Speaker 1: Scrap on your parachute. It's time for What Goes Up? Hello,
Speaker 1: and welcome to What Goes Up, a weekly Bloomberg Markets
Speaker 1: podcast of Mike Reagan, a senior editor at Bloomberg, and
Speaker 1: this week on the show, the armies of Gung Ho
Speaker 1: retail traders who were so influential on the stock market
Speaker 1: in the past. Here, well, they seem to have sobered
Speaker 1: up a bit and the market has stopped going straight up.
Speaker 1: Are these two topics related? And do sky hide valuations
Speaker 1: mean a bigger correction is inevitable. We'll get into it
Speaker 1: with a veteran Wall Street strategist, but first, Charlie Pellett
Speaker 1: tell us who is this week's mystery co host. This
Speaker 1: week's mystery co host is sid Verma. Sid as a
Speaker 1: senior editor with Bloomberg's Crosssset team in London. His hobbies
Speaker 1: include trolling Joe Wisenthal on Twitter, and while he and
Speaker 1: Mike Reagan share the title of scene, You're out of
Speaker 1: here said is much younger and nowhere near as washed
Speaker 1: up as Reagan said, claims his parents are proud of him,
Speaker 1: even though he never did become a doctor. Said, I'm
Speaker 1: gonna need to talk to Chu earlier about these intros.
Speaker 1: I'm not sure what I did to get on his
Speaker 1: bad side. Maybe I didn't stand clear of the closing
Speaker 1: doors the right way or something, But anyway, Dr said Vermont,
Speaker 1: welcome to the show. Thank you very much. I mean,
Speaker 1: if Charlie says that it's true, I feel like this
Speaker 1: is a Bloomberg writer. Passes said, before we get into
Speaker 1: the markets, I wanted to get a sense from you
Speaker 1: of what it's like in London these days, especially now
Speaker 1: that the pubs are back open. I can't really picture
Speaker 1: London with closed pubs. I mean, is it really London
Speaker 1: if the pubs aren't open? Yeah, I mean there are
Speaker 1: a lot of pernicious effects. Um. A lot of people
Speaker 1: were forced to talk to their family, express their emotions
Speaker 1: in a in a civilized way um, and basically fraternize
Speaker 1: with their neighbors UM, and do very American style subversive
Speaker 1: things like go do fitness um, and we'll go enter
Speaker 1: the positivity industrial complex and is Instagram and exercise with teams. Um.
Speaker 1: Now things are opening up, so hopefully we can get
Speaker 1: to the London of old um. And Yeah, I mean
Speaker 1: it's it's crazy. I don't know how much of you
Speaker 1: guys have been going out, but um, I went out,
Speaker 1: and it's kind of you're relearning social norms when you
Speaker 1: go to the pub, when you're queuing to actually get
Speaker 1: around in um, and it's kind of it's we're entering
Speaker 1: new territory. Anyway, let's get to that market chat with
Speaker 1: our guests. Our guests this week has a list of
Speaker 1: awards and accomplishments that's a mile long. But in my opinion,
Speaker 1: her biggest claim to fame is that, like me, she's
Speaker 1: a graduate of the number one university in the state
Speaker 1: of Delaware. She is the chief investment strategist at Charles
Speaker 1: Schwab and her name is Lizianne Sanders. Liz, and welcome
Speaker 1: back to the show. Well, thank you, Mike, thanks for
Speaker 1: having me in high Stid. How are you very well?
Speaker 1: Thank you very much, and listen. Uh, it's very nice
Speaker 1: of you to not point out that I've made that
Speaker 1: same joke about the best school in the state of
Speaker 1: Delaware probably every time we've we've been in the same
Speaker 1: room together, So I appreciate that. That's okay. Hey, we
Speaker 1: have the President United States is also a blue hen
Speaker 1: so yeah, the alumni is moving up in the world. Listen,
Speaker 1: let's start with that idea of the individual retail investors.
Speaker 1: There's a sense, at least in the media that the
Speaker 1: reddit type of traders have sort of sobered up a
Speaker 1: bit and at least aren't chasing meme stocks the way
Speaker 1: they used to. From your perspective, I'm curious if you
Speaker 1: think that's true. And I wonder if in the past
Speaker 1: year or so, when you're trying to analyze the market,
Speaker 1: if you've been sort of looking in the mirror a
Speaker 1: little bit more than normal, in other words, looking at
Speaker 1: what the retail investors at Schwab and elsewhere have been doing,
Speaker 1: if they're moving as a flock, uh, and what sort
Speaker 1: of the sentiment is there are among that cohort right now? Yeah, So,
Speaker 1: there there are some indications that the robust volume driven
Speaker 1: by that that crowd, the newly minted day traders, the
Speaker 1: Reddit crowd, whatever you wanna call, and it's broader than
Speaker 1: just the Reddit flash mobs that became um so in
Speaker 1: the news in the January February time frame. But if
Speaker 1: you look more broadly, there's some indication that there's a
Speaker 1: little bit of a waning in terms of that participation.
Speaker 1: But it also sometimes gets masked because the the outset
Speaker 1: of interest by that fairly new cohort dates back to
Speaker 1: the June July period of last year, and it didn't
Speaker 1: that that cohort didn't get as much attention even though
Speaker 1: the likes of Citadel came out last summer and said
Speaker 1: that retail traders represented of daily volume, but where their
Speaker 1: interest was most dominant within the market, at least outside
Speaker 1: of the options market. We're in the fang type style
Speaker 1: in the big five names that were otherwise the leadership names,
Speaker 1: so their activity blended into what was otherwise working in
Speaker 1: the market. It really wasn't until the beginning of this
Speaker 1: year that that cohort got more interested in the meme stocks,
Speaker 1: heavily shorted stocks, weak balance sheet companies, penny sheet stocks,
Speaker 1: some of the spacks obviously cryptos. So it was just
Speaker 1: more noticeable when it was in those lower quality, uh
Speaker 1: not sort of typical leadership areas of the market. What
Speaker 1: we don't know is whether that money is sort of
Speaker 1: morphed back into where leadership has been more recently, really
Speaker 1: since mid February, we've seen us shift, believe it or not,
Speaker 1: back toward some semblance of fundamentals driving stocks, a bit
Speaker 1: more of a quality bias, profitability bias, a little bit
Speaker 1: of evaluation bias. Notice I say valuation, not value, because
Speaker 1: I think those sometimes are are separate. So it's gonna
Speaker 1: be interesting to see when we really open back up
Speaker 1: and doing people or some percentage of people go back
Speaker 1: to work and we've got sports betting again, whether some
Speaker 1: of the forces that that drove that cohort to a
Speaker 1: level of interest that we've not seen before, whether that
Speaker 1: fades a bit, or whether we truly have brought them
Speaker 1: into the world of investing for a more extended period
Speaker 1: of time. We've seen this whole euphoria in markets UM
Speaker 1: and yeah, as you've explained, a lot of it has
Speaker 1: been retail driven. One thing that is incredibly different from
Speaker 1: this UM business cycle compared to other crisis eras has
Speaker 1: been the fact that savings right it's amongst the middle class,
Speaker 1: has standard out stood out very respectfully. And you know
Speaker 1: this is down to fiscal policy redress and other such
Speaker 1: factors that what could challenge this business cycle. I guess
Speaker 1: it's it's just like a business cycle like no other.
Speaker 1: You know, if we forget about exultinist shocks, which no
Speaker 1: one can predict and just thing cur broader forces. I mean,
Speaker 1: I'm used to thinking of business cycles as young, you know, middle,
Speaker 1: middle aged, and old. That kind of framework seems kind
Speaker 1: of out of place because we seem to be going
Speaker 1: back to the pre COVID business cycle. It seems that
Speaker 1: people are talking about wage inflation and that could reduce
Speaker 1: corporate margins and lead to a bit of overheating. I
Speaker 1: find that's a really interesting question. What are your thoughts
Speaker 1: on that. I think that this cycle you're right is
Speaker 1: is more unique than any we have seen in the past,
Speaker 1: and I'm not even sure there's a consensus assumption of
Speaker 1: what the path of recovery looks like from here. It's
Speaker 1: sort of all over the map. From the more bearish
Speaker 1: end of the spectrum that believes this is just a
Speaker 1: fiscal stimulus sugar high, we'll get the inevitable pop in
Speaker 1: the data by virtue of base effects, but that after
Speaker 1: that we're gonna quickly move back down to a pretty
Speaker 1: subdued pace of growth, much like we had pre pandemic.
Speaker 1: So for all the we have to remember, for all
Speaker 1: the cheering about the cycle that preceded this, and it's
Speaker 1: it's factual that it was the longest economic expansion in
Speaker 1: history and had lovely stats associated with it, like a
Speaker 1: three half percent unemployment rate, But the reality is that
Speaker 1: the strength of the expansion was the weakest in history
Speaker 1: by far. So long, yes, weak, yes, And so I'd
Speaker 1: say the negative cases that we're going to revert back
Speaker 1: down to that muddle through that kind of pace, and
Speaker 1: then of course at the under the other end of
Speaker 1: the spectrum is the roaring twenties kind of scenario. I
Speaker 1: think that the the honest answer that I can provide
Speaker 1: is I have no idea. I think you you mentioned
Speaker 1: at the outside of the question the savings rate, and
Speaker 1: certainly embedded in the more optimistic case for the economy
Speaker 1: is that if we that savings rate goes from the
Speaker 1: current down to this a five to seven percent that's
Speaker 1: been typical in the last cycle, or to do the
Speaker 1: app of how many trillions of dollars that means in
Speaker 1: the consumption pipeline and even going ahead forward where we're
Speaker 1: not going to have the benefit of fiscal stimulus, that's
Speaker 1: enough to power the economy for years to come. I
Speaker 1: don't know that that's a safe assumption. What we don't
Speaker 1: know is whether, like the Great Depression, whether this also
Speaker 1: ushered out a paradox of thrift to an era where
Speaker 1: there's a mindset toward lower debt levels, higher cushion. We
Speaker 1: already knew that household deleveraging came out of the financial crisis,
Speaker 1: and we never levered up the consumer side of the
Speaker 1: economy in the last expansion like we had in the
Speaker 1: prior expansion. Debt paid down was was paramount, and thinking
Speaker 1: we still had strong consumption data, but it wasn't on
Speaker 1: the back of debt. And what we don't know is
Speaker 1: whether that savings cushion is going to stay higher. The
Speaker 1: other potential faulty assumption I think in the really robust
Speaker 1: case is that pent up demand is both really robust
Speaker 1: on the good side and the service society of the economy, uh,
Speaker 1: and that it's likely to be persistent. And I just
Speaker 1: question that piece of the really optimistic story because the
Speaker 1: good side of the economy we are well above pre
Speaker 1: pandemic level, so arguably the demand has been extraordinarily strong,
Speaker 1: consistently for the past year, and that demand has been met.
Speaker 1: So if anything, I think the pent up demand will
Speaker 1: be much more on the services side, and just the
Speaker 1: nature of pent up demand on services is a bit different.
Speaker 1: It's a little more one time in nature. So I
Speaker 1: do worry that as we start to get these really
Speaker 1: strong numbers that there might be too much extrapolating too
Speaker 1: far into the future. I think there are still a
Speaker 1: lot of questions to which we don't have answers. As
Speaker 1: a tournus, I've never extrapolated from one time data. Well,
Speaker 1: one thing I find fascinating about the savings rates. It's
Speaker 1: such a simplistic calculation, you know, it's basically income minus consumption.
Speaker 1: And I don't think we get a lot of sort
Speaker 1: of granularity about where that savings is. You know, I
Speaker 1: wonder how much of that savings is actually housed in
Speaker 1: brokerage accounts. And if we do start talking about a
Speaker 1: drawdown in savings, does that mean, you know, emptying out
Speaker 1: your your Schwab account. God forbid, Liz, you know, God forbid?
Speaker 1: But well, it depends on, honestly, what what's going to
Speaker 1: be The interesting test is at whatever point we get
Speaker 1: something more than the six seven eight percent pullback, which
Speaker 1: is what we've been limited to in the past year.
Speaker 1: You had one in June, you had a period in
Speaker 1: September October where you got a couple We didn't really
Speaker 1: have it for the SMP to get a temper cent
Speaker 1: correction in the NASDAC earlier this year. But at the
Speaker 1: inevitable point, something is a bit more severe than that. Uh,
Speaker 1: an actual correction, a severe correction, even God forbid a
Speaker 1: bear market does that? Does that? Uh? Sort of what
Speaker 1: we saw last year was it? It almost stimulated that
Speaker 1: cohort a bit more. It didn't, It didn't scare them off,
Speaker 1: and they looked at it the way we all know
Speaker 1: we're supposed to, which is, boy, now we can buy cheaper.
Speaker 1: But what we don't know is whether the inevitable something
Speaker 1: more severe. And I don't have any crystal ball in
Speaker 1: the timing of that. UM, what what we see with that,
Speaker 1: with that cohort? You know, is our bonds too boring
Speaker 1: for retail investors these days? Um? Looking at rates of returns?
Speaker 1: And do you think treasuries and bond products need to
Speaker 1: be marketed to be fun to get the online meme
Speaker 1: crowd interested in the asset class. Well, I would argue
Speaker 1: that a lot of the online meme crowd, and I
Speaker 1: don't want to generalize here, are are largely pure momentum
Speaker 1: uh players. I don't think they're doing a tremendous amount
Speaker 1: of kind of deep fundamental analysis like many of us
Speaker 1: do that have been long in the business, and I
Speaker 1: think on the fixed income side, I think that that's
Speaker 1: the same thing. I don't think there's a lot of
Speaker 1: understanding on how the bond market works, the nature of
Speaker 1: truly what is a bond bear market relative to an
Speaker 1: equity bear market, where what the correlations are depending on
Speaker 1: what is maybe causing the rise in yields, the growth component,
Speaker 1: the inflation component when it starts to hit the equity market,
Speaker 1: the impact it has on valuations, but how it's still
Speaker 1: can serve as a diversifier what you do when rates
Speaker 1: are rising in terms of how a position you're fixed
Speaker 1: income portfolio, whether it's barbells or ladders, or longer duration
Speaker 1: or short duration. I've had conversations like this with some younger,
Speaker 1: newer investors and the eyes sort of glaze over. Maybe
Speaker 1: it does mean you need more confetti and excitement. But
Speaker 1: if if the bond market it becomes an area where
Speaker 1: there's momentum in one direction another, could that crowd follow
Speaker 1: it and try to play that trend short you know
Speaker 1: listen yet an interesting note recently. The title is the
Speaker 1: stock market Disconnected from the economy um and what struck
Speaker 1: me uh in that is a really cool graphic you
Speaker 1: had where you go through I don't know, it's about
Speaker 1: ten or a dozen of some of the most commonly
Speaker 1: looked at valuation metrics, a few obscure ones, you know,
Speaker 1: like the buffet indicator, the ratio of market cap, the GDP,
Speaker 1: Tobin's Q, the ratio of market caps, replacement value of assets.
Speaker 1: And to describe the graphic, on the left side, it
Speaker 1: was green meaning sort of valuations were attractive. The right
Speaker 1: side was read meaning unattractive valuations. Pretty much everything was
Speaker 1: pinned to the right to the red except for the
Speaker 1: metrics that are influenced by the interest rates, like the
Speaker 1: FED model. And that's sort of thing which kind of
Speaker 1: explains why the market tends to have a freak out
Speaker 1: when rates suddenly have lurched higher a few times over
Speaker 1: this year. As you point out, though, the stock market
Speaker 1: is forward looking, so you know, there is a case
Speaker 1: to be made to maybe not take all these metrics
Speaker 1: as seriously as perhaps you would have in a in
Speaker 1: a more normal environment when the base effects so weren't
Speaker 1: so ridiculous compared to last year. Um And we actually
Speaker 1: did a story not too long ago about people we're
Speaker 1: less trying to shoot down each and every one of
Speaker 1: these types of metrics, And I get it in one way,
Speaker 1: I totally get it. And as you point out in
Speaker 1: your note, valuations are a lousy market timing tools. I mean,
Speaker 1: really probably everything is allousy market timing tool when you
Speaker 1: get to it. But still, like, I can't help but
Speaker 1: wonder you know, whenever you hear the paradigm is shifted
Speaker 1: and this time is different, it just it just makes
Speaker 1: me nervous. It makes me think of to some of
Speaker 1: the turn of the century geist of looking at new
Speaker 1: metrics and not worrying about the traditional metrics. How are
Speaker 1: you thinking about all that? I mean? Is it? Is
Speaker 1: it more of a expect weaker returns over say, the
Speaker 1: not so distant future, than it is trying to worry
Speaker 1: about an imminent correction? You know, how do you sort
Speaker 1: of incorporate these valuation extremes into what you're thinking about
Speaker 1: the future. Sure, so, when when I wrote that report
Speaker 1: recently and in conjunction with that heat map, I highlighted
Speaker 1: as one example, what you mentioned, which is valuation, at
Speaker 1: least in the shortish term, is a terrible timing indicator.
Speaker 1: And I agree with you if there's no such thing
Speaker 1: as a perfect timing tool. If there were, boy this
Speaker 1: would be easy, and it's not. But it looked at
Speaker 1: the forward PE historically and then subsequent one year performance.
Speaker 1: In this case it was for the SMP, and yes
Speaker 1: there is a negative correlation, meaning higher PE ratios have
Speaker 1: been followed by lower one year performance and vice versa.
Speaker 1: But it was a very small negative correlation, only point
Speaker 1: one eight. And if you look at a scattergram which
Speaker 1: I put in the report, the the observations, the individual
Speaker 1: observations are far and wide. They're literally all over the map.
Speaker 1: There's plenty of instances, and you can certainly go back
Speaker 1: to the late ninety nineties to see some of them
Speaker 1: where you were in stratospheric valuation territory, but you still
Speaker 1: had a pretty robust runway before ultimately the market peaked out.
Speaker 1: I think the key difference in the current environment versus
Speaker 1: say the rise into two thousand and this doesn't suggest
Speaker 1: that I think it's all clear ahead and that there's
Speaker 1: no valid comps to the excess of the late nineties,
Speaker 1: and there are a lot of valid comps, But the
Speaker 1: one potential offset to some of those concerns is that
Speaker 1: into the peak in two thousand, when the SMPS PE
Speaker 1: for a couple of years had been hovering around the
Speaker 1: twenty seven level, underlying that the earnings, the denominator on
Speaker 1: a forward basis was also rising. It's just prices were
Speaker 1: rising more robustly than than earnings. What we now know
Speaker 1: what the benefit of Pine site, is that earnings were
Speaker 1: rising at the time, but they were rising into a peak.
Speaker 1: What caused the parabox spike in the pe in the
Speaker 1: current environment was, of course last year's epic plunge in earnings,
Speaker 1: and needless to say, the plunge in earnings last year
Speaker 1: was not your typical dipp in earnings. It was an
Speaker 1: epic depression era reaction to what was going on in
Speaker 1: the economy, and unlike CIRCUITOO thousand were now on the
Speaker 1: upswing and earnings which had the effect of quickly seeing
Speaker 1: once we rolled into improving forward four quarters, most of
Speaker 1: which was now in one, you saw the forward pe
Speaker 1: drop quickly from twenty seven down to twenty two. It's
Speaker 1: popped up a little bit since then, and I'm certainly
Speaker 1: not suggesting that a twenty two or three p is cheap,
Speaker 1: but there is the potential that if like last year,
Speaker 1: this year's earnings bar is still set on the low side,
Speaker 1: that ultimately where earnings moved to could put continue to
Speaker 1: bring down valuation levels. Now it's in conjunction. Was still
Speaker 1: really frothy sentiment which has been positively offset by strong breadth,
Speaker 1: but breath is starting to look a little shakier, and
Speaker 1: it's quite weak for Nasdac and Russell two thousand. It's
Speaker 1: been kind of hanging in there for the SMP. So
Speaker 1: I think that's really key to watch because when you
Speaker 1: when you have like in two thousand, wildly optimistic sentiment
Speaker 1: but deteriorating breadth and an earnings trajectory that is peaking,
Speaker 1: that's that's sort of a triple whammy on the negative side.
Speaker 1: And we we we only have sort of formally the
Speaker 1: sentiment concern, but the other two are absolutely worth watching
Speaker 1: because the market by no means cheat, I mean implicit
Speaker 1: in that scenario is the idea that perhaps value in
Speaker 1: cyclical stocks might not be able to pick up the
Speaker 1: slack if some of the big mega caps disappointment. You know,
Speaker 1: we saw some of the story UM take a shine
Speaker 1: with Netflix earnings, UM and so forth, and breadth has
Speaker 1: already improved as well. We've seen a large number of
Speaker 1: members actually trade above their two two hundred day or
Speaker 1: fifty day moving average recently. And so it's a it's
Speaker 1: a huge conundrum when it comes to just how much
Speaker 1: good prices are good needs is already priced into value
Speaker 1: in cyclical stocks, UM, what's your view on that part
Speaker 1: of the market. So I think what's been going on
Speaker 1: from a value perspective has more to do with the
Speaker 1: with the sectors that we're doing well for that span
Speaker 1: of time, in particular from late October until about mid
Speaker 1: February this year, and there were fundamental drivers to that.
Speaker 1: In the case of financials, it was rates going up,
Speaker 1: a steepening of the yield curve. In the case of energy,
Speaker 1: obviously it was an improvement in global economic growth sort
Speaker 1: of China coming back from a demand perspective, and then
Speaker 1: industrials was also driven by China sort of coming out
Speaker 1: of the COVID environment and seeing a ramp in economic activity. Well,
Speaker 1: those sectors happened to be dominant in the value indexes
Speaker 1: so I think it was more of a sector driver
Speaker 1: than it was a shift into value. Now, I think
Speaker 1: we're in an environment where valuation, where a focus on
Speaker 1: the factor of value is essential. I think for particularly
Speaker 1: for individual stock pickers that want to try to be
Speaker 1: in the types of stocks and parts of the market
Speaker 1: that will do well, it's almost a hybrid or Garpi
Speaker 1: kind approach which has really started to work in the
Speaker 1: last month, and it's part of the reason why active
Speaker 1: managers have been doing better relative to passive managers, why
Speaker 1: equal weighted has been performing better relative to cap weighted.
Speaker 1: So I think there is a shift towards sort of
Speaker 1: a value mindset, which can be very distinct from value
Speaker 1: indexes doing well. Um that one of the reasons why
Speaker 1: we don't put tactical recommendations on growth versus value, even
Speaker 1: though we will on large versus small is I think
Speaker 1: there are times where there can be a huge difference
Speaker 1: between growth and value in terms of the types of
Speaker 1: stocks housed in the indexes versus the versus the fundamentals
Speaker 1: of say value. You know, in october O VO two,
Speaker 1: after the tech bust, NASDAC one trough overall, nasdack down
Speaker 1: s SMP down fifty. If you wanted to buy deep
Speaker 1: value and you did, and you did well in doing so.
Speaker 1: A lot of that deep value was found in the
Speaker 1: tech stocks there still housed in the Russell growth indexes.
Speaker 1: More recently, utilities became really expensive. That doesn't mean Russell
Speaker 1: moves them into the growth indexes. They're not growth stocks.
Speaker 1: They're just really expensive stocks that are housed in the
Speaker 1: value indexes. UM sometimes called the value trap. So when
Speaker 1: I when I say that I think investors should have
Speaker 1: a value mindset. That shouldn't be seen as the same
Speaker 1: comment as just take a passive am broach approach and
Speaker 1: just blindly by you know, the value indexes, either Russell
Speaker 1: or SMP or other symmetric I think now we need
Speaker 1: to be factor oriented. I think cyclical leverage to an
Speaker 1: upturn in the economy. But that doesn't mean just think
Speaker 1: of what typical cyclicals are. Hey, listen to what you know.
Speaker 1: The first six months of this bull market last year,
Speaker 1: it was the defensive names that did well. But this
Speaker 1: era's defensive names were the Big five. They were Apple, Microsoft, Google, Netflix, Amazon.
Speaker 1: Typical defense of areas are staples and utilities, but this
Speaker 1: cycle just had a different definition of what was defensive,
Speaker 1: and I think this cycle is probably gonna have a
Speaker 1: different definition of what is cyclical. Where the cyclical leverages,
Speaker 1: It's probably going to be in segments of the market
Speaker 1: that might have a lot of the stocks housed in
Speaker 1: the growth indexes. But that's where the damage was most
Speaker 1: significant in terms of the economy and the stocks. So yes,
Speaker 1: value factor that I think will still work cyclical, yes,
Speaker 1: but but don't think of that just in terms of
Speaker 1: the traditional definitions and the traditional labeling and housing in
Speaker 1: terms of standard index. I think one of the craziest
Speaker 1: things I saw of the year was looking at the
Speaker 1: growth estimates for the value indexes and the growth indexes,
Speaker 1: and the yearnings growth estimates were higher for the value
Speaker 1: index than for the growth index, right, because that's where
Speaker 1: I mean, look at what's going to happen in the
Speaker 1: second quarter. I think the definitive consensus for earnings growth
Speaker 1: in the second quarter for energy is for digits. I
Speaker 1: think it's over a thousand percent. So they obviously the
Speaker 1: areas of the economy that got most severely hit are
Speaker 1: going to be where you see the greatest growth characteristics.
Speaker 1: So it's characteristics are very different than index constituents, I'll say,
Speaker 1: Lucien refinitive, we've we've never heard of it. I never
Speaker 1: heard of that that particular company. But just to shift
Speaker 1: gears a little bit, Um, you had a good note
Speaker 1: talking about the federal debt. Obviously it's exploded. Uh, fiscal
Speaker 1: stimulus has been such a huge driver for once, let's say,
Speaker 1: for once of both you know, the economic recovery and
Speaker 1: the market. I think if if for a lot of
Speaker 1: people getting a check, it's kinda like house money that
Speaker 1: that you can go then you bet on memestocks or whatnot.
Speaker 1: But I think I think what also drove that that
Speaker 1: cohort of course also may have had something to do
Speaker 1: with zero commissions, which we have trobbed, may have had
Speaker 1: something to do with um and and then things like
Speaker 1: stock slices as we call them for actional shares. So
Speaker 1: I think it was a confluence of events. But certainly
Speaker 1: the stimulus checks as a feeder into accounts that now
Speaker 1: allow you to trade free and more easily. Yes, it
Speaker 1: was all part of the recipe. You know, if we
Speaker 1: if we all put our politics for aside and just
Speaker 1: look at the debt analytically about you know what it
Speaker 1: could or could not be a headwinder at heil Wind
Speaker 1: two growth. Obviously, I think you know that the glory
Speaker 1: days of fiscal stimulus are are are probably behind us.
Speaker 1: I mean, maybe you know if if we're lucky, we'll
Speaker 1: get some sort of infrastructure bill, but I mean the
Speaker 1: big work has already done. There. Walk us through sort
Speaker 1: of that work you did on the debt and and
Speaker 1: what it means as it relates to the economy. Sure,
Speaker 1: so first let's talk about the deficit, which of course
Speaker 1: is the annual mismatch of what's coming in and going
Speaker 1: out and um. And then debt is a cumulative effect
Speaker 1: of running deficits, and debt, of course, can be categorized
Speaker 1: in a number of different ways. Typically these days, when
Speaker 1: we talk about debt, most people are talking about federal
Speaker 1: government debt, but you know, add to that state and
Speaker 1: local debt, non financial sector debt, corporate debt, and every
Speaker 1: variety of household debt. And whereas government debt is going
Speaker 1: above ad of GDP this year and that's just federal
Speaker 1: government debt, total credit market debt is closer to about
Speaker 1: fo of GDP, which by the way, doesn't include any
Speaker 1: of the future debt associated with unfunded entitlements. Um, that's
Speaker 1: when you get up into the nine percent of GDP.
Speaker 1: But what's amazing to me, and again not to get political,
Speaker 1: but here I'm gonna I'm gonna be not a bipartisan critic.
Speaker 1: It's amazing to me how many people I hear in Washington, senators,
Speaker 1: congress people who when talking about either the deficit or
Speaker 1: the debt, will conflate the two and as they're talking
Speaker 1: about the deficit, I think they're actually talking about debt.
Speaker 1: And I don't know whether many of these people, and
Speaker 1: I've heard both sides of the i'll do it, I
Speaker 1: don't know whether they don't know the difference or they
Speaker 1: do when they're trying to confuse people. It's sadly it's
Speaker 1: probably the former. You know, In terms of the stock market,
Speaker 1: what's interesting, and this is just simple fact. This is
Speaker 1: not an assessment on my part that deficits don't matter,
Speaker 1: but there's been a positive correlation with the deficit in
Speaker 1: the stock market. Higher levels of a deficit as a
Speaker 1: share of GDP have typically been accompanied by better stock
Speaker 1: market performance. Moving on to the debt, though clearly the
Speaker 1: environment wherein you talk about headwinds associated with debt, and
Speaker 1: typically I get the question in terms of at what
Speaker 1: point do we hit a wall of a point looking
Speaker 1: forward does it start to become a problem. However, one
Speaker 1: defines a problem, and my argument it has been a
Speaker 1: problem for quite some time now. It's a bit of
Speaker 1: a chicken in an egg argument. Nonetheless, going back the
Speaker 1: long history of data that we have on economic activity
Speaker 1: across the spectrum of GDP, productivity, inflation, capital spending, housing,
Speaker 1: and total credit market debt, so not just government debt,
Speaker 1: but total credit market debt, lower zones of debt have
Speaker 1: been accompanied by much higher economic growth. Higher zones of
Speaker 1: debt much lower economic growth. You know, I talked earlier
Speaker 1: about Yes, the last expansion was the longest in history,
Speaker 1: but it was also the weakest. I think the high
Speaker 1: and rising burden of debt was a contributing factor to that. Now,
Speaker 1: the chicken the egg piece of it comes with well,
Speaker 1: because growth has been subdued for whatever reasons, maybe demographics
Speaker 1: or lack of productivity, that has in turn stimulated more uh,
Speaker 1: fiscal stimulus, which is added to the deficit, which is
Speaker 1: added to the debt. So that's the chicken egg argument. Nonetheless,
Speaker 1: we can go outside the United States. Look at Japan,
Speaker 1: which has much higher debt levels, certainly government debt levels
Speaker 1: than we do, and they've had unbelievably weak growth, but interestingly,
Speaker 1: accompanying that has been low levels of inflation. So where
Speaker 1: I where I disagree with some of what the consensus
Speaker 1: is that this high and rising burden of debt is
Speaker 1: an inflation accident waiting to happen. For decades and decades
Speaker 1: and decades, there's been a I think complete mirror image
Speaker 1: relationship than what the consensus believes. Higher zones of debt
Speaker 1: have historically been companied by lower inflation rates, largely because
Speaker 1: it tends to be accompanied by lower economic growth. So
Speaker 1: I don't worry about the inflation piece as it relates
Speaker 1: to debt, but I worry, especially as interest rates go
Speaker 1: up further than they already have, that it's the crowding
Speaker 1: out effect and a much greater share of revenues coming
Speaker 1: in have to be devot it's simply to paying interest
Speaker 1: on on that debt. But what evidence do we have
Speaker 1: that public set of spending has had a crowding effect already?
Speaker 1: What evidence do we have if it's the classic crowding
Speaker 1: out effects. I didn't see much evidence of crowding out.
Speaker 1: Yet I agree with you. I agree with you. What
Speaker 1: we can look at perspectively is all the big areas
Speaker 1: that government spends money on, whether it's education, health, defense,
Speaker 1: and look at the growth rate expected based on you know,
Speaker 1: CBO assumptions, and then look at some sort of standard
Speaker 1: assumption of the change in interest rates over the next
Speaker 1: ten years, and what the growth rate in servicing that
Speaker 1: debt will be. The growth rate and the interest on
Speaker 1: debt the growth rate is going through the roof. But
Speaker 1: if we are truly all m M tears now and
Speaker 1: we're in a different paradigm where we're just not going
Speaker 1: to worry about and we're going to spend at a
Speaker 1: level akin to what we've seen this year and disregard
Speaker 1: any concern about deficits in the near to medium turn,
Speaker 1: then I agree with you. It isn't automatically the case
Speaker 1: that a high and rising burden of debt crowds out
Speaker 1: spending or investments elsewhere. I think we're at the beginning
Speaker 1: of an experiment to see whether we are in a
Speaker 1: in a different MMT like paradigm of which there is
Speaker 1: implicit supporters on both sides of the aisle. You know,
Speaker 1: if there's one area of somewhat bipartisan supporter or a
Speaker 1: game that both sides are are playing pretty effectively right now,
Speaker 1: it's it's kicking the can down the road. So I
Speaker 1: agree with you while we we may not have to
Speaker 1: um sort of face the implications of that crowding out effect,
Speaker 1: because it's not something that's that's a worry right now.
Speaker 1: I wonder if you know MMT works if you are
Speaker 1: guaranteed that you're the global reserve currency and that oil
Speaker 1: continues to be traded in dollars. You know, if if
Speaker 1: the Southeast decide that they want to sell their oil
Speaker 1: and euros or renmimby or douge coin or whatever and
Speaker 1: and start keeping reserves in other currencies, if that sort
Speaker 1: of upturns the case for m MT a little bit. Well,
Speaker 1: that's certainly a big part of the case that we
Speaker 1: we sit in this extraordinary, you know, privileged chair of
Speaker 1: having the being the global monetary standard and having the
Speaker 1: world's reserve currency. And I do think possibly even in
Speaker 1: my lifetime, we live in a world where there are
Speaker 1: multiple reserve currencies, but in terms of the dominance of
Speaker 1: the dollar and it representing the monetary standard. When you
Speaker 1: look at what percent the dollar represents in global reserves,
Speaker 1: the present represented in global trade, and how the doomsayers
Speaker 1: have been suggesting a plunge in that for decades that
Speaker 1: I don't buy. I I see the ideas we have
Speaker 1: more sort of siloed segments of the global economy, that
Speaker 1: there will be the emergence of more regional transaction with
Speaker 1: local currencies. I think that's the nature of technology and
Speaker 1: the speed with which that can be done and translations
Speaker 1: can be done. But I don't worry about the dollar
Speaker 1: losing its reserve status. There's really not many countries, if any,
Speaker 1: you can think of that, certainly not China. I get
Speaker 1: the question all the time, well, what would stop them
Speaker 1: from just dumping their treasury securities. Well, if that would
Speaker 1: be aiming the gun squarely at their own economic foot
Speaker 1: so I'm not sure they want to do that to
Speaker 1: to make some point, and they're just is nothing out there,
Speaker 1: including the Chinese yuan or the euro, that has anywhere
Speaker 1: near the weight in those metrics on percent of reserves
Speaker 1: for our trade that I think dethrones the dollar anytime soon.
Speaker 1: So that as an underlying sort of basis for m
Speaker 1: M T, which I don't fully agree that it's a
Speaker 1: theory that can persist at infinitum without negative consequences. Um,
Speaker 1: but I don't worry about the dollar losing its reserve status.
Speaker 1: But I think you can have that view but still
Speaker 1: take issue with them. Empty said, I brought up that
Speaker 1: was no accident me bringing up dose coin. That is
Speaker 1: that is meant to be. Uh. The segue to the
Speaker 1: part of the show that I think a lot of
Speaker 1: listeners tune in, Charlie Pellett once again, we'll tell us
Speaker 1: what that is. Tieden up your straight jackets. It's time
Speaker 1: for the craziest things we saw in markets this week,
Speaker 1: So said, I have a lot of faith in you
Speaker 1: to deliver us with the craziest thing you ever saw
Speaker 1: this week. A lot of faith that will be a
Speaker 1: good one. What do happen? There are lots of crazy
Speaker 1: things have been happening in recent weeks. But I think
Speaker 1: one crazy thing that I don't think has got any
Speaker 1: attention whatsoever. Um, is the fact that Ghana came out
Speaker 1: the country of Ghana came out with a zero coupon bond.
Speaker 1: And this is after they try to go for a
Speaker 1: century bond. And the zero coupon bonds are just weird
Speaker 1: instruments UM, and they found ample demand UM, and they
Speaker 1: found a way to UM issue whilst trying to pacify
Speaker 1: credit rating agencies. And to me, that was an interesting
Speaker 1: deal about how credit markets UM just all the UM
Speaker 1: firepower and all the leverage is with borrows and UM.
Speaker 1: This week, for example, I was on a call with
Speaker 1: some some of my colleagues and we find that European
Speaker 1: distress funds of buying high quality effectively buying much higher
Speaker 1: quality credits than you could ver imagine because it's just
Speaker 1: a sortable shortage of investable assets. So when you see Gharner,
Speaker 1: an emerging market issue is able to do funky stuff
Speaker 1: like that, that that always gets to be interested. That is,
Speaker 1: I assume that's a local currency bond, not a not
Speaker 1: a dollar bond. It that is actually a euro bond,
Speaker 1: so zero coupon bond. But yeah, it's usually more volatile
Speaker 1: than bonds that pay regular interests, So it's definitely one
Speaker 1: of the weirdest things out there. Liz, are you gonna
Speaker 1: put any clients into a zero coupon uh A B Well,
Speaker 1: I I don't personally put any clients money anywhere, and
Speaker 1: they should all be very thankful for that. But I
Speaker 1: would say as a company, no, I don't think you're
Speaker 1: going to see it on any Schwab recommended list anytime soon.
Speaker 1: Just just just a guess, just a guess. What was
Speaker 1: that anything crazy from you this week? Yeah? You you already,
Speaker 1: you already used it to tease this uh segment, the
Speaker 1: doge coin. I I have trouble sort of getting a
Speaker 1: lot about the valid cryptocurrencies, if you want to call
Speaker 1: it that, let alone something that was started as a
Speaker 1: as a joke. So um, I've been shaking my head
Speaker 1: at that one. I have to admit, Okay, well you're
Speaker 1: gonna shake it even harder when you hear my craziest
Speaker 1: thing because this is a little self indulgent, but I
Speaker 1: I actually tweeted out a chart of the SMP five
Speaker 1: d priced in doge coin, denom denominated in dog coin,
Speaker 1: simple ratio of of the SMP level to doge coin.
Speaker 1: Possibly the stupidest thing on Twitter this week, as well
Speaker 1: as the craziest thing And I'm proud. I'm proud of
Speaker 1: that because it's that's not an easy accomplishment, given Twitter
Speaker 1: what it is. But here's where we're gonna have some
Speaker 1: fun in is I'd like to turn this segment into
Speaker 1: kind of a quiz show, like the price is right,
Speaker 1: SMP five hundreds done pretty well since the presidential election,
Speaker 1: at least since the day after. I it's a more
Speaker 1: than since November fours. And what do you think the
Speaker 1: performance of the SMP five hundred priced and doge coin
Speaker 1: has been since the US election? No idea. Honestly, you know,
Speaker 1: I haven't even done the calculation on on what the
Speaker 1: performances of doge coin from whatever recent trout to whatever
Speaker 1: recent high, so I'm not even gonna adventure a guest.
Speaker 1: I imagine your bosses and the and the Schwab clients
Speaker 1: are probably happy to hear that that I'm not spending
Speaker 1: my time looking. Yes, I hope they're happy to hear that.
Speaker 1: My boss is maybe not as happy to hear to
Speaker 1: hear me doing ratios. Said, what's what's your guests at
Speaker 1: the doge coin denominated performance of the SMP five since
Speaker 1: election day? I'm gonna say it's good, seriously down. But
Speaker 1: you know, I do think there's a serious point to
Speaker 1: be made, Lausanne, is that people are throwing money at
Speaker 1: things that are literally jokes. You know, maybe Game Stop
Speaker 1: had some you know, fundamental turnaround story. I don't know,
Speaker 1: but you know a lot of people are just trading
Speaker 1: on the memes. I just can't wrap my head around it.
Speaker 1: Muther and I it's not even you know, what they
Speaker 1: say often, what many often say about just the other
Speaker 1: cryptocurrencies is that at this stage it's less a currency.
Speaker 1: Let's use bitcoin as an example, less a currency, less
Speaker 1: an investment, more a religion. You know, it's very faith based.
Speaker 1: I don't even know how to categorize something like doach coin. Uh,
Speaker 1: it's just it's we're at some point we're going to
Speaker 1: look back whether that's going to be the poster child,
Speaker 1: but there will be some poster children associated with us
Speaker 1: looking back at some point and thinking how did people
Speaker 1: not see this? I think I was created with with
Speaker 1: the intention to be the poster child of excess. I
Speaker 1: mean that's a coin of pure tonical way of looking
Speaker 1: at it. I mean, no one who's buying dose coin
Speaker 1: things that's going to be changing the world, Like the
Speaker 1: bitcoin believers argue, no one believes that it's going to
Speaker 1: be a medium of exchange or store of value. You
Speaker 1: have market participants who fully aware that it's ridiculous but
Speaker 1: find it fun, isn't it? You know, similar just to
Speaker 1: buying expensive shoes, you know, having a night out on
Speaker 1: the town. It's it's an experience that everyone's enjoying. It's
Speaker 1: the greater full theory. Uh so you know, if somebody
Speaker 1: else's is willing to pay an even more ridiculous some
Speaker 1: than I'm a winner. It's only that greatest fool who
Speaker 1: gets stuck holding the bag, I guess. But with that,
Speaker 1: I think we have run out of time. Lizen, always
Speaker 1: such a pleasure to catch up with you. Appreciate your time.
Speaker 1: And I know you're in Florida now, so where that sunscreen?
Speaker 1: Be sure to wear the sunscreen I always do. I'm
Speaker 1: inside working, I'm I'm in front of this camera all
Speaker 1: the time, and if it's not a fake backdrop, I'm
Speaker 1: actually inside outside. But it's a lovely place to live,
Speaker 1: all right. And our old, my old co host, Sarah
Speaker 1: pond Zac moved to Florida too, so if you see her,
Speaker 1: say hello and Sid Dr Sid Verma, very happy to
Speaker 1: have you on the show. I hope we can get
Speaker 1: you back to thank you very much for having me.
Speaker 1: What Goes Up. We'll be back next week. Until then,
Speaker 1: you can find us on the Bloomberg Terminal, website and app,
Speaker 1: or wherever you get your podcast. We'd love it if
Speaker 1: you took the time to rate and review the show
Speaker 1: on Apple Podcast so more listeners can find us. And
Speaker 1: you can find us on Twitter, follow me at Reaganonymous.
Speaker 1: Sid Verma is at Underscore sid Verma. This week's guest,
Speaker 1: Liz Anne Saunders, is at Liza Anne Saunders. You can
Speaker 1: also follow Bloomberg Podcast at at podcast and thank you
Speaker 1: to Charlie Pelletta, Bloomberg Radio and the voice of the
Speaker 1: New York City Subway System. What Goes Up is produced
Speaker 1: by Laura Carlson. The head of Bloomberg Podcast is Francesco Leavy.
Speaker 1: Thanks for listening, See you next time.