Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: What a newslough. It's a perfect day to enjoy. Short
Speaker 2: thirty minutes, Two short thirty minutes with Abby Joseph Cohen.
Speaker 2: The office at Columbia Business School is five seventy four Cravis.
Speaker 2: When the students walk through the door, do they shake?
Speaker 2: They bow down?
Speaker 3: You know, I have so much enjoyed working with the students,
Speaker 3: but also the faculty members. It's a pleasure to be
Speaker 3: working with a number of people whose names you would recognize,
Speaker 3: but also a lot of the up and comers.
Speaker 2: Two years into the game, do the underlying theories that
Speaker 2: you owned and I was weaned on do they still work?
Speaker 2: De Sharp, does Fama of Chicago the other giants? Do
Speaker 2: those theories still work in this market?
Speaker 3: This is a market clearly that is breaking a lot
Speaker 3: of rules. The question is do we get back to
Speaker 3: those rules? And as you know, my own personal rule
Speaker 3: of a TOM has always been that one must pay
Speaker 3: attention to things like valuation models based on fundamentals. But
Speaker 3: that doesn't mean that the market is always an equilibrium.
Speaker 2: Damian's dying to get in here.
Speaker 3: But let me make one other comment if I may,
Speaker 3: and that is we swing from one level of disequilibrium
Speaker 3: to another. So market cycles are typically going from undervaluation
Speaker 3: through fair value to overvaluation. And the question I think
Speaker 3: for today is as we swing back down, where do
Speaker 3: we stop?
Speaker 2: Okay, I'm going to rip up the script here right now,
Speaker 2: and we got again. We've got abby for the entire
Speaker 2: half hour. Megdan Decaiah l Let's say, wrote a book
Speaker 2: in Fury out of their financial crisis. Golden Sach caused
Speaker 2: the financial crisis in case you didn't no on volacy
Speaker 2: in general equilibrium theory, and he said it's flawed, but
Speaker 2: it's the best tool we have, is our global vo
Speaker 2: and equilibrium in finance and an investment. Is it still
Speaker 2: in place?
Speaker 3: It seems to me that it's always something we need
Speaker 3: to keep in mind. But I think that some of
Speaker 3: the best calls that get made by strategists, for example,
Speaker 3: is identifying the situations that keep you off of equilibrium
Speaker 3: number one, and number two identifying the catalysts that will
Speaker 3: do that. So, for example, there have been many people
Speaker 3: talking about the peculiarity of the US equity market recently
Speaker 3: with the over concentration in a very small number of names,
Speaker 3: but The magic, of course, is identifying the catalyst that
Speaker 3: would move that away and also figuring out what the
Speaker 3: ultimate target might be. Doesn't mean you get there, but
Speaker 3: it gives you a sense of direction.
Speaker 1: Abbie, you mentioned catalyst, and so that takes me to
Speaker 1: the concept of factor investing in equities. It's changed so
Speaker 1: very much. And I'm a big fan of g SAM.
Speaker 1: You know, Cliff Asness, this g SAM factor in disease,
Speaker 1: the long short value, the growth. But there's quality, there's
Speaker 1: low volatility, there's I mean, there's all these different factors
Speaker 1: that are driving equities. What beta regime are we in
Speaker 1: now and what beta regime do you think we're going
Speaker 1: into through the end of this year.
Speaker 3: Well, that is a very good question and a highly
Speaker 3: technical one, but let me answer it in a somewhat
Speaker 3: different way, and that has to do with the level
Speaker 3: of concentration that we're seeing in markets and the focus
Speaker 3: that we have on indexation, both implicit and explicit, seems
Speaker 3: to me to be driving a lot of the very
Speaker 3: extraordinarily well developed quantitative models. It's just driving them in
Speaker 3: the wrong direction. That doesn't mean they're wrong intermediate to
Speaker 3: long term, but it doesn't really help on a trading basis.
Speaker 3: And by the way, we have seen this before. Right
Speaker 3: years ago, there was something called the nifty fifty Ye
Speaker 3: no really, and many people listening to us may not
Speaker 3: remember that, or they may not have read about it,
Speaker 3: but there were fifty sauce stocks that dominated the markets
Speaker 3: decades ago, and basically the question was would it continue.
Speaker 3: And many of the companies that were included in this,
Speaker 3: including IBM, if you did the extrapolation, they were going
Speaker 3: to be twenty to fifty percent of usgdpaid. Obviously, that
Speaker 3: is not sustainable. And then we have an even more
Speaker 3: extreme version of that now with a magnificent five, with
Speaker 3: a mag seven, depending upon which ones you like. And
Speaker 3: it is driven in large part by the self fulfilling
Speaker 3: prophecy of people using indexed approaches, particularly market cap indexed approaches.
Speaker 3: And you guys have talked about this before, so I'm
Speaker 3: not going to belabor it to.
Speaker 1: Me blaming Larry Fink and black Rot. Now, I'm not
Speaker 1: a concentration risk in the equity market.
Speaker 3: I am focusing on the idea that everyone has been
Speaker 3: emphasizing relative performance of easy be the index and doing
Speaker 3: it on a very short term basis. And there are
Speaker 3: some great companies out there that have been facilitating that
Speaker 3: for investors who wanted to get it done because it's
Speaker 3: low cost and so on. And if you are a
Speaker 3: professional investor, many of them don't want to veer too
Speaker 3: far from the index because if you're wrong, better to
Speaker 3: be wrong with lots of companies, right, And.
Speaker 1: The thing the behavioral component of that.
Speaker 3: Absolutely, and one of the things that intrigues me, of course,
Speaker 3: are those people who are willing to kind of stick
Speaker 3: their necks out and say, you know, maybe the consensus
Speaker 3: will prove to be wrong. The problem this time around,
Speaker 3: of course, has been that the movement towards five or
Speaker 3: seven stocks, that level of concentration is really unparalleled.
Speaker 2: I want to spend the entire next section on the
Speaker 2: concentration of the magazine of it. And there's a small
Speaker 2: shop downtown that put out a blistering essay about six
Speaker 2: days ago that will did you hire Jim Cavello, You're
Speaker 2: the one is a ear fault? I was. It's going
Speaker 2: to be great.
Speaker 3: We're going to do that.
Speaker 2: In the next section for Global Law Street, I want
Speaker 2: to talk about courage to be in the market and
Speaker 2: the word in this room that we get from many
Speaker 2: strategists as an abby Joseph Cohne word which is solid.
Speaker 2: And what you say is, if the American economy is
Speaker 2: solid and business is solid, you have to participate. Talk
Speaker 2: about the gloom crew that says go to cash.
Speaker 3: That is a fascinating question, Tom, And it seems to
Speaker 3: me that we do have an economy right now that
Speaker 3: is extremely solid. We have never seen in recent decades
Speaker 3: as strong a labor market as we have now. Wages
Speaker 3: are rising at a rate that now exceeds inflation, which
Speaker 3: is hell helpful, particularly for middle income and lower middle
Speaker 3: income families that have been having trouble. We have enormously
Speaker 3: strong profits. Return on equity for the s and P
Speaker 3: five hundred is at an extremely high level. In fact,
Speaker 3: it might be the highest ever. So things are in
Speaker 3: fact solid. What I worry about always is is that
Speaker 3: already priced into the market number one and number two,
Speaker 3: the policies that helped get us to this are they
Speaker 3: potentially in danger. So this is obviously a big political
Speaker 3: point in the United States right now. Policies may be changing,
Speaker 3: and among the things that I worry about, for example,
Speaker 3: would be a movement towards more significant tariffs, which are inflationary.
Speaker 3: It damages not just the economies of our trading partners,
Speaker 3: but our economy as well. I worry about whether we
Speaker 3: would step away from some of the good long term
Speaker 3: policies implemented during the Biden administration to encourage long term
Speaker 3: investment in public infrastructure, in technology through the CHIPSAC basically
Speaker 3: making things here, and then of course the investments that
Speaker 3: are being made in alternative energy. One more point time,
Speaker 3: if I may, if we're looking at where there's a
Speaker 3: shortage of something in this country, it's power. Right with
Speaker 3: all of the focus on technology, and clearly people are
Speaker 3: talking about it this morning with the outage. If we're
Speaker 3: going to be moving towards an even more tech concentrated economy,
Speaker 3: one that is using AI, cloud services and so on,
Speaker 3: we need a dependable grid. And one of the things
Speaker 3: under the legislation, bipartisan legislation that was passed over the
Speaker 3: last couple of years is a development of more power sources,
Speaker 3: including alternatives.
Speaker 2: Ammy Joseph Cohen, a legend at Globen Sachs, is now
Speaker 2: a legend at the clou be A Business School. Her
Speaker 2: classes damian SS are so oversubscribed they're doing classes now
Speaker 2: a dinosaur barbecue over in a Hudson River. I mean,
Speaker 2: like push it right out of the school. Here's what
Speaker 2: everybody wants to know. This arguably is a conversation of
Speaker 2: twenty twenty four. Somebody really competent James Cavello, Georgetown Tuk
Speaker 2: Gulben Sachs has said, we got a problem. We're going
Speaker 2: opposite of the way it worked at Intel and everywhere else.
Speaker 2: You have technology that comes in that's cheaper, that drives
Speaker 2: the dialogue forward. AI seems to be more expensive, polar,
Speaker 2: opposite of the norm we have lived. Is there substance
Speaker 2: there to James Cavello's questioning AI?
Speaker 3: Yep. I think Jim is a very thoughtful guy who
Speaker 3: also has access to of information being pulled together by analysts.
Speaker 3: And what many have been hearing for the past six
Speaker 3: months in particular, has been that companies that have been
Speaker 3: investing heavily in AI are saying they're not yet seeing
Speaker 3: the return. Economists throughout the country are saying they're not
Speaker 3: really seeing the productivity enhancements yet from AI. Now, it
Speaker 3: could be that the analyses are looking at data in
Speaker 3: a premature stage. Maybe things will improve, but clearly AI
Speaker 3: has been quite expensive. At this point, there was a
Speaker 3: race in many industries to take on as much AI
Speaker 3: investment as possible, and it might take a little while
Speaker 3: to digest.
Speaker 2: Do you believe, I'm thinking of the railroads from eighteen
Speaker 2: eighty out to nineteen thirty nineteen forty, that you can
Speaker 2: partition parts of AI where there will be AI failures,
Speaker 2: but there will be AI successes, and we've already identified them,
Speaker 2: taking Nvidia as the trophy child time.
Speaker 3: Your point is very well made. Clearly, the success thus
Speaker 3: far has been in those companies providing the infrastructure right,
Speaker 3: the ones who are providing the basic support for future
Speaker 3: investment in AI. Where we've not yet seen the full
Speaker 3: payback and maybe we won't in some companies has to
Speaker 3: do with the application of AI. We also need to
Speaker 3: train people, just the way everybody who's been trained in
Speaker 3: the Microsoft three sixty five products are feeling a little
Speaker 3: bit of pain today that worked out. Sure it'll be
Speaker 3: straightened out. You know, people are not yet fully familiar
Speaker 3: with many of the AI product and I believe, based
Speaker 3: upon my background in computer science. I do have an
Speaker 3: undergraduate degree in computer science. It's ancient at this point
Speaker 3: talking about dinosaurs Fortram, Yes, for trends, Pascal Pascal and
Speaker 3: cobol oh my gosh. But what I have seen over
Speaker 3: the years is that it takes a while for users
Speaker 3: to understand the capabilities of what they have, and I
Speaker 3: think that we're still in that gestation period for AI.
Speaker 3: What I also think, however, is that many investors in
Speaker 3: the market, because of this heavy concentration, perhaps became very
Speaker 3: enthusiastic a little bit too soon, and so we're going
Speaker 3: to need to see some digestion of that as well.
Speaker 1: Abby. I have to ask you something that I know
Speaker 1: you're an expert about meme stocks, Robin Hood AMC, I
Speaker 1: mean game stop. I mean, did these names ever come
Speaker 1: up in your classrooms? I mean are students actually investing
Speaker 1: in or asking about them?
Speaker 3: Students are asking about them, and the response is always
Speaker 3: one of momentum investing. And what we always do is
Speaker 3: to encourage students to think about the fundamentals. What's the
Speaker 3: business plan, what's the business model, what it does matter,
Speaker 3: what do the financials look like? And if you can't
Speaker 3: make a case based on that, it's a only momentum
Speaker 3: And that to me, you know, in my history in
Speaker 3: the market, can take you only so far, but more importantly,
Speaker 3: only for so long, because at some point there's a
Speaker 3: catalyst that basically makes you stand up and say, emperor
Speaker 3: has no clothes.
Speaker 1: Well, I mean, let's just talk about momentum as a factor, right,
Speaker 1: I mean, look back windows and all that. I mean,
Speaker 1: there's a lot of momentum based strategies, but you know,
Speaker 1: my understanding and I don't know if it works for
Speaker 1: equity certainly doesn't have facts. It's a volatility damp new
Speaker 1: you know, so when you used with other factors, it
Speaker 1: kind of does a little bit and it improves your
Speaker 1: risk of justiny return, your sharp ratio, as it were.
Speaker 1: Do you agree with that?
Speaker 3: You know, momentum is something that you need to pay
Speaker 3: attention to. Part of my own fundamental analysis has always
Speaker 3: been flow of funds, because you need to say, okay,
Speaker 3: what will corporates be doing with their cash? What will
Speaker 3: individual investors, what will institutional investors be doing? And so on?
Speaker 3: And one of the things that distinguishes this period has
Speaker 3: been that those investors have all kind of coalesced around
Speaker 3: the same thing because many of them are using the
Speaker 3: same benchmarks for performance. And that's one of the big
Speaker 3: differences this time around.
Speaker 2: I'm going back in this insane period and it's someone
Speaker 2: abby you and I know well Michael Mobison now with
Speaker 2: a shingle out at Morgan Stanley. That's a firm across
Speaker 2: the street. Michael has been writing since nineteen ninety five
Speaker 2: brilliantly for the CFA Institute and others about the new
Speaker 2: capital allocation we're under and the traditional Graham Dot and
Speaker 2: hot Coddle capital intensive businesses have given way to an
Speaker 2: intellectually intensive, innovation intensive work that needs less capital and
Speaker 2: provides greater return roic and greater and bigger cash. Do
Speaker 2: you buy the kool aid?
Speaker 3: I buy that to a very large extent, because it
Speaker 3: also helps explain why the US economy and the US
Speaker 3: equity market has so dramatically outperformed economies and markets in
Speaker 3: other parts of the world.
Speaker 2: Can we sustain that?
Speaker 3: I think that there are very active decisions that have
Speaker 3: already been taken in other countries to try to catch
Speaker 3: up with us, and we're not keeping our eye on
Speaker 3: the ball sufficiently. So, for example, there are industrial policies
Speaker 3: that are underway in Asia and in Europe to try
Speaker 3: to catch up with the United States in this regard
Speaker 3: and I'm not a huge fan of industrial policies because
Speaker 3: mistakes can be made. But if you can provide a
Speaker 3: capital incentive for the right sort of investment, that that,
Speaker 3: to me makes a great deal of sense. There's one
Speaker 3: other piece of this time that I think we need
Speaker 3: to touch on, and that is we are in a
Speaker 3: new era in which capital is no longer free. Paying
Speaker 3: for capital. Now, and when there was an environment in
Speaker 3: which it was free to borrow money, you can make
Speaker 3: all kinds of interesting decisions. Now you really have to
Speaker 3: sharpen the pencil in so many areas. And it's not
Speaker 3: just what companies are doing, and it's not just what
Speaker 3: active investors are doing. It's also the use of leverage
Speaker 3: in many other investment vehicles.
Speaker 2: Please visit with these when you stop giving out c's
Speaker 2: at Columbia Business School, Professor Joseph Cohen with us here
Speaker 2: on New on this Friday, of our politics, our markets,
Speaker 2: and the certitude of our technology. William Joel gets it done.
Speaker 2: Good morning,