Speaker 1: Strap on your parachute. Is time for What Goes Up
Speaker 1: with Sarah Ponzick and Mike Reagan. Hello and welcome to
Speaker 1: What goes Up, a Bloomberg Weekly Markets podcast. I'm Sarah Ponzek,
Speaker 1: a reporter on the Cross Asset team, and I'm Mike Reagan,
Speaker 1: a senior editor at Bloomberg. And you can think of
Speaker 1: me as the Polly Walnuts to Sarah's Tony Soprano. Let's
Speaker 1: keep it going, Mike, keep it going. You like you
Speaker 1: like that one that makes you the boss? You know
Speaker 1: I am the boss here. You know that that's a
Speaker 1: big compliment in Jersey here, so I hope you like
Speaker 1: that one down in North Carolina. I don't know if
Speaker 1: they take Tony Soprano as as big as a compliment
Speaker 1: as with you in Jersey, but I'm gonna take it
Speaker 1: and run with it. Alright. Good a big week on
Speaker 1: the show. So the breakneck rally in the stock market,
Speaker 1: even amid the economic uncertainty surrounding the coronavirus, has many
Speaker 1: market observers wondering if a bubble is forming. Our guest
Speaker 1: is the absolute perfect person to discuss this, and for
Speaker 1: years has analyzed the nature of bubbles across financial markets,
Speaker 1: and as always, will close out the episode with our
Speaker 1: tradition the craziest thing I saw in markets this week,
Speaker 1: And remember, if you saw anything crazy, give us a
Speaker 1: call on the Bloomberg Podcast hotline at six four six
Speaker 1: three to four three four nine zero, or tweet to
Speaker 1: us at Podcasts and maybe we'll read your tweet or
Speaker 1: play your voicemail on the show. And Sarah, as you said,
Speaker 1: very very excited to welcome back this week's guest. But
Speaker 1: before I introduce him, I do want to point out
Speaker 1: one thing to listeners. You know how the big thing
Speaker 1: on Wall Street now, the big trend is to look
Speaker 1: at all the alternative data, the Apple Maps mobility data
Speaker 1: open table, that sort of thing. I want to warn people.
Speaker 1: I think there's a problem with the Apple mobility data
Speaker 1: and sorry, you know what that is. I'm waiting for
Speaker 1: this explanation. Let's hear it. The upticking that data is
Speaker 1: all because of Sarah. I think, truly I did. I'd
Speaker 1: use Apple Maps a very fair amount over the past
Speaker 1: week or so planning out how I was going to
Speaker 1: get up here. Um I will say, though, service is
Speaker 1: very rocky, so the Apple Mobility data probably hasn't been
Speaker 1: able to send through a decent amounts of time. I'm
Speaker 1: hiding out. It's pretty cool hiding out Florida. Now I'm
Speaker 1: hiding out in the woods. You look like you're in
Speaker 1: a giant sauna right now. We're we're you can't see
Speaker 1: this at home, but we're all on a zoom calls.
Speaker 1: How we do our podcasts in the age of COVID
Speaker 1: and Sarah. Sarah fled New York because the virus got
Speaker 1: really bad to her family home in Florida. It got
Speaker 1: bad in Florida. Now she's fled to North Carolina. So
Speaker 1: if you're listening from North Carolina, I mean, I'm no doctor,
Speaker 1: but I'm gonna say, maybe shelter in place because this
Speaker 1: virus is following side. I've really timed COVID nineteen very
Speaker 1: well with my travels across the country, and I have
Speaker 1: been driving everywhere too and keeping to myself. Um, but yes,
Speaker 1: fingers crossed, that doesn't happen obviously, I would hate for
Speaker 1: that to happen in North Carolina. There's an alternative explanation.
Speaker 1: Maybe she's bringing it wherever she had never had it.
Speaker 1: I promise I've been tested nothing this this is one
Speaker 1: more reason why I'm glad we're doing this, uh these
Speaker 1: podcasts remotely these days. But that other voice you here,
Speaker 1: that's our guest this week. Very very excited to have
Speaker 1: him back on the show. His name is Rob or Not.
Speaker 1: He's the co founder of Research Affiliates. Rob, welcome back
Speaker 1: to the show. Thank you so much. It's a pleasure.
Speaker 1: And Rob, where are you? You're in California? I presume right.
Speaker 1: I live mostly in Miami Beach, but I flee Miami
Speaker 1: Beach during the summer months and returned to Newport Beach,
Speaker 1: where I used to live. So I'm I'm hunkered down
Speaker 1: here at home until end of September, roughly Florida, California.
Speaker 1: Rob can't escape it either. Yeah, well, Rob, as Sarah
Speaker 1: pointed out in the in the introduction, You've thought a
Speaker 1: lot of really fascinating research over the years on bubbles,
Speaker 1: and boy, I think that one of the craziest things
Speaker 1: I've seen this year is this notion of the valuation
Speaker 1: expansion that we've seen in a market that already seemed
Speaker 1: very frothy before the recession hit. You know, of course,
Speaker 1: we had the the big correction, the bear market that
Speaker 1: was very quickly almost completely reversed. How shocking is it
Speaker 1: to you to see this valuation expansion we're seeing right now,
Speaker 1: and you know, based on on your studies of past bubbles,
Speaker 1: is there any way to sort of expect how far
Speaker 1: it goes or or when the sort of the music
Speaker 1: stops playing and we all have to come back to
Speaker 1: earth sort of mean reverting valuations, if ever, I'll take
Speaker 1: the last part of your question. First. Short answer is no,
Speaker 1: there's no way of knowing when it's when the bubbles
Speaker 1: going to peter her out. We just know that it will. Um.
Speaker 1: We also know that people buying bubble assets will make
Speaker 1: money until they don't. And if they're buying on the
Speaker 1: presumption that hey, it's soaring, I want to get on
Speaker 1: this and uh right at the next leg up. Um,
Speaker 1: if they don't have a cell discipline, if they don't
Speaker 1: have a view of what will it take for me
Speaker 1: to say, okay, enough already, I'm going to get out, Um,
Speaker 1: then they are doomed to ride the roller coaster over
Speaker 1: the top and down. And uh so, without a cell discipline,
Speaker 1: buying bubble assets is insanely stupid. Bubbles. Jeremy Grantham went
Speaker 1: on record saying this is the third bubble of his lifetime.
Speaker 1: I view bubbles on a more uh scaled approach. There's
Speaker 1: always bubbles. There's a little micro bubbles at work in
Speaker 1: the market all the time, bits of irrationality all the time.
Speaker 1: What we think of as a bubble is really when
Speaker 1: a market as a whole goes to irrational levels, or
Speaker 1: when a segment of the market as a whole goes
Speaker 1: to irrational levels. One of the things that I've done
Speaker 1: that I think is relatively important is to come up
Speaker 1: with a workable definition of the term bubble. People bandy
Speaker 1: around the term, and all it means is, well, it's frothy. Okay,
Speaker 1: froth is a characteristic of bubbles and vice versa. But
Speaker 1: that doesn't define it in a way you can use
Speaker 1: it in real time. Uh. My definition that you can
Speaker 1: use in real time is if you wanted to value
Speaker 1: an asset using discounted cash flow or some other accepted
Speaker 1: valuation method, you would have to use implausible assumptions to
Speaker 1: justify the current multiple second part of the definition, and
Speaker 1: no less important. The marginal buyer, the person who's buying
Speaker 1: it today's prices, doesn't care about valuation models. At all.
Speaker 1: If those two definitions are in place, you've got a
Speaker 1: bubble and you can identify it when it's happening. Now,
Speaker 1: the right answer is not to short short all of
Speaker 1: the bubble assets, because bubbles can continue farther than you
Speaker 1: can imagine. The The old adage the market can be
Speaker 1: irrational longer than you can remain solvent is absolutely true,
Speaker 1: and there's there's myriad examples of that. I love the
Speaker 1: title of one of the papers that Research Affiliates put
Speaker 1: out back in April, and it's yes, it's a bubble,
Speaker 1: so what And you mentioned micro bubbles and at the time,
Speaker 1: one of those micro bubbles that you mentioned was Tesla,
Speaker 1: And of course look at where we are now with Tesla.
Speaker 1: But we hear the word bubble being thrown out almost
Speaker 1: constantly these days, whether or not it relates to tech
Speaker 1: or the fame names or Tesla for example. Well, we
Speaker 1: had a recent guest on the podcast we talked about
Speaker 1: the concept of a melt up and said that hold
Speaker 1: on a second. Sure, it's scary because eventually will end
Speaker 1: and roll over, but you can enjoy it while it's
Speaker 1: happening well from your perspective, because it's so difficult to
Speaker 1: time these things. What advice can you give on how
Speaker 1: to possibly approach what maybe a bubble? Well, you can
Speaker 1: enjoy it as long as it keeps going, for sure.
Speaker 1: The question is do you have a cell discipline? So
Speaker 1: whoever said enjoy it while it's running, the question to
Speaker 1: them would be a very simple one. Okay, So what
Speaker 1: will it take for you to sell? Tesla is currently
Speaker 1: valued larger than the entire US auto industry x Tesla.
Speaker 1: It's valued at more than twice the value of Toyota,
Speaker 1: which has remained profitable through the COVID crisis, remained profitable
Speaker 1: through the global financial crisis, and produces thirty times as
Speaker 1: many cars as Tesla. Now, Tesla is not just an
Speaker 1: auto company. It's also a technology company and a patents company,
Speaker 1: and an energy company and so forth. But what they
Speaker 1: purport to make money on at the moment is cars,
Speaker 1: and what they hope aspirationally to make money on is
Speaker 1: some of these other things too. The bottom line is
Speaker 1: to justify a valuation larger than Test than Toyota plus
Speaker 1: the entire US auto industry the combination of all of that,
Speaker 1: you'd have to paint a scenario in which Tesla's revenues
Speaker 1: are comparable to all of those companies combined in let's
Speaker 1: say ten years. Is that possible. Yes, That's why I
Speaker 1: use the word plausible. Is it plausible? No? It would
Speaker 1: have to see thirty or forty growth per annum for
Speaker 1: the next ten years in order to have that uh
Speaker 1: thirty full fortyfold fiftyfold growth in business in just ten years.
Speaker 1: In fact, in its last ten years, it hasn't grown fiftyfold. Sir,
Speaker 1: I think Ellen needs to restock those short shorts he
Speaker 1: was selling to justify this valuation. Summer is not gonna
Speaker 1: last forever. I would note that I have never shortened Tesla.
Speaker 1: I've thought it was overpriced since it was a lot
Speaker 1: cheaper than than current levels. At level, I was thinking
Speaker 1: it's a short, but I've never shorted it for the
Speaker 1: very simple reason that bubbles can continue longer than you
Speaker 1: can possibly imagine, and can go further than you can
Speaker 1: possibly imagine. They don't last forever. When I use the
Speaker 1: word plausible, it's important because you do have bubble stocks
Speaker 1: that that simple definition would identify as a bubble, and
Speaker 1: correctly identify as a bubble that subsequently proved to have
Speaker 1: results that that exceed plausible and that actually justify those prices.
Speaker 1: The vivid example that comes to mind from the earlier
Speaker 1: tech bubble of two thousand is Amazon. Amazon and ninety
Speaker 1: nine was priced at levels that it would have had
Speaker 1: to achieve implausible growth to justify the prices at that time.
Speaker 1: Well over the next ten years, it underperformed the market
Speaker 1: in a big way over the next ten years. It's
Speaker 1: in that second decade that they finally hit their stride
Speaker 1: and achieved the kind of growth that would have justified
Speaker 1: the price. That's a long time to wait, so bubbles
Speaker 1: usually burst. There's just enough exceptions to the rule that
Speaker 1: do achieve implausible growth, and then some that it draws
Speaker 1: suckers in to say, Okay, this time is different. I
Speaker 1: wonder if there is an element of people trying to
Speaker 1: put a book value on on Elon Musk's brain, you know,
Speaker 1: and look looking, and it's the Amazon example is a
Speaker 1: great example. You know that valuation for an online bookseller
Speaker 1: was one thing, but of course we saw, you know,
Speaker 1: Amazon turn into something much more than that. I wonder
Speaker 1: if people are thinking, Nielon will will turn this into
Speaker 1: something bigger than just a car company, you know, a
Speaker 1: battery company that you know whatever. I don't know, but
Speaker 1: it's hard to get into the brains of people that
Speaker 1: are buying uh Tesla at ten thousand times trailing earnings
Speaker 1: or or twelve times annual run rate revenues to make
Speaker 1: money at ten times revenues, if you assume maybe the
Speaker 1: company will have a twenty or thirty percent profit margin
Speaker 1: down the road, how how big would those revenues have
Speaker 1: to grow to justify ten times revenues. Well, you'd have
Speaker 1: to have the revenues grow to thirty to fifty times
Speaker 1: current levels to justify ten times revenues today, and thirty
Speaker 1: to fifty times growth, My goodness, that is an extravagant expectation.
Speaker 1: I would also say that Amazon has entered what I
Speaker 1: would call bubble territory um. When it announced its first
Speaker 1: quarter earnings at the end of April, it was priced
Speaker 1: at the end of that day at a hundred eleven
Speaker 1: times trailing. When you're earnings now, I use trailing earnings,
Speaker 1: not expected earnings, because expected earnings haven't happened yet and
Speaker 1: they often don't. But in any event, they were selling
Speaker 1: at a hundred eleven times the trailing earnings. My chief
Speaker 1: investment officer Chris Brightman did a very simple analysis. He said,
Speaker 1: what if Amazon grows tenfold in the next ten years,
Speaker 1: grows tenfold and at that stage is bigger than the
Speaker 1: entire US retailing community in terms of its sales, bigger
Speaker 1: than all of US retailing in the space of ten years,
Speaker 1: what would it be worth And he came up with
Speaker 1: an answer of seventy times earnings. It would be worth
Speaker 1: a massive premium to the market. Seventy times earnings is
Speaker 1: a big premium. It's not a hundred times, and it's
Speaker 1: not today's hundred sixty times. Right. It's a good point
Speaker 1: about trailing earnings, especially in this environment when boy, who's
Speaker 1: even given a forecast anymore, it's it's almost impossible to know.
Speaker 1: But rap I think what a lot of from the map,
Speaker 1: from sort of the macro angle, um, I think what
Speaker 1: a lot of people are struggling with when they try
Speaker 1: to do valuation models is the notion that real yields
Speaker 1: are negative right now. In other words, you know, treasury yields,
Speaker 1: the safest assets are paying a yield uh that's less
Speaker 1: than the inflation rate. Even out I think all the
Speaker 1: way to thirty years, I'd have to double check that.
Speaker 1: But the whole curve pretty much is negative on a
Speaker 1: real basis. How much does that gum up your attempt
Speaker 1: to to find a fair valuation. You know, our colleague
Speaker 1: of mine who writes a colum at Bloomberg, Cameron Christ,
Speaker 1: keeps joking that, you know, people think this justifies sort
Speaker 1: of an infinity valuation on tech stocks. But there is
Speaker 1: some truth to the fact that when the you know,
Speaker 1: when the ascount rate is solo, when real yields are negative,
Speaker 1: we should be able to sort of expect some valuation expansion.
Speaker 1: But how do you wrap your head around an equity
Speaker 1: valuation from a macro level when when real yields are negative. Well, firstly,
Speaker 1: low real yields do justify higher evaluation, So let's stipulate
Speaker 1: that and move that out of the way. The question
Speaker 1: is how much higher? Now one of the nuances, there's
Speaker 1: a Gordon equation, which is uh dividends over a discount
Speaker 1: rate being a valuation metric for companies, which means that
Speaker 1: if the if the discount rate is zero, that the
Speaker 1: evaluation is infinity. Okay, Well, that is tacitly the argument
Speaker 1: that negative rates justify any evaluation. You choose. My pushback
Speaker 1: on that is, we had negligible real rates in the
Speaker 1: mid fifties and stocks were trading at ten twelve times earnings,
Speaker 1: so it didn't work. Then we have negative rate real
Speaker 1: rates in Japan and Europe. They're trading at half to
Speaker 1: two thirds are multiples, so it's not working there. So
Speaker 1: if it doesn't work in other locations or at other times,
Speaker 1: then why not? And I think the reason is very
Speaker 1: very simple. Your your growth rate is also linked to
Speaker 1: real interest rates. Real interest rates being low can mean
Speaker 1: money is cheap and the discount rate is way down. Uh,
Speaker 1: And it can mean that growth expectations are anemic, and
Speaker 1: you have to take that into account. If growth expectations
Speaker 1: dropped just as much as the interest rates, they cancel
Speaker 1: and the low rates don't help your valuations at all.
Speaker 1: So what does research affiliates do in that environment? I
Speaker 1: spoke with Chris Brightman back in April, so just a
Speaker 1: couple of months ago, early on in a month, and
Speaker 1: he explained to me how you are moving from a
Speaker 1: more defensive posture to more so riskon moving into small
Speaker 1: tap us stocks, moving further more so into value. Obviously
Speaker 1: that's worked out well as that was early April, but
Speaker 1: it does feel like a good amount has changed since
Speaker 1: that point in time. Is that still where you stand.
Speaker 1: We've been moving back towards a defensive posture recently, and um,
Speaker 1: we're reluctant to go fully to a defensive posture until
Speaker 1: this next stimulus bill gets negotiated and passed and starts
Speaker 1: to work its way into the economy. In the last
Speaker 1: two weeks, the rumored size of the stimulus has risen
Speaker 1: from one trillion to two trillion. Uh. That's a big delta.
Speaker 1: And we know, we know from the past that stimulus
Speaker 1: doesn't just drop into consumer pockets and drop into their
Speaker 1: spending and stimulate the economy. What it does is stimulate
Speaker 1: asset bubbles, and so to the extent that it drops
Speaker 1: into people's pockets and people aren't working, so there's less
Speaker 1: goods and services to buy, then you're either going to
Speaker 1: get asset inflation or consumer price inflation, or a bit
Speaker 1: of both. We didn't get the consumer price inflation after
Speaker 1: the global financial crisis because the money may remainstalled on
Speaker 1: the Fed's balance sheet and in rebuilding the balance sheets
Speaker 1: of banks, and didn't get out into the macro economy.
Speaker 1: To be spent to create the demand. Now, if it
Speaker 1: gets out in the economy to create the demand and
Speaker 1: there's no supply, there's elements of truth in both Keynesianism
Speaker 1: and supply side economics. If there's no supply, you're going
Speaker 1: to create inflation, and so there in lies the challenge.
Speaker 1: Do I think some of the stimulus will make its
Speaker 1: way into the capital markets? Of course yes, And so
Speaker 1: does that push the market higher very possibly yes, um,
Speaker 1: or at least it props it up at levels that
Speaker 1: don't make economic sense. Um. I never thought after the
Speaker 1: tech bubble that I would ever see dispersion and valuation
Speaker 1: between growth and value stocks as wide as we saw then.
Speaker 1: It was insane, and we're there again. The spread between
Speaker 1: growth and value stocks using price to book value, which
Speaker 1: is a very flawed measure, reached a point of nine
Speaker 1: to one ratio, growth being nine times as expensive as
Speaker 1: value during the tech bubble. That's an astonishing ratio. Well,
Speaker 1: it's now eleven to one, eleven to one. Using price
Speaker 1: to sales, it reached a point of sixteen or seventeen
Speaker 1: to one. It's now nineteen to one between growth and value.
Speaker 1: Some valuation metrics you mentioned Elon Musk and the negligible
Speaker 1: book value of Tesla. Some valuation metrics like price to
Speaker 1: book are actually pretty deeply flawed. We have a paper
Speaker 1: coming out shortly the demonstrates that intangibles are a huge
Speaker 1: missing component of book value and that if you incorporate
Speaker 1: intangible as you get a better valuation metric. And that
Speaker 1: I think is exciting work because it actually makes the
Speaker 1: FAMA French price to book based value factor about thirty
Speaker 1: more powerful. That's cool, That's that's pretty interesting, you know. Rob.
Speaker 1: That brings us to another really interesting report that you
Speaker 1: guys have out recently about the sort of the notion
Speaker 1: of when that turn to value uh might happen? Uh.
Speaker 1: And you point out that value tends to underperform in
Speaker 1: a in a downturn in a market like like we
Speaker 1: saw this year, and then outperformed during the recovery. The
Speaker 1: question I always have with this is, you know, when
Speaker 1: you look at sort of what the cohort of value
Speaker 1: stocks is right now, Um, you know a lot of banks,
Speaker 1: a lot of energy companies, um, that would clearly benefit
Speaker 1: from higher interest rates, higher energy prices, that sort of thing.
Speaker 1: So how much of of the phenomenon is actually the factor,
Speaker 1: and how much does it depend on sort of what
Speaker 1: sectors are in that factor at any given time, or
Speaker 1: does it just so happen that cyclical stocks like that
Speaker 1: tend to be in the value factor a lot more often,
Speaker 1: especially at these sort of inflection points in the economy
Speaker 1: like this. That's a lot of questions rolled into one. Firstly,
Speaker 1: the notion that value loses during bearer markets. Actually, what
Speaker 1: our research showed is that it's a coin toss um.
Speaker 1: People buy value thinking it's going to help cushion the downside. Uh,
Speaker 1: it sometimes does, and it sometimes doesn't. If you buy
Speaker 1: furcate bear markets into those that are driven by the
Speaker 1: bursting of a bubble, value when is big big the
Speaker 1: end of the tech bubble, value stocks actually were up
Speaker 1: about thirty percent in the first two years of that
Speaker 1: bear market up, all right, that's interesting. When the nifty
Speaker 1: fifty burst in seventy three and four, value outperformed handily.
Speaker 1: When you have a macroeconomic shock where the economy itself
Speaker 1: is getting hit hard, value tends to perform as badly
Speaker 1: as the market or worse. Global financial crisis, it performed worse,
Speaker 1: not drastically worse, but worse enough. To get people's attention
Speaker 1: because they thought it was going to protect them on
Speaker 1: the downside, which it doesn't. Where value really shines is
Speaker 1: in the first two years after a bear market peters out,
Speaker 1: and it makes very little difference whether the bear market
Speaker 1: was fundamentals related or bubble related. The recovery um of
Speaker 1: value tends to beat the market as a whole by
Speaker 1: ten to twenty percentage points over the next two years,
Speaker 1: and taken together, the bear market and the recovery value
Speaker 1: on average winds by about ten percent in cases where
Speaker 1: it's it's economic dislocation and uh forty or fifty percent
Speaker 1: in times when it's bursting in bubble. What do we
Speaker 1: have now? We have kind of both, right, yeah, kind
Speaker 1: of economic driven bearer market, and the bubble has not
Speaker 1: yet burst. So if we have a second leg to
Speaker 1: the bearer market, my prediction would be that it will
Speaker 1: be a bubble bursting portion of the bearer market. I
Speaker 1: have no idea when is the right time to pivot
Speaker 1: into value. I have a very strong view that value
Speaker 1: over the next five years will beat growth handily by
Speaker 1: a wide margin. But if you want to pick the
Speaker 1: entry point, I have no clue. I would say average
Speaker 1: in over the course of the next year or two.
Speaker 1: Do not do not cut your value exposure just because
Speaker 1: it's hurt. You have laid now. The other part of
Speaker 1: your question is what about those sectors that comprise value,
Speaker 1: aren't they Let me rephrase your question and put words
Speaker 1: in your mouth. This time is different, People say this
Speaker 1: time is different lots of times and usually always things
Speaker 1: are different. Things are always a little different. Rarely are
Speaker 1: they different enough to matter this particular economic meltdown. Things
Speaker 1: are different enough that they do matter. And the question
Speaker 1: is by how much there are going to be a
Speaker 1: ton of bankruptcies. Those bankruptcies will be overwhelmingly on the
Speaker 1: value side of the spectrum. So to the extent you
Speaker 1: can invest in value and avoid value traps that are
Speaker 1: headed to zero, that is wonderful. It's a tough thing
Speaker 1: to do, but that is a wonderful aspirational goal. Then
Speaker 1: the question is how much of the value segment would
Speaker 1: have to go bust to justify that current eleven to
Speaker 1: one spread. That spread is absolutely enormous. Growth stocks eleven
Speaker 1: times as expensive as value using price to book and
Speaker 1: different ratios using earnings or sales eleven to one spread.
Speaker 1: What's the normal spread, it's about five to one. So
Speaker 1: what would it take for the eleven to one spread
Speaker 1: to go to five to one without value doubling or
Speaker 1: relative to growth. Well, the easy way to do that
Speaker 1: is for half of the value stocks to go bust.
Speaker 1: So I would say, if you look at the current situation,
Speaker 1: and if you come away with a view that half
Speaker 1: of the publicly traded value stocks in the market are
Speaker 1: likely to go bust in the coming year, then I
Speaker 1: would say, don't pivot into value. My personal view is
Speaker 1: ten or of them are going bust. I don't know
Speaker 1: which ones, although I think deck coverage ratios and things
Speaker 1: like that can help avoid some of the falling knives.
Speaker 1: But uh, in any event, um, if you have the
Speaker 1: view that this cycle is different, but not so radically
Speaker 1: different as to kill half of the value stocks, then
Speaker 1: it's a phenomenal time to buy value. I believe Rob
Speaker 1: gets some special award for actually answering all parts to
Speaker 1: Mike's question. I think I think he got every one
Speaker 1: of them. It's like when you know, well, you when
Speaker 1: you watch the you know, the Federal Reserve press conference,
Speaker 1: you know you've got your one shots. You're you're throwing
Speaker 1: like five questions I thought, I've I've seen my friend
Speaker 1: Jeff Kern's ask questions that those things, and I keep
Speaker 1: expecting like that music they play at the Oscars, you know,
Speaker 1: halfway through his questions exactly. But never mind, never mind,
Speaker 1: I've been in our comment on that one. Rob, I
Speaker 1: don't know no emergency rate cut. I think that leads
Speaker 1: us to uh, that time of the week, Sarah, I
Speaker 1: believe it does stand clear of the craziest things we
Speaker 1: saw in markets this week. So Rob, this is our week,
Speaker 1: our weekly gimmick, the craziest thing we saw in markets
Speaker 1: this week. I'm gonna let Sarah go first, because I
Speaker 1: feel like in North Carolina there's got to be something
Speaker 1: crazy going on that we don't know about. Uh, not
Speaker 1: too much. I really have been confined to where I'm
Speaker 1: staying right now. I haven't been able to get out
Speaker 1: and about and explore. Unfortunately, hopefully soon, UM, so I
Speaker 1: might disappoint you. Not as crazy as it is, I
Speaker 1: think interesting. Um to the point that we are in
Speaker 1: right now, I was able to see so far, eleven
Speaker 1: SMP five hundred technology companies have reported earnings, and every
Speaker 1: single one of them have beat in earnings expectations. Now,
Speaker 1: of course there are plenty of other metrics that people
Speaker 1: are watching and that go into this um, but since
Speaker 1: the earning season began, check is actually the worst performing
Speaker 1: sector along with communication services. So you you bring in
Speaker 1: some of the other fang names as well, and it
Speaker 1: just shows you the point that we are at right
Speaker 1: now with some of these mega cap very popular tech
Speaker 1: names where they can beat on earnings, but it doesn't
Speaker 1: matter because they already are trading at very high valuations
Speaker 1: and expectations are them or just just sky high? Yeah,
Speaker 1: that's that's pretty good. That's tells you a lot about
Speaker 1: sort of the climate right now. Not only do you
Speaker 1: have to beat I guess you have to you know, uh,
Speaker 1: cure cancer and land on the moon and who knows
Speaker 1: what else, but every single one of these tech companies
Speaker 1: is going to do that, right right, they'll all go
Speaker 1: to the moon. Maybe Tesla. So I'm gonna I'm gonna
Speaker 1: break your rules a little bit. I'm gonna go back
Speaker 1: a week. Um. The craziest thing I've seen, uh this
Speaker 1: month was a week ago Monday, when Tesla rose uh
Speaker 1: two hundred fifty points and then fell three hundred points
Speaker 1: basically a fifteen percent up down move based on precisely
Speaker 1: zero news about Tesla. Now you can think about that
Speaker 1: and come up with possible rationals. Um Uh. If they
Speaker 1: have a trailing twelve month profitability net profitability, S and
Speaker 1: P will finally have to add them to the index.
Speaker 1: The index funds like to say, we don't move stock prices.
Speaker 1: Oh my god, is that a lie? Uh. It doesn't
Speaker 1: move on the day they add the stocks because it
Speaker 1: moves in the weeks ahead as arbit treasures and hedge
Speaker 1: funds load up on the company in order to fulfill
Speaker 1: the one day immediate demand. But Tesla would come in
Speaker 1: at about a one percent weight. There's about six trillion
Speaker 1: index to the S and P. Uh. That means that
Speaker 1: when it's added to the S and P, there will
Speaker 1: be a sixty billion dollar buy ticket for Tesla stock
Speaker 1: in a single day. People looking ahead to that will say, okay,
Speaker 1: I wanted to front run that, put that on my books,
Speaker 1: and then flip it over to the index funds when
Speaker 1: it gets added. We saw it on Twitter that went
Speaker 1: up in the space of ten days. Uh, and the
Speaker 1: index funds were able to say we didn't move Twitter's price.
Speaker 1: It closed more or less unchanged, same thing will happen
Speaker 1: this go around. Um, but that swing up three hundred,
Speaker 1: up to fifty and down three hundred in a single
Speaker 1: day based on no news was to me the wackiest
Speaker 1: thing I've seen this month. That was a good one. Yeah,
Speaker 1: it's amazing. I think it's because they ran out of
Speaker 1: those short shorts. It is why everything is because they
Speaker 1: ran out of those short shorts. The reason that they
Speaker 1: posted twelve month profitability, Mike was because of those short
Speaker 1: shorts as well. I really don't want to see Elon
Speaker 1: Muskin short shorts. Maybe that'll be what finally brings the
Speaker 1: stock downhill. He'll tweet out I think Tesla stock is
Speaker 1: too expensive, and then will also include a picture of
Speaker 1: him in Tesla short shorts. Well, it's it's interesting to
Speaker 1: think of what, you know, how much is gonna have
Speaker 1: to get sold of all the other stocks in the
Speaker 1: index funds to make to make some room for Tesla.
Speaker 1: I guess they. I guess they buy it ahead of time.
Speaker 1: And just that's a nuance that a lot of people overlook.
Speaker 1: You're gonna have to see to buy sixty billion in
Speaker 1: Tesla that day, you're gonna have to uh sell about
Speaker 1: three billion of uh Apple and a like amount of
Speaker 1: Microsoft that same day in order to make that trade,
Speaker 1: and people aren't paying attention to that. Right, You're not
Speaker 1: making room for a little guy, You're make You're making
Speaker 1: room for a very large stack. When it gets at it,
Speaker 1: it will be the biggest addition to the SMP ever ever.
Speaker 1: Right as far as a waiting, I guess. And of
Speaker 1: course the share price hasn't budged in the least based
Speaker 1: on that speculation, just trading sideways lately. Right, alright, that's
Speaker 1: pretty good. Well in the spirit of bubbles, you know, Sarah,
Speaker 1: a lot of our Twitter friends complain that we don't
Speaker 1: cover bitcoin and crypto enough, So I'm gonna delve into
Speaker 1: that world a little bit through the back door, so
Speaker 1: to speak, um and talk about sort of what I
Speaker 1: think is the most important uh real world use case
Speaker 1: for bitcoin, and that is committing crimes, you know, and
Speaker 1: another another shadiness general shadin. I know, I know, I'm
Speaker 1: I'm bound to get some more similar tweets at me
Speaker 1: about this, but all in good fun. I'm just joking
Speaker 1: sort of. But anyway, there's a great story in this
Speaker 1: week's Business Week about this company, Norse Chidro. It's a
Speaker 1: it's a big aluminum manufacturer based in Norway, and they
Speaker 1: got hit with one of these ransomware attacks where you know,
Speaker 1: a hacker basically freezes is up your computer systems and
Speaker 1: demands bitcoin and payment, and then they send you the
Speaker 1: decode to unlock your computers again. And you know, companies
Speaker 1: have a variety of strategies for dealing with this. Norse
Speaker 1: Chidros was was really interesting. They're like, no way, we're
Speaker 1: unplugging all of our computers. They took the entire company offline,
Speaker 1: and then the story is all about how they tried
Speaker 1: to operate in sort of an analog world without being
Speaker 1: connected to the Internet, and they had to do all
Speaker 1: sorts of things, uh, including um, they went to Staples
Speaker 1: and bought a bunch of printers and paper and ink
Speaker 1: car cartridges. They said, they cleaned out the local staples basically,
Speaker 1: and they had these old PCs somewhere in storage that
Speaker 1: don't connect to the Internet. So they broke them out
Speaker 1: and they started printing out orders. Now the salesman, you know,
Speaker 1: because they couldn't communicate on the Internet, had not much
Speaker 1: to do, so they they made the salesman go to
Speaker 1: the factory floor and start running these instructions on paper
Speaker 1: back and forth between the guys on the floor, the
Speaker 1: workers on the floor. But my favorite part, Sarah, is well,
Speaker 1: one other thing they in order to meet payroll, they
Speaker 1: basically just copied all of the previous week's paychecks from
Speaker 1: their third party supplier and set them all out again.
Speaker 1: And they tried to weed out the people who had
Speaker 1: retired and gotten fired and that sort of thing. But
Speaker 1: to communicate with suppliers, they broke out the old fax machine,
Speaker 1: which I think is amazing because, Sarah, if this happened
Speaker 1: to Bloomberg, I think I might be running the I
Speaker 1: might be one of the only guys old enough who
Speaker 1: still knew how to work a fax machine. I would
Speaker 1: be I'd be like, I'd be facts in your stories.
Speaker 1: That is my When I started in my newspaper career
Speaker 1: in the early nineties, I used to go to the
Speaker 1: fax machine every day and I'd have to check for
Speaker 1: oh bits, you know, obituaries and police reports, and tucked
Speaker 1: in among all of that would be news from from
Speaker 1: this new, young, upstart news company called Bloomberg News, and
Speaker 1: I and they would just facts. It's too newspapers. Uh.
Speaker 1: That's how we started, was was faxing out the stories
Speaker 1: and hoping that newspapers would say, it's pretty good. We're
Speaker 1: gonna we're gonna take this service. You know, we're gonna
Speaker 1: start running this stuff. Um so I'm I'm an old
Speaker 1: hand with a fax machine. Rob. I imagine you worked
Speaker 1: a fax machine or two in your day. Oh I have,
Speaker 1: I have. I still get some every now and then
Speaker 1: if you facts to us. There's some facts number we're
Speaker 1: all associated with, and it'll show up in my email. Uh,
Speaker 1: sort of a scan of the facts, and it's always like,
Speaker 1: you know, some sort of Caribbean vacation or I don't know.
Speaker 1: You get you get the weirdest stuff, fascinating story. But
Speaker 1: I still think Rob gets the win with Tesla. You
Speaker 1: you almost can't lose with Tesla these days. Yeah, yeah,
Speaker 1: especially the short shorts head on the back. But where
Speaker 1: are going to have to leave it there? Rob or not?
Speaker 1: Thank you so much for coming on the podcast this week.
Speaker 1: This was great fun. Thank you so much. What goes up?
Speaker 1: We'll be back next week. Until then, you can find
Speaker 1: us on the Bloomberg Terminal website and app or wherever
Speaker 1: you get your podcasts. We love it if you took
Speaker 1: the time to rate and read the show on Apple
Speaker 1: Podcasts so more listeners can find us. And you can
Speaker 1: find us on Twitter, follow me at Sara Pantzack. Mike
Speaker 1: is a reaganonymous and you can also follow Bloomberg Podcasts
Speaker 1: at podcasts And a very special thank you to Charlie
Speaker 1: Pellett of Bloomberg Radio and the voice of the New
Speaker 1: York City Subway System. What Goes Up is produced by
Speaker 1: Jordan Gospore. The head of Bloomberg podcast is francesco Leavie.
Speaker 1: Thanks for listening, See you next time.