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Speaker 1: Well, can a trillions. I'm Joel Webber and i am

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Speaker 1: Eric belchiernas eric Um. The stock market over the past

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Speaker 1: week has given given me heart palpitations. Uh. And it

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Speaker 1: feels like we've just been on this like roller coaster,

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Speaker 1: and there's been dread about inflation rising rates. Uh, and

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Speaker 1: then there's been corporate earnings in the backdrop which have

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Speaker 1: kind of exceeded expectations. I'm really confused. Can you help

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Speaker 1: me make sense of that? And do you have any

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Speaker 1: guests who could help? Yeah, well, we have a two

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Speaker 1: great guests. It's a perfect one to punch because everything

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Speaker 1: going on to the market now really mostly is is

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Speaker 1: a derivative of the Fed and their plan to be

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Speaker 1: more hawkish. There's two ways of doing that, which we'll

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Speaker 1: go into. But it's not just rate hikes, but the

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Speaker 1: idea of raising interest rates because they're obviously concerned about

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Speaker 1: inflation and inflation I think is actually trumping the idea

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Speaker 1: that the stock market could fall. Especially politically, I don't think, uh,

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Speaker 1: you know, any of these politicians want to go into

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Speaker 1: mid terms or the presidential election with inflation running high.

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Speaker 1: So the Fed uh looks like they're committed. I've been

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Speaker 1: pretty critical of the FED always folding like a lawn

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Speaker 1: chair where they get hawkish and they just fold immediately

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Speaker 1: when the stock market goes down two points. But they

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Speaker 1: seem pretty persistent. That last um UH press conference that

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Speaker 1: Pal had, I felt he was the strongest he've been.

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Speaker 1: I'm a casual observer, I'm not an expert, but as

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Speaker 1: somebody who's doubted them, I feel like they have more

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Speaker 1: of a spy now. And so everybody's just repositioning, and

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Speaker 1: they're saying, well, if if, if rates are going to

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Speaker 1: go up a little bit, I've got to figure different

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Speaker 1: things out my portfolio. So it's hurt growth stocks, help

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Speaker 1: bank stocks, hurt bonds, and so there's a lot of repositioning.

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Speaker 1: I will say that general mass blob of retail flow

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Speaker 1: is still kind of buying Vanguard, but the outer layers definitely.

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Speaker 1: You can feel a lot of activity around this, including

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Speaker 1: some selling of of stocks and et f s. So

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Speaker 1: you'll help us with the E t F side, but

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Speaker 1: who's gonna help us with sort of the equity slash

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Speaker 1: economic outlook through all of this? So Carl Rickadonna, who

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Speaker 1: I've known for a while and now is sort of

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Speaker 1: in my group. Um, he's gonna take the FED part

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Speaker 1: of this, and he's so good at simplifying FED speak,

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Speaker 1: and I really go always go to him when I

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Speaker 1: have a question. And then Gina Martin Adams, who is

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Speaker 1: both of our bosses. She covers the macro outlook, so

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Speaker 1: she's always looking at earnings and the FED and how

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Speaker 1: the whole thing fits together. So I think she can

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Speaker 1: also talk about how the new environment is affecting her outlook. Alright,

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Speaker 1: So joining us on Trillions Carl Rickadonna, the chief economist

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Speaker 1: for Bloomberg Intelligence, as well as Gina Martin Adams back

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Speaker 1: on the pod, the chief equity strategist for Bloomberg Intelligence.

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Speaker 1: Next time on trying buckle up for a roller coaster. Carl, Gina,

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Speaker 1: welcome back to Trillions. Thank you, thanks for having us,

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Speaker 1: glad to be here, thanks for providing me on. I'm

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Speaker 1: gonna start with you, Carl. Is the FED going to

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Speaker 1: fold like Eric's lawn chair? The FED is not going

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Speaker 1: to fold like a lawn chair here, but I don't

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Speaker 1: think they're going to be as aggressive as some of

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Speaker 1: the worst concerns in the marketplace. So, as Eric mentioned

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Speaker 1: in the past, the FED has been a very reactive

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Speaker 1: to a resetting of financial conditions, explicitly sharp declines in

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Speaker 1: the equity markets. Because the stock market in the economy

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Speaker 1: are not too uh independent creatures. What happens in the

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Speaker 1: stock market often has very significant consequences for wealth effects

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Speaker 1: for households, for confidence effects among companies who may be

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Speaker 1: pulled back on the pace of hiring when when equities

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Speaker 1: take a schoon or become much less confident in the

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Speaker 1: economic outlook. Because equities are in the nose dives, so

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Speaker 1: that that does have implications for the commodity for the

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Speaker 1: FED the reaction function. But front and center at the

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Speaker 1: moment is the fact that now the fence two main objectives,

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Speaker 1: maximizing the level of employment in the economy and achieving

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Speaker 1: price stability, are now both on the same side of

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Speaker 1: the two cold too hot spectrum. They are both running

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Speaker 1: too hot. So we have the unemployment rate below where

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Speaker 1: the FED thinks it should settle in the longer run,

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Speaker 1: and obviously inflation for outstripping the fence two percent objective.

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Speaker 1: The last reading on the CPI showed a seven percent print.

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Speaker 1: So let's go into what they do. Okay, So there's

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Speaker 1: we all know that over the past ten years, they've

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Speaker 1: kept rates low, and they've fought they fought assets. I

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Speaker 1: mean they have a balance sheet. That's uh, I want

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Speaker 1: to say fortually, but you'll correct me in a minute

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Speaker 1: if I'm wrong. Now, explain this idea of what are

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Speaker 1: they doing on the rate side and what are they

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Speaker 1: doing on the balance sheet side going forward? So what's

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Speaker 1: happening the Fed that uses interest rates the overnight lending

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Speaker 1: rate as its primary policy tool, and so as uh,

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Speaker 1: you know, as the economy heats up, they raise interest

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Speaker 1: rates to slow things down. What happens in the overnight

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Speaker 1: rate then often gets multiplied out into longer term lending rates,

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Speaker 1: whether it's your credit card rate, the interest rate on

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Speaker 1: your car loan, your mortgage, or corporate lending rates. So

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Speaker 1: what the Fed does then has ripple effects throughout the

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Speaker 1: broader economy. The problem for the FED if you keep

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Speaker 1: cutting interest rates, eventually you get to zero uh. And

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Speaker 1: once you get to zero, then negative interest rates don't

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Speaker 1: really work that well. So that's a policy option the

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Speaker 1: Fed has abandoned. Uh. And so what the Fed does

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Speaker 1: then is reach further out into the maturity spectrum or

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Speaker 1: further out on the yield curve. By influencing other interest rates.

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Speaker 1: So as we saw after the global financial crisis in

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Speaker 1: two thousand and seven to two thousand and nine, the

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Speaker 1: FED cut rates to zero for the first time and

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Speaker 1: saw the need to do more UH, and so in

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Speaker 1: doing more, they purchase assets. So they purchase in this

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Speaker 1: case treasury securities of of varying maturity, so across the

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Speaker 1: yield curve. And also they purchased mortgages. Now, the mortgages

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Speaker 1: kind of a legacy of the housing bust in O

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Speaker 1: A DO nine, and they saw particular need to influence,

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Speaker 1: you know, financial conditions for households. We come out of

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Speaker 1: the O nine recession and have a very weak economic recovery,

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Speaker 1: so the Fed's very slow to tighten policy by both

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Speaker 1: raising interest rates and also starting to shrink the size

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Speaker 1: of its balance sheet. Sure enough, COVID comes along in

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Speaker 1: the Fed again has to aggressively cut rates and doesn't

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Speaker 1: have enough room to just achieve their objectives through interest

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Speaker 1: rate cuts. They cut to zero and once again start

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Speaker 1: expanding the balance sheet, in this case even more aggressively

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Speaker 1: than they did back around the global financial crisis, so

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Speaker 1: they have UH. In O nine, they quadrupled the size

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Speaker 1: of their balance sheet, and now the balance sheet is

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Speaker 1: approaching nine or ten trillion dollars. So it's a huge

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Speaker 1: number here for the Fed. Uh. And this provided tremendous

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Speaker 1: stimulus during the COVID crisis. Uh. You know, we can say, well,

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Speaker 1: the FED did too much in in in the hindsight

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Speaker 1: that that created some inflation problems, but we cannot underestimate,

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Speaker 1: you know, what could have potentially transpired had the FED

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Speaker 1: not acted so aggressively. We saw even the most deep

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Speaker 1: and liquid financial market in the world, the US treasury market,

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Speaker 1: basically seizing up in March of and so this was

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Speaker 1: a matter of not only propping up the economy but

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Speaker 1: also preserving the sanctity the liquid city of the most

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Speaker 1: deep mark asset classes said that are hugely consequential for

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Speaker 1: the global economy and the US economy. So the FED

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Speaker 1: had to step in in a major way. We didn't

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Speaker 1: know exactly how the pandemic would play out. We didn't

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Speaker 1: fully understand what the mortality rate was in the early

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Speaker 1: stages of the pandemic, so the FED acted in a

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Speaker 1: very big fashion. The other factor they didn't understand was

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Speaker 1: how much fiscal stimulus would be coming through because they know,

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Speaker 1: the experience after the global financial crisis, Congress was very

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Speaker 1: stingy providing stimulus to the economy, and so the you know,

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Speaker 1: the risk was that if we saw a reprise of that,

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Speaker 1: given the political tension in the economy in the country

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Speaker 1: at that time, that maybe there would not be much

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Speaker 1: fiscal support. So the Fed went massively. Uh. We got

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Speaker 1: a lot of fiscal stimulus, trillions of fiscal stimulus. So

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Speaker 1: that did very importantly prop up the economy until it

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Speaker 1: could get back onto its own feet. And now the

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Speaker 1: FED has realized where at a stage where it is

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Speaker 1: now time, you know, the pandemic is becoming endemic. It's

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Speaker 1: less of a threat to the economy, and so the

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Speaker 1: Fed is pulling back on those uh, those levels of accommodation,

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Speaker 1: which means we'll soon be seeing both interest rate increases

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Speaker 1: uh and later this year, perhaps much later this year,

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Speaker 1: the FED will start to gradually shrink its balance sheet.

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Speaker 1: Gina um Carl's successfully has ratcheted up my anxiety. I

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Speaker 1: feel like I'm at the top of that roller coaster now,

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Speaker 1: and which was not what I needed after the last

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Speaker 1: week and of watching this market. Uh, take me, take

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Speaker 1: me on some whiplash we had you on a few

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Speaker 1: months ago. One of the things that I that we

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Speaker 1: did spend some time talking about then was inflation. It's gotten.

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Speaker 1: It's just become like almost the only thing that the

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Speaker 1: market and the FED is has been centered on since

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Speaker 1: that conversation. So just bring us up to speed on

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Speaker 1: on where where you are now, what what you feel

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Speaker 1: like that outlook is um and and how powerful um

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Speaker 1: the FED is and what the market is gonna be

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Speaker 1: doing in the weeks and months to come. Yeah, UM,

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Speaker 1: long a lot of questions to answer there. I'll try

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Speaker 1: to get to all of them. First, Joel, I have

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Speaker 1: to say, you're gonna have to toughen up. You're gonna

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Speaker 1: have to get stronger, because it's going to be a

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Speaker 1: wild ride in two. We have been here before, right,

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Speaker 1: The FED has attempted to reverse or normalize policy multiple

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Speaker 1: times over the course of the last ten years. In

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Speaker 1: each case, especially when they stopped inflating the balance sheet,

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Speaker 1: the stock market goes through a pretty rough correction. Right

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Speaker 1: on average, we see the stock market fall somewhere between

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Speaker 1: fifteen and in each of those cases that that Carl

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Speaker 1: alluded to. So I do think we have to we're

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Speaker 1: gonna have to be tougher. In two. We've gotten very

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Speaker 1: complacent as equity investors over the last two years, just

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Speaker 1: really accustomed to constant gains in the equity market, and

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Speaker 1: that's highly unlikely to be the case in two. That said,

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Speaker 1: you know, I think a couple of things has changed

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Speaker 1: since the last time I was on and most of

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Speaker 1: it is really the Fed's interpretation of what's going on.

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Speaker 1: If you recall when we talked last, we talked about

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Speaker 1: the fact that I believe the economy is on much

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Speaker 1: much stronger footing than most economists are forecasting, and the

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Speaker 1: demand side of inflation is completely underappreciated, and the FED

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Speaker 1: really leaned on this idea that inflation was going to

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Speaker 1: be transitory, it would go away because it was all

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Speaker 1: supply driven. And the reality is that household balance sheets

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Speaker 1: are in much much better condition than they were last cycles,

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Speaker 1: so sort of going on a last cycle playbook for

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Speaker 1: how slow they can move. Uh. That's really changed over

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Speaker 1: the course of the last few months, where the FED

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Speaker 1: is now acknowledging well, you know, even some of the

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Speaker 1: most esoteric unemployment rate measures that we like to follow

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Speaker 1: to suggest that we're not yet at maximum employment well

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Speaker 1: low and behold, we're back to where we were in

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Speaker 1: two thousand nineteen. Right. Retail sales are still on fire

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Speaker 1: for the most part. Inflation is still very strong. There's

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Speaker 1: there's really very few slignes signs that the economy is

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Speaker 1: even slowing down, so inflation may actually sustain. And I

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Speaker 1: think they finally have capitulated on the idea that, yeah,

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Speaker 1: as Carl mentioned, the pandemic is becoming endemic. It's less

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Speaker 1: of a risk to broader economic growth, and we need

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Speaker 1: to normalize things. So the natural reaction and the stock

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Speaker 1: market is oh, hey, okay, we thought you're going to

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Speaker 1: be our best buddy, and now you're gonna leave us be.

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Speaker 1: So valuations are naturally reacting. Um. I think Eric mentioned

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Speaker 1: at the onset that you know, the market has reacted

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Speaker 1: to inflation. I totally agree. In particular, the market has

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Speaker 1: reacted to how rates are are moving with respect to

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Speaker 1: inflation and with respect to what the FED is going

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Speaker 1: to do specifically. And we see that in our work

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Speaker 1: in the equity market, the stocks with the most sensitivity

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Speaker 1: two rates have dramatically underperformed the stocks with the least

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Speaker 1: sensitivity to rates. And and I think that that's going

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Speaker 1: to be the prevailing case for most of because this

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Speaker 1: is an adjustment process. Now that's set head. There is

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Speaker 1: a saving grace here that nobody's talking about, and that is, Hey,

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Speaker 1: the economy is still strong, and I think we're going

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Speaker 1: to continue to underappreciate just how strong the economy is,

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Speaker 1: even in the face of FED tightening, even in the

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Speaker 1: face of potential balance sheet runoff. We probably will continue

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Speaker 1: to underappreciate just how strong that economy is. And that

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Speaker 1: shows up in earnings. So the offset for the market

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Speaker 1: is this sort of pull and push kind of metaphor

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Speaker 1: where valuations are constantly under some degree of pressure, but

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Speaker 1: earnings do make up some of that difference. And as

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Speaker 1: long as earnings hold in, you know, the longer term

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Speaker 1: uptrend for the stock market probably remains intact. Um. Let

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Speaker 1: me follow up on this whole idea, because I think

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Speaker 1: people out there here all the time, Oh, higher rates

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Speaker 1: bad for growth stocks, They're bad for the ARC stocks.

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Speaker 1: Clearly that's happened right. ARC is down in the past year,

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Speaker 1: but the S and PS up twenty That is a

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Speaker 1: big spread. Although art crushed in long story, short just

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Speaker 1: exp plane why just basis proints make that big of

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Speaker 1: a difference for some of these stocks like Zoom Roku.

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Speaker 1: I mean, these are pretty big companies. It's not like

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Speaker 1: they're like nobody companies who have nothing going on. I

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Speaker 1: guess maybe try to square that. Yeah, so a couple

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Speaker 1: of things happen. Right. If you're a purest if you're

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Speaker 1: a pure fundamentalist, you believe the value of any equity

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Speaker 1: is it's discounted future to cash flow stream, right, And

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Speaker 1: so if that discount rate is going higher and your

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Speaker 1: future cash flows are not changing as the discount rate

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Speaker 1: goes higher, the stocks that had the longest term future

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Speaker 1: cash flow growth are going to be impacted the most.

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Speaker 1: Those are the growth stocks in the market in agent

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Speaker 1: most in the most generic sense. At the same time,

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Speaker 1: there is a proven relationship between high volatility stucks in

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Speaker 1: the balance sheet for the FED, and not very many

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Speaker 1: people can really explain this, but the reality of the

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Speaker 1: situation is every time that balance sheet has exceler rated,

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Speaker 1: the highest volatility stocks in the SNP five hundred, no

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Speaker 1: matter what type of stock they are, have tended to benefit.

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Speaker 1: So we what we started to see all the way

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Speaker 1: back in March of last year, actually, as some of

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Speaker 1: these most high volatility stocks in the market started to

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Speaker 1: suss out this idea that the FED was going to

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Speaker 1: have to tighten policy and liquidity conditions would start to change,

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Speaker 1: and the reduced this materially reduced risk tolerance for these

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Speaker 1: type of stocks. Some of them are high growth or

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Speaker 1: high cash flow growth stocks. Some of them have no

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Speaker 1: cash flow at all, so you can't explain it through

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Speaker 1: a traditional fundamental metric, but they are sensitive because they're

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Speaker 1: high vall And we've really started to see this in

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Speaker 1: some of our factor work over the course of the

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Speaker 1: last six months, especially as the factor models that we run,

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Speaker 1: we're saying, get out of the way of high volatility

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Speaker 1: volatility stocks, start to move your portfolio to lower volatility stocks,

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Speaker 1: and that is reflecting what's happening with interest rate expectations,

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Speaker 1: but also what's happening with expectations for the ballot sheet.

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Speaker 1: If the balance sheet is not going to continue to rise,

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Speaker 1: it will impact the most volatle stocks in the market

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Speaker 1: most um. And I think that's what's happened with some

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Speaker 1: of the arcs and you know, some of these meme

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Speaker 1: stocks and the like. You know, as is typically the case,

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Speaker 1: the market really started to suss this out, as I mentioned,

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Speaker 1: almost a full year ago now, but you had some

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Speaker 1: offsets that made us kind of not you know, maybe

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Speaker 1: when we're looking at the aggregate numbers, the SMP five

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Speaker 1: hundred looked great, but if you look at where the

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Speaker 1: returns came from in the SNP five hundred, it was

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Speaker 1: characteristically very different than the returns. Just to paraphrase Gina

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Speaker 1: in very blunt Layman's terms, stocks love que quantitine of easing, Yes,

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Speaker 1: that purchases from the Fed. If the Fed so much

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Speaker 1: as whispers QUI, stocks rally. And when the Fed does

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Speaker 1: the opposite, which is what they've been doing over the

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Speaker 1: course of the last year, when they talk about quantitative tightening,

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Speaker 1: the shrinking of the balance sheet, then though you know,

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Speaker 1: stocks as much as they like QUEI, they despise QT.

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Speaker 1: And the FED has been murmuring increasingly loudly about quantitative

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Speaker 1: tightening and what that's going to look like over the

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Speaker 1: course of the last several months, especially in since the

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Speaker 1: December FOMC meeting, and stocks don't like that, especially the

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Speaker 1: risky stocks don't like that. And that's totally consistent with

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Speaker 1: what we've seen play out in the marketplace. So Carlos,

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Speaker 1: stick with that for a second. Say I give you

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Speaker 1: the football. You are j pal, When do you next

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Speaker 1: look at the stock market? Well, you have to continuously

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Speaker 1: watch the stock market and see how it's reacting to

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Speaker 1: what you're doing. Because again, the stock market is not

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Speaker 1: divorced from the real economy. Everyone says Wall Street is

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Speaker 1: not main Street, but there are very important linkage is here.

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Speaker 1: The stock market is a periscope into the future, into

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Speaker 1: future company earnings, into the future health of the economy.

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Speaker 1: So stocks are tanking. That's giving you a very negative

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Speaker 1: signal on the economy, and that tells you maybe you

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Speaker 1: need to move at a slower pace in terms of

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Speaker 1: tightening policy. Mind you, if we're thinking about Eric Incorporated,

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Speaker 1: let's call it a small business. Eric is producing widgets now,

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Speaker 1: and if it's chairs, lawn chairs, lawn chairs, okay, Eric,

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Speaker 1: slawn chair company. If his business is growing at a

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Speaker 1: ten percent pace and the cost of his financing is

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Speaker 1: one percent, what are you gonna do, Eric? Grow the business? Sure, sure,

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Speaker 1: keep growing it. Okay. Now your business slows down to

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Speaker 1: eight percent, your cost of financing goes up to four percent.

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Speaker 1: Keep growing the business a little a little. Okay. Now

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Speaker 1: the business is growing four percent and your cost of

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Speaker 1: financing is five percent, you're going to grow the business. No,

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Speaker 1: I'm gonna I'm gonna cash any more. I'm gonna cash

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Speaker 1: up with you. Oh cash out? Well, you're you're not

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Speaker 1: going to continue to grow the business. And what's true

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Speaker 1: for Eric's lawn Chairs Incorporated is also true for a

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Speaker 1: twenty trillion dollar US economy. When the cost of financing

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Speaker 1: approaches the growth rate, then all of a sudden, we're

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Speaker 1: not stepping on the gas pedal anymore. Now we're starting

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Speaker 1: to move towards the brake pedal. So as the FED

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Speaker 1: lifts rates from zero to maybe one percent at year end,

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Speaker 1: that's really just easing off of the accelerator. It's not

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Speaker 1: stepping on the brake pedal, but it's moving in the

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Speaker 1: direction of the brake pedal. And so that's why GENA

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Speaker 1: can have a very constructive outlook for the economy and

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Speaker 1: for stocks, just to to put those numbers around instead

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Speaker 1: of Eric's lawn chair business, the U s economy right

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Speaker 1: interest rates or zero or effectively zero h The economy

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Speaker 1: as of the final quarter of grew at a nominal

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Speaker 1: pace of twelve percent year on year, So there's a

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Speaker 1: huge gap between twelve the growth rate of the business

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Speaker 1: and zero the cost of financing. The FED is going

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Speaker 1: to start narrowing that gap, and probably nominal GDP slows down,

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Speaker 1: you know, considerably, to something closer to five or six

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Speaker 1: percent by the end of this year. But if the

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Speaker 1: FAN is hiking once per quarter, that puts them at

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Speaker 1: one percent, So you still have a huge interest rate differentials.

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Speaker 1: We're not talking until maybe twenty four or beyond. If

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Speaker 1: the FED continues on this steady pace of tightening to

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Speaker 1: really move that interest rate differential down to what we

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Speaker 1: would call a neutral pace. The FAN is giving it

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Speaker 1: a very aggressive steroid to the economy and will continue

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Speaker 1: to do so, albeit in slightly smaller doses going forward.

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Speaker 1: I would just add one thing because I think that

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Speaker 1: was a great explanation. We're surrounding the cost of financing

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Speaker 1: um I would say when we look at corporate balance sheets,

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Speaker 1: the thing that also is completely underappreciated is that cost

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Speaker 1: of financing is significantly lower than you might observe when

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Speaker 1: you're looking at even spreads because of the degree to

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Speaker 1: which companies have built up cash stores, and it's very

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Speaker 1: similar with households, where we are substantially less dependent on

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Speaker 1: on financing to grow, especially relative to the last cycle,

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Speaker 1: where corporate balance sheets and household balance sheets were in

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Speaker 1: tremendous disrepair following the Great Financial Crisis, there on significantly

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Speaker 1: sounder footing. And you know, the perfect example of this

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Speaker 1: is Microsoft wants to grow. They don't need to go

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Speaker 1: issue debt to even buy a company as large as Activision,

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Speaker 1: which is a huge testament to just how much insane

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Speaker 1: amount of cash is just sitting on balance sheets. And

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Speaker 1: it's the same across most of the S and P

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Speaker 1: five hundred, where corporate cash is still sitting near and

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Speaker 1: all time high, even though we're this far into recovery,

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Speaker 1: and it's it's quite phenomenal, right, is this? Companies just

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Speaker 1: haven't spent a ton yet on anything, And even though

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Speaker 1: they've been able to tap the bond markets for the

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Speaker 1: last couple of years, they have stored up a lot

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Speaker 1: of capability of keeping the cycle going for longer than

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Speaker 1: many people anticipate, even if the fet ist tight. And

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Speaker 1: I should just add to what jetas saying, what she's

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Speaker 1: seeing at the company level is also true at the

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Speaker 1: household level. Households stockpiled cash during the pandemic, they got

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Speaker 1: rebate checks from the government. They didn't have the opportunity

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Speaker 1: to spend money in many cases, and a lot of

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Speaker 1: households were significantly invested in the markets and so they

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Speaker 1: saw their wealth increase on that front as well. So

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Speaker 1: there's a a mountain of savings that's in the trillions

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Speaker 1: of dollars that households are sitting on, which is why

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Speaker 1: they can weather the storm of slightly higher inflation and

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Speaker 1: higher interest rates as well. But it's gonna be a

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Speaker 1: bumpy little ride here, Eric, for all of them. And

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Speaker 1: I'm curious, like, just as flows go something I know

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Speaker 1: you watch closely all the time, what's it? What's it

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Speaker 1: been like of late? Where have people gotten out of

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00:22:56,320 --> 00:23:00,360
Speaker 1: I saw that spy was had a massive outflow, Um

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Speaker 1: what what? Other? What? Other kind of things of culture

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00:23:03,160 --> 00:23:07,000
Speaker 1: and bring it back to the world of ets for us? Yeah, sure,

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Speaker 1: And I think this I'll pivot to a question for Gina,

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Speaker 1: which is the main vanguard investor is just totally oblivious.

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Speaker 1: They're just investing vanguards taken into one billion. That's they're

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Speaker 1: just like nothing's happening. Um, Schwab is doing well too.

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Speaker 1: So if you're like a passive bogel And type investor,

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Speaker 1: none of this really but bothers you. That said, there's

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Speaker 1: the trading crowd and people institutions who are repositioning on

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Speaker 1: the on the fringes especially so for example, we've seen

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Speaker 1: a lot of money go into financial E T s.

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Speaker 1: Obviously rates go up, they can lend, get a higher rate,

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Speaker 1: or they can get more their interest rates are good

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Speaker 1: for them. We've also seen gold get a bid because

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Speaker 1: I think there's some nerves on like, hey, I should

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Speaker 1: be more diversified because my sixty and my forty is

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Speaker 1: going down. And we've seen value E t F s

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Speaker 1: UM and energy. I put energy in value together almost

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Speaker 1: because they're beat up for so long. So there's a

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Speaker 1: bit of a repositioning, uh. And that's where it's happening.

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Speaker 1: And the other thing that's the big loser this year,

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Speaker 1: besides the cueues which is seeing outflows, is bonds. If

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Speaker 1: you look at the outflow list, it's basically it's a

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Speaker 1: who's who of the all the bond E t F

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Speaker 1: t l t H y G, even the tip E

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Speaker 1: t F tips e tfs l q D I E,

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Speaker 1: F J, and K. It's basically treasuries mortgages because if

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00:24:23,760 --> 00:24:26,359
Speaker 1: rates go up, all those current bonds are just worthless

430
00:24:26,680 --> 00:24:28,320
Speaker 1: because you can get more with the new rate. So

431
00:24:29,440 --> 00:24:32,400
Speaker 1: what the Fed is doing clearly is going to impact

432
00:24:32,400 --> 00:24:35,440
Speaker 1: the bond market. And there's been this huge monster bowl

433
00:24:35,480 --> 00:24:38,000
Speaker 1: market for the twenty years. And like I guess I

434
00:24:38,000 --> 00:24:40,040
Speaker 1: would throw it to Gina. I just went over a lot.

435
00:24:40,119 --> 00:24:44,919
Speaker 1: But is the bond market going to have real problems

436
00:24:44,960 --> 00:24:48,280
Speaker 1: and is that going to spill over into the stock mark? Um?

437
00:24:48,840 --> 00:24:51,000
Speaker 1: You know, I think that we certainly are on the

438
00:24:51,000 --> 00:24:55,159
Speaker 1: precipice of a longer term shift in rates, and and

439
00:24:55,240 --> 00:24:58,240
Speaker 1: I base that opinion based simply on my views of

440
00:24:58,240 --> 00:24:59,879
Speaker 1: the economy. I just think the economy is in a

441
00:25:00,000 --> 00:25:02,800
Speaker 1: copletely different condition than it was for the bulk of

442
00:25:02,840 --> 00:25:05,679
Speaker 1: the last ten years. I also think the inflationary scenario

443
00:25:05,800 --> 00:25:08,400
Speaker 1: is very different, in part as a result of that,

444
00:25:08,520 --> 00:25:12,639
Speaker 1: but other longer term structural factors as well. And the

445
00:25:12,680 --> 00:25:16,160
Speaker 1: result of that is we are very unlikely to see

446
00:25:16,240 --> 00:25:18,200
Speaker 1: rates as low as we did for the for much

447
00:25:18,200 --> 00:25:20,760
Speaker 1: of the last ten years or the first call it

448
00:25:20,880 --> 00:25:23,520
Speaker 1: ten years of this of this bull market in stocks.

449
00:25:24,200 --> 00:25:27,000
Speaker 1: So the value of your future cash flows. You know

450
00:25:27,080 --> 00:25:30,320
Speaker 1: your is naturally going to adjust to rates moving higher.

451
00:25:31,000 --> 00:25:33,840
Speaker 1: But again, the offset there is that cash flow growth

452
00:25:33,880 --> 00:25:37,160
Speaker 1: should also be stronger. And the thing that we might

453
00:25:37,200 --> 00:25:41,520
Speaker 1: all be under appreciating is if bonds move from thirty

454
00:25:41,600 --> 00:25:47,200
Speaker 1: year bull market, two bear market, or even just moving

455
00:25:47,240 --> 00:25:50,760
Speaker 1: sideways and then slightly bear market, what we could be

456
00:25:50,840 --> 00:25:53,359
Speaker 1: under appreciating is just the amount of capital that comes

457
00:25:53,400 --> 00:25:57,720
Speaker 1: out of bonds and goes into stocks, and that I

458
00:25:57,760 --> 00:26:01,280
Speaker 1: think is much more difficult to model. Um It's been

459
00:26:01,280 --> 00:26:03,760
Speaker 1: one of the anomalies of the past the first ten

460
00:26:03,840 --> 00:26:06,520
Speaker 1: years of the cycle. We're not about investors putting more

461
00:26:06,600 --> 00:26:08,800
Speaker 1: money to work in stocks. We know that for sure.

462
00:26:09,560 --> 00:26:14,560
Speaker 1: We know that investors, broadly household ownership of equities merely

463
00:26:14,600 --> 00:26:17,000
Speaker 1: went up because market value went up. On net, they

464
00:26:17,000 --> 00:26:22,120
Speaker 1: didn't add anything to their equity portfolio, which is completely anomalous. Historically,

465
00:26:22,119 --> 00:26:26,240
Speaker 1: you don't see a tenure economic recovery in which investors

466
00:26:26,240 --> 00:26:28,800
Speaker 1: don't add any more capital to the equity market on net.

467
00:26:28,920 --> 00:26:34,480
Speaker 1: It's just it's just wildly strange. UM. I think starting

468
00:26:34,480 --> 00:26:38,560
Speaker 1: in probably extending into and I do think moving into

469
00:26:39,200 --> 00:26:42,119
Speaker 1: two and beyond, we're going to continue to see this

470
00:26:42,240 --> 00:26:46,240
Speaker 1: great rotation really in we started to see the first

471
00:26:46,240 --> 00:26:49,399
Speaker 1: signs that equity and the investors are interested in stocks again,

472
00:26:49,480 --> 00:26:52,639
Speaker 1: with flows coming back to the market, longer term flows

473
00:26:52,680 --> 00:26:54,879
Speaker 1: moving back into stocks. We started to see I p

474
00:26:55,000 --> 00:26:59,040
Speaker 1: o issuance again. One These are things that I didn't

475
00:26:59,080 --> 00:27:03,040
Speaker 1: talk about for ten years um because they just weren't

476
00:27:03,040 --> 00:27:05,040
Speaker 1: supports to the stock market. Instead, the stock market went

477
00:27:05,080 --> 00:27:07,280
Speaker 1: up because the supply of equities went down, not because

478
00:27:07,280 --> 00:27:10,840
Speaker 1: demand for equities went higher. So I think that we

479
00:27:10,960 --> 00:27:13,080
Speaker 1: are seeing a little bit more exuberance in the stock

480
00:27:13,119 --> 00:27:15,760
Speaker 1: market developed simply because the barn market is in disrepair.

481
00:27:16,119 --> 00:27:18,840
Speaker 1: There will be offsets, and in periods of time in

482
00:27:18,880 --> 00:27:22,320
Speaker 1: which rates are dominating attention and moving into a spiking fashion,

483
00:27:22,760 --> 00:27:26,880
Speaker 1: it does create volatility for the stock market. But longer term,

484
00:27:26,920 --> 00:27:29,040
Speaker 1: you know, you just model what happened in the nineteen

485
00:27:29,080 --> 00:27:31,320
Speaker 1: fifties and sixties. The stock market went through a twenty

486
00:27:31,400 --> 00:27:35,120
Speaker 1: year bull market as rates were rising. This is certainly

487
00:27:35,200 --> 00:27:38,400
Speaker 1: possible to have rates rise and the stock market rise

488
00:27:38,440 --> 00:27:40,680
Speaker 1: at the same time, but you do have to have

489
00:27:41,160 --> 00:27:44,160
Speaker 1: very strong growth, and you have to have somewhat contained

490
00:27:44,200 --> 00:27:55,080
Speaker 1: inflation before it gets If there's a switch that gets flipped. Okay,

491
00:27:55,119 --> 00:27:58,720
Speaker 1: So that whole idea of bonds and stocks and this

492
00:27:58,800 --> 00:28:01,560
Speaker 1: is what most people have in a retirement portfolio. This

493
00:28:01,640 --> 00:28:03,080
Speaker 1: brings me to a theory. I want to I want

494
00:28:03,080 --> 00:28:04,719
Speaker 1: to throw it, Carl. I've thrown I threw it at

495
00:28:04,720 --> 00:28:08,640
Speaker 1: Genia last time. She was on lawn chair right now. Yeah,

496
00:28:08,680 --> 00:28:10,720
Speaker 1: this is this is this is kind of why my

497
00:28:10,920 --> 00:28:13,280
Speaker 1: the lawn chair thing comes up with me. I have

498
00:28:13,480 --> 00:28:16,280
Speaker 1: this thing called the boom Errati theory, which is that

499
00:28:16,720 --> 00:28:19,840
Speaker 1: you know how like j Pal's a boomer, Trump was

500
00:28:19,880 --> 00:28:22,520
Speaker 1: a boomer, isn't it. First of all, it's interesting that

501
00:28:22,560 --> 00:28:25,120
Speaker 1: Trump and Biden kept the same fed chair. They would

502
00:28:25,119 --> 00:28:27,960
Speaker 1: agree on nothing. Two things they agree on they like

503
00:28:28,040 --> 00:28:31,160
Speaker 1: pale and they hate bitcoin. Right, there's a boomer thing.

504
00:28:31,640 --> 00:28:34,560
Speaker 1: It transcends politics. They have all the money, if you

505
00:28:34,560 --> 00:28:36,280
Speaker 1: look at the stock and bond market over the years,

506
00:28:36,320 --> 00:28:39,920
Speaker 1: has become America's retirement fund. So all these boomers, which

507
00:28:40,600 --> 00:28:44,400
Speaker 1: they own about like se of the stock market, it's

508
00:28:44,400 --> 00:28:47,120
Speaker 1: their money and they're at all the levels of power.

509
00:28:48,000 --> 00:28:53,720
Speaker 1: So is there possibly subconsciously or consciously going to always

510
00:28:53,760 --> 00:28:58,240
Speaker 1: be a fed put because this is literally America's retirement money.

511
00:28:58,280 --> 00:29:00,360
Speaker 1: We cannot let the stock and bar market go down

512
00:29:00,360 --> 00:29:06,600
Speaker 1: that much, I would say that this is not First

513
00:29:06,640 --> 00:29:08,520
Speaker 1: of all, as you're sitting in your lawn chair, I

514
00:29:08,880 --> 00:29:12,040
Speaker 1: suggest you take off the tinfoil or at least luc

515
00:29:12,320 --> 00:29:18,920
Speaker 1: around the down. So in some capacity, we could view

516
00:29:19,040 --> 00:29:22,000
Speaker 1: this through the eyes of the boomers preserving their wealth

517
00:29:22,120 --> 00:29:26,720
Speaker 1: and uh, some conspiracy against the millennials and their disruptions

518
00:29:26,720 --> 00:29:31,360
Speaker 1: and whatnot, although the millennials are you know, poised for

519
00:29:31,480 --> 00:29:35,320
Speaker 1: the largest transfer of wealth and the history of humankind

520
00:29:36,000 --> 00:29:43,000
Speaker 1: as we look twenty twenty years down the road and whatnot. However, again,

521
00:29:43,080 --> 00:29:45,880
Speaker 1: this preservation of the stock market or the FED puts

522
00:29:45,920 --> 00:29:49,000
Speaker 1: so the FED is not just acting to prop up assets.

523
00:29:49,520 --> 00:29:54,160
Speaker 1: The FED is looking at economic looking to achieve successful

524
00:29:54,320 --> 00:29:59,840
Speaker 1: economic stewardship. Now, if they successfully achieve that goal of

525
00:30:00,080 --> 00:30:04,120
Speaker 1: price stability and maximum employment, then they are creating the

526
00:30:04,520 --> 00:30:08,480
Speaker 1: type of economy that GENA is describing, where you have

527
00:30:09,000 --> 00:30:13,880
Speaker 1: controlled inflation pressures and healthy growth in the economy, and

528
00:30:13,920 --> 00:30:17,239
Speaker 1: that should be favorable for the equity market. So you know,

529
00:30:17,320 --> 00:30:20,960
Speaker 1: it's more about the economic stewardship question, which the side

530
00:30:20,960 --> 00:30:24,160
Speaker 1: effect of that is a healthy stock market, than some

531
00:30:24,240 --> 00:30:29,080
Speaker 1: sort of nefarious plot for some generation to hoard, hoard

532
00:30:29,160 --> 00:30:31,960
Speaker 1: the wealth, as you say, and you know, as Gina

533
00:30:32,080 --> 00:30:34,800
Speaker 1: described it as I think she used the expression the

534
00:30:34,840 --> 00:30:38,720
Speaker 1: great rotation that we're seeing playing out over the next

535
00:30:38,760 --> 00:30:41,480
Speaker 1: couple of years. I think of it in macro terms

536
00:30:41,480 --> 00:30:45,240
Speaker 1: as the great competition, right, and the competition is with

537
00:30:45,920 --> 00:30:50,200
Speaker 1: let's say a two year government yield. Right during the

538
00:30:50,240 --> 00:30:55,280
Speaker 1: crisis to year government government notes, we're yielding about point

539
00:30:55,680 --> 00:31:00,600
Speaker 1: one percent. They are now yielding a full percentage point higher,

540
00:31:00,600 --> 00:31:03,200
Speaker 1: about one point one percent, and that will only go

541
00:31:03,320 --> 00:31:07,080
Speaker 1: up as a FED formalizes its plans to continue raising rates.

542
00:31:07,080 --> 00:31:09,440
Speaker 1: If the Fed is raising the overnight rate, two year

543
00:31:09,480 --> 00:31:12,800
Speaker 1: yields are going to go up as well. So now, uh, stocks,

544
00:31:12,880 --> 00:31:17,560
Speaker 1: whether it's Cathy Woods ARC or a dividend paying uh

545
00:31:17,600 --> 00:31:22,120
Speaker 1: you know what equity aristocrat, they they're not competing against

546
00:31:22,120 --> 00:31:27,320
Speaker 1: the point one percent rate of return. They're now competing

547
00:31:27,320 --> 00:31:30,200
Speaker 1: against a one point one percent yield on a two

548
00:31:30,320 --> 00:31:34,840
Speaker 1: year government security. So that competition is heating up, and

549
00:31:34,880 --> 00:31:39,120
Speaker 1: that means you're you're less happy holding uh those longer

550
00:31:39,520 --> 00:31:42,480
Speaker 1: maturity assets like a ten year yield or you know,

551
00:31:42,520 --> 00:31:45,760
Speaker 1: a third year bond for instance, or some of the corporates,

552
00:31:45,920 --> 00:31:47,680
Speaker 1: you know, a very highly rated corporates that are not

553
00:31:47,760 --> 00:31:50,720
Speaker 1: giving you much return. The competition is heating up, and

554
00:31:50,760 --> 00:31:54,480
Speaker 1: so now there's more of that rotation into higher yielding

555
00:31:54,520 --> 00:31:57,120
Speaker 1: equities for instance, which is you know, another way of

556
00:31:57,120 --> 00:32:02,120
Speaker 1: framing that growth versus value debate. Okay, as we start

557
00:32:02,160 --> 00:32:06,240
Speaker 1: to bring this roller coaster ride to to an end, Um, Carl, Gina,

558
00:32:06,440 --> 00:32:11,440
Speaker 1: I'm gonna ask you a question, and uh, it's it's

559
00:32:11,560 --> 00:32:13,040
Speaker 1: a free for all. You can do whatever you want

560
00:32:13,080 --> 00:32:16,360
Speaker 1: with it. Um. Eric knows a lot about E t

561
00:32:16,520 --> 00:32:19,280
Speaker 1: F s. We've talked a lot about the economy, about

562
00:32:19,280 --> 00:32:22,440
Speaker 1: the FED, about equities. What E t F question would

563
00:32:22,440 --> 00:32:26,880
Speaker 1: you like to ask? Eric, Carl, you go first? Okay, Well, first,

564
00:32:27,000 --> 00:32:30,120
Speaker 1: before I asked that question, I'm just going to go

565
00:32:30,160 --> 00:32:33,719
Speaker 1: back to Joel's roller coaster analogy because Gina and I

566
00:32:33,800 --> 00:32:37,680
Speaker 1: have done our best here to kind of signal that

567
00:32:37,760 --> 00:32:39,720
Speaker 1: the roller coaster just because it goes up the steep

568
00:32:39,800 --> 00:32:43,800
Speaker 1: hill doesn't mean there's a scary descent thereafter. And we

569
00:32:43,880 --> 00:32:47,080
Speaker 1: both have a relatively constructive outlook where the FED can

570
00:32:47,280 --> 00:32:50,640
Speaker 1: move towards the exit and the economy performs soundly. And

571
00:32:50,680 --> 00:32:54,560
Speaker 1: that's our my baseline scenario. I believe it's Gina's baseline

572
00:32:54,560 --> 00:32:57,840
Speaker 1: scenario as well. That doesn't mean this can't be a scarier,

573
00:32:57,880 --> 00:33:01,080
Speaker 1: bumpy roller coaster ride, because you know, this is a

574
00:33:02,040 --> 00:33:06,720
Speaker 1: path fraught with danger, right if the FED is too

575
00:33:06,760 --> 00:33:11,440
Speaker 1: worried over the inflation outlook, tightens too aggressively, unwinds the

576
00:33:11,520 --> 00:33:14,240
Speaker 1: balance sheet, which is again a tool we we've only

577
00:33:14,320 --> 00:33:18,080
Speaker 1: used once before, so we're not entirely uh sure of

578
00:33:18,120 --> 00:33:20,680
Speaker 1: what the potency of that tool is. So if we

579
00:33:20,680 --> 00:33:23,760
Speaker 1: we take the unknown medicine and take too high of

580
00:33:23,760 --> 00:33:26,600
Speaker 1: a dosage, you can have some real problems here, and

581
00:33:26,680 --> 00:33:28,600
Speaker 1: so it can certainly be a bumpy ride. And the

582
00:33:28,680 --> 00:33:30,800
Speaker 1: risk is, you know, the FED could move too slowly

583
00:33:30,800 --> 00:33:33,400
Speaker 1: and inflation gets out of control. I think the bigger

584
00:33:33,640 --> 00:33:37,000
Speaker 1: concern is that the FED could potentially panic move too

585
00:33:37,000 --> 00:33:41,040
Speaker 1: aggressively and nudge the economy into a downturn, into a recession,

586
00:33:41,600 --> 00:33:44,440
Speaker 1: which then you know, you're back to applying all of

587
00:33:44,480 --> 00:33:48,760
Speaker 1: this aggressive medication to try to restimulate growth. So there's

588
00:33:48,760 --> 00:33:53,080
Speaker 1: certainly a you know, uh, potentially exciting roller coaster ride ahead, Joel,

589
00:33:53,600 --> 00:33:57,680
Speaker 1: as you according to your analogy, But I would be

590
00:33:57,880 --> 00:34:04,240
Speaker 1: interested in asking Eric about the passive uh is passive

591
00:34:04,280 --> 00:34:09,040
Speaker 1: investing passive versus active? Is that How confident are you

592
00:34:09,120 --> 00:34:12,759
Speaker 1: that that trend continues? Because if you're a passive investor, uh,

593
00:34:12,840 --> 00:34:15,120
Speaker 1: and you're in the type of economic cycle we saw

594
00:34:15,200 --> 00:34:19,120
Speaker 1: over the past couple of years, FED delivers massive uh

595
00:34:19,160 --> 00:34:21,600
Speaker 1: you know, stimulus to the economy. So we you know,

596
00:34:21,760 --> 00:34:23,799
Speaker 1: the rising tides going to lift all ships. It's a

597
00:34:23,840 --> 00:34:27,600
Speaker 1: great environment to be passive. I would just to play

598
00:34:27,640 --> 00:34:32,080
Speaker 1: Devil's advocate. Wonder if we're not heading into the stock

599
00:34:32,120 --> 00:34:34,920
Speaker 1: pickers paradise now where we've had a big rise in

600
00:34:34,960 --> 00:34:38,800
Speaker 1: the equity markets. But now the differentiation starts to occur

601
00:34:39,000 --> 00:34:41,600
Speaker 1: as as the tide as as Warren Buffett says, as

602
00:34:41,600 --> 00:34:44,359
Speaker 1: the tide starts to roll out, we find out who's

603
00:34:44,400 --> 00:34:47,400
Speaker 1: wearing a bathing suit and who's not. Aren't we heading

604
00:34:47,400 --> 00:34:51,600
Speaker 1: into that realm right now? Eric? Where now the active

605
00:34:51,640 --> 00:34:55,319
Speaker 1: investors are going to really be able to differentiate themselves

606
00:34:56,040 --> 00:34:59,200
Speaker 1: as as it becomes a stock pickers market, uh, and

607
00:34:59,239 --> 00:35:01,960
Speaker 1: therefore will be less of a pro E t F

608
00:35:02,120 --> 00:35:07,600
Speaker 1: or at least a pro passive environment going forward. Well, yeah, good,

609
00:35:07,640 --> 00:35:09,839
Speaker 1: You're good to separate E t F and passive because

610
00:35:09,880 --> 00:35:12,360
Speaker 1: our big outlook theme this year is that um E

611
00:35:12,480 --> 00:35:14,879
Speaker 1: t F have transcended the passive label. I mean it's

612
00:35:14,880 --> 00:35:17,440
Speaker 1: a big tent, and more and more they're becoming active

613
00:35:17,480 --> 00:35:19,600
Speaker 1: and people use them actively. So one thing I would

614
00:35:19,600 --> 00:35:21,200
Speaker 1: say is we just went over how flows are going

615
00:35:21,200 --> 00:35:24,920
Speaker 1: into financials and value et F So people are actively

616
00:35:25,080 --> 00:35:27,640
Speaker 1: using passive E t F s to reposition, just like

617
00:35:27,680 --> 00:35:32,560
Speaker 1: you're saying relative to the stock picker problem. Is this

618
00:35:33,480 --> 00:35:37,480
Speaker 1: a stock picker? You know, if you're doing deep value

619
00:35:37,520 --> 00:35:40,000
Speaker 1: stock picking, I think you have a bright future. If

620
00:35:40,040 --> 00:35:43,120
Speaker 1: you're doing like closet indexing stock picking like the Fidelity

621
00:35:43,160 --> 00:35:46,879
Speaker 1: Magellan which holds mostly SMP and tilts a little, your

622
00:35:46,920 --> 00:35:50,680
Speaker 1: goose is cooked. You'll never get money again because nobody

623
00:35:50,760 --> 00:35:53,799
Speaker 1: is going to sell a three basis point Vanguard fund

624
00:35:53,840 --> 00:35:56,840
Speaker 1: and buy you for ad basis points when you're mostly

625
00:35:56,880 --> 00:35:59,200
Speaker 1: the Vanguard fund and I can't even guarantee you'll perform.

626
00:35:59,360 --> 00:36:03,040
Speaker 1: In fact, the s are you won't. Also, in past downturns,

627
00:36:03,080 --> 00:36:07,080
Speaker 1: active has only outperformed at the same thirty three rate

628
00:36:07,120 --> 00:36:10,960
Speaker 1: as when it's good. The look cheap data is just

629
00:36:11,000 --> 00:36:13,319
Speaker 1: the hell of a drug. People are just not going

630
00:36:13,360 --> 00:36:16,400
Speaker 1: to sell a three basis point Vanguard fund. My theory

631
00:36:16,440 --> 00:36:19,600
Speaker 1: is if active got cheaper, if fidelities started passing on

632
00:36:19,600 --> 00:36:21,919
Speaker 1: economies of scale and got to twenty BIPs fifteen BIPs,

633
00:36:22,520 --> 00:36:25,319
Speaker 1: then there are little bets around the SMP could could

634
00:36:25,360 --> 00:36:27,439
Speaker 1: actually be worth it. But at eight I just think

635
00:36:28,040 --> 00:36:30,279
Speaker 1: I just don't think it stops anything. I think what

636
00:36:30,400 --> 00:36:32,040
Speaker 1: you will see THO is more and more people use

637
00:36:32,040 --> 00:36:36,080
Speaker 1: ETFs actively and so you'll see flows into financials, deep

638
00:36:36,120 --> 00:36:38,560
Speaker 1: value and that kind of thing. But I, as we

639
00:36:38,640 --> 00:36:42,680
Speaker 1: can see, Vanguard is taking in money like like nobody's business.

640
00:36:42,680 --> 00:36:45,320
Speaker 1: And also the Vanguard type investor, the kind of person

641
00:36:45,320 --> 00:36:49,600
Speaker 1: who goes to Vanguard typically is pretty aware that, uh,

642
00:36:49,840 --> 00:36:53,760
Speaker 1: you own everything. So whether values in play or gross

643
00:36:53,760 --> 00:36:57,080
Speaker 1: in play or energy stocks are a hit, it's fomo

644
00:36:57,160 --> 00:36:59,239
Speaker 1: proof you already own it. I don't really care. I'll

645
00:36:59,280 --> 00:37:01,680
Speaker 1: just you know, what am I going to do? Replace

646
00:37:01,719 --> 00:37:03,600
Speaker 1: this with like the hot stock picker of that year

647
00:37:03,920 --> 00:37:06,799
Speaker 1: and then probably underperform in the year after most of

648
00:37:06,800 --> 00:37:08,839
Speaker 1: them have just come to the conclusion there's no better deal.

649
00:37:09,160 --> 00:37:11,600
Speaker 1: That's my opinion on that. Gina, Do I get to

650
00:37:11,640 --> 00:37:15,000
Speaker 1: ask my question now? So? Yeah, I was gonna say,

651
00:37:15,000 --> 00:37:19,560
Speaker 1: you're Eric's really interested and it can be drug related.

652
00:37:19,760 --> 00:37:26,960
Speaker 1: It could be launch. So my question really is around

653
00:37:27,640 --> 00:37:30,239
Speaker 1: the non passive portion of e t s. And we

654
00:37:30,360 --> 00:37:34,480
Speaker 1: have seen some active conversions. We've obviously seen thematic investing

655
00:37:34,560 --> 00:37:36,719
Speaker 1: really just take off over the course of the last

656
00:37:36,760 --> 00:37:39,360
Speaker 1: few years. And your team, Eric has done some insane

657
00:37:39,960 --> 00:37:43,360
Speaker 1: work on themes and and the sort of the themes

658
00:37:43,400 --> 00:37:47,319
Speaker 1: that are driving stocks. So, um, my question for you

659
00:37:47,400 --> 00:37:50,000
Speaker 1: is who's the next arc? If ARC is over? If

660
00:37:50,040 --> 00:37:52,200
Speaker 1: we can just assume that ARC is over for now,

661
00:37:53,040 --> 00:37:54,680
Speaker 1: where are we going to see the next big theme?

662
00:37:54,760 --> 00:37:56,920
Speaker 1: What's the next big theme that's going to drive stocks,

663
00:37:57,040 --> 00:37:58,879
Speaker 1: and and and what shall we be on the guard

664
00:37:58,920 --> 00:38:03,439
Speaker 1: on guard for. Yeah, this is really a fascinating question

665
00:38:03,480 --> 00:38:06,400
Speaker 1: because we wrote a note that said a deep value

666
00:38:06,480 --> 00:38:11,120
Speaker 1: et F could be the next Cathy would because it's

667
00:38:11,480 --> 00:38:16,120
Speaker 1: it's not about growth, it's really about concentration. We think

668
00:38:16,160 --> 00:38:18,640
Speaker 1: that if most people's core of their portfolio is now

669
00:38:18,640 --> 00:38:21,439
Speaker 1: in dirt cheap beta and they're happy with that, they're

670
00:38:21,480 --> 00:38:23,000
Speaker 1: not going to touch it. They're gonna let the paint

671
00:38:23,080 --> 00:38:26,000
Speaker 1: dry for twenty years. They are looking for things to

672
00:38:26,520 --> 00:38:29,960
Speaker 1: put on the outside, like hot sauce. So Kathy was

673
00:38:30,080 --> 00:38:33,960
Speaker 1: perfectly positioned for a growth wave hot sauce. What comes

674
00:38:34,000 --> 00:38:36,839
Speaker 1: next um you know, and and theme ETFs uh like

675
00:38:36,880 --> 00:38:41,520
Speaker 1: cybersecurity and cryptocurrency ETFs. So I think you could see

676
00:38:41,840 --> 00:38:44,879
Speaker 1: themes start to repackage value stocks in fun, clever ways,

677
00:38:44,960 --> 00:38:47,760
Speaker 1: like maybe they'll come out with a stuff You're really

678
00:38:47,880 --> 00:38:53,440
Speaker 1: effing F which is basically just like consumer staples, because

679
00:38:53,640 --> 00:38:56,920
Speaker 1: themes have really done a good job of stealing thunder

680
00:38:57,000 --> 00:39:01,319
Speaker 1: from sectors and from styles and from factors by sort

681
00:39:01,360 --> 00:39:03,279
Speaker 1: of making it easy, you know, more fun and easy

682
00:39:03,360 --> 00:39:06,200
Speaker 1: to understand, like the work from Home et F. That's

683
00:39:06,239 --> 00:39:09,000
Speaker 1: just two sectors put together. It's not like rocket science,

684
00:39:09,080 --> 00:39:13,120
Speaker 1: but the labeling is really is really powerful, and so

685
00:39:13,400 --> 00:39:15,560
Speaker 1: we also think that So I think you'll find some

686
00:39:15,680 --> 00:39:19,440
Speaker 1: themes that tap into like maybe the staples or value

687
00:39:19,480 --> 00:39:23,279
Speaker 1: stocks UM and and just maybe a deep value E

688
00:39:23,400 --> 00:39:25,680
Speaker 1: t F because we did see that the ones that

689
00:39:25,760 --> 00:39:28,000
Speaker 1: have the most concentration pop the most in Q one

690
00:39:28,600 --> 00:39:31,080
Speaker 1: and they were doubling and tripling the Vanguard Value et F,

691
00:39:31,160 --> 00:39:34,600
Speaker 1: which is very weighted down with big cat names. So

692
00:39:34,760 --> 00:39:37,960
Speaker 1: again our big theme is, look, we always say you

693
00:39:38,000 --> 00:39:40,040
Speaker 1: have to there's three cs. There's the three cs to

694
00:39:40,080 --> 00:39:41,839
Speaker 1: E C E t F success. You've gotta be cheap,

695
00:39:42,719 --> 00:39:47,080
Speaker 1: you've got to be creative or concentrated or cabernet, which

696
00:39:47,120 --> 00:39:48,880
Speaker 1: is you've got to sort of like wine and dine advisors.

697
00:39:48,880 --> 00:39:53,640
Speaker 1: But I'll move that that lane aside. But clearly something

698
00:39:54,200 --> 00:39:58,680
Speaker 1: shiny objects aren't limited to growth. They can be value,

699
00:39:58,719 --> 00:40:00,880
Speaker 1: they can be energy. Um. You know there's an e

700
00:40:00,960 --> 00:40:04,000
Speaker 1: t F called the fracking e t F. I mean

701
00:40:04,040 --> 00:40:06,120
Speaker 1: there's certain ways you can sort of play with the energy,

702
00:40:06,200 --> 00:40:08,960
Speaker 1: maybe like old guy old school energy or something, and

703
00:40:09,040 --> 00:40:12,480
Speaker 1: maybe try to make oil producers interesting again because they're

704
00:40:12,520 --> 00:40:14,880
Speaker 1: doing so well. So that's where I think you'll see it.

705
00:40:15,000 --> 00:40:18,399
Speaker 1: But a lot of those flows are more on the fringe. Um,

706
00:40:18,520 --> 00:40:20,120
Speaker 1: but they're gonna keep coming. I mean, we just saw

707
00:40:20,120 --> 00:40:23,000
Speaker 1: an t F for airline cruises and hotels, which is

708
00:40:23,120 --> 00:40:26,880
Speaker 1: essentially like the reopening trade. Joel, Joel, Can I get

709
00:40:26,920 --> 00:40:31,600
Speaker 1: a second question? Okay? Thanks, thanks Genie. That's like asking

710
00:40:31,640 --> 00:40:34,200
Speaker 1: the Genie for another three wishes. Um. I want to

711
00:40:34,239 --> 00:40:37,520
Speaker 1: ask Eric if you think that this kind of deep

712
00:40:37,920 --> 00:40:44,200
Speaker 1: value investment can outperform something like tech disruption, which is

713
00:40:44,239 --> 00:40:48,080
Speaker 1: what ARC was all about, over a longer period of time.

714
00:40:48,120 --> 00:40:50,120
Speaker 1: And I would, you know, as a skeptic, I would

715
00:40:50,120 --> 00:40:52,719
Speaker 1: say no, it couldn't tech is going to out. You know,

716
00:40:53,000 --> 00:40:56,200
Speaker 1: tech disruption is going to have a higher sustained growth

717
00:40:56,280 --> 00:40:58,319
Speaker 1: rate over the long run than than deep value, which

718
00:40:58,400 --> 00:41:00,959
Speaker 1: may in the short run have a bound and maybe

719
00:41:00,960 --> 00:41:04,759
Speaker 1: outpaced chech, but not over the longer run. Well, it

720
00:41:04,840 --> 00:41:06,360
Speaker 1: all moves in waves. You don't have a line in

721
00:41:06,440 --> 00:41:09,000
Speaker 1: my new book coming out about Bogel because he was

722
00:41:09,280 --> 00:41:11,440
Speaker 1: he launched the value et F and the growth ETF

723
00:41:11,719 --> 00:41:15,120
Speaker 1: way back in the nineties. He actually pioneered style indexing,

724
00:41:15,640 --> 00:41:17,400
Speaker 1: and he said, I thought you'd buy the growth ETF

725
00:41:17,480 --> 00:41:20,080
Speaker 1: when you're young, and then you transfer to the value

726
00:41:20,120 --> 00:41:21,840
Speaker 1: and you find out people tried to trade it, and

727
00:41:21,880 --> 00:41:23,400
Speaker 1: they ended up doing worse than just don't need the

728
00:41:23,480 --> 00:41:25,719
Speaker 1: S and P. And if you track growth and value

729
00:41:25,760 --> 00:41:27,560
Speaker 1: over a long period of time, they sort of end

730
00:41:27,640 --> 00:41:30,319
Speaker 1: up at the same spot. So I recite that line

731
00:41:30,320 --> 00:41:33,839
Speaker 1: from Almost Famous when Lester Bangs tells the high school reporter, Oh,

732
00:41:33,880 --> 00:41:35,480
Speaker 1: don't worry, you'll meet them all again in the long

733
00:41:35,560 --> 00:41:37,480
Speaker 1: road to the middle. So I do think if you

734
00:41:37,560 --> 00:41:38,879
Speaker 1: time it right, you can make a lot of money.

735
00:41:39,000 --> 00:41:41,439
Speaker 1: But in the two thousand small cat Value and Gino,

736
00:41:41,560 --> 00:41:43,439
Speaker 1: I think we'll attest to this. She probably better numbers

737
00:41:43,440 --> 00:41:45,960
Speaker 1: than I do. In two thousand to two thousand ten,

738
00:41:46,000 --> 00:41:49,320
Speaker 1: which is a whole decade, small value crushed the S

739
00:41:49,400 --> 00:41:51,840
Speaker 1: and P, which was I think flat and small value

740
00:41:51,880 --> 00:41:53,839
Speaker 1: was up a lot. And that was during a huge

741
00:41:53,920 --> 00:41:56,960
Speaker 1: tech renaissance, right, You had a lot of the Internet

742
00:41:57,080 --> 00:41:59,879
Speaker 1: was just kind of like exploding. Um so I would

743
00:42:00,000 --> 00:42:03,360
Speaker 1: it's totally possible that there's a complete regime change, and

744
00:42:03,560 --> 00:42:05,399
Speaker 1: it has to be like a psychological thing where people

745
00:42:05,440 --> 00:42:09,279
Speaker 1: just like we were too crazy with the computers, we

746
00:42:09,440 --> 00:42:11,160
Speaker 1: really want to get back to basics. I don't know,

747
00:42:11,200 --> 00:42:13,080
Speaker 1: like there's a psychological thing and it all a sudden

748
00:42:13,120 --> 00:42:16,239
Speaker 1: becomes it just seems so silly to go so far

749
00:42:16,440 --> 00:42:20,160
Speaker 1: into the tech, and it seems more I guess it

750
00:42:20,280 --> 00:42:22,840
Speaker 1: just seems right to go into staples and energy for

751
00:42:22,960 --> 00:42:24,879
Speaker 1: some reason. I don't know if Gina has a comment

752
00:42:24,960 --> 00:42:27,319
Speaker 1: on that, but I don't know if that psychological thing

753
00:42:27,360 --> 00:42:30,840
Speaker 1: will ever To Carl's point, our culture is so tech oriented.

754
00:42:31,280 --> 00:42:34,400
Speaker 1: Could someone ever get out of that psychological mindset that

755
00:42:34,480 --> 00:42:37,200
Speaker 1: tech is in the future. Well, I think we're watching

756
00:42:37,280 --> 00:42:40,680
Speaker 1: it happen to some degree, and we're watching it happen

757
00:42:41,600 --> 00:42:45,799
Speaker 1: in energy stocks and technology related energy stocks. I mean,

758
00:42:45,840 --> 00:42:49,000
Speaker 1: the perfect example, the S and P is even thinking

759
00:42:49,040 --> 00:42:51,880
Speaker 1: about reconstituting industries because they don't know what to do

760
00:42:52,120 --> 00:42:57,360
Speaker 1: with all these techie energy companies. Right, and we're in

761
00:42:57,440 --> 00:43:01,120
Speaker 1: the midst of, you know, trying to tackle things like

762
00:43:01,280 --> 00:43:07,719
Speaker 1: climate change and uh, you know, massive energy consumption problems

763
00:43:08,640 --> 00:43:12,239
Speaker 1: that are resulting in energy stocks materially outperforming. I mean,

764
00:43:12,280 --> 00:43:13,920
Speaker 1: I don't know how many people pay attention to this,

765
00:43:14,040 --> 00:43:16,440
Speaker 1: but energy stocks were up twenty in January while the

766
00:43:16,480 --> 00:43:19,480
Speaker 1: market crashed, And it's been our big call for the

767
00:43:19,560 --> 00:43:22,799
Speaker 1: last year and a half that longer term, as long

768
00:43:22,840 --> 00:43:26,799
Speaker 1: as inflation is at a much stronger pace, that's the key.

769
00:43:27,400 --> 00:43:31,000
Speaker 1: And if you know commodity prices are contributing to that inflation,

770
00:43:31,400 --> 00:43:34,359
Speaker 1: then it's even a bigger key than energy stocks will outperform.

771
00:43:34,480 --> 00:43:39,000
Speaker 1: And if you look back in history, growth doesn't always outperform.

772
00:43:39,320 --> 00:43:44,000
Speaker 1: Value usually outperforms when growth economic growth is faster, because

773
00:43:44,200 --> 00:43:47,560
Speaker 1: value stocks tend to leverage that near term economic growth

774
00:43:47,600 --> 00:43:51,359
Speaker 1: outlook better. Right, tech has longer dated cash flows. Value

775
00:43:51,400 --> 00:43:53,680
Speaker 1: stocks get the immediate cash flow growth when the economy

776
00:43:53,760 --> 00:43:57,600
Speaker 1: is running at a faster pace. So I completely agree

777
00:43:57,640 --> 00:43:59,360
Speaker 1: that it's a I think it's a great call to

778
00:43:59,440 --> 00:44:01,719
Speaker 1: be in small up value. I think value already is

779
00:44:01,760 --> 00:44:05,319
Speaker 1: showing signs of topping out or beating out growth stocks,

780
00:44:05,360 --> 00:44:07,360
Speaker 1: and will continue to beat out growth stocks. Our favorite

781
00:44:07,400 --> 00:44:11,239
Speaker 1: sector is still energy, followed very closely by financials, and

782
00:44:11,320 --> 00:44:14,680
Speaker 1: I don't see that changing um And what will make

783
00:44:14,800 --> 00:44:18,640
Speaker 1: that chain, what will make that endure, is the inflation outlook.

784
00:44:19,120 --> 00:44:22,120
Speaker 1: If you think inflation is going to settle this cycle

785
00:44:22,200 --> 00:44:24,200
Speaker 1: at a pace above three percent, you have to be

786
00:44:24,400 --> 00:44:26,759
Speaker 1: in value of our growth. If you think inflation is

787
00:44:26,800 --> 00:44:30,880
Speaker 1: going to revert back to the slow inflation environment that

788
00:44:30,960 --> 00:44:33,400
Speaker 1: we saw in the last cycle, then you want, you know,

789
00:44:33,480 --> 00:44:36,320
Speaker 1: you want to move back toward the growth, growth sensitive

790
00:44:36,360 --> 00:44:38,920
Speaker 1: stocks in the market. Carl, we have a question that

791
00:44:38,960 --> 00:44:41,560
Speaker 1: we ask everybody on trillions first time on So are

792
00:44:41,560 --> 00:44:45,799
Speaker 1: you gonna get it? What's your favorite E t F ticker? Oh,

793
00:44:46,000 --> 00:44:51,040
Speaker 1: my goodness, my favorite E t F ticker. Don't worry, Carl,

794
00:44:51,080 --> 00:44:54,160
Speaker 1: I bobble this question every time you're talking about E

795
00:44:54,239 --> 00:44:56,800
Speaker 1: t F. I'm gonna go with like a kind of

796
00:44:56,960 --> 00:45:04,239
Speaker 1: you know, passive vanguard, type of all cap kind of

797
00:45:04,920 --> 00:45:08,799
Speaker 1: rising rising tide continues to lift all boats. Since we're

798
00:45:08,800 --> 00:45:12,160
Speaker 1: allowed to bobble the answer here, I'm gonna go into

799
00:45:12,239 --> 00:45:16,560
Speaker 1: my my E t F pick list. I'm gonna go

800
00:45:16,960 --> 00:45:22,560
Speaker 1: with V I G the Vanguard Dividend Appreciation e t

801
00:45:22,760 --> 00:45:27,360
Speaker 1: F and this factor's back into this whole camp, the

802
00:45:27,520 --> 00:45:32,799
Speaker 1: great competition thesis, which I mentioned earlier in our discussion,

803
00:45:33,360 --> 00:45:36,759
Speaker 1: because dividend appreciation is uh, you know, I think going

804
00:45:36,840 --> 00:45:40,279
Speaker 1: to be so fundamentally important to stock valuations as we

805
00:45:40,400 --> 00:45:45,400
Speaker 1: move into a higher inflation and higher interest rate regime

806
00:45:45,880 --> 00:45:49,720
Speaker 1: for the foreseeable future. You bobbled it, recovered the fumble,

807
00:45:49,800 --> 00:45:53,160
Speaker 1: and then like took off for a touchdown. Yeah. And

808
00:45:53,480 --> 00:45:56,239
Speaker 1: also that's the first person who picked big your your

809
00:45:56,280 --> 00:46:00,359
Speaker 1: original all right? When did they're Gina Martin Adams, Carl

810
00:46:00,400 --> 00:46:02,560
Speaker 1: wi Ganna. Thank you so much for joining us on Trillians.

811
00:46:02,840 --> 00:46:11,120
Speaker 1: Thank you my pleasure. Thanks for listening to Trillions until

812
00:46:11,200 --> 00:46:13,040
Speaker 1: next time. You can find us on the Bloomberg Terminal,

813
00:46:13,239 --> 00:46:17,000
Speaker 1: Bloomberg dot com, Apple Podcast, Spotify, and wherever else you'd

814
00:46:17,000 --> 00:46:19,160
Speaker 1: like to listen. We'd love to hear from you. We're

815
00:46:19,200 --> 00:46:22,759
Speaker 1: on Twitter, I'm at Joel Weber Show, He's at Eric Baltunas.

816
00:46:23,480 --> 00:46:26,920
Speaker 1: This episode of Trillions was produced by Magnus Hendrickson, Francesca

817
00:46:27,000 --> 00:46:29,760
Speaker 1: Levy is the head of Bloomberg podcast Bye