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
Speaker 1: Woomberg and Umbal Donna hik Across, asset reporter with Bloomberg,
Speaker 1: and this week on the show, Well, as we sit
Speaker 1: here today on Wednesday, August, Spire is now up almost
Speaker 1: from its bear market low in the middle of June.
Speaker 1: So is that it crisis over or is this just
Speaker 1: another bear market rally that's doom to fail. And what
Speaker 1: about those growth stocks? They're up even more after being
Speaker 1: left for dead for value stocks earlier in the year.
Speaker 1: We're gonna get into it with the chief investment officer
Speaker 1: for the wealth management unit of a major Wall Street bank,
Speaker 1: who is quite a bit more cautious about this market
Speaker 1: than the people chasing this ferocious rebound. But first they'll
Speaker 1: on I think as many listeners of the show, no
Speaker 1: being a podcast co host such as it's a very
Speaker 1: fulfilling job. But I think thanks for having listen. I
Speaker 1: think listeners have probably picked up on though that my
Speaker 1: real ambition is to be a game show host. Yeah,
Speaker 1: I've noticed you're making the transition. I know, I know,
Speaker 1: I'm trying. I'm working it on it every week. I
Speaker 1: think I need better hair, I need more hairspray and
Speaker 1: stuff like that. But we'll get there. We'll get there.
Speaker 1: I can help you with that, and regular listeners will
Speaker 1: know at the end of the show we do the
Speaker 1: craziest things we saw in the market that week, and
Speaker 1: I like to sort of make it like prices right,
Speaker 1: although I'm definitely afraid of Bob Barker after seeing happy
Speaker 1: Gilmore and seeing him punch out Happy Gilmore, so we
Speaker 1: can't call it prices right. We can't not anymore. But
Speaker 1: we got away with it for a long time. We did.
Speaker 1: I haven't gotten punched, no angry letters from lawyers, but
Speaker 1: a listener from London, Chris Whitman of Convergence Value Partners
Speaker 1: in London, wrote in to suggest what I think is
Speaker 1: the perfect title that Bob Barker cannot complain at all about,
Speaker 1: which is what it is. The price is precise, Price
Speaker 1: is precise. Can you say it's a tongue twister? It's
Speaker 1: it's hard. Let me hear you say, Well, we know
Speaker 1: I prefer prices, correct prices, correct prices, so we can
Speaker 1: so we have prices correct and now prices precise I
Speaker 1: think I like prices precise. I just know I'm going
Speaker 1: to mess it up. Precise, precise price. Yeah, I know
Speaker 1: I'll mess it up. Anyway. Well let's go with it
Speaker 1: for this week. Anyway. If anybody else has any suggestions,
Speaker 1: you can just tweet at us. Absolutely. But anyway, I
Speaker 1: do want to bring in our guests. We're really lucky
Speaker 1: to have her. It's Lisa Shallett, chief investment officer at
Speaker 1: Morgan Stanley Wealth Management. Thanks so much for joining us, Lisa,
Speaker 1: Thanks for having me at Leasta. I wanted to sort
Speaker 1: of set the stage a little bit here because UM,
Speaker 1: Morgan Stanley has gotten a lot of attention UH this
Speaker 1: year rightly, so, you know, for being correct about being
Speaker 1: cautious about this market. Your colleague Mike Wilson has a
Speaker 1: year end target for the SMP at thirty nine D
Speaker 1: not the lowest on the street, but you know, well
Speaker 1: below average, about five points below average of the strategists
Speaker 1: we survey. And you know it would mean an eighteen
Speaker 1: percent drop on the year for for the index. UM.
Speaker 1: And I was reading your weekly note from the Global
Speaker 1: Investment Committee, UH, which you are the chair of I
Speaker 1: believe the head of Let me just read the beginning
Speaker 1: of it. Um, the Global Investment Committees base case is
Speaker 1: a profits recession, not an economic recession. Earnings are vulnerable
Speaker 1: to rise and costs a strong dollar, bulging inventories and
Speaker 1: waning pricing pricing power. Um. And then you go on
Speaker 1: to to point out about the hotness in the labor
Speaker 1: market being sort of, you know, a risk to everything.
Speaker 1: Today though, on Wednesday we got this CPI report. Uh
Speaker 1: that surpris eyes a lot of people. Uh it does
Speaker 1: you know, fingers cross, knuck on wood, everything else? Uh,
Speaker 1: it signals perhaps inflation has peaked month over month. It
Speaker 1: was flat. Um the headline number I think was but
Speaker 1: down the eight point five a very low eight point
Speaker 1: five percent from from nine point one. So I'm just curious,
Speaker 1: is does the Wednesday CPI report and the market reaction
Speaker 1: to it change at all your thinking? You know, does
Speaker 1: it create any sort of silver linings in the clouds
Speaker 1: that you see for the economy in the markets? Um? No,
Speaker 1: not at all. I mean, uh, you know, look in fact,
Speaker 1: um that the idea that inflation may have peaked in
Speaker 1: our humble opinion may be correct directionally, but may also
Speaker 1: be a little bit of a head fake. Uh, you know,
Speaker 1: with regard to this idea that hey, game over problem solved.
Speaker 1: The you know, the FED has conquered the day and
Speaker 1: you know, FED credibility is back and all of that. Um,
Speaker 1: you know, our gas is a lot of things have
Speaker 1: gone right here visa V. Energy prices, visa V global
Speaker 1: demand in Europe and China in particular, really being much
Speaker 1: slower uh than global economists were calling for in the
Speaker 1: month of July, which has helped ease a lot of
Speaker 1: supply chain issues, has helped UH ease UH and take
Speaker 1: some of the heat off some of the food parts
Speaker 1: of inflation. Um. So our gas is that Yeah, directly,
Speaker 1: this is right. But for the market to be, you know,
Speaker 1: kind of celebrating as they have been since the middle
Speaker 1: of June, again, our gases were way premature for that.
Speaker 1: So Lisa, can you maybe talk a little bit more
Speaker 1: about that. I want to ask you how much the
Speaker 1: CPI print does to what extent does it relieve pressure
Speaker 1: on the FED, And maybe you can talk a bit
Speaker 1: about what you're expecting from their September meeting and through
Speaker 1: the rest of the year. Yeah. Absolutely, so, uh, look,
Speaker 1: good news for the FED is like I said, direction
Speaker 1: is correct, right, We're not making new highs. And year
Speaker 1: over year inflation compares, UH, it looks like nine point
Speaker 1: one percent at least for now, is going to be
Speaker 1: UH cycle peak on headline CPI inflation UM, so that
Speaker 1: you know is directionally good. And if I'm Jerome Powell,
Speaker 1: I probably do have a smile on my face and
Speaker 1: and I'm glad that energy prices went my way. But
Speaker 1: let's you know, get real here, people. I mean eight
Speaker 1: point five percent on your headline and a core that
Speaker 1: was really hunched at close to six percent UH is
Speaker 1: nowhere near a sustainable level. It's three times your target
Speaker 1: of two percent. And look, we know throughout history, if
Speaker 1: Jerome Powell is really the student of history that he
Speaker 1: claims to be, if he really thinks he's you know,
Speaker 1: Paul Bulker, then he knows that it's gonna be very
Speaker 1: hard for him to take his foot off the accelerator
Speaker 1: on the Fed Funds rate until the Fed Funds rate
Speaker 1: is approaching core cp I UH. And if a look
Speaker 1: throughout history, UH, most beds that are trying to fight
Speaker 1: inflation have to get to that point. So inflation coming
Speaker 1: down towards something closer having core inflation come down to
Speaker 1: something below four means you know, he still has about
Speaker 1: another hundred and fifty hundred seventy five basis points to
Speaker 1: go and Fed funds uh. And he's probably gonna have
Speaker 1: to get there sooner rather than later. So to answer
Speaker 1: your question, you know, September UH, you know was looking
Speaker 1: like fifty. We had a brief moment last week on
Speaker 1: the labor data which was super hot, where you know,
Speaker 1: some exuberant folks said, oh, it's got to be seventy five,
Speaker 1: and now we're back to fifty. UM, so we've kind
Speaker 1: of round tripped. I don't think this is there's a
Speaker 1: lot of new news in this other than the direction
Speaker 1: is correct, but the levels are wrong. So do you
Speaker 1: think the market pricing is right to think fifty in September?
Speaker 1: I mean, is it is there any scenario where we
Speaker 1: could go back to the old world basis points by September? Uh?
Speaker 1: It would be hard to get to twenty five, I
Speaker 1: think uh. And and that's just again the distance and
Speaker 1: speed here between that core where core inflation is UH
Speaker 1: and where our current Fed funds rate is. I just
Speaker 1: I think they need to keep their their foot on
Speaker 1: the accelerator. Obviously, if labor markets completely crap out. Uh,
Speaker 1: you know, maybe they would, they would down shift to five.
Speaker 1: But I think it would really take too bad labor reports,
Speaker 1: meaning the one for August and the one for September,
Speaker 1: which they won't have at the next meeting. I should
Speaker 1: I should be clear for them to really downshift that much. Well,
Speaker 1: speaking of the labor market, we also have that super
Speaker 1: super good jobs number on Friday, and I'm wondering if
Speaker 1: that also at all has changed your you on what
Speaker 1: the FED might be doing or your outlook. It doesn't
Speaker 1: change her outlook. To the contrary, it kind of reaffirms
Speaker 1: the thesis that we've had out there for a while,
Speaker 1: which is um that you know, we're gonna all look
Speaker 1: back on the COVID pandemic as this massive generational shock
Speaker 1: to the labor market. Um where we fundamentally restructured as
Speaker 1: a society globally, how we think about work, about where
Speaker 1: we work, how we work, how many days a week
Speaker 1: we work, whether we work in essential jobs that are
Speaker 1: deemed by our society as essential workers or not essential workers. Uh.
Speaker 1: And this is really pretty profound. And so you know
Speaker 1: what we've been articulating a thesis that says, Look, we
Speaker 1: think that they're structural change to this labor market, whether
Speaker 1: we're talking about more folks retiring, fewer immigrants, uh, entering
Speaker 1: more folks and detaching from the labor market and and
Speaker 1: going the entrepreneurial route or going the gig route. Uh.
Speaker 1: And and this is a labor market that is much
Speaker 1: more fluid, where people are much more willing to geographically relocate,
Speaker 1: embrace the ideas of remote opportunities and live wherever they want.
Speaker 1: And that's causing big demands client balances in the labor market.
Speaker 1: And we think they're going to persist for a couple
Speaker 1: of years now, keeping inflation uh somewhat above that two
Speaker 1: percent target for the FED. That's interesting you bring that up,
Speaker 1: because when I think about that, that flexibility of labor
Speaker 1: um this year is one thing. Obviously this is super
Speaker 1: tight labor market, but looking further out, is that potentially
Speaker 1: sort of deflationary towards wages. Uh. You know, if I
Speaker 1: can work in uh, you know, the middle of the
Speaker 1: country instead of having to live in New York, because
Speaker 1: that's sort of suppress wages in the longer run. You
Speaker 1: do you think, Uh? No, actually not? And and The
Speaker 1: reason is that, uh, companies, you know have jobs in
Speaker 1: specific locations, the vast majority of companies, right, I mean,
Speaker 1: Amazon maybe located and have its headquarters in one place,
Speaker 1: but it needs workers to deliver packages. All fifty states
Speaker 1: are all you know, uh whatever three countries around the world,
Speaker 1: and so, um, you know, they need workers. So people
Speaker 1: are you know, relocating and in transit. That's going to
Speaker 1: drive up wages in the places that are quote unquote
Speaker 1: maybe less desirable for you know, new employees to live
Speaker 1: or or or to be um and you still have
Speaker 1: to attract those employees to get the jobs done. At
Speaker 1: least it Just to bring us back to the markets,
Speaker 1: Mike mentioned at the top that stocks are up something
Speaker 1: like fifteen percent since mid June, and I wanted to
Speaker 1: ask you what, in your view is behind the recent
Speaker 1: market resilience. Yeah, so, look, I think I think really
Speaker 1: from January to June, you know, our analysis has been
Speaker 1: that this has been a very very textbook bear market.
Speaker 1: And what I mean by that is that, you know,
Speaker 1: we saw a very clear, very well telegraphed pivot in
Speaker 1: federal reserve policy that was on equivocally driven by a
Speaker 1: FED that was massively behind the inflation curve. As a result,
Speaker 1: the market had to discount a hike and Fed funds rates.
Speaker 1: So real interest rates moved up and price earnings ratios
Speaker 1: moved down. And it was in a very clear kind
Speaker 1: of linear mathematical formula. And so the first you know,
Speaker 1: draw down on the SMP five from jan to middle
Speaker 1: of June, you know, it was very textbook. Uh. Really,
Speaker 1: from there, I think we're getting a very typical reflexive
Speaker 1: bear market rally, meaning you get a pause. It looks
Speaker 1: like the Fed says we're going to now be dated dependent.
Speaker 1: You know, folks think the data is going to get
Speaker 1: more constructive. Uh. And you know, we we get folks
Speaker 1: thinking that they're, you know, going to find some bargains,
Speaker 1: and they go in and they find the bargains where
Speaker 1: things have sold off the most uh. And some of
Speaker 1: the biggest damage, as we know, was in the unprofitable
Speaker 1: tech space, some of the meme stock space, uh, and
Speaker 1: some of the more you know, core pieces of the
Speaker 1: NASDAC and FANG uh. And so that's driven this hope
Speaker 1: that the worst is over, has driven the bottom fishing
Speaker 1: back in. But folks who are true students of the
Speaker 1: market know that in every bearer market, we have these
Speaker 1: retracement rallies. They are head fake rallies. And the reason
Speaker 1: is is that we have to understand that it's not
Speaker 1: enough for price earnings ratios to come in. Policy operates
Speaker 1: with a lag, and it has an impact. It slows
Speaker 1: the economy. And if the economy slows, corporate profits go down.
Speaker 1: It's just a fact, it's math. And so we have
Speaker 1: not seen those earnings estimates come down yet. Uh, and
Speaker 1: that's really what we're waiting for. And you know what
Speaker 1: what we have found, you know, perhaps you know most
Speaker 1: um curious, is what we have said is that the
Speaker 1: draw down on corporate profits is going to be relatively modest.
Speaker 1: It's only gonna be ten to fifteen percent. And we
Speaker 1: have people calling us parish. Um. You know, I remind people,
Speaker 1: you know, in the last three were recessions, right ninety
Speaker 1: one oh one, and and you know the great, the
Speaker 1: great financial crisis. Um, you know, you're looking at drawdowns
Speaker 1: and profitability anywhere from thirty five to six. Right, So
Speaker 1: if SMP profits are down, you know, ten to fifteen
Speaker 1: percent over the next twelve months, that that's not too bad.
Speaker 1: Can I actually ask you to say more about the
Speaker 1: idea that we are in a bear market rally, because
Speaker 1: historically they tend to be very frequent, right, And I
Speaker 1: think in one of your recent you said there there
Speaker 1: may be more headwinds ahead and the market just isn't
Speaker 1: pricing them in yet. And I want to ask you
Speaker 1: what those are. Yeah, sure, I mean, you know, if
Speaker 1: we think about, you know, some of the things that
Speaker 1: could you know, suddenly become additional headwinds, not only economic slowing,
Speaker 1: but one of the other things is, um, you know,
Speaker 1: the US dollar. If in fact, the Fed starts easing
Speaker 1: up on their rate hiking cycle, it's entirely possible that
Speaker 1: the the US dollar, which has been extraordinarily strong, um
Speaker 1: you know, moves in a different direction, and that, believe
Speaker 1: it or not, for the average consumer, is inflationary, so
Speaker 1: that you know, suddenly, you know, throws a wrench into
Speaker 1: the works. Another you know, factor that that you know,
Speaker 1: we remind people of is be careful what you wish for.
Speaker 1: You know, Inflation is actually a really good thing for
Speaker 1: companies in the long run, particularly companies that have brand franchise,
Speaker 1: because they take pricing power and they pass it through.
Speaker 1: And so if we look at the last couple of
Speaker 1: quarters of uh SP earnings, you have a lot of
Speaker 1: companies talking about their pricing power. Well, guess what guys have.
Speaker 1: Inflation goes down, you lose your ability to pass on price,
Speaker 1: and immediately you're taking a hit um to the bottom line.
Speaker 1: So you can't have it both ways. And so things
Speaker 1: like the change in the US dollar, things like a recession. Uh,
Speaker 1: you know, things like a loss of pricing power are
Speaker 1: all additional headwinds that we just don't think we're not hearing. Uh,
Speaker 1: some of the clients who are buying into this bull
Speaker 1: market rally or bear market rally, I should say, talk
Speaker 1: about So if if I were an investor, I wanted
Speaker 1: to screen for sort of stocks that have the best
Speaker 1: type of pricing power, how how would you go about that?
Speaker 1: I mean, is it as simple as looking for, you know,
Speaker 1: whose sales growth is keeping up with inflation? Or do
Speaker 1: you go, you know, go announcement by announcement to which
Speaker 1: companies have actually raised prices. What's the best way to
Speaker 1: to kind of you know, grasp that pricing power in
Speaker 1: the market. Yeah, So, you know, the way we usually
Speaker 1: think about pricing power is, you know, who are the
Speaker 1: guys who are growing their sales more quickly than they're
Speaker 1: growing their volumes than their unit volumes. And does it
Speaker 1: intuitively make sense? Uh? You know, visa be the strength
Speaker 1: of their brand franchise. Meaning if you are a consumer product,
Speaker 1: if you're Nike sneakers for example, and suddenly you know
Speaker 1: you've got you know, two new models, you're able to
Speaker 1: to hold or increase prices at a rate faster than
Speaker 1: your unit volume is selling through. UM, that would be
Speaker 1: a suggestion to us that maybe you have uh, pricing power. Uh.
Speaker 1: Some companies have already said, you know, they're starting to
Speaker 1: see their their margins compress. UM, they're already feeling uh,
Speaker 1: the lack of that pricing power where their costs are
Speaker 1: growing faster than than their revenue. Is it as simple
Speaker 1: as sort of the higher end? Uh? You know, companies
Speaker 1: selling to the higher end consumers are going to be
Speaker 1: able to do that better than the Walmart's and the
Speaker 1: lower end. Uh. And no, not at all. I mean
Speaker 1: we we have, you know, a bunch of franchises that
Speaker 1: serve lower end consumers who you know seem to be
Speaker 1: quote unquote getting it done. Look at McDonald's. McDonald's has
Speaker 1: had UM some very good pricing power during during you know,
Speaker 1: this this most recent part of the business cycle, so
Speaker 1: you know it, really you've got to look at it
Speaker 1: company by company. I feel like my inbox has never
Speaker 1: been more divided in terms of some of the research
Speaker 1: notes I'm getting. I have half of the thing of
Speaker 1: the notes saying it's a bear market rally, in the
Speaker 1: other half saying this this thing is for real. And
Speaker 1: so I'm just wondering, how difficult is it to come
Speaker 1: up with a thesis right now? And what are you
Speaker 1: telling clients who are potentially looking to get invested. Yeah,
Speaker 1: so look it it legitimately. Um, this is a complex environment. Um.
Speaker 1: None of us who are in the business today, even
Speaker 1: folks who have been doing it twenty thirty forty years,
Speaker 1: have ever dealt with the aftermath of, you know, a
Speaker 1: global public health pandemic. Uh, none of us have ever
Speaker 1: you know, uh, you know, dealt with the amount of
Speaker 1: stimulus that we got in a twelve month period, which
Speaker 1: was close to nine trillion dollars, four from the Fed
Speaker 1: and five from Washington. That equates to forty five percent
Speaker 1: of annual GDP. I mean, just think about that for
Speaker 1: a minute. How much liquidity is in this economy, and
Speaker 1: so we've never really been in this situation where, um,
Speaker 1: we're raising rates this fast from those heights. Uh. And
Speaker 1: while a lot of people want to make the analogy
Speaker 1: to to other times the economy has soft landed. Uh
Speaker 1: and you know other times um, like you know when
Speaker 1: Greenspan was able to soft land the economy, Um, he
Speaker 1: wasn't facing kind of the geopolitical instability um that the
Speaker 1: world is facing today, whether you're talking about relations between
Speaker 1: you know, US and Russia and the Russia Ukraine War. Uh.
Speaker 1: And the pressure that's putting on Europe, which is extraordinary.
Speaker 1: I mean, think about if I told you that Europe
Speaker 1: was going to be rationing energy. Okay, that's what's happening. Um,
Speaker 1: So extraordinary pressures in the global economy. And then of
Speaker 1: course there's US China, not to mention the dysfunction in
Speaker 1: the US itself. So uh, you know, this is a
Speaker 1: really really, really tough environment. UM to call that. Having
Speaker 1: been said, right, as much as we all want to
Speaker 1: talk about this time is different, we also know that
Speaker 1: very rarely is it completely different. And usually quote unquote rhymes.
Speaker 1: And so when we think about where could we be
Speaker 1: rhyming with history. Right. The places we know we rhyme
Speaker 1: with history is that typically, right, bear markets don't end
Speaker 1: until certain things happen. Right, So bear markets tend not
Speaker 1: to end right unless uh, you know, unemployment has has uh,
Speaker 1: you know peaked. Uh. You know, bear markets that are
Speaker 1: related to inflation and policy scares don't tend to end
Speaker 1: until you know leading economic indicators trough. Uh. These kind
Speaker 1: of bear markets don't tend to end until you know
Speaker 1: the orders to inventory ratio you know, uh turns positive. Um.
Speaker 1: So there's a bunch of things that we could say
Speaker 1: if we're if we're looking for rhymes with history, we
Speaker 1: think that we're still in this bear market and we've
Speaker 1: got a ways to go. I was really hoping you
Speaker 1: were going to rhyme that at the end there such
Speaker 1: a such a lost opportunity. You're right, absolutely, but there's
Speaker 1: a reason that reason. I work on wall. I have
Speaker 1: a picture of jay Z on my wall. But do
Speaker 1: you really I really do? Okay, Well, if you started
Speaker 1: writing some wraps, by all means now you can debut
Speaker 1: them on the podcast anytime, we would be happy to. Yeah,
Speaker 1: But at least I I want to get back to
Speaker 1: that notion of how growth seems to be back from
Speaker 1: the dead, and I get the impression, Um, you're more of,
Speaker 1: at least at the moment, you're more of a bottoms
Speaker 1: up stock picker type than somebody wants to chase factors
Speaker 1: back and forth. Um. But to me, what's fascinating about
Speaker 1: growth is we you know, we had this period between
Speaker 1: uh you know, the aftermath of the financial crisis and
Speaker 1: COVID where it seemed like a simple equation, you know,
Speaker 1: low growth, uh economy, low inflation, growth, stocks just take
Speaker 1: off in that type of environment. Now we've had the pandemic,
Speaker 1: the recovery. Obviously, value had its moment in the sun there.
Speaker 1: The last month and a half, though, growth is out
Speaker 1: performing again. UM. I know your skeptical on that growth rebound,
Speaker 1: but I want to ask you basically two things. If
Speaker 1: you could unpack for us why you're skeptical on on
Speaker 1: the growth rebound. But also, is that sort of new
Speaker 1: normal that we saw in that period between the GFC
Speaker 1: and COVID where growth just was the perennial outperformer. Are
Speaker 1: we ever going to get back to that? I mean,
Speaker 1: to me, it seems like if the economy ever gets
Speaker 1: back to normal, we'll go we'll revert back to that
Speaker 1: sort of equation where growth is sort of the perennial favorite. Um,
Speaker 1: is that notion just gone forever? You know, on the
Speaker 1: other side of covid Um, No, I don't. Look, I
Speaker 1: don't think it's gone forever. Here here's what i'd say. Look,
Speaker 1: I'm in the camp that says that the period after
Speaker 1: the Great Financial Crisis, where you know, the United States
Speaker 1: economic growth was suppressed, where interest rates were suppressed, where
Speaker 1: inflation was suppressed, where capital spending was slow, where you know,
Speaker 1: productivity growth was full, uh, and you know wage growth
Speaker 1: was mediocre. UM. That that's actually the outlier in history.
Speaker 1: And while we can completely understand why in an environment
Speaker 1: where long run real interest rates are consistently falling for
Speaker 1: almost you know, a decade going on thirteen years, where
Speaker 1: growth would structurally outperformed value. UM, we do think that,
Speaker 1: you know, we have not killed the business cycle. And
Speaker 1: because we haven't killed the business cycle, UM, we believe
Speaker 1: that you want to, you know, very oftentimes own more
Speaker 1: cyclical or more value oriented uh stocks. And we're not
Speaker 1: sure that you don't want to this time, especially if
Speaker 1: you're in the camp that we are that says, we're
Speaker 1: pretty confident that we could actually pull off a soft
Speaker 1: landing this time. It isn't a slam dunk that we're
Speaker 1: going into this deep, deep recession where you have to
Speaker 1: get ultra defensive and you have to only own uh
Speaker 1: secular growers. Uh. And you know, our our bullishness on
Speaker 1: the labor market is one component of that thesis. The
Speaker 1: second component is we believe that capital spending is going
Speaker 1: to remain pretty resilient and that one of the things
Speaker 1: that's really different in this business cycle is that, you know,
Speaker 1: COVID was a shock to business models and almost every
Speaker 1: single business had to re engineer themselves and think about
Speaker 1: how can I run this business with fewer people with
Speaker 1: less human contact? Right? Uh? And that has unleashed a
Speaker 1: level of innovation and capital spending an automation across every industry. Uh.
Speaker 1: You know that we think is pretty profound and has
Speaker 1: some legs. So that's a very long winded way of
Speaker 1: us saying, Look, we don't think the business cycle is dead,
Speaker 1: and therefore we don't think value uh investing is dead. Uh.
Speaker 1: And you know, while there are a lot of growth
Speaker 1: oriented stocks that I want to own, right, I don't
Speaker 1: want to just own the nasdact blindly. I'm gonna pull
Speaker 1: a mic and ask you a multi part question. Okay's
Speaker 1: I don't like to do it typically, but so can
Speaker 1: you talk about what you like within value and then
Speaker 1: on all the way On the other end of the spectrum,
Speaker 1: we've also had this resurgence in meme stocks and crypto,
Speaker 1: and I'm wondering how you would go about characterizing what
Speaker 1: is happening in terms of like the speculative stuff that's
Speaker 1: seeing a resurgence. Yeah. So you know, look, I think
Speaker 1: the speculative stuff is just as as defined it is speculative.
Speaker 1: Uh It in our humble opinion was always premised on
Speaker 1: you know, market momentum and liquidity and the greater full theory. Uh.
Speaker 1: I think that that may be operating again here today.
Speaker 1: Absolutely nothing has changed to make the value proposition of
Speaker 1: of some of those um investing strategies any better. Uh.
Speaker 1: You know, uh, now that we're six months into a
Speaker 1: FED tightening cycle, I just I don't get it. I
Speaker 1: understand that, you know, some inexperienced investors may look at
Speaker 1: their charts and say, oh goodness, look here was the
Speaker 1: high and now here's where it is. I'm getting a bargain. Um,
Speaker 1: I just I don't see that there was fundamental value
Speaker 1: there to begin with, so so we wouldn't be going there.
Speaker 1: But where is there value in the market. I think
Speaker 1: it's there's a lot of places, a lot of pockets, right. So, Uh,
Speaker 1: you know, we're buying some of the more traditional value,
Speaker 1: which is in financials and energy and industrials and materials
Speaker 1: and mining, but we're also finding value throughout the healthcare
Speaker 1: uh sector, We're finding some across uh consumer services. Uh,
Speaker 1: there's some interesting things we think in home building. You know,
Speaker 1: our view is, yes, have we seen you know, a
Speaker 1: meteoric rise in mortgage rates and has that slowed the
Speaker 1: housing market? Yes? Absolutely, But do we think the housing
Speaker 1: market is going to go into a multi year recession. No,
Speaker 1: we don't because we think that there's fundamentals supply demanding balances, UM,
Speaker 1: and so we think that there's some interesting to buy
Speaker 1: thanks to buy even among home builders. UM. Semiconductors we
Speaker 1: know have you know had a very uh typical textbook
Speaker 1: cyclical sell off most recently. Uh that there's going to
Speaker 1: be a time probably in the next three to six
Speaker 1: months where I want to own semi's again. So you know,
Speaker 1: we're looking at all these these areas. Someday they're going
Speaker 1: to get semiconductor supplying demand in equilibrium. Someday. I don't
Speaker 1: know if it will be in our lifetime, but some
Speaker 1: someday it's gonna it's gonna happen, Lisa, you know they
Speaker 1: always warned guys like me at Thanksgiving, don't talk about religion,
Speaker 1: don't talk about politics. Uh, the bad news for you,
Speaker 1: as though this isn't Thanksgiving dinner. So I do want
Speaker 1: to ask about politics a little bit, uh, because you know,
Speaker 1: the one thing you hear over and over again, and
Speaker 1: you read the researches that look mid term years, there's
Speaker 1: like a seasonality to the election cycle. In mid term
Speaker 1: years can be kind of uh historically a week time
Speaker 1: for the equity market. Obviously, there's so much going else
Speaker 1: going on in the economy this year that that who
Speaker 1: knows if that's really playing any role at all. But
Speaker 1: I want to ask a how are you thinking about
Speaker 1: these mid terms? If if there is any risk or
Speaker 1: opportunities in the market, uh from what's expected. And also
Speaker 1: all this this flurry of legislation that we've just seen.
Speaker 1: The chips Act. You know, you're talking about semi conductors,
Speaker 1: uh and the Inflation Reduction Act, which is very heavily
Speaker 1: on green energy and that sort of thing. Has the
Speaker 1: market sort of priced out all the positives and negatives
Speaker 1: from from all this? Or are you know, are there
Speaker 1: any opportunities that are popping out that you think the
Speaker 1: market might have missed? YEA so fantastic question, because again
Speaker 1: I think right now, UM, the market is maybe not
Speaker 1: fully focusing enough on Washington. So, UM, you know, just
Speaker 1: to answer a second part of your question first, UM,
Speaker 1: you know, I think that some of the legislative dynamics
Speaker 1: coming out of Washington are extraordinarily positive, uh for some
Speaker 1: key sectors. To your point, Uh, the amount of money
Speaker 1: that's going to be invested in domestic semiconductor uh capacity unprecedented. Uh.
Speaker 1: The amount of money that's going to uh, you know,
Speaker 1: clean energy with this uh what's left of the build
Speaker 1: back batter bill? Um. I can't call it the Inflation
Speaker 1: Reduction Act. I just can't bring myself to do that.
Speaker 1: But you know, and also just flying under the radar,
Speaker 1: you guys may have may have seen the Department of
Speaker 1: Energy is doing a two point five billion dollar interest
Speaker 1: free loan to general motors to help them uh invest
Speaker 1: in electric vehicle battery battery capacity. So there's all of
Speaker 1: these kind of initiatives which are also very good for
Speaker 1: economic growth. They're very good for capital spending, as we
Speaker 1: know from history. As much as people don't like it
Speaker 1: from a political perspective or from a debt and deficit perspective,
Speaker 1: they do tend to create jobs and they do tend um,
Speaker 1: you know, to deepen capital and productivity in the long run.
Speaker 1: And I don't think that I'm seeing the market recognize
Speaker 1: you know, all of that yet, nor are they necessarily
Speaker 1: recognizing that they're are going to be a handful of
Speaker 1: companies uh, by the way, who have to pay taxes
Speaker 1: who have not historically paid taxes. Uh. And that number
Speaker 1: is going to be about three hundred, you know, billion
Speaker 1: dollars off of SMP five hundred earnings in three And
Speaker 1: again I don't see earnings estimates coming down uh to
Speaker 1: reflect that yet. Uh. And so you know, I'm not
Speaker 1: exactly sure why analysts are being um, you know, so
Speaker 1: uh so reticent about what. Maybe it's it's it's faith
Speaker 1: in the perennial ability for companies that dodge taxes perhaps
Speaker 1: of course, of course, of course, of course, but but
Speaker 1: you know, there's a little bit of that that I
Speaker 1: feel like it is right in front of their face.
Speaker 1: But to the bigger part of your question, which is
Speaker 1: the mid terms, Um, you know, without getting to the
Speaker 1: substance of the mid terms, because I don't know that
Speaker 1: there is going to be any substance to the mid terms. Um. Uh.
Speaker 1: What I think is the bigger risk that no one
Speaker 1: has talking about. And I know that it's you know,
Speaker 1: great fodder for network news, and it's great fodder you know,
Speaker 1: for you know, the Internet and you know politically oriented
Speaker 1: uh media outlets. Um. You know, to to ramp up
Speaker 1: the rhetoric here. Um, but I think it's getting increasingly dangerous.
Speaker 1: And I'm not just talking about you know, as an American.
Speaker 1: You know, the the issue about is our democracy under assault.
Speaker 1: It's really quite more pedestrian than that. And that is uh,
Speaker 1: you know, the United States capital markets, um, are the
Speaker 1: destination for global capital. We are the world's reserve currency.
Speaker 1: The US dollar is strong because of that. That gives
Speaker 1: Americans extraordinary purchasing power. It also allows us to finance
Speaker 1: what are increasingly humongous debts uh at below market rates
Speaker 1: that we don't necessarily acknowledge every day. And so I think,
Speaker 1: and if we get into a scenario where, you know,
Speaker 1: people think that it is normal to litigate the outcome
Speaker 1: of elections and not seed com if we get to
Speaker 1: a place where we're not seeding congressmen in three, four
Speaker 1: or five states because we're litigating outcomes, I think that
Speaker 1: we've got to really start thinking about that. You know
Speaker 1: that that maybe this you know, politics, political war has
Speaker 1: gone too far. Because our credibility in the world matters.
Speaker 1: It matters if you're if you're an investor in American
Speaker 1: capital markets, you're a capitalist. This matters, and and people
Speaker 1: need to start behaving as if it matters. And I'm
Speaker 1: in the camp that says, if we keep going down
Speaker 1: this path, there are going to be implications for the
Speaker 1: financial markets with regard to people's willingness uh and non
Speaker 1: US citizens willingness um to engage. I think that's a
Speaker 1: super super important point that really hasn't resonated with a
Speaker 1: lot of people, especially if litigating those outcomes involves billy
Speaker 1: clubs and you know, fighting with each other with flags
Speaker 1: and breaking windows. Lisa really really appreciate Uh, your your
Speaker 1: thoughts today. I think we only have a limited amount
Speaker 1: of time left, so uh, we can't let you go
Speaker 1: without getting to our crazy things of the week. So
Speaker 1: I hope you came prepared, Uh, vill Donald, let's start
Speaker 1: with you, okay, minus courtesy of my friend Julia Morpurgo.
Speaker 1: She's in the London office, so you remember I took
Speaker 1: a trip there and hung out with her a couple
Speaker 1: of weeks ago. But she had this story on Domino's
Speaker 1: Pizza leaving Italy. So the last of Domino's twenty nine
Speaker 1: branches has closed in Italy after having just started in
Speaker 1: the country seven years ago, and the company had borrowed
Speaker 1: very heavily and had planned to open eight hundred and
Speaker 1: eight stores. I'd love to meet the strategic genius who decided,
Speaker 1: you know, what Italy needs is some Domino's pizzas and
Speaker 1: that that is a great one. That's pretty good. How
Speaker 1: about you, Lisa, have you seen anything crazy this week?
Speaker 1: H crazy? I'd probably not for publication on this. Go
Speaker 1: ahead and spill. That's fair, all right, I'll give you
Speaker 1: mine then before we leave. Um, Vildonna, have you ever
Speaker 1: seen the movie Greece? Of course? Of course, okay, good.
Speaker 1: I don't know. I never know with your generation, if
Speaker 1: you've seen the classics, I know Lisa's seen it. I
Speaker 1: don't even have to ask if Lisa, yes, thank you.
Speaker 1: I even know that you know Olivia Newton John passed
Speaker 1: this week and you know her co star John Travolta.
Speaker 1: You know couple, uh that they will You know that
Speaker 1: he sent his very warm condolence. Yeah, so r I
Speaker 1: p rest in peace to Olivia Newton John and in
Speaker 1: her honor. I have a uh Grease related crazy thing.
Speaker 1: It's an auction coming up um. And this information is
Speaker 1: courtesy the Robb Report website. By the way, remember the
Speaker 1: drag race scene in Greece where John Travolta races the
Speaker 1: bad guy who's known as Creator Face. By the way,
Speaker 1: it was on back then, if you won the drag race,
Speaker 1: you not only won the car, you also won the girl.
Speaker 1: I don't know. I don't know if that's still valid
Speaker 1: these days. Hopefully we've we've progressed past that. But that
Speaker 1: used to be the case. So he won not only
Speaker 1: the hot rod but Olivia Newton John. So a very
Speaker 1: successful race for John, but the bad guy's car, uh,
Speaker 1: it was the black Mercury hot rod had the flames
Speaker 1: on the side and everything that is up for auction.
Speaker 1: It comes complete with an autograph on the dashboard. Uh
Speaker 1: from Olivia Newton John Sandy herself, which who I gotta say.
Speaker 1: I think every guy my age had a crush on
Speaker 1: back in the day. Uh, but only once she went bad,
Speaker 1: when she went bad with the leather pants and and
Speaker 1: the that's that's that's that's what you want. A lot
Speaker 1: of hearts with that look. But so it's time to
Speaker 1: play the prices precise. Say let me hear you say,
Speaker 1: it's time to play the prices precise. Now it's had
Speaker 1: a lot up for sale yet, so all we know
Speaker 1: is what the auction house believes will be the range.
Speaker 1: So let's go at the high end of the range.
Speaker 1: Uh do you start? What do you think the high
Speaker 1: end of the range. And I'm shielding my my notes here,
Speaker 1: so sitting next to you, Okay, I'm going to go
Speaker 1: with two million, two million dollars, two million dollars. No, No,
Speaker 1: I want to advise one point to one point two million,
Speaker 1: one point three million, one point three million, is Lisa,
Speaker 1: is that price precise or you know prices precise? Rules
Speaker 1: might you say, is that price correct? You could say
Speaker 1: that one you could say that, but I am I
Speaker 1: that is an honor of what was the guy's name,
Speaker 1: Chris Whitman in London who gave us that precise at Lesa.
Speaker 1: Remember the you know you can go over or under.
Speaker 1: You don't have to. You don't have to give an
Speaker 1: exact dollar figure. I think you're over. I think this
Speaker 1: is why she's a chief investment office and your every
Speaker 1: auction house's dream. You're always like a ten billion dollars
Speaker 1: for that baseball card of the guy who never played
Speaker 1: high and seven d for the Mercury hot rod. Hell's
Speaker 1: Chariot was the name of the car. But here's the ques,
Speaker 1: here's the question. What did the n f T of it? Right? Yes,
Speaker 1: first we have to blow it up, and I guess
Speaker 1: you videotape that and make it an n f T.
Speaker 1: So we'll see. We'll check back on that and see
Speaker 1: if that's what happened. But at least I know you've
Speaker 1: got a busy day ahead and needs to get on
Speaker 1: with it. We can't thank you enough if your your
Speaker 1: insights and your time today, and I hope we can
Speaker 1: have you back again in the future. Thank you guys,
Speaker 1: a lot of fun. Thank you Lisa, take care, Bye bye,
Speaker 1: What Goes Up. We'll be back next week and something.
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Speaker 1: you can find us on Twitter, follow me at Reaganonymous
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Speaker 1: by Stacy Wang. Thanks for listening, See you next time.