WEBVTT - Your 2020 Guide 0:00:13.400 --> 0:00:16.760 Hello, and welcome to What Goes Up, a Bloomberg weekly 0:00:16.800 --> 0:00:20.520 market podcast. I'm Sarah Ponzac, a reporter on the Cross 0:00:20.520 --> 0:00:23.479 Asset Team, and I'm Mike Reagan, a senior editor on 0:00:23.520 --> 0:00:27.600 the Markets teams. Our first episode of It's Pretty Crazy. 0:00:27.760 --> 0:00:30.280 I know. Do you have any New Year's resolutions? Sarah, 0:00:30.520 --> 0:00:32.040 I can put you on the spot, Like, yeah, you're 0:00:32.040 --> 0:00:34.000 really putting me on the spot. I can't say I've 0:00:34.000 --> 0:00:37.200 ever been a New Year's resolution type person, really big 0:00:37.200 --> 0:00:40.240 about just trying to better yourself through the year. Um 0:00:40.400 --> 0:00:43.760 do you Well, I've got a teenage daughter who's going 0:00:43.800 --> 0:00:46.720 to be getting her driver's learning permit? Are you going 0:00:46.760 --> 0:00:48.840 to be teaching her very soon in the new year? So? 0:00:49.280 --> 0:00:52.400 Uh well, Luckily in New Jersey they forced them to 0:00:52.440 --> 0:00:54.440 take driver's ED so I don't have to do most 0:00:54.440 --> 0:00:57.320 of the teaching. But uh I think my resolution is 0:00:57.400 --> 0:00:59.760 going to be not to have a heart attack at 0:00:59.760 --> 0:01:01.320 any time during the new year. That's a good one. 0:01:01.320 --> 0:01:05.360 Good luck with that. No drivers that in Florida, Yeah 0:01:09.319 --> 0:01:11.280 you can get away with it. But happy New Year 0:01:11.400 --> 0:01:13.959 to everyone who's listening. Right, And luckily we have a 0:01:13.959 --> 0:01:16.240 guest who's going to predict exactly what's going to happen 0:01:16.280 --> 0:01:20.839 in the new year to a correct rate of predictions. 0:01:20.840 --> 0:01:23.120 I assume is all right, Chris Harvey, head of equity 0:01:23.160 --> 0:01:26.120 strategy at Wells Fargo. Absolutely, we've got it down to 0:01:26.160 --> 0:01:28.600 a ti. Whatever you want to know, we've got the answer. 0:01:29.480 --> 0:01:32.280 The shell answer man right now. I do I feel 0:01:32.280 --> 0:01:34.720 sorry for you guys because you have to make these predictions. 0:01:34.760 --> 0:01:37.240 Is this like how much do you sweat these things? 0:01:37.280 --> 0:01:40.880 Sometimes a lot, sometimes very little. And sometimes the funny 0:01:40.880 --> 0:01:42.680 thing is when things work, then people ask you, so 0:01:42.680 --> 0:01:44.440 what's next? And you said to yourself, well, I'm not 0:01:44.480 --> 0:01:48.560 really sure. But that's never a good answer. They demand 0:01:48.720 --> 0:01:51.480 exactly what's going to happen. I've got to say I 0:01:51.560 --> 0:01:56.200 was looking over your predictions from the past year, and 0:01:56.280 --> 0:01:59.600 you guys really did do a good job at calling 0:01:59.640 --> 0:02:05.200 what was is a very unusual, unexpected year. I must say, sorry, 0:02:05.200 --> 0:02:07.200 you're not supposed to look at last year's predictions that 0:02:07.760 --> 0:02:13.440 they don't like that, but they were right. If they 0:02:13.440 --> 0:02:16.280 were wrong, maybe I wouldn't or maybe I would have 0:02:16.280 --> 0:02:21.280 saved it to the end of the podcast. But let's 0:02:21.520 --> 0:02:24.239 let's get into this year's I uh, some some I 0:02:24.360 --> 0:02:28.720 poppers here one I think is very provocative. Expect of 0:02:28.760 --> 0:02:31.679 potential five to ten percent pullback in the first half 0:02:31.720 --> 0:02:37.200 of five percent pullbacks, Theoretically you should not be that uncommon, 0:02:37.200 --> 0:02:39.600 but we just have gotten used to not seeing them. 0:02:39.639 --> 0:02:42.080 What's what's the gist of why you think that could happen. 0:02:42.240 --> 0:02:44.320 So as we look in the market, there's a lot 0:02:44.360 --> 0:02:47.040 of things to like. Rates are lower, credit spreads are tighter, 0:02:47.200 --> 0:02:50.040 the fete has been a combinative um. We've got some 0:02:50.080 --> 0:02:53.320 sort of resolution with trade and tariff, and sentiment has improved, 0:02:53.360 --> 0:02:55.680 and it improved greatly. And that's what we don't like. 0:02:55.880 --> 0:02:59.960 When everything starts turning positive, expectations go higher, it's usually 0:03:00.120 --> 0:03:02.440 not a great time for equity markets. And with a 0:03:02.520 --> 0:03:05.760 vix in and round twelve, you can see things change quickly. 0:03:06.200 --> 0:03:08.800 I'll quickly go back to fourth quarter of two thousand 0:03:08.800 --> 0:03:11.040 and eighteen, when the wheels were falling off the card, 0:03:11.400 --> 0:03:14.000 the world was going to end. It was a fantastic 0:03:14.040 --> 0:03:16.920 time to get involved. You had returns that were well 0:03:16.960 --> 0:03:21.160 into the double digits um and you had great opportunity 0:03:21.160 --> 0:03:24.080 to invest here. Typically, when people are a little bit 0:03:24.160 --> 0:03:27.720 more what we would say greedy as as opposed to fearful, 0:03:28.040 --> 0:03:30.800 it's not always a great time, and so with expectations 0:03:30.800 --> 0:03:33.080 so much higher, we're just worried that things can change 0:03:33.080 --> 0:03:35.640 and change rather quickly. It's that old Buffett trope, you 0:03:35.680 --> 0:03:38.080 know what, it's fearful when everyone's greedy, and greedy when 0:03:38.080 --> 0:03:41.160 everyone's fearfully and you know, it seems to play out 0:03:41.160 --> 0:03:44.960 again and again. It's one of those cliches that keeps 0:03:45.280 --> 0:03:47.880 coming back for a reason. Um. I think the phrases 0:03:47.880 --> 0:03:49.360 buying when you can, not when you have to, and 0:03:49.360 --> 0:03:51.360 so when you can, not when you have to, and 0:03:51.400 --> 0:03:53.920 I think that applies here, so also fitting into that 0:03:54.000 --> 0:03:58.640 correction called potentially coming within the beginning of I also 0:03:58.720 --> 0:04:02.680 saw you mentioned and liquidity and the Fed's balance sheet. 0:04:02.720 --> 0:04:05.720 I saw a statistic recently. But if the Fed's balance 0:04:05.760 --> 0:04:07.640 sheet continues to grow at the pace we've been seeing 0:04:07.640 --> 0:04:09.480 it grow at, it will be at a new record 0:04:09.520 --> 0:04:13.440 by May. Is it going to be very difficult once 0:04:13.480 --> 0:04:16.760 again for the Fed to try to wean investors off 0:04:17.080 --> 0:04:20.280 of this liquidity. I think that's a great question. And 0:04:20.320 --> 0:04:23.479 we've been saying at what point does the FED stop intervening? 0:04:23.800 --> 0:04:26.640 And you're right about the the massive amount of liquid 0:04:26.680 --> 0:04:29.360 in the marketplace, Whether it's um from the FED or 0:04:29.400 --> 0:04:31.840 whether it's from the credit market. If we look at 0:04:31.920 --> 0:04:33.960 half by the end of it or by the end 0:04:34.000 --> 0:04:36.240 of I think first quarter will have the balance sheet 0:04:36.240 --> 0:04:39.120 grown by a half a trillion dollars. Interestingly, what what 0:04:39.240 --> 0:04:41.880 does that do? Well? That that shortens the duration of 0:04:41.920 --> 0:04:44.360 the balance sheet, which is good because what we've seen 0:04:44.440 --> 0:04:46.680 is the curve is starting to steepen. That's a very 0:04:46.680 --> 0:04:49.640 positive economic signal. But at some point we have to 0:04:49.680 --> 0:04:51.719 let the economy, we will have to let the markets 0:04:51.720 --> 0:04:54.479 stand on their own, and we need we need for 0:04:54.560 --> 0:04:57.839 more diversification, or we need things to be really priced 0:04:57.839 --> 0:05:00.680 more appropriately. And that's the issue where also having it 0:05:00.360 --> 0:05:03.800 is everything is fantastic, everything's great. We need a lot 0:05:03.839 --> 0:05:07.080 more differentiation. Another thing that caught my eye in a 0:05:07.080 --> 0:05:11.200 recent note of yours downgrading semiconductor stocks, and I can't say, 0:05:11.240 --> 0:05:13.400 I can't tell you how many TV hits I've done 0:05:13.400 --> 0:05:16.200 this year where someone's been like, why are semi conductor 0:05:16.279 --> 0:05:18.919 stocks so still and so well? And you know, the 0:05:18.960 --> 0:05:21.160 sort of stock answer has been, well, it's the next 0:05:21.200 --> 0:05:24.680 big thing. If five G Internet of things that the 0:05:24.680 --> 0:05:27.440 cloud is still has to be built out. But I've 0:05:27.480 --> 0:05:29.520 always you know, wanted to add sort of that Trumpian 0:05:29.839 --> 0:05:32.560 uh catchphrase. Well we'll see what happens, you know, because 0:05:32.600 --> 0:05:35.320 it does seem I mean, earnings for semis this year 0:05:35.400 --> 0:05:39.200 we're pretty abysmal um and there it's crazy to see 0:05:39.240 --> 0:05:42.360 this rally. And then what's is your main rationale for 0:05:42.360 --> 0:05:46.000 forgetting a little cautious on semmings. So in two thousand nineteen, 0:05:46.040 --> 0:05:48.280 we wanted to add cicklicality to the portfolio. We want 0:05:48.320 --> 0:05:50.440 to do it in a stepwise fashion. So we came 0:05:50.480 --> 0:05:53.039 into the year overweight capped goods, we upgraded the semis, 0:05:53.040 --> 0:05:56.400 and then ultimately we we went overweight the banks. Everything 0:05:56.520 --> 0:05:59.680 worked quite well, actually I think too well, and so 0:05:59.720 --> 0:06:02.119 we on greaded the semis for three reasons. It was macro, 0:06:02.680 --> 0:06:05.799 it was sentiment, and it was relative performance and working backwards. 0:06:06.040 --> 0:06:09.320 Relative performance has been fantastic. It really has been a 0:06:09.360 --> 0:06:12.120 fantastic year. The semi some of the semi in dcs 0:06:12.120 --> 0:06:15.520 are up. The second thing is sentiment. To your point, 0:06:15.839 --> 0:06:19.520 sentiment is turned dramatically. You had everyone saying that the 0:06:19.560 --> 0:06:21.320 cycle or the bottom of the cycle won't be for 0:06:21.360 --> 0:06:23.880 another twelve or twenty four months. Turns out it was 0:06:23.920 --> 0:06:25.800 a lot sooner. Maybe we have a different calendar than 0:06:25.800 --> 0:06:27.920 most people. And the last thing is from a macro 0:06:28.040 --> 0:06:30.880 point of view, as we go into and look into 0:06:31.839 --> 0:06:33.800 from a portfolio point of view, we want to start 0:06:33.880 --> 0:06:35.920 laying off a little bit of risk. We think that 0:06:35.960 --> 0:06:39.200 the cyclicality that we told you to buy, we want 0:06:39.240 --> 0:06:41.279 to start harvesting at this point in time. And the 0:06:41.320 --> 0:06:44.279 move is just exceptional at this juncture. And does it 0:06:44.279 --> 0:06:47.040 all relate to the trade situation at all? I know 0:06:47.560 --> 0:06:51.000 something else you've written is that phase two could be elusive. 0:06:51.120 --> 0:06:53.360 I mean, I'll put out phase one still is kind 0:06:53.360 --> 0:07:00.440 of elusive there, but um will uh sort of dumbling 0:07:00.480 --> 0:07:02.720 blocks on the way to phase two be as big 0:07:02.760 --> 0:07:05.800 of a deal as uh stumbling blocks in phase one, 0:07:05.839 --> 0:07:09.240 and and the semis play a role in in that 0:07:09.520 --> 0:07:11.320 at all. So so the first thing I would say 0:07:11.360 --> 0:07:13.440 is if this was your first day and the job 0:07:13.680 --> 0:07:15.720 and people said, hey, what a trade in tariff to 0:07:15.840 --> 0:07:18.200 the semi conductors, you would have said it really helped them, 0:07:19.000 --> 0:07:21.520 which is which is odd. So now that we've had 0:07:21.560 --> 0:07:23.440 the semi we have some sort of certainty, and I 0:07:23.520 --> 0:07:27.120 agree with you, we're not certain what phase one actually is. 0:07:27.640 --> 0:07:29.680 Our our view on Phase two is you're not going 0:07:29.760 --> 0:07:32.760 to see a Phase two anytime soon, and so we 0:07:32.800 --> 0:07:34.720 will get a lot of bumps and we will get 0:07:34.760 --> 0:07:36.280 a lot of fits and starts with regard to it. 0:07:36.560 --> 0:07:38.080 If you look at what the Chinese are doing or 0:07:38.120 --> 0:07:40.680 what they're not doing, there's no behavioral change. They don't 0:07:40.680 --> 0:07:42.800 want it. They they've shown you no indication that they 0:07:42.800 --> 0:07:44.720 want to change. And at the end of the day, 0:07:44.720 --> 0:07:47.680 I think Phase one was, Okay, we'll get something on 0:07:47.720 --> 0:07:51.320 the table, something moderate or small, you claim victory, will 0:07:51.360 --> 0:07:53.680 claim victory, and then we'll move on. And that's where 0:07:53.680 --> 0:07:55.760 we are right now. With that said, do you think 0:07:55.960 --> 0:07:59.000 the improvement that we have had with the quote unquote 0:07:59.000 --> 0:08:01.760 elusive Phase one t a deal right now was enough 0:08:01.800 --> 0:08:05.840 to really lift CEO confidence again potentially lead to an 0:08:05.880 --> 0:08:08.040 uptick and CAPEX spending Because if now all of a 0:08:08.080 --> 0:08:12.000 sudden we're talking about phase two, what's the enforcement mechanism 0:08:12.000 --> 0:08:13.880 may be going to be. Is it possible tariffs go 0:08:13.920 --> 0:08:16.280 back into effect again? In a way? Are we just 0:08:16.320 --> 0:08:19.680 in this circle where what we did see in where 0:08:19.720 --> 0:08:21.800 we saw a bit of a pause on business spending 0:08:21.800 --> 0:08:25.080 plans just continue through. So a couple of thoughts and 0:08:25.160 --> 0:08:28.040 I'll be a little bit all over the place. So 0:08:29.040 --> 0:08:32.000 we don't think trade and tariff did that much to 0:08:32.040 --> 0:08:34.400 the economy. It did slow things down, But what it 0:08:34.440 --> 0:08:36.319 really did when we look at earnings, when we look 0:08:36.360 --> 0:08:39.520 at stocks, the word the phrase we heard time and 0:08:39.559 --> 0:08:43.240 time again uncertainty, uncertainty, uncertainty. So now we have some 0:08:43.280 --> 0:08:47.400 sort of certainty that does help planning, That does help people, um, 0:08:47.440 --> 0:08:49.840 maybe be a little bit more aggressive in their investment pattern. 0:08:50.040 --> 0:08:51.840 So at the margin, I think it is better, But 0:08:51.920 --> 0:08:54.040 is it a ton better? No, not really. There's not 0:08:54.120 --> 0:08:56.319 a ton of pent up demand. It wasn't as if 0:08:56.320 --> 0:08:58.800 we just went through some major recession. We didn't. We 0:08:58.880 --> 0:09:01.319 had a moderate slow down, And so what we should 0:09:01.320 --> 0:09:03.800 see on the flip side is something to improve on 0:09:03.840 --> 0:09:22.320 a moderate fashion. Nothing more than that. Here's a line 0:09:22.320 --> 0:09:26.080 I love in your outlook. Banks possibly to become the 0:09:26.080 --> 0:09:28.680 new low volatility trade. Boy, if you had said that 0:09:28.720 --> 0:09:30.760 a ten years ago, I'd I'd like to see the reaction. 0:09:30.800 --> 0:09:34.400 But I mean, is this, you know, a function of 0:09:34.440 --> 0:09:38.080 just the capital return story at banks? That, um, why 0:09:38.120 --> 0:09:41.319 would they crash when you know, you know the dividends 0:09:41.360 --> 0:09:44.120 are coming, you know the buybacks are coming. The Feds 0:09:44.200 --> 0:09:46.079 kind of, you know, easing off a little bit on 0:09:46.120 --> 0:09:49.400 those stress tests. You know that those capital plans are 0:09:49.480 --> 0:09:52.200 getting maybe a little bit easier of a look, so 0:09:52.480 --> 0:09:54.240 I hate to use this phrase, but this late in 0:09:54.240 --> 0:09:56.120 the cycle because we've been this late in the cycle 0:09:56.160 --> 0:09:58.640 for a very long time. Typically, banks balance sheets are 0:09:58.720 --> 0:10:02.359 upside down backwards and and can be rather toxic. Additional, 0:10:02.679 --> 0:10:05.360 in addition, they don't always do all that smart emin 0:10:05.440 --> 0:10:09.080 a activity. They've been regulated out a lot of these issues, 0:10:09.280 --> 0:10:12.000 and so banks balance sheees are actually quite good, one 0:10:12.040 --> 0:10:14.000 of the things that we saw in third quarter. So 0:10:14.200 --> 0:10:17.960 we upgraded banks in September of nineteen UM. A lot 0:10:17.960 --> 0:10:19.560 of people said, hey, Chris, we like a lot of 0:10:19.559 --> 0:10:22.400 your calls, but this you want to rethink this. People 0:10:22.400 --> 0:10:25.079 are still shell shocked about the financial stocks. I feel like, 0:10:25.120 --> 0:10:27.840 I mean, look, it is just December that the S 0:10:27.880 --> 0:10:31.400 and P Financials finally reclaimed that seven records. That's remarkable 0:10:31.440 --> 0:10:34.360 to me, and and the bank industry group still has it, 0:10:34.480 --> 0:10:37.560 which is also pretty remarkable. But the pushback at that 0:10:37.559 --> 0:10:39.559 point in time is Chris, credit costs are going to 0:10:39.600 --> 0:10:42.360 go up. Chris, you really don't understand anything about about 0:10:42.360 --> 0:10:44.559 an interest margins or the curve, it's just going to 0:10:44.640 --> 0:10:47.720 be horrific. And what I said is you're you're really 0:10:47.720 --> 0:10:51.840 not appreciating what's changed, how the fundamentals have changed, how 0:10:51.920 --> 0:10:54.400 lower risk, how much more diversified they are. And then 0:10:54.400 --> 0:10:57.320 we got third quarter numbers and everyone's like, oh, maybe 0:10:57.400 --> 0:11:00.920 you are right, and so now you're starting. The run 0:11:01.000 --> 0:11:03.640 up that we've seen has been very aggressive. And we 0:11:03.679 --> 0:11:06.480 do like banks. We like them strategically longer term and 0:11:06.480 --> 0:11:09.200 and to your point, we can also see multiple expansion 0:11:09.240 --> 0:11:12.600 as people realize these are lower risk profile type companies. 0:11:12.679 --> 0:11:15.040 And we talk about banks and banks being low voless 0:11:15.080 --> 0:11:17.440 really the larger cap banks not so much the regional 0:11:17.480 --> 0:11:21.040 and the smaller cap banks, and so we expect longer term. 0:11:21.280 --> 0:11:23.079 But boy, you're right, they've had a heck of a 0:11:23.160 --> 0:11:25.199 run over the last couple of months. But I mean, 0:11:25.200 --> 0:11:27.400 you think about how long were they trading below A 0:11:27.400 --> 0:11:29.280 lot of big banks were trading below book value for 0:11:29.320 --> 0:11:31.920 Pize's sake. I mean, that's it's remarkable. They were hated 0:11:31.920 --> 0:11:34.120 and when we we did the upgrade, there was a 0:11:34.160 --> 0:11:36.600 lot of pushback. A lot of fundamental players just said 0:11:36.679 --> 0:11:38.760 this isn't gonna work. And and even if You're right, 0:11:39.280 --> 0:11:41.080 the market is not going to price it correctly, or 0:11:41.080 --> 0:11:43.320 it's not going to price the belief that they are 0:11:43.600 --> 0:11:45.960 are lower risk profile. What we said is we're seeing 0:11:46.000 --> 0:11:47.920 a lot of money going to these quant funds. We're 0:11:47.920 --> 0:11:49.880 seeing a lot of money going too low volatility funds. 0:11:50.200 --> 0:11:53.640 They will be your your marginal driver return or your 0:11:53.679 --> 0:11:56.120 marginal driver price. And so far that that's been more 0:11:56.200 --> 0:11:58.520 right than row Is it partially sort of the moving 0:11:58.559 --> 0:12:01.600 target of regulations? Who I mean banks obviously, like you said, 0:12:01.600 --> 0:12:03.720 they've kind of been whipped in the shape after the crisis. 0:12:04.040 --> 0:12:07.520 Now it seems like all the scorn in Washington is 0:12:07.640 --> 0:12:10.079 going in the other direction towards uh, you know, the 0:12:10.120 --> 0:12:13.640 big fang stocks that your your social media and your 0:12:13.679 --> 0:12:16.120 internet stocks. Is that part of the story there? So 0:12:16.400 --> 0:12:18.520 on regulation, one of the things we were saying, One 0:12:18.520 --> 0:12:20.280 of the things in our recent note has been that 0:12:20.360 --> 0:12:24.679 we think that tech will be the new healthcare. It 0:12:24.840 --> 0:12:28.400 is scar I mean, just considering how how important tech 0:12:28.440 --> 0:12:30.640 has been to the rally and the underperformance that we've 0:12:30.679 --> 0:12:34.400 seen recently in healthcare due to talks of regulation and 0:12:34.440 --> 0:12:36.480 heading into the election, and now I don't want to 0:12:36.480 --> 0:12:39.120 say it's doom and gloom. But you're going to have 0:12:39.200 --> 0:12:42.480 some bipartisanship, which is very unusual in Washington because both 0:12:42.520 --> 0:12:45.920 sides and you can see it already are talking about 0:12:46.000 --> 0:12:48.560 tech in issues, whether it's privacy or what have you. 0:12:48.760 --> 0:12:52.400 We have the California Consumer Privacy Act coming too effect 0:12:52.400 --> 0:12:54.800 next year and it's going to be on the forefront, 0:12:54.920 --> 0:12:56.280 and we do worry that it's going to put a 0:12:56.280 --> 0:12:58.600 fair amount of volatility into the names. And people are 0:12:58.600 --> 0:13:01.360 always an election you're looking at health care. But again, 0:13:01.400 --> 0:13:05.160 what I don't think what may surprise people is the 0:13:05.200 --> 0:13:07.600 amount of rhetoric in and around some of these tech companies, 0:13:07.640 --> 0:13:10.360 which in some cases isn't fair, in some cases may 0:13:10.400 --> 0:13:12.960 be fair. When you say tech, do you actually mean 0:13:13.080 --> 0:13:15.520 tech as in it would be classified by the gig 0:13:15.600 --> 0:13:17.840 sectors or more so, you can think of it broader 0:13:17.880 --> 0:13:21.640 as faying and the internet companies as well. So, um, 0:13:21.720 --> 0:13:24.000 when we talk about tech, it is the broader indicries. 0:13:24.040 --> 0:13:26.760 But obviously there are going to be certain companies and 0:13:26.840 --> 0:13:29.439 certain subsectors that are more in the focus of the regulators, 0:13:29.480 --> 0:13:31.760 whether it's on the Internet side, the ones that have 0:13:31.840 --> 0:13:33.760 a little bit more pricing or a little bit more 0:13:33.800 --> 0:13:38.079 information on your background as opposed to say a semiconductor. Um. 0:13:38.160 --> 0:13:39.760 So the things that we worry about are more the 0:13:39.800 --> 0:13:43.680 hardware and some of your portals, if you will. But overall, 0:13:44.160 --> 0:13:46.760 if it affects one area, it should affect all areas 0:13:46.760 --> 0:13:49.480 to some degree. Is there a chance of healthcare being 0:13:49.520 --> 0:13:56.000 the new healthcare? To watch these democratic debates and I 0:13:56.000 --> 0:13:58.640 guess the difference is that risk is to a large 0:13:58.640 --> 0:14:04.320 degree priced in already. Um It that again great, great question. 0:14:05.200 --> 0:14:08.800 So bigger picture, what we think is political risk. We 0:14:08.840 --> 0:14:11.160 don't think it's really priced in at this juncture because 0:14:11.200 --> 0:14:13.280 if you think about its sentiment is so good, everything 0:14:13.360 --> 0:14:15.839 is so great. Um. If we look at the price 0:14:15.880 --> 0:14:18.760 action in some of the healthcare spaces with the HMOs 0:14:18.840 --> 0:14:21.200 or some of the providers, you saw this big sell 0:14:21.240 --> 0:14:25.240 off um when we had Medicare for all first bandied about. 0:14:25.560 --> 0:14:27.960 Now there's been a massive snap back in it, and 0:14:28.240 --> 0:14:30.480 that's not going to go away. At some point the 0:14:30.520 --> 0:14:33.680 Democrats are going to get some momentum. This will come 0:14:33.720 --> 0:14:35.920 back to some degree, and I do think you're right. 0:14:36.200 --> 0:14:38.840 Healthcare will be healthcare and there will be some pressure 0:14:38.840 --> 0:14:41.800 on it. But ultimately with the valuations look pretty attractive 0:14:41.840 --> 0:14:44.280 to us, and you probably want to get aggressive on 0:14:44.320 --> 0:14:46.040 those sell offs. I want to get back to the 0:14:46.080 --> 0:14:48.720 low all trade, which you had mentioned before. Where do 0:14:48.760 --> 0:14:51.520 you guys actually stand on that broader low all trade, 0:14:51.600 --> 0:14:54.640 because we just saw it grow in such popularity this 0:14:54.720 --> 0:14:56.920 year and now we hear a couple of people coming 0:14:56.920 --> 0:14:58.760 out saying, look, this has gone too far. We're going 0:14:58.800 --> 0:15:00.720 to see you oursel and you pounded the table a 0:15:00.720 --> 0:15:02.400 while is back on the trade. So where do you 0:15:02.440 --> 0:15:06.600 guys stand now? So again, bigger picture, we've liked low 0:15:06.680 --> 0:15:09.440 volatility low volatility sector for and we've been writing about 0:15:09.480 --> 0:15:12.120 it for the last ten years. We got very aggressive 0:15:12.120 --> 0:15:14.920 in the summer of two thousand it was two thousand 0:15:15.000 --> 0:15:18.520 eight um but in the summer of two thousand nineteen, 0:15:18.560 --> 0:15:21.280 what we were saying is it's now pricing in a recession, 0:15:21.480 --> 0:15:23.440 and from a tactical point of view, we wanted to 0:15:23.480 --> 0:15:25.160 fade that. We want to fade a lot of your 0:15:25.160 --> 0:15:27.920 bond proxies, especially when the tenures in and around one 0:15:27.960 --> 0:15:30.200 and a half percent. At some point we'll want to 0:15:30.240 --> 0:15:32.360 come back to that, but we're not ready. One of 0:15:32.400 --> 0:15:35.000 the things that we always talk about is the volatility 0:15:35.040 --> 0:15:38.120 of low ball and how people are whether whether they're 0:15:38.120 --> 0:15:42.160 discriminating or not discriminating across that volatility access Right now, 0:15:42.640 --> 0:15:45.360 they don't really care. We're starting to see opportunities, were 0:15:45.360 --> 0:15:47.680 starting to see low ball roll over, We're starting to 0:15:47.720 --> 0:15:52.400 see your bond proxies pull back, the tactical opportunities opening up. 0:15:52.600 --> 0:15:55.320 But just not yet. We need to see people we 0:15:55.400 --> 0:15:57.560 see need to see a little bit more optimism, a 0:15:57.600 --> 0:16:00.160 little bit more speculation at that point in time will 0:16:00.160 --> 0:16:02.720 come back to it from a tactical, tactical point of view. 0:16:03.040 --> 0:16:06.600 What the issue that we have longer term is this space, 0:16:07.120 --> 0:16:09.000 whether it's some of the e t f s, some 0:16:09.080 --> 0:16:11.560 of the quant funds UM and even some of the 0:16:11.560 --> 0:16:14.760 fundamental funds UM are a lot more a u M 0:16:14.840 --> 0:16:16.840 is going into this space, and the opportunities are less 0:16:16.840 --> 0:16:19.120 and less, and the valuations are higher and higher. So 0:16:19.200 --> 0:16:22.240 it's not what it used to be UM from five 0:16:22.320 --> 0:16:24.920 or five plus years ago. So if you boil it 0:16:24.960 --> 0:16:28.200 all down to a headline, uh, you're looking at an 0:16:28.280 --> 0:16:33.240 SMP five hundred target your end of thirty eight, about 0:16:33.240 --> 0:16:36.200 a six percent gain. I always like to ask sort 0:16:36.240 --> 0:16:40.280 of what your confidence level is in that, and more importantly, 0:16:40.280 --> 0:16:44.920 you know, uh, everyone sort of has upside surprise in mind, 0:16:45.000 --> 0:16:47.800 and a downside surprise, which which risk is is greater 0:16:47.880 --> 0:16:56.920 and upside or downside to that um um, so a 0:16:56.960 --> 0:16:59.080 couple of things there, because because you asked and said 0:16:59.160 --> 0:17:01.640 said a lot um. One of the things we have 0:17:01.760 --> 0:17:03.440 the most confidence in and one of the things that 0:17:03.480 --> 0:17:05.439 we expect to see next year is we expect to 0:17:05.440 --> 0:17:08.240 see a lot more spikes and volatility, a lot more 0:17:08.400 --> 0:17:11.720 training opportunities open, opening up the buying hold. I don't 0:17:11.760 --> 0:17:14.199 think is going to be your friend next year, and 0:17:14.280 --> 0:17:16.760 so ultimately we think we get to some sort of 0:17:16.760 --> 0:17:19.720 mid single digit return. But by the end of the year, 0:17:20.040 --> 0:17:23.680 you're gonna need a drink because it's it's gonna be 0:17:23.760 --> 0:17:25.560 a long road, and there's gonna be times where people 0:17:25.600 --> 0:17:27.600 say where we here they are word again, where we 0:17:27.720 --> 0:17:31.159 hear recession um switching gears a little bit. What worries 0:17:31.240 --> 0:17:33.800 us most is we don't think the volatility in the 0:17:33.880 --> 0:17:35.959 rates market is over at this point in time, and 0:17:36.000 --> 0:17:39.119 we can make an equally plausible issue that rates go 0:17:39.240 --> 0:17:41.679 too high as well as too low, and so that 0:17:41.760 --> 0:17:46.000 continues to trouble us, if you will. And it's just 0:17:46.160 --> 0:17:49.600 really difficult to handicap because you can trying to figure 0:17:49.600 --> 0:17:51.800 out the winners and losers. You know, the the index 0:17:51.880 --> 0:17:55.000 might be somewhat steady, but the the winners and losers 0:17:55.040 --> 0:17:57.800 inside will be flipping and flopping around. It possible. And 0:17:57.840 --> 0:18:00.240 then the other thing is that getting back to liquidity. 0:18:00.440 --> 0:18:03.080 At some point the FED will stop growing their balance sheet. 0:18:03.480 --> 0:18:05.920 We saw that in at the end of two thousand fourteen. 0:18:06.240 --> 0:18:09.119 Two thousand fifteen was not a great year, and so 0:18:09.600 --> 0:18:13.280 it looks like they've been helping to push price, push risk. Yes, 0:18:13.320 --> 0:18:15.719 trade and tariff has done its fair share, but if 0:18:15.760 --> 0:18:17.159 you look at what's happened to the shape of the 0:18:17.200 --> 0:18:20.440 yeld curve, interest rates and risk product, it's been very 0:18:20.440 --> 0:18:23.760 aggressive as a FED has put more liquid into the system. 0:18:24.119 --> 0:18:26.560 Is that balance sheet risks sort of? I would imagine 0:18:26.560 --> 0:18:28.720 that could be frontloaded towards the beginning of the year, 0:18:28.760 --> 0:18:30.439 just because you know, they want to get past the 0:18:30.560 --> 0:18:32.760 term in the repo market. And I think I think 0:18:32.840 --> 0:18:35.680 that's fair and I think that's right as well. But 0:18:35.920 --> 0:18:38.080 the one thing that when I ask people, so where 0:18:38.080 --> 0:18:40.200 do you think they end? How big a balance sheet 0:18:40.200 --> 0:18:42.159 do you think they get to? And right now it 0:18:42.160 --> 0:18:43.560 looks like they're going to add about a half a 0:18:43.600 --> 0:18:46.719 trillion dollars, but that might not be the end of it. 0:18:46.800 --> 0:18:49.119 That's what we think, but it's not clear they're not 0:18:49.200 --> 0:18:53.560 saying okay, that's that's the level. We're done here. You 0:18:53.600 --> 0:18:57.159 could see more um. Hopefully they end and and we 0:18:57.200 --> 0:18:59.240 can have the kappa markets start to stand on their own. 0:18:59.359 --> 0:19:01.960 But we'll see. So within your risks that you lay 0:19:01.960 --> 0:19:04.760 at in your look of first on, there is interest 0:19:04.880 --> 0:19:08.280 rate risks and volatility. At what point would it be 0:19:08.320 --> 0:19:10.480 an issue? Say we actually do see ten your yield 0:19:10.560 --> 0:19:12.479 moving to the upside, at what point do you think 0:19:12.480 --> 0:19:14.720 would actually cause an issue? Then? For the stock market, 0:19:15.280 --> 0:19:17.480 one of the things that we think about, yes, how 0:19:17.520 --> 0:19:20.520 will they get UM up safe? Let's just choose a 0:19:20.560 --> 0:19:23.320 figure up fifty basis points and and taking a step 0:19:23.359 --> 0:19:25.560 back to if you look at the equity market in 0:19:25.560 --> 0:19:28.359 two thousand nineteen, we could say majority or more than 0:19:28.440 --> 0:19:31.719 majority of the return was because of multiple expansion, and 0:19:31.760 --> 0:19:34.879 that multiple expansion was predicated on lower rates and tighter 0:19:34.880 --> 0:19:38.280 credit spreads, and so at some point and maybe it's 0:19:38.520 --> 0:19:40.880 it depends on the level, and it depends on the speed. 0:19:40.920 --> 0:19:43.800 If it happens very quickly, then then the levels lower. 0:19:43.840 --> 0:19:46.840 If it takes time, then it's probably fifty basis points 0:19:46.920 --> 0:19:50.040