Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene along
Speaker 1: with Paul Sweeney. Join us each day for insight from
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Speaker 1: the Bloomberg Terminal, and the Bloomberg Business App. Look how
Speaker 1: out of the net right now? Helping us here with
Speaker 1: the markets? What do you do at thirty eight thousand
Speaker 1: or UBS one?
Speaker 2: By and large, you're prepared for a consolidation given the
Speaker 2: strength of the run, but you prepare for hire. Really
Speaker 2: is our view or view coming into the year, is
Speaker 2: that the surprise of the year, the thing that markets
Speaker 2: weren't expecting, would be that stocks actually in a soft
Speaker 2: landing less than any other major asset class, and that
Speaker 2: stocks could rise hit pressure record highs without getting much
Speaker 2: help from lower bond yields. So far, that's what happened.
Speaker 2: What we expect the next leg will be you know,
Speaker 2: possibly after some consolidation, is a more broadening out of
Speaker 2: that rally. So it's not just you know, on the
Speaker 2: backs of the of the few.
Speaker 1: So kay, we got industrials coming out and it's pretty
Speaker 1: shaky this morning. We didn't J and J did well,
Speaker 1: but others really pretty rocky morning. Do you subdivide into
Speaker 1: the day to day grind the tech growthy profitable companies,
Speaker 1: cash flow companies like Microsoft from everybody else, or do
Speaker 1: you pull them together?
Speaker 2: So our view for for a while now has been
Speaker 2: that given just the extent of earnings out performance you're
Speaker 2: getting from some of these names intact, you just you
Speaker 2: can't you can't be short them. You really cannot be
Speaker 2: short some of these cast generating machines. And you know
Speaker 2: we have no overweight to technology and sector ETFs where
Speaker 2: we have that ability. So it the short answer is
Speaker 2: is yes, still still enjoy those, still separate them. However,
Speaker 2: you know, our view is more towards the broadening out.
Speaker 2: Want to have betting on a lot of different winners,
Speaker 2: whether that's in US financials, whether that's in you know,
Speaker 2: em ex China, whether that's in Japan. I really do
Speaker 2: think the story is the soft landing and narrative is
Speaker 2: a boon to risk assets the world over.
Speaker 3: Hey, look, you know we had that great run to
Speaker 3: end the year last year in kind of November December.
Speaker 3: I don't recall earnings expanding that much during that period.
Speaker 3: We have a valuation risk here in the marketplace. Given
Speaker 3: that run we had.
Speaker 2: Certainly at a valuation risk. You could also say that
Speaker 2: since the start of twenty twenty two and theory valuations
Speaker 2: have also improved mildly, So you can you know, you
Speaker 2: can play that off one way or another. Valuation is
Speaker 2: clearly not the best market timing tool. What it is
Speaker 2: very good at is kind of delineating how close to
Speaker 2: the money you might want your stop to be at
Speaker 2: a very very rich valuation. You might want to stop
Speaker 2: a little closer to the money at something that you
Speaker 2: know has a little more evaluation support. You might be
Speaker 2: a little more consistent to be able to bear out
Speaker 2: a weaker stretch.
Speaker 3: So you mentioned merging markets here. I've heard Japan mentioned,
Speaker 3: not to Japan's on merging market, but I've heard Japan
Speaker 3: mentioned more in the last six months that I have
Speaker 3: in the last twenty years. What's going on in Japan.
Speaker 2: There's a lot of different elements here I think you
Speaker 2: can tie together. I think first, there's been a long
Speaker 2: story of trying to get to corporate Japan to improve
Speaker 2: its shareholder return programs that actually became serious. You actually
Speaker 2: really start to see more concrete steps around that, you know,
Speaker 2: let's call it February March of last year, and really
Speaker 2: start to see that ramp up and the market glom
Speaker 2: onto that. The second is Japan is probably the best
Speaker 2: levered play to nominal growth that you have out there.
Speaker 2: It's you're predominantly export oriented the earnings outlook, and it's
Speaker 2: also benefited from, at the same time having the end
Speaker 2: as weak as it is. The third element, Sorry I
Speaker 2: have to, but the third element is is it just
Speaker 2: definitely the fact that from an Asian perspective, if it's
Speaker 2: China or Japan, I think that rotational flow has been
Speaker 2: a very important story.
Speaker 1: The heart of the matter is this debate over cash
Speaker 1: or deep into January, and everybody knows there's six eight
Speaker 1: trillion out there, bringing up literally in every conversation because
Speaker 1: all of our listeners and viewers are looking at cash,
Speaker 1: where's it going to go? Is there a UBS formula
Speaker 1: that says x percent of it goes back to deposits.
Speaker 2: I would say the just speaking generally into longer duration assets.
Speaker 2: So this is something that even at the start of
Speaker 2: last year, because I would say the macromood was a
Speaker 2: lot lower. Going to the start of last year, A
Speaker 2: big thing I was pounding the table on was reinvestment risk.
Speaker 2: Reinvestment risk, You're not going to be able to get
Speaker 2: this yield on cash forever. Well, now that's actually more
Speaker 2: teed up. I think people are a lot more aware
Speaker 2: of what's what's coming down the pipe here. So it's
Speaker 2: it's effectively we are going to see some flows into
Speaker 2: whether it's longer duration or whether it's into the equity market.
Speaker 2: We would expect some more support on a flow basis
Speaker 2: as it becomes more apparent that cuts and the yield
Speaker 2: on cash is going down for good news reasons, a
Speaker 2: soft landing, falling inflation, rather than bad news reasons a stumbling,
Speaker 2: a deteriorating economy.
Speaker 3: All right, so Tom's been all over this magnificent seven.
Speaker 3: He's just been printing it in twenty twenty three.
Speaker 1: How about for the rest of us.
Speaker 3: I mean I missed that trade, no surprise, my new
Speaker 3: Jersey municipals have done just fine, thank you. But where
Speaker 3: do I go now? I mean, do I chase those
Speaker 3: magnificent seven yere I miss?
Speaker 2: I must have missed it when Tom left the Triple
Speaker 2: Lover doll Hash Fund in favor of Greener your.
Speaker 3: Pastors, now Stealth's move into market.
Speaker 2: Are our views things like US mid caps, US financials, EMX, China.
Speaker 2: Those are some of the areas where you are seeing
Speaker 2: some more relative earning support valuations a heck of a
Speaker 2: lot supportive. So if you if you're looking at things
Speaker 2: that have been relative laggards, have a lot of catch
Speaker 2: up potential if the risk gone mood stays going. Those
Speaker 2: are probably some of the spaces where we expectator.
Speaker 1: Love Kawa talk. Now we got to go to hockey.
Speaker 1: You know, there's a great video out there, folks of
Speaker 1: a really magnificent moment and I lived it in that
Speaker 1: Michigan when I played was number one in the nation
Speaker 1: with that question. Red Berenson was the force there and
Speaker 1: I had the privilege of talking to him as he said, Tom,
Speaker 1: you're not good enough. You're not going to escape from Michigan.
Speaker 1: Somebody else was and it's one of the most famous
Speaker 1: goals in NCAA history. Your father and I went back
Speaker 1: and forth, Lukala the other day on one of the
Speaker 1: greatest goals the NCD he went around Jim Craig and
Speaker 1: put the Urban the net and they lost to Wisconsin
Speaker 1: in the finals. But so lot, that's Wisconsin, a bunch
Speaker 1: of Canadians. But what a joy growing up with Ben Kawa.
Speaker 1: What was that like? I mean, was he do you
Speaker 1: have you in the backyard doing sprints?
Speaker 2: Not not sprints? But man, they're still next to his
Speaker 2: his dad just turned one hundred this year. They're still
Speaker 2: an outdooryard right in the park beside their place where
Speaker 2: he remembers skating as early as hell in some years.
Speaker 2: And you know, now, I think it's well into the
Speaker 2: new year before that thing freezes over. To make what
Speaker 2: you will. But yeah, no, what a what a great guy,
Speaker 2: what a great coach. And it's been, you know, great
Speaker 2: getting to banter with him on hockey over the years,
Speaker 2: as it is with you as well.
Speaker 1: Okay, well, thanks so much, Lukawa with us in good
Speaker 1: morning to Ben Koa and mister Kyler Senior. One hundred
Speaker 1: years old, one hundred years very cool. Carl Ricadonna is
Speaker 1: at VMP Perry Bob, and he knows that you read
Speaker 1: Blinder in ballmart at fourteenth edition at Princeton, because that
Speaker 1: is gospel.
Speaker 4: And if you go to.
Speaker 1: Chapter eighteen, they talk about factors of production and other
Speaker 1: bow tie stuff involving productivity. Carl, productivity right now is
Speaker 1: a mystery. How does our mystery of productivity marginal productivity theory,
Speaker 1: how does that into what I believe is a fully
Speaker 1: employed America.
Speaker 4: Well, we good morning all, first of all, and as
Speaker 4: we think about the productivity numbers, it's really kind of
Speaker 4: a snow globe at the moment post polgetic, because we've
Speaker 4: had wild swings in both directions, and so this is
Speaker 4: really a residual measure of economic performance. And I think
Speaker 4: we won't understand the productivity trend until we get to
Speaker 4: more steady state performance in the economy, which I'm optimistic
Speaker 4: that will be the case in twenty twenty four. But
Speaker 4: typically as you have a kind of labor scarcity episodes
Speaker 4: and high wage inflation, that creates the type of capital
Speaker 4: investment which does lead to higher productivity numbers. That being said,
Speaker 4: as we look at forward indicators of capital spending and whatnot.
Speaker 4: They don't look great. Capex intentions look pretty poor for
Speaker 4: the economy at the moment. So there really is kind
Speaker 4: of a two way narrative or two way discussion that
Speaker 4: we'll have to filter through over the course of this year.
Speaker 1: I love, love, love the Rick Adonna snow Globe analog.
Speaker 1: We will steal that and use that, Carl. If that
Speaker 1: is the case, we're a fully employed America. But Paul
Speaker 1: Sweeney and I are getting emails by the hour saying,
Speaker 1: you guys are nuts. How can we have a four
Speaker 1: percent sub four percent unemployment rate and we're getting the
Speaker 1: emails we're getting.
Speaker 5: How does that happen?
Speaker 4: Well, what's interesting if we look at the last jobs report,
Speaker 4: there was some peculiar behavior in labor force participation. Had
Speaker 4: we not seen those moves, the unemployment rate would indeed
Speaker 4: be moving above four percent. So there's definitely a down
Speaker 4: vector on the labor market at the moment. It's been
Speaker 4: pretty steadily decelerating for the last twenty four months really,
Speaker 4: and so this may be creating some perceptions of economic weakness.
Speaker 4: But tying into today's events in New Hampshire and as
Speaker 4: we think about the presidential cycle, there's weak economic sentiment
Speaker 4: from the public. But I think that over the course
Speaker 4: of this year, as it becomes more apparently that inflation
Speaker 4: has moderated and it becomes more apparent that the labor
Speaker 4: market is still on a relatively healthy footing, this economic messaging,
Speaker 4: I think is going to play favorably into incumbent politicians,
Speaker 4: most importantly the top of the ticket. The presidential races
Speaker 4: are very sensitive to economic conditions. Ronald Reagan said it
Speaker 4: in nineteen eighty asking voters, are you better off than
Speaker 4: four years ago? And Bill Clinton also honed in on
Speaker 4: that message in ninety two with his unofficial campaign slogan
Speaker 4: of it's the economy stupid, and I think it's the
Speaker 4: economy is going to resonate with voters, and maybe we
Speaker 4: saw kernels of that in the last Michigan sentiment survey
Speaker 4: as well.
Speaker 3: Hey Carl, what are you? And the good people at
Speaker 3: BNP parabal what are you? Quick're econom a call here
Speaker 3: for twenty four A you in the soft landing camp?
Speaker 6: Where are you guys?
Speaker 4: It's some version of soft landing, So maybe we'll say
Speaker 4: soft ish landing, because when you have the fastest and
Speaker 4: most aggressive fed tightening campaign in four decades. Just to
Speaker 4: think that comes in for a perfect landing, I think
Speaker 4: is maybe a little bit too optimistic. So we are
Speaker 4: cognizant that there will be some tensions here between still
Speaker 4: very restrictive monetary policy, rising real rates in the economy
Speaker 4: at the same time that the labor market and income
Speaker 4: trends are decelerating. So I think it will be a
Speaker 4: bumpier version of soft landing that plays out, but I
Speaker 4: think it will still fall short of what would be
Speaker 4: called a recession by the Business Cycle Dating Committee. So
Speaker 4: all in all, it looks to be a decent year ahead.
Speaker 3: Hey, Carl, we just saw some earnings from some of
Speaker 3: the industrial companies, whether it's General Electric or three AM.
Speaker 3: A little bit of softness there, and we've seen softness
Speaker 3: in the manufacturing economy for many months now. But boy,
Speaker 3: the consumers hanging in there. What's your call on the
Speaker 3: consumer here for the year.
Speaker 4: So the consumers hanging in there, And just to take
Speaker 4: one step back looking at those big industrials, rights, as
Speaker 4: a macroeconomist puts on his equity strategist hat, right, we
Speaker 4: focus on the nominal GDP trend and rather than margins,
Speaker 4: we look at inflation, right, there, they're measuring the same
Speaker 4: thing essentially, and when we think about the twenty twenty
Speaker 4: four outlook, it will be a year where nominal GDP
Speaker 4: is slower than what we've seen in the recent years.
Speaker 4: Doesn't mean it's contracting, but it's definitely decelerating. And also,
Speaker 4: as inflation moderates, that's going to put pressure on corporate margins.
Speaker 4: So if you have slowing top line growth and margin compression,
Speaker 4: that's a challenging year, you know, a challenging outlook for
Speaker 4: for equities. Now, the other side of that is that
Speaker 4: consumers are relatively healthy. We still have a tight labor market,
Speaker 4: we still have a persistent wage pressure. So one way
Speaker 4: to think of that is it delays the fed's rate
Speaker 4: cut plans, but you know, wage pressures are still running.
Speaker 4: It effectively four percent four point six percent is measured
Speaker 4: by the Employment cost Index, and this is, you know,
Speaker 4: bad news for the FED that wants to get quickly
Speaker 4: back to two percent inflation, but it's good news for
Speaker 4: the resilience of consumer activity in a car.
Speaker 1: I use a ten year inflation adjusted yield to real yield, folks,
Speaker 1: is sort of my you know, it's like the Gilbert
Speaker 1: Kem set to correct donated years ago in the basement,
Speaker 1: and I look, Carl, the tenure really yield one point
Speaker 1: eight zero to break out above one point eight six
Speaker 1: is new territory. Are you suggesting a sustained higher real
Speaker 1: yield is where at one point eighty three right now?
Speaker 4: I think if we have a sustained higher real yield,
Speaker 4: that is going to put downward pressure on economic activity.
Speaker 4: And I like to think of it in Fed funds terms.
Speaker 4: So if we take the you know, five and a
Speaker 4: half Fed funds rate, we look what's happening in core inflation.
Speaker 4: Pick your poison, whether you want to look at inflation expectations,
Speaker 4: core CPI, core PC deflator, which we'll get another look
Speaker 4: at this Friday. In that type of measure, it's telling
Speaker 4: you that the policy rate is moving higher and maybe
Speaker 4: too high for kind of a soft landing type of
Speaker 4: play out for the year. And so I think that
Speaker 4: means that there has to be a course correction. I
Speaker 4: don't think at the March meeting, but I think by
Speaker 4: the time the second quarter rolls around, we will have
Speaker 4: more confidence that the economy is moderating, the labor market
Speaker 4: is coming into better balance, inflation pressures have moved lower,
Speaker 4: so they still need to continue pushing on inflation with
Speaker 4: real rates well above our star so at two percent
Speaker 4: real rate. But there will be a time for a
Speaker 4: recalibration around the middle of this year.
Speaker 1: Well, we're our start FREEO on Tuesday, Carlson in short here,
Speaker 1: thank you so much. Carl Rick. Odona is a BNP paradi.
Speaker 1: She did the Gabelli track, that's what we call it here.
Speaker 1: If you go to BC and then Fordham, yep, we
Speaker 1: call that the Mario Gabelli.
Speaker 3: That's a good track. And this is this is a.
Speaker 1: Really important conversation, folks, because she came off the derivatives
Speaker 1: desk at Deutsche Bank and it's socked Gen, which is
Speaker 1: owned European derivatives. Sock Gen invented the math trading gaining
Speaker 1: and losing here on equity derivatives. Sylvia Jablonski joins us
Speaker 1: with Defiance this morning. Sylvia, let me just start out
Speaker 1: with Defiance ETFs. I love your cruise ETF. You know
Speaker 1: it's it's been great. It's a triple leverage all cruise
Speaker 1: ETF love it. But why did you guys choose not
Speaker 1: to do a bitcoin ETF.
Speaker 5: Let's go right there, good, good morning time, Thanks for
Speaker 5: having me. Well, you know, I think it's at ETFs
Speaker 5: A lot of times it's a it's a first movers market,
Speaker 5: and there were a whole lot of first movers yeah here.
Speaker 5: You know, so once you start hearing that black rocks
Speaker 5: in the game, you know you had to great scale
Speaker 5: people converting GBTC. It's just you know, you have to
Speaker 5: make sound business decisions and know where you're going to win.
Speaker 5: But we probably would have to be honest if we
Speaker 5: were had a chance of being first just within the cards.
Speaker 1: For us, we understand price volatility, like in cruises during
Speaker 1: the pandemic. I'm sure your ETF was sport there on
Speaker 1: a day to day basis. What do you make of
Speaker 1: price volatility of bitdog forty nine thousand when I stepped
Speaker 1: into it. Thank you folks that worked out and we're
Speaker 1: enjoying sub forty thousand this morning, thirty eight thousand and
Speaker 1: nine sixty one. What will be the ramifications of that
Speaker 1: price volatility for the billions in bitdog ETFs.
Speaker 5: I like the Bitdog ETFs. I think that a whole
Speaker 5: lot of people are going to buy the bit Dog
Speaker 5: ETFs pretty soon when it falls to that, you know,
Speaker 5: thirty seven thousand, maybe even thirty six thousand level before
Speaker 5: it starts to rally up. I think this is kind
Speaker 5: of a classic sell the news thing. And you know,
Speaker 5: the thing with these bitcoin ETFs and bitcoin in general,
Speaker 5: you have a lot of people that actually believe in
Speaker 5: the thesis of the product and that you know, it
Speaker 5: will be digital gold, that there's a place for it
Speaker 5: in a portfolio. And if you see these institutions actually
Speaker 5: allocating that one to two percent, just give it, you know,
Speaker 5: give it a go and invest on that thesis. Plus
Speaker 5: the people who just invest because they think a whole
Speaker 5: lot of people are going to buy it and the
Speaker 5: price is going to go up, but have no conviction
Speaker 5: on it. You know, you can see that bitcoin is
Speaker 5: going to get some tailwind here in the future because
Speaker 5: of these ETFs. If you look at the ETF filings,
Speaker 5: there are so many of them out there now for
Speaker 5: covered call strategies, for put right strategies and things like this.
Speaker 5: So you know, just the sheer amount of volume of
Speaker 5: stuff that comes in and the amount of people that
Speaker 5: are willing to give it a.
Speaker 6: Try and buy it.
Speaker 5: I think we'll move the price.
Speaker 1: It's inside baseball. Jabloski's all jargon. I mean there, but
Speaker 1: can you imagine it covered right now? God, I can't
Speaker 1: imagine framing out a covered right to bring in premium
Speaker 1: on bitcoin. I just can't go there.
Speaker 6: But I know a lot of people are and either
Speaker 6: or not because we looked at this that you'd be
Speaker 6: surprised the actual you know, the actual kind of juiced
Speaker 6: inness is less there we go than like a vix
Speaker 6: It's really surprising.
Speaker 5: It's kind of surprisingly boring, to be honest. I don't
Speaker 5: know how it'll change our time, but there's not as
Speaker 5: much juice in there as you think.
Speaker 1: And what's great about this is the way you learn
Speaker 1: about Jews. You don't learn that like in CFA one
Speaker 1: oh one. You learn a Marianne Boston and you're going
Speaker 1: to Boston College.
Speaker 7: So Soviet.
Speaker 3: I mean, I've just been blown away really over the
Speaker 3: last ten fifteen years in the growth of the ETF business.
Speaker 3: It's just been extraordinary. And the more you learn about it,
Speaker 3: the more sense it makes. And we have some good
Speaker 3: folks here Bloomberg got are really following the ETF business.
Speaker 3: Where do we go next, what's the what's the next
Speaker 3: area of growth? For etfscuse the fun flows there just extraordinary.
Speaker 5: Yeah, the fun flows are back. I think, you know,
Speaker 5: post twenty twenty two, like everything else. ETF sixteen of recovery.
Speaker 5: You've seen you know, the majority of inflows this year,
Speaker 5: and I think a lot of the kind of you know,
Speaker 5: kitchy mean types of products have now been closed and
Speaker 5: kind of filtered out, and now what you have out
Speaker 5: there are the classic ETF products. You have some good
Speaker 5: and invest in things like AI and you know, supercomputing
Speaker 5: things like that. We do a lot of that. But
Speaker 5: the next, you know, the next kind of hurrah for
Speaker 5: ETF seems to be using options to do different things.
Speaker 5: So whether it's to generate income, you know, there's been
Speaker 5: a huge growth and covered call strategies, there's been a
Speaker 5: huge growth in put right strategies to generate income. You've
Speaker 5: seen a lot of flows there and you've also seen
Speaker 5: you know, different issuers doing creative things with leverage. You're
Speaker 5: starting to see four beta you know, four x daily
Speaker 5: rebalanced products, single stock products, and I think that there's
Speaker 5: appetite there. I mean, billions of dollars have flown into it,
Speaker 5: so it's it's hard to say there isn't. And I
Speaker 5: think using the option structure to generate income will be
Speaker 5: a big theme this year.
Speaker 3: You know, Sylvia, I you know, when I first started learning,
Speaker 3: and I think a lot of people learning about ETFs,
Speaker 3: it was the whole passive thing y s and P
Speaker 3: five hundred type of thing, and I got that JET
Speaker 3: would allow you to operate a really low cost structure
Speaker 3: type of rapper here. But then you guys introduced you
Speaker 3: guys being ETF industry introduced active ets and that's kind
Speaker 3: of or you lost me here. So is the cost
Speaker 3: advantage to an active ETF that much better than you know,
Speaker 3: walking down the street and getting a FID outing mutual fund.
Speaker 5: Well, it depends on the fun right. I mean, mutual
Speaker 5: funds were sort of historically classically expensive. Some of them
Speaker 5: have cut their fees because of what ETFs have done.
Speaker 5: And it depends on the performance, right. I think on
Speaker 5: a lot of these active ETFs, if you're getting you know,
Speaker 5: twenty forty sixty percent returns, you don't really care that
Speaker 5: you're paying one percent, which is arguably on the high
Speaker 5: side for ETFs, right, So it's all about what the
Speaker 5: ETF actually delivers. And then ETFs are just but you know,
Speaker 5: they're just better. I mean they are they are a
Speaker 5: better mousetrape. You can buy and sell them all day long.
Speaker 5: You know, you can arbitrage them. You can go to
Speaker 5: a market maker, you know, get filled that nav. I mean,
Speaker 5: they're just a better product.
Speaker 1: Sylvia question off the market. This goes to SoC Gen.
Speaker 1: I spent a lot of time with SoC Gen animals
Speaker 1: in London. There was a Cuban there's a Cuban cigar
Speaker 1: bar and warder Stream, which is basically the cafeteria for
Speaker 1: SoC Gen. This is a few This is before Sylvia's
Speaker 1: said she's too young to remember this, but you know
Speaker 1: it's Satcha and you guys are pros it trying to
Speaker 1: figure out where the shadows are and leverage right now,
Speaker 1: away from Defiance and your great work there, what do
Speaker 1: you worry about within the shadows of the derivative space
Speaker 1: right now? The leveraging up the notion? What what's the
Speaker 1: shadow out there that concerns you?
Speaker 5: You know, I think if the in terms of the
Speaker 5: structure of those products, you know, I think that they've
Speaker 5: become kind of more stable and safe. I was actually
Speaker 5: at SoC Gen, you know, shortly around the time that
Speaker 5: you had the leam and crashing things like that. I
Speaker 5: was working on the swaps desk when all of that
Speaker 5: was going on, So that was you know, that was
Speaker 5: eye opening, right, And people learn that you kind of
Speaker 5: have to have a third party holding the overnight collateral.
Speaker 5: You have to have you know a lot of kind
Speaker 5: of like good Monte Carlo simulation before you take certain
Speaker 5: things on and swap and things like this. So I
Speaker 5: think that the risk standards are a lot higher. I think,
Speaker 5: you know, having having actual cash and physical funds at
Speaker 5: a third party matters. I worry more about the client.
Speaker 5: You know, if you get a big market move and
Speaker 5: you have a four X product, I mean you gompe
Speaker 5: bout the fund in a day, right, But all of
Speaker 5: us yeah, I mean, you know, so I haven't actually
Speaker 5: seen that. I spend a lot of time at Direction
Speaker 5: the three X you know place too. And even during
Speaker 5: COVID when we had these massive moves, the company itself
Speaker 5: took the leverage point from three to two to kind
Speaker 5: of protect the protect people from themselves really and and
Speaker 5: you know, the volcility and things like that, and so
Speaker 5: you hope companies do that.
Speaker 2: But yeah, that's the risk.
Speaker 1: This is you hugely, hugely valuable. She's a defiance ETF
Speaker 1: Sylvia Jablanski with US joining US no op tech wizards
Speaker 1: who figured out YouTube decades ago. Gene Munster joins US
Speaker 1: co founder deep Water Asset Management, Gane I've got like
Speaker 1: eight ways to go. Let's start at sixty thousand feet.
Speaker 1: I'm in the theme that if any broke, don't fix it.
Speaker 1: The Magnificent seven had a magnificent twenty twenty three. I
Speaker 1: just don't buy the idea it ends. Will it continue
Speaker 1: into this year and.
Speaker 7: Next for the year, I think it absolutely will. And
Speaker 7: what we're seeing as a gravitational pull when it comes
Speaker 7: to the AI opportunity with Magnificent seven and also what
Speaker 7: I would call the Ordained fifteen, which are the private
Speaker 7: late stage AI companies, and I think that's where all
Speaker 7: the traction is going to happen. I would say, there's
Speaker 7: a mag seven on the public side, there's also going
Speaker 7: to be this Magnificent seven or ten on the private side.
Speaker 7: But yes, Tom, I think it's going to continue, I
Speaker 7: would caution, and continue for the year. I would caution
Speaker 7: this earnings period is going to be a lot of intensity,
Speaker 7: a lot of focus from investors related to commentary about
Speaker 7: AI contribution in twenty twenty four. I think that is
Speaker 7: the a topic that's going to orbit around the mag
Speaker 7: seven for this earnings period, and I suspect that the
Speaker 7: commentary is going to be relatively muted, or the commentary
Speaker 7: will be we expect some contribution the good news, so
Speaker 7: I think that that could cause a new term pause
Speaker 7: in some of these stocks. I think the good news
Speaker 7: for a lot of these for the companies, if you
Speaker 7: look at the estimates for the December quarter for the
Speaker 7: growth rates and then for the full year of twenty
Speaker 7: twenty four, December twenty three and twenty twenty four, analysts
Speaker 7: aren't really expecting much contribution from AI. I think psychologically
Speaker 7: it's a bigger topic than it is relative to the numbers.
Speaker 7: But I just I think that these companies are going
Speaker 7: to continue to do well.
Speaker 1: I do.
Speaker 7: Anticipate this earnings period to be mixed in terms of
Speaker 7: the stock reaction.
Speaker 1: Early Gene Monster monsters so large. There's early gene Monster,
Speaker 1: middle Gene Monster, and later Gene Monster. Early Gene Monster
Speaker 1: was fourteen page or some pipe Jeffrey which came in
Speaker 1: at four pm and you had to read it by
Speaker 1: dinner you couldn't focus. And in the back of it,
Speaker 1: he always had these brilliant some of the parts analysis
Speaker 1: gene Monster for the Magnificent seven, for Apple and Microsoft
Speaker 1: in particular. Whats the sum of the parts look like
Speaker 1: right now?
Speaker 7: Well, there's some of the parts. It's ultimately when you
Speaker 7: think about Apple, it's about services, it's about from you
Speaker 7: put all this together, I think it's better than a
Speaker 7: three trillion dollar company. I think the iPhone business today
Speaker 7: it's just over half of their total revenue. I think
Speaker 7: in aggregate that should be should trade at essentially a
Speaker 7: thirty five multiple. I think that multiple is justified given
Speaker 7: even though it doesn't grow much. I think it's justified
Speaker 7: because these devices have become substance to our life. We
Speaker 7: can't live without these Basically half the people in the
Speaker 7: US can't live without these devices. And so I think
Speaker 7: that you put this together, I think this is a
Speaker 7: three plus trillion dollar company. I think that there is
Speaker 7: a lot of uncertainty related to Apple at this time.
Speaker 7: I haven't I haven't recalled a time in Apple's history
Speaker 7: when there's been as much concern really going into this
Speaker 7: to a quarter, there's concern about the iPhone demand. He's
Speaker 7: concerned about some of the delays that they've had or
Speaker 7: taking some of that watch aff off the table because
Speaker 7: of the blood oxygen monitoring. And there's also some concerns
Speaker 7: related to how their app store policies are changing, specifically
Speaker 7: related to steering in the impact on the app store revenue.
Speaker 7: But I think that I think that you know when
Speaker 7: you when you course these out, I think that this
Speaker 7: is a three plus trillion dollar company. And when it
Speaker 7: comes to Microsoft, from some of the parts, there's two
Speaker 7: basic parts to it. There's their cloud business. That business
Speaker 7: say they have twenty two percent market share. Microsoft in
Speaker 7: total is of two hundred and twenty billion dollar revenue company.
Speaker 7: It's going to grow about fifteen percent this year. But
Speaker 7: as you think about and aggregate, their cloud business is
Speaker 7: worth even though it's called fifteen percent of total revenue,
Speaker 7: given the profitability, it's thirty plus percent of the valuation.
Speaker 7: The biggest lever when it comes to Microsoft over the
Speaker 7: next year in terms of the some of the parts
Speaker 7: is related to what's going on with the upside and
Speaker 7: uptake with Microsoft their copilot and office that contribution, so
Speaker 7: they of course have raised the price call going from
Speaker 7: fifteen to thirty dollars a month that started back in November.
Speaker 7: There's about three hundred and fifty million office office users,
Speaker 7: so the office business today is about a sixty five
Speaker 7: million dollar business. Of that two hundred and twenty total
Speaker 7: in revenue, But you could build a case if ten
Speaker 7: if a third of those people pay up for colpile,
Speaker 7: which I think is conservative, you know that that can
Speaker 7: increase revenue by ten percent. And that's probably the biggest
Speaker 7: sum of the parts. Lever when it comes to Microsoft
Speaker 7: is what the uptake is going to be. They haven't
Speaker 7: broken out what those numbers have been. As I mentioned,
Speaker 7: it's started in November. All they've said is that they
Speaker 7: know they've had a positive reception from their early corporate
Speaker 7: beta testers with this coal Pilot, and I suspect this
Speaker 7: is going to be a hit product that's going to
Speaker 7: help you compose emails, help you do powerpoints.
Speaker 3: Exactly.
Speaker 7: Yeah, taxes potentially.
Speaker 1: So you thought that was funny, Lisa, Yeah, you want
Speaker 1: to jump in here. What would you use co pilot for, Lisa, mateo.
Speaker 2: Let's see, I know what my kids would use it.
Speaker 7: For help with the homework.
Speaker 3: Of course, we're talking to Gene Monster managing partner and
Speaker 3: co founder deep Water Asset Management.
Speaker 4: Hey, Gene, I.
Speaker 3: Think you know that in twenty twenty three, not just
Speaker 3: in tech, but for the whole stock market, AI was
Speaker 3: such a driver of positive sentiment, and I think what
Speaker 3: a lot of investors who are pulling away and just saying,
Speaker 3: let me just take a look at this AI story.
Speaker 3: And the question I hear most often is how much
Speaker 3: of this spending across tech over the next several years
Speaker 3: for AI will be actually incremental to what was already
Speaker 3: kind of a base case for tech spending in general.
Speaker 3: Do you have an idea how that might look?
Speaker 7: So, yes, the answer is that it's it's a substantial
Speaker 7: amount the twenty to twenty to thirty percent range. Meta
Speaker 7: last week had some commentary about what their spend is
Speaker 7: going to be on GPUs and if you look at
Speaker 7: what their baseline spend was before they announced that, it's
Speaker 7: a thirty percent increase and spend is these you know,
Speaker 7: there was this talk about pause in AI last summer.
Speaker 7: There was this letter that went around that a bunch
Speaker 7: of people, including ironically Elon, must signed and there has
Speaker 7: been no pause. Is that this has been these companies
Speaker 7: continue to aggressively go after this, and I think that
Speaker 7: that is one of the I think one of the
Speaker 7: clearest signs how much investment is going on from these
Speaker 7: companies that this AI, that the AI substance is ultimately
Speaker 7: going to exceed the hype. It may take several years
Speaker 7: to get there, but yes, there the infrastructure spend is remarkable,
Speaker 7: especially with the Magnificent seven. And of course that infrastructure
Speaker 7: spend helps a lot of companies, many companies, potentially most
Speaker 7: companies to enable AI in their products in the years
Speaker 7: to come.
Speaker 3: Hey, Gene, one of the things that I think some
Speaker 3: investors are waiting for when you think about AI is
Speaker 3: that defining IPO. Like maybe Google was a defining IPO
Speaker 3: for the search business, Facebook was the defining IPO for
Speaker 3: the social media business. And you mentioned some private companies.
Speaker 3: Do you see something like that in the next year
Speaker 3: or two of a company or a group of companies
Speaker 3: that say, wow, AI has really arrived as a standalone
Speaker 3: kind of investment opportunity.
Speaker 7: Absolutely, I think that's going to be the next leading class.
Speaker 7: I think it's probably two to three years away. But
Speaker 7: I think that that you know, these companies that are
Speaker 7: AI first companies, so we look at the Magnificent seven.
Speaker 7: I talked about the upside related to copile at Microsoft
Speaker 7: and saying that that could add ten percent to their revenue. Well,
Speaker 7: these companies that are AI peer plays, they're growing at
Speaker 7: three hundred percent off small bases, but approaching more than
Speaker 7: a billion in revenue some of them. And I think
Speaker 7: that these AI peer plays, there will be this moment
Speaker 7: ultimately when you put it together at deep Water, we
Speaker 7: think we are going to enter an AI bubble in
Speaker 7: the next three to five years. We don't think we're
Speaker 7: anything close to it right now. We put this in
Speaker 7: and put we think we're in like nineteen ninety five
Speaker 7: and we still have five more years to go before
Speaker 7: this really escalates. But I think that's going to be
Speaker 7: one of those moments where it really gets some excitement
Speaker 7: in the market once we get some of these IPOs
Speaker 7: and who are they? You know it could be open
Speaker 7: AI data Bricks is one hugging face. Those are mid journey.
Speaker 7: Those are kind of the four most obvious ones that
Speaker 7: would be published.
Speaker 1: That's a secret world of gene Monster there Gane. The
Speaker 1: fact of the matter is, mister Nadella is firing on
Speaker 1: all cylinders. You mentioned co pilot and all the applications
Speaker 1: that we're seeing of actual money coming in twenty dollars
Speaker 1: a person, ten dollars, thirty dollars a person, and I'm
Speaker 1: enjoying a thirty eight multiple, and maybe my monster guestimate
Speaker 1: four squeezes down to a thirty five multiple. What do
Speaker 1: you do with a tech stock when all the good
Speaker 1: news is in, like in Microsoft right now.
Speaker 7: Well, if your view is that all the good news
Speaker 7: is in, you probably sell it. And I think in
Speaker 7: the case of you know that you know owning, that
Speaker 7: is a great way to build wealth, is to own
Speaker 7: and have people agree with you later. And if you
Speaker 7: there's generally a consensus that the good times are going
Speaker 7: to continue for these large companies, and so I think
Speaker 7: that if you have a view that maybe this is
Speaker 7: as good as it gets, that this is absolutely the
Speaker 7: time to sell because you'll get multiple compression. I of
Speaker 7: course don't believe that that's the case, and I just
Speaker 7: want to put one put some a little bit of
Speaker 7: perspective on that in terms of, you know, how on
Speaker 7: Earth I really strive to be level headed when it
Speaker 7: comes to these tech trends and making sure that I'm
Speaker 7: not getting carried away. Yeah, and some of the overall
Speaker 7: hype on it. And when I think of A I'm
Speaker 7: in the camp that electricity is one hundred, the mobile
Speaker 7: phones of twenty five in terms of scale of importance,
Speaker 7: the Internet's of fifteen. I think AI is probably a ninety.
Speaker 7: I think this is ultimately wow. And if in fact
Speaker 7: that ends up playing out, then we really haven't seen.
Speaker 7: I'll give you another example is that we were buying
Speaker 7: Meta over the last couple of years and it's done
Speaker 7: well recently, and we debated about internally about should we
Speaker 7: use this a stock that we should sell ted a
Speaker 7: good run, let's take our money and go other places.
Speaker 7: But then we just thought more about the impact that
Speaker 7: I was going to have in their business, and it
Speaker 7: just felt like this is one to continue to hold.
Speaker 7: And so that's what we're doing.
Speaker 1: Single most important inside of the week. You just heard
Speaker 1: it from Geen at Monster with war wounds of selling
Speaker 1: too soon, and he said he has a winner in Facebook.
Speaker 1: Guess what he and his team said, extend that and
Speaker 1: that Paul, you and I know how much money have
Speaker 1: I left on the table. I'm in triple levers dog
Speaker 1: cash coveraged up with a fifteen percent gross and I
Speaker 1: go now lighting up and I'm wrong every time.
Speaker 3: Hey, Gene one of the I'm just trying to think
Speaker 3: of some headwinds here for the tech space. I mean,
Speaker 3: do I have to worry about Washington DC here in
Speaker 3: terms of regulations more just broadly defined on tech and
Speaker 3: maybe even specific for AI. How are you guys framing
Speaker 3: that risk out?
Speaker 7: Well, when it comes to AI, there's going to be
Speaker 7: more regulation. Of course, we've got that letter that I mentioned.
Speaker 7: Tim Cook has been he hasn't said anything in the
Speaker 7: prepared commentary on their earnings calls in twenty twenty three
Speaker 7: related to AI. He has made comments more recently outside
Speaker 7: of the earnings calls and said that regulation is important.
Speaker 7: He's mentioned that also in their Q and A. I
Speaker 7: think when you have a company like Apple inviting regulation
Speaker 7: in I think it's probably something that is going to
Speaker 7: play out as far as the impact on the business
Speaker 7: and how profound this growth can be. I don't think
Speaker 7: it's going to have an impact on that. I think
Speaker 7: that a lot of the regulation is going to come
Speaker 7: around things like water marking related to images to try
Speaker 7: to help prevent deep fakes, and the use of AI
Speaker 7: for you know whether it's for for malice behavior, but
Speaker 7: I don't think that. I think that this aggressive investment
Speaker 7: cycle is ultimately going to continue. The broader topic beyond
Speaker 7: AI and regulation in Washington is something that has orbited
Speaker 7: obviously for years, and we have at the end of
Speaker 7: this month, Meta and Snapchat and TikTok is are They're
Speaker 7: all going to be and on Capitol Hill and talk
Speaker 7: about some of the latest issues related to some of
Speaker 7: the targeting that's going on on those platforms. The simple
Speaker 7: answer is that regulation sounds bad, and really the substance
Speaker 7: of it hasn't played out, and it's a little bit
Speaker 7: hard for me to imagine why now this is the
Speaker 7: time when this would have it start to have an impact.
Speaker 1: Really generous time with us today gene Monster, Thank is
Speaker 1: so much deepwater asset management there on your view of tech.
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