WEBVTT - Ragin’ Rates 0:00:04.120 --> 0:00:07.560 Strap on your parachute. It's time for What Goes Up 0:00:07.840 --> 0:00:15.000 with Sarah Ponzick and Mike Reagan. Hello and welcome to 0:00:15.040 --> 0:00:19.160 What goes Up, a Bloomberg Weekly Markets podcast. I'm Sarah Ponzek, 0:00:19.360 --> 0:00:22.840 reporter on the Cross Asset team, and I'm Mike Reagan, 0:00:23.040 --> 0:00:25.600 a senior editor at Bloomberg. This week on the show, 0:00:26.040 --> 0:00:29.520 for the first time in a year, benchmark tenure treasury 0:00:29.560 --> 0:00:32.960 yields spiked above one point six and the stock market 0:00:33.000 --> 0:00:36.200 started the show It's nerves. What's actually behind the spike 0:00:36.240 --> 0:00:38.960 and rates? And at what point does the equity market 0:00:39.040 --> 0:00:43.240 have to take serious notice? We discuss, and as always, 0:00:43.240 --> 0:00:46.000 we will close out the episode with our tradition the 0:00:46.040 --> 0:00:50.159 craziest thing we saw in markets this week? Uh, Sarah, 0:00:50.440 --> 0:00:52.320 another crazy week. I got a couple of good ones. 0:00:52.400 --> 0:00:54.720 I trust you do as well. I trust you have 0:00:54.760 --> 0:00:58.639 plenty good ones. Mike. Yeah. Um. And I'm excited this week. 0:00:58.680 --> 0:01:00.400 I mean, I know I'm excited every week, but I'm 0:01:00.440 --> 0:01:05.400 especially excited this week for one thing, because You've managed 0:01:05.440 --> 0:01:07.880 to drum up a ridiculous amount of interest in my 0:01:07.959 --> 0:01:11.160 high school nickname among listeners. I did not expect the 0:01:11.600 --> 0:01:14.040 demand to be so robust. I think the joke is 0:01:14.080 --> 0:01:16.760 on you, Mike, though, because I think you're actually the 0:01:16.800 --> 0:01:19.039 one who drummed up all this demand. I've just been 0:01:19.080 --> 0:01:22.480 going along for the ride, and here we are sitting 0:01:22.959 --> 0:01:25.800 knocking on the door of two hundred reviews, and that 0:01:25.840 --> 0:01:27.959 means that Mike's just gonna have to share his other 0:01:28.240 --> 0:01:32.680 other not as flattering high school nicknames soon. It backfired 0:01:32.680 --> 0:01:34.319 on me, It really did. I did not think. I 0:01:34.360 --> 0:01:36.640 did not think the demand would be that robust. But 0:01:36.640 --> 0:01:38.560 we're really up to one ninety seven now, so I 0:01:39.200 --> 0:01:41.800 will not reveal the high value nickname. I might reveal 0:01:42.360 --> 0:01:44.399 a lesser valued nickname at the end of the show 0:01:44.560 --> 0:01:47.960 if you stick around. So there's that. But the other 0:01:47.960 --> 0:01:51.320 reason I'm excited, Sarah is this week's guest is a 0:01:51.360 --> 0:01:56.400 bona fide Philadelphian like myself, at least suburban Philadelphia, which 0:01:56.480 --> 0:01:59.080 means I may slip into my sort of Delaware Valley 0:01:59.120 --> 0:02:02.280 accent and talk about winter ice and stuff like everyone 0:02:02.320 --> 0:02:06.200 would love that. Everyone I know, at least our guest, Uh, 0:02:06.840 --> 0:02:10.120 we'll understand what I'm talking about. And she is the 0:02:10.200 --> 0:02:14.320 chief investment strategist at P and C Financial Services Group, 0:02:14.600 --> 0:02:18.280 which manages the neighborhood of a hundred and fifty billion dollars. 0:02:18.280 --> 0:02:21.400 Her name is Amanda Gotti. Amanda, welcome to the show. 0:02:22.520 --> 0:02:24.560 Thank you so much for having me. I'm excited to 0:02:24.560 --> 0:02:27.320 be with you both today. Great and also I believe 0:02:27.320 --> 0:02:30.240 a loser if if my LinkedIn stalking is accurate. A 0:02:30.280 --> 0:02:35.200 Losern County native, or at least high school which is that? 0:02:35.360 --> 0:02:38.760 Is that is really impressive? Yes, I'm a Dallas High 0:02:38.760 --> 0:02:44.200 school grad, Losern County. Yes, Harvey's Lake. You've swimming Harvey's Lake, 0:02:44.240 --> 0:02:48.400 I assume and uh oh absolutely, many many summers spend 0:02:48.440 --> 0:02:51.919 at Harvey's Lake, like you should never ever be ashamed 0:02:51.919 --> 0:02:55.480 of LinkedIn stalking. Yeah, it's what we do. It's what 0:02:55.520 --> 0:02:58.760 we do. It's what we do. I'm impressed. But my 0:02:58.840 --> 0:03:02.600 people came from Wolk Spara not too far away from there, 0:03:03.360 --> 0:03:05.880 and and many summers at Harvey's Lake too. I'd not 0:03:05.960 --> 0:03:10.280 meet with them. But anyway, enough with all that, Amanda, I, 0:03:10.280 --> 0:03:15.160 as Sarah pointed out, the treasury market has really taken 0:03:15.440 --> 0:03:19.880 center stage this week. I guess, um, you know, it 0:03:19.960 --> 0:03:23.720 wasn't very surprising that we should see yields yields creep 0:03:23.800 --> 0:03:26.640 up the way they have. I think the rate of 0:03:26.720 --> 0:03:30.119 change is kind of what's alarming people how swiftly they've 0:03:30.160 --> 0:03:33.000 moved up. What is your thinking on that? You know, 0:03:33.040 --> 0:03:36.400 what are you telling clients about? This? Is it um 0:03:36.440 --> 0:03:38.400 you know to the moon? As they say on Reddit 0:03:38.440 --> 0:03:40.560 for yields an hours? This is this just sort of 0:03:40.600 --> 0:03:43.520 an anomaly and should should this at least the rate 0:03:43.520 --> 0:03:46.800 of change in the increase settled down? Do you think? Well? 0:03:46.840 --> 0:03:49.400 I think there's a lot to unpack as it relates 0:03:49.400 --> 0:03:51.920 to what's happening with interest rates here. I think at 0:03:51.960 --> 0:03:55.040 the end of the day, this feels like about as 0:03:55.160 --> 0:03:58.160 high as we can see the ten year ago from 0:03:58.200 --> 0:04:01.480 a market driven perspective. Can talk a little bit about 0:04:01.680 --> 0:04:04.520 why that's the case. I think there's some issues at 0:04:04.520 --> 0:04:06.760 the very short end of the curve. There's also some 0:04:06.840 --> 0:04:10.440 issues at the intermediate and longer end, and so when 0:04:10.480 --> 0:04:14.200 you combine those two things together, we're really seeing pretty 0:04:14.280 --> 0:04:17.599 dramatics deepening in the yield curve if I just take 0:04:17.680 --> 0:04:20.600 kind of the longer end as a starting point, So 0:04:21.080 --> 0:04:24.680 the tenure absolutely at the highest level of the pandemic 0:04:25.000 --> 0:04:29.200 um you know, really outsize moves more significant than even 0:04:29.240 --> 0:04:32.200 what we saw following the Georgia Senate runoffs and even 0:04:32.200 --> 0:04:36.760 the Fiser efficacy um news around their vaccine back in November, 0:04:37.320 --> 0:04:41.200 and yet we really haven't had a lot of meaningful news, 0:04:41.640 --> 0:04:46.159 so fairly extreme moves here on basically this idea that 0:04:46.240 --> 0:04:49.479 we're going to get a ton of stimulus coming into 0:04:49.480 --> 0:04:52.920 the system and fast, and so, you know, I think 0:04:53.000 --> 0:04:56.400 this is the bond market's interpretation that that Congress is 0:04:56.440 --> 0:04:59.919 going to effectively pull off at one point nine trillion 0:05:00.040 --> 0:05:03.279 dollar stimulus package and then turn right around and do 0:05:03.560 --> 0:05:08.799 another package, but infrastructure focused of the same magnitude or larger, 0:05:08.960 --> 0:05:10.960 just in a matter of a few months. And our 0:05:11.080 --> 0:05:14.279 take on this is that the bond market is obviously 0:05:14.360 --> 0:05:18.600 concerned about it, obviously fixated on it, but ultimately it's 0:05:18.600 --> 0:05:21.000 going to be very difficult to get all of this 0:05:21.080 --> 0:05:24.560 done and rapid succession. I think it's pretty clear and 0:05:24.640 --> 0:05:27.880 well understood that the one point nine trillion can get 0:05:27.920 --> 0:05:31.760 done through budget reconciliation, not at all clear that we 0:05:31.800 --> 0:05:36.480 can get the same magnitude of stimulus done for infrastructure 0:05:36.600 --> 0:05:39.400 without raising taxes. And so I think that's going to 0:05:39.480 --> 0:05:41.800 be the key to the path forward in terms of 0:05:41.839 --> 0:05:44.560 the intermediate and longer end of the curve, I think 0:05:44.600 --> 0:05:46.600 things are going to settle down a bit. We may 0:05:46.600 --> 0:05:50.840 not actually see rates fall back down meaningfully, but this 0:05:50.960 --> 0:05:54.080 rate of change has to slow down when you start 0:05:54.120 --> 0:05:57.440 to factor in UM increasing taxes. That's not going to 0:05:57.520 --> 0:06:00.560 be able to happen or turn on a dime US necessarily. 0:06:01.000 --> 0:06:03.720 The short end of the curve very different story, So 0:06:03.920 --> 0:06:08.000 much much more pressure on the downward side of the 0:06:08.040 --> 0:06:10.440 short end of the curve, and it's really a function 0:06:10.720 --> 0:06:15.039 of treasury related accounting as I would describe it. UM. 0:06:15.080 --> 0:06:18.240 There's an adjustment there in terms of cash reserves as 0:06:18.279 --> 0:06:21.440 it relates to their funded status and as it relates 0:06:21.480 --> 0:06:23.839 to what they think is going to happen from a 0:06:23.880 --> 0:06:27.800 stimulus perspective, and so net net, they are creating some 0:06:27.880 --> 0:06:30.919 scarcity of supply there, and I think that that is 0:06:30.960 --> 0:06:35.000 putting pretty significant pressure on short term rates. We've even 0:06:35.040 --> 0:06:40.000 seen REPO go into negative territory here again very recently, 0:06:40.080 --> 0:06:43.919 and so I think net net two very different forces 0:06:44.000 --> 0:06:46.960 applying a lot of pressure here on the yield curve, 0:06:47.040 --> 0:06:50.400 creating a lot of steepening UM. You know, the usual 0:06:50.440 --> 0:06:53.320 interpretation of steepening is that we're going to see this 0:06:53.480 --> 0:06:58.400 massive acceleration and growth and potentially an inflationary spike. But 0:06:58.520 --> 0:07:00.599 I would say we need to slow our role here 0:07:00.800 --> 0:07:03.039 a little bit, just given kind of the forces that 0:07:03.080 --> 0:07:05.359 are at play, a little bit of a head fake, 0:07:05.640 --> 0:07:09.680 not necessarily expecting a full normalization, but I think that 0:07:09.800 --> 0:07:13.600 this is you know, very significant short term volatility that 0:07:13.680 --> 0:07:16.360 will start to slow down a bit over the weeks 0:07:16.360 --> 0:07:20.120 and months ahead, So so focusing on the longer end 0:07:20.120 --> 0:07:22.600 of the curve. I mean, we heard from Jerome Powell 0:07:22.680 --> 0:07:26.120 this past week speaking to the Senate Banking Committee and 0:07:26.200 --> 0:07:28.760 which he said that you know what, essentially people shouldn't 0:07:28.760 --> 0:07:31.840 really worry about the backup and long and yield because 0:07:31.840 --> 0:07:34.800 it's a statement of competence and growth. And you mentioned 0:07:34.840 --> 0:07:37.520 that people kind of need to slow their role talking 0:07:37.520 --> 0:07:41.800 about this massive pickup and growth, possible worries about inflation 0:07:41.920 --> 0:07:46.320 down the road. But what is the takeaway here and 0:07:46.360 --> 0:07:50.000 when you look at the data and the expectations for 0:07:50.120 --> 0:07:53.680 trillions of dollars of stimulus coming our way, what is 0:07:53.720 --> 0:07:56.040 the outlook for growth, what is the outlook for inflation? 0:07:56.160 --> 0:07:58.560 And therefore what does it actually mean for assets like 0:07:58.560 --> 0:08:03.440 bonds and equities. Well, again, there's a lot to unpack 0:08:03.520 --> 0:08:05.360 here in terms of the path forward, I mean, I 0:08:05.400 --> 0:08:08.400 think it's pretty clear that we are not out of 0:08:08.440 --> 0:08:11.160 the woods yet. In terms of the pandemic, you know, 0:08:11.440 --> 0:08:14.160 case curves are definitely moving in the right direction. There 0:08:14.240 --> 0:08:17.400 is some progress on the vaccine front, but my goodness, 0:08:17.480 --> 0:08:19.640 things are moving a lot slower than I think all 0:08:19.680 --> 0:08:22.760 of us would like to see at this point, and 0:08:22.800 --> 0:08:26.400 so that really does pose some pretty significant challenges as 0:08:26.440 --> 0:08:29.920 it relates to the reopening and the path forward. You know, 0:08:30.000 --> 0:08:32.719 somewhere in the neighborhood of eight percent of US g 0:08:32.880 --> 0:08:36.160 d P is still in states that are under some 0:08:36.280 --> 0:08:40.200 form of economic restriction or lockdown. So we got a long, 0:08:40.280 --> 0:08:43.320 strange trip ahead of us, right was a very long, 0:08:43.400 --> 0:08:47.400 strange trip in one is setting the stage very similarly 0:08:48.000 --> 0:08:51.360 long and strange trip to get to a reopening. And 0:08:51.360 --> 0:08:54.760 while we think in the short run things are likely 0:08:54.800 --> 0:08:57.320 to be a little bit choppy on the economic growth 0:08:57.440 --> 0:09:00.840 side of things, and also in terms of this market rally, 0:09:00.960 --> 0:09:03.320 as we moved towards the second half of the year, 0:09:03.480 --> 0:09:07.360 and certainly as a setup for two, a much more 0:09:07.400 --> 0:09:11.520 bullish backdrop starts to come into focus. And so at 0:09:11.559 --> 0:09:13.360 the end of the day, it really comes back to 0:09:13.480 --> 0:09:17.800 the path forward very much being dictated by covid um 0:09:17.840 --> 0:09:21.360 and the pace or timing of getting this economy reopened, 0:09:21.920 --> 0:09:24.440 But certainly some fits and starts in the short run. 0:09:24.760 --> 0:09:28.360 As to your question around inflation, you know, back following 0:09:28.400 --> 0:09:32.240 the financial crisis, there was a lot of concern sort 0:09:32.280 --> 0:09:35.680 of deja vu all over again, very reminiscent today of 0:09:35.720 --> 0:09:39.400 the concerns and fears back then following the financial crisis 0:09:39.679 --> 0:09:42.480 that we were going to see this big inflationary spike 0:09:42.640 --> 0:09:48.200 or inflationary accident, and ultimately none of that really did transpire. Now, 0:09:48.280 --> 0:09:52.640 I fully admit that we are in unprecedented territory as 0:09:52.679 --> 0:09:55.280 it relates to stimulus coming into the system, far and 0:09:55.320 --> 0:09:59.280 away more today than what we saw back then. But 0:09:59.360 --> 0:10:02.720 we still think there are some structural forces in place 0:10:03.360 --> 0:10:06.000 that will keep a lid on inflation. So it isn't 0:10:06.000 --> 0:10:08.560 that we won't see some bouts of it here in 0:10:08.600 --> 0:10:12.200 the short run, certainly seeing it in terms of lumber prices, 0:10:12.800 --> 0:10:17.199 healthcare costs, childcare a costs. There isn't certainly a short 0:10:17.280 --> 0:10:20.120 list um, but net net, we don't think that that's 0:10:20.240 --> 0:10:22.960 enough to cause any kind of long term damage to 0:10:23.000 --> 0:10:27.120 the economic recovery or frankly the market rally, and then 0:10:27.280 --> 0:10:31.640 longer term, when you think about the structural forces like demographics, 0:10:31.679 --> 0:10:36.400 which are clearly deflationary here in the US, um technological 0:10:36.440 --> 0:10:41.320 innovation which really has been disinflationary, deflationary how you want 0:10:41.360 --> 0:10:45.640 to describe it throughout the pandemic, even before the pandemic 0:10:45.679 --> 0:10:50.040 took hold, and has really distinguished itself in terms of 0:10:50.080 --> 0:10:52.920 pulling away from the rest of the market pack. We 0:10:52.960 --> 0:10:57.240 think that technological innovation story is very much here to stay, 0:10:57.280 --> 0:11:00.360 and we'll also keep a lid on longer run um 0:11:00.400 --> 0:11:03.760 inflation measures. And then the one thing that had been 0:11:04.240 --> 0:11:07.680 pretty significant headwind to inflation, now we're seeing a little 0:11:07.679 --> 0:11:10.320 bit of a pop in it a certainly energy prices. 0:11:10.760 --> 0:11:14.240 But again, if you think about where we are today 0:11:14.559 --> 0:11:17.599 versus kind of the next three months or so relative 0:11:17.679 --> 0:11:21.559 to last year, boy, we have some awfully easy comparisons 0:11:21.640 --> 0:11:25.200 relative to inflation. I mean basically bouncing off of record 0:11:25.640 --> 0:11:29.840 no activity, right, not record low, but record no activity. 0:11:29.880 --> 0:11:32.760 And so is it any wonder that we might start 0:11:32.800 --> 0:11:36.080 to see a little bit of inflation pop here? No, 0:11:36.400 --> 0:11:39.120 But I think net net once the weather kind of 0:11:39.160 --> 0:11:41.960 normalizes in the middle of the country moves past the 0:11:42.040 --> 0:11:46.120 challenges they've faced over the last couple of weeks, we 0:11:46.160 --> 0:11:48.679 think that energy story is going to start to fade 0:11:48.720 --> 0:11:52.600 a bit into the background. So we are obviously watching 0:11:52.640 --> 0:11:56.920 the inflation backdrop very very closely in terms of, you know, 0:11:57.000 --> 0:12:00.000 all the stimulus coming into the system and this economic 0:12:00.080 --> 0:12:04.120 mac recovery that's in the very early inning still, but 0:12:04.240 --> 0:12:08.120 we're not not particularly alarmed um that inflation is going 0:12:08.160 --> 0:12:19.320 to be strong enough to derail the path forward. I 0:12:19.320 --> 0:12:22.840 gotta say, Amanda, you won my heart there with the long, 0:12:22.920 --> 0:12:26.760 strange trip, grateful dead reference. That's that's pretty good. She 0:12:26.880 --> 0:12:30.400 also Sarah referenced a door song break on through to 0:12:30.440 --> 0:12:32.560 the Other Side in a note which also in my 0:12:32.640 --> 0:12:34.839 I think we have the same record collection as as 0:12:34.960 --> 0:12:38.840 as kids have beended, but amazing. Yeah, you know, I 0:12:38.920 --> 0:12:41.720 have to I have to laugh one of the eye 0:12:41.800 --> 0:12:44.560 joke that it's one of the most important jobs that 0:12:44.640 --> 0:12:47.520 I have as the strategist for P and C. Other 0:12:47.559 --> 0:12:51.199 people would say, you've completely lost your mind. But every 0:12:51.280 --> 0:12:55.080 year we try really hard to kind of pick a 0:12:55.240 --> 0:12:58.240 song of the year or a musical reference that we 0:12:58.320 --> 0:13:01.520 think is really going to define the next twelve months. 0:13:01.520 --> 0:13:05.160 Either from an economy perspective or from a market perspective, 0:13:05.200 --> 0:13:10.760 and so unfortunately or fortunately, I'm not sure, the musical 0:13:10.840 --> 0:13:16.400 reference was trucking bad. And you know, to start the year, 0:13:16.559 --> 0:13:21.559 we were actually seeing this really interesting and attractive cyclical 0:13:21.720 --> 0:13:24.320 brightening of the backdrop. But then, of course, you know, 0:13:24.400 --> 0:13:28.120 everything fell apart with the pandemic that was not part 0:13:28.200 --> 0:13:31.120 of the musical reference by any means, was certainly not 0:13:31.200 --> 0:13:34.680 in our twenty outlook. And so it evolved from the 0:13:34.760 --> 0:13:38.040 cycle is going to keep on truck into my little long, 0:13:38.120 --> 0:13:42.120 strange trip. I love it so love worked. It still worked. 0:13:42.440 --> 0:13:45.280 I gotta say. I wrote a column years ago saying 0:13:45.320 --> 0:13:48.000 that the key to success as a strategist was how 0:13:48.040 --> 0:13:52.000 good your musical references were in the titles of notes. 0:13:52.080 --> 0:13:57.480 So you win, I think you win. Yeah, that's the 0:13:57.480 --> 0:14:00.520 only metric I I really I really followed. But but 0:14:00.720 --> 0:14:02.720 I wanted to get back to that. You mentioned, you 0:14:02.760 --> 0:14:05.880 know that the notion of a head fake in inflation, 0:14:05.960 --> 0:14:09.600 and I think that's super important right now. Um, not 0:14:09.679 --> 0:14:13.600 only you know, looking at the stimulus in the pipeline, 0:14:13.640 --> 0:14:17.079 but also the sort of craziness in the energy markets 0:14:17.120 --> 0:14:20.840 because of the Texas situation. Uh, you look at commodities 0:14:20.840 --> 0:14:23.200 across the board, you look at copper, it's it's really 0:14:23.240 --> 0:14:26.560 just going to the moon lately. Um. So I think 0:14:26.640 --> 0:14:30.440 that sort of uh colors the notion of the FED 0:14:30.840 --> 0:14:33.360 allowing inflation to run hot a little bit when you 0:14:33.720 --> 0:14:36.480 have such depressed base effects from the previous year, like 0:14:36.480 --> 0:14:40.280 like you you point out, Um, but I wonder, you know, 0:14:42.040 --> 0:14:44.600 if the bottom market could fall for that head fake 0:14:45.400 --> 0:14:49.080 and sell off even more aggressively. Um. And it gets 0:14:49.080 --> 0:14:51.400 to the notion of, well, what how does the FED respond? 0:14:51.400 --> 0:14:54.760 Everyone's kind of worried about a tapering. Um. I wonder 0:14:54.800 --> 0:14:57.280 if that, you know, that could be the wrong worry 0:14:57.480 --> 0:15:00.240 and and maybe you know, we should start thinking about 0:15:00.240 --> 0:15:02.160 what with the the FED go the other way and 0:15:02.440 --> 0:15:05.200 maybe buy more on the long end and sort of 0:15:05.240 --> 0:15:08.640 really do an explicit type of yield curve control? Is 0:15:08.680 --> 0:15:11.480 that something? Is that a possibility? Do you think? Or 0:15:11.520 --> 0:15:13.520 if I have, I've been listening to the grateful debt 0:15:13.560 --> 0:15:17.600 too much here and I'm going nothing. Well, you know, 0:15:17.720 --> 0:15:21.440 I don't pretend to be in the head of of 0:15:21.480 --> 0:15:23.960 the FED chairs and really kind of getting a sense 0:15:24.000 --> 0:15:25.720 of what they plan to do. I mean, I think 0:15:25.720 --> 0:15:30.560 it's certainly a possibility. Are base cases that you know 0:15:30.680 --> 0:15:33.320 the FED is going to continue not thinking about thinking 0:15:33.400 --> 0:15:36.200 about raising rates, right, A little bit of a riff 0:15:36.240 --> 0:15:39.680 there on on Powell's quote, you know, no major rate 0:15:39.800 --> 0:15:43.360 increases for the next two or three years potentially. So 0:15:43.440 --> 0:15:46.600 we're not in the camp we've we've seen members of 0:15:46.640 --> 0:15:51.000 the streets start talking about pulling forward rate increases UM 0:15:51.040 --> 0:15:53.920 into the nearer term. Outlook, we are not in that camp. 0:15:54.000 --> 0:15:56.240 We we think that we're going to stand pat here 0:15:56.320 --> 0:15:59.640 for a while, um, and that the Quei story is 0:15:59.680 --> 0:16:02.960 just going to continue. I think the piece of the 0:16:03.000 --> 0:16:06.320 puzzle here that just doesn't get enough attention in terms 0:16:06.400 --> 0:16:11.400 of rate movements is really global interest rate differentials. UM. 0:16:11.440 --> 0:16:14.840 There's that. We wrote a paper last fall talking about 0:16:15.160 --> 0:16:18.480 negative interest rates and the upside down world. That's a 0:16:18.520 --> 0:16:23.600 Stranger Things reference, not musical reference, but still ready for 0:16:23.640 --> 0:16:28.400 the next season. Totally totally obsessed with it, um. But 0:16:28.520 --> 0:16:31.840 we thought it was a really good analogy for the 0:16:31.920 --> 0:16:34.920 upside down world of negative interest rates. And so I 0:16:34.960 --> 0:16:39.440 think you still have to take into consideration global interest 0:16:39.520 --> 0:16:43.800 rate differentials and how wide they are that giant sucking 0:16:43.800 --> 0:16:48.360 effect from negative interest rates that gravitational poll um that 0:16:48.400 --> 0:16:51.880 we're seeing it has to come into play here in 0:16:52.080 --> 0:16:55.560 capping or putting a lid on longer term interest rates. 0:16:55.880 --> 0:16:58.920 The ten years now the second highest interest rate across 0:16:59.000 --> 0:17:02.400 developed market, I think, behind Iceland if I did my 0:17:02.480 --> 0:17:05.800 math right. Kind of fun fact there um and eight 0:17:05.880 --> 0:17:08.879 countries today in the developed world have a tenure with 0:17:08.920 --> 0:17:11.800 a negative yield. And so we really think that that 0:17:11.920 --> 0:17:15.600 is just going to continue to attract foreign investment into 0:17:15.640 --> 0:17:19.479 the US, really acting as that additional pressure on longer 0:17:19.600 --> 0:17:23.360 term rates, kind of creating this vicious or virtuous I guess, 0:17:23.400 --> 0:17:25.600 depending on how you want to look at it, kind 0:17:25.600 --> 0:17:28.359 of cycle. And so, yes, you know, the market can 0:17:28.400 --> 0:17:32.720 certainly take interest rates wherever they would like to. We've 0:17:32.800 --> 0:17:35.520 we've seen that certainly in the last few weeks. But 0:17:35.640 --> 0:17:39.040 I do think that there is this gravitational pull um 0:17:39.160 --> 0:17:42.000 at the longer end that is going to eventually put 0:17:42.000 --> 0:17:44.320 the brakes on in a big way. The other thing 0:17:44.320 --> 0:17:46.960 that we haven't really talked about too too much is 0:17:47.440 --> 0:17:50.439 how much pressure the equity market is starting to feel 0:17:50.520 --> 0:17:53.480 from this rapid increase in rates that may very well 0:17:53.560 --> 0:17:56.240 also put some breaks on this um here in the 0:17:56.240 --> 0:17:59.639 not too distant future. So what that said? I mean, 0:17:59.640 --> 0:18:01.080 I asked at the top of the show, at what 0:18:01.160 --> 0:18:04.200 point does the rising yield start to affect the equity market? 0:18:04.200 --> 0:18:06.800 And clearly we've seen some jitters this past week, and 0:18:06.960 --> 0:18:09.440 I feel like I've heard people ask this question over 0:18:09.480 --> 0:18:12.920 and over and over again, uh and pos in research 0:18:13.080 --> 0:18:16.560 reports left and right. Can't the point already be made, though, 0:18:16.560 --> 0:18:19.400 that we already have seen the bond market assert itself 0:18:19.560 --> 0:18:21.840 in the equity market when you look at the breakdown 0:18:21.880 --> 0:18:24.600 of the returns we've seen this year. I mean, for example, 0:18:24.640 --> 0:18:26.720 this week, you had financials hit a record high, you 0:18:26.720 --> 0:18:29.200 had banks rise to the high since twenty two thousand 0:18:29.280 --> 0:18:31.960 and seven. At the same time, you have energy on 0:18:32.040 --> 0:18:35.240 pace for its best month versus the SMP on record, 0:18:35.560 --> 0:18:37.760 And yet we see the likes of Tesla and the 0:18:37.880 --> 0:18:40.119 r q t F, NASA one hundred of growth docks 0:18:40.160 --> 0:18:42.280 all coming under pressure. I mean, aren't we already seeing 0:18:42.280 --> 0:18:46.480 the repercussions of this? Oh? I think we absolutely are. 0:18:46.760 --> 0:18:48.760 I think it will be a little bit more fleeting 0:18:48.800 --> 0:18:52.119 though than perhaps what the headlines suggests, and kind of 0:18:52.160 --> 0:18:55.760 what we're seeing in terms of regime shifts and market 0:18:55.840 --> 0:18:59.080 rotations and such I mean, if you think about the 0:18:59.200 --> 0:19:03.640 areas that are rallying on this this increase in rates here, 0:19:03.880 --> 0:19:06.800 it's really the value side of the equation. It's really 0:19:06.920 --> 0:19:10.360 the go outside trade. And so and this has been 0:19:10.400 --> 0:19:13.440 the case for a while now, right post the fiser 0:19:13.520 --> 0:19:17.120 efficacy news back in November, that kicked off a firestorm 0:19:17.160 --> 0:19:20.720 of a rotation, and yet it really largely has been 0:19:20.760 --> 0:19:24.440 a sentiment shift. It has not been an underlying fundamental 0:19:24.600 --> 0:19:29.520 improvement and fundamental acceleration. And so we're really of the 0:19:29.600 --> 0:19:33.919 mindset that this is really getting pretty extended here in 0:19:34.040 --> 0:19:37.000 terms of this value rally in the short run, and 0:19:37.000 --> 0:19:39.919 and this go outside trade. Not that we are of 0:19:39.920 --> 0:19:42.800 the mindset that we have to revert here and go 0:19:42.920 --> 0:19:45.679 back fully to the stay at home trade. But if 0:19:45.720 --> 0:19:48.080 you think about where the rubber meets the road, and 0:19:48.119 --> 0:19:51.280 it is in terms of earnings growth and fundamental improvement 0:19:51.320 --> 0:19:56.120 and profitability, the stay at home trade has really distinguished 0:19:56.160 --> 0:19:59.000 itself and continues to even as a function of Q 0:19:59.240 --> 0:20:03.240 four earnings season, such strong bright spots coming out of 0:20:03.320 --> 0:20:06.280 Q four earning season. It's still on that stay at 0:20:06.320 --> 0:20:10.240 home trade side. And so even though valuations are pushing 0:20:10.680 --> 0:20:13.800 pretty elevated levels. Right, it's not a stretch to say 0:20:13.920 --> 0:20:17.760 equity valuations are indeed stretched, but we actually think the 0:20:17.840 --> 0:20:21.479 underlying fundamentals in many aspects of the stay at home trade, 0:20:22.000 --> 0:20:26.760 the growth areas in particular, justify evaluations and so on 0:20:26.880 --> 0:20:31.880 a growth adjusted basis, we actually think there's still room left. Um, 0:20:32.040 --> 0:20:34.239 still much more of a hail Mary. I think in 0:20:34.359 --> 0:20:38.200 terms of this value rally, that we've seen markets starting 0:20:38.200 --> 0:20:40.520 to price for perfection on the value side of the 0:20:40.560 --> 0:20:43.439 equation when we know that we're nowhere near back to 0:20:43.640 --> 0:20:48.600 pre COVID you know, pre uh pre pre norms, and 0:20:48.680 --> 0:20:52.160 so pricing for a perfection in a backdrop that's anything, 0:20:52.200 --> 0:20:54.800 but that gives us a little bit of pause here 0:20:55.320 --> 0:21:15.440 at this stage of the market rally, you know, Amen. 0:21:15.520 --> 0:21:18.480 I think one of the really fascinating things that's happened 0:21:18.480 --> 0:21:21.040 over the last year has been this new focus on 0:21:21.080 --> 0:21:24.639 sort of alternative data sets UH, sort of high frequency 0:21:25.400 --> 0:21:30.840 economic data, you know, whether it be open table reservations, UH, 0:21:30.880 --> 0:21:35.200 airline traffic on a on a sort of weekly daily basis. Um. 0:21:35.240 --> 0:21:39.040 I know you've looked a lot at this type of data. 0:21:39.600 --> 0:21:41.960 You even talk about moving I'm not quite sure what 0:21:42.040 --> 0:21:45.800 that is. I assume it's some kind of moving uh 0:21:45.960 --> 0:21:49.399 how much people are moving APP. But it's so moving 0:21:49.520 --> 0:21:54.159 as a public transit from APP. And as a function 0:21:54.200 --> 0:21:58.679 of the pandemic, they actually started releasing data for major 0:21:58.800 --> 0:22:02.439 city usage and so that is actually, believe it or not, 0:22:02.560 --> 0:22:06.199 has become one of the key indicators for us in 0:22:06.320 --> 0:22:09.159 terms of the success or failure around reopening. And you 0:22:09.280 --> 0:22:13.560 called it out things like open table reservations, weekly retail 0:22:13.680 --> 0:22:20.040 sales data, even weekly airline passenger volumes. In pre COVID times, 0:22:20.080 --> 0:22:22.720 we would have never shortened up our line of sight 0:22:22.920 --> 0:22:26.960 and looked at such noisy, high frequency indicators. We really 0:22:26.960 --> 0:22:30.439 would have been looking more at the traditional usual suspects 0:22:30.480 --> 0:22:35.000 like industrial production, monthly retail sales, and GDP. I mean 0:22:35.040 --> 0:22:39.439 today thinking about GDP growth and the GDP forecast. You know, 0:22:39.520 --> 0:22:43.000 three months lagged with a number of revisions. I can't 0:22:43.000 --> 0:22:46.320 remember what for lunch yesterday, let alone what happened three 0:22:46.359 --> 0:22:50.280 months ago. It's a blur, and so it's not really 0:22:50.480 --> 0:22:53.719 giving us the right line of sight in terms of 0:22:53.720 --> 0:22:57.280 the path forward. And so no matter what indicator you're 0:22:57.280 --> 0:22:59.800 looking at on the high frequency side, any of these 0:22:59.800 --> 0:23:02.880 one that I've thrown out, um they're all still somewhere 0:23:02.920 --> 0:23:05.920 in the neighborhood of thirty to forty to fifty even 0:23:05.960 --> 0:23:09.640 seventy percent off pre COVID levels or even really year 0:23:09.720 --> 0:23:12.040 over year, given kind of where we are in late 0:23:12.080 --> 0:23:15.280 February here, and so I think it's just very helpful 0:23:15.400 --> 0:23:19.200 in terms of gauging this path forward. The consumer may 0:23:19.320 --> 0:23:23.280 very well still be consuming to a degree, but clearly 0:23:23.320 --> 0:23:25.359 we're all still very much living in a stay at 0:23:25.400 --> 0:23:28.600 home world, and so it's also very reflective of this 0:23:28.800 --> 0:23:32.960 massive divergence between Main Street and Wall Street and kind 0:23:32.960 --> 0:23:36.800