overweight. That entire overweight characterization is coming
Speaker 3: from the positioning of systematic strategies who are not following
Speaker 3: or thinking about fundamentals. If you think about the details.
Speaker 2: When we say systematic, it's quantitative, its trend based, it's
Speaker 2: earning scrow.
Speaker 3: So I have three in particular in mind so there's
Speaker 3: the VALL control, there's the ctias, and then there's risk parody.
Speaker 2: Fund CTA is meaning mostly trend following commodities.
Speaker 3: Exactly, So it's about trend involve UH is a good
Speaker 3: summary of each of the three basically, I mean, and
Speaker 3: if you look at systematic strategies positioning, you know, it's
Speaker 3: hard to come up with an intuitive, simple measure of
Speaker 3: what is the trend and that that that's what a
Speaker 3: lot of that exercise is about. But the other part
Speaker 3: is very easy, which is basically VALL. You can use
Speaker 3: any measure of VALL that you like, and and and
Speaker 3: and it explains basically their positioning. So we had Liberation
Speaker 3: Day collapse, we had April to ninth when the cause
Speaker 3: of the volatility basically diminished or went down, and so
Speaker 3: we had the fastest recovery from a wall shock ever
Speaker 3: and and and but there's been very limited buy in,
Speaker 3: I would say from discretionary investors who are actually sitting
Speaker 3: at neutral discretionary is as opposed to systematic, but discretionary
Speaker 3: you want to think about as fundamentals based in.
Speaker 2: Let's take that apart, because that's kind of fascinating because,
Speaker 2: on the one hand, there's been a bubble in bubble forecasts.
Speaker 2: That's an old joke. We've heard that, you know, for decades.
Speaker 2: But really it seems like everybody is saying, oh, there's
Speaker 2: an AI bubble, there's a market concentration bubble, and the
Speaker 2: market seems to not care, and it just keeps powering
Speaker 2: itself higher. Let's talk about the policy issues you just raised. So,
Speaker 2: despite Trump won with some tariffs that were I don't
Speaker 2: know about ten percent, and I'm tariff man. It's the
Speaker 2: most beautiful word in the dictionary. Despite all of that,
Speaker 2: a failure of imagination or on all our parts, April
Speaker 2: second shocked everybody with one hundred percent tariffs. I don't
Speaker 2: think anybody imagined it, and we had that very rapid
Speaker 2: sell off over the next week, then the ninety day
Speaker 2: pause and markets took off. But at the end of
Speaker 2: the ninety day pause, markets just kind of came going going, yeah,
Speaker 2: how do you how do you put this policy into context?
Speaker 2: And when you say there's not buying from the discretionary
Speaker 2: part of the equity markets, somebody's buying, is it just
Speaker 2: systematic or.
Speaker 3: So it's systematic strategies? And I would say, you know,
Speaker 3: we are sitting here in the first week of October.
Speaker 3: So if you think about September and just the very
Speaker 3: very steady step, huge, huge games and society. So what
Speaker 3: we got in September is basically big inflows.
Speaker 2: Right, And I want to say Q three twenty twenty
Speaker 2: five was like the seventh best quarter going back to
Speaker 2: World War II, some crazy number like that.
Speaker 3: So last month we had the highest inflow into bonds
Speaker 3: and equities as a group ever, billion dollars into in
Speaker 3: just one month.
Speaker 2: Do you pay attention or care about the seven trillion
Speaker 2: dollars in money market funds.
Speaker 3: Or is that you know?
Speaker 2: So?
Speaker 3: I think that's partly a red herring in the sense
Speaker 3: that basically it is a reallocation away from bank deposits.
Speaker 3: So if you have sum of money market funds and
Speaker 3: cash deposits, the line's kind of going up, but it's
Speaker 3: going up in line with its trend because cash holdings
Speaker 3: are going up. So the two things are just sort
Speaker 3: of a wash.
Speaker 2: Because some people have been claiming that is the next
Speaker 2: source of fuel for equities, I'm in your camp. I
Speaker 2: think that money mostly came from low yielding bonds or
Speaker 2: checking in savings account.
Speaker 3: I think it's like very important to keep in mind
Speaker 3: that we're having a boom and inflows across all asset
Speaker 3: classes really and it's been going on for two years,
Speaker 3: if not longer. And you know, as to the question
Speaker 3: of why we're having this boom, our take is basically that,
Speaker 3: so you have to start historically first, so that we're
Speaker 3: talking about, you know, how things check changed relative to history.
Speaker 3: So the pattern was that US households would put about
Speaker 3: fifty percent of the new savings. So you get a paycheck,
Speaker 3: you spend, something is left in the bank account, and
Speaker 3: then you allocate basically some of it. But historically about
Speaker 3: half of all household savings it would stay in cash,
Speaker 3: half would basically go into financial assets. And so if
Speaker 3: you think about the cash holdings of households, it's very
Speaker 3: very steady, clear trend line. What the pandemic did, partly
Speaker 3: because people spent less, partly because they were getting checks
Speaker 3: in the mail or directly deposited in their bank accounts,
Speaker 3: their cash holdings went way way up relative to trend.
Speaker 3: We then had a period where, because you just over
Speaker 3: allocated relative to trend, a period of cash going sideways,
Speaker 3: so that all new savings one percent of it was
Speaker 3: going into financial assets and into all financial assets is
Speaker 3: not just I mean bonds were actually the bigger beneficiary
Speaker 3: than equities. Believe it or not. Really people to think
Speaker 3: it's equities first, but it's across that so crypto, you know,
Speaker 3: commodity funds, you name it a but but it goes
Speaker 3: all the way back to the pandemic, and and and
Speaker 3: and it's not done yet, is the way I would
Speaker 3: put it.
Speaker 2: Well, So you were talking about trade earlier. One of
Speaker 2: the comments you made really I found fascinating markets often
Speaker 2: price in trade deal hopes early. Are we over discounting
Speaker 2: the impact of tariffs or our markets being too optimistic
Speaker 2: or how do you contextualize?
Speaker 4: You know, we've been waiting to hear about.
Speaker 2: All these tariff deals we really haven't heard of. I
Speaker 2: think we have one with the UK that's kind of
Speaker 2: kind of it and Japan. Are are markets not paying
Speaker 2: enough attention to tariffs? Or are market saying, hey, President
Speaker 2: lost at the Court of Trade, he lost at the
Speaker 2: Court of Appeals.
Speaker 4: Maybe he's going to lose it to the Supreme Court.
Speaker 4: How are we looking at tariffs?
Speaker 3: So, so, first, you know, a confession, which is basically
Speaker 3: after April the second, you know, if you thought through
Speaker 3: the impact of the announced tariffs, you were to come
Speaker 3: to a very very negative conclusion, right, And that's what
Speaker 3: we did, And so we lowered our numbers. We always
Speaker 3: built in that there would be what we call a
Speaker 3: relent on policies. It's just like trade war one point. Oh,
Speaker 3: when the market is up, you know, he would escalate.
Speaker 3: When the market was down, he would de escalate.
Speaker 4: People have hold that. I heard a couple of options.
Speaker 2: Traders called that the Trump collar.
Speaker 4: The Trump calls unlike the this is the Trump.
Speaker 2: Collar when markets are high, he's embolden when they're low.
Speaker 2: All right, we're going to pause this and.
Speaker 3: Let exactly that's kind of you know, where we were.
Speaker 3: And and so the call was that we would go
Speaker 3: a lot higher, but a lot less than we had
Speaker 3: originally thought, basically a and and we have since basically
Speaker 3: raised both our earnings numbers and our target your seven
Speaker 3: so on. On January first, it was seven thousand, and
Speaker 3: today it's again back to seven thousand, and then raised
Speaker 3: it in two steps. But your question on you know,
Speaker 3: or the tariffs having an impact, what I would say
Speaker 3: is that there's sort of different dimensions. So it's kind
Speaker 3: of a big question because it impacts everything. So first
Speaker 3: is growth. We kind of spoke about that a little bit,
Speaker 3: macro growth, and what I would say is that so far,
Speaker 3: there's i mean, the logical and intellectual case for slowing
Speaker 3: because of very high tariffs or a new tax. You know,
Speaker 3: it's impossible to refute, and I'm not refuting it, but
Speaker 3: I'm just saying there's like no evidence of that because
Speaker 3: what other things are basically dominating? So I talked about
Speaker 3: the consumers are doing what they've always been doing, et cetera.
Speaker 3: But if you look at macro growth. I also said
Speaker 3: that what we're going through is mini version of twenty
Speaker 3: twenty three because everybody took a negative view. That negativity
Speaker 3: is extremely important part of the positivity in terms of
Speaker 3: the price action. But climb a wall away exactly, and
Speaker 3: and and you know, our equity is going to go
Speaker 3: down if somebody raises their GDP growth numbers or their
Speaker 3: earnings numbers. So it's so that negativity is a positive
Speaker 3: force for now are economists. So Matt Lazetti has a
Speaker 3: two point eight percent GDP growth number for the third quarter. That's,
Speaker 3: you know, the highest numbers I've ever seen from now,
Speaker 3: even close before before the data started to disappear. And
Speaker 3: and and so you know a number one, no sign
Speaker 3: of it in terms of growth if you do and
Speaker 3: think about it in terms of earnings, So there should
Speaker 3: have been a big impact in the second quarter. Earnings
Speaker 3: growth in the second quarter actually picked up from where
Speaker 3: it was in the first quarter. So even the sign
Speaker 3: is wrong, it's going in the other direction. A number
Speaker 3: three qualitative reado on earnings, which I would LaDue use
Speaker 3: more important than just the numbers, and companies just basically
Speaker 3: saying that, yes, this is a negative shock, Yes it's
Speaker 3: a big deal, but it's you know, it's not way
Speaker 3: out of basically the realm of in many cases even
Speaker 3: for machinery copies, within the realm of you know, our
Speaker 3: guidance range. So yes it's negative, but it's not having
Speaker 3: such a huge impact. And and and that the impacts
Speaker 3: are basically you know, modest and manageable, and there is
Speaker 3: a level at which you know you can think about.
Speaker 3: So the numbers, what are the numbers? So the effective
Speaker 3: tariff rate defined as basically tariff revenue on the Treasury's website,
Speaker 3: divided by the value of imported goods it was kind
Speaker 3: of stuck at ten to eleven percent, and maybe it's
Speaker 3: a little bit higher right now, So the market's working
Speaker 3: with something like fifteen, so we still have a ways
Speaker 3: to basically get there. And the underlying thesis has been
Speaker 3: basically that if there's a problem, you will get relents
Speaker 3: on exemption. So there's a lot of exemptions and that's
Speaker 3: part of the whole thing.
Speaker 1: Really.
Speaker 3: Dimension of course is inflation.
Speaker 2: So let's talk about yeah, yeah, you know it.
Speaker 3: Did it already happen or is it still to come
Speaker 3: one simple way. I mean, there's no way to answer
Speaker 3: the question with one hundred percent certainty, But what I
Speaker 3: would say is that if I take a look at
Speaker 3: core goods prices or core CPI if you want, and
Speaker 3: what you will see is that the norm is for
Speaker 3: goods prices to be deflating. We have the post pandemic
Speaker 3: ten percent increases a chart of the price level. We
Speaker 3: jump up by ten to eleven percent in a relatively
Speaker 3: short period of time, and then that's done with and
Speaker 3: we start disinflating at the same historical trend rate is
Speaker 3: a very modest mild deflation, and what we've had over
Speaker 3: the last three months is a clear increase up. So
Speaker 3: some impact of the tariffs has already happened. Question is
Speaker 3: how much? And I would say relative to the trend line,
Speaker 3: core goods prices are probably one one and a quarter
Speaker 3: percent higher than they would have been if we had
Speaker 3: just continued basically down that trend line. And so how
Speaker 3: to basically, you know, handicap that one and a quarter percent.
Speaker 3: We have in house from our rates strategist, a bottom
Speaker 3: up measure basically of the direct impact of tariffs. So
Speaker 3: you go sic code by sic code, you add it
Speaker 3: up and then you calculate, and they calculate two two
Speaker 3: and a half percent. So simple point I would make
Speaker 3: is it looks like half of the direct impact already happened,
Speaker 3: and if half of it, you know, it wasn't so bad,
Speaker 3: how much should we fear the second half?
Speaker 2: Coming up, we continue our conversation with Binkie Chata, chief
Speaker 2: US equity and global strategist and head of asset Allocation
Speaker 2: at Deutsche Bank's Securities, talking about his roles at Deutsche Bank.
Speaker 4: I'm Barry Ritolts.
Speaker 2: You're listening to Master's of Business on Bloomberg Radio. I'm
Speaker 2: very redults. You're listening to Masters in Business on Bloomberg Radio.
Speaker 2: My extra special guest today is Binkie Chada. He's chief
Speaker 2: US equity and global strategist as well as head of
Speaker 2: asset allocation at Deutsche Bank. You're very constructive about additional
Speaker 2: Federal Reserve rate cuts this year and next year, and
Speaker 2: the people who are a little bearish on that are saying, hey,
Speaker 2: tariffs are going to be very inflationary. We're seeing a reacceleration.
Speaker 2: This isn't a noisy blip, but it's a start of
Speaker 2: something worse. We're gonna end up at four to four
Speaker 2: and a half five percent inflation, which would put the
Speaker 2: Fed on hold. Walk us through your thinking on how
Speaker 2: many more rate cuts this year and next year. It
Speaker 2: sounds like you've already given the game away, because no.
Speaker 3: No, actually, you know I'm not counting on the rate cuts,
Speaker 3: and I would argue the rate cuts, you know, much
Speaker 3: more of a sideshow, basically real earnings.
Speaker 2: We do. We're so hyper focused on them. At least
Speaker 2: the media sure is on it's you know, everybody is.
Speaker 2: If we get these rate cuts, it'll unfreeze the housing market,
Speaker 2: it'll do all these great things.
Speaker 3: No, I mean the one freeze the housing market. You
Speaker 3: need longer hand yields to basically.
Speaker 4: Go down, which have not happened.
Speaker 3: Yeah, they are pretty much on the low side. I
Speaker 3: would argue relative too, So we have a house of
Speaker 3: view for the ten year by year end that's closer
Speaker 3: to four and a half, so four forty five.
Speaker 2: So we what does that mean for mortgage rates? So
Speaker 2: we can see a five handle on mortgage rates.
Speaker 3: That's a pretty wide so there is room if and
Speaker 3: spreads depend on volatility rates. Volatility has been coming down
Speaker 3: quite a lot because you know, brokers need to hedge
Speaker 3: basically the interest rate risk. Well that's outstanding, so so
Speaker 3: I think it's supportive. But I'm not foreseeing any big
Speaker 3: decline in interest rates.
Speaker 2: So maybe another cuts this year, one or two more
Speaker 2: next year.
Speaker 3: It's also I mean, we don't have the data anymore,
Speaker 3: so it's.
Speaker 4: Gonna be well, well, there's that it needs data.
Speaker 3: But I wouldn't be surprised if the Fed misses one
Speaker 3: of those two meetings. In terms of the rape Cottson
Speaker 3: pushes it out. I mean this is sort of more
Speaker 3: a you know, fine tuning type exercise, either argue. I mean,
Speaker 3: if the Atlanta Fed GDP is right, and it's been
Speaker 3: pretty right for several years. Obviously not to all the decimals,
Speaker 3: but it was giving you some you know, that kind
Speaker 3: of growth. I mean, do we really need lower interest rate?
Speaker 4: So let me ask the Jerome pal question.
Speaker 2: We're seeing the labor market sort of soften, even though
Speaker 2: we're fairly close to to you know, as low as
Speaker 2: unemployment gets. At the same time, they're a shortage of workers.
Speaker 2: Twenty twenty five maybe the first year in history where
Speaker 2: US population actually declines. Less immigration, more deportations, a whole
Speaker 2: lot of other policy issues that are affecting that. How
Speaker 2: do you think about the labor market here and what
Speaker 2: does that mean for corporate earnings? What does it mean
Speaker 2: for interest rate policy?
Speaker 3: Yeah, I think we have a relatively fully employed labor
Speaker 3: for us in our baseline view basically sees, you know,
Speaker 3: if you ignore the decimals, a little bit abounts here
Speaker 3: and they're not really you know, changing very much. So
Speaker 3: the question becomes, you know, who's going to produce that
Speaker 3: three and four percent GDP? So it was pretty bearish
Speaker 3: take when we got the revisions basically to the payrolls numbers,
Speaker 3: the benchmark provision. But you know, if you're not changing
Speaker 3: the GDP numbers and base the level of productivity basically commensurately.
Speaker 2: It's not as much of a negative as it looks
Speaker 2: at first plus exactly, right, don't I know a lot
Speaker 2: of economists who look at growth as productivity plus inflation?
Speaker 2: Fair fair assessment.
Speaker 3: Yeah, I would say productivity plus employment. Then to get
Speaker 3: to the nominal part you would add inflation. And so
Speaker 3: I mean, if you think about so we talked a
Speaker 3: little bit about, you know, the parallels between today and
Speaker 3: the nineteen sixties and the second half of the nineteen nineties.
Speaker 3: That's the two periods since World War Two where we
Speaker 3: had basically productivity growing at three three and a half
Speaker 3: percent for sustained period of time. Normally it grows at
Speaker 3: one point one point five percent.
Speaker 2: What's the old line? I forget who I'm stealing this from?
Speaker 2: Productivity gains are seen everywhere except the productivity data.
Speaker 3: So that's because you know it's calculated as a residual. Right,
Speaker 3: So first you have to estimate GDP. Then you have
Speaker 3: the first revision, second vision, third revision. Then you have
Speaker 3: to estimate what we were just talking about, which is
Speaker 3: the labor input, which is revised then re revised benchmark,
Speaker 3: and then what's left over is productivity. But what I
Speaker 3: would argue is that if you look at a simple
Speaker 3: chart of reported productivity in the non foreign business sector,
Speaker 3: you know you'll see this growing in a trend channel
Speaker 3: of one point four percent, and basically what we've had
Speaker 3: over the last couple of years, we went way about the.
Speaker 2: Channel basically, and so post pandemic.
Speaker 3: That is right, So we got a pandemic jump, then
Speaker 3: a slow down back into the channel, and so over
Speaker 3: the last two years is what I'm saying. So officially,
Speaker 3: you know, yes, the immigration issue, but officially unemployment it's
Speaker 3: only been four percent, was even lower, so it was
Speaker 3: a tight Historically, a tight labor market has been a
Speaker 3: necessary condition for getting those productivity booms like we had
Speaker 3: in the nineteen sixties and in the second half of
Speaker 3: the nineties, and we've had a tight labor market for
Speaker 3: several years right now.
Speaker 2: Very interesting. One of the things I'm so fascinated about
Speaker 2: your work is that you're not just you know, a
Speaker 2: one way bull. You start the year as one of
Speaker 2: the most bullish forecasts for the S and P five hundred,
Speaker 2: but you're constantly bringing up the various macro risks investors'
Speaker 2: face that sort of full view and not being so
Speaker 2: just mindlessly bullish is kind of fascinating. So let's talk
Speaker 2: about some of the risks that you've been writing about
Speaker 2: and discussing. Have to start with froth and AI and
Speaker 2: capital spending. How do you respond to chargers that this
Speaker 2: market has become frothy A.
Speaker 3: What I would say is basically that you know, we
Speaker 3: do see signs basically of rampant speculation, but I would say,
Speaker 3: so far, it's only in basically relatively well defined pockets.
Speaker 2: So AI bitcoin hit one hundred and twenty five thousand
Speaker 2: over the wen.
Speaker 3: On AI, I would say, it's you know, what some
Speaker 3: companies and some deals are doing. You could put in
Speaker 3: that bucket, But I mean the stocks are not necessarily
Speaker 3: doing that, and so I would argue that we are
Speaker 3: still sort of in the early stages. I would say,
Speaker 3: there's a lot of focus on the retail investor. Now,
Speaker 3: the question I would ask about the retail investor is,
Speaker 3: you know, when you look at measures of retail participation
Speaker 3: or retail activity, you know, it's easy to sort of
Speaker 3: exaggerate relative to their own history. This is I mean,
Speaker 3: we don't have a history of retail participation participation in
Speaker 3: US equity since the nineties, so it's been more episodic basically,
Speaker 3: And so there is a tendency to put it in
Speaker 3: that light that this is an episode. But I mean,
Speaker 3: we were talking about Asia earlier. It's a long history
Speaker 3: of retail involvement in all markets. And so one of
Speaker 3: the things that is getting attention is the presence of
Speaker 3: retail investers. But from a quantitative point of view, I
Speaker 3: don't know. I was looking at statistics, So there's conflicting measures.
Speaker 2: It's fairly modest, and a lot of it seems to
Speaker 2: be four oh one k.
Speaker 3: And the whole thing about how you know, the volumes
Speaker 3: have taken off and they have skyrocketed and now they
Speaker 3: account for four percent tiny exactly. So everything is you know,
Speaker 3: consistent and correct. But I now you have to frame
Speaker 3: it appropriately. Yeah, and this is a cycle, and we're
Speaker 3: talking about now, but basically, and this is you know,
Speaker 3: me speaking has equities with it's a cyclical asset, okay.
Speaker 3: And and and so if the cycle continues the way
Speaker 3: that it's been continuing, all of this is going to grow.
Speaker 3: But today you're not there yet.
Speaker 2: What about market concentration that the magnificent seven or whatever
Speaker 2: you want to call the top ten? Is that as big?
Speaker 2: Is that real threat? Or is that? You know, this
Speaker 2: happens from time to time when a new technology attracts
Speaker 2: all this attention.
Speaker 3: So I mean, I would put it slightly differently. I
Speaker 3: would say the market concentration in megacap growth in tech
Speaker 3: reflects the concentration of S and P five hundred earnings
Speaker 3: in the megacap growth in what are they?
Speaker 2: Something like two trillion in revenue three hundred billion in profits?
Speaker 3: Some crazy they're responsible right now for about forty percent
Speaker 3: of S and P five hundred earnings, So.
Speaker 4: Why shouldn't they be forty percent of the market cap?
Speaker 3: Exactly? So they're actually thirty percent of earnings and forty
Speaker 3: percent of the market cap.
Speaker 2: I apologize, So why are they so overweight?
Speaker 4: Is it just future growth expectations?
Speaker 3: They're growing faster, so they should definitely have higher multiples. So,
Speaker 3: you know, people frame the question as focused on the
Speaker 3: megacap growth in tech, you can ask the equivalent question, Actually,
Speaker 3: it's a bigger part than sixty percent. Why isn't everybody
Speaker 3: else growing? I got into this a little bit earlier.
Speaker 3: It's very peculiar recovery where the cyclical parts basically haven't
Speaker 3: really kicked in in a big way, but it looks
Speaker 3: like they're kicking.
Speaker 2: In what other sectors are kicking and you we I
Speaker 2: know you've written about financials, consumer cyclicals, materials, and then
Speaker 2: we could talk about em and small cap and value.
Speaker 2: Sure what other sectors have been lagging that you find
Speaker 2: particularly interesting?
Speaker 3: So right now you know we have what I call
Speaker 3: simple cyclical tilt to our positioning because I talked about
Speaker 3: discretionary investors sitting at neutral? Why are they sitting at
Speaker 3: neutral because they're concerned about the cycle? What are they
Speaker 3: going to buy? If they get off and start participating
Speaker 3: in a bigger way? I would argue they will buy
Speaker 3: the cyclicals because that's their concern. They're unlikely to buy
Speaker 3: megacap growth in tech for well known reasons, all the
Speaker 3: reasons that you basically mentioned, So you know, if you
Speaker 3: phrase it form, you can phrase the question basically from
Speaker 3: who's actually going to buy this stuff? This group stands
Speaker 3: out and their concerns suggests that they would buy the
Speaker 3: cycling goals if they started to believe that the cycle
Speaker 3: is going to be fine if you look at it
Speaker 3: from a fundamental point of view. No, I mean, there
Speaker 3: aren't no signs of a huge uptick on the cignical side.
Speaker 3: But if you wait for those signs, equity market will
Speaker 3: price it far before. I mean, one of the lessons
Speaker 3: that I take away is you have to think about
Speaker 3: the S and P five recession. You know, this brick
Speaker 3: shaded period. Equity market falls twenty percent once the recessions
Speaker 3: you know, starts, but it robustly bottoms around the middle
Speaker 3: of the recession and before and recovers while you're still
Speaker 3: in this gray shaded area. So if you wait till
Speaker 3: payrolls turn negative, you will have missed the entire move
Speaker 3: and you will be back to, you know, basically catching
Speaker 3: that small exactly. So equities turn up when there's a
Speaker 3: positive probability that you're going to basically have a recovery.
Speaker 3: Because you've been in a recession for so long.
Speaker 2: You've identified a number of risks earlier in the year,
Speaker 2: and I'm curious if you still think they are significant.
Speaker 2: Protectionist trade policies and immigration policies. Are those still potential
Speaker 2: growth pressures or inflation pressures?
Speaker 3: I think on the tariffs basically they've proved to be
Speaker 3: exactly and so I don't worry about that. I don't
Speaker 3: think it closes the issue. I mean, they could still
Speaker 3: be negatives that come out of that that we're just
Speaker 3: not completely aware of yet. But in that event, you know,
Speaker 3: a big part of our thesis for this year has
Speaker 3: been that if things get bad, you know, at the
Speaker 3: end of the day, any administration cares about its approval ratings,
Speaker 3: the approved ratings about the economy, so they will relent,
Speaker 3: and especially if it's caused by one of the policies.
Speaker 3: So that's been a big part of our thesis for
Speaker 3: staying constructive through the year. So, you know, we talk
Speaker 3: about risks, and I am deeply aware of what most
Speaker 3: people mean when they talk about risks, but where we
Speaker 3: are sitting, I would argue that it is my duty
Speaker 3: to simply point out that right now I'm much more
Speaker 3: concerned about upside risks than downside.
Speaker 4: And melts up potential. A.
Speaker 3: Yes, because we don't we stop worrying about going into
Speaker 3: a recession, We stop worrying about the politics, and we
Speaker 3: stop worrying about the tariffs because companies are dealing.
Speaker 2: With it, and suddenly there are blue skies out there.
Speaker 3: Exactly.
Speaker 4: So last question before I get to my favorite questions.
Speaker 2: Okay, what do you think investors are not paying attention
Speaker 2: to or not talking about that perhaps they should, could
Speaker 2: be a policy, could be an asset class.
Speaker 4: What do you think is getting overlooked.
Speaker 3: The context that we are in? What I was talking
Speaker 3: about basically that a three percent growth with a four
Speaker 3: percent unemployment happens only five or six percent of the time,
Speaker 3: and it unleashes certain dynamics. And you know, it started
Speaker 3: during the previous administration and has continued in this administration.
Speaker 3: So it's not necessarily about the policies.
Speaker 2: So we've got a lot of noise and a lot
Speaker 2: of headlines and a lot of news coverage. Is that
Speaker 2: obscuring what is fundamentally underneath everything? A robust economy and
Speaker 2: a healthy market, I believe, So yeah, really interesting stuff.
Speaker 2: Let's jump to our favorite questions, starting with the question
Speaker 2: that brought me to you, which is who are your
Speaker 2: mentors who helped shape your career? So many people, so
Speaker 2: many guests of this show have mentioned you who helped
Speaker 2: shape your career.
Speaker 3: So I started my career at the research department at
Speaker 3: the IMF and the most important mentor, I would say
Speaker 3: was my boss is a gentleman called Michael Dooley, ex
Speaker 3: Federal Reserve, you know, at some of the highest levels,
Speaker 3: but was at the IMF then he I was just
Speaker 3: out of graduate school. He taught me basically how to
Speaker 3: think critically, how to stand on my own feet, and
Speaker 3: most importantly, how to communicate things or the essence of
Speaker 3: things in a very simple way.
Speaker 2: That's a great, great answer. Let's talk about books. What
Speaker 2: are some of your favorites? What are you reading currently?
Speaker 3: So, I'm definitely a fiction reader. It gives me a
Speaker 3: good break from where I live and what I do.
Speaker 3: I'm currently reading Isabelle Allende's books. I'm currently on a
Speaker 3: Long Pedal by the Sea, which is a book about Chile.
Speaker 2: Really interesting. What about streaming outside of this show? What
Speaker 2: are you watching listening to? What keeps you entertained when
Speaker 2: you have a little downtime?
Speaker 3: Given my background, I'm definitely big Bollywood fan.
Speaker 2: Oh really.
Speaker 3: Yeah, I'm very partial to Indian movies.
Speaker 4: And give us a title that some of them are.
Speaker 3: One that I really liked its own prime. Actually it's
Speaker 3: called Tonda t A.
Speaker 2: N d A v uh huh.
Speaker 3: What's that about it's about politics in political career, and
Speaker 3: unfortunately they did not allow the season two to be
Speaker 3: the authorities didn't allow season two to in India.
Speaker 4: They going off, Yeah, yeah, well, thank goodness, nothing like that.
Speaker 3: But you still watch season one?
Speaker 2: Yeah, all right. Our final two questions, what sort of
Speaker 2: advice would you give a recent college grad interest in
Speaker 2: a career in either economic policy analysis, asset allocation, or
Speaker 2: just investing.
Speaker 3: Yeah, I think that you know, a working on Wall
Speaker 3: Street or in finance. I mean, there's a lot of
Speaker 3: different things you can do, and I think for young
Speaker 3: people starting out, the biggest challenge is to figure out
Speaker 3: where you know, how do I match basically what I'm
Speaker 3: most interested in and where my abilities are. And my
Speaker 3: advice would be to go with where your interests are,
Speaker 3: the ability will come. I just went through recruiting process
Speaker 3: and just hired somebody from our grad program onto my team.
Speaker 4: Interesting.
Speaker 2: And our final question, what do you know about the
Speaker 2: world of economics and investing today? Would have been helpful
Speaker 2: when you were starting out back at the IMF in
Speaker 2: the nineteen nineties.
Speaker 3: To ignore everything except the economy. You all heard this
Speaker 3: expression right about presidential elections, it's about the economy stupid,
Speaker 3: it's still accurate, and the S and P five hundred
Speaker 3: is about earnings period positioning valuation. It all fits in,
Speaker 3: but the underlying trend is all basically coming from earnings.
Speaker 2: Totally, totally fascinating. Thank you, Binkie for being so generous
Speaker 2: with your time. We have been speaking with Binkie Chada.
Speaker 2: He is the chief US Equity and Global Strategist and
Speaker 2: head of asset Allocation at Deutsche Banks Securities. If you
Speaker 2: enjoy this conversation well, be sure to check out any
Speaker 2: of the five hundred and seventy seven we've done over
Speaker 2: the past eleven years. You can find those at iTunes, Spotify,
Speaker 2: Bloomberg YouTube, or wherever you get your favorite podcasts. Be
Speaker 2: sure and check out my new book How Not to
Speaker 2: Invest The Ideas, numbers, and behaviors that destroy wealth and
Speaker 2: how to avoid them How Not to Invest at your
Speaker 2: favorite bookseller.
Speaker 4: I would be remiss if I do not.
Speaker 2: Thank the track team that helps put these conversations together
Speaker 2: each week. Alexis Noriega is my video producer. Anna Luke
Speaker 2: is my producer. Sage Bauman is the head of podcasts
Speaker 2: at Bloomberg. Sean Russo is my researcher. I'm Barry Rudoltz.
Speaker 2: You've been listening to Masters in Business on Bloomberg Radio