WEBVTT - Beware an 'Inflation Head Fake' 0:00:13.840 --> 0:00:17.000 Hello, and welcome to What Goes Up, a weekly markets podcast. 0:00:17.120 --> 0:00:19.400 My name is Mike Reagan. I'm a senior editor at 0:00:19.440 --> 0:00:22.680 Woomberg and Umbal Donna hik Across, asset reporter with Bloomberg, 0:00:23.079 --> 0:00:25.320 and this week on the show, Well, as we sit 0:00:25.400 --> 0:00:30.920 here today on Wednesday, August, Spire is now up almost 0:00:30.640 --> 0:00:34.440 from its bear market low in the middle of June. 0:00:34.920 --> 0:00:38.080 So is that it crisis over or is this just 0:00:38.159 --> 0:00:41.159 another bear market rally that's doom to fail. And what 0:00:41.240 --> 0:00:44.440 about those growth stocks? They're up even more after being 0:00:44.560 --> 0:00:47.080 left for dead for value stocks earlier in the year. 0:00:47.760 --> 0:00:50.240 We're gonna get into it with the chief investment officer 0:00:50.360 --> 0:00:52.920 for the wealth management unit of a major Wall Street bank, 0:00:52.960 --> 0:00:55.480 who is quite a bit more cautious about this market 0:00:55.720 --> 0:00:59.920 than the people chasing this ferocious rebound. But first they'll 0:01:00.040 --> 0:01:03.520 on I think as many listeners of the show, no 0:01:04.040 --> 0:01:07.440 being a podcast co host such as it's a very 0:01:07.440 --> 0:01:12.600 fulfilling job. But I think thanks for having listen. I 0:01:12.640 --> 0:01:15.080 think listeners have probably picked up on though that my 0:01:15.160 --> 0:01:17.600 real ambition is to be a game show host. Yeah, 0:01:18.720 --> 0:01:21.160 I've noticed you're making the transition. I know, I know, 0:01:21.200 --> 0:01:24.560 I'm trying. I'm working it on it every week. I 0:01:24.640 --> 0:01:26.800 think I need better hair, I need more hairspray and 0:01:26.800 --> 0:01:28.520 stuff like that. But we'll get there. We'll get there. 0:01:28.520 --> 0:01:31.440 I can help you with that, and regular listeners will 0:01:31.440 --> 0:01:32.480 know at the end of the show we do the 0:01:32.480 --> 0:01:35.920 craziest things we saw in the market that week, and 0:01:36.000 --> 0:01:38.479 I like to sort of make it like prices right, 0:01:38.880 --> 0:01:42.240 although I'm definitely afraid of Bob Barker after seeing happy 0:01:42.280 --> 0:01:46.400 Gilmore and seeing him punch out Happy Gilmore, so we 0:01:46.440 --> 0:01:49.720 can't call it prices right. We can't not anymore. But 0:01:50.000 --> 0:01:52.080 we got away with it for a long time. We did. 0:01:52.160 --> 0:01:55.760 I haven't gotten punched, no angry letters from lawyers, but 0:01:56.680 --> 0:02:01.520 a listener from London, Chris Whitman of Convergence Value Partners 0:02:01.520 --> 0:02:04.600 in London, wrote in to suggest what I think is 0:02:04.600 --> 0:02:09.200 the perfect title that Bob Barker cannot complain at all about, 0:02:09.280 --> 0:02:13.880 which is what it is. The price is precise, Price 0:02:14.040 --> 0:02:16.959 is precise. Can you say it's a tongue twister? It's 0:02:17.000 --> 0:02:18.800 it's hard. Let me hear you say, Well, we know 0:02:18.960 --> 0:02:22.880 I prefer prices, correct prices, correct prices, so we can 0:02:22.960 --> 0:02:26.000 so we have prices correct and now prices precise I 0:02:26.040 --> 0:02:28.400 think I like prices precise. I just know I'm going 0:02:28.440 --> 0:02:32.280 to mess it up. Precise, precise price. Yeah, I know 0:02:32.360 --> 0:02:35.080 I'll mess it up. Anyway. Well let's go with it 0:02:35.120 --> 0:02:37.880 for this week. Anyway. If anybody else has any suggestions, 0:02:38.000 --> 0:02:41.840 you can just tweet at us. Absolutely. But anyway, I 0:02:41.840 --> 0:02:44.120 do want to bring in our guests. We're really lucky 0:02:44.160 --> 0:02:46.960 to have her. It's Lisa Shallett, chief investment officer at 0:02:47.040 --> 0:02:50.040 Morgan Stanley Wealth Management. Thanks so much for joining us, Lisa, 0:02:51.120 --> 0:02:54.400 Thanks for having me at Leasta. I wanted to sort 0:02:54.440 --> 0:02:57.240 of set the stage a little bit here because UM, 0:02:57.639 --> 0:03:00.520 Morgan Stanley has gotten a lot of attention UH this 0:03:00.600 --> 0:03:05.160 year rightly, so, you know, for being correct about being 0:03:05.160 --> 0:03:08.760 cautious about this market. Your colleague Mike Wilson has a 0:03:08.840 --> 0:03:11.959 year end target for the SMP at thirty nine D 0:03:12.680 --> 0:03:14.600 not the lowest on the street, but you know, well 0:03:14.639 --> 0:03:18.919 below average, about five points below average of the strategists 0:03:18.919 --> 0:03:21.200 we survey. And you know it would mean an eighteen 0:03:21.240 --> 0:03:25.120 percent drop on the year for for the index. UM. 0:03:25.160 --> 0:03:28.520 And I was reading your weekly note from the Global 0:03:28.600 --> 0:03:32.200 Investment Committee, UH, which you are the chair of I 0:03:32.240 --> 0:03:34.680 believe the head of Let me just read the beginning 0:03:34.680 --> 0:03:37.720 of it. Um, the Global Investment Committees base case is 0:03:37.720 --> 0:03:42.360 a profits recession, not an economic recession. Earnings are vulnerable 0:03:42.520 --> 0:03:45.880 to rise and costs a strong dollar, bulging inventories and 0:03:46.040 --> 0:03:49.600 waning pricing pricing power. Um. And then you go on 0:03:49.640 --> 0:03:51.560 to to point out about the hotness in the labor 0:03:51.560 --> 0:03:54.640 market being sort of, you know, a risk to everything. 0:03:55.600 --> 0:03:59.000 Today though, on Wednesday we got this CPI report. Uh 0:03:59.120 --> 0:04:02.360 that surpris eyes a lot of people. Uh it does 0:04:02.840 --> 0:04:06.120 you know, fingers cross, knuck on wood, everything else? Uh, 0:04:06.480 --> 0:04:10.080 it signals perhaps inflation has peaked month over month. It 0:04:10.200 --> 0:04:13.400 was flat. Um the headline number I think was but 0:04:13.520 --> 0:04:16.400 down the eight point five a very low eight point 0:04:16.440 --> 0:04:19.280 five percent from from nine point one. So I'm just curious, 0:04:19.480 --> 0:04:23.760 is does the Wednesday CPI report and the market reaction 0:04:23.839 --> 0:04:27.000 to it change at all your thinking? You know, does 0:04:27.080 --> 0:04:29.960 it create any sort of silver linings in the clouds 0:04:29.960 --> 0:04:33.359 that you see for the economy in the markets? Um? No, 0:04:33.440 --> 0:04:36.680 not at all. I mean, uh, you know, look in fact, 0:04:37.080 --> 0:04:40.560 um that the idea that inflation may have peaked in 0:04:40.680 --> 0:04:46.200 our humble opinion may be correct directionally, but may also 0:04:46.240 --> 0:04:49.279 be a little bit of a head fake. Uh, you know, 0:04:49.360 --> 0:04:53.160 with regard to this idea that hey, game over problem solved. 0:04:53.200 --> 0:04:56.040 The you know, the FED has conquered the day and 0:04:56.400 --> 0:04:59.520 you know, FED credibility is back and all of that. Um, 0:04:59.600 --> 0:05:01.359 you know, our gas is a lot of things have 0:05:01.400 --> 0:05:06.160 gone right here visa V. Energy prices, visa V global 0:05:06.240 --> 0:05:11.320 demand in Europe and China in particular, really being much 0:05:11.400 --> 0:05:15.359 slower uh than global economists were calling for in the 0:05:15.360 --> 0:05:17.599 month of July, which has helped ease a lot of 0:05:17.640 --> 0:05:21.400 supply chain issues, has helped UH ease UH and take 0:05:21.440 --> 0:05:24.119 some of the heat off some of the food parts 0:05:24.120 --> 0:05:27.680 of inflation. Um. So our gas is that Yeah, directly, 0:05:27.720 --> 0:05:29.919 this is right. But for the market to be, you know, 0:05:30.040 --> 0:05:33.400 kind of celebrating as they have been since the middle 0:05:33.400 --> 0:05:37.160 of June, again, our gases were way premature for that. 0:05:38.040 --> 0:05:40.320 So Lisa, can you maybe talk a little bit more 0:05:40.320 --> 0:05:42.640 about that. I want to ask you how much the 0:05:42.680 --> 0:05:46.120 CPI print does to what extent does it relieve pressure 0:05:46.200 --> 0:05:48.240 on the FED, And maybe you can talk a bit 0:05:48.279 --> 0:05:51.160 about what you're expecting from their September meeting and through 0:05:51.200 --> 0:05:55.119 the rest of the year. Yeah. Absolutely, so, uh, look, 0:05:55.440 --> 0:05:58.200 good news for the FED is like I said, direction 0:05:58.320 --> 0:06:01.840 is correct, right, We're not making new highs. And year 0:06:01.880 --> 0:06:05.640 over year inflation compares, UH, it looks like nine point 0:06:05.760 --> 0:06:08.400 one percent at least for now, is going to be 0:06:09.000 --> 0:06:13.240 UH cycle peak on headline CPI inflation UM, so that 0:06:13.640 --> 0:06:16.359 you know is directionally good. And if I'm Jerome Powell, 0:06:16.440 --> 0:06:18.719 I probably do have a smile on my face and 0:06:18.720 --> 0:06:23.240 and I'm glad that energy prices went my way. But 0:06:23.360 --> 0:06:25.960 let's you know, get real here, people. I mean eight 0:06:26.000 --> 0:06:29.880 point five percent on your headline and a core that 0:06:29.960 --> 0:06:33.440 was really hunched at close to six percent UH is 0:06:33.480 --> 0:06:37.599 nowhere near a sustainable level. It's three times your target 0:06:38.320 --> 0:06:42.320 of two percent. And look, we know throughout history, if 0:06:42.400 --> 0:06:44.840 Jerome Powell is really the student of history that he 0:06:44.880 --> 0:06:48.360 claims to be, if he really thinks he's you know, 0:06:48.560 --> 0:06:51.520 Paul Bulker, then he knows that it's gonna be very 0:06:51.560 --> 0:06:54.400 hard for him to take his foot off the accelerator 0:06:54.440 --> 0:06:56.760 on the Fed Funds rate until the Fed Funds rate 0:06:57.120 --> 0:07:00.360 is approaching core cp I UH. And if a look 0:07:00.400 --> 0:07:04.000 throughout history, UH, most beds that are trying to fight 0:07:04.040 --> 0:07:07.719 inflation have to get to that point. So inflation coming 0:07:07.760 --> 0:07:11.520 down towards something closer having core inflation come down to 0:07:11.680 --> 0:07:15.560 something below four means you know, he still has about 0:07:15.600 --> 0:07:18.200 another hundred and fifty hundred seventy five basis points to 0:07:18.200 --> 0:07:21.120 go and Fed funds uh. And he's probably gonna have 0:07:21.200 --> 0:07:23.720 to get there sooner rather than later. So to answer 0:07:23.760 --> 0:07:27.520 your question, you know, September UH, you know was looking 0:07:27.560 --> 0:07:31.760 like fifty. We had a brief moment last week on 0:07:31.840 --> 0:07:34.560 the labor data which was super hot, where you know, 0:07:34.880 --> 0:07:37.760 some exuberant folks said, oh, it's got to be seventy five, 0:07:37.800 --> 0:07:40.200 and now we're back to fifty. UM, so we've kind 0:07:40.200 --> 0:07:42.320 of round tripped. I don't think this is there's a 0:07:42.320 --> 0:07:45.840 lot of new news in this other than the direction 0:07:46.000 --> 0:07:48.520 is correct, but the levels are wrong. So do you 0:07:48.520 --> 0:07:51.720 think the market pricing is right to think fifty in September? 0:07:51.880 --> 0:07:54.200 I mean, is it is there any scenario where we 0:07:54.240 --> 0:07:58.960 could go back to the old world basis points by September? Uh? 0:07:59.000 --> 0:08:01.320 It would be hard to get to twenty five, I 0:08:01.360 --> 0:08:04.400 think uh. And and that's just again the distance and 0:08:04.520 --> 0:08:09.760 speed here between that core where core inflation is UH 0:08:09.760 --> 0:08:12.080 and where our current Fed funds rate is. I just 0:08:12.200 --> 0:08:14.240 I think they need to keep their their foot on 0:08:14.280 --> 0:08:20.880 the accelerator. Obviously, if labor markets completely crap out. Uh, 0:08:20.920 --> 0:08:24.119 you know, maybe they would, they would down shift to five. 0:08:24.280 --> 0:08:29.440 But I think it would really take too bad labor reports, 0:08:29.520 --> 0:08:32.640 meaning the one for August and the one for September, 0:08:32.640 --> 0:08:34.760 which they won't have at the next meeting. I should 0:08:34.840 --> 0:08:39.600 I should be clear for them to really downshift that much. Well, 0:08:39.640 --> 0:08:42.200 speaking of the labor market, we also have that super 0:08:42.240 --> 0:08:45.720 super good jobs number on Friday, and I'm wondering if 0:08:45.800 --> 0:08:49.520 that also at all has changed your you on what 0:08:49.600 --> 0:08:52.600 the FED might be doing or your outlook. It doesn't 0:08:52.679 --> 0:08:56.840 change her outlook. To the contrary, it kind of reaffirms 0:08:56.880 --> 0:08:59.320 the thesis that we've had out there for a while, 0:08:59.440 --> 0:09:02.600 which is um that you know, we're gonna all look 0:09:02.640 --> 0:09:07.040 back on the COVID pandemic as this massive generational shock 0:09:07.200 --> 0:09:12.360 to the labor market. Um where we fundamentally restructured as 0:09:12.400 --> 0:09:16.439 a society globally, how we think about work, about where 0:09:16.480 --> 0:09:18.760 we work, how we work, how many days a week 0:09:18.800 --> 0:09:21.680 we work, whether we work in essential jobs that are 0:09:21.679 --> 0:09:26.440 deemed by our society as essential workers or not essential workers. Uh. 0:09:26.480 --> 0:09:29.120 And this is really pretty profound. And so you know 0:09:29.280 --> 0:09:32.520 what we've been articulating a thesis that says, Look, we 0:09:32.600 --> 0:09:36.000 think that they're structural change to this labor market, whether 0:09:36.360 --> 0:09:42.199 we're talking about more folks retiring, fewer immigrants, uh, entering 0:09:43.080 --> 0:09:46.600 more folks and detaching from the labor market and and 0:09:46.760 --> 0:09:50.959 going the entrepreneurial route or going the gig route. Uh. 0:09:50.960 --> 0:09:53.160 And and this is a labor market that is much 0:09:53.200 --> 0:09:58.839 more fluid, where people are much more willing to geographically relocate, 0:09:59.000 --> 0:10:03.800 embrace the ideas of remote opportunities and live wherever they want. 0:10:04.120 --> 0:10:08.040 And that's causing big demands client balances in the labor market. 0:10:08.080 --> 0:10:09.760 And we think they're going to persist for a couple 0:10:09.800 --> 0:10:14.160 of years now, keeping inflation uh somewhat above that two 0:10:14.160 --> 0:10:17.400 percent target for the FED. That's interesting you bring that up, 0:10:17.600 --> 0:10:20.520 because when I think about that, that flexibility of labor 0:10:20.840 --> 0:10:24.240 um this year is one thing. Obviously this is super 0:10:24.240 --> 0:10:27.679 tight labor market, but looking further out, is that potentially 0:10:28.000 --> 0:10:31.160 sort of deflationary towards wages. Uh. You know, if I 0:10:31.200 --> 0:10:35.079 can work in uh, you know, the middle of the 0:10:35.120 --> 0:10:37.280 country instead of having to live in New York, because 0:10:37.320 --> 0:10:40.880 that's sort of suppress wages in the longer run. You 0:10:41.160 --> 0:10:45.800 do you think, Uh? No, actually not? And and The 0:10:45.880 --> 0:10:50.280 reason is that, uh, companies, you know have jobs in 0:10:50.400 --> 0:10:53.640 specific locations, the vast majority of companies, right, I mean, 0:10:54.000 --> 0:10:57.680 Amazon maybe located and have its headquarters in one place, 0:10:57.720 --> 0:11:01.000 but it needs workers to deliver packages. All fifty states 0:11:01.000 --> 0:11:05.080 are all you know, uh whatever three countries around the world, 0:11:05.240 --> 0:11:08.839 and so, um, you know, they need workers. So people 0:11:08.840 --> 0:11:12.280 are you know, relocating and in transit. That's going to 0:11:12.440 --> 0:11:15.480 drive up wages in the places that are quote unquote 0:11:15.559 --> 0:11:20.080 maybe less desirable for you know, new employees to live 0:11:20.320 --> 0:11:23.440 or or or to be um and you still have 0:11:23.480 --> 0:11:27.560 to attract those employees to get the jobs done. At 0:11:27.600 --> 0:11:29.840 least it Just to bring us back to the markets, 0:11:30.040 --> 0:11:33.040 Mike mentioned at the top that stocks are up something 0:11:33.120 --> 0:11:36.199 like fifteen percent since mid June, and I wanted to 0:11:36.240 --> 0:11:39.040 ask you what, in your view is behind the recent 0:11:39.640 --> 0:11:44.480 market resilience. Yeah, so, look, I think I think really 0:11:44.520 --> 0:11:48.719 from January to June, you know, our analysis has been 0:11:48.760 --> 0:11:52.679 that this has been a very very textbook bear market. 0:11:53.120 --> 0:11:55.560 And what I mean by that is that, you know, 0:11:55.640 --> 0:12:01.080 we saw a very clear, very well telegraphed pivot in 0:12:01.160 --> 0:12:06.080 federal reserve policy that was on equivocally driven by a 0:12:06.120 --> 0:12:10.880 FED that was massively behind the inflation curve. As a result, 0:12:11.320 --> 0:12:15.040 the market had to discount a hike and Fed funds rates. 0:12:15.120 --> 0:12:19.559 So real interest rates moved up and price earnings ratios 0:12:19.720 --> 0:12:22.480 moved down. And it was in a very clear kind 0:12:22.480 --> 0:12:27.320 of linear mathematical formula. And so the first you know, 0:12:29.080 --> 0:12:33.840 draw down on the SMP five from jan to middle 0:12:33.840 --> 0:12:38.000 of June, you know, it was very textbook. Uh. Really, 0:12:38.160 --> 0:12:42.479 from there, I think we're getting a very typical reflexive 0:12:43.360 --> 0:12:47.199 bear market rally, meaning you get a pause. It looks 0:12:47.200 --> 0:12:49.880 like the Fed says we're going to now be dated dependent. 0:12:50.320 --> 0:12:52.440 You know, folks think the data is going to get 0:12:52.480 --> 0:12:57.000 more constructive. Uh. And you know, we we get folks 0:12:57.240 --> 0:12:59.720 thinking that they're, you know, going to find some bargains, 0:12:59.800 --> 0:13:02.199 and they go in and they find the bargains where 0:13:02.240 --> 0:13:05.280 things have sold off the most uh. And some of 0:13:05.320 --> 0:13:10.080 the biggest damage, as we know, was in the unprofitable 0:13:10.080 --> 0:13:13.760 tech space, some of the meme stock space, uh, and 0:13:13.880 --> 0:13:16.960 some of the more you know, core pieces of the 0:13:17.040 --> 0:13:21.520 NASDAC and FANG uh. And so that's driven this hope 0:13:21.880 --> 0:13:25.920 that the worst is over, has driven the bottom fishing 0:13:26.000 --> 0:13:28.520 back in. But folks who are true students of the 0:13:28.559 --> 0:13:31.840 market know that in every bearer market, we have these 0:13:32.200 --> 0:13:35.920 retracement rallies. They are head fake rallies. And the reason 0:13:36.080 --> 0:13:39.160 is is that we have to understand that it's not 0:13:39.440 --> 0:13:45.280 enough for price earnings ratios to come in. Policy operates 0:13:45.280 --> 0:13:48.080 with a lag, and it has an impact. It slows 0:13:48.120 --> 0:13:51.840 the economy. And if the economy slows, corporate profits go down. 0:13:52.080 --> 0:13:55.760 It's just a fact, it's math. And so we have 0:13:55.920 --> 0:14:00.200 not seen those earnings estimates come down yet. Uh, and 0:14:00.280 --> 0:14:03.440 that's really what we're waiting for. And you know what 0:14:03.440 --> 0:14:06.360 what we have found, you know, perhaps you know most 0:14:07.080 --> 0:14:11.040 um curious, is what we have said is that the 0:14:11.160 --> 0:14:14.200 draw down on corporate profits is going to be relatively modest. 0:14:14.280 --> 0:14:16.960 It's only gonna be ten to fifteen percent. And we 0:14:17.080 --> 0:14:20.760 have people calling us parish. Um. You know, I remind people, 0:14:21.040 --> 0:14:23.760 you know, in the last three were recessions, right ninety 0:14:23.800 --> 0:14:28.800 one oh one, and and you know the great, the 0:14:28.840 --> 0:14:32.560 great financial crisis. Um, you know, you're looking at drawdowns 0:14:32.640 --> 0:14:36.720 and profitability anywhere from thirty five to six. Right, So 0:14:36.880 --> 0:14:39.760 if SMP profits are down, you know, ten to fifteen 0:14:39.800 --> 0:14:42.840 percent over the next twelve months, that that's not too bad. 0:14:50.040 --> 0:14:52.040 Can I actually ask you to say more about the 0:14:52.040 --> 0:14:54.280 idea that we are in a bear market rally, because 0:14:54.360 --> 0:14:58.240 historically they tend to be very frequent, right, And I 0:14:58.280 --> 0:15:01.320 think in one of your recent you said there there 0:15:01.360 --> 0:15:04.280 may be more headwinds ahead and the market just isn't 0:15:04.280 --> 0:15:06.240 pricing them in yet. And I want to ask you 0:15:06.280 --> 0:15:09.960 what those are. Yeah, sure, I mean, you know, if 0:15:10.000 --> 0:15:12.480 we think about, you know, some of the things that 0:15:12.520 --> 0:15:17.520 could you know, suddenly become additional headwinds, not only economic slowing, 0:15:18.280 --> 0:15:21.320 but one of the other things is, um, you know, 0:15:21.400 --> 0:15:24.920 the US dollar. If in fact, the Fed starts easing 0:15:25.040 --> 0:15:29.440 up on their rate hiking cycle, it's entirely possible that 0:15:29.480 --> 0:15:34.840 the the US dollar, which has been extraordinarily strong, um 0:15:34.880 --> 0:15:38.840 you know, moves in a different direction, and that, believe 0:15:38.880 --> 0:15:42.480 it or not, for the average consumer, is inflationary, so 0:15:42.560 --> 0:15:45.640 that you know, suddenly, you know, throws a wrench into 0:15:45.640 --> 0:15:49.120 the works. Another you know, factor that that you know, 0:15:49.240 --> 0:15:52.320 we remind people of is be careful what you wish for. 0:15:52.760 --> 0:15:55.400 You know, Inflation is actually a really good thing for 0:15:55.480 --> 0:15:59.720 companies in the long run, particularly companies that have brand franchise, 0:16:00.120 --> 0:16:02.840 because they take pricing power and they pass it through. 0:16:03.440 --> 0:16:05.440 And so if we look at the last couple of 0:16:05.520 --> 0:16:09.040 quarters of uh SP earnings, you have a lot of 0:16:09.080 --> 0:16:13.040 companies talking about their pricing power. Well, guess what guys have. 0:16:13.160 --> 0:16:16.880 Inflation goes down, you lose your ability to pass on price, 0:16:17.040 --> 0:16:21.160 and immediately you're taking a hit um to the bottom line. 0:16:21.200 --> 0:16:24.120 So you can't have it both ways. And so things 0:16:24.160 --> 0:16:28.400 like the change in the US dollar, things like a recession. Uh, 0:16:28.440 --> 0:16:31.280 you know, things like a loss of pricing power are 0:16:31.320 --> 0:16:35.920 all additional headwinds that we just don't think we're not hearing. Uh, 0:16:36.080 --> 0:16:38.160 some of the clients who are buying into this bull 0:16:38.240 --> 0:16:41.920 market rally or bear market rally, I should say, talk 0:16:41.960 --> 0:16:45.520 about So if if I were an investor, I wanted 0:16:45.560 --> 0:16:48.200 to screen for sort of stocks that have the best 0:16:48.240 --> 0:16:50.400 type of pricing power, how how would you go about that? 0:16:50.440 --> 0:16:53.880 I mean, is it as simple as looking for, you know, 0:16:53.920 --> 0:16:57.400 whose sales growth is keeping up with inflation? Or do 0:16:57.440 --> 0:17:00.600 you go, you know, go announcement by announcement to which 0:17:00.640 --> 0:17:04.200 companies have actually raised prices. What's the best way to 0:17:04.200 --> 0:17:07.119 to kind of you know, grasp that pricing power in 0:17:07.160 --> 0:17:10.719 the market. Yeah, So, you know, the way we usually 0:17:10.760 --> 0:17:13.080 think about pricing power is, you know, who are the 0:17:13.119 --> 0:17:16.040 guys who are growing their sales more quickly than they're 0:17:16.040 --> 0:17:19.560 growing their volumes than their unit volumes. And does it 0:17:19.640 --> 0:17:23.280 intuitively make sense? Uh? You know, visa be the strength 0:17:23.320 --> 0:17:27.320 of their brand franchise. Meaning if you are a consumer product, 0:17:27.400 --> 0:17:31.239 if you're Nike sneakers for example, and suddenly you know 0:17:31.320 --> 0:17:34.800 you've got you know, two new models, you're able to 0:17:34.800 --> 0:17:38.680 to hold or increase prices at a rate faster than 0:17:38.720 --> 0:17:41.760 your unit volume is selling through. UM, that would be 0:17:41.800 --> 0:17:46.600 a suggestion to us that maybe you have uh, pricing power. Uh. 0:17:46.680 --> 0:17:49.600 Some companies have already said, you know, they're starting to 0:17:49.640 --> 0:17:55.120 see their their margins compress. UM, they're already feeling uh, 0:17:55.160 --> 0:17:57.760 the lack of that pricing power where their costs are 0:17:57.760 --> 0:18:01.119 growing faster than than their revenue. Is it as simple 0:18:01.160 --> 0:18:04.000 as sort of the higher end? Uh? You know, companies 0:18:04.000 --> 0:18:06.520 selling to the higher end consumers are going to be 0:18:06.560 --> 0:18:08.560 able to do that better than the Walmart's and the 0:18:08.560 --> 0:18:12.680 lower end. Uh. And no, not at all. I mean 0:18:12.800 --> 0:18:15.560 we we have, you know, a bunch of franchises that 0:18:15.720 --> 0:18:19.560 serve lower end consumers who you know seem to be 0:18:19.640 --> 0:18:22.680 quote unquote getting it done. Look at McDonald's. McDonald's has 0:18:22.720 --> 0:18:26.639 had UM some very good pricing power during during you know, 0:18:26.720 --> 0:18:29.600 this this most recent part of the business cycle, so 0:18:29.960 --> 0:18:31.600 you know it, really you've got to look at it 0:18:31.680 --> 0:18:36.080 company by company. I feel like my inbox has never 0:18:36.119 --> 0:18:39.040 been more divided in terms of some of the research 0:18:39.080 --> 0:18:42.160 notes I'm getting. I have half of the thing of 0:18:42.200 --> 0:18:44.639 the notes saying it's a bear market rally, in the 0:18:44.640 --> 0:18:47.639 other half saying this this thing is for real. And 0:18:47.720 --> 0:18:49.880 so I'm just wondering, how difficult is it to come 0:18:49.960 --> 0:18:51.840 up with a thesis right now? And what are you 0:18:51.880 --> 0:18:56.639 telling clients who are potentially looking to get invested. Yeah, 0:18:56.640 --> 0:19:01.720 so look it it legitimately. Um, this is a complex environment. Um. 0:19:01.840 --> 0:19:04.480 None of us who are in the business today, even 0:19:05.000 --> 0:19:09.080 folks who have been doing it twenty thirty forty years, 0:19:09.119 --> 0:19:12.240 have ever dealt with the aftermath of, you know, a 0:19:12.320 --> 0:19:16.520 global public health pandemic. Uh, none of us have ever 0:19:16.880 --> 0:19:20.959 you know, uh, you know, dealt with the amount of 0:19:21.200 --> 0:19:24.240 stimulus that we got in a twelve month period, which 0:19:24.240 --> 0:19:28.160 was close to nine trillion dollars, four from the Fed 0:19:28.240 --> 0:19:33.719 and five from Washington. That equates to forty five percent 0:19:33.920 --> 0:19:37.159 of annual GDP. I mean, just think about that for 0:19:37.240 --> 0:19:40.879 a minute. How much liquidity is in this economy, and 0:19:40.960 --> 0:19:46.000 so we've never really been in this situation where, um, 0:19:46.080 --> 0:19:50.639 we're raising rates this fast from those heights. Uh. And 0:19:50.680 --> 0:19:53.600 while a lot of people want to make the analogy 0:19:53.600 --> 0:19:57.639 to to other times the economy has soft landed. Uh 0:19:57.680 --> 0:20:02.120 and you know other times um, like you know when 0:20:02.160 --> 0:20:05.920 Greenspan was able to soft land the economy, Um, he 0:20:06.000 --> 0:20:10.960 wasn't facing kind of the geopolitical instability um that the 0:20:11.000 --> 0:20:14.480 world is facing today, whether you're talking about relations between 0:20:15.119 --> 0:20:18.720 you know, US and Russia and the Russia Ukraine War. Uh. 0:20:18.760 --> 0:20:22.600 And the pressure that's putting on Europe, which is extraordinary. 0:20:22.640 --> 0:20:25.560 I mean, think about if I told you that Europe 0:20:25.600 --> 0:20:30.720 was going to be rationing energy. Okay, that's what's happening. Um, 0:20:30.760 --> 0:20:34.000 So extraordinary pressures in the global economy. And then of 0:20:34.040 --> 0:20:37.320 course there's US China, not to mention the dysfunction in 0:20:37.800 --> 0:20:40.639 the US itself. So uh, you know, this is a 0:20:40.880 --> 0:20:45.399 really really, really tough environment. UM to call that. Having 0:20:45.440 --> 0:20:47.680 been said, right, as much as we all want to 0:20:47.720 --> 0:20:50.880 talk about this time is different, we also know that 0:20:51.080 --> 0:20:55.600 very rarely is it completely different. And usually quote unquote rhymes. 0:20:56.119 --> 0:20:58.480 And so when we think about where could we be 0:20:58.680 --> 0:21:02.399 rhyming with history. Right. The places we know we rhyme 0:21:02.440 --> 0:21:06.880 with history is that typically, right, bear markets don't end 0:21:07.040 --> 0:21:11.560 until certain things happen. Right, So bear markets tend not 0:21:11.680 --> 0:21:17.840 to end right unless uh, you know, unemployment has has uh, 0:21:17.920 --> 0:21:22.120 you know peaked. Uh. You know, bear markets that are 0:21:22.119 --> 0:21:26.040 related to inflation and policy scares don't tend to end 0:21:26.480 --> 0:21:31.080 until you know leading economic indicators trough. Uh. These kind 0:21:31.119 --> 0:21:34.159 of bear markets don't tend to end until you know 0:21:34.240 --> 0:21:40.199 the orders to inventory ratio you know, uh turns positive. Um. 0:21:40.240 --> 0:21:42.720 So there's a bunch of things that we could say 0:21:42.720 --> 0:21:46.800 if we're if we're looking for rhymes with history, we 0:21:46.880 --> 0:21:49.360 think that we're still in this bear market and we've 0:21:49.359 --> 0:21:52.119 got a ways to go. I was really hoping you 0:21:52.160 --> 0:21:55.000 were going to rhyme that at the end there such 0:21:55.040 --> 0:21:59.200 a such a lost opportunity. You're right, absolutely, but there's 0:21:59.200 --> 0:22:02.879 a reason that reason. I work on wall. I have 0:22:02.920 --> 0:22:06.479 a picture of jay Z on my wall. But do 0:22:06.520 --> 0:22:10.040 you really I really do? Okay, Well, if you started 0:22:10.040 --> 0:22:12.399 writing some wraps, by all means now you can debut 0:22:12.440 --> 0:22:15.480 them on the podcast anytime, we would be happy to. Yeah, 0:22:15.520 --> 0:22:17.080 But at least I I want to get back to 0:22:17.119 --> 0:22:20.960 that notion of how growth seems to be back from 0:22:21.000 --> 0:22:25.320 the dead, and I get the impression, Um, you're more of, 0:22:25.400 --> 0:22:27.600 at least at the moment, you're more of a bottoms 0:22:27.640 --> 0:22:30.960 up stock picker type than somebody wants to chase factors 0:22:31.000 --> 0:22:35.080 back and forth. Um. But to me, what's fascinating about 0:22:35.119 --> 0:22:37.960 growth is we you know, we had this period between 0:22:38.640 --> 0:22:41.920 uh you know, the aftermath of the financial crisis and 0:22:42.160 --> 0:22:45.359 COVID where it seemed like a simple equation, you know, 0:22:45.440 --> 0:22:50.640 low growth, uh economy, low inflation, growth, stocks just take 0:22:50.680 --> 0:22:53.720 off in that type of environment. Now we've had the pandemic, 0:22:53.800 --> 0:22:57.160 the recovery. Obviously, value had its moment in the sun there. 0:22:57.720 --> 0:22:59.960 The last month and a half, though, growth is out 0:23:00.040 --> 0:23:04.119 performing again. UM. I know your skeptical on that growth rebound, 0:23:04.400 --> 0:23:06.119 but I want to ask you basically two things. If 0:23:06.119 --> 0:23:08.639 you could unpack for us why you're skeptical on on 0:23:08.800 --> 0:23:12.280 the growth rebound. But also, is that sort of new 0:23:12.280 --> 0:23:15.600 normal that we saw in that period between the GFC 0:23:15.960 --> 0:23:20.480 and COVID where growth just was the perennial outperformer. Are 0:23:20.480 --> 0:23:22.080 we ever going to get back to that? I mean, 0:23:22.119 --> 0:23:24.160 to me, it seems like if the economy ever gets 0:23:24.160 --> 0:23:26.800 back to normal, we'll go we'll revert back to that 0:23:26.920 --> 0:23:31.520 sort of equation where growth is sort of the perennial favorite. Um, 0:23:32.520 --> 0:23:35.800 is that notion just gone forever? You know, on the 0:23:35.800 --> 0:23:38.760 other side of covid Um, No, I don't. Look, I 0:23:38.800 --> 0:23:42.000 don't think it's gone forever. Here here's what i'd say. Look, 0:23:42.080 --> 0:23:44.359 I'm in the camp that says that the period after 0:23:44.400 --> 0:23:47.520 the Great Financial Crisis, where you know, the United States 0:23:47.720 --> 0:23:52.640 economic growth was suppressed, where interest rates were suppressed, where 0:23:52.640 --> 0:23:58.359 inflation was suppressed, where capital spending was slow, where you know, 0:23:58.440 --> 0:24:02.800