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: Baldana Hick, Across Acid, reporter at Bloomberg. This week on
Speaker 1: the show, well, when I was a kid, we didn't
Speaker 1: have the internet, we didn't have video games. There are
Speaker 1: only three channels on the TV, but we did have
Speaker 1: aluminum cans. So most nights in the warmer weather, all
Speaker 1: the neighborhood kids would gather in someone's yard and play
Speaker 1: a game called kick the can. And guess what. That's
Speaker 1: exactly what Congress did this week. They kicked the can
Speaker 1: down the road on the topic of raising the US
Speaker 1: debt ceiling, and that has obviously been one of the
Speaker 1: issues that was causing investor sentiment to deteriorate in the
Speaker 1: last month. The markets have reacted euphorically. What was that really?
Speaker 1: It was that all that was keeping benchmark indexes from
Speaker 1: returning to record highs. We'll get into it with the
Speaker 1: chief US echoity strategist at a big bank, and as always,
Speaker 1: we'll close out the episode with the craziest thing we
Speaker 1: saw in markets this week. So if you saw anything,
Speaker 1: call us on the Craziest Things hotline at six or
Speaker 1: six three two four three four nine zero. Leave us
Speaker 1: a voicemail and maybe we'll play it on the show
Speaker 1: Phil Dona. Did you play Kick the Can when you're
Speaker 1: a kid? I didn't, And I cannot even believe that
Speaker 1: this was a real game. Why it's it's totally a
Speaker 1: real game because you could use the ball like a
Speaker 1: soccer ball. The can was I don't know why, maybe,
Speaker 1: but the can was much better for some reason. It
Speaker 1: made the noise you got. You would fill it with
Speaker 1: rocks and then you'd get that noise anyway, How would
Speaker 1: you close the can if you fill it with rocks?
Speaker 1: You just strapped the little pebbles inside and then make
Speaker 1: them anyway. Okay, well it just sounds so fun. That
Speaker 1: have sounded really genuine. Anyway, maybe there's like a video
Speaker 1: version of Kick the Can can play. But this is
Speaker 1: this is what they refer to, uh problem, this sort
Speaker 1: of problem solving like we saw in the European debt crisis,
Speaker 1: when every week they'd kick the can further down the
Speaker 1: road and the markets would go nuts, and then the
Speaker 1: problem would return in a week and they'd kick it again.
Speaker 1: But let's get into it with our guests. Shall we
Speaker 1: Evil do La? Do you know our guest also has
Speaker 1: a podcast, and not only that, her podcast has slides
Speaker 1: attached to it. I think we need slides with podcasts. Yeah,
Speaker 1: she's a she's an inspiration and I listened to her podcast.
Speaker 1: She comes out with reports beforehand, then the podcast to
Speaker 1: tell you what the report was all about in a
Speaker 1: sort of quick snippet, which I think is great, a
Speaker 1: better way, more organized than our podcast, which I'm amazed
Speaker 1: it even happened some weeks with me too technical difficulties.
Speaker 1: Let's bring our guests in. Her name is Lori Calvacina.
Speaker 1: She's the head of US equity strategy at RBC Capital Markets. Laurie,
Speaker 1: welcome back to the show. Thanks so much for having me.
Speaker 1: I mean, I'll say, you know, you guys know I've
Speaker 1: been a fan of this podcast in the past, and
Speaker 1: when you guys started putting out, I think I did mind.
Speaker 1: You know, maybe like a year or so later, but
Speaker 1: you guys definitely help get my creative juice is flowing.
Speaker 1: So it's an honor to be here, you know, in
Speaker 1: many ways as a listener and um, you know, as
Speaker 1: someone who's taken some inspiration for you guys. Oh that's
Speaker 1: nice to you to say you're showing us up with
Speaker 1: the slides, though, Laurie, I want to I want to
Speaker 1: see how we can get some slides to attach it
Speaker 1: to ours. I have enough problems with the basic podcast
Speaker 1: cast technology. I'm not sure I want to add Laurie's.
Speaker 1: It's been a while since you've been on the show.
Speaker 1: I know you had a new baby. Congratulations. I'm jealous.
Speaker 1: I love babies. Thank you. He's he's not a baby anymore.
Speaker 1: My pandemic baby is thirteen months old. Now. Yeah, he's awesome.
Speaker 1: Hopefully he will you know he will. He will continue
Speaker 1: to do his cute little things for a while. But yeah,
Speaker 1: he's not a baby anymore. I had that realization that's
Speaker 1: not too fast. That's an adorable age. And enjoy them
Speaker 1: before they get old enough where they're roasting you on TikTok,
Speaker 1: like my kids are very, very unfortunate. But lord, let's
Speaker 1: get into this whole idea. I know you spent a
Speaker 1: lot of time looking at and measuring investors sentiment and
Speaker 1: it had really, you know, turned south there in September.
Speaker 1: It it really gotten pretty poor, um, you know, and
Speaker 1: it's always hard to tell exactly to sort of quantify
Speaker 1: and dissect what's causing it. But we have seen this,
Speaker 1: you know, strong reaction to the market by the fact
Speaker 1: that Congress was able to at least postpone the day
Speaker 1: of reckoning for the debt ceiling issue. Um, did that
Speaker 1: surprise you that that was that much of sort of
Speaker 1: a weight around the market's neck? I mean, is this
Speaker 1: clearing this out of the way, Is that enough to
Speaker 1: sort of say, blue guys ahead or what? Well, Mike,
Speaker 1: I think you know, you you've kind of stolen my
Speaker 1: craziest thing, which was you know, the reaction to the
Speaker 1: de ceiling deal was you know, sort of the crazy
Speaker 1: thing to me because I had the same thought you did.
Speaker 1: That we knew that this was something that was weighing
Speaker 1: on investor sentiment one of many things, right, but you know,
Speaker 1: there's a pretty long list right now. But you know,
Speaker 1: I think that the conventional wisdom, right is they always,
Speaker 1: you know, this this issue comes up every few years.
Speaker 1: They always figure out way to avoid financial arm again
Speaker 1: and get it done. And a lot of people I
Speaker 1: was even out talking to clients this week about this issue,
Speaker 1: UM in person actually, and you know, the responses while
Speaker 1: they always get it done. You know, I've learned to
Speaker 1: sort of ignore this issue. There's a lot of noise
Speaker 1: and then lo and behold. You know, we see this
Speaker 1: enormous reaction in markets today. So look, I think it
Speaker 1: probably was a little bit different this time just because
Speaker 1: it did seem it just wasn't clear how they were
Speaker 1: going to get to resolution. It did seem like, um,
Speaker 1: there was a little bit more than theater this time around,
Speaker 1: So maybe that worry was a little bit deeper than
Speaker 1: a lot of us were letting on and lur the
Speaker 1: dead ceiling was one of the things that was sort
Speaker 1: of weighing on markets up until now. And I'm hoping
Speaker 1: you can sort of talk about what else is behind
Speaker 1: the two way volatility that we've seen from markets where
Speaker 1: we're seeing these you know, one percent updates followed by
Speaker 1: one percent down days followed by one percent updates, and
Speaker 1: what does it all mean for investors? So look, you know,
Speaker 1: I think if we're just thinking about the past, maybe
Speaker 1: like two weeks, because I think that question might have
Speaker 1: a different answer if we went back to you know,
Speaker 1: to kind of a month ago. But I think over
Speaker 1: the past couple of weeks. I think the sort of
Speaker 1: jarring move that we had in the treasury yield, the
Speaker 1: tenure yield, was something we certainly heard about from a
Speaker 1: lot of investors. UM. And you know, when it's always,
Speaker 1: you know, when you kind of get into these discussions
Speaker 1: with people, it's never the direction or the magnitude of
Speaker 1: the move, it's the speed of the move that tends
Speaker 1: to to sort of freak people out. I think we
Speaker 1: did have a very quick move here, UM. And you know,
Speaker 1: we we did an investor survey at the end of
Speaker 1: September and we actually give people a write in question
Speaker 1: and we say, you know, what keeps you up at night,
Speaker 1: what's on your mind? And we had one person right
Speaker 1: into that survey as their free response, UM, sort of
Speaker 1: the rapid rotation from growth back to value, which we're
Speaker 1: not positioned for. And so I think it's also it's
Speaker 1: not just what's happening on the macro variable. It's the
Speaker 1: fact that it happened quickly and people weren't set up
Speaker 1: for it. And you saw a fierce rotation out of
Speaker 1: technology stocks, which have been the you know, the long
Speaker 1: term favorites of a lot of investors. And I think
Speaker 1: people sort of new in the back of their heads.
Speaker 1: You know, we think rates might go up, We think
Speaker 1: financials are going to catch a bit. But the fact
Speaker 1: that it happens so quickly that everybody's favorites talks in
Speaker 1: the stocks in the tech sector flips so quickly, I
Speaker 1: think it was just a combination of all of that
Speaker 1: on that really jarred markets over the last week or so.
Speaker 1: We'll talk to us about that notion of growth and value.
Speaker 1: I mean, it's it's obviously been the lemma all year.
Speaker 1: You know, how long we'll we'll value out perform, and
Speaker 1: then it stopped out performing. And now you know, it
Speaker 1: looks like the conditions are in place for for that,
Speaker 1: you know, to that trade to come back. I mean,
Speaker 1: are we poised for some more value out performance going forward?
Speaker 1: Do you think? I think so? And we've we've tried
Speaker 1: to not be too cute in our recommendations, you know,
Speaker 1: we're sort of stopping the conversation in terms of you know,
Speaker 1: we like value, we like growth. We're trying to say,
Speaker 1: just have exposure to both. We think it's going to
Speaker 1: be a very choppery leadership environment oversay the next year
Speaker 1: year and a half. So that's how we've positioned everything.
Speaker 1: But I think the really interesting conversation is, you know,
Speaker 1: sort of why and different time frames we see. So
Speaker 1: really since I think kind of early August, we changed
Speaker 1: all those positioning calls, and the framework we tried to
Speaker 1: lay out was at the time at least we said, look,
Speaker 1: there have been some very clear pressures on the value
Speaker 1: trade that have caused people to shift back into growth.
Speaker 1: And at the time it was the delta variant UM,
Speaker 1: it was some of the supply chain pressures which we're
Speaker 1: having an impact on value earnings revisions UM, and a
Speaker 1: lot of it was COVID to be honest, UM, that
Speaker 1: was there was still a lot of uncertainty there and
Speaker 1: no influencing things like the Michigan sentiment data UM. But
Speaker 1: we said, look, you know, we're going to come out
Speaker 1: of this. We think Wall Street has not really you know,
Speaker 1: sort of properly baked in a lot of the things
Speaker 1: we went through at the end of the summer, but
Speaker 1: we're going to come out of that. And when we
Speaker 1: come out of that, we think you'll see another big
Speaker 1: kind of intermediate term pop in the value trade UM.
Speaker 1: And we said, you know, it's we think it in
Speaker 1: some time in a sort of mid till late next year,
Speaker 1: so there's an expiration date on that trade um and
Speaker 1: we think growth leadership will eventually take over again late
Speaker 1: next year. But that was really the framework we tried
Speaker 1: to put out there was, Yes, we're gonna get another
Speaker 1: big move in the value you trade, don't get too comfortable,
Speaker 1: and it don't expect it's going to be the beginning
Speaker 1: of kind of a five year type cycle because growth
Speaker 1: is going to take back over, but we're going to
Speaker 1: have this sort of nice, you know, kind of move
Speaker 1: in financials and energy and things like that for a while.
Speaker 1: The interesting, you know, sort of set up for me
Speaker 1: was if you if you kind of look at the
Speaker 1: valuation data, there's a lot of room for value to
Speaker 1: beat growth. There's a lot of room for cyclicals to
Speaker 1: do well versus secular growth. I look at small cash right,
Speaker 1: small cats are still very cheap versus large caps. So
Speaker 1: we said, you know, the room is there from the
Speaker 1: valuation perspective. We knew that COVID trends had been driving
Speaker 1: a lot of those trades, and our biotech analysts was
Speaker 1: making a call that COVID cases would peak shortly after
Speaker 1: labor after Labor Day, so we said that would give
Speaker 1: you a catalyst to let that value trade move higher UM.
Speaker 1: And then the last thing we really talked about was
Speaker 1: just what do you expect from the economy next year.
Speaker 1: And when you're in a hot economy, which is one
Speaker 1: that tends to run above average the average is about
Speaker 1: two and a half percent UM, you tend to see
Speaker 1: value outperform, small cap outperform, cyclicals outperform. And and even
Speaker 1: though some of the economic numbers have been knocked down,
Speaker 1: consensus for next year still sitting comfortably above four percent,
Speaker 1: so you know, kind of a valuation room, a catalyst
Speaker 1: from COVID trends improving, and hot economy that will allow
Speaker 1: those ciglical you know, parts of the market to to
Speaker 1: really have some good fundamental support for next year. That
Speaker 1: was really kind of three ingredients we saw for that
Speaker 1: intermediate term value. Pope. Let's let's unpack that a little
Speaker 1: bit on small caps. I know you you started out
Speaker 1: as a small cap analysts in a previous life, right,
Speaker 1: so I know it's probably dear to your heart, uh,
Speaker 1: the smaller companies you know. To me, I don't always
Speaker 1: think of small caps in the same breath as as
Speaker 1: value stocks. But I guess you know, if you look
Speaker 1: at the waiting of the Russell two thousand, I mean,
Speaker 1: have you on on financials, have you on energy? So
Speaker 1: from a sector's perspective, you know, they certainly seemed to
Speaker 1: potentially benefit from the same type of tell wines that
Speaker 1: that would boost the value stocks in the large cap induexes.
Speaker 1: How are you thinking about small caps going forward? I
Speaker 1: mean it also feels like, um, the revitalization, the rebound
Speaker 1: and earnings for small caps has been sort of deferred
Speaker 1: a little bit into the future compared to large caps.
Speaker 1: I mean, is it kind of, uh the time for
Speaker 1: the for small caps to shine? But given all these factors,
Speaker 1: and to make a twelve part question, I know, the
Speaker 1: you know, earning earnings estimates for small caps can be
Speaker 1: a little bit more violatile than, uh than large caps,
Speaker 1: and so I don't know if that plays into your
Speaker 1: thinking at all. But you know, how are you sort
Speaker 1: of thinking about small caps going forward, given given all
Speaker 1: these sort of catalysts that potentially could help them out. Yeah,
Speaker 1: it's it's a great question. And you know, I sort
Speaker 1: of described small cap as my first professional child. Um,
Speaker 1: you know, I spent seven years as a small cap
Speaker 1: strategist at a couple of different shops. I mean, now
Speaker 1: I kind of do I do everything the broad market,
Speaker 1: and I still do small caps, but there's a certain
Speaker 1: fondness for me there, and I often feel like it's
Speaker 1: the lens through which I can really understand what's going
Speaker 1: on the market. I do think that a lot of
Speaker 1: things are clearer there than they are an SMPD. UM.
Speaker 1: And look, I think with small cap and people hate
Speaker 1: it when I say this, UM, but I really don't
Speaker 1: think earnings matter that much. Um. You know. I think
Speaker 1: the reality is that small caps have so many companies
Speaker 1: with losses and now it's obviously more now than in
Speaker 1: the past. UM. But the reality is there's really no
Speaker 1: good way to calculate the EPs growth of the Russell
Speaker 1: two thousand. I come up with ways to do it
Speaker 1: to satisfy client requests. Frankly, UM, and to try to
Speaker 1: help my clients, you know, put some numbers around something
Speaker 1: that's very difficult to put numbers around. But I've just
Speaker 1: realized over time that's just not what the stocks trade on.
Speaker 1: The stocks tend to trade on higher level macro variables,
Speaker 1: and the only way the earnings I feel like really
Speaker 1: sort of seeps in is when you sort of look
Speaker 1: at it from a quality perspective, and people want higher
Speaker 1: quality so than the sheer number of companies with losses
Speaker 1: will push people out of that space into bigger caps um.
Speaker 1: But and I think that's certainly something that hurts small
Speaker 1: cap over the summer. The nervousness around the COVID outlook,
Speaker 1: the FED a lot of other things pushed investors back
Speaker 1: towards higher quality stories, and that pulled some of the
Speaker 1: multi asset investors out of small cap. But that's really
Speaker 1: the only time I think you really want to pay
Speaker 1: too much attentions to earnings. I think earnings is more
Speaker 1: of a stock selection issue within small cap for active
Speaker 1: managers as opposed to a reason to get in or
Speaker 1: out of the asset class um. But you know, to
Speaker 1: kind of go back to your original question, I think
Speaker 1: small caps and value are not always the same trade.
Speaker 1: I think they are the trade the same trade right now.
Speaker 1: If you look at how large has performed versus small,
Speaker 1: and growth has performed versus large within the Russell one thousand,
Speaker 1: so the large cap lands both of those trades have
Speaker 1: been moving in tandem with the rate of change in
Speaker 1: COVID cases in the US. That's been true for small
Speaker 1: cap since last November. It's been true for value growth
Speaker 1: since March UM but the last like six nine months
Speaker 1: or so. They are both trading on one of the
Speaker 1: same economic variables. They are also both very sensitive to
Speaker 1: interest rate direct ship. And this is something we've seen
Speaker 1: over time that when the tenure yield is going up,
Speaker 1: it doesn't really matter why it's going up. Small caps
Speaker 1: tend to outperform and value tends to outperform. And if
Speaker 1: you sort of think about why those relationships are there, UM,
Speaker 1: I think right now, financials is a huge influence on
Speaker 1: both the small cap space as an asset class and
Speaker 1: the value trade. And so interest rates go up, financials
Speaker 1: tend out perform. It's pulling both of those parts of
Speaker 1: the market up right now. UM. And I just sort of,
Speaker 1: you know, put in a slightly different way when we
Speaker 1: talk about small cap looking cheap versus large cap UM.
Speaker 1: It's a really really compelling chart that we put together
Speaker 1: on that you're really at historic valuation opportunities and small
Speaker 1: versus large when you go and look at it sector
Speaker 1: by sector to figure out what's driving that valuation differential.
Speaker 1: It's not things like healthcare, UM. It's it's the financial sector,
Speaker 1: it's the energy sector. UM. It's these kind of you know,
Speaker 1: value oriented parts of the market that are have a
Speaker 1: very heavy presence in small cap now that are really
Speaker 1: driving that valuation differential. So there's a lot of overlap
Speaker 1: in those trade right now that we might not no,
Speaker 1: not not ordinarily. See. I'm glad you brought up financials
Speaker 1: because I had noticed in one of your notes recently
Speaker 1: where you said ahead of FED hikes, you tend to
Speaker 1: see some value in some small caps out performing. So
Speaker 1: I'm hoping you can walk us through what can work
Speaker 1: well in in the environment now where people are anticipating
Speaker 1: a FED taper and then eventually FED hikes. So I
Speaker 1: do think the taper was largely priced in in the
Speaker 1: second quarter of the year. UM. And if you kind
Speaker 1: of go back and you think about the sort of
Speaker 1: conversation that was happening among economic economists and rage strategists,
Speaker 1: and there was you know, sort of this this kind
Speaker 1: of pounding the table up. The FED is behind the
Speaker 1: curve and they need to taper because inflation is getting
Speaker 1: out of control and they're going to eventually wake up
Speaker 1: to this risk and pull their time table forward. But
Speaker 1: that was a big conversation happening in kind of March
Speaker 1: and April, and that's actually when we saw the value trade,
Speaker 1: you know, kind of start to underperform. And we after
Speaker 1: having had a big run and also small caps mysteriously
Speaker 1: at the time, seemingly peaked versus large cap and we
Speaker 1: sort of put some of those trades that had been
Speaker 1: doing very well and that normally do well going into
Speaker 1: a hiking environment, they suddenly, you know, just stopped working um.
Speaker 1: And I think as we go back and look at
Speaker 1: the data, we think sort of the deterioration you were
Speaker 1: starting to seeing some of the COVID stats contributed to that.
Speaker 1: But I also think it was just Wall Street figuring
Speaker 1: out that the taper was coming sooner rather than later,
Speaker 1: despite what the Fed was saying. And you know, if
Speaker 1: you go do back and look at the taper, we
Speaker 1: had you know, time frame and that announcement, and then
Speaker 1: when we actually did the taper, um we saw those
Speaker 1: traditional you know, kind of rate hike trades flip um.
Speaker 1: So normally you get into a rate hiking cycle, small
Speaker 1: peaks versus large value does very well going into the
Speaker 1: hiking cycle and then growth leadership takes over once hikes begin.
Speaker 1: And that's exactly what happened back in the taper during
Speaker 1: and we really essentially saw those trades take root again
Speaker 1: in second quarter of this year. UM. But you know
Speaker 1: what we had before, right, was the sort of interesting
Speaker 1: intervening period between the AP and the hikes, um, where
Speaker 1: a lot of these risk trades started to work again. UM.
Speaker 1: And now you know, essentially I think we're sort of
Speaker 1: in this holding period, right. I think the market is
Speaker 1: going to enjoy the cyclical spirits that make the FED
Speaker 1: confident enough to hike rates. UM. So we've got above
Speaker 1: average GDP in place. That's something you normally see before
Speaker 1: and early on in a FED hiking cycle. Um, we've
Speaker 1: got very lofty levels of I s M. That's something
Speaker 1: you also tend to see before the hikes actually, you know,
Speaker 1: start to happen. Um. And you know what, unfortunately, we
Speaker 1: tend to see is when the hikes themselves start. I
Speaker 1: s M usually ends up peaking during the hikes are
Speaker 1: shortly thereafter in GDP grows from being above average to
Speaker 1: below average shortly after the hiking cycle. So the markets
Speaker 1: start to say, you know, the FED always cools off
Speaker 1: the economy and pull some of that that froth out,
Speaker 1: and markets start to anticipate it, and so these parts
Speaker 1: of the market that benefit from that really hot economy,
Speaker 1: they start to discount in advance even though it's happening. So,
Speaker 1: you know, I think that the Fed, unfortunately, I think
Speaker 1: is what puts the expiration daid on the siblical tradits,
Speaker 1: you know, Laurie, I, I think the one interesting sort
Speaker 1: of difference in this latest episode over the last year
Speaker 1: two has been the the enormous fiscal response. Uh. You know,
Speaker 1: in addition to such a huge uh monetary response from
Speaker 1: the Fed, we for once we saw a really huge
Speaker 1: fiscal response from from the Congress and the President's UM.
Speaker 1: That's how one's obviously wearing off. UM. I wonder how
Speaker 1: much optimism was priced into the market about whether it
Speaker 1: be an infrastructure deal the Biden three and a half
Speaker 1: trillion spending package. You know, at this point, it doesn't
Speaker 1: look like we will necessarily get either one. I mean,
Speaker 1: at least I wouldn't bet on it. Possibly will get
Speaker 1: some kind of of narrowed down UH package that would
Speaker 1: be sort of above trend government spending. But you know
Speaker 1: what's priced into the market as the market, in your opinion,
Speaker 1: just written off the sort of an above average fiscal
Speaker 1: spend going forward at this point, I think it's such
Speaker 1: a great question, Mike. And when we sort of think
Speaker 1: about the risks to our view and something that could
Speaker 1: cause the value and small cat trade to have an
Speaker 1: extended cycle. I always point people to fiscal policy, and
Speaker 1: and the reason I point people to it is just
Speaker 1: my conversations with investors this year. They're absolutely focused on tax.
Speaker 1: They don't like corporate tax hikes. A lot of the
Speaker 1: BYE side is already baking this into their numbers, not
Speaker 1: the sell side, but the BY side. But nobody on
Speaker 1: the BYE side or even the Cell side, frankly my
Speaker 1: conversations at least, wants to give the economic forecast or
Speaker 1: the fundamental forecast any kind of credit for anything coming
Speaker 1: out of Washington on the fiscal side. And you know,
Speaker 1: I the things I tend to hear are, well, it's
Speaker 1: too spread out, it's going to happen over a ten
Speaker 1: year period, so it's not going to have, you know,
Speaker 1: too much of an impact. Or while the dollar value
Speaker 1: in the context of the size of our economy just
Speaker 1: really isn't big enough to move the needle um, you know,
Speaker 1: so we'll hear that a lot um. And then you know,
Speaker 1: people will also say, well, that the negative impacts of
Speaker 1: tax hikes are going to offset anything that you would get,
Speaker 1: and I just hear that time and time again. And
Speaker 1: you know, I used to joke back in you know,
Speaker 1: sort of April and May like I I felt like
Speaker 1: I was a policy analyst because when I was discussing
Speaker 1: that your head your head outlook at an hour meeting,
Speaker 1: we'd spend forty minutes on corporate tax perform and that's
Speaker 1: not even an exaggeration. Um. But then I would try
Speaker 1: to talk to people. When Biden's Jobs Fan and Family's
Speaker 1: plan came out and he put the white papers out,
Speaker 1: we did a whole analysis and nobody wanted to talk
Speaker 1: about them. And you know, I I've told people, you know,
Speaker 1: you may be right on infrastructure, you know, with industrials
Speaker 1: and materials. People also say it crowds out private investment. Fine,
Speaker 1: you know, I get that, but I think that the
Speaker 1: sort of some of the details and the Budget Reconciliation
Speaker 1: Bill are so interesting from a consumer perspective. And you know,
Speaker 1: you mentioned I have a thirteen month OLDO. I also
Speaker 1: have a five year old UM, and so you know,
Speaker 1: I see sort of the provisions about paying for daycare
Speaker 1: or pre k um, and you know, just the sort
Speaker 1: of idea of putting some you know, money back in
Speaker 1: consumers pockets. And we just went through an episode, you know,
Speaker 1: with with a pandemic where the stimulus payments, we saw
Speaker 1: impacts on credit card spending. Um. You know, the companies
Speaker 1: were talking about discrete impacts that they've seen from stimulus. Um.
Speaker 1: You know, it just sort of is interesting to me
Speaker 1: that we just lived through that and saw you know,
Speaker 1: giving consumers some extra cash having a direct impact on
Speaker 1: their spend um. And and people are just not thinking
Speaker 1: about this at all when it comes to that budget
Speaker 1: reconciliation bill. So I've described it as a show me story. Um.
Speaker 1: You know, I'm not the one to make the economic projections,
Speaker 1: but I do think, you know, if we think about
Speaker 1: what could make my call wrong and extend that cyclical
Speaker 1: trade longer, the upside risk I do think lies in
Speaker 1: fiscal policy. If we get those bills passed, Um, could
Speaker 1: they caused some surprises to the upside on the economic side,
Speaker 1: or could from a corporate perspective. They change consumer spending patterns,
Speaker 1: give certain consumers more money to spend. That has an
Speaker 1: impact on bottom lines. Markets not prepared for that. Well, Lurie,
Speaker 1: all I have to say is a thirteen month old
Speaker 1: and a five year old is good spacing. I can tell.
Speaker 1: I can tell why you're a strategist now, because you
Speaker 1: never want to have two in diapers at one time,
Speaker 1: and I think you spaced them out appropriately. I thought
Speaker 1: I did. I made the opposite mistake. I had to
Speaker 1: too many babies and diapers at once, and it's it's
Speaker 1: gonna be overwhelming. I know you're worried about college costs.
Speaker 1: My Oh, yes, absolutely, let's try. I'll never bring it
Speaker 1: up again. I'm sorry trying to give me, trying to
Speaker 1: give you a heart at Speaking of Lorie's research, Laura,
Speaker 1: your research reports are just some of the best. I
Speaker 1: always read them all the way through. I flipped through
Speaker 1: all your slides, and I know you have a new
Speaker 1: survey out, which you do from from time to time,
Speaker 1: but the most recent one, I think it was titled
Speaker 1: the mood of the market has gotten more pessimistic, but
Speaker 1: investors are still buying value. And you had found the
Speaker 1: pessimism overall has sort of continued to rise, although it's
Speaker 1: done from past peaks. But I'm hoping you can walk
Speaker 1: us through some of the things that you found and
Speaker 1: what else has stood out to you from what you're
Speaker 1: hearing from people. Yeah, you know, I thought it was
Speaker 1: I thought it was really fascinating, UM that the the
Speaker 1: overall mood of the market was you know, just just
Speaker 1: not as not as chipper as it was, you know,
Speaker 1: sort of earlier in the year. We've sort of seen
Speaker 1: that progressing over the last couple of surveys. UM, But
Speaker 1: investors still seem to be on board with this value
Speaker 1: trade UM and specifically the financials and energy, which I
Speaker 1: think makes sense those areas are not at the epicenter
Speaker 1: of you know, sort of supply chain concerns. UM. I'll
Speaker 1: take you know, just kind of going back to the
Speaker 1: topic of taxes, because I do think you know, when
Speaker 1: you talk to people about the case for a pullback
Speaker 1: in markets late in the year, and we've been in
Speaker 1: that camp as well, but I find a lot of
Speaker 1: people are pointing to this idea of corporate taxes and
Speaker 1: that it's not been baked in and it's going to
Speaker 1: be this big, huge, you know, sort of disaster for
Speaker 1: corporate America longer term. And we just asked the investors
Speaker 1: in the survey, we said, you know, what do you
Speaker 1: think this does to earnings? What do you think this
Speaker 1: does to performance? And we always give people, we try
Speaker 1: to give people five choices on you know, sort of
Speaker 1: most of these questions, and there will be sort of
Speaker 1: an extreme bowl and an extreme bear, and the kind
Speaker 1: of a moderate bowl and a moderate bear, and then
Speaker 1: kind of a neutral. That's how we always try to
Speaker 1: lay everything out. And we found that on the question
Speaker 1: of corporate taxes, most people, um, I think it was
Speaker 1: about two thirds maybe on each of the questions we
Speaker 1: asked about earnings independent from performance, and we found that
Speaker 1: most people were in that camp saying, and it's gonna
Speaker 1: be a wonderful you know, one to five percent hit
Speaker 1: to performance. It's gonna be a one to five percent
Speaker 1: to earn hit two earnings. UM. And I thought that
Speaker 1: was so interesting because it's not sort of the disaster
Speaker 1: scenario um that a lot of people have laid it
Speaker 1: out to be market. If it happens, markets will price
Speaker 1: it in and readjust and then move on. Um. The
Speaker 1: other thing, you know, that I thought was so interesting.
Speaker 1: We asked some questions on supply chains, which of course
Speaker 1: has been the kind of big freak out point post
Speaker 1: labor date for a lot of investors, especially in the
Speaker 1: industrial and material space, and we've just been hearing a
Speaker 1: lot of negative commentary around that. But we found sort
Speaker 1: of a general vibe. You know, most people are you know,
Speaker 1: I would say, are more worried about second half numbers
Speaker 1: as opposed to two numbers. But when we ask people,
Speaker 1: you know, kind of how worried are you about this?
Speaker 1: Most people picked the you know, I'm worried, but I'm
Speaker 1: not panicked. Um, I think we'll get some some downward
Speaker 1: revisions and mrs. But it's not the end of the world.
Speaker 1: And you know, it just goes to show me that
Speaker 1: people are taking some of these concerns and stride. Yeah,
Speaker 1: I'm I'm not sure how everyone's too worried about Biden
Speaker 1: being able to get a tax hike through Congress. I
Speaker 1: don't see him him getting that through Congress. But maybe
Speaker 1: I'm just being too cynical with all the moderates and Congress.
Speaker 1: If they're if they're stopping everything else, I don't see
Speaker 1: how that gets through but I mean it's certainly they're
Speaker 1: a risky you have to to think about. Um. Well,
Speaker 1: Laurie before we get to the crazy things. They passed
Speaker 1: the law where all financial podcasts have to get the
Speaker 1: guests take on inflation this year, um quickly in just
Speaker 1: a few seconds. I mean, you know, we saw the
Speaker 1: natural gas prices in Europe. Just go through the roof.
Speaker 1: We're you know, commodity indexes are high. Transitory is looking
Speaker 1: a little less transitory than than maybe everyone thought. How
Speaker 1: big of a race of a risk is inflation or
Speaker 1: stiflation really in your mind? Um? Or is it just
Speaker 1: a matter of picking the beneficiaries of of a rising
Speaker 1: price environment? Yeah, I'll say, you know, maybe I'll put
Speaker 1: my small cap hat back on again. Um. You know,
Speaker 1: I sort of, you know, took took one very important
Speaker 1: lesson when I first launched as a small cap strategist.
Speaker 1: Remember one long time investor told me, Um, portfolio manager
Speaker 1: in the space have been around for years, Um said,
Speaker 1: small caps are inflationary, and small caps do well at
Speaker 1: inflationary environments. And you know, if you sort of think
Speaker 1: about the birth of Russell right and then the Russell indexes,
Speaker 1: it came at the those indexes start at the end
Speaker 1: of the seventies, right, so they were they were created
Speaker 1: for a reason. And if you go and you look
Speaker 1: at the data, small caps tend to outperform when inflation
Speaker 1: expectations are high and rising, or if you look at
Speaker 1: the CPI data and it is it is a testament
Speaker 1: to the fact that they are more responsive to the
Speaker 1: underlined cycle and health of the economy that's enabling that
Speaker 1: strong inflation than they are to the pricing pressures and
Speaker 1: the mark in the margin pressures and small caps do
Speaker 1: I think have more pricing pressures, are pricing power rather
Speaker 1: than people give them credit for. But to me, I
Speaker 1: feel like I know what to do in that environment,
Speaker 1: and it's it's by the small caps, it's by the financials,
Speaker 1: it's by the energy stocks, and they deserve to be
Speaker 1: bought based on where the valuations are. So I'm not
Speaker 1: overly worried right now. My my, Again, I'm not the economist,
Speaker 1: so we don't do a forecast on inflation, but my
Speaker 1: hunch is that it will be, you know, sort of
Speaker 1: more elevated than it was previous to the pandemic, not
Speaker 1: as bad as it is now. And you'll see you'll
Speaker 1: see things come down as as demand starts to normalize.
Speaker 1: And I also, you know, I read a lot of
Speaker 1: earnings called transcripts. I know we've talked about on this
Speaker 1: that on this podcast before. We're still reading those transcrip its.
Speaker 1: And you know, if you think about it from a
Speaker 1: margin perspective and the corporate profitability perspective, the company since
Speaker 1: have just been hemming and high about all the margin
Speaker 1: pressures and inflationary pressures and supply chain pressures and tariffs,
Speaker 1: and they do a marvelous job of managing through UM
Speaker 1: given hedging the tools at their disposal, they are constantly
Speaker 1: sucking costs out of the system and the margins have
Speaker 1: been fantastic. So I I try not to overly react.
Speaker 1: I feel like I just want to focus on I
Speaker 1: know what to do, and then you know, I kind
Speaker 1: of I don't love the term stackfulation, but you know,
Speaker 1: when I sort of look at the growth backdrop separately
Speaker 1: from the inflation question, the high frequency indicators that sort
Speaker 1: of softened at the end of the summer are stabilizing,
Speaker 1: and even back to work is starting to poke up. UM.
Speaker 1: We've got kid vaccines coming UM soon hopefully. UM We've
Speaker 1: got some good news on that this week. UM. I
Speaker 1: think that will help restore some of the confidence that's
Speaker 1: taken a hidden markets late over the summer. UM And
Speaker 1: so I think that we are really not at risk
Speaker 1: of a recession. UM. I think that we are just
Speaker 1: working through some challenges from a supply chain perspective. UM.
Speaker 1: But I do think companies tend to get through these.
Speaker 1: So I I try not to worry about all this
Speaker 1: too much. Stand clear of the craziest things we saw
Speaker 1: in markets this week, well, l Donna, one supply chain
Speaker 1: that has continued to be very robust is the supply
Speaker 1: of crazy things in markets. How about that? How about
Speaker 1: that segue that that was That was really good. I'll
Speaker 1: give you that. And this week in particular had so
Speaker 1: many crazy stories it was really hard to pick. All right,
Speaker 1: Well did you start then? Oh? Sure, Well I saw
Speaker 1: that Burger King has chicken less chicken wings or chicken
Speaker 1: nuggets coming. I saw that Best Buy has some sort
Speaker 1: of uh program you can pay for that sort of
Speaker 1: helps you get around supply chain issues. I don't know
Speaker 1: if you saw any of those stories. I have not.
Speaker 1: Oh my gosh, there was just so many really interesting
Speaker 1: things happening. So with best Buy, you can buy like
Speaker 1: you pay a hundred dollars a year, and you can
Speaker 1: jump the line to to get certain products, but they
Speaker 1: don't exactly tell you which products. But anyway, the craziest
Speaker 1: thing that I chose was actually from a Matt Levine
Speaker 1: column and the title of the article was is the
Speaker 1: stock market open at three am? This startup says it
Speaker 1: should be. So there's a company called twenty four Exchange,
Speaker 1: and it's looking for SEC approval to offer ron the
Speaker 1: clock stock trading sixty five days a year, on all
Speaker 1: the holidays, overnight, all the time, just like the krypto markets.
Speaker 1: And to me, that was one of the most interesting
Speaker 1: things I've seen in a really long time. Because I
Speaker 1: know we've talked about it on the podcast before. That
Speaker 1: means you'll have to cover the stock market twenty four hours, right,
Speaker 1: So I'm not this I'm having anxiety just thinking about it. Yeah,
Speaker 1: it was. It was really interesting. Yeah, let's all right
Speaker 1: to our congressman or something to make sure make sure
Speaker 1: that doesn't happen. How about you, Laurie, what's the craziest
Speaker 1: thing you've seen? Oh? Gosh, I mean to be honest,
Speaker 1: but I haven't sort of noticed, frankly, any sort of
Speaker 1: like weird quirky thing this week in terms of like
Speaker 1: trading or story. UM, and we already talked about you
Speaker 1: know what I was. Yeah, but the market reaction just like, yeah,
Speaker 1: maybe this was all about the debt ceiling. Um. But look,
Speaker 1: I'll tell you sort of the sort of most unusual,
Speaker 1: sad and heartwarming thing all in one UM that I
Speaker 1: saw earlier this week, my former boss, Tobias Love Combitu,
Speaker 1: I guess has technically been a competitor in the past
Speaker 1: few years for me. UM passed away on Friday after
Speaker 1: you know, a car accident about a month ago or so,
Speaker 1: and UM, for those of you who know him, UM,
Speaker 1: it was just an incredibly emotional time. This man touched
Speaker 1: so many people in so many different ways and was
Speaker 1: so beloved. And you know, I'm not the biggest fan
Speaker 1: of social media. UM, I deleted some of my accounts
Speaker 1: a few years ago. UM, I've spend a lot of
Speaker 1: time there. But the outpouring that I've seen on Twitter
Speaker 1: and LinkedIn, UM, you know there if you just go
Speaker 1: in and search for Tobias Love commnch on there, especially
Speaker 1: on LinkedIn, there are some amazing tributes that have been
Speaker 1: posted and comments, and the reach that this man had
Speaker 1: and how beloved he was by so many different people
Speaker 1: in different corners of the investment community. I mean, it
Speaker 1: just does go to remind you this is truly a
Speaker 1: community and is truly a small world. Um And I
Speaker 1: thought it was, you know, an unbelievably heartbreaking thing that happened,
Speaker 1: but just the outpouring and how he impacted so many
Speaker 1: people was just so touching. Absolutely a man whose reputation
Speaker 1: really uh is triple A rated uh as far as
Speaker 1: I can sell, and not only had Laurie, but it's
Speaker 1: not easy to keep a job as a strategist for
Speaker 1: twenty two years or however money, you know, so you know,
Speaker 1: you know he's doing something right to keep a job
Speaker 1: that long. So we'll certainly miss him in the well.
Speaker 1: The panic euphoria model at at City that he he
Speaker 1: was sort of in charge of has been renamed the
Speaker 1: Levkovich model. I think I saw a note this week
Speaker 1: saying that that's that's good. That's amazing. You know, if
Speaker 1: there's one thing about him, he was always willing to
Speaker 1: take on a consensus argument and challenge the consensus and
Speaker 1: say what he believed. He used to says, my job
Speaker 1: to tell people what they need to know, not what
Speaker 1: they want to hear, And that model absolutely embodied his spirit.
Speaker 1: That's that's incredibly fitting. Certainly an influencer since long before
Speaker 1: that became a term. I think, so, Uh, our condolences
Speaker 1: to his loved ones. Um, and I'll try to cheer
Speaker 1: us up a little bit here with my crazy thing. Uh,
Speaker 1: I thought, I know you're a Jersey native, so surely
Speaker 1: you you must have some familiarity with one Mr Bruce Springsteen.
Speaker 1: So my my crazy things. Via my friend John Miller
Speaker 1: pointed out a story in Rolling Stone. There's a bunch
Speaker 1: of Springsteen memorabilia going up for sale at one of
Speaker 1: the auction houses. I forgot to write down which one,
Speaker 1: So it's time to play prices, right, Fildonna and Lorie.
Speaker 1: The handwritten manuscript for the song The thunder Road, one
Speaker 1: of the bosses most classic songs. Ever, it was written
Speaker 1: in pen across four notebook pages. Uh. The final page
Speaker 1: actually has two different versions of the opening verse, which
Speaker 1: is kind of interesting. It's going up for sale. Uh.
Speaker 1: We don't know what it will solve for, but they've
Speaker 1: given us an estimated range. So lord, you go first,
Speaker 1: what's your bid for the handwritten manuscript of thunder Road Lyrics? Oh?
Speaker 1: I have no idea. I mean like pre pandemic inflation
Speaker 1: or post pandemic inflation. I don't know. I don't know.
Speaker 1: Fifty dollars. Was it for a charity? I don't know.
Speaker 1: But that's a good question. I don't know. I'm gonna
Speaker 1: keep a poker face, fildonna. What what's your bid for
Speaker 1: the thunder Road manuscript? So you get the whole notebook
Speaker 1: or you just go you get four pages, You're like,
Speaker 1: I want, I want the whole notebook. You would, right,
Speaker 1: because you never know what else is in the notebook.
Speaker 1: It would be like taking interview notes in the empty
Speaker 1: pages of it. Probably, yeah, for sure. Yeah, from the podcast.
Speaker 1: I always take notes from the podcast. Um. I was
Speaker 1: going to say twenty Yeah, you're frugal when it comes
Speaker 1: to stuff like this. All right, Well, Laurie, um no,
Speaker 1: Well it's the it's the handwritten lyrics the thunder Road.
Speaker 1: Come on, Laurie, I gotta set my cap to you.
Speaker 1: They're estimating between fifty thousand and seventy thousand. I personally
Speaker 1: think it's going to go for a lot more, but
Speaker 1: we'll have to check back on that the auctions at
Speaker 1: the end of October. So I don't know a lot
Speaker 1: of Boss fans out there, uh a lot. I know
Speaker 1: a lot of Wall Streeters who are big Bruce fans.
Speaker 1: I could see it going for more than that book,
Speaker 1: but as far as the estimated price, Laurie, you'll be
Speaker 1: pretty much doubted on the head there. That's impressive, excellent.
Speaker 1: Hopefully my SMP target will be on with that. I
Speaker 1: think that is all the time we have, uh, Laurie,
Speaker 1: so great to catch up with the Uh. Always been
Speaker 1: a good such an interesting guest on the show and
Speaker 1: I can't wait to have you back someday. Well, thanks
Speaker 1: for having me on which lard to it? Thank you,
Speaker 1: LOI what goes up? We'll be back next week and
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Speaker 1: is Francesco Levie. Thanks for listening, See you next time.