Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast.
Speaker 1: My name is Mike Reagan, I'm a senior editor at Bloomberg,
Speaker 1: and I'm Valdonna, hired across asset reporter with Bloomberg. And
Speaker 1: this week on the show, Well, it was the first
Speaker 1: time in more than two decades that the Federal Reserve
Speaker 1: raised interest rates by half a percentage point. But all
Speaker 1: it took was just a little hint of dovishness from
Speaker 1: chair j Palell to get the stock market roaring. He
Speaker 1: indicated it's unlikely that the federal increase rates by seventy
Speaker 1: five basis points during this cycle and the SMP shot
Speaker 1: up about three. So is that it is that all
Speaker 1: it took to set up bottom in the stock market.
Speaker 1: We'll talk about it this week with a Wall Street strategist.
Speaker 1: But first, Vildanna, I have to ask one thing before
Speaker 1: we get started, All Ears, did you have any nicknames
Speaker 1: in high school? Um? Why wait wait wait stop stop
Speaker 1: stop stop? Do not reveal your high school nicknames? Why
Speaker 1: you don't understand why? At this point of the show,
Speaker 1: the veteran podcast co host and listener of What Goes Up,
Speaker 1: nicknames are a very valuable commodity on this podcast. I
Speaker 1: think we got about a hundred reviews on Apple podcasts
Speaker 1: when I promised to reveal my high school nickname and
Speaker 1: I realized we are ratings and reviews have slowed down
Speaker 1: on Apple podcast, so I think we need to leverage
Speaker 1: your high school nickname. How long are you holding your hostage?
Speaker 1: A hundred more ratings. I think I got about seventy
Speaker 1: ratings on the on Apple podcast. So go ahead, listeners,
Speaker 1: if you want to hear Voldonna's high school nickname, you
Speaker 1: have to go and give us a rating on Apple podcast.
Speaker 1: We're not saying it has to be a five star rating. Uh,
Speaker 1: even though you know, maybe maybe that's what you want
Speaker 1: to give us. I don't know, but go rate, rate,
Speaker 1: review the show and I think we get a hundred more.
Speaker 1: Will will reveal you're holding the listeners hostage. No, no, no,
Speaker 1: I'll have to go and click that five stars, however
Speaker 1: many stars you want to click. I'm not saying it
Speaker 1: has to be five stars, not making any prerequisites. I
Speaker 1: will have no idea what they actually hit, how many
Speaker 1: stars they hit, but it's going to get the numbers
Speaker 1: going so more listeners can find the show and Uh,
Speaker 1: find out what you think about it, especially if you
Speaker 1: have a good a good review for us. You know
Speaker 1: who else we're holding hostage our guest this week. I
Speaker 1: realized this week he's probably having second thoughts about about
Speaker 1: English but joining this podcast. Yeah exactly. Oh, he might
Speaker 1: not even be on the zoom call anymore. I think
Speaker 1: he's still there. He is. I want to welcome Jeremy's
Speaker 1: here and he's senior portfolio manager and head of private
Speaker 1: client US Equities at ubs ASCID Management. Jeremy, welcome to
Speaker 1: the show. Thanks for having me out. And if you
Speaker 1: need a nickname for me. The other jay Z works
Speaker 1: is fine, that's pretty good. One, that's really good. All right,
Speaker 1: you'll be jay Z the rest of the rest of
Speaker 1: this podcast. But tell us, you know, what is your
Speaker 1: takeaway from this FED meeting this week? I mean, obviously,
Speaker 1: a relief rally in the market. Uh SMP up three
Speaker 1: in a matter of minutes after Pal indicated that seventy
Speaker 1: basis points was most likely off the table. Also some
Speaker 1: comments suggesting that, you know, a soft landing in the
Speaker 1: economy amid rising FED rates is not necessarily unthinkable. Uh.
Speaker 1: You know, he indicated to be tricky but he doesn't
Speaker 1: think it's possible. I mean, was it just that was
Speaker 1: a real relief rally. Do you think we'll give it
Speaker 1: all back in coming days or we're um or is
Speaker 1: that really the type of thing that could help the
Speaker 1: market set a bottom after this ugly start to a year. Look,
Speaker 1: I think the markets are going to remain shoppy, but
Speaker 1: I do think that the Federals are being very clear
Speaker 1: that they're not con conto inflating far more aggressive tightening
Speaker 1: was certainly helpful in terms of thinking about the future
Speaker 1: path of monetary policy and just reducing what a lot
Speaker 1: of investors fear is a policy mistake tightening too quickly
Speaker 1: in the context of a slowing economy. I also think
Speaker 1: one of the statements that was really interesting was that
Speaker 1: you know, Federal you know s Propell said that he
Speaker 1: will strive to avoid adding uncertainty to what is already
Speaker 1: an extraordinarily challenging and uncertain time. Right. So it's not
Speaker 1: just that they didn't tighten as much or they're not
Speaker 1: contemplating tightening as much as feared, but it was also
Speaker 1: they want to be predictable, They want to be very
Speaker 1: clear on what they're doing and not surprised the market,
Speaker 1: and so to the extent that the market already has
Speaker 1: lots of things to worry about that are hard to predict,
Speaker 1: write the war in Ukraine, COVID outbreaks in China, out
Speaker 1: just you know, will we see peak inflation in the
Speaker 1: first half of this year? You know, the Federal Reserve
Speaker 1: is trying to reduce one of those uncertainties. Jermy, can
Speaker 1: you talk about the idea of I mean, wouldn't Pal
Speaker 1: sort of want the idea of a seventy five basis
Speaker 1: point hike at least like floating out there as this
Speaker 1: sort of fear because it helps tighten financial conditions. Whereas
Speaker 1: if we have stocks and other risky acids rallying, financial
Speaker 1: conditions are are are going to to ease or loosen.
Speaker 1: So can you talk about why he felt the need
Speaker 1: to to quash the idea of a seventy five basis
Speaker 1: point hike. Yeah, I think it's pretty straightforward. I think
Speaker 1: that financial conditions have tightened. Right. We've seen a dramatic
Speaker 1: increase in the two year the ten year, and real
Speaker 1: interest rates that have gone from deeply negative territory just
Speaker 1: three months ago to positive territory from the first time
Speaker 1: since before the pandemic, and so, you know, I think
Speaker 1: that that has a tricky balancing act to handle. I mean,
Speaker 1: we certainly have seen some of the growth indicators soften,
Speaker 1: uh during the first week of this month, with the
Speaker 1: I s M both manufacturing and non manufacturing index, you know,
Speaker 1: coming off the boil. And so I think this was
Speaker 1: just a matter of you know, the Fed saying, look,
Speaker 1: financial conditions are tightening, we have are high on the
Speaker 1: ball in terms of trying to balance our dual mandate
Speaker 1: and that you know, given you know, market positioning, which
Speaker 1: was horrendous right over the last month, with you know,
Speaker 1: the SMP dropping on early ten percent last month. UM,
Speaker 1: this was just the Powell's attempt to try to balance
Speaker 1: and square that equation. You know. Jeremy, you mentioned that
Speaker 1: you think markets will remain choppy on some of the
Speaker 1: outlook notes you sent over to us. Uh, you indicated
Speaker 1: that you think yes, and people probably be in a
Speaker 1: trading range over the next few months. UM, as investors
Speaker 1: wrestle with all these cross currents. Uh, how do you
Speaker 1: play that as a portfolio managers a strategist, I mean,
Speaker 1: is it just kind of hold what you have and
Speaker 1: you know, wait, for this this phase to be overs there.
Speaker 1: You know, it doesn't make sense to try to play
Speaker 1: that range at all, or is that just too risky?
Speaker 1: I think it's hard to sort of a so called
Speaker 1: play the range in terms of the very short term
Speaker 1: just because of the unpredictability of what's happening in some
Speaker 1: of the risk factors that we talked about. UM. Generally,
Speaker 1: you know, we invest for the long term, so we
Speaker 1: own great companies that generate great cash flows and normalized environments,
Speaker 1: and so we don't worry too much about you know,
Speaker 1: thinking about you know, we're in the range of a
Speaker 1: tactical positioning. We are, although when opportunities arise, I think
Speaker 1: that you do want to tilt portfolios to take advantage
Speaker 1: of some areas that could be attractive. Uh, you know, certainly,
Speaker 1: you know, we think and we've been positioned more towards
Speaker 1: the value segments of the market over the past several months,
Speaker 1: believing that we are in a tightening cycle. We are
Speaker 1: in a rising rate environment and with elevated valuations and
Speaker 1: some of the secular growth areas of the market that
Speaker 1: you value reopening plays are you know, the most interesting
Speaker 1: and offer the best reward in the market. So when
Speaker 1: segments within those categories sell off because of you know,
Speaker 1: near term concerns, we get more interested in and tend
Speaker 1: to back those positions. But would you want if I
Speaker 1: just follow up on that and ask, you know, uh,
Speaker 1: what looks like a good value in the market. You know,
Speaker 1: what are the what are the value pockets of the
Speaker 1: market that look attractive at the moment um. But I
Speaker 1: think there's a couple of ways to look at it, right,
Speaker 1: I mean, if you look at it by you know,
Speaker 1: sort of sector and industry, I think it is your
Speaker 1: classic value oriented sectors, So that would be energy, financials,
Speaker 1: you pockets of the consumer discretionary sector, um, where you
Speaker 1: do see you know, just low valuations and just fears
Speaker 1: that the earnings will not be resilient enough and that
Speaker 1: they are you know, potentially value traps. And so you know,
Speaker 1: you look at energy energy right now trading at free
Speaker 1: cash flow yields over ten percent, four per points above
Speaker 1: any other sector in the market. So there's clear fear
Speaker 1: that you know, the oil prices will normalize or go
Speaker 1: be lower over the next six twelve, twenty four months.
Speaker 1: And just given you know how tight oil markets are,
Speaker 1: limited supply just the under investment in the sector for
Speaker 1: the past five to six years. It does look like
Speaker 1: there's you know, even though the sector has done phenomenally
Speaker 1: well over the last twelve to fifteen months or so,
Speaker 1: I think that there's more upside and markets are still
Speaker 1: you know, cautious on the long term outlook. I think
Speaker 1: financials also look attractive here in certain areas. Um You know,
Speaker 1: if what's been interesting is that, you know, the financials
Speaker 1: have traded sort of in line with the tenure treasury
Speaker 1: up until about two months ago, and that's been a
Speaker 1: there's there's been a pretty big disconnect between the performance
Speaker 1: of financials and interest rates, meaning that financials haven't kept
Speaker 1: up with the pace of interest rates. And I think
Speaker 1: a lot of this is on fears of a hard
Speaker 1: landing and fears that you know, credit is going to
Speaker 1: be a problem, and that if we do have uh
Speaker 1: an extension of the economic cycle and that that is
Speaker 1: able to orchestrate a soft or soft dish landing, then
Speaker 1: you know, financial should perform very well in this type
Speaker 1: of environment. And then also I think you like a
Speaker 1: lot of the reopening place that are tied to the
Speaker 1: travel industry, the hotel leisure that type of stuff. If
Speaker 1: you could talk about that. I know, we had some
Speaker 1: really good earnings from the likes of Airbnb earlier and
Speaker 1: I think it was earlier this week. Speek feels really long,
Speaker 1: but um, but you to like some of those, right,
Speaker 1: I do? Right, Like, So, if you think about across
Speaker 1: you know, across sectors where there's good value, I would
Speaker 1: say it's in you know, industries where their earnings were
Speaker 1: impaired because of COVID and their catch up trades, because
Speaker 1: the market is skeptical that earnings can reach more you know,
Speaker 1: pre COVID levels anytime in the next couple of years.
Speaker 1: And so if you look at some of the travel
Speaker 1: uh um levered stocks, I mean just bookings last night,
Speaker 1: but up I said that room night growth was thirty
Speaker 1: percent higher than two thousand nineteen levels, and so there
Speaker 1: is significant pent up demand for travel for service oriented industries,
Speaker 1: and largely, you know, I think what investors are really
Speaker 1: wrestling with is that we've had this you know, pull
Speaker 1: forward of demand in segments of the economy and you know,
Speaker 1: technology and many goods producing industries, and we've had you know,
Speaker 1: and that was largely just because consumers had cash and
Speaker 1: they needed we're going to spend it, but they couldn't
Speaker 1: spend it on service oriented industries because of health concerns
Speaker 1: or just restrictions. And so now I think we're seeing
Speaker 1: that reverse and it's not a straight line because we
Speaker 1: don't have you know, uh, we still have COVID to
Speaker 1: deal with, not as much as we did, but we
Speaker 1: still are dealing with some some of the effects of COVID.
Speaker 1: Less so in the United States, but you know, still
Speaker 1: seeing the effects in other parts of the world, especially
Speaker 1: in Asia. Um. But I do think that for patient
Speaker 1: capital that the best risk rewards in the market are
Speaker 1: really on those areas that have seen um, you know,
Speaker 1: you know, disruption from COVID that you know, I don't
Speaker 1: know if it's going to be in three to six months,
Speaker 1: but in two to five years are likely to have
Speaker 1: sort of more normal earnings levels and back to trend
Speaker 1: earnings levels that they saw before COVID. Yeah. I think
Speaker 1: it's an interesting dynamic that pent up sort of bottleneck
Speaker 1: and demand that you mentioned. You know, the flip side
Speaker 1: of the coin of that is just you know, consumers
Speaker 1: having this extraordinary amount of savings that you know, the
Speaker 1: likes of which we really never saw in modern times
Speaker 1: before the pandemic um. So to me, it seems like
Speaker 1: that a corporations to you know, corporations balance sheets are
Speaker 1: are so strong, uh coming out of the pandemic um
Speaker 1: that it seems like, you know, the inflationary environment mean
Speaker 1: um is not as sort of a head as big
Speaker 1: of a headwind as it would be otherwise. If you know,
Speaker 1: if the savings rate had not sort of ballooned the
Speaker 1: way it did during the pandemic, how long do you
Speaker 1: think that lasts? Though? How long can that consumer sort
Speaker 1: of draw down those savings um before we sort of
Speaker 1: normalize back to uh, you know, pre pandemic levels of demand.
Speaker 1: Is it, you know, something that could happen quickly or
Speaker 1: is it something that the last perhaps as long as
Speaker 1: the pandemic lasted. Is there any sense from your end
Speaker 1: of of how long we can count on that consumer
Speaker 1: to have the spending power that they do. Yeah, I
Speaker 1: think the market is overestimating just the probability of the
Speaker 1: consumer retrenching. I think it is because of what as
Speaker 1: you mentioned, there is a good amount of pent up savings,
Speaker 1: but more importantly what the highest correlation to consumer spending
Speaker 1: is simply jobs? Right, If if if you have a job,
Speaker 1: you're going to spend. If your way just are going up,
Speaker 1: you're going to spend a little bit more. If you
Speaker 1: have excess savings, you're gonna spend a little bit more.
Speaker 1: But the main, the main focal point for any analysis
Speaker 1: of the outlook for consumer spending is employment. And right
Speaker 1: now labor demand is by far outstripping labor supply. We
Speaker 1: still have labor force participation rates at well below pre
Speaker 1: pandemic levels because a lot of people were fearful of
Speaker 1: entering the labor market because of COVID or couldn't because
Speaker 1: of child care concerns. And so if we get I mean,
Speaker 1: at the end of the day, you know, the consumer
Speaker 1: can stay resilient, and it's not a matter of working
Speaker 1: off savings in my view, it's a matter of whether
Speaker 1: they stay employed. And I think that you know, even
Speaker 1: with that tightening, we're not anywhere close to seeing our
Speaker 1: trenchment in corporate hiring, and so, like, I understand the
Speaker 1: bearish argument that the FED is tightening and that you know,
Speaker 1: the yield curve inverted and that has been a precur
Speaker 1: search of recession, but it seems like in this environment
Speaker 1: the buffer is that consumer and corporate balance sheets are
Speaker 1: in very good shape. We still have a very healthy
Speaker 1: demand for labor. That isn't that is far out of balance,
Speaker 1: and that you know, the spent you know, because consumer
Speaker 1: spending can remain far more resilient for a longer period
Speaker 1: of time because you know, we don't this isn't a
Speaker 1: normal economic cycle. We didn't see, you know, a housing
Speaker 1: boom and bust like we did in two thousand six
Speaker 1: or two thousand seven. We're not seeing a corporate spending
Speaker 1: boom and bust in technology like we did in the
Speaker 1: late nineties. Fundamentals are generally pretty good going into this
Speaker 1: health crisis and pandemic. So I think that, you know,
Speaker 1: the outlook for for UH and the probability of a
Speaker 1: softer landing and longer expansion is fairly high and probably
Speaker 1: higher than market perception. I was just about to ask
Speaker 1: you what your view is and whether or not the
Speaker 1: FED can avoid a hard landing or this UH if
Speaker 1: we can have this softish lending is how I think
Speaker 1: Paul described it this week. Yeah, I mean, look, I
Speaker 1: think that because of what I just mentioned, and just
Speaker 1: because the strength of the consumer and incorporate balance sheets
Speaker 1: and still generally healthy labor markets. You know, there's a
Speaker 1: good chance. I mean, that's that's essentially what Powell said,
Speaker 1: that there's a good chance we don't know, right. I mean,
Speaker 1: there's a lot of risk factors that you know, could
Speaker 1: lead to a you know, moderate downturn um. I don't
Speaker 1: think that if we do see your recession, it would
Speaker 1: be your normal you know, typical you know, markets go down,
Speaker 1: it takes a couple of years to get back to
Speaker 1: you know, back to trend levels of economic activity. It
Speaker 1: will probably be a little bit you know, more shallow um,
Speaker 1: given some of the strong economic momentum that's already you know,
Speaker 1: in the in the U. S. Economy. But I think
Speaker 1: that there's a good chance that we you know, in
Speaker 1: our base case, you know, the economy slows, it doesn't
Speaker 1: roll over, you know, even the outlined and very clearly
Speaker 1: defined you know, hiking path from the Fed, you know,
Speaker 1: we're only going to go to sort of neutral territory
Speaker 1: in terms of FED policy over the next several months.
Speaker 1: And you know, in my view, there's a reasonably good
Speaker 1: chance that the Fed can pause there and once they
Speaker 1: reach you know, levels of around two to and a
Speaker 1: half percent on the FED funds right, and because I
Speaker 1: think that inflation is likely peaking right about now or
Speaker 1: in the next couple of months, and that will see
Speaker 1: lower levels of inflation over the course of the second
Speaker 1: half of the year, and that will give the FED
Speaker 1: an opportunity to you know, uh the ease off in
Speaker 1: terms of it's hiking, increasing the probability of a software landing.
Speaker 1: You know, you mentioned in UH when your notes to
Speaker 1: us that you like high quality companies with pricing power.
Speaker 1: I've been kind of surprised, um at it seems like
Speaker 1: so many companies have that pricing power right now. This week, UM,
Speaker 1: we saw a T and T and Verizon you know,
Speaker 1: either announcing or planning to announce uh increases in mobile
Speaker 1: UH subscription rates, which perhaps that's kind of a no
Speaker 1: brain or a cell phone company is going to be
Speaker 1: able to you know, raise prices arguably more than sort
Speaker 1: of a discretionary um uh consumer company. Where where would
Speaker 1: you expect the pockets of the market to be where
Speaker 1: the pricing power is not robust. Is it as simple
Speaker 1: as sort of you know, frivolous consumer discretionary type of products,
Speaker 1: or is it more complicated than that. Now I think
Speaker 1: that like in general, you know, you would see it
Speaker 1: in sort of some of the names that are are
Speaker 1: really sort of like discounters, right, and where you don't
Speaker 1: have where you're already working on very low margins. And
Speaker 1: so I do think that you know, in pockets of
Speaker 1: consumer discretionary um or very competit it is environments and
Speaker 1: very competitive industries, you're likely to see you less pricing
Speaker 1: power than and see some further margin erosion than other
Speaker 1: you know, other other sectors. But probably it seems like
Speaker 1: most companies are are being you know, have that power
Speaker 1: they a they're able to raise prices pretty aggressively. Um,
Speaker 1: so far is up in your your general impression, Yeah,
Speaker 1: I mean, if you look at the ring season so
Speaker 1: far most companies have reported and you're seeing that you know,
Speaker 1: sales growth is on track to be up about twelve
Speaker 1: percent for the sp earnings up about ten so you know,
Speaker 1: an aggregate, that statement you just made is true. I
Speaker 1: do think though, that we are in a period where
Speaker 1: as you mentioned, right, the consumer still has a good
Speaker 1: amount of savings to spend, and labor markets are strong,
Speaker 1: so we have good economic momentum. What will be more
Speaker 1: interesting to see is how companies have you know, how
Speaker 1: the pricing power holds up as the economy starts to
Speaker 1: and the consumer you know, starts to get a little
Speaker 1: bit more stretched. And so there I think, you know,
Speaker 1: what we try to do in our analysis is really
Speaker 1: look at, you know, do the companies have a mode.
Speaker 1: Are they in industries that have oligopalistic nature to them
Speaker 1: where they don't have where they generally have rational pricing
Speaker 1: across the industry, and you know, are they able to
Speaker 1: do they have enough brand equity where they can and
Speaker 1: raise prices to continue to offset some of the costs.
Speaker 1: You mentioned the earning season, and I actually wanted to
Speaker 1: ask you why you feel the market hasn't held up
Speaker 1: better or didn't hold up better during the earning season
Speaker 1: when we did have all of these reports that were
Speaker 1: largely very good and whether or not you think that's
Speaker 1: largely tied to you know, the macro narratives just being
Speaker 1: so much more overwhelming than anything we've heard from from companies. Yeah,
Speaker 1: I would say one it was the rate backdrop was
Speaker 1: the primary driver. Uh. You know, if you look at
Speaker 1: what didn't work in the stock market the last few weeks,
Speaker 1: it's been you know, the secular growth names that sold
Speaker 1: off a lot more than you know, value and cyclicals,
Speaker 1: and so you know that was directly tied to the
Speaker 1: rise in you know, nominal and real interest rates, I
Speaker 1: think more so than than earnings. I would also note that,
Speaker 1: you know, while earnings were reasonably good in the quarter,
Speaker 1: the level of beats this quarter was well below the
Speaker 1: outsized beats that we saw over the last several quarters. Now,
Speaker 1: it doesn't make me overly concerned because the level of
Speaker 1: beats this quarter is actually pretty normal in line with
Speaker 1: historical averages. It was just that the companies were beating
Speaker 1: by such a wide margin, uh in the last few
Speaker 1: quarters that I think you know, investors sort of have
Speaker 1: muscle memory and said, well, you know, things are beats
Speaker 1: are slowing the aggregate level of growth, this slowing the
Speaker 1: beds raising rates, and you know, putting all of that
Speaker 1: into the into the equation to say, you know, this
Speaker 1: might not be as good in uh time to be
Speaker 1: investing inequities. I also think you also, just last point
Speaker 1: I'll make is you had some pretty high profile margin misses,
Speaker 1: you know with technology companies or you know pull forward
Speaker 1: demand companies like you know a Netflix, um or an Amazon,
Speaker 1: and so from the from that perspective, you know, there
Speaker 1: was I think just concern about Okay, you know, well
Speaker 1: in aggregate companies are handling, are able to pass along
Speaker 1: pricing um, and are seeing reasonably resilient and market demand.
Speaker 1: It's not uniform and so it's not a fewer company
Speaker 1: you know, with a breath of companies beating and the
Speaker 1: level of company beats uh decelerating. I think that just
Speaker 1: added to the rate rise in some of the angsteon markets. Yeah,
Speaker 1: it's a great point about sort of that recency bias.
Speaker 1: You know, it's easy for the market to get used
Speaker 1: to the companies beating and you know reversion back that's
Speaker 1: not normal. Yeah, yeah, yeah, that's it's Uh, that's interesting, Jeremy.
Speaker 1: I'm wondering what you see as what are the risks
Speaker 1: that sort of keep you up at night. You know,
Speaker 1: I'm looking at the news today, it's Thursday. Uh. Leaders
Speaker 1: in China are reiterating the whole notion of the zero
Speaker 1: COVID policy. Um, they're not backing down from that. There's
Speaker 1: a lot of concern about this Russian holiday coming up
Speaker 1: on on May nine, that Russia will really use that
Speaker 1: as an excuse to get very aggressive in this war
Speaker 1: and maybe you know some some real dangerous rhetor coming
Speaker 1: out from them. Is it? Are they the two main risks?
Speaker 1: Do you think China lockdowns in Russia's is that really
Speaker 1: what keeps everyone up at night right now? Or is
Speaker 1: there anything we're missing? I think from you know, a
Speaker 1: very tactical perspective about what's going to drive markets in
Speaker 1: the next week or two. Um, you know that you
Speaker 1: know what's in with the war in Ukraine and the
Speaker 1: Asian Chinese cities, lockdowns are are front and center. I
Speaker 1: would say, looking out a little bit further, and not
Speaker 1: even a lot further tactically, but just over the next
Speaker 1: several months, I would say it's going to be the
Speaker 1: inflation data that drives markets. If we see inflation continuing
Speaker 1: to stay at very elevated levels and not seeing some
Speaker 1: of the declines that you know we're hoping to see, UM,
Speaker 1: then I think that you're gonna start to see expectations
Speaker 1: for the FED tightening to be even more aggressive, and
Speaker 1: that's going to put more pressure on the markets. And
Speaker 1: I think the timing on the inflation data is difficult
Speaker 1: to assess, but we are seeing some signs that inflation
Speaker 1: is in fact peeking, and so I mentioned that, you know,
Speaker 1: I think we're gonna be at a trading range, but
Speaker 1: I think we're probably closer to the bottom of that
Speaker 1: trading range in the near term than than the top.
Speaker 1: And it's because of the fact, uh you know, you
Speaker 1: have seen use car prices come off the boil, right,
Speaker 1: you have seen sort of a stall in some of
Speaker 1: the commodity price increases, and encouragingly from a from a
Speaker 1: wages perspective, you you are seeing labor force participations start
Speaker 1: to improve and without further meaningful outbreaks of COVID that
Speaker 1: would restrict mobility, uh in in you know, domestically, I
Speaker 1: do think you'll see labor supply improve over time, and
Speaker 1: just the combination of FED tightening and slowing the economy
Speaker 1: a little bit from the demand perspective, and increased supply
Speaker 1: of labor should allow for you know, wage growth at
Speaker 1: a minimum to stop going up and likely to to
Speaker 1: plateau and start trending a little bit lower over the
Speaker 1: next couple of quarters, in more likely the next couple
Speaker 1: of years. You know, Jeremy, we often hear about this
Speaker 1: idea that stocks can be a really good inflation hedge
Speaker 1: because of what we were just talking about companies passing
Speaker 1: on costs. But we have this story earlier this week
Speaker 1: that said, adjusted for inflation, the SMP five dred is
Speaker 1: down in value at an annualized rate of roughly or
Speaker 1: sent any full year since nine. So what do you
Speaker 1: make of the idea that stocks are a good inflation hedge. Yeah,
Speaker 1: I think that down is just a a poor way
Speaker 1: to frame a statistic. Uh that that that shouldn't that
Speaker 1: is misguided, right, I mean in the long run, you know,
Speaker 1: stocks are a very good inflation hedge because they appreciate
Speaker 1: at a level that is much higher than inflation. And
Speaker 1: to the point we were making before, stocks do have pricing.
Speaker 1: You know, many companies do have pricing power and are
Speaker 1: able to offset those costs. I mean, we've seen very
Speaker 1: clearly that bonds are a terrible inflation edge and their
Speaker 1: prices have gone down dramatically as well, you know, inflation
Speaker 1: has risen. I think one of the more underappreciated areas
Speaker 1: of you know, the equity market for long term invest
Speaker 1: you're just looking for inflation protection. Are just your stable,
Speaker 1: lower risk dividend growth stocks, right, I mean if you
Speaker 1: think about, uh, you know, the return you're getting from
Speaker 1: a company that has a two two and a half
Speaker 1: percent dividend yield today moderate pes but grow learnings and
Speaker 1: dividends in the mid to high single digits year after year. Um.
Speaker 1: You know, we're all freaking out that inflation is eight
Speaker 1: percent now on the CPI and six percent on the
Speaker 1: pc E UH indicators. Um. But you know there are
Speaker 1: many companies in the SMP five that you know, historically
Speaker 1: have delivered dividend growth of eight to ten percent every year. Right,
Speaker 1: And so if you're worried about you know, inflation being
Speaker 1: stickier at a mid single digit rate over the next
Speaker 1: you know, three, five, ten years, and what that does
Speaker 1: to your purchasing power by dividend growth stocks, right, you know,
Speaker 1: by bye bye, you know, more stable dividend growth docks
Speaker 1: and consumer staples in health there that consistently grow their
Speaker 1: dividends by to ten percent a year, and you'll have
Speaker 1: that offset relative to high levels of inflation. The aristocrats,
Speaker 1: as they say, the dividend aristocrats. Jeremy, I wonder you
Speaker 1: know you mentioned the notion of inflation being sticky. I
Speaker 1: do think you know, I agree, and everyone seems to
Speaker 1: agree that there are plenty of signs that inflation is piqud.
Speaker 1: But I wonder what happens if we get it sort
Speaker 1: of plateauing out, say later in the year, in the
Speaker 1: in the summer, and into the second half of the year.
Speaker 1: If you know, I don't know CPI is at what
Speaker 1: eight and a half? If it sort of sticks at
Speaker 1: you know, in the fives and PCs sort of sticks
Speaker 1: in the fours or the fives, is that ultimately a
Speaker 1: dangerous situation for equities? If you know, we get to
Speaker 1: the point where we say, well, it's peaked, but it's
Speaker 1: still not normalizing back to two. Um, you know, is
Speaker 1: that sort of a a danger point for equities? Do
Speaker 1: you think? I mean, certainly, if we see more structural
Speaker 1: drivers of higher inflation take hold, like if wage growth
Speaker 1: continues to stay at a very high level and isn't
Speaker 1: trending in a more you know, trending lower, I think
Speaker 1: that is going to lead to a lot more concerns
Speaker 1: that that are reserved, is going to have to high
Speaker 1: interest rates a lot faster. UM. I tend to think
Speaker 1: of inflation and the inflation problems that we're having right now,
Speaker 1: you know, in three buckets. I mean, you have this
Speaker 1: commodity price inflation, which is you know, very clear, and
Speaker 1: it's a high frequency purchase, so it gets a lot
Speaker 1: of you know, airtime. Um. But look, I mean commodity
Speaker 1: prices went from you know, oil prices for example, and
Speaker 1: from sixty dollars a barrel a year ago to over
Speaker 1: a hundred dollars of barrel today. Uh, you know you're
Speaker 1: going to see a deceleration and headline inflation unless commodity
Speaker 1: prices go to a hundreds oil prices to a hundred
Speaker 1: and six hundred and seventy. Right, and so just from
Speaker 1: a year on your change basis, because that's how we
Speaker 1: measure inflation, you know, the commodity complex should start to
Speaker 1: show deceleration of inflation over the next several months and quarters.
Speaker 1: I mean in terms of you know, the second bucket
Speaker 1: is goods, right, Like we've just seen a huge amount
Speaker 1: of goods price inflation, not service price inflation, because demand
Speaker 1: for goods was so high during the pandemic and now
Speaker 1: that we're seeing, as we talked about, like really strong
Speaker 1: demand for travels, a shift in spending from goods to services.
Speaker 1: The bands for goods is declining. Um. But the sticky
Speaker 1: point there is that we are still seeing manufacturing centers
Speaker 1: and supply chain bottlenecks because of COVID related issues UH
Speaker 1: in in zero policy to zero COVID season in China,
Speaker 1: and so the timing is tricky. But I still think that,
Speaker 1: you know, markets are forward looking, and you know, if
Speaker 1: you think that the primary driver of the inflation that
Speaker 1: we're seeing is mostly COVID related, right because you know,
Speaker 1: the commodity shock, the goods inflation, and labor and wages,
Speaker 1: then if we do see relief from COVID and limited
Speaker 1: mobility restrictions and more uniform global trends of COVID UH improving,
Speaker 1: then I think that the outlook for the broader based
Speaker 1: inflation both domestically and globally will be you know, structurally lower,
Speaker 1: and that people will have a lot more comfort that
Speaker 1: even if it transit from a transitory perspective that falls
Speaker 1: from eight to five and stays there for a little bit,
Speaker 1: if it's because of COVID trends that are sticking that
Speaker 1: are you know, that are that are stickier or problematic
Speaker 1: or cropping up, then I think that you know, the
Speaker 1: investors will not be thrilled about it, but they'll look
Speaker 1: past it. If it's really structural that we're seeing signs
Speaker 1: of a wage price spiral and then there's just a
Speaker 1: lot more bargaining power for labor and we don't get
Speaker 1: the increase in labor force participation, then I think it's
Speaker 1: a much more problematic for equities because then I think
Speaker 1: you're gonna have to see them more aggressive. That it
Speaker 1: sounds like you're you're kind of expecting the former rather
Speaker 1: than the ladder. Though I guess I am with a
Speaker 1: lot of concern that the timing could be you know,
Speaker 1: it might not be the next couple of months, it
Speaker 1: could be the next couple of quarters. It might not
Speaker 1: be the next couple of quarters, it could be the
Speaker 1: next couple of years. Right, So that I think the
Speaker 1: timing is the trickiest part. Which makes me, you know,
Speaker 1: more cautious on the overall outlook, is particularly in the
Speaker 1: near term, because I just think that at the end
Speaker 1: of the day, you know, it's you know, we've all
Speaker 1: been underestimating the duration of COVID uh you know, related disruptions,
Speaker 1: and so because of you know, just out of that,
Speaker 1: out of that hubress, I would say that I think
Speaker 1: we all need to to be a little bit of humble,
Speaker 1: diversify your portfolios, not take huge tilts based on a
Speaker 1: single core view, but not getting overly negative as well.
Speaker 1: And Jeremy, just to round things out, I know we
Speaker 1: were talking about whether or not, UM, we could potentially
Speaker 1: be bottoming right now, and I wanted to ask you
Speaker 1: what sorts of signals you look for. I know a
Speaker 1: lot of people turn to technicals, others look at sentiments.
Speaker 1: So what are you looking for to see signs that
Speaker 1: we potentially could be forming a bottom look. I think
Speaker 1: that you know, sentiment certainly got very extreme. If you
Speaker 1: look at the you know AI bullish bearish indicators, UM. Historically,
Speaker 1: when you reach the level of bearishness that we reached
Speaker 1: last month, that forward returns are generally, you know, well
Speaker 1: above average. So that's a decent signal, UM. But you know,
Speaker 1: at the end of the day, I really think it's
Speaker 1: you know, as we talked about, it's going to be
Speaker 1: the you know, the outlook for inflation. And so I
Speaker 1: think the next couple of months indications of c P
Speaker 1: I p p I UH cour PC price index inflation
Speaker 1: is going to be critical in terms of just the
Speaker 1: short term movements of markets. UH. If the market thinks
Speaker 1: that inflation is stickier and that bed is still well
Speaker 1: behind the curve. Um, there's likely still you know, more downside.
Speaker 1: And the reason I think that you know, we've seen
Speaker 1: as sort of like as much downside as we've had
Speaker 1: already this year is because you know, the composition of
Speaker 1: the SMP over the last several years has has shifted
Speaker 1: and you have a lot more concentration and secular growth
Speaker 1: names within the index, and they're the most vulnerable to
Speaker 1: arising interest rates because their long duration plays within the
Speaker 1: equity market and they're gonna be more sensitive to interest rates.
Speaker 1: And so from that perspective, I think it's really you know, inflation. Inflation.
Speaker 1: Inflation is what we uh, we're worried about as our
Speaker 1: as our top three um and uh we'll assess as
Speaker 1: we moved along. Jay Z, great stuff, really appreciating anyway,
Speaker 1: but that I think it's time. It's that time. It's
Speaker 1: time ye tell the people what time it is. It's
Speaker 1: time for the craziest thing in market. All right, I'm
Speaker 1: gonna get started for once, I'll get started. So, Uh,
Speaker 1: there was a news report on a TV station in China,
Speaker 1: um in let me make shureg at the city right
Speaker 1: hang Zoo, which is where Ali Baba is headquarters. And
Speaker 1: this TV report said a gentleman by the name of
Speaker 1: Ma was arrested, and instantly the market assumed it was
Speaker 1: Jack Ma and sold off aggressively shares the value Baba.
Speaker 1: I'm sorry, detained, not arrested. We've had discussions about this.
Speaker 1: He was detained, not arrested, the Chinese translator and I
Speaker 1: had to this question about this anyway, Ali Baba sold off.
Speaker 1: So to play the prices right with this one, how
Speaker 1: much do you think uh investors getting the wrong ma
Speaker 1: uh in the news mixed up? How much do you
Speaker 1: think that lopped off of the value of value Baba
Speaker 1: in a matter of minutes, are going first market cap
Speaker 1: US dollar market cap. I'm gonna go with five billion,
Speaker 1: all right, I'm gonna keep a poker face, Jeremy, how
Speaker 1: much do you think the wrong Ma cost Ali Baba
Speaker 1: in a few short minutes. I'm gonna take the over
Speaker 1: if we're playing price right. So yeah, that's that's why,
Speaker 1: that's why he's a strategist. He does so. So you're
Speaker 1: you'll take twenty five billion and one dollars I exactly,
Speaker 1: that's good. The over was good? Was six billion? Was? Though?
Speaker 1: I think you read the story? Did you read the story? Did?
Speaker 1: But but the story came out on like Monday or something,
Speaker 1: which honestly feels like it was three years ago. Billion
Speaker 1: vaporized in a matter of minutes, but it all came back.
Speaker 1: So um, I don't know, there's a lesson there somewhere
Speaker 1: to make sure you got your your maths straight before
Speaker 1: you sell. I don't know. Quite a remarkable story, though,
Speaker 1: how about you hold on it? What's what's the craziest
Speaker 1: thing you saw this week? Had tip to Matt Levine
Speaker 1: who wrote about this, But there's this amazing story in
Speaker 1: the Wall Street Journal about n f T s and
Speaker 1: how sales and interest has has totally been dropping off recently.
Speaker 1: And so there's this one tidbit that really really struck me.
Speaker 1: The story says, an n f T of the first
Speaker 1: tweet from Twitter co founder Jack Dorsey sold in March
Speaker 1: of last year for two point nine million to Sina Estavi,
Speaker 1: who is a chief executive at a blockchain company in Malaysia.
Speaker 1: Earlier this year, he put the n f T up
Speaker 1: for auction, and he didn't get any bids above fourteen
Speaker 1: thousand dollars. Remember he paid two point nine million four
Speaker 1: you know, and some people might find it crazy that
Speaker 1: someone's willing to pay fourteen thousand for this thing. Yeah,
Speaker 1: good point, that's pretty good. Although I see the the
Speaker 1: the crypto punks and the board apes. They're still selling.
Speaker 1: I think those are. I guess they are your blue
Speaker 1: chip n f T s right there. They seem to
Speaker 1: still be selling for six figures. Yeah, so I don't know.
Speaker 1: They are the uh, the the Apple and the Amazon
Speaker 1: of the n f T world. I suppose we're not
Speaker 1: Amazon so much anymore. But anyway, cheremy, you see anything
Speaker 1: crazy this week? That's the end of the second week
Speaker 1: of earning season, the busiest week of earning season. So
Speaker 1: my my brain is mush by the end of the week.
Speaker 1: So I'm gonna pass. I'm the crazy things I don't
Speaker 1: just think I've seen. Probably the last week is the
Speaker 1: the Mets throwing a five pitch or no hitter with
Speaker 1: taking out a picture after five innings and eight pitches.
Speaker 1: Oh yeah, As as a Phillies fan, I uh uh
Speaker 1: that one hurt. That one hurt. I just went to
Speaker 1: that game. Actually, yeah, that was we had a group
Speaker 1: outing of Bloomberg to that game. I'm glad I missed it,
Speaker 1: though five pitch really found. I'm glad you did. I'm
Speaker 1: sure you're glad you five pictured no hitter. I wonder
Speaker 1: if that. I wonder what the most pictures ever used
Speaker 1: in a no hitter is. That's got to be getting
Speaker 1: close to it. That's pretty I'll to look that one up.
Speaker 1: Five and that counts a five picture no hitter will
Speaker 1: allow that. That's a That's probably the craziest thing I
Speaker 1: saw this week too. Anyway, jay Z, great to get
Speaker 1: your perspective on markets. Really appreciate your time, and I
Speaker 1: hope we can bring you back some day. Great, happy
Speaker 1: to do it. Thanks so much for joining us What
Speaker 1: Goes Up. We'll be back next week and so. And
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