WEBVTT - Your Guide to the 2022 Market Roller Coaster 0:00:05.840 --> 0:00:08.159 Well, can a trillions. I'm Joel Webber and i am 0:00:08.240 --> 0:00:17.599 Eric belchiernas eric Um. The stock market over the past 0:00:17.720 --> 0:00:22.120 week has given given me heart palpitations. Uh. And it 0:00:22.160 --> 0:00:24.759 feels like we've just been on this like roller coaster, 0:00:25.520 --> 0:00:31.440 and there's been dread about inflation rising rates. Uh, and 0:00:31.480 --> 0:00:34.320 then there's been corporate earnings in the backdrop which have 0:00:34.560 --> 0:00:38.720 kind of exceeded expectations. I'm really confused. Can you help 0:00:38.760 --> 0:00:40.320 me make sense of that? And do you have any 0:00:40.320 --> 0:00:43.120 guests who could help? Yeah, well, we have a two 0:00:43.120 --> 0:00:46.199 great guests. It's a perfect one to punch because everything 0:00:46.240 --> 0:00:49.360 going on to the market now really mostly is is 0:00:49.400 --> 0:00:52.199 a derivative of the Fed and their plan to be 0:00:52.320 --> 0:00:55.120 more hawkish. There's two ways of doing that, which we'll 0:00:55.160 --> 0:00:57.720 go into. But it's not just rate hikes, but the 0:00:57.760 --> 0:01:00.960 idea of raising interest rates because they're obviously concerned about 0:01:00.960 --> 0:01:05.200 inflation and inflation I think is actually trumping the idea 0:01:05.240 --> 0:01:09.360 that the stock market could fall. Especially politically, I don't think, uh, 0:01:09.400 --> 0:01:11.440 you know, any of these politicians want to go into 0:01:11.440 --> 0:01:14.920 mid terms or the presidential election with inflation running high. 0:01:15.040 --> 0:01:18.200 So the Fed uh looks like they're committed. I've been 0:01:18.200 --> 0:01:20.679 pretty critical of the FED always folding like a lawn 0:01:20.760 --> 0:01:22.840 chair where they get hawkish and they just fold immediately 0:01:22.880 --> 0:01:25.000 when the stock market goes down two points. But they 0:01:25.040 --> 0:01:28.960 seem pretty persistent. That last um UH press conference that 0:01:29.360 --> 0:01:31.880 Pal had, I felt he was the strongest he've been. 0:01:31.920 --> 0:01:35.000 I'm a casual observer, I'm not an expert, but as 0:01:35.040 --> 0:01:37.520 somebody who's doubted them, I feel like they have more 0:01:37.560 --> 0:01:40.560 of a spy now. And so everybody's just repositioning, and 0:01:40.560 --> 0:01:42.280 they're saying, well, if if, if rates are going to 0:01:42.360 --> 0:01:44.039 go up a little bit, I've got to figure different 0:01:44.040 --> 0:01:47.160 things out my portfolio. So it's hurt growth stocks, help 0:01:47.200 --> 0:01:50.720 bank stocks, hurt bonds, and so there's a lot of repositioning. 0:01:50.720 --> 0:01:53.040 I will say that general mass blob of retail flow 0:01:53.120 --> 0:01:57.360 is still kind of buying Vanguard, but the outer layers definitely. 0:01:57.400 --> 0:02:00.560 You can feel a lot of activity around this, including 0:02:00.640 --> 0:02:03.160 some selling of of stocks and et f s. So 0:02:03.200 --> 0:02:04.720 you'll help us with the E t F side, but 0:02:04.720 --> 0:02:08.680 who's gonna help us with sort of the equity slash 0:02:09.040 --> 0:02:14.000 economic outlook through all of this? So Carl Rickadonna, who 0:02:14.040 --> 0:02:15.639 I've known for a while and now is sort of 0:02:16.120 --> 0:02:20.200 in my group. Um, he's gonna take the FED part 0:02:20.240 --> 0:02:23.120 of this, and he's so good at simplifying FED speak, 0:02:23.320 --> 0:02:25.360 and I really go always go to him when I 0:02:25.360 --> 0:02:27.960 have a question. And then Gina Martin Adams, who is 0:02:28.000 --> 0:02:31.560 both of our bosses. She covers the macro outlook, so 0:02:31.600 --> 0:02:33.799 she's always looking at earnings and the FED and how 0:02:33.840 --> 0:02:36.600 the whole thing fits together. So I think she can 0:02:36.600 --> 0:02:41.239 also talk about how the new environment is affecting her outlook. Alright, 0:02:41.280 --> 0:02:44.799 So joining us on Trillions Carl Rickadonna, the chief economist 0:02:44.919 --> 0:02:48.600 for Bloomberg Intelligence, as well as Gina Martin Adams back 0:02:48.639 --> 0:02:52.840 on the pod, the chief equity strategist for Bloomberg Intelligence. 0:02:55.480 --> 0:03:02.919 Next time on trying buckle up for a roller coaster. Carl, Gina, 0:03:03.080 --> 0:03:06.400 welcome back to Trillions. Thank you, thanks for having us, 0:03:06.400 --> 0:03:08.600 glad to be here, thanks for providing me on. I'm 0:03:08.600 --> 0:03:11.000 gonna start with you, Carl. Is the FED going to 0:03:11.120 --> 0:03:14.600 fold like Eric's lawn chair? The FED is not going 0:03:14.639 --> 0:03:18.239 to fold like a lawn chair here, but I don't 0:03:18.280 --> 0:03:20.640 think they're going to be as aggressive as some of 0:03:20.680 --> 0:03:25.160 the worst concerns in the marketplace. So, as Eric mentioned 0:03:25.520 --> 0:03:28.680 in the past, the FED has been a very reactive 0:03:28.800 --> 0:03:34.639 to a resetting of financial conditions, explicitly sharp declines in 0:03:34.680 --> 0:03:38.160 the equity markets. Because the stock market in the economy 0:03:38.160 --> 0:03:42.160 are not too uh independent creatures. What happens in the 0:03:42.200 --> 0:03:47.800 stock market often has very significant consequences for wealth effects 0:03:47.880 --> 0:03:52.520 for households, for confidence effects among companies who may be 0:03:52.640 --> 0:03:55.240 pulled back on the pace of hiring when when equities 0:03:55.280 --> 0:03:57.880 take a schoon or become much less confident in the 0:03:57.880 --> 0:04:01.400 economic outlook. Because equities are in the nose dives, so 0:04:01.520 --> 0:04:04.760 that that does have implications for the commodity for the 0:04:04.760 --> 0:04:08.200 FED the reaction function. But front and center at the 0:04:08.240 --> 0:04:12.320 moment is the fact that now the fence two main objectives, 0:04:12.640 --> 0:04:16.360 maximizing the level of employment in the economy and achieving 0:04:16.440 --> 0:04:20.080 price stability, are now both on the same side of 0:04:20.120 --> 0:04:24.440 the two cold too hot spectrum. They are both running 0:04:24.480 --> 0:04:27.799 too hot. So we have the unemployment rate below where 0:04:27.800 --> 0:04:30.320 the FED thinks it should settle in the longer run, 0:04:30.760 --> 0:04:35.840 and obviously inflation for outstripping the fence two percent objective. 0:04:35.880 --> 0:04:39.360 The last reading on the CPI showed a seven percent print. 0:04:40.880 --> 0:04:44.559 So let's go into what they do. Okay, So there's 0:04:44.800 --> 0:04:46.600 we all know that over the past ten years, they've 0:04:46.680 --> 0:04:51.000 kept rates low, and they've fought they fought assets. I 0:04:51.000 --> 0:04:53.760 mean they have a balance sheet. That's uh, I want 0:04:53.760 --> 0:04:55.400 to say fortually, but you'll correct me in a minute 0:04:55.440 --> 0:04:58.960 if I'm wrong. Now, explain this idea of what are 0:04:58.960 --> 0:05:00.520 they doing on the rate side and what are they 0:05:00.560 --> 0:05:04.320 doing on the balance sheet side going forward? So what's 0:05:04.320 --> 0:05:08.640 happening the Fed that uses interest rates the overnight lending 0:05:08.720 --> 0:05:12.279 rate as its primary policy tool, and so as uh, 0:05:12.320 --> 0:05:14.359 you know, as the economy heats up, they raise interest 0:05:14.440 --> 0:05:17.760 rates to slow things down. What happens in the overnight 0:05:17.880 --> 0:05:23.320 rate then often gets multiplied out into longer term lending rates, 0:05:23.320 --> 0:05:26.320 whether it's your credit card rate, the interest rate on 0:05:26.360 --> 0:05:29.919 your car loan, your mortgage, or corporate lending rates. So 0:05:29.960 --> 0:05:33.040 what the Fed does then has ripple effects throughout the 0:05:33.120 --> 0:05:37.360 broader economy. The problem for the FED if you keep 0:05:37.400 --> 0:05:40.640 cutting interest rates, eventually you get to zero uh. And 0:05:40.720 --> 0:05:44.200 once you get to zero, then negative interest rates don't 0:05:44.279 --> 0:05:47.520 really work that well. So that's a policy option the 0:05:47.600 --> 0:05:50.640 Fed has abandoned. Uh. And so what the Fed does 0:05:50.720 --> 0:05:55.000 then is reach further out into the maturity spectrum or 0:05:55.080 --> 0:05:59.479 further out on the yield curve. By influencing other interest rates. 0:05:59.520 --> 0:06:03.000 So as we saw after the global financial crisis in 0:06:03.080 --> 0:06:05.640 two thousand and seven to two thousand and nine, the 0:06:05.680 --> 0:06:08.960 FED cut rates to zero for the first time and 0:06:09.040 --> 0:06:11.919 saw the need to do more UH, and so in 0:06:12.120 --> 0:06:16.880 doing more, they purchase assets. So they purchase in this 0:06:16.960 --> 0:06:21.560 case treasury securities of of varying maturity, so across the 0:06:21.600 --> 0:06:25.359 yield curve. And also they purchased mortgages. Now, the mortgages 0:06:25.800 --> 0:06:28.400 kind of a legacy of the housing bust in O 0:06:28.600 --> 0:06:32.800 A DO nine, and they saw particular need to influence, 0:06:33.160 --> 0:06:36.560 you know, financial conditions for households. We come out of 0:06:36.560 --> 0:06:40.880 the O nine recession and have a very weak economic recovery, 0:06:40.920 --> 0:06:44.400 so the Fed's very slow to tighten policy by both 0:06:44.480 --> 0:06:48.360 raising interest rates and also starting to shrink the size 0:06:48.360 --> 0:06:51.279 of its balance sheet. Sure enough, COVID comes along in 0:06:52.320 --> 0:06:55.560 the Fed again has to aggressively cut rates and doesn't 0:06:55.560 --> 0:06:59.359 have enough room to just achieve their objectives through interest 0:06:59.440 --> 0:07:02.160 rate cuts. They cut to zero and once again start 0:07:02.240 --> 0:07:05.920 expanding the balance sheet, in this case even more aggressively 0:07:06.080 --> 0:07:09.800 than they did back around the global financial crisis, so 0:07:09.840 --> 0:07:14.080 they have UH. In O nine, they quadrupled the size 0:07:14.080 --> 0:07:17.080 of their balance sheet, and now the balance sheet is 0:07:17.360 --> 0:07:21.800 approaching nine or ten trillion dollars. So it's a huge 0:07:21.960 --> 0:07:27.160 number here for the Fed. Uh. And this provided tremendous 0:07:27.200 --> 0:07:30.760 stimulus during the COVID crisis. Uh. You know, we can say, well, 0:07:30.760 --> 0:07:32.800 the FED did too much in in in the hindsight 0:07:32.880 --> 0:07:38.400 that that created some inflation problems, but we cannot underestimate, 0:07:38.840 --> 0:07:41.520 you know, what could have potentially transpired had the FED 0:07:41.600 --> 0:07:45.160 not acted so aggressively. We saw even the most deep 0:07:45.280 --> 0:07:49.720 and liquid financial market in the world, the US treasury market, 0:07:49.960 --> 0:07:53.840 basically seizing up in March of and so this was 0:07:53.880 --> 0:07:57.280 a matter of not only propping up the economy but 0:07:57.360 --> 0:08:01.600 also preserving the sanctity the liquid city of the most 0:08:01.640 --> 0:08:06.200 deep mark asset classes said that are hugely consequential for 0:08:06.320 --> 0:08:09.040 the global economy and the US economy. So the FED 0:08:09.080 --> 0:08:11.760 had to step in in a major way. We didn't 0:08:11.760 --> 0:08:14.520 know exactly how the pandemic would play out. We didn't 0:08:14.520 --> 0:08:17.240 fully understand what the mortality rate was in the early 0:08:17.280 --> 0:08:19.520 stages of the pandemic, so the FED acted in a 0:08:19.720 --> 0:08:23.080 very big fashion. The other factor they didn't understand was 0:08:23.120 --> 0:08:26.280 how much fiscal stimulus would be coming through because they know, 0:08:26.720 --> 0:08:30.840 the experience after the global financial crisis, Congress was very 0:08:30.960 --> 0:08:34.840 stingy providing stimulus to the economy, and so the you know, 0:08:34.880 --> 0:08:37.440 the risk was that if we saw a reprise of that, 0:08:37.520 --> 0:08:40.400 given the political tension in the economy in the country 0:08:40.400 --> 0:08:43.120 at that time, that maybe there would not be much 0:08:43.160 --> 0:08:47.160 fiscal support. So the Fed went massively. Uh. We got 0:08:47.200 --> 0:08:50.240 a lot of fiscal stimulus, trillions of fiscal stimulus. So 0:08:50.280 --> 0:08:53.680 that did very importantly prop up the economy until it 0:08:53.679 --> 0:08:56.480 could get back onto its own feet. And now the 0:08:56.520 --> 0:08:58.840 FED has realized where at a stage where it is 0:08:58.880 --> 0:09:03.120 now time, you know, the pandemic is becoming endemic. It's 0:09:03.200 --> 0:09:04.880 less of a threat to the economy, and so the 0:09:04.920 --> 0:09:09.160 Fed is pulling back on those uh, those levels of accommodation, 0:09:09.240 --> 0:09:13.800 which means we'll soon be seeing both interest rate increases 0:09:14.280 --> 0:09:17.360 uh and later this year, perhaps much later this year, 0:09:17.559 --> 0:09:21.120 the FED will start to gradually shrink its balance sheet. 0:09:28.679 --> 0:09:33.280 Gina um Carl's successfully has ratcheted up my anxiety. I 0:09:33.320 --> 0:09:35.560 feel like I'm at the top of that roller coaster now, 0:09:36.200 --> 0:09:38.959 and which was not what I needed after the last 0:09:39.000 --> 0:09:41.880 week and of watching this market. Uh, take me, take 0:09:41.880 --> 0:09:44.640 me on some whiplash we had you on a few 0:09:44.640 --> 0:09:46.840 months ago. One of the things that I that we 0:09:46.960 --> 0:09:50.640 did spend some time talking about then was inflation. It's gotten. 0:09:50.880 --> 0:09:53.960 It's just become like almost the only thing that the 0:09:54.000 --> 0:09:57.240 market and the FED is has been centered on since 0:09:57.280 --> 0:09:59.760 that conversation. So just bring us up to speed on 0:09:59.760 --> 0:10:02.560 on where where you are now, what what you feel 0:10:02.600 --> 0:10:07.200 like that outlook is um and and how powerful um 0:10:07.360 --> 0:10:09.280 the FED is and what the market is gonna be 0:10:09.360 --> 0:10:12.920 doing in the weeks and months to come. Yeah, UM, 0:10:13.080 --> 0:10:15.679 long a lot of questions to answer there. I'll try 0:10:15.720 --> 0:10:17.360 to get to all of them. First, Joel, I have 0:10:17.400 --> 0:10:20.160 to say, you're gonna have to toughen up. You're gonna 0:10:20.200 --> 0:10:22.679 have to get stronger, because it's going to be a 0:10:22.720 --> 0:10:26.480 wild ride in two. We have been here before, right, 0:10:26.600 --> 0:10:31.560 The FED has attempted to reverse or normalize policy multiple 0:10:31.600 --> 0:10:33.640 times over the course of the last ten years. In 0:10:33.720 --> 0:10:37.520 each case, especially when they stopped inflating the balance sheet, 0:10:37.520 --> 0:10:39.920 the stock market goes through a pretty rough correction. Right 0:10:39.960 --> 0:10:42.080 on average, we see the stock market fall somewhere between 0:10:42.120 --> 0:10:45.400 fifteen and in each of those cases that that Carl 0:10:45.400 --> 0:10:48.160 alluded to. So I do think we have to we're 0:10:48.160 --> 0:10:50.760 gonna have to be tougher. In two. We've gotten very 0:10:50.760 --> 0:10:53.480 complacent as equity investors over the last two years, just 0:10:53.559 --> 0:10:57.160 really accustomed to constant gains in the equity market, and 0:10:57.160 --> 0:11:01.800 that's highly unlikely to be the case in two. That said, 0:11:02.280 --> 0:11:03.760 you know, I think a couple of things has changed 0:11:03.800 --> 0:11:06.120 since the last time I was on and most of 0:11:06.160 --> 0:11:09.679 it is really the Fed's interpretation of what's going on. 0:11:09.920 --> 0:11:12.400 If you recall when we talked last, we talked about 0:11:12.840 --> 0:11:14.800 the fact that I believe the economy is on much 0:11:14.840 --> 0:11:18.240 much stronger footing than most economists are forecasting, and the 0:11:18.320 --> 0:11:21.920 demand side of inflation is completely underappreciated, and the FED 0:11:21.960 --> 0:11:24.000 really leaned on this idea that inflation was going to 0:11:24.000 --> 0:11:25.840 be transitory, it would go away because it was all 0:11:25.880 --> 0:11:29.400 supply driven. And the reality is that household balance sheets 0:11:29.400 --> 0:11:31.640 are in much much better condition than they were last cycles, 0:11:31.640 --> 0:11:33.960 so sort of going on a last cycle playbook for 0:11:34.360 --> 0:11:38.400 how slow they can move. Uh. That's really changed over 0:11:38.440 --> 0:11:39.959 the course of the last few months, where the FED 0:11:40.080 --> 0:11:42.880 is now acknowledging well, you know, even some of the 0:11:42.880 --> 0:11:46.720 most esoteric unemployment rate measures that we like to follow 0:11:46.800 --> 0:11:49.760 to suggest that we're not yet at maximum employment well 0:11:49.920 --> 0:11:51.640 low and behold, we're back to where we were in 0:11:51.640 --> 0:11:55.240 two thousand nineteen. Right. Retail sales are still on fire 0:11:55.520 --> 0:11:59.000 for the most part. Inflation is still very strong. There's 0:11:59.080 --> 0:12:01.959 there's really very few slignes signs that the economy is 0:12:02.000 --> 0:12:05.440 even slowing down, so inflation may actually sustain. And I 0:12:05.440 --> 0:12:08.200 think they finally have capitulated on the idea that, yeah, 0:12:08.240 --> 0:12:11.600 as Carl mentioned, the pandemic is becoming endemic. It's less 0:12:11.600 --> 0:12:14.600 of a risk to broader economic growth, and we need 0:12:14.640 --> 0:12:18.160 to normalize things. So the natural reaction and the stock 0:12:18.200 --> 0:12:21.599 market is oh, hey, okay, we thought you're going to 0:12:21.679 --> 0:12:24.600 be our best buddy, and now you're gonna leave us be. 0:12:25.520 --> 0:12:29.000 So valuations are naturally reacting. Um. I think Eric mentioned 0:12:29.040 --> 0:12:31.920 at the onset that you know, the market has reacted 0:12:31.960 --> 0:12:34.880 to inflation. I totally agree. In particular, the market has 0:12:34.920 --> 0:12:38.960 reacted to how rates are are moving with respect to 0:12:39.280 --> 0:12:41.960 inflation and with respect to what the FED is going 0:12:42.000 --> 0:12:45.600 to do specifically. And we see that in our work 0:12:45.600 --> 0:12:48.640 in the equity market, the stocks with the most sensitivity 0:12:48.760 --> 0:12:51.640 two rates have dramatically underperformed the stocks with the least 0:12:51.679 --> 0:12:55.200 sensitivity to rates. And and I think that that's going 0:12:55.200 --> 0:12:57.960 to be the prevailing case for most of because this 0:12:58.080 --> 0:13:01.440 is an adjustment process. Now that's set head. There is 0:13:01.440 --> 0:13:04.240 a saving grace here that nobody's talking about, and that is, Hey, 0:13:04.320 --> 0:13:07.199 the economy is still strong, and I think we're going 0:13:07.240 --> 0:13:10.240 to continue to underappreciate just how strong the economy is, 0:13:10.320 --> 0:13:12.160 even in the face of FED tightening, even in the 0:13:12.200 --> 0:13:17.199 face of potential balance sheet runoff. We probably will continue 0:13:17.200 --> 0:13:19.960 to underappreciate just how strong that economy is. And that 0:13:20.000 --> 0:13:22.880 shows up in earnings. So the offset for the market 0:13:22.960 --> 0:13:26.440 is this sort of pull and push kind of metaphor 0:13:26.480 --> 0:13:29.400 where valuations are constantly under some degree of pressure, but 0:13:29.480 --> 0:13:31.559 earnings do make up some of that difference. And as 0:13:31.559 --> 0:13:34.720 long as earnings hold in, you know, the longer term 0:13:34.920 --> 0:13:38.640 uptrend for the stock market probably remains intact. Um. Let 0:13:38.640 --> 0:13:40.679 me follow up on this whole idea, because I think 0:13:40.679 --> 0:13:44.040 people out there here all the time, Oh, higher rates 0:13:44.320 --> 0:13:47.319 bad for growth stocks, They're bad for the ARC stocks. 0:13:47.880 --> 0:13:52.120 Clearly that's happened right. ARC is down in the past year, 0:13:52.600 --> 0:13:55.280 but the S and PS up twenty That is a 0:13:55.280 --> 0:13:59.640 big spread. Although art crushed in long story, short just 0:13:59.720 --> 0:14:04.960 exp plane why just basis proints make that big of 0:14:05.000 --> 0:14:08.840 a difference for some of these stocks like Zoom Roku. 0:14:08.880 --> 0:14:10.880 I mean, these are pretty big companies. It's not like 0:14:10.920 --> 0:14:14.000 they're like nobody companies who have nothing going on. I 0:14:14.440 --> 0:14:18.199 guess maybe try to square that. Yeah, so a couple 0:14:18.240 --> 0:14:21.640 of things happen. Right. If you're a purest if you're 0:14:21.640 --> 0:14:25.560 a pure fundamentalist, you believe the value of any equity 0:14:25.800 --> 0:14:29.400 is it's discounted future to cash flow stream, right, And 0:14:29.440 --> 0:14:32.320 so if that discount rate is going higher and your 0:14:32.360 --> 0:14:36.080 future cash flows are not changing as the discount rate 0:14:36.080 --> 0:14:38.800 goes higher, the stocks that had the longest term future 0:14:38.800 --> 0:14:41.160 cash flow growth are going to be impacted the most. 0:14:41.200 --> 0:14:43.000 Those are the growth stocks in the market in agent 0:14:43.080 --> 0:14:46.800 most in the most generic sense. At the same time, 0:14:47.640 --> 0:14:51.440 there is a proven relationship between high volatility stucks in 0:14:51.480 --> 0:14:55.000 the balance sheet for the FED, and not very many 0:14:55.040 --> 0:14:57.240 people can really explain this, but the reality of the 0:14:57.280 --> 0:15:00.400 situation is every time that balance sheet has exceler rated, 0:15:00.800 --> 0:15:04.120 the highest volatility stocks in the SNP five hundred, no 0:15:04.120 --> 0:15:07.560 matter what type of stock they are, have tended to benefit. 0:15:08.520 --> 0:15:10.920 So we what we started to see all the way 0:15:10.920 --> 0:15:13.080 back in March of last year, actually, as some of 0:15:13.080 --> 0:15:15.640 these most high volatility stocks in the market started to 0:15:15.680 --> 0:15:17.760 suss out this idea that the FED was going to 0:15:17.800 --> 0:15:22.119 have to tighten policy and liquidity conditions would start to change, 0:15:22.560 --> 0:15:26.160 and the reduced this materially reduced risk tolerance for these 0:15:26.200 --> 0:15:29.920 type of stocks. Some of them are high growth or 0:15:30.000 --> 0:15:31.720 high cash flow growth stocks. Some of them have no 0:15:31.800 --> 0:15:33.720 cash flow at all, so you can't explain it through 0:15:33.720 --> 0:15:38.120 a traditional fundamental metric, but they are sensitive because they're 0:15:38.200 --> 0:15:40.920 high vall And we've really started to see this in 0:15:40.960 --> 0:15:42.480 some of our factor work over the course of the 0:15:42.560 --> 0:15:46.520 last six months, especially as the factor models that we run, 0:15:46.560 --> 0:15:49.760 we're saying, get out of the way of high volatility 0:15:49.800 --> 0:15:53.920 volatility stocks, start to move your portfolio to lower volatility stocks, 0:15:53.960 --> 0:15:57.440 and that is reflecting what's happening with interest rate expectations, 0:15:57.440 --> 0:16:00.440 but also what's happening with expectations for the ballot sheet. 0:16:00.800 --> 0:16:03.040 If the balance sheet is not going to continue to rise, 0:16:04.000 --> 0:16:07.360 it will impact the most volatle stocks in the market 0:16:07.400 --> 0:16:10.680 most um. And I think that's what's happened with some 0:16:10.720 --> 0:16:12.640 of the arcs and you know, some of these meme 0:16:12.720 --> 0:16:16.280 stocks and the like. You know, as is typically the case, 0:16:16.320 --> 0:16:19.720 the market really started to suss this out, as I mentioned, 0:16:19.840 --> 0:16:23.200 almost a full year ago now, but you had some 0:16:23.280 --> 0:16:25.560 offsets that made us kind of not you know, maybe 0:16:25.600 --> 0:16:27.800 when we're looking at the aggregate numbers, the SMP five 0:16:27.880 --> 0:16:29.600 hundred looked great, but if you look at where the 0:16:30.240 --> 0:16:33.280 returns came from in the SNP five hundred, it was 0:16:33.400 --> 0:16:39.560 characteristically very different than the returns. Just to paraphrase Gina 0:16:39.680 --> 0:16:45.200 in very blunt Layman's terms, stocks love que quantitine of easing, Yes, 0:16:45.240 --> 0:16:48.200 that purchases from the Fed. If the Fed so much 0:16:48.240 --> 0:16:52.680 as whispers QUI, stocks rally. And when the Fed does 0:16:52.720 --> 0:16:54.680 the opposite, which is what they've been doing over the 0:16:54.720 --> 0:16:58.280 course of the last year, when they talk about quantitative tightening, 0:16:58.400 --> 0:17:00.880 the shrinking of the balance sheet, then though you know, 0:17:01.040 --> 0:17:05.000 stocks as much as they like QUEI, they despise QT. 0:17:05.800 --> 0:17:10.560 And the FED has been murmuring increasingly loudly about quantitative 0:17:10.600 --> 0:17:12.720 tightening and what that's going to look like over the 0:17:12.720 --> 0:17:16.680 course of the last several months, especially in since the 0:17:16.760 --> 0:17:20.040 December FOMC meeting, and stocks don't like that, especially the 0:17:20.119 --> 0:17:22.560 risky stocks don't like that. And that's totally consistent with 0:17:22.600 --> 0:17:26.520 what we've seen play out in the marketplace. So Carlos, 0:17:26.560 --> 0:17:29.080 stick with that for a second. Say I give you 0:17:29.119 --> 0:17:33.040 the football. You are j pal, When do you next 0:17:33.320 --> 0:17:38.119 look at the stock market? Well, you have to continuously 0:17:38.359 --> 0:17:41.320 watch the stock market and see how it's reacting to 0:17:41.359 --> 0:17:44.399 what you're doing. Because again, the stock market is not 0:17:45.119 --> 0:17:48.560 divorced from the real economy. Everyone says Wall Street is 0:17:48.600 --> 0:17:52.080 not main Street, but there are very important linkage is here. 0:17:52.440 --> 0:17:56.080 The stock market is a periscope into the future, into 0:17:56.200 --> 0:17:59.560 future company earnings, into the future health of the economy. 0:17:59.600 --> 0:18:03.200 So stocks are tanking. That's giving you a very negative 0:18:03.200 --> 0:18:06.280 signal on the economy, and that tells you maybe you 0:18:06.359 --> 0:18:08.879 need to move at a slower pace in terms of 0:18:08.960 --> 0:18:15.160 tightening policy. Mind you, if we're thinking about Eric Incorporated, 0:18:15.240 --> 0:18:18.800 let's call it a small business. Eric is producing widgets now, 0:18:18.800 --> 0:18:22.280 and if it's chairs, lawn chairs, lawn chairs, okay, Eric, 0:18:22.359 --> 0:18:26.080 slawn chair company. If his business is growing at a 0:18:26.160 --> 0:18:29.719 ten percent pace and the cost of his financing is 0:18:30.280 --> 0:18:36.160 one percent, what are you gonna do, Eric? Grow the business? Sure, sure, 0:18:36.320 --> 0:18:39.639 keep growing it. Okay. Now your business slows down to 0:18:39.720 --> 0:18:42.800 eight percent, your cost of financing goes up to four percent. 0:18:43.440 --> 0:18:47.840 Keep growing the business a little a little. Okay. Now 0:18:47.880 --> 0:18:50.919 the business is growing four percent and your cost of 0:18:50.960 --> 0:18:55.600 financing is five percent, you're going to grow the business. No, 0:18:55.640 --> 0:18:58.440 I'm gonna I'm gonna cash any more. I'm gonna cash 0:18:58.480 --> 0:19:02.080 up with you. Oh cash out? Well, you're you're not 0:19:02.119 --> 0:19:04.399 going to continue to grow the business. And what's true 0:19:04.480 --> 0:19:08.960 for Eric's lawn Chairs Incorporated is also true for a 0:19:09.200 --> 0:19:13.920 twenty trillion dollar US economy. When the cost of financing 0:19:14.040 --> 0:19:17.520 approaches the growth rate, then all of a sudden, we're 0:19:17.560 --> 0:19:20.399 not stepping on the gas pedal anymore. Now we're starting 0:19:20.400 --> 0:19:22.680 to move towards the brake pedal. So as the FED 0:19:22.760 --> 0:19:26.360 lifts rates from zero to maybe one percent at year end, 0:19:26.800 --> 0:19:30.000 that's really just easing off of the accelerator. It's not 0:19:30.080 --> 0:19:32.479 stepping on the brake pedal, but it's moving in the 0:19:32.480 --> 0:19:35.560 direction of the brake pedal. And so that's why GENA 0:19:35.640 --> 0:19:39.080 can have a very constructive outlook for the economy and 0:19:39.160 --> 0:19:42.920 for stocks, just to to put those numbers around instead 0:19:42.920 --> 0:19:46.600 of Eric's lawn chair business, the U s economy right 0:19:46.760 --> 0:19:50.800 interest rates or zero or effectively zero h The economy 0:19:50.960 --> 0:19:55.720 as of the final quarter of grew at a nominal 0:19:55.840 --> 0:19:59.080 pace of twelve percent year on year, So there's a 0:19:59.160 --> 0:20:02.800 huge gap between twelve the growth rate of the business 0:20:02.840 --> 0:20:05.440 and zero the cost of financing. The FED is going 0:20:05.520 --> 0:20:10.679 to start narrowing that gap, and probably nominal GDP slows down, 0:20:11.119 --> 0:20:14.240 you know, considerably, to something closer to five or six 0:20:14.280 --> 0:20:16.840 percent by the end of this year. But if the 0:20:16.880 --> 0:20:19.879 FAN is hiking once per quarter, that puts them at 0:20:19.880 --> 0:20:23.320 one percent, So you still have a huge interest rate differentials. 0:20:23.400 --> 0:20:27.680 We're not talking until maybe twenty four or beyond. If 0:20:27.680 --> 0:20:30.800 the FED continues on this steady pace of tightening to 0:20:30.880 --> 0:20:33.639 really move that interest rate differential down to what we 0:20:33.680 --> 0:20:36.480 would call a neutral pace. The FAN is giving it 0:20:36.520 --> 0:20:40.280 a very aggressive steroid to the economy and will continue 0:20:40.359 --> 0:20:43.719 to do so, albeit in slightly smaller doses going forward. 0:20:43.880 --> 0:20:45.960 I would just add one thing because I think that 0:20:46.040 --> 0:20:49.680 was a great explanation. We're surrounding the cost of financing 0:20:50.600 --> 0:20:54.040 um I would say when we look at corporate balance sheets, 0:20:53.840 --> 0:20:57.160 the thing that also is completely underappreciated is that cost 0:20:57.200 --> 0:21:01.959 of financing is significantly lower than you might observe when 0:21:02.000 --> 0:21:04.919 you're looking at even spreads because of the degree to 0:21:04.960 --> 0:21:08.440 which companies have built up cash stores, and it's very 0:21:08.440 --> 0:21:12.359 similar with households, where we are substantially less dependent on 0:21:12.720 --> 0:21:17.280 on financing to grow, especially relative to the last cycle, 0:21:17.560 --> 0:21:20.280 where corporate balance sheets and household balance sheets were in 0:21:20.320 --> 0:21:25.440 tremendous disrepair following the Great Financial Crisis, there on significantly 0:21:25.520 --> 0:21:28.080 sounder footing. And you know, the perfect example of this 0:21:28.160 --> 0:21:31.439 is Microsoft wants to grow. They don't need to go 0:21:31.640 --> 0:21:34.800 issue debt to even buy a company as large as Activision, 0:21:35.480 --> 0:21:38.359 which is a huge testament to just how much insane 0:21:38.359 --> 0:21:40.639 amount of cash is just sitting on balance sheets. And 0:21:40.640 --> 0:21:42.480 it's the same across most of the S and P 0:21:42.640 --> 0:21:45.760 five hundred, where corporate cash is still sitting near and 0:21:45.840 --> 0:21:48.440 all time high, even though we're this far into recovery, 0:21:48.560 --> 0:21:52.119 and it's it's quite phenomenal, right, is this? Companies just 0:21:52.320 --> 0:21:57.320 haven't spent a ton yet on anything, And even though 0:21:57.320 --> 0:21:59.000 they've been able to tap the bond markets for the 0:21:59.040 --> 0:22:01.640 last couple of years, they have stored up a lot 0:22:01.640 --> 0:22:05.119 of capability of keeping the cycle going for longer than 0:22:05.160 --> 0:22:08.280 many people anticipate, even if the fet ist tight. And 0:22:08.320 --> 0:22:10.840 I should just add to what jetas saying, what she's 0:22:10.840 --> 0:22:13.280 seeing at the company level is also true at the 0:22:13.280 --> 0:22:17.760 household level. Households stockpiled cash during the pandemic, they got 0:22:17.800 --> 0:22:20.520 rebate checks from the government. They didn't have the opportunity 0:22:20.600 --> 0:22:23.119 to spend money in many cases, and a lot of 0:22:23.119 --> 0:22:26.080 households were significantly invested in the markets and so they 0:22:26.080 --> 0:22:29.359 saw their wealth increase on that front as well. So 0:22:29.440 --> 0:22:33.080 there's a a mountain of savings that's in the trillions 0:22:33.119 --> 0:22:35.200 of dollars that households are sitting on, which is why 0:22:35.240 --> 0:22:39.240 they can weather the storm of slightly higher inflation and 0:22:39.800 --> 0:22:43.840 higher interest rates as well. But it's gonna be a 0:22:43.880 --> 0:22:46.879 bumpy little ride here, Eric, for all of them. And 0:22:46.920 --> 0:22:50.520 I'm curious, like, just as flows go something I know 0:22:50.600 --> 0:22:53.199 you watch closely all the time, what's it? What's it 0:22:53.240 --> 0:22:55.880 been like of late? Where have people gotten out of 0:22:56.320 --> 0:23:00.360