Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast.
Speaker 1: I'm Joe wisen at All and I'm Tracy Alloway. Pretty
Speaker 1: I liked one of your tweets this morning. Which one? No,
Speaker 1: I mean, they're all good. I like all your tweets,
Speaker 1: but I liked your chart comparing the share price of
Speaker 1: Tesla with the price of the cryptocurrency Ethereum and how
Speaker 1: closely they've tracked each other this year. Yeah. You know,
Speaker 1: I have a history of finding spurious correlations between cryptocurrency
Speaker 1: and other assets, the most famous one being bitcoin and avocados.
Speaker 1: But I have to say, the Tesla versus Ethereum chart,
Speaker 1: I'm not sure it's actually that spurious a correlation. I
Speaker 1: think there's something there. Yeah, I mean I do too,
Speaker 1: And I was exactly gonna say, I think the uh,
Speaker 1: the infamous bitcoin price of bitcoin versus the price of
Speaker 1: avocado's one, that one was probably spurious. But I actually
Speaker 1: think that when you look at something like Tesla and ethereum,
Speaker 1: it's not as spurious as as that one was, or
Speaker 1: maybe people think. And in fact, there are like a
Speaker 1: lot of charts that all kind of look like that
Speaker 1: these days, even though they seem to be in very
Speaker 1: different asset classes and with different fundamental theoretical drivers. Yeah.
Speaker 1: I think you tweeted one recently as well, which was
Speaker 1: wasn't it lumber versus uh, crypto of some sort versus
Speaker 1: tesla as well, and it was all moving in the
Speaker 1: same direction. Yeah, there's a good bunch. So it's a
Speaker 1: gold and tesla and lumber and cryptocurrencies and just like
Speaker 1: a bunch of other stuff. Basically, all these charts sort
Speaker 1: of look the same these days. It's very strange, and
Speaker 1: a lot of people have been saying this, but it
Speaker 1: feels like everything is sort of all one trade right now. Yeah.
Speaker 1: And I think this gets to some of the frustration
Speaker 1: in the market currently, which is that the same things
Speaker 1: keep increasing in value, notably the TEX stocks, and lots
Speaker 1: of people think that that shouldn't be happening, that that's irrational,
Speaker 1: that at some point the price movement should become self limiting,
Speaker 1: i e. The stocks themselves should become too expensive, and
Speaker 1: yet they just never seem to People just keep buying
Speaker 1: and buying and buying and pushing up the valuation. Yeah.
Speaker 1: And I think the other weird thing is is that
Speaker 1: like you know, you look at say like tech stocks
Speaker 1: flying to the moon, and it's like, this is what
Speaker 1: people would call like risk on right, So people are like,
Speaker 1: this usually is associated with you know, when you see
Speaker 1: valuations go up and you see stocks go up, one
Speaker 1: typically associates that with boom times. But the weird thing
Speaker 1: is also the simultaneous rarely and assets that one doesn't
Speaker 1: associate with boom times. So gold obviously has had an
Speaker 1: incredible year, it's come off the boil a little bit lately.
Speaker 1: Treasuries have had an incredible year, although they're sort of
Speaker 1: like backed down because rates are at long end treasuries
Speaker 1: or zero. So you have this simultaneous boom not just
Speaker 1: in risky assets with different fundamental drivers, but also weird
Speaker 1: like booming safe haven assets and risk assets at the
Speaker 1: same time. And I think that's the part that really
Speaker 1: sort of throws people a look like gold and Tesla
Speaker 1: both looking the same. It's strange. Yeah, it's strange. Although
Speaker 1: I have a feeling that a lot of people would
Speaker 1: point out the role of central banks in this and
Speaker 1: the flooding of liquidity and the idea that money has
Speaker 1: to work its way into some sort of asset, whether
Speaker 1: it's the traditional safe haven or something like a tech stalk,
Speaker 1: And of course some people are calling tech stalks safe
Speaker 1: havens now, which is kind of crazy, um compared to
Speaker 1: ten years ago. But anyway, Um, Yes, it's a big
Speaker 1: theme in the market and I'm looking forward to this discussion. Great,
Speaker 1: So we are going to be talking about how everything
Speaker 1: has just become one big trade. Our guest this week
Speaker 1: is really brilliant guy. I've loved reading this stuff for
Speaker 1: a long time, Jared Woodard. He is the head of
Speaker 1: the Research Investment Committee at Bank of America, and he
Speaker 1: recently wrote a note exactly on this the all one
Speaker 1: trade and nous of the market. So, Jared, thanks so
Speaker 1: much for joining us. Yeah, I'm really glad to be
Speaker 1: with both of you. Thanks so much for having me.
Speaker 1: So it's not just our illusion, right, I mean, it
Speaker 1: really does seem like everything is kind of the same
Speaker 1: right now? Is there a Is that true? Is there
Speaker 1: an easy way to sort of demonstrated quantitatively that it
Speaker 1: is all the same right now? It's not just sort
Speaker 1: of us playing tricks with terminal charge. Look, I do
Speaker 1: the same tricky charts and excel. So I think you
Speaker 1: can choose your software and uh and and and make
Speaker 1: some pretty bold claims, but I think there is some
Speaker 1: underlying truth to it, and there is a simple explanation. UM,
Speaker 1: this is a world in which to two big features
Speaker 1: that have been with us for some time, name really
Speaker 1: really scarce sources of growth, especially sources of profit growth UM.
Speaker 1: Combine with the world of ample liquidity as you mentioned,
Speaker 1: and when quinnings growth is scarce but there's lots of
Speaker 1: liquidity slashing around. The investors will, you know, kind of
Speaker 1: do two things we know from the last ten to
Speaker 1: twenty years. You know. The first thing they'll do is
Speaker 1: they'll build up the price of those assets that can
Speaker 1: produce you know, some cash flows and profits in the
Speaker 1: world with where those are incredibly scarce. UM, they'll build
Speaker 1: those up to the very expensive levels as you mentioned
Speaker 1: with tech, and there's lots of other examples. The other
Speaker 1: thing that they'll do is they'll buy things that basically
Speaker 1: function like call options in a way, even though they're
Speaker 1: not derivatives that you know, the assets that maybe don't
Speaker 1: do anything right now but might do something really big
Speaker 1: in the future. UM. Cryptocurrencies might be a good example
Speaker 1: of that, you know, esoteric commodities linked to new products,
Speaker 1: new sources of energy UM, you know, futuristic technology, UM.
Speaker 1: Any kind of asset that that might really explode in
Speaker 1: value is some future scenario the world, even if it's
Speaker 1: not giving you a cash flow today, you know, may
Speaker 1: become worth quite a lot, and so we're worth buying
Speaker 1: today point liquidity example. And you know there's really no
Speaker 1: alternatives in in conventional UM investment, uh, you know assets.
Speaker 1: So so you know, fixed income for example, you have
Speaker 1: treasury yields at record lows, UM, corporate bond yields incredibly low.
Speaker 1: There's relatively scarce places to generate those kinds of returns.
Speaker 1: And so what we find our investors forming portfolios that
Speaker 1: are kind of a barbell of the tech and maybe
Speaker 1: health care, maybe consumative discretionary stocks that can still grow
Speaker 1: their earnings in a reliable way, UM scarce as they
Speaker 1: are a little bit up those on the one side
Speaker 1: of the portfolio. And then the other side is kind
Speaker 1: of your your liquidity trade UH slightly more speculative part
Speaker 1: where you you know, buy something that might generate some
Speaker 1: outside return someday as long as it's not too expensive
Speaker 1: to own today. And you know that at the underlying
Speaker 1: dynamic here is one in which there's an actually reasonable
Speaker 1: econom rationale I think, I mean, just as as as
Speaker 1: corporate profit growth is scarce, we know economic growth is scarce,
Speaker 1: and so you're starting to see I think the kind
Speaker 1: of inequality on Wall Street that that we've seen on
Speaker 1: Main Street for a very long time. Everyone knows about,
Speaker 1: you know, all those eye popping you know, uh statistics
Speaker 1: about the relative you know, size of income and wealth
Speaker 1: controlled by you know, vast numbers of people on the
Speaker 1: world relative to the handful of very wealthy folks who
Speaker 1: control quite a lot more. And so um, if you
Speaker 1: think about that, I mean, one of my favorite statistics
Speaker 1: on this measure is or in casts cost of thriving
Speaker 1: in deck. So he if you go back to I
Speaker 1: think you know, the average worker making you know, median
Speaker 1: salary um, it might take them. I think it was
Speaker 1: something like twenty maybe twenty five weeks out of the
Speaker 1: year um to to earn enough money to pay for
Speaker 1: the big fixed costs that you have to have for
Speaker 1: sort of a comfortable you know, middle class life, a house,
Speaker 1: to car, education, healthcare, housing. So you fast forward to
Speaker 1: today and I think it takes like fifty three weeks
Speaker 1: out of a fifty two week year to pay for
Speaker 1: those same fixed costs. So the bottom line is, even
Speaker 1: if people can kind of get by, they certainly can't thrive.
Speaker 1: They certainly can't spend on things they like to spend
Speaker 1: because they there their income, so much of their income
Speaker 1: is consumed by the necessities. And and whatever your your
Speaker 1: politics are around that, I think the bottom line is
Speaker 1: that for a country like the United States and which
Speaker 1: consumption is GDP, we can't ever expect to have a
Speaker 1: breakout economic growth in an economy in which most people
Speaker 1: simply don't have enough income to spend on discretionary you know,
Speaker 1: disposable kind of items. Well, that's that's a familiar story.
Speaker 1: Which I think less familiar, perhaps is is the inequality
Speaker 1: that you're seeing that manifest on Wall Street. Where you
Speaker 1: can look at the broad measures of corporate profitability across
Speaker 1: the United States, the National Income Product Account and Input
Speaker 1: measure is a popular one where if you look at
Speaker 1: that measure across all of corporate America, even including small
Speaker 1: medium businesses, profits haven't actually really grown in dollar terms
Speaker 1: since about two thousand and fourteen. I mean, if you
Speaker 1: found you know, obviously excluding the pandemic and the and
Speaker 1: the collapse and profits then, But if you go back
Speaker 1: to the start of before profits really took a nose dive,
Speaker 1: corporate profits at flatline for for many years. Contrast that
Speaker 1: with the SMP five hundred large cap, the really big winners,
Speaker 1: where profit growth has been continuing to explode, you know,
Speaker 1: upside lead primarily by the six or seven big tech
Speaker 1: and and sort of consumer stocks that we can all
Speaker 1: think about. Well, that kind of inequality on on Wall Street,
Speaker 1: where just a handful of firms were able to generate
Speaker 1: the lion's share both of profits and of of market
Speaker 1: returns um is I think exactly the kind of damic
Speaker 1: you've seen across the real economy. That's what drives people
Speaker 1: into these crowded trades. The intuition that we all have
Speaker 1: is this is incredibly extreme. You know, this can't continue forever,
Speaker 1: This won't end well, et cetera. The problem is that
Speaker 1: if you bet against that trend, you've you've gotten burned,
Speaker 1: I think, for for quite quite a long time. And
Speaker 1: so the next question that we always get asked is
Speaker 1: what would cause reversal, what would cause it change? Yeah,
Speaker 1: I think that's the big question, and we're definitely going
Speaker 1: to return to that topic, But just before we do,
Speaker 1: one thing I was wondering is, given this backdrop of
Speaker 1: slow economic growth and abundance of liquidity, how much does
Speaker 1: price of financial assets actually play into all of this?
Speaker 1: And I know it sounds weird, but one thing I
Speaker 1: often think about is if you can't make money through
Speaker 1: UM cash flow of companies because there's sluggish economic growth,
Speaker 1: then one way to actually make money is through asset price.
Speaker 1: Asset prices going up, So it's kind of flows following flows, right,
Speaker 1: You're trying to target the thing where a lot of
Speaker 1: money is flowing into on the hopes that that's going
Speaker 1: to force the price up. And that's basically another way
Speaker 1: of monetizing. Is that something that you observe as well
Speaker 1: in the current UM and vironament, Well, we definitely see,
Speaker 1: you know, periods of speculative flows kind of and price
Speaker 1: bubbles UM, which is maybe the natural outcome of this
Speaker 1: kind of environment. UM. A lot of work done this year,
Speaker 1: I think, for example, on flows among individual investors, especially
Speaker 1: you know, younger and more tech savvy UM investors trading
Speaker 1: in different ways, trading different kinds of assets. I'm not
Speaker 1: sure how much those moves the needle and in overall
Speaker 1: dollar terms relative to the size of the market. But um,
Speaker 1: whether it's in the options market or in or in uh,
Speaker 1: you know, just cash equities. UM. You've certainly seen some
Speaker 1: of those big speculative flows. And I know that if
Speaker 1: you look at a very simple measure, something like the
Speaker 1: the price of the SMP five relative to its it's
Speaker 1: two moving average. In recent weeks, that just that simple
Speaker 1: ratio I think reached the highest level since since two
Speaker 1: thousand and nine. UM, as we had this incredible rally
Speaker 1: fueled by the sense from at least some investor there's
Speaker 1: that you know, markets are only gonna go up for
Speaker 1: quite a while and UM, and when that gets reinforced
Speaker 1: by that ample liquidity by um obviously incredible fiscal support
Speaker 1: this year, it's a great recipe for speculative upside bubbles
Speaker 1: that the then get popped and UM, you know, assets
Speaker 1: be distributed, perhaps in the steady your hands kind of
Speaker 1: the classic old story. What doesn't change are the economic
Speaker 1: fundamentals and the scarcity of that underlying growth. I'm gonna
Speaker 1: I really like the way you sort of characterized earlier
Speaker 1: the sort of some of these speculative assets, like a
Speaker 1: lot of popular tech stocks is sort of being like
Speaker 1: a call option on some future outcome. And so you
Speaker 1: see incredible valuations per se cloud computing stocks how much
Speaker 1: or say Tesla, which maybe one day we'll have an
Speaker 1: autonomous electric vehicle on Mars or something like that, and
Speaker 1: somehow they'll make a ton of money on that. I'm curious, Like,
Speaker 1: one of the things is this art of idea of
Speaker 1: the blooding of liquidity, the collapse and real interest rates.
Speaker 1: Real interest rates are extreally negative? How much? That's really
Speaker 1: the part of the story, because if you talk to
Speaker 1: cloud investors are like, oh, yeah, all these businesses are
Speaker 1: going to the cloud. Uh. If you talk to auto
Speaker 1: investors like all these business all these cars or whatever. Like.
Speaker 1: People have their individual stories, but how much is it
Speaker 1: is simply that when real interest rates are negative, people
Speaker 1: can afford to wait because they're not really losing any
Speaker 1: money in the short term by waiting for those profits
Speaker 1: that they expect to come rolling into the Ye. Look,
Speaker 1: I think I think it's it's It's certainly true that
Speaker 1: each individual industry has its own idios and credit drivers.
Speaker 1: But what gets people to invest and what motivates those flows,
Speaker 1: I think absolutely is is the broader macro story. Yeah,
Speaker 1: just to the overall value versus growth debate, I think
Speaker 1: captures is really well. UM. You know, we we published recently,
Speaker 1: you know on the fact that value versus growth over
Speaker 1: the past ten years is just you know, UM endured
Speaker 1: its worst period of returns in history, worse than the
Speaker 1: dot com bubble. Yeah, that was a great chart, you guys, public.
Speaker 1: Thank you. The bottom line is that is that when
Speaker 1: when growth is scarce, uh, you know, growth stocks outperform.
Speaker 1: It's it's really simple, but you know, we tried to
Speaker 1: get a little bit deeper. If you look at the
Speaker 1: just to to sort of explain the that ratio value
Speaker 1: versus growth. We found that you could you could explain
Speaker 1: about eight percent of the variance with with just three variables.
Speaker 1: It was interest rates, inflation, you know, expectations inflation, compensation
Speaker 1: and in the business cycle proxy by purchasing manager indexes.
Speaker 1: So those are three really common varables everybody looks at
Speaker 1: and they can help for a value percent of the variants.
Speaker 1: What that tells us is that for value to UM
Speaker 1: recover the losses this year relative to growth stocks, you'd
Speaker 1: have to see the ten year treasury yield rise from
Speaker 1: I think like six six percent today to one point
Speaker 1: eight percent. You have to see five year forward inflation,
Speaker 1: you know, expectations rise to two and a half percent
Speaker 1: and keep p M I is very stable and expansion territory.
Speaker 1: So that's a really big recipe. Uh, you know, a
Speaker 1: really big bill to to fill and uh and one
Speaker 1: reason why we think growth stocks can continue. Um. So
Speaker 1: it's absolutely I think a function of you know, very
Speaker 1: low expectations out into the future for growth and for
Speaker 1: inflation and driving a lot of those flows. You saw
Speaker 1: some great evidence of this, by the way, very recently
Speaker 1: when the FED shifted it's it's inflation framework and in
Speaker 1: the chair, it basically made it very clear that we're
Speaker 1: gonna allow inflation to overshoot for some amount of time.
Speaker 1: On those days and and the sessions and market thereafter,
Speaker 1: there was I think that you know, pretty clear rotation
Speaker 1: out of some of those tech and other kind of
Speaker 1: growth names into things like financials and energy, precisely because
Speaker 1: I think investors realized that in terms of these longer
Speaker 1: dated you know, discounting cash flows back to the present
Speaker 1: at some point in the business cycle, if we do
Speaker 1: get to meaningful wage growth in particular, again, you know,
Speaker 1: the FED might really will be more tolerant. It's really
Speaker 1: remarkable if you look at a chart, for example, of
Speaker 1: wages and and just the FED funds rate. However, the
Speaker 1: past three or four cycles, that has always hiked interest
Speaker 1: rates just when you know, the lowest income parts of
Speaker 1: the labor market really start to enjoy, you know, some
Speaker 1: of that juicy upside, and then they cut it off
Speaker 1: and you get a recession. You know shortly thereafter. It's
Speaker 1: always happened in the past. What a coincidence? Yeah, right,
Speaker 1: And so you know that's always happened in the past.
Speaker 1: It's always it's always bad news for growth. You know.
Speaker 1: Although I'm I'm I'm not quite the sort of perennial
Speaker 1: optimists like some folks are about the FED. You know,
Speaker 1: it does seem that if the FED is able to
Speaker 1: make and meet this commitment, that if we do get
Speaker 1: in the next business cycle, you know, we start to
Speaker 1: see wages rise really meaningfully. If the FED does sit
Speaker 1: on its hands and say, look, when I let this continue, um,
Speaker 1: it actually could mean at that future date, who knows
Speaker 1: how long it takes to get there, and it could
Speaker 1: mean some more meaningful upside. I think for the economy
Speaker 1: and for inflation, investors are going to price that in.
Speaker 1: It doesn't mean a radical, permanent shift now, but it
Speaker 1: does mean that I think that the distribution of returns
Speaker 1: can tilt a little bit more in favor of value,
Speaker 1: you know, in that sort of right hand tail future
Speaker 1: state of the world. Yeah, it could actually be different
Speaker 1: this time, or at least the FED spramework is different.
Speaker 1: So you already touched on this a little bit. But
Speaker 1: when it comes to something like the text stocks or
Speaker 1: you know, the typical things that people like to say
Speaker 1: are in bubble territory, what will be the thing that
Speaker 1: sparks the big reversal You just mentioned inflation and the
Speaker 1: return of some wage growth potentially and maybe the FED
Speaker 1: being more patient than it used to be. Um when
Speaker 1: it comes to that, But is there anything else that
Speaker 1: you see that could sort of spark that big repositioning. Well,
Speaker 1: there's there's one sort of markets related catalyst that could
Speaker 1: happen anytime, and then there's a policy related catalysts that
Speaker 1: that I think we could look for as well. The
Speaker 1: markets one is I mean, you know, I wonder whether
Speaker 1: this sort of value under performance, for example, or or
Speaker 1: just the kind of returns we've seen lately cause investors
Speaker 1: to to look at their accounting again and think twice
Speaker 1: about the way that they are interpreting understanding corporate actions
Speaker 1: and businesses. If you think about a conventional value in
Speaker 1: the actual price to book sort of a ratio, But
Speaker 1: what goes into that book value, it's it's it's assets,
Speaker 1: my salabilities. But the assets that typically are included are
Speaker 1: are mostly just tangible assets. Um. We saw one estimate
Speaker 1: from a third party uh claiming that in SMP five companies,
Speaker 1: intangible assets actually account for eighty four percent of their
Speaker 1: other total assets. Now, I think that knows a little
Speaker 1: bit high. It just sounds high to me. But but
Speaker 1: even if you think it's only you know, fifty or sixty,
Speaker 1: I mean it's a it's a huge amount of work
Speaker 1: that's not being accounted for in a lot of convention
Speaker 1: in all models, things like patterns, the output of R
Speaker 1: and D, the training that goes into a workforce, customer loyalty,
Speaker 1: brand value, whatever that's worth. I mean, these things aren't
Speaker 1: worth zero dollars. It should be included. And if you
Speaker 1: if you do include them. There's some academic research and
Speaker 1: some independent work that our team has done suggesting that
Speaker 1: if you include intangible assets and the formula for companies
Speaker 1: book value, you can improve the returns to a value
Speaker 1: strategy by you know, more than three percentage points a
Speaker 1: year versus a conventional benchmark. And that's a pretty meaningful,
Speaker 1: uh you know, meaningful result. If you throw in a
Speaker 1: couple other tricks, things like a quality filter, a small
Speaker 1: cap value byas rather than large cap, you can boost
Speaker 1: returns by another two to three percentage points. Altogether some
Speaker 1: pretty meaningful performance. And I wouldn't be surprised to see
Speaker 1: investors start to rethink their models of how companies are
Speaker 1: built and what they what they look like in the
Speaker 1: future in a way that could shift some flows in
Speaker 1: the meaningful direction towards companies that we don't typically think
Speaker 1: of as you know, as you stocked. We think about
Speaker 1: the winners and losers in this market. We've mentioned tach
Speaker 1: a lot, and and maybe it would include healthcare and
Speaker 1: some consumer discretionary as the big growth sectors. I think
Speaker 1: that's been true historically and the same by the same token,
Speaker 1: our work shows that value index is traditionally have been
Speaker 1: really overweighted into in financials, um and energy. But if
Speaker 1: you start to include intangible assets is actually credible, you know,
Speaker 1: meaningful parts of what makes a company worthwhile. Then financials
Speaker 1: energy don't get quite the big overweights that they that
Speaker 1: they would today, and you can actually as a value
Speaker 1: investor go into some sectors that people don't typically think of,
Speaker 1: things like you know, healthcare, even a little bit of tech,
Speaker 1: even some others. So um, I think that could happen.
Speaker 1: That could me causing the equal shift within the market.
Speaker 1: It obviously doesn't affect the broader economy, you know, in
Speaker 1: the first order way. But I think the more important
Speaker 1: shift to look out for something we've worked on a
Speaker 1: lot this year. It is what happens in public policy
Speaker 1: over the next several quarters, next several years. Because we
Speaker 1: know that if fiscal if monetary policy does what it does.
Speaker 1: We talked about that already, that's not going to move
Speaker 1: the needle independently. It just kind of affects what happens
Speaker 1: really in some far off distant land of of a
Speaker 1: really hot economy. UM, and a fiscal policy, I we've argued,
Speaker 1: only remains limited to providing you know, sort of life support,
Speaker 1: and it's absolutely necessary. The kind of work that we've
Speaker 1: seen this year. Look, this is the biggest and fastest
Speaker 1: fiscal expension in US history outside of World War Two.
Speaker 1: It's been incredibly powerful, incredibly important. But all it does
Speaker 1: is get us back to where we sort of started
Speaker 1: the year. If that's the most we can achieve, we're
Speaker 1: not going to break out of this world of sort
Speaker 1: of secular stagnation and scarce, scarce growth. To see a
Speaker 1: level shift, kind of elevation to a new tier of
Speaker 1: of growth and productivity requires new investment, especially I think
Speaker 1: industrial policy. Um this has worked really well in the
Speaker 1: past in the United States, in South Korea, in Japan
Speaker 1: and German. I mean basically, any modern economy that you
Speaker 1: look at the past hundred years hasn't gotten to where
Speaker 1: it is today, any modern industrialized economy without some cooperation
Speaker 1: between the public and private sector when it comes to
Speaker 1: incentivizing research, boosting productivity, and key industries, protecting nascent industries
Speaker 1: for a little while from competition until they can stand
Speaker 1: on their own two feet, and and and sometimes even
Speaker 1: government as a ready buyer. All that to say, things
Speaker 1: are changing, I think not just in Washington, d C.
Speaker 1: But around uh out around the world as countries realize
Speaker 1: that you know, competition globally is going to require a
Speaker 1: little bit more than a kind of a las fair
Speaker 1: hands off attitude. And so if if governments continue the
Speaker 1: path that I think they've started this year, I mean,
Speaker 1: we tracked fifteen to twenty different bills in Congress just
Speaker 1: this year, many with broad by partisan support designed to
Speaker 1: incentivize research and development and capex um in in the
Speaker 1: direction of new technologies. And if companies, uh, you know,
Speaker 1: get those benefits, get those incentives, and governments really push
Speaker 1: in that area, I think you can actually see a
Speaker 1: big boost productivity. That's exactly what happened in the US
Speaker 1: during the Cold War. So that's the scenario. I think,
Speaker 1: a combination of of supporting consumption but also incentivizing you know,
Speaker 1: productivity that could get us to a new growth scenario
Speaker 1: and actually cause a really profound shift in the kinds
Speaker 1: of portfolios that will work well. So, if I'm hearing
Speaker 1: you correctly, then the best thing for the financial industry
Speaker 1: or finance stocks and the oil industry would be a
Speaker 1: huge Biden and Democratic sweep and a massive fiscal stimulus.
Speaker 1: And so probably the two industries that we most associate
Speaker 1: with antagonism, perhaps towards uh, tax and spend, and Democrats
Speaker 1: and liberals would actually theoretically benefit the most from the
Speaker 1: UH such an out. I can't, I can't, I can't
Speaker 1: go all the way with you. I know, I know
Speaker 1: you can't say that. I know, I know, but you cannot.
Speaker 1: I know. No one can see your face because we're
Speaker 1: just doing it on audio. But you could just sort
Speaker 1: of nod that that's kind of a potential implication. Well, whoever,
Speaker 1: I mean, who whoever, whatever political coalition gets it done.
Speaker 1: I don't think matters all that much, and we could
Speaker 1: handicap which you know, who's more likely under which scenarios,
Speaker 1: But I I can't agree with. The bottom language is
Speaker 1: that if you do see a big surge into new
Speaker 1: forms of investment UM that that can boost productivity, then yeah,
Speaker 1: that's the most bullish scenario for the most highly cyclical
Speaker 1: you know, inflation and sensitive parts of the market, which
Speaker 1: are financials and materials and industrials and energy. UM. I
Speaker 1: would just note that historically you've seen this kind of
Speaker 1: investment and and and sort of productivity booms happen under
Speaker 1: administrations of both parties. I don't think anyone has a uh,
Speaker 1: you know, a lock on this. But um, but that
Speaker 1: is that that is definitely the most plausible scenario that
Speaker 1: we can see for a shift to a higher level
Speaker 1: of growth from where we are today. Um. So, I
Speaker 1: know we're talking about big changes in the environment that
Speaker 1: could spark that long awaited rotation from growth to value.
Speaker 1: But is there anything in the meantime that you think
Speaker 1: investors could do to sort of tweak their models or too,
Speaker 1: I don't know, re appraise the way they're actually looking
Speaker 1: at value stocks. So, for instance, you talked a lot
Speaker 1: about intangibles. Is that something investors should be adding to
Speaker 1: price to book value in order to compensate for the
Speaker 1: modern economy or is there anything else that people can
Speaker 1: do now rather than just waiting for the economic environment
Speaker 1: to change significantly? Yeah? Absolutely, Um. Within an equity the
Speaker 1: equity part of a portfolio, there absolutely are some tweaks
Speaker 1: that that investors can make, you know, bargain hunters or
Speaker 1: folks with the value you know, bios sort of psychologically
Speaker 1: can I think it can and should add intangible assets
Speaker 1: to their calculation. And if you don't think that every
Speaker 1: dollar of goodwill on a company's balance sheet is a
Speaker 1: rock solid asset, the way that you know a manufacturing
Speaker 1: plant might be, it's also not worth nothing. And right now,
Speaker 1: you know, again, a lot of conventional measures treat those
Speaker 1: intangibles as worth literally nothing or or as or as
Speaker 1: simply as expenses. Like R and D for example, doesn't
Speaker 1: only shows up as an expense unless a company gets acquired,
Speaker 1: and then the R and D can be you know,
Speaker 1: capitalized as good will. But the bottom line is there's
Speaker 1: a lot of value strategies today and value indexes and
Speaker 1: so on that that simply haven't you know, they were
Speaker 1: based on the economies of decades ago and before that
Speaker 1: on beloved Graham and Dott sort of you know, snippets
Speaker 1: from their books, and you know, that's all great. The
Speaker 1: economy has changed, and I think our investment you know,
Speaker 1: approaches can change with it. So we investors absolutely should
Speaker 1: include intangibles, and I think, you know, as I mentioned,
Speaker 1: history suggests that can really improve returns. The other two
Speaker 1: things that I hinted at before but I think are
Speaker 1: worth really worth implementing, is to add a quality filter.
Speaker 1: My colleagues in research have have done some great work
Speaker 1: on this too, suggesting that in point of fact, as
Speaker 1: economy has changed, sometimes there are dead industries or dead
Speaker 1: businesses that that have to be completely rethought or since
Speaker 1: they are an investable. You know, a horse and buggy
Speaker 1: manufacturer a certain point had a great price to book ratio,
Speaker 1: but you know, never quite came back. And I think
Speaker 1: there may be some lines of business in companies today
Speaker 1: that that might you know, be facing a similar fate.
Speaker 1: Adding you know, filters for the quality of a company's
Speaker 1: earnings and and and the quality of their business historically
Speaker 1: has added about a percentage point a year. I think
Speaker 1: two returns and and the and the small versus large
Speaker 1: debate is really interesting too. Small cap value stocks have
Speaker 1: always performed better than large cap valu stocks. There's data
Speaker 1: going back to the nineteen twenties for US equities and
Speaker 1: that's always been true. And even in this period where
Speaker 1: value overall has performed so terribly versus growth and really
Speaker 1: a historical unusual way over the past decade, even over
Speaker 1: this period that that bias in favor of small cap
Speaker 1: value has actually continued to work well. So I think
Speaker 1: that's still worth preserving that. That's another sort of two
Speaker 1: percentage points a year or so about performance, and those
Speaker 1: are things that investors can do today. That's within the
Speaker 1: equities leave for fixed income people, I think the world
Speaker 1: is even more difficult. You know, there's a lot of
Speaker 1: discussions since we sort of floated our end of sixty
Speaker 1: four D thesis last year, it's been a kind of
Speaker 1: a perennial topic, and the bottom line is there's no
Speaker 1: great answer in the world of very low yields for
Speaker 1: for you know, fixed income folks. But I think the
Speaker 1: only solution that makes any sense at all is to
Speaker 1: allocate a little bit away from from treasuries that pay
Speaker 1: you nothing in fact, obviously float fit your face with
Speaker 1: negative real interest rates on those assets, and to shift
Speaker 1: into different kinds of risk. I mean, whether it's credit
Speaker 1: risk or something more equity like in terms of prefers
Speaker 1: or convertibles or you know reads. There's there's there are
Speaker 1: places still to get some incredible yield today. And if
Speaker 1: you agree with with our outlook that you know, we're
Speaker 1: not on the cusp of a set and dip you
Speaker 1: into a d procession or something even worse than. This
Speaker 1: point of the business cycle looks like a moment in
Speaker 1: which a little bit of extra credit risk or or
Speaker 1: even some equity like risk certainly seems preferable. For an
Speaker 1: investor with an income target to hit, then you know,
Speaker 1: to simply cross your fingers in government bonds and hope
Speaker 1: that it all works out. Those are things that investors
Speaker 1: can and should do today, and I think that the
Speaker 1: economic government um is pressuring people more than ever to
Speaker 1: start to rethink how they construct orse portfolios. So the
Speaker 1: bottom line is, although we could get the shift, a
Speaker 1: major policy shift, there are things that investors can do.
Speaker 1: There is an alternative between the sort of like hardcore
Speaker 1: Gram and dudd book value side on one side, and
Speaker 1: he put it all on Tesla and ethereum on the
Speaker 1: on the other hand, Like we don't have to choose,
Speaker 1: like maybe like okay, a policy shift would be preferable,
Speaker 1: and that's great, but in the meantime, uh, there are
Speaker 1: sort of option is in the middle, absolutely right, that's right.
Speaker 1: I want to go back to something you said about
Speaker 1: the FED and it's inclination too. Somehow, it always seems
Speaker 1: to raise rates just as the lower end of the
Speaker 1: income spectrum is starting to see wage growth. And maybe
Speaker 1: that's just some accident, maybe it's a conspiracy or whatever,
Speaker 1: maybe something in between. But I'm curious whether we basically
Speaker 1: live in a society where the elite or the very
Speaker 1: wealthy people don't really prefer growth, where this sort of
Speaker 1: like the growth famine. The growth scarcity that we have
Speaker 1: right now is better for people who are very rich
Speaker 1: because their wealth and their standard of living is more
Speaker 1: tied to asset valuations than it is from say GDP
Speaker 1: going from three percent in a year to four percent
Speaker 1: in a year. It's a this is a tough question,
Speaker 1: and it's a really sensitive question. And I'll give you
Speaker 1: I'll give you two answers. And I'm not sure, honestly,
Speaker 1: I'll give you two answers. I'm not sure which one
Speaker 1: I believe in totally. The first answer is the more
Speaker 1: politically radical one, which is that is to say that
Speaker 1: that that yes, actually, you know, holders of capital would
Speaker 1: just rather see you know, profits um and and we'll
Speaker 1: go down the ship with with the ship, you know,
Speaker 1: until there's last drop of profit has been squeezed, no
Speaker 1: matter what the cost or what the harm is to
Speaker 1: the raw society. I don't know that I believe that.
Speaker 1: But there's a great old essay called The Political Aspects
Speaker 1: of Full Employment by fairly famous economist michaelle Klatsky, who's
Speaker 1: kind of a rival to to Keynes, and a lot
Speaker 1: of people think sort of came up with some of
Speaker 1: the same ideas around the same time, and doesn't get
Speaker 1: nearly so much credit. And he argues in that essay
Speaker 1: that in fact, you know, the reason that there's often
Speaker 1: you know, what we call standing army reserve of of
Speaker 1: of unemployed folks has much more to do with the
Speaker 1: desire for owners of capital and owers in businesses to
Speaker 1: keep labor you know, sort of well disciplined so that
Speaker 1: they can generate good returns and and and so on.
Speaker 1: And it is politically radical. I'm not I'm not necessarily
Speaker 1: endorsing the sort of the view, but I think you
Speaker 1: can certainly see a trend, at least in the United
Speaker 1: States in recent decades between decreasing you know, power of
Speaker 1: labor negotiations, increasing power of owners of capital um and decline,
Speaker 1: and things like capacity realization rates of manufacturing decline and
Speaker 1: demand decline and inflation. As you know, more and more
Speaker 1: capital gets concentrated and relatively fewer and fewer hands. The
Speaker 1: bottom line is that folks who have a lot of
Speaker 1: of cash don't tend to spend it quite as much.
Speaker 1: They tend to save it. People who don't have that
Speaker 1: much capital. When they get a little bit extra, they'll
Speaker 1: they'll they will spend it. And and so you don't
Speaker 1: have to be a political radical to think that getting
Speaker 1: a little bit more capital into the hands of people
Speaker 1: who you know, circulated in the economy is is a
Speaker 1: pretty great way to boost demand in a time when
Speaker 1: demand is scarce. The other the other answer to this,
Speaker 1: and this is a little bit more sunny side, you know,
Speaker 1: kind of things will work out in the end of view,
Speaker 1: at least by via the market. Is is something I
Speaker 1: mentioned before the fact that we're seeing increasingly more inequality
Speaker 1: in Wall Street to mirror that kind of inequality on
Speaker 1: Main Street, meaning that as returns get more scarce and
Speaker 1: profits get more scarce. Even if Joe, you're right that
Speaker 1: maybe owners of capital or content to just squeeze things
Speaker 1: forever as as much as possible, no matter what I
Speaker 1: think you're seeing these days, and you see it in
Speaker 1: kind of valuations and tech and growth and so on,
Speaker 1: is um increasing pain for owners of capital, whether it's uh,
Speaker 1: someone buying a treasury note, you know, holding their nose
Speaker 1: and getting six sixty basis points of yield, or someone
Speaker 1: buying an expensive tech stock, holding their own and hoping,
Speaker 1: holding the nose and just taking whatever future cash flows
Speaker 1: might eventually come their way. Increasingly owners of capital of
Speaker 1: feeling the pressure and the pain and are starting to think.
Speaker 1: That's why. I think politically, as I mentioned before, you're
Speaker 1: seeing some really broad by partisan support this year. In
Speaker 1: this it's it's an election year, it's incredibly hostile political environment,
Speaker 1: and yet somehow, for example, the Senate was able to
Speaker 1: pass a bill a few months ago authorizing billion dollars
Speaker 1: for billion dollars for semiconduction manufacturing in the United States
Speaker 1: by partisan co sponsors, passed easily, and they're they're working
Speaker 1: on more things in that direction. That doesn't fit the
Speaker 1: narrative of sorrowners of capital, you know, fighting new policy
Speaker 1: measures no matter what it takes. And I think, without
Speaker 1: getting into it too much, the some of the movements
Speaker 1: you've seen in political coalitions the United States on the
Speaker 1: left and the right have started to incorporate more discussion
Speaker 1: about whether it's universal basic income, job guarantees, modern monetary
Speaker 1: theory on the left on on on the right, you know, um,
Speaker 1: nonprofits talking about whether maybe we do need a better
Speaker 1: deal for working families and maybe labor unions are part
Speaker 1: of that. I mean, things that were unthinkable I think
Speaker 1: politically in both parties ten years ago are suddenly very
Speaker 1: thinkable today because increasingly, the bottom line, I think is
Speaker 1: that many owners of capital, including regular investors, are starting
Speaker 1: to realize they're actually in the same boat with many workers.
Speaker 1: And if they don't find a new sort of negotiated
Speaker 1: settlement of the sport that we had across the Western
Speaker 1: world after World War two, um in many countries. UM,
Speaker 1: if we don't find a new settlement, then things are
Speaker 1: gonna go badly, not just for working people, but increasingly
Speaker 1: for you know, people trying to invest as well. Jared, Uh,
Speaker 1: thank you so much for joining us. This is sort
Speaker 1: of you know, we had a conversation recently with Paul
Speaker 1: McCauley and touched on some of these things, but this
Speaker 1: felt like a really nice sort of part two to
Speaker 1: that in terms of really diving into some of the
Speaker 1: portfolio implications of policy and you know, the sort of
Speaker 1: long running inequality. Thank you so much for joining it.
Speaker 1: My pleasure. Good to connect with both of you. Thanks Jared,
Speaker 1: that was really good. So I guess the lesson Tracy
Speaker 1: is that inequality is why Tesla and ethereum trade exactly
Speaker 1: the same. It's kind of funny how every investment discussion
Speaker 1: nowadays ends up touching on on marks, right, Like, I
Speaker 1: don't know, it just seems inevitable nowadays, but and you know,
Speaker 1: I'm joking slightly, but I will say I agree with
Speaker 1: Jared that there does seem to be a growing recognition
Speaker 1: of the need for some sort of policy shift, even
Speaker 1: at places like the Federal Reserve. We did see the
Speaker 1: Fed put out a working paper I think it was
Speaker 1: last month or something talking about how the growth of
Speaker 1: big corporations had increased inequality and basically caused sluggish growth
Speaker 1: and all of that. And there is this ongoing conversation
Speaker 1: about monopsyy, this idea of monopoly power in the labor market.
Speaker 1: So it feels like there is this recognition, but change
Speaker 1: is slow. Change is super slow. But you know, I think, look,
Speaker 1: it's like the you look at the market and you
Speaker 1: have this everything is the same nos above these different
Speaker 1: asset classes, so it's like, okay, we have to look bigger.
Speaker 1: It almost forces zooming out. Like if energy and financials
Speaker 1: are the same trade, if Tesla and the Theorum are
Speaker 1: the same trade. If gold is the same trade as
Speaker 1: UH Snowflake, the popular cloud computing ip o that just
Speaker 1: came out, If all of it is the same essentially
Speaker 1: as market observers, commentators have no choice that to zoom
Speaker 1: out and talk about this sort of like broader political
Speaker 1: and economic conditions that created the same Yeah. I think
Speaker 1: that's right. You can't really focus on micro you're forced
Speaker 1: to talk about the macro. Yeah, you know. The other
Speaker 1: thing I was thinking was we should do a deeper
Speaker 1: I've on intangibles at some point. Yes, I think we
Speaker 1: actually have one scheduled because I think in a future
Speaker 1: episode we're gonna be talking to Michael Mobrison, who we've
Speaker 1: had on before. But he just came out with a
Speaker 1: pretty great sort of white paper on valuing intangible So
Speaker 1: I think people who are interesting interested in that. I
Speaker 1: should stay tuned. But can I just say something about that?
Speaker 1: And I meant to joke about it with Jared, But
Speaker 1: do you think it's kind of cheating? It's like value
Speaker 1: investing doesn't work, so let's find a way to explain
Speaker 1: how Peloton and Tesla are actually Like it's kind of cheating. Yeah,
Speaker 1: I mean I think there's a lot of fudging that
Speaker 1: you can do around intangibles, and I think Jared touched
Speaker 1: on this, but it's I mean, the accounting for intangibles
Speaker 1: is kind of insane, so it's really easy to to
Speaker 1: make the numbers look a lot bigger than they are.
Speaker 1: So just saying that everyone should factor in intangibles along
Speaker 1: with traditional price to book ratios, it's kind of much
Speaker 1: easier said than And if you're looking at intangibles, you
Speaker 1: actually have to do a deep dive into how those
Speaker 1: intangibles are being portrayed on a company's balance sheet. And
Speaker 1: again this sort of sorry, now I'm going to go
Speaker 1: on a rant, but this gets to one of the
Speaker 1: things that I've been saying about the sluggish growth environment,
Speaker 1: which is that if you if you're a company and
Speaker 1: you can't grow through traditional ways like just growing your
Speaker 1: cash flow and your business, then one of the easy
Speaker 1: ways to grow is to buy a bunch of other
Speaker 1: companies and do add backs and you know, add intangible
Speaker 1: assets from your acquisitions, which makes you appear to be
Speaker 1: growing faster than you actually are. And I think we've
Speaker 1: seen some examples of that in the current economic cycle
Speaker 1: as well. Yeah, absolutely, And you know, I think that's
Speaker 1: sort of like, um, you know, like these pe roll
Speaker 1: ups and other sort of It's like you can sort
Speaker 1: of grow two ways. You can grow by creating a
Speaker 1: really red hot software company that everyone every other company
Speaker 1: has to use, or you can essentially do it by
Speaker 1: financial engineer and credit which turned which turned my meager
Speaker 1: cash flows into big cash flows. Yeah exactly, And so
Speaker 1: just saying oh, look at the intangibles, sure, that makes
Speaker 1: a lot of sense. But on the other hand, it's
Speaker 1: not a sort of bulletproof way of investing on m
Speaker 1: I swear I read an interview with some value manager
Speaker 1: a couple of years ago. I think it was like
Speaker 1: a barren and they're like, this value manager made a
Speaker 1: bunch of money. How did he do it at time
Speaker 1: when value wasn't good? And it's basic answer really was like, oh,
Speaker 1: I basically came up with a framework where Netflix is
Speaker 1: a value stock. Yeah, so I invested in Amazon and
Speaker 1: Apple as a value play. Yeah alright, Well Laura Buffett
Speaker 1: bought Apple, so if he did it all right, clearly
Speaker 1: we could talk about this for a while, but we
Speaker 1: are going to come back to it in a future episode,
Speaker 1: which will be good looking forward to. Shall we leave
Speaker 1: it there. Yeah, alright, this has been another episode of
Speaker 1: the All Thoughts Podcast. I'm Tracy the Way. You can
Speaker 1: follow me on Twitter at Jucy All the Way, and
Speaker 1: I'm Joe Wisn't Thal You could have follow me on
Speaker 1: Twitter at Stalwart and you should follow our producer on Twitter,
Speaker 1: Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg
Speaker 1: head of podcast, Francesca Levi at Francesco Today, and check
Speaker 1: out all of our podcasts under the handle AD Podcast.
Speaker 1: Thanks for listening.