Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast.
Speaker 1: I'm Mike Reagan, a senior editor at Bloomberg, and I'm
Speaker 1: Waldonna Hirich, across asset reporter at Bloomberg. This week on
Speaker 1: the show, well, everyone is freaking out about interest rates again.
Speaker 1: The tenure treasure yield is up twenty some basis points
Speaker 1: since the Federal Reserve September meeting. That's when the Central
Speaker 1: Bank signaled that tapering of its asset purchases will likely
Speaker 1: commence sometime this year. At the same time, well, remember
Speaker 1: that soap opera surrounding the debt ceiling. It's been renewed
Speaker 1: for another season, so as the drama about a potential
Speaker 1: hard landing in China's economy. So what's it all mean
Speaker 1: for your investments? We'll get into it with the chief
Speaker 1: investment strategist at a major investment firm. But first we
Speaker 1: have a very special announcement from Charlie Pellett himself. Well,
Speaker 1: every good mystery must come to an end, so we'll
Speaker 1: keep you in suspense no longer. What Goes Up is
Speaker 1: pleased to announce that Bill Donna hi Rick will be
Speaker 1: the new co host of the show. Permanently, or at
Speaker 1: least until Reagan drives her nuts. I like how Charlie
Speaker 1: could not resist getting a dig in on me on
Speaker 1: that that introduction. They're built but which I really appreciate.
Speaker 1: By the way, this is news to me. Oh well, surprise, surprise. Thanks.
Speaker 1: We know how much you love the the attention and
Speaker 1: the spotlight to be on you, so I I don't
Speaker 1: at all. Yeah, you'll get used to it, you'll get
Speaker 1: used to but but I love but I love everything
Speaker 1: Charlie does. So I appreciate that that's that's one of
Speaker 1: the members here that that you love, Like, okay, yeah,
Speaker 1: that's fair enough. Yeah, but I'm very proud to have you,
Speaker 1: Bill Donna. I mean we I obviously enjoyed the mystery
Speaker 1: co host gimmick for as long as it lasted. But uh,
Speaker 1: long time listeners will know vil Donna has been a
Speaker 1: major behind the scenes contributor to the show since it's beginning.
Speaker 1: Uh that vildonna energy is unrivaled and she's uh uh importantly,
Speaker 1: she's on the phone every day with smart people who
Speaker 1: may or may not realize that they're they're actually auditioning
Speaker 1: for for a guest spot on the for the podcast, right,
Speaker 1: I don't know if you tell them that. I never do,
Speaker 1: and I think that might have been the case with
Speaker 1: this week's guests. We can we can ask him. I
Speaker 1: want to introduce this week's guest. It's Brian Nick. He's
Speaker 1: the chief investment strategist at Moving and he also used
Speaker 1: to work at the New York Fed. So I think
Speaker 1: he's the perfect guest for for the podcast this week.
Speaker 1: Thank thank you for joining us, Brian, Thank you very
Speaker 1: much for having me. And I would say every time
Speaker 1: I talked to a reporter, I secretly hope that I'm
Speaker 1: auditioning for a podcast. So this is this is fantastic.
Speaker 1: It's every strategist stream right. It is finally paid off. Well,
Speaker 1: you know as well, Dona said you started earlier in
Speaker 1: your we're working at the at the market's desk at
Speaker 1: the FED itself. Um so, I want to hope and
Speaker 1: you can kind of put that FED hat on again
Speaker 1: before we actually get into your views on the market,
Speaker 1: I just talked to us a little bit about what
Speaker 1: you're expecting for the tapering process. Um uh, you know,
Speaker 1: how aggressive will the FED be? How soon are you
Speaker 1: expecting sort of the the normalization of interest rates to
Speaker 1: follow after tapering, and you know, how do you think
Speaker 1: the market. Is the market prepared for what's coming um
Speaker 1: or is it over pricing under pricing at any of
Speaker 1: the risks here? Yeah, So I think from the Fed's perspective,
Speaker 1: they have this sort of institutional memory of the last
Speaker 1: crisis when they did wait a very long time after
Speaker 1: the financial crisis three or four years before that. You
Speaker 1: when we're talking about tapering their bond purchases, and they
Speaker 1: were off and on with QI one, q E two,
Speaker 1: q E three, but it took until for them to
Speaker 1: actually get you know, busy with the with the task
Speaker 1: of rolling down those bond purchases, and in retrospect, they
Speaker 1: probably think they did that too quickly. J Pal himself
Speaker 1: has said the economy is actually in better shape today
Speaker 1: that it was when they first announced that taper in
Speaker 1: the market had a big tantrum about it. An interest
Speaker 1: rates doubled in a pretty short period of time. So
Speaker 1: the Fed is taking lessons of the last recovery and
Speaker 1: their part in, you know, getting to the period of
Speaker 1: higher interest rates and fewer bond purchases, and it probably
Speaker 1: thinks it went too quickly, tightened too much tightened too quickly,
Speaker 1: even by what at the time seemed like very very
Speaker 1: slow standards. And and so this feed has become much
Speaker 1: more dubbish in its reaction function to hotter economic data,
Speaker 1: whether it's growth or higher inflation, much more tolerant of inflation.
Speaker 1: I'd say, almost dismissive. When you hear a FED chair
Speaker 1: get up in front of everybody and say, well, the
Speaker 1: difference between two point four percent and two percent. You know,
Speaker 1: the average households not going to feel that. You know,
Speaker 1: we're not in Paul Volker territory anymore, right when we
Speaker 1: have the FED chair saying that. And obviously inflation has
Speaker 1: been much higher than two point four percent this year,
Speaker 1: and the FED has been extremely tall and continuing to
Speaker 1: do the asset purchases, continuing to really like shoot off
Speaker 1: any notion that they're going to be raising interest rates
Speaker 1: anytime soon. I think they got to a point where
Speaker 1: even the doves on the committee were comfortable that liquidity
Speaker 1: was ample. This emergency stimulus, you know, bond buying program
Speaker 1: was probably um no longer doing a whole lot of good,
Speaker 1: probably wasn't doing harm, but wasn't gonna be helping anymore.
Speaker 1: And so I think they were very explicit, in fact,
Speaker 1: more explicit than I expected them to be at the
Speaker 1: September meeting that they would be heading into November with
Speaker 1: the expectation to be announcing a taper, probably start that
Speaker 1: in December, wind it down maybe fifteen billion a month
Speaker 1: until they're done it at the end of July, and
Speaker 1: I think that's probably the timeline that we're looking for,
Speaker 1: probably a bit more aggressive than maybe a few months
Speaker 1: ago what we would have expected. But I think with
Speaker 1: with the COVID cases sort of peeking and coming down,
Speaker 1: some of the economic data has actually turned a bit
Speaker 1: better and inflation hasn't gone away as an issue for
Speaker 1: the FAT to have to consider. Um, this is probably
Speaker 1: kind of the media outcome from markets in terms of
Speaker 1: interest rate hikes. I do think this is where maybe
Speaker 1: the market is being a little bit too aggressive pricing
Speaker 1: in FED hikes. Yes, the FED dots are telling us
Speaker 1: that about half the members think that they should be
Speaker 1: raising rates next year at least once. I mean is
Speaker 1: also half the members don't think they should be raising
Speaker 1: rates next year or won't have to raise rates next year,
Speaker 1: And I think there will be more doves on the
Speaker 1: committee a year from now than there are now. Because
Speaker 1: Biden's going to pick three two or three new FED governors,
Speaker 1: it'll probably be more inclined not to raise rates, and
Speaker 1: so I wouldn't look for them to lift off until
Speaker 1: the first part of three, with a caveat being that
Speaker 1: if inflation continues to come in a lot hotter than expected,
Speaker 1: that may be pulled forward into the second half of
Speaker 1: next year. So, Brian, obviously we saw a spike in
Speaker 1: treasury yields right after the FED meeting, or maybe not
Speaker 1: right after. I think in a story I wrote, uh,
Speaker 1: we said something like eighteen hours afterwards. So it is
Speaker 1: is that what's behind the sell off in the bond market?
Speaker 1: Is it what we you know it was, it's parked
Speaker 1: by what we heard from the Fed? Or is it
Speaker 1: more so the outlook for growth? It both? Can you
Speaker 1: walk us through your thinking? They're sure. I think it
Speaker 1: follows the pattern of a taper tantrum, except in a
Speaker 1: much more mild case than we saw in real interest
Speaker 1: rates rising. You don't really have inflation expectations doing much,
Speaker 1: so the markets not screaming that the Fed's making a
Speaker 1: huge mistake by tapering. Do you think all the way
Speaker 1: back to June. That meeting, when the dots were interpreted
Speaker 1: as being more hawkish and the FED maybe kind of
Speaker 1: mishandle its communication spook the markets a little bit into
Speaker 1: thinking it was going to be a bit too hawkish.
Speaker 1: You actually saw long term interest rates fall, which is
Speaker 1: a sign at the market, at least the bondo market
Speaker 1: thinks that fed's making a mistake and going too quickly.
Speaker 1: With the September meeting, I think it was handled a
Speaker 1: bit better. The communication, the separation of the bond buying
Speaker 1: from the interest rate lift off um again, the dismissive
Speaker 1: attack towards inflation, I think I'll probably also got got
Speaker 1: markets attention. So when you have interest rates rising at
Speaker 1: the Yolkurf steepening, I think it's a sign that the
Speaker 1: markets are optimistic about growth, and I think you have
Speaker 1: to consider the context. Yes, the FED was probably sort
Speaker 1: of proximate cause for the increase in rates, but we
Speaker 1: also have now a clear decline in US and global
Speaker 1: COVID cases, So it seems like the delta variant is
Speaker 1: is in decline in many more places than it's than
Speaker 1: it's on the rise at this point, and the economic
Speaker 1: data sort of sneakily has gotten a little bit better,
Speaker 1: or at least it's less prone to disappointment than it was.
Speaker 1: Over the summer, we got a really good retail sales number,
Speaker 1: some of the housing numbers, home construction was was better
Speaker 1: than expected, and so I think that the overall tone
Speaker 1: has become a bit more optimistic, maybe reversing some of
Speaker 1: the pessimism we saw in July and August, which is
Speaker 1: when rates were declining for reasons that that to us
Speaker 1: at the time we're pretty mysterious. So a bit of
Speaker 1: a reversal of what we saw then. UM, not quite
Speaker 1: risk one, because we've seen the equity markets and how
Speaker 1: they behave. But I think an overall more optimistic tone
Speaker 1: in the bottom market UM that sees the FED is
Speaker 1: as pretty much getting things right and not too many
Speaker 1: other things interfering with the general story, which is slower
Speaker 1: economic growth from a very very high rate and peak
Speaker 1: in the second quarter and at least a number of
Speaker 1: quarters of of above trend growth ahead. So you know,
Speaker 1: I think, so still still relatively smooth sailing for the
Speaker 1: US economy. Ran so obviously, uh, equity valuations are are
Speaker 1: super high, at least compared with history. Credit spreads are
Speaker 1: razor thin um, and you make you set up some
Speaker 1: thoughts heres too toldon and I, uh, sort of your
Speaker 1: general thoughts about the market. And one point you made
Speaker 1: I think is really interesting. Uh you said that the
Speaker 1: economy is early to mid cycle, but markets are are
Speaker 1: late cycle, you know, presumably looking at evaluation metrics like that.
Speaker 1: And I think that's an interesting way of looking at it.
Speaker 1: I agree, I I completely agree. But I'm wondering how
Speaker 1: you think that resolves itself. I mean, to me, there's
Speaker 1: there's kind of two maybe main possibilities. You know, obviously
Speaker 1: that the markets can can sort of you know, come
Speaker 1: down and drag the economy, uh down with them into
Speaker 1: the late cycle or uh, you know, end of the
Speaker 1: cycle for the economy, or you know, I always think
Speaker 1: maybe you get that correction on the X axis of
Speaker 1: the chart rather than the y access you know, in
Speaker 1: other words, just a market that goes nowhere for a while, uh,
Speaker 1: until learnings catch up that sort of thing, um, rather
Speaker 1: than a sharpe drop in price that brings things back
Speaker 1: to a sort of a mean reversion evaluations. But how
Speaker 1: are you thinking about how that will resolve itself? This
Speaker 1: discrepancy between where the economy is, what part of the cycle,
Speaker 1: and where the market seem to be in the cycle. Yes,
Speaker 1: so just just quickly, I think to put some some
Speaker 1: meat on the bones of the argument that if you
Speaker 1: look at the economy, the unemployment or it's not high,
Speaker 1: but it's higher than it was pre pandemic. We have
Speaker 1: a lot of people who haven't even entered the or
Speaker 1: re entered the labor force yet. So I think there's
Speaker 1: still many millions of more people who will be getting
Speaker 1: jobs in the next call at six to eighteen months,
Speaker 1: and so that it's a sign that you're you're creating
Speaker 1: jobs at that clip. It's still early cycle. Savings rates
Speaker 1: are very high, which is not abnormal after research when
Speaker 1: people have built up savings, although the reason that they're
Speaker 1: high is much different than this massive physical stimulus and
Speaker 1: people you know, essentially confined to their to their homes
Speaker 1: for many many months um and then things like inventories,
Speaker 1: their companies are scrambling to restock inventories, they let them
Speaker 1: wind all the way down. That's something that happens earlier
Speaker 1: in economic cycle as well. Whereas the markets are behaving
Speaker 1: almost as if the pandemic they never happened. Equity valuations,
Speaker 1: to your point, are higher than they were pre pandemic.
Speaker 1: They were a little bit off their peaks from earlier
Speaker 1: in the year. They have been coming down because the
Speaker 1: market has been doing less well than earnings growth has
Speaker 1: been doing. But credit spreads certainly extremely resilient and much
Speaker 1: better UM you know, have exhibited you know, late cycle
Speaker 1: signs in a way that that they weren't even doing
Speaker 1: before the pandemic. So how did this resolves itself? I
Speaker 1: think your your point about maybe the market's not giving
Speaker 1: you a whole lot as a diversified investor for some
Speaker 1: period of time. I think it's probably the way we
Speaker 1: see this resolving. As the economy continues to decelerate gently,
Speaker 1: I think we get you know, slightly less good market returns,
Speaker 1: and we're seeing the third quarter has resolved in a
Speaker 1: way that the net net sp five really hasn't gone
Speaker 1: much of anywhere. UM. Interest rates are incrementally higher than
Speaker 1: they were to start the quarter UM, but really it's
Speaker 1: a three D sixty degree turned throughout the quarters, a
Speaker 1: little bit of treading water already this early in the cycle,
Speaker 1: and I think investors can expect some more of that
Speaker 1: doesn't mean there's not opportunities in places credit outperformed in
Speaker 1: in the in the third quarter, but it's gonna be
Speaker 1: I think more frustrating, certainly for anybody who's gotten used
Speaker 1: to the last eighteen months or go back ten years
Speaker 1: of returns for somebody in a portfolio to generate those
Speaker 1: types of returns when markets have already moved so so fast,
Speaker 1: so forward, um in terms of you know, pricing in
Speaker 1: a very good and mature economic cycle when we haven't
Speaker 1: really arrived at that point yet. I think from a
Speaker 1: from a fundamental standpoint, um. The other way it could
Speaker 1: resolve is that we're just wrong about the economic cycle
Speaker 1: being early, and the market is actually much tighter than
Speaker 1: we think, and those workers aren't coming back, and that
Speaker 1: means we do get your classic kind of overheating. The
Speaker 1: FED has has become too debbish and he's gotten behind
Speaker 1: the eight ball, and that's where you get the kind
Speaker 1: of the rapid end of the cycle. We talked about
Speaker 1: that as an investment committee. We talked about that at
Speaker 1: new being quite frequently as a big risk. But we
Speaker 1: don't think that's that's something we should be acutely worried
Speaker 1: about unless there's more evidence in some of these Jaws
Speaker 1: reports coming out soon that that there really aren't that
Speaker 1: many more people on the sidelines are going to get
Speaker 1: back to work. So just to tie a few of
Speaker 1: these things together, everything that's going on with the bond market,
Speaker 1: and then you know what we've seen from the stock
Speaker 1: market so far this year. I know one of the
Speaker 1: things that we were thinking about is just what the
Speaker 1: background looks like, the economic background looks like right now
Speaker 1: with yield spiking, versus what the setup looks like back
Speaker 1: in the spring when we were seeing, you know, a
Speaker 1: similar things happening in the in the bond market. And
Speaker 1: I think some people would argue that the economic background
Speaker 1: just looking forward, it doesn't look as strong as when
Speaker 1: everybody was looking forward to the reopening. Then at the
Speaker 1: same time you did, as you just said, we have
Speaker 1: seen stocks run up quite a lot since then. So
Speaker 1: does that mean like through the end of the year,
Speaker 1: just the bullish set up for the market is a
Speaker 1: little bit less constructive or how are you thinking about it? Yes, So,
Speaker 1: this this economic period that we've been in start obviously
Speaker 1: starting with with the first quarter UM. Most people who
Speaker 1: are investors today have never experienced something like this before
Speaker 1: where we have six or seven GDP growth for a
Speaker 1: period of six months and they were decelerating from that.
Speaker 1: But the absolute level of growth in the third quarter
Speaker 1: is still going to make it one of the best
Speaker 1: quarters that we've seen in several decades. Right, even if
Speaker 1: it's three and a half or four and a half
Speaker 1: of me that that's well above normal, certainly post financial
Speaker 1: crisis and even before that. So we're still running the
Speaker 1: economy hot here and we should still be seeing you know,
Speaker 1: solid contributions from consumer, albeit not as good as the
Speaker 1: first half of the year when we were getting stimulus
Speaker 1: checks and other kinds of of of transfer payments that
Speaker 1: was enabling consumption to be artificially high. Um. We got
Speaker 1: that second quarter, UH revision for GDP. We're now consumer
Speaker 1: spending annualized at in the second quarter. That's just not
Speaker 1: gonna happen in the third. What didn't happen in the
Speaker 1: third quarter is not gonna happen in the fourth quarter. Um.
Speaker 1: But it's still gonna be solid. People are still drawing
Speaker 1: down on considerable savings. UH. We know that businesses need
Speaker 1: to restock inventories. We know they're making investments to try
Speaker 1: to make those workers more productive. That, by the way,
Speaker 1: is one of the things that can help forestall more inflation.
Speaker 1: Is if we just get more productivity out of the
Speaker 1: existing workforce, we can pay those people more without having
Speaker 1: to charge higher prices to to the end end customers.
Speaker 1: So there's a lot of good things happening economy. Global
Speaker 1: manufacturing output is an all time high. Trade flows are
Speaker 1: called close to their all time highs UM. But we
Speaker 1: don't have this huge demand shock every single quarter the
Speaker 1: way we did in Q one and Q two, because
Speaker 1: the fiscal stimulus is gonna very quickly go from being
Speaker 1: an a plus two once it sort of expires and
Speaker 1: becomes a drag and that minus and that's gonna mean that, yeah,
Speaker 1: the growth rate is gonna come down. It's gonna come
Speaker 1: down to four ish three ish two wish, and probably
Speaker 1: by the end of next year we'll kind of get
Speaker 1: a sense of where the new normal is. Maybe it's
Speaker 1: you know, one and a half percent to two and
Speaker 1: a half percent growth, something like what we're used to
Speaker 1: pre pandemic. But we know from experience that equities can
Speaker 1: do fine and that scenario credit can certainly do. Find
Speaker 1: in that scenario UM and some of the I think
Speaker 1: rotations that we've seen into more those more familiar out
Speaker 1: performers like technology and brawdly defined a lot of you know,
Speaker 1: higher growth companies. You know that I think has been
Speaker 1: of a piece with a recognition that that growth is decelerating.
Speaker 1: What we might get pockets of cyclical outperformance here and there,
Speaker 1: like the ones we've been in for the last few weeks.
Speaker 1: I think for the most part, we're settling back down
Speaker 1: into a more familiar pattern for growth, albeit after several
Speaker 1: quite good quarters for the US economy, which would still
Speaker 1: you know, I mean, we're creating jobs, we're seeing wages
Speaker 1: move up, and yes, inflation still probably running above where
Speaker 1: the FED would ideally like it to be. So, Brian,
Speaker 1: I think regular listeners of this show, UH listen up
Speaker 1: for for two main things when when they listen to
Speaker 1: the show. One is the craziest things we saw in
Speaker 1: the market. That's your real test. We'll get to that later.
Speaker 1: That that's your that's your real doctorate thesis there that
Speaker 1: that we'll get to. But the other question they look
Speaker 1: out for is, well, just tell me what to buy
Speaker 1: right now for a guy like you, you know, I know,
Speaker 1: moving you've got a big um what is it one
Speaker 1: point two trillion or something like that at one point
Speaker 1: to bigger than bitcoin. Well we'll say, uh, that's on
Speaker 1: the day. It depends on it depends on the day.
Speaker 1: But you know, so obviously you got your eye on
Speaker 1: across all asset classes, across all uh, you know, markets
Speaker 1: around the world. What is sticking out you know to
Speaker 1: you now as sort of worth investing in right now?
Speaker 1: To to simplify it, to it to sort of the
Speaker 1: most basic question. Yeah, so we we do have this
Speaker 1: sort of late market cycle thesis, which means that a
Speaker 1: lot of things that would normally at this stage look
Speaker 1: at look inexpensive, look to us fully valued or maybe
Speaker 1: even a bit expensive. The question is looking outside of
Speaker 1: those areas which I think make up the bread and butter,
Speaker 1: traditional uh diverse fire portfolios that people invest in. That's
Speaker 1: going to be the key, and it's it's really up
Speaker 1: to the individual. Are you diversifying fully into things like
Speaker 1: a liquid alternatives, private credit, farmland, timber. Those are all
Speaker 1: things that that we're keen on getting investors into if
Speaker 1: we can. But I think even for investors who who
Speaker 1: don't have that liquidity tolerance, of that ability to allocate alternatives.
Speaker 1: It's things like emerging market credit, which is an asset
Speaker 1: class that still looks early cycle compared to the US markets.
Speaker 1: It's always a bit of a penalty just for being
Speaker 1: emerging markets, but EM credit is one of the nice
Speaker 1: things about it. A little bit less China exposure than
Speaker 1: if you go with the e M equity side UM, so,
Speaker 1: less less sort of idiosyncratic ad hoc China regulatory risk,
Speaker 1: which is a big theme in the third quarter. UH.
Speaker 1: And then just just a an environment that we know
Speaker 1: is going to be a reach for yield, increasing risk
Speaker 1: tolerance of fixed income investors. As the global economy continues
Speaker 1: to to do fine, people are gonna be looking for
Speaker 1: areas where they can earn extra income and that's gonna
Speaker 1: be one of them. And then things like bank loans
Speaker 1: of floating rate loans UM also for the US, also
Speaker 1: a big asset class, sort of tactical preference for US
Speaker 1: as well in an environment of raising rising interest rates,
Speaker 1: and it's underperformed high yield just a little bit, so
Speaker 1: if you're looking at that loan versus credit trade, the
Speaker 1: loans look a little bit more attractive to US too,
Speaker 1: And you know, we're very focused on income. Almost every
Speaker 1: asset class we do has some sort of income uh
Speaker 1: bent to it, and so that that's one area that
Speaker 1: we're we're certainly looking for. And then something else that
Speaker 1: we talked about it every investment committee meeting and sort
Speaker 1: of in our d n A as E s G
Speaker 1: investing uh specifically, one thing we talked about it this
Speaker 1: uh this this last meeting, and we're gonna be writing
Speaker 1: about a fourth courter outlook is paying it more attention
Speaker 1: to the s the social in E s G and
Speaker 1: just do as an example, looking and trying to find
Speaker 1: ways to measure employee satisfaction with their companies. So you
Speaker 1: can look at how much companies pay their employees as
Speaker 1: our sort of a should I invest in this company
Speaker 1: or not? It has to be a pretty bad predictor
Speaker 1: for how the stock is going to do. But if
Speaker 1: you wrap up employee compensation into things like training, benefits, opportunities, lifestyle,
Speaker 1: work life balance and can find ways to measure those things,
Speaker 1: that's where the positive alpha comes in. So if you
Speaker 1: have that s G component to your security selection, that's
Speaker 1: something that can help with the margins too. In an
Speaker 1: environment where we know it's very hard to be a
Speaker 1: reliable stock picker. Free snacks. I think if you can
Speaker 1: correlate free snacks from a company to other returns, I
Speaker 1: think we'll find something. You know, we had just gotten
Speaker 1: the free snacks just before the pandemic, so they may
Speaker 1: be still be sitting in the opposite you have to
Speaker 1: re replenish them. I want to just rewind a little bit.
Speaker 1: And he did mention China's he sounded a little uh
Speaker 1: China verse uh there for a minute. And you know,
Speaker 1: I wonder if you look at some of the dislocations
Speaker 1: that have happened in the Chinese market in recent months,
Speaker 1: and it's I mean, it's got to be tempting to
Speaker 1: go bargain hunting across whether it be equities or credits.
Speaker 1: You know, even uh sovereign yields always in China looking
Speaker 1: a little bit better than than most of the rest
Speaker 1: of the world. But you know what what you're thinking
Speaker 1: on China right now, a lot of people saying it's
Speaker 1: it's simply uninvestable right now with this regulatory crackdown going on.
Speaker 1: I mean, do you take it that far? Whereas you know,
Speaker 1: is there a middle ground where you try to you know,
Speaker 1: take advantage of some of this dislocation, but maybe not
Speaker 1: expose yourself too much to it. Yeah, I think you
Speaker 1: said it with the middle ground. We actually had three
Speaker 1: different emerging market speakers in our at our investment community
Speaker 1: meeting and from around New vine Um. You guess what
Speaker 1: happened when we get three people. One of them is
Speaker 1: a bit more bullish, one of them embarrass and one
Speaker 1: of them sort of in between. And I think, you know,
Speaker 1: we're not We're not going to say that China is
Speaker 1: uninvestable because it's an economy that big, that's growing that fast,
Speaker 1: that has you know, a lot of kind of positive stories,
Speaker 1: whether it's technology, whether it's manufacturing. You know, just taking
Speaker 1: it off the table is very hard to do, even
Speaker 1: if you wanted to, because it's such a huge part
Speaker 1: of these benchmark indexes that any kind of China specific
Speaker 1: risk is going to destroy your ability to make, you know,
Speaker 1: to add value else one in portfolio. And you don't
Speaker 1: want your entire performance to be hostage to what's going
Speaker 1: on with China. So I think the idea is we
Speaker 1: want to be about market weight China, and we're not,
Speaker 1: you know, bottom fishing in areas that are at high
Speaker 1: risk for governmental capture. But we want to be much
Speaker 1: more selective. And I know that's you know, that's never
Speaker 1: like the most satisfying answer, that we want to be
Speaker 1: more selective and sharpen our pencils and find the right opportunity,
Speaker 1: But it really is trying to identify areas where the
Speaker 1: government may have an interest in becoming more active a
Speaker 1: k a. Reducing shareholder value, reducing profit margins because they're
Speaker 1: serving some kind of larger economic or political purpose, and
Speaker 1: looking more to areas that China is probably going to
Speaker 1: allow a bit of more of a lazy fair attitude
Speaker 1: because they're talking about companies that are trying to compete
Speaker 1: with the US and other areas of the world on
Speaker 1: a global stage. And I think a lot of that
Speaker 1: is is going to be in tech, some of that
Speaker 1: will be in manufacturing as well. Um, but it has
Speaker 1: become undoubtedly much much much harder because you could have
Speaker 1: been underweight China in the third quarter, and if you
Speaker 1: just had the wrong names in the portfolio, you could
Speaker 1: still could have underperformed because of the acute underperformance of
Speaker 1: whether it was gaming, whether it was that you know
Speaker 1: that that for profit education sector, or whether it was
Speaker 1: areas of tech that we're you know, again surprised with
Speaker 1: um with with sort of that you know that that
Speaker 1: ad hoc regulatory capture. Yeah, it does kind of overlap
Speaker 1: with the E s G notion to some degree. I
Speaker 1: mean trying to figure out you know, E s G
Speaker 1: through the lens of Xi jing Ping. You know a
Speaker 1: lot of this stuff that there's overlap there. I guess
Speaker 1: there is. And when you've been talking about E s
Speaker 1: G in the United States, it's usually a data issue.
Speaker 1: You think you have a thesis on what I can
Speaker 1: do to allocate towards certain type of companies or maybe
Speaker 1: away from certain types of companies depending on the issue.
Speaker 1: But it's all about getting the right data. With China,
Speaker 1: there's not much of a hope of getting a lot
Speaker 1: of transparent data at the very very micro micro levels.
Speaker 1: We're talking like sub operating statements and and earnings reports.
Speaker 1: We're talking more things like like I said, employees satisfaction,
Speaker 1: you know, net carbon emissions, that kind of thing much
Speaker 1: much harder to get when it comes to China, but
Speaker 1: it's still the same. I think overall tone is that
Speaker 1: you want to avoid investing in places where there could
Speaker 1: be reputational risk, country risk. Um uh, you know, single
Speaker 1: single company issues that that end up again if you're
Speaker 1: overallocated to these certain areas, end up torpedo and your performance. Ryan.
Speaker 1: Just to to close out are are grilling of you,
Speaker 1: I want to ask you to look ahead to the
Speaker 1: next earning season, which is supposed to kick off in
Speaker 1: just a couple of days. I think I think it's
Speaker 1: October thirteenth that we start to see some of the
Speaker 1: banks releasing earnings. So can you just tell us, like,
Speaker 1: what will you be looking for? Because I know my
Speaker 1: inbox is always flooded when ever we hear these warnings
Speaker 1: from companies like Surewyn Williams that we've heard over the
Speaker 1: last couple of days. So what will you be looking
Speaker 1: for and is there anything that would be really concerning
Speaker 1: to hear from company management. Yes, So it's a continuation
Speaker 1: to the second quarter where we were really looking for
Speaker 1: statements or evidence that there was a declining profit margin
Speaker 1: because of a combination of higher input costs for all
Speaker 1: materials for some firms, and higher labor costs because there
Speaker 1: was a shortage of available workers or workers able to
Speaker 1: work at the wage that was being offered, and we
Speaker 1: didn't actually see that much of that. Even at the
Speaker 1: places that we know the sort of the price pressures
Speaker 1: or the the the labor costs are a bit of
Speaker 1: a stress. For example, UM, you know restaurants, fast food
Speaker 1: industry would be in an area what you would expect
Speaker 1: to see some stress. We didn't see that as much
Speaker 1: in the second quarter. I think part of that's just
Speaker 1: the man was so strong that revenue growth was able
Speaker 1: to kind of overwhelm UH rising costs. But we know
Speaker 1: that revenue growth is gonna be slowing down like the economy,
Speaker 1: which peaked in the second quarter. Earnings growth almost certainly
Speaker 1: peaked in the second quarter as well, just because of
Speaker 1: base effects. So we're gonna be seeing fully expect to
Speaker 1: see a decline in the year on year rate of
Speaker 1: earnings growth, and probably more anecdotal evidence that inflation, especially
Speaker 1: raw materials, maybe supply chain disruptions, and maybe a combination
Speaker 1: of all those things in labor costs is eating into
Speaker 1: profit margins. I don't think that's necessarily a flashing red
Speaker 1: light for investors. I think it's perfectly natural that you'd
Speaker 1: see profit margins peak in a very very hot UH
Speaker 1: quarter for growth and then kind of decline from there.
Speaker 1: But we don't want to see, you know, abrupt declines
Speaker 1: and profit margins accompanied by very kind of pessimistic outlooks
Speaker 1: for profitability because all of these issues are kind of
Speaker 1: coming to a head. That would be my my concern
Speaker 1: and one of the things that you know, even if
Speaker 1: the bond market doesn't step in and and tell the
Speaker 1: Fed that it's time to raise interest rates, profitability of
Speaker 1: US corporations might might be doing that. I don't think
Speaker 1: that's gonna be a huge issue in the third quarter,
Speaker 1: but I think it's the thing I'm most um intently
Speaker 1: looking at for for sort of a common theme across
Speaker 1: different industries. Well, you know what most intently looking at,
Speaker 1: bil Donna. Yeah, I know, skared a hazard. I guess
Speaker 1: you know, as co host, you're contractually obligated to laugh
Speaker 1: at my jokes. Now you realize that, right, Oh sorry,
Speaker 1: it's just so hard because I can't. Sometimes they don't
Speaker 1: even sound like jokes, That's that's what makes them funny. Yeah,
Speaker 1: you've really got to be paying attention there anyway. Oh
Speaker 1: my gosh, enough with that, Enough with that, It's time
Speaker 1: for the craziest things we saw in markets this week
Speaker 1: stand clear of the craziest things we saw in markets
Speaker 1: this week, I'm gonna say I got a really good one.
Speaker 1: I hate to declare myself the winner already, but um
Speaker 1: so we'll go through the motions with you too, but
Speaker 1: mine's pretty good. So I'm gonna I'm gonna wait till last. Uh,
Speaker 1: let's start with you. What's the craziest thing you saw
Speaker 1: in markets this week? So, Mike, I want to give
Speaker 1: a shout out to our producer too, for four heads
Speaker 1: who who flagged this story to me and you actually,
Speaker 1: so you might already be familiar with it, but it's
Speaker 1: a CNN story and the headline is this hamster's crypto
Speaker 1: currency portfolio is beating the market and it's amazing. It's like, honestly,
Speaker 1: the craziest thing I've seen in a really long time.
Speaker 1: It's this German hamster and he's beating investors at their
Speaker 1: own game, apparently. So he has this little spinning wheel
Speaker 1: and he sort of runs around and then like wherever
Speaker 1: he ends up, if it's like a buy or a cell,
Speaker 1: it triggers these purchases, I think. And so he's been
Speaker 1: doing really really well in his portfolio, has ether and bitcoin,
Speaker 1: and I mean you can't. I think I win. You
Speaker 1: can't get better than that when it comes to cryptocurrencies.
Speaker 1: That that strategy makes as much sense as just about
Speaker 1: every other one I've heard. So I'll take the Hampsten.
Speaker 1: You know, Bert mack Hill had the monkey throwing darts
Speaker 1: at the dartboard, So why not a hamster. That should
Speaker 1: be the benchmark. The hamster the crypto benchmark. That's that's
Speaker 1: a pretty good one. That's a pretty good one we
Speaker 1: should make. We should make an index of like what
Speaker 1: the hamsters tracking and then just yeah, you get all
Speaker 1: you should get on that. You should get, you should get.
Speaker 1: We need a ticker ham h A M. That one's
Speaker 1: pretty good. I'll give you. I'll give you uh props
Speaker 1: for that one. How about you, Brian? Have you seen
Speaker 1: anything crazy? Uh? This weekend markets? Well, it's going to
Speaker 1: suggest that we look at the octopus that predicted the
Speaker 1: World Cup and see if that that he or she
Speaker 1: can come up with a better crypto strategy. So I'm
Speaker 1: gonna cheat a little bit and stretch the definition of
Speaker 1: markets to include prediction markets for what's going on in Washington,
Speaker 1: d C. Now, these are not the US treadury market,
Speaker 1: not the deepest most liquid markets in the world. But
Speaker 1: when you are kind of on Twitter religiously, like I
Speaker 1: am kind of following the minutes a minute, what's going
Speaker 1: on with the Reconciliation bill, there's this really cool um
Speaker 1: predicted market on on unpredicted that is basically saying, how
Speaker 1: big is the reconciliation bill going to be? And as
Speaker 1: this crazy week kind of wore on the one point
Speaker 1: five trillion and under category a much much stronger bid
Speaker 1: as we as we kind of wore on. I had
Speaker 1: been kind of thinking it was the two trillion number
Speaker 1: was sort of the over under um We're gonna get
Speaker 1: close to there. But you know now that it seems
Speaker 1: like there's even less agreement or consensus on on on
Speaker 1: these these spending bills that the potential is it falls
Speaker 1: apart completely or just becomes a much much smaller number.
Speaker 1: Now that that's the most fun weird thing I saw
Speaker 1: in markets this week. The extra bit of weirdness that
Speaker 1: I'd add to it is the financial markets seem completely
Speaker 1: uninterested in this UM. I to the best of my ability,
Speaker 1: I can't discern any movement in the tenure Treasury, the
Speaker 1: spire market leadership based on what's going on with this bill,
Speaker 1: because um, hey, we I don't think it's a great
Speaker 1: understanding of what's in it other than a sort of
Speaker 1: a lot of kind of kind of transfer payments. Um
Speaker 1: that could help the economy or could hurt the economy,
Speaker 1: depending on if you're paying more taxes or receiving more
Speaker 1: in benefits. But it's being doled out over you know,
Speaker 1: five or eight or ten years, depending on how they
Speaker 1: get it done. It just is dwarfed by all the
Speaker 1: stimulus we've done. Let's hit bottom lines immediately in the
Speaker 1: last eighteen months, and it almost seems like we have
Speaker 1: we kind of have this um uh, you know that
Speaker 1: we've gotten used to these huge fiscal influxes into the
Speaker 1: economy that when you you know, you said it's gonna
Speaker 1: be oh, it's true, tillion dollars over ten years, we
Speaker 1: kind of shrug it dot number even though it's still
Speaker 1: a massive amount of money. But it doesn't seem like
Speaker 1: it's having much of a much of an impact on
Speaker 1: markets for the time being. That's a good one. I'll hey,
Speaker 1: I love the predictions market. We'll allow that any time.
Speaker 1: How about the debt sailing is the debt shilling keeping
Speaker 1: you up at night, or is this the typical game
Speaker 1: of chicken that's gonna end at the eleventh hour like
Speaker 1: we've seen in the past. So this is my second
Speaker 1: favorite um predicted contract, which is will the debt ceiling
Speaker 1: be raised by October fifteen? And then Johnny Ellen comes
Speaker 1: out this week and says the drop dead date is
Speaker 1: the eighteen. So I'm a big no on the fifteen
Speaker 1: because why would they do it three days earlier? Thing? Right,
Speaker 1: if you got an extra three days, you know Congress
Speaker 1: is gonna use it. There's gonna be a lot of brinksmanship.
Speaker 1: My senses that Democrats are going to use a reconciliation process,
Speaker 1: which is a big pain in the neck for them,
Speaker 1: and get it in there and get it through and
Speaker 1: passed by the eighteenth. And the reason they're saying they're
Speaker 1: not going to do that, they want to wait until
Speaker 1: the last minute because they want Republicans to basically have
Speaker 1: the cave on letting them do it quickly, because the
Speaker 1: Republicans are not going to vote to raise the dead ceiling,
Speaker 1: but they're not going to throw obstacles in the way
Speaker 1: of the Democrats for spite as they're trying to kind
Speaker 1: of scramble to get this done at the eleventh hour.
Speaker 1: So I would say, if you're up on October seventeenth
Speaker 1: at eleven fifty nine eastern seconds, that's probably about when
Speaker 1: i'd expect the death ceiling to be right. That sounds
Speaker 1: about right. I'll to look up and see if there's
Speaker 1: a trillion dollar coin market on predicted. That's that's uh,
Speaker 1: that's the other option. Not yet, but it's still early days.
Speaker 1: All right, those are good you guys stuff competition this week.
Speaker 1: But now now I can give you the winning entry
Speaker 1: in the craziest thing. I'm just kidding. We'll call it
Speaker 1: a three away time. But mine's pretty good. And this
Speaker 1: is courtesy of our colleague Nick Baker, who turned me
Speaker 1: onto this market. I can't believe I've never heard it
Speaker 1: about it before. It's called the royalties Exchange. Have you
Speaker 1: have you ever heard of this, fill Donna. It's not
Speaker 1: like royal family members. You know, you can't trade, uh
Speaker 1: you know, Prince Henry for I don't know, but it's
Speaker 1: royalties from music and movies I guess too. So up
Speaker 1: for auction this week where the royalties from the jingle
Speaker 1: the best part of waking up. Remember the Folders jingle? Yeah,
Speaker 1: classic jingle. Uh, So you know Folders still uses it
Speaker 1: from time to time, so you kind of you're kind
Speaker 1: of at the mercy of when they decided to use
Speaker 1: it or not. And I guess maybe, I don't know,
Speaker 1: Kanye West could cover it to who knows, and you
Speaker 1: get you get royalties that way, but I think that
Speaker 1: the mainstream of royalties is from the commercials when Folders
Speaker 1: uses it. So we're gonna play prices right here. Let's
Speaker 1: put your break, your out, your your dividendic's discount model
Speaker 1: Brian or whatever you call it in the in this case.
Speaker 1: So the royalties last twelve month royalties for this jingle
Speaker 1: were eleven thousand, seven hundred forty seven dollars. Right. Now,
Speaker 1: here's the deal with this. You if you buy this,
Speaker 1: you get um the royalties for the lifetime of the
Speaker 1: author who actually had to go and look up. Her
Speaker 1: name is Leslie Pearl. She's sixty nine, still alive, so
Speaker 1: you get it for the duration of her lifetime plus
Speaker 1: seventy years, so you know, you got at least seventy
Speaker 1: years there. She could live to a hundred and you
Speaker 1: know then you got a hundred years out of it. Um,
Speaker 1: so eleven thousand, seven hundred dollars in royalties in the
Speaker 1: trailing twelve months? What would you bid for that based
Speaker 1: on that information? Uh? And I've got the I've got
Speaker 1: the latest bid. The auctions like got two hours left
Speaker 1: in it, so we're pretty close to the final bid.
Speaker 1: What's let's start with you, old Ona, what's your bid
Speaker 1: for the royalties for the Falters jingle? I saw this story,
Speaker 1: so I might be cheating if if I give you
Speaker 1: an answer, you're allowed to cheat. It's fine. Oh okay,
Speaker 1: I think, well, Brian, you go first, so he doesn't
Speaker 1: get gonna run down and ask my wife, who's an act.
Speaker 1: Surely how long this lady's gonna live? That would give
Speaker 1: me an inside track on the answer. I know we
Speaker 1: need to we need more information on her lifestyle habits,
Speaker 1: I think to uh, okay, So it's a hundred years
Speaker 1: eleven thousand dollars a year with some kind of very
Speaker 1: low interest rate because I'm assuming interest rates are going
Speaker 1: down forever. Yeah, yeah, applied to it. So, um, let's
Speaker 1: see five thousand. It's a pretty good guess. I would
Speaker 1: guess I'm not gonna tell you what I guess we'll do.
Speaker 1: What's your guess? I was gonna say, twenty seven thousand. Wow,
Speaker 1: that's a big bitess spread right there. Yeah, maybe I'm
Speaker 1: misremembering the story UM eighty three thousand, three hundred and fifty, which,
Speaker 1: to your point, Pride, I think is a bargain. I
Speaker 1: mean you you yeah, right about You're talking about like
Speaker 1: a fourteen percent yield off of this thing. I mean,
Speaker 1: you know, granted you don't get your return of capital
Speaker 1: at the end of a hundred years, but it comes
Speaker 1: stream I would think would be a lot worth a
Speaker 1: lot more than uh uh eight three grand I don't know.
Speaker 1: I think I'm discounting a much too low an interest rate,
Speaker 1: but I think I'm probably right to do so. I agree,
Speaker 1: I agree, But yeah, pretty pretty good bargain on the
Speaker 1: folders jingle. If you know two hours left, if either
Speaker 1: he wants to get in on that, Dana, you could, uh,
Speaker 1: I wonder if they'll just let me transfer half my
Speaker 1: four one k into that and just fit it up.
Speaker 1: I don't know, you could try. I don't know if
Speaker 1: real ties are a valid for one k only if
Speaker 1: you do do it, only if you really like Folgers coffee.
Speaker 1: If you don't just I don't know why Folgers just
Speaker 1: doesn't buy it for four grand if they're spending twelve
Speaker 1: grand a year on the royalties, I don't know why
Speaker 1: they don't buy it. But we'll pay off in a
Speaker 1: couple I'm gonna give I'm gonna go talk to the
Speaker 1: people at Folgers and uh, we'll figure that out. But
Speaker 1: with that said, I think that's all the time we have,
Speaker 1: right Nick, really uh injoyed the conversation. Hopefully we can
Speaker 1: get you back again sometime. You passed Voldonna's audition, you
Speaker 1: can give me back anytime. Thanks very much for having me.
Speaker 1: Thank you, Brian, what goes up? We'll be back next week.
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