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Speaker 1: Hello, and welcome to What Goes Up, a Bloomberg weekly

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Speaker 1: market podcast. I'm Sarah pont Set, a reporter on the

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Speaker 1: Cross Asset team. That I'm Mike Reagan, a senior editor

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Speaker 1: on the Markets team at Bloomberg. This week on the show, well,

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Speaker 1: many investors are shunning emerging market stocks in the wake

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Speaker 1: of a trade war. One widely followed investor is making

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Speaker 1: a bullish bet. And of course we'll close out the

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Speaker 1: episode with our tradition, the craziest thing I saw in

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Speaker 1: markets this week, Sara, you better be prepared. Oh I'm

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Speaker 1: prepared this week? Are you wait for it now? Sarah?

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Speaker 1: You know in our business financial news the words pioneer

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Speaker 1: and revolutionary or thrown thrown around a lot. I'm guilty

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Speaker 1: of using them a lot, but I can't think of

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Speaker 1: a better words for our guests. One of our guests

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Speaker 1: here today he did a lot of important work coming

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Speaker 1: up with what's known as the I be a fundamental indexing. Basically,

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Speaker 1: you can invest in a passive manner at a very

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Speaker 1: low cost in an index that gives you a lot

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Speaker 1: of diversity. But instead of making market capitalization sort of

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Speaker 1: the center of the indexing universe. Uh, you wait your

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Speaker 1: stocks based on more fundamental things like revenue, cash flow,

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Speaker 1: dividends and buy backs and book value. And this really

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Speaker 1: launched a lot of popular investment strategies that have sort

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Speaker 1: of taken this and and some more dubious ways to

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Speaker 1: do this under the banner of smart beta factoring, investing,

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Speaker 1: that sort of thing. But joining us today is Rob Barnett,

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Speaker 1: the guy who sort of started it all, the founder

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Speaker 1: of Research Affiliates. Rob, can we call you the godfather

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Speaker 1: of smart beta? Is that is that appropriate? Lots of

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Speaker 1: people have fine with me? That makes it safe? Good good.

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Speaker 1: That's that's a it's a nice catchy title. As journalist,

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Speaker 1: we need something like that. Also joining us the godfather

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Speaker 1: of the newsroom downstairs, Chris. I think that, uh, groundbreaking

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Speaker 1: would have been pushing groundbreaking breaking. So and Chris is

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Speaker 1: the executive editor here of the markets team at Bloomberg. Um, Rob,

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Speaker 1: I think he's read every single one of your research reports,

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Speaker 1: so we can quiz him on it if you want it.

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Speaker 1: He'd be the only one I sure haven't. But let's

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Speaker 1: talk about this notion of what you started calling fundamental investing. Uh,

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Speaker 1: and now it's sort of falls under the banner of

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Speaker 1: smart data. I get the oppression you don't like exactly

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Speaker 1: necessarily everything that's now falling under the umbrella smart data

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Speaker 1: is that? Is that fair? That's fair? When UM the

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Speaker 1: term smart beta was invented, it was invented by Towers

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Speaker 1: Watson out of London, a major institutional consulting firm, and

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Speaker 1: they coined the expression actually on the basis of fundamental index.

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Speaker 1: They recognize that fundamental index doesn't win because of the fundamentals.

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Speaker 1: It wins because you are waiting the portfolio in a

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Speaker 1: fashion that's indifferent to price. So as the price goes

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Speaker 1: up and down, if it's big swings, you're going to

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Speaker 1: contratrate against it. Whatever's sword, you're gonna trim, whatever is tumbled,

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Speaker 1: you're gonna buy. And so it profits from the mean reversion,

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Speaker 1: as prices tended to mean revert. And so they looked

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Speaker 1: around and said, what other strategies do this equal weight

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Speaker 1: minimum variance UM ed hex risk efficient strategy toebam's maximum

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Speaker 1: diversification strategy and so forth, And so they said, let's

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Speaker 1: call it smart beta, and let's encourage all of our

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Speaker 1: clients to split their money between bulk beta capuated indexing

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Speaker 1: and smart beta mean reversion strategies. Well, the industry loved

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Speaker 1: the term smart beta, embraced it, and attached it to

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Speaker 1: everything under the sun. So there's a lot of stupid

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Speaker 1: beta under the rubric smart beta. And one of the

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Speaker 1: quickest to embrace the term was the factor investing crowd

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Speaker 1: factor investing starts with cap weight and then puts a

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Speaker 1: tilt on. It's not smart beta under the original definition.

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Speaker 1: So smart beta now means anything and everything. It also

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Speaker 1: means nothing, and that's where we are now. It's it's

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Speaker 1: a catchy term for anything goes. Just to clar the

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Speaker 1: whole mean reversion theory is this idea that when you

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Speaker 1: get a cap weighted index, things get big. They become

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Speaker 1: basically enslaved to their wargest components, and that to some

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Speaker 1: degree to start the return partly partly, but it's actually

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Speaker 1: more fundamental than that. Um If a stock is overvalued,

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Speaker 1: by which I mean it's destined to underperform in the

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Speaker 1: years ahead, then it has a weight in a cap

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Speaker 1: weighted portfolio that's higher than it fair value weight indexers

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Speaker 1: will say, yeah, that's a truism, and it's obviously true,

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Speaker 1: but so what you don't know what the fair value

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Speaker 1: weight is. But if you link to market cap, then

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Speaker 1: every single stock that's above its fair value is overweighting

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Speaker 1: your portfolio. Every single stock that's below it's fair value

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Speaker 1: is underweight. The majority of your money is in over

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Speaker 1: priced stocks. By definition, break the link with price, and

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Speaker 1: now if it's overpriced, it might be overweight, it might

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Speaker 1: be underweight. The airs cancel and the canceling of the error.

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Speaker 1: As we did a paperback in two thousand fifteen with

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Speaker 1: Harry Markowitz in which we showed that the uh if

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Speaker 1: you cancel the errors by breaking the link with price,

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Speaker 1: firstly you explain the entire value effect, and secondly, cap

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Speaker 1: weighting has about a two perannum reduction in return against

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Speaker 1: anything that breaks that link. Along these lines, you guys

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Speaker 1: put out a re set research paper as well called

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Speaker 1: buy high, Sell Low, which is the opposite of what

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Speaker 1: classic investor's thing to do, where you want to buy

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Speaker 1: low and sell high. Does it come back to that

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Speaker 1: there is a fundamental issue with index funds and what

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Speaker 1: actually is this problem? Is it very widespread? How do

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Speaker 1: you change this? The notion of buying high and selling

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Speaker 1: low is extremely widespread, and it's it's embedded in human nature.

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Speaker 1: Whatever has given us great profit and joy, we want

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Speaker 1: more of that. Oh, let's buy it, because it's gone

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Speaker 1: up and it's made us money. Whatever is inflicted pain

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Speaker 1: and losses, we want to get rid of that, and

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Speaker 1: so if it's tumbled, get me out of here. It's

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Speaker 1: totally human nature, and it's the essential basis for the

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Speaker 1: value effect. It's the essential basis for fundamental index alpha,

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Speaker 1: or for equal weight alpha, or a whole host of

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Speaker 1: these strategies. It happens with regard to stocks. It happens

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Speaker 1: with regard to mutual funds and managers. Nothing is better

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Speaker 1: for a mutual funds au M than a recent success

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Speaker 1: performance may be brilliant, money will pour in. People don't

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Speaker 1: ask the question, did this strategy win because it was

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Speaker 1: getting more popular and more expensive? And if it wins

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Speaker 1: because it's getting more popular and more expensive, it's a

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Speaker 1: sell not to buy. So the paper buy high and

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Speaker 1: sell low. With index funds focused on how index funds

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Speaker 1: do this, it turns out that stocks added to index

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Speaker 1: funds UH index funds don't have zero turnover, they just

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Speaker 1: have low turnover. But stocks added to index funds on

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Speaker 1: average are priced at three to four times the valuation

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Speaker 1: multiples of stocks that are dropped. By stocks that are dropped,

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Speaker 1: I mean discretionary deletions. If it's UH corporate action, If

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Speaker 1: it's a bankruptcy merger, UM, that doesn't count. But if

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Speaker 1: it's a discretionary deletion, it's inevitably going to be a

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Speaker 1: company that's out of favor, unloved for a long time.

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Speaker 1: So that the attitude is, let's get rid of this

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Speaker 1: and put put twitter in UM. And so what's added

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Speaker 1: is on average three to four times the valuation multiples

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Speaker 1: of what's dropped. Now, that's fine if what's added is

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Speaker 1: has such such wonderful future growth that it's worth triple,

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Speaker 1: but in point of fact, it's not. What we find

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Speaker 1: is that the stocks that are added on average underperform

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Speaker 1: UH the market by about two In the next year,

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Speaker 1: the stocks that are dropped on average outperformed the market

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Speaker 1: by about twenty percentage points. Because there's value there, and

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Speaker 1: that I imagine, yeah, yeah. And the other thing that's

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Speaker 1: interesting is UM starting s and P would pre announce,

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Speaker 1: So I got to remember who their clients are. Their

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Speaker 1: clients are the index funds. That's who pays the bills.

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Speaker 1: And so the index funds were saying, hey, stop blindsiding

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Speaker 1: us with these changes in the index, give us some notice,

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Speaker 1: tell us when you're going to make the change, and

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Speaker 1: tell us what the change will be. And being responsive

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Speaker 1: to their clients, they started doing that. UM. It gives

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Speaker 1: the index funds and opportunity to put the trade in

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Speaker 1: place before the index has changed. Prior to that, they

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Speaker 1: they had to play catch up, which meant that they

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Speaker 1: were moving the share prices, which meant that they were

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Speaker 1: underperforming the index. Now they didn't have to underperform the

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Speaker 1: index as long as they got their trades done by

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Speaker 1: the time that the stock was being added. And so

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Speaker 1: what we found was that between the day before the

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Speaker 1: announcement and the day after the change in the index

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Speaker 1: took effect, the additions beat the deletions by a thousand

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Speaker 1: basis points. That's pretty amazing, Rob. Some of the um

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Speaker 1: uh interviews I've I've seen with you recently, you talk

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Speaker 1: about putting uh fully half of your own personal assets

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Speaker 1: in emerging market value. Um. Now, you're a guy in

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Speaker 1: your mid sixties, uh um, picturing sort of the average

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Speaker 1: Joe of that age walking into their local you know,

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Speaker 1: Raymond James office and say to their advisor, I I

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Speaker 1: want to put half my money in the end back

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Speaker 1: up the truck, and I feel like their advisor would

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Speaker 1: be like, I gotta speak to my manager here. But

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Speaker 1: so is that a strategy just for uh someone like you?

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Speaker 1: Where would you advise that to a to a normal retiree.

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Speaker 1: Most people are sensitive to downside risk and even more

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Speaker 1: sensitive to maverick risk. If the markets up and they're

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Speaker 1: not they're flat, they feel terrible. If the market's flat

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Speaker 1: and they're down, they start to look in the mirror

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Speaker 1: and hate themselves. So maverick risk performing differently from how

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Speaker 1: you think you ought to perform, UH, is the risk

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Speaker 1: that people most want to avoid. Well investing in emerging

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Speaker 1: markets value stocks versus investing in the SMP. The tracking

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Speaker 1: error between the two is going to be huge. The

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Speaker 1: difference in returns between the two is going to be huge.

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Speaker 1: So it only makes sense to make a big bet

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Speaker 1: like that. If you're somebody who really doesn't care about

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Speaker 1: maverick risk, and I don't for myself, for you seem

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Speaker 1: to embrace maverick risk to something to some to say

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Speaker 1: some extent, yeah, for our clients, UM, I would simply

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Speaker 1: advocate UM put nearly as much into emerging markets as

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Speaker 1: you would view as your maximum comfortable exposure, and put

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Speaker 1: most of that into value, not growth. And that's about

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Speaker 1: as far as I push it. For a lot of people.

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Speaker 1: That would mean a five or ten percent allocation. That's fine,

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Speaker 1: that's enough to move the needle and make a difference

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Speaker 1: in your performance. But our expectation is that emerging markets

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Speaker 1: value stocks based on our models, should beat the SMP

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Speaker 1: by about a thousand basis points per year for the

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Speaker 1: next ten years. That adds up big. And I noticed

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Speaker 1: on your website you have sort of a calculator that

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Speaker 1: tries to predict returns, and the the e M equity

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Speaker 1: returns are projected at very high seven percent real versus

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Speaker 1: half a percent real for U S stocks, right right.

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Speaker 1: But it also uh projects volatility and it looks like uh,

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Speaker 1: some some very healthy volatility, healthy volatility so to speak,

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Speaker 1: in e M. And it made me look, you know, actually,

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Speaker 1: the the SMP is more volatile than the e M

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Speaker 1: index right now, So UM, is that just a functional

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Speaker 1: mean reversion to for for emerging market stocks. Part of

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Speaker 1: that is a matter that emerging markets have been a

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Speaker 1: little bit more UM benign of late. In terms of volatility,

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Speaker 1: I would expect emerging market stocks to be more volatile

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Speaker 1: than the S and P, but again not drastically so.

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Speaker 1: And uh so people fear emerging markets because of the unfamiliarity,

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Speaker 1: not because they are inherently hugely risky. And certainly when

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Speaker 1: the UM, I like to use the Schiller pe ratio,

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Speaker 1: which was price relative to ten your smooth earnings US stocks,

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Speaker 1: it's north of thirty times emerging market stocks, it's south

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Speaker 1: of fifteen times. It's more than half off emerging markets

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Speaker 1: deep value it's around eight times. So if you can

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Speaker 1: buy half the world's GDP concentrating on the value end

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Speaker 1: of the spectrum and pay less than eight times the

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Speaker 1: sustainable ten year smooth earnings, that's pretty cool, Chris. I

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Speaker 1: want to bring you in here and get the state

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Speaker 1: of plan markets because we continue to get more headlines

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Speaker 1: on trade, whether it relates to China in Mexico and

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Speaker 1: in that arena, the majority of the investors are saying,

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Speaker 1: don't go into emerging markets, it's so volatile. Of course,

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Speaker 1: they have a shorter term outlook than ten years, But

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Speaker 1: over this past week, it seems like markets don't really

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Speaker 1: care much, do they? Well, they have stopped being overly

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Speaker 1: concerned because somebody rushed to their aid once again, or

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Speaker 1: to a degree, I mean, depending someone being oh Jerome

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Speaker 1: Pow and if depending on how you slice his his

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Speaker 1: did it did look like he was conscious that he

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Speaker 1: was being called on to issue some some peaceful commentary

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Speaker 1: and they got that. And I don't know, uh, to me,

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Speaker 1: not in any way surprising that the SNP of volatility

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Speaker 1: is higher than everything right now. It's been a crazy

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Speaker 1: market to cover if there's no sign that it's going

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Speaker 1: to get any easier. There's lots of economics, I mean,

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Speaker 1: I think this is what we're pivoting to. We were

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Speaker 1: obsessed with the Fed, we remain obsessed with the trade war.

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Speaker 1: But a lot of people are starting to become really

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Speaker 1: concerned that there's emerging evidence that the U. S economy

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Speaker 1: is not what it what not would it looked like

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Speaker 1: a few months ago? And that's probably going to call

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Speaker 1: the tune from here. And are the head winds to

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Speaker 1: the economy fixable by a few rate cuts? Considering how

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Speaker 1: close we all arts is zero? I would just say

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Speaker 1: to that the answer, if the economy is in trouble

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Speaker 1: has historically been No. I mean, eventually rate cuts will

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Speaker 1: will kick in turn things around. But the economy is

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Speaker 1: too big of a ship I think really in anything

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Speaker 1: but the long term to to to be rescuable by

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Speaker 1: you know, FED gestures, particularly now. I mean they don't

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Speaker 1: have enormous amounts of bandwidth to deal with it. Rob,

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Speaker 1: You were not in your head in agreement there, which

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Speaker 1: is rare with NJ. We don't see that, right, we

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Speaker 1: don't see that in this office. Uh much? Is is

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Speaker 1: this rate cut that everyone's pricing in enough to keep

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Speaker 1: the party going? Or is there are too many headlines?

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Speaker 1: The short answer is not really. The longer answer is

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Speaker 1: um Monetary policy acts with a lag of about eighteen

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Speaker 1: to thirty six months, so they should have been doing

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Speaker 1: this a year ago. Um. Now, what's interesting is the

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Speaker 1: the markets tell the FED whether it's too loose or

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Speaker 1: too tight. You have a set rate, the short rate,

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Speaker 1: you have a market rate the long rate, and don't

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Speaker 1: view an inverted yield curve as a signal that a

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Speaker 1: recession may be coming. Few an inverted yield curve as

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Speaker 1: something that creates the recession. Thank you. I've always thought that, Yeah,

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Speaker 1: is that because of the fear that it creates in

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Speaker 1: the investor space, or just because of the actual ways

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Speaker 1: that now banks are lending out we're lending rate stand

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Speaker 1: more the latter, because when you're dealing with long rates

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Speaker 1: at let's say two and a half percent and tenure

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Speaker 1: at um Ballpark of two and the T bill yield

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Speaker 1: is higher, materially higher. Basically, the long rate is saying, WHOA,

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Speaker 1: we're seeing signs of a slowdown. We think two percent

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Speaker 1: is about it for the cost of capital in a

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Speaker 1: slowing economy, and the FETE is saying, we don't see

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Speaker 1: it yet. By the time they see it, it's way

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Speaker 1: too late. So Cam Harvey did his nine six um

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Speaker 1: PhD dissertation on this very topic. He was the one

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Speaker 1: who originally found the yield curve and versions had a

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Speaker 1: then perfect track record. To gauge the track record of

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Speaker 1: any indicator, you're looking for false positives and false negatives.

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Speaker 1: False positives would be signal that there's a recession coming

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Speaker 1: and it doesn't happen. False negatives would be no signal

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Speaker 1: and it does happen. There were no false positive those

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Speaker 1: or false negatives from nine well, there's been no false

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Speaker 1: positives or negatives since then, that's pretty unusual. So when

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Speaker 1: you see an inversion, it doesn't guarantee the recessions coming,

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Speaker 1: but sit up and pay attention, because basically the market

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Speaker 1: is saying this FED is too tight, it's stifling UH investment,

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Speaker 1: and historically it's a perfect indicator. It's never failed. You know,

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Speaker 1: I can't resist the chance to get a little plug

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Speaker 1: in here if you want to hear more about Cam Harvey.

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Speaker 1: A few episodes ago our four Horsemen of the Apocalypse,

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Speaker 1: we we interviewed Cam Harvey, Rob's colleague at at Research

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Speaker 1: Affiliates UM Rob. We also heard from Mario Draggy this week,

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Speaker 1: and the market didn't react very well to him. I

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Speaker 1: mean they the ECB obviously has less sort of biggle

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Speaker 1: room to stimulate UH still at zero percent interest rates.

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Speaker 1: I mean he's developed Europe a lost cause in the

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Speaker 1: stock market, uh for the over I mean you have

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Speaker 1: European banks index trading at basically the level of traded

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Speaker 1: at in the in the nineteen eighties. You know, when

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Speaker 1: when Chris was well, you've got you've got to recognize

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Speaker 1: the downside risk is constrained. I mean Deutsche Bank that

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Speaker 1: I can't lose more than two bucks to share because

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Speaker 1: it's a two bucks share um, so you have a

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Speaker 1: firm zero lower bound is firm when it comes to

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Speaker 1: share crisis, I would argue, and central bankers just don't

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Speaker 1: see this that if you reduce rates from six percent

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Speaker 1: to four percent, you're stimulating. If you reduce rates from

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Speaker 1: two percent to zero percent, probably not. If you're reduced

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Speaker 1: from zero to minus one, you're not stimulating. Your singing

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Speaker 1: signaling panic, and people instead of going out and spending

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Speaker 1: are going to hoard. They're going to um set money

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Speaker 1: aside for a rainy day because the central bank is

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Speaker 1: signaling watch out, big rainy days are coming. So no,

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Speaker 1: I don't think it signals that the opportunity in European

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Speaker 1: equities are for clothes for the foreseeable future. The market

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Speaker 1: knows about the impact of negative rates even as central

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Speaker 1: bankers don't, and it's already priced it in European stocks. Uh.

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Speaker 1: The European stock index is priced at half the Schiller

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Speaker 1: pe ratio of the US emerging markets. A little cheaper

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Speaker 1: than that, but half off already says we don't like

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Speaker 1: the way things are going here, and we're pricing that in.

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Speaker 1: So I would much rather invest in Europe than in

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Speaker 1: the US. That's saying a lot. You don't hear that

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Speaker 1: many times, especially when short Europe is still one of

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Speaker 1: the most crowded trades out there, supposedly according to some

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Speaker 1: Bank of America dat Maverick. Maverick, Chris, I don't like crowded. Now,

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Speaker 1: we know that, we know that. I do want to

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Speaker 1: bring it back to Jerome Powell for a second, because

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Speaker 1: he said at the beginning of the week that he

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Speaker 1: would do whatever is appropriate to sustain the expansion, which

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Speaker 1: is nice and ambiguous. Right what is what it is appropriate?

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Speaker 1: We don't know. But you've said on Bloomberg Television before

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Speaker 1: that this can potentially cause an issue because it encourages

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Speaker 1: investors to buy on the dip, and we did not

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Speaker 1: gloss over the fact that ten minutes ago you just

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Speaker 1: said that over the next ten years, US stocks will

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Speaker 1: probably return half a percentage point above inflation. Are these

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Speaker 1: two at odds or is it the possibility that investors

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Speaker 1: are buying on dips and continuing to drive the market

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Speaker 1: higher that could potentially make the fall out even worse.

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Speaker 1: I think they've been buying on dips for a long time,

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Speaker 1: and that has a lot to do with evaluation multiples

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Speaker 1: we see here in the US. My concern about US

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Speaker 1: stocks is all valuation related, it's not growth related. I

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Speaker 1: think US is better positioned for economic growth in Europe

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Speaker 1: or Japan, and I think demograph fix are a big

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Speaker 1: part of that. We still have a rising population and

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Speaker 1: a rising population working age population, um Japan has a

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Speaker 1: shrinking population, in Europe has a shrinking working age population,

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Speaker 1: so they have demographic headwinds that are much more serious

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Speaker 1: than the ones that we face. But even our demographics,

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Speaker 1: the baby boomer population is huge, and roll the clock

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Speaker 1: forward ten years and the vast majority of boomers will

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Speaker 1: be retired. When the vast majority is retired, they will

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Speaker 1: be having to sell assets in order to buy goods

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Speaker 1: and services in retirement, whether it's through a direct sales

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Speaker 1: or indirect through a pension paying out to them. In

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Speaker 1: either case, those are valuation in different sales. You're selling

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Speaker 1: because you need to regardless of the price. So baby

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Speaker 1: boomers switch from ten years ago being valuation in different

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Speaker 1: buyers to valuation in different sellers. That's a big switch,

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Speaker 1: and that could easily lead to valuation multiples being rather

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Speaker 1: drastically lower ten years from now, Rob, one quick thing

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Speaker 1: before we get to the craziest thing in markets this week.

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Speaker 1: I think everyone's favorite part of the podcast, and at

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Speaker 1: least mine two and fifteen I actually interviewed it you.

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Speaker 1: I don't even know if you remember. I'm a very

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Speaker 1: forgettable guy, but one quote really, uh stuck with me,

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Speaker 1: and I just want to read it back to you. Uh.

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Speaker 1: You said, right now, we have earnings coming off of

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Speaker 1: a record high as a percentage of GDP, and yet

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Speaker 1: you have Wall Street saying, don't worry, it's going to

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Speaker 1: sort of new hides. Pardon me, but when when do

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Speaker 1: the peasants with pitchworks come out and start rioting? Society

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Speaker 1: at large has to enjoy some of the large guests,

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Speaker 1: or else the pitchforks come out, you know. And that's

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Speaker 1: really stuck with me because you look at some of

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Speaker 1: the political developments that populism have since then. The populism, um,

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Speaker 1: you know, the blue collar support for President Trump on

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Speaker 1: one hand, that on the left you have a very

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Speaker 1: big lurch to the left into downright socialism. Um, is

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Speaker 1: that a sign of the pitchforks? And and ultimately, what

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Speaker 1: is the target of pitchforks? I wonder if one of

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Speaker 1: them might be buy backs, which is an element of

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Speaker 1: the fundamental index um. Where do you see who's going

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Speaker 1: to get punctured by it by a pitchworks? Buy Backs

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Speaker 1: I don't think are a big deal. It reflects companies

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Speaker 1: concerns that they don't have new initiatives that are worth

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Speaker 1: investing in, and therefore the best thing they can do

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Speaker 1: for their share prices to buy back stock. That's a

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Speaker 1: lot healthier than secondary equity offerings, which dilute the shareholder,

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Speaker 1: and through most of market history, secondary equity offerings have

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Speaker 1: been much bigger than buy backs. But back to the

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Speaker 1: basic question. Populism is a manifestation of the pitchforks. The

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Speaker 1: pitchforks come out with people being angry and not knowing

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Speaker 1: who to be angry at. So the Brexit tears are

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Speaker 1: angry at Brussels, and they're angry at the mainstream politicians

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Speaker 1: that got them married to Brussels. The Trumpians are angry

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Speaker 1: about a lot of things, uh, mostly blaming immigrants and

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Speaker 1: things like that. Um, Well, immigration, healthy, well structured immigration

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Speaker 1: is a wonderful thing. It's great for growth. You want

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Speaker 1: to welcome people who are willing to work hard, who

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Speaker 1: are willing to obey our laws and pay their taxes,

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Speaker 1: and subject to that, we should be eager to hand

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Speaker 1: out green cards. But are immigration policies are shambles. Uh,

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Speaker 1: it's not at all correctly selective, and so people are angry. Um,

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Speaker 1: across Europe you have populism in a very big way.

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Speaker 1: So is this the pitchforks? It is. It's not yet uh,

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Speaker 1: to a point of anger of truly getting out pitchforks,

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Speaker 1: but it does. It's a manifestation of the level of

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Speaker 1: anger out there in the broad populace. Right, all right, Well,

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Speaker 1: let's end on a happier note with the craziest thing

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Speaker 1: I ever saw in markets this week, Chris Nag. You've

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Speaker 1: seen a lot of crazy stuff in you. Let's let's

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Speaker 1: start with you. Mine isn't hugely crazy. It's just the

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Speaker 1: rally and utilities over the last four days, which has

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Speaker 1: been going on all year, that the best performing group

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Speaker 1: in the SNP, which is in of itself kind of crazy,

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Speaker 1: and then the last four days been pretty parabolic to

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Speaker 1: a point where their forward valuation is now like a

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Speaker 1: thirty year high. And I just think it's it's crazy

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Speaker 1: in and of itself. They've all risen basically all week,

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Speaker 1: and it's just such a lens for this market. People

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Speaker 1: want to bid it up, they want to own stuff,

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Speaker 1: and what they're gonna end up owning is the ultimate

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Speaker 1: safety trade. And as a result of that, defense even

429
00:26:57,000 --> 00:27:00,399
Speaker 1: something is sort of classically defense boringly to offensive is

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00:27:00,520 --> 00:27:04,600
Speaker 1: utilities is now nosebleed valuation. And that's not the hot

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00:27:04,640 --> 00:27:07,920
Speaker 1: new growth sector utilit evident it is. There is an

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00:27:07,920 --> 00:27:10,080
Speaker 1: inflow into an x l U, which is the e

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00:27:10,119 --> 00:27:12,520
Speaker 1: t F at tracks utilities, the largest ever in history.

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00:27:12,560 --> 00:27:14,520
Speaker 1: I mean, people just want to get in. Yeah, it's

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00:27:14,760 --> 00:27:20,640
Speaker 1: it's such a psychotic kind of psychological event, just basically

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00:27:20,640 --> 00:27:24,879
Speaker 1: euphoria for utilities the most psychotic thing. Sarah, what do

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00:27:24,880 --> 00:27:28,720
Speaker 1: you get? So we all know Costco obviously, and we

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00:27:28,760 --> 00:27:31,159
Speaker 1: think of Costco, you think of tread or Hunt buying,

439
00:27:31,280 --> 00:27:35,160
Speaker 1: you get a lot in bulk for a cheaper amount. Well,

440
00:27:35,359 --> 00:27:38,800
Speaker 1: there was a wedding ring that was sold at Costco,

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00:27:39,440 --> 00:27:43,440
Speaker 1: and the CFO at Costco said, in part their sales

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00:27:43,560 --> 00:27:46,439
Speaker 1: got a nice little boost from this gift because if

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00:27:46,440 --> 00:27:48,359
Speaker 1: anyone want to take a guess at how much this

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00:27:48,440 --> 00:27:50,399
Speaker 1: ring sold for, and if you know you can't guess how.

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00:27:50,520 --> 00:27:52,520
Speaker 1: And I read the story and I can't remember that

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00:27:53,560 --> 00:27:58,320
Speaker 1: four thousand dollars a wedding ring at Costco. Well, everything's

447
00:27:58,320 --> 00:28:02,080
Speaker 1: bigger at Costco, So is it like a I don't

448
00:28:02,080 --> 00:28:03,600
Speaker 1: think it's ninety five. I think it was something like

449
00:28:04,160 --> 00:28:06,480
Speaker 1: ten point one. And it's still have a huge diamond.

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00:28:06,560 --> 00:28:09,520
Speaker 1: But who knew they sold rings that cost over four

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00:28:10,119 --> 00:28:13,000
Speaker 1: dollars at Costco? Did you quiz your boyfriend about whether

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00:28:13,040 --> 00:28:15,119
Speaker 1: he's been shopping at Costcos? I? I did not, d

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00:28:15,440 --> 00:28:17,880
Speaker 1: It's hard. There's no Costcos in the city, no costs

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00:28:17,880 --> 00:28:20,400
Speaker 1: have been had, and there's no point Rob. I don't

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00:28:20,400 --> 00:28:21,960
Speaker 1: know if they warned you about our gimmick. Here the

456
00:28:22,000 --> 00:28:23,800
Speaker 1: craziest thing you saw in markets this week? Have you

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00:28:23,840 --> 00:28:27,959
Speaker 1: have you seen anything crazy? Oh? I sure have. Um,

458
00:28:29,000 --> 00:28:33,639
Speaker 1: there was and you're familiar with original issue new issue

459
00:28:33,720 --> 00:28:40,520
Speaker 1: junk bonds UM, pioneered by Milken, and what we've seen

460
00:28:40,720 --> 00:28:44,200
Speaker 1: is that junk bond yields famously. A year or so

461
00:28:44,280 --> 00:28:48,720
Speaker 1: ago in Europe were christ that yields lower than US

462
00:28:48,960 --> 00:28:53,640
Speaker 1: tenure treasuries, and I thought that was crazy. In Japan

463
00:28:54,280 --> 00:28:57,880
Speaker 1: this past week, there was an original issue new issue

464
00:28:58,360 --> 00:29:02,720
Speaker 1: junk bond to your junk bond priced at basis points.

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00:29:03,400 --> 00:29:07,000
Speaker 1: It's a single b credit, it's expected to be able

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00:29:07,040 --> 00:29:11,400
Speaker 1: to pay. It's a coupon. It's not clear it'll be

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00:29:11,440 --> 00:29:16,840
Speaker 1: able to pay. The principle um, so you're buying something

468
00:29:17,520 --> 00:29:21,479
Speaker 1: for a hundred yen that you expect will give you

469
00:29:21,520 --> 00:29:23,760
Speaker 1: back a hundred two yen if it doesn't go bust?

470
00:29:25,040 --> 00:29:30,040
Speaker 1: What you do? That's pretty grave it I prefer junk bond,

471
00:29:30,240 --> 00:29:34,280
Speaker 1: I excuse me, I prefer emerging markets deep value stocks.

472
00:29:34,760 --> 00:29:37,080
Speaker 1: That's pretty good. I think Rob might win, but I'll

473
00:29:37,160 --> 00:29:39,080
Speaker 1: just give you mine anyway. Uh, and Rob, you'll like

474
00:29:39,120 --> 00:29:41,960
Speaker 1: this one. Given your discussion about stocks getting dropped out

475
00:29:41,960 --> 00:29:44,800
Speaker 1: of an index, did anyone notice the stock that get

476
00:29:44,920 --> 00:29:51,160
Speaker 1: dropped out of the SMP five on Monday night? Let's

477
00:29:51,160 --> 00:29:54,760
Speaker 1: tell that toyaker? And why is this the craziest thing

478
00:29:54,800 --> 00:29:57,959
Speaker 1: I've ever seen? And maybe not so crazy given Rob's research?

479
00:29:58,000 --> 00:30:00,480
Speaker 1: But can anyone guess what the best perform ring stock?

480
00:30:00,600 --> 00:30:07,960
Speaker 1: The next day in the Let's Hell, of course, and

481
00:30:08,360 --> 00:30:13,800
Speaker 1: one of the catalyst cited was Mattel announced a licensing

482
00:30:13,880 --> 00:30:17,880
Speaker 1: deal to make toys based on the Hello Kitty love

483
00:30:17,920 --> 00:30:20,240
Speaker 1: their Hello Kitty. Who you know who? Cares about the

484
00:30:20,320 --> 00:30:24,040
Speaker 1: SMP when you got Hello Kitty, I guess from that,

485
00:30:24,520 --> 00:30:27,640
Speaker 1: so maybe Tesla will need to add a Hello Kitty

486
00:30:27,800 --> 00:30:32,280
Speaker 1: version of the Tesla peread themselves a little bit thitterer

487
00:30:32,480 --> 00:30:35,840
Speaker 1: than people, Like I said. Stocks that are deleted from

488
00:30:35,840 --> 00:30:39,520
Speaker 1: the SMP on average beat the market by two thousand

489
00:30:39,600 --> 00:30:42,600
Speaker 1: basis points over the next year, So they just did

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00:30:42,640 --> 00:30:46,720
Speaker 1: half of it in one day. They're on their way.

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00:30:47,080 --> 00:30:48,640
Speaker 1: We'll have to leave it there, though, Robert or not,

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00:30:48,760 --> 00:30:50,360
Speaker 1: Chris n G thanks so much for coming on the

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00:30:50,360 --> 00:31:02,040
Speaker 1: show today. Thanks. What Goes Up will be back next week.

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00:31:02,360 --> 00:31:04,719
Speaker 1: Until then, you can find us on the Bloomberg Terminal

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00:31:04,840 --> 00:31:08,280
Speaker 1: website and app, or wherever you get your podcasts. We'd

496
00:31:08,280 --> 00:31:09,800
Speaker 1: love it if you took the time to rate and

497
00:31:09,880 --> 00:31:12,840
Speaker 1: review the show so more listeners can find us, and

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00:31:13,080 --> 00:31:15,640
Speaker 1: you can find us on Twitter. Follow me at at

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00:31:15,680 --> 00:31:19,400
Speaker 1: Sarah pont Seck, Mike is at reg Anonymous. Our guests

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00:31:19,520 --> 00:31:23,680
Speaker 1: Rob are Nots Research Affiliates is at r A Underscore Insights,

501
00:31:23,920 --> 00:31:27,000
Speaker 1: and Chris Nag is at Chris nag One. What Goes

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00:31:27,080 --> 00:31:29,280
Speaker 1: Up is produced by TOFA Foreheads and the head of

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00:31:29,320 --> 00:31:32,680
Speaker 1: Bloomberg Podcast is Francesca Levie. Thanks for listening See you

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00:31:32,760 --> 00:31:33,200
Speaker 1: next time.