WEBVTT - How All Financial Markets Turned Into The Same Big Trade 0:00:11.119 --> 0:00:14.880 Hello, and welcome to another episode of the Odd Lots podcast. 0:00:14.920 --> 0:00:18.440 I'm Joe wisen at All and I'm Tracy Alloway. Pretty 0:00:18.560 --> 0:00:23.439 I liked one of your tweets this morning. Which one? No, 0:00:23.560 --> 0:00:25.320 I mean, they're all good. I like all your tweets, 0:00:25.320 --> 0:00:29.720 but I liked your chart comparing the share price of 0:00:30.120 --> 0:00:35.360 Tesla with the price of the cryptocurrency Ethereum and how 0:00:35.400 --> 0:00:38.440 closely they've tracked each other this year. Yeah. You know, 0:00:38.520 --> 0:00:43.080 I have a history of finding spurious correlations between cryptocurrency 0:00:43.200 --> 0:00:46.960 and other assets, the most famous one being bitcoin and avocados. 0:00:46.960 --> 0:00:50.560 But I have to say, the Tesla versus Ethereum chart, 0:00:50.800 --> 0:00:54.800 I'm not sure it's actually that spurious a correlation. I 0:00:54.800 --> 0:00:57.480 think there's something there. Yeah, I mean I do too, 0:00:57.560 --> 0:01:00.240 And I was exactly gonna say, I think the uh, 0:01:00.280 --> 0:01:03.520 the infamous bitcoin price of bitcoin versus the price of 0:01:03.520 --> 0:01:07.400 avocado's one, that one was probably spurious. But I actually 0:01:07.560 --> 0:01:11.760 think that when you look at something like Tesla and ethereum, 0:01:11.800 --> 0:01:14.880 it's not as spurious as as that one was, or 0:01:14.880 --> 0:01:17.000 maybe people think. And in fact, there are like a 0:01:17.080 --> 0:01:20.160 lot of charts that all kind of look like that 0:01:20.240 --> 0:01:23.080 these days, even though they seem to be in very 0:01:23.240 --> 0:01:28.480 different asset classes and with different fundamental theoretical drivers. Yeah. 0:01:28.560 --> 0:01:31.280 I think you tweeted one recently as well, which was 0:01:31.280 --> 0:01:35.399 wasn't it lumber versus uh, crypto of some sort versus 0:01:35.480 --> 0:01:37.440 tesla as well, and it was all moving in the 0:01:37.440 --> 0:01:40.040 same direction. Yeah, there's a good bunch. So it's a 0:01:40.160 --> 0:01:47.760 gold and tesla and lumber and cryptocurrencies and just like 0:01:47.800 --> 0:01:51.600 a bunch of other stuff. Basically, all these charts sort 0:01:51.600 --> 0:01:54.040 of look the same these days. It's very strange, and 0:01:54.080 --> 0:01:56.480 a lot of people have been saying this, but it 0:01:56.520 --> 0:02:00.639 feels like everything is sort of all one trade right now. Yeah. 0:02:00.680 --> 0:02:03.560 And I think this gets to some of the frustration 0:02:03.720 --> 0:02:06.559 in the market currently, which is that the same things 0:02:07.160 --> 0:02:11.000 keep increasing in value, notably the TEX stocks, and lots 0:02:11.000 --> 0:02:14.400 of people think that that shouldn't be happening, that that's irrational, 0:02:14.480 --> 0:02:18.280 that at some point the price movement should become self limiting, 0:02:18.760 --> 0:02:22.080 i e. The stocks themselves should become too expensive, and 0:02:22.200 --> 0:02:24.919 yet they just never seem to People just keep buying 0:02:24.919 --> 0:02:28.120 and buying and buying and pushing up the valuation. Yeah. 0:02:28.160 --> 0:02:30.160 And I think the other weird thing is is that 0:02:30.360 --> 0:02:33.560 like you know, you look at say like tech stocks 0:02:33.560 --> 0:02:35.840 flying to the moon, and it's like, this is what 0:02:35.840 --> 0:02:38.440 people would call like risk on right, So people are like, 0:02:38.840 --> 0:02:42.800 this usually is associated with you know, when you see 0:02:43.000 --> 0:02:45.399 valuations go up and you see stocks go up, one 0:02:45.440 --> 0:02:48.959 typically associates that with boom times. But the weird thing 0:02:49.080 --> 0:02:53.200 is also the simultaneous rarely and assets that one doesn't 0:02:53.240 --> 0:02:56.720 associate with boom times. So gold obviously has had an 0:02:56.720 --> 0:02:59.680 incredible year, it's come off the boil a little bit lately. 0:03:00.320 --> 0:03:03.920 Treasuries have had an incredible year, although they're sort of 0:03:03.960 --> 0:03:06.720 like backed down because rates are at long end treasuries 0:03:06.800 --> 0:03:10.839 or zero. So you have this simultaneous boom not just 0:03:11.040 --> 0:03:15.600 in risky assets with different fundamental drivers, but also weird 0:03:15.680 --> 0:03:19.440 like booming safe haven assets and risk assets at the 0:03:19.480 --> 0:03:21.200 same time. And I think that's the part that really 0:03:21.240 --> 0:03:24.360 sort of throws people a look like gold and Tesla 0:03:24.560 --> 0:03:28.760 both looking the same. It's strange. Yeah, it's strange. Although 0:03:28.800 --> 0:03:30.480 I have a feeling that a lot of people would 0:03:30.600 --> 0:03:33.280 point out the role of central banks in this and 0:03:33.360 --> 0:03:36.400 the flooding of liquidity and the idea that money has 0:03:36.440 --> 0:03:38.840 to work its way into some sort of asset, whether 0:03:38.880 --> 0:03:42.240 it's the traditional safe haven or something like a tech stalk, 0:03:42.280 --> 0:03:44.560 And of course some people are calling tech stalks safe 0:03:44.600 --> 0:03:47.480 havens now, which is kind of crazy, um compared to 0:03:47.520 --> 0:03:50.400 ten years ago. But anyway, Um, Yes, it's a big 0:03:50.440 --> 0:03:54.040 theme in the market and I'm looking forward to this discussion. Great, 0:03:54.160 --> 0:03:56.880 So we are going to be talking about how everything 0:03:56.920 --> 0:04:00.880 has just become one big trade. Our guest this week 0:04:01.080 --> 0:04:04.400 is really brilliant guy. I've loved reading this stuff for 0:04:04.440 --> 0:04:06.720 a long time, Jared Woodard. He is the head of 0:04:06.760 --> 0:04:10.400 the Research Investment Committee at Bank of America, and he 0:04:10.480 --> 0:04:14.119 recently wrote a note exactly on this the all one 0:04:14.240 --> 0:04:17.320 trade and nous of the market. So, Jared, thanks so 0:04:17.400 --> 0:04:19.599 much for joining us. Yeah, I'm really glad to be 0:04:19.640 --> 0:04:21.280 with both of you. Thanks so much for having me. 0:04:21.480 --> 0:04:25.080 So it's not just our illusion, right, I mean, it 0:04:25.160 --> 0:04:28.559 really does seem like everything is kind of the same 0:04:28.720 --> 0:04:31.240 right now? Is there a Is that true? Is there 0:04:31.279 --> 0:04:35.240 an easy way to sort of demonstrated quantitatively that it 0:04:35.400 --> 0:04:37.400 is all the same right now? It's not just sort 0:04:37.440 --> 0:04:42.080 of us playing tricks with terminal charge. Look, I do 0:04:42.160 --> 0:04:44.599 the same tricky charts and excel. So I think you 0:04:44.600 --> 0:04:47.520 can choose your software and uh and and and make 0:04:48.080 --> 0:04:50.760 some pretty bold claims, but I think there is some 0:04:50.839 --> 0:04:54.640 underlying truth to it, and there is a simple explanation. UM, 0:04:54.680 --> 0:04:57.520 this is a world in which to two big features 0:04:57.520 --> 0:05:00.160 that have been with us for some time, name really 0:05:00.640 --> 0:05:05.920 really scarce sources of growth, especially sources of profit growth UM. 0:05:06.000 --> 0:05:08.479 Combine with the world of ample liquidity as you mentioned, 0:05:08.839 --> 0:05:11.960 and when quinnings growth is scarce but there's lots of 0:05:12.000 --> 0:05:15.240 liquidity slashing around. The investors will, you know, kind of 0:05:15.240 --> 0:05:17.159 do two things we know from the last ten to 0:05:17.200 --> 0:05:19.279 twenty years. You know. The first thing they'll do is 0:05:19.279 --> 0:05:22.000 they'll build up the price of those assets that can 0:05:22.080 --> 0:05:25.360 produce you know, some cash flows and profits in the 0:05:25.400 --> 0:05:28.159 world with where those are incredibly scarce. UM, they'll build 0:05:28.120 --> 0:05:30.719 those up to the very expensive levels as you mentioned 0:05:30.720 --> 0:05:32.800 with tech, and there's lots of other examples. The other 0:05:32.839 --> 0:05:35.440 thing that they'll do is they'll buy things that basically 0:05:35.640 --> 0:05:38.279 function like call options in a way, even though they're 0:05:38.520 --> 0:05:41.520 not derivatives that you know, the assets that maybe don't 0:05:41.520 --> 0:05:43.960 do anything right now but might do something really big 0:05:44.160 --> 0:05:47.320 in the future. UM. Cryptocurrencies might be a good example 0:05:47.360 --> 0:05:50.719 of that, you know, esoteric commodities linked to new products, 0:05:50.760 --> 0:05:54.920 new sources of energy UM, you know, futuristic technology, UM. 0:05:54.960 --> 0:05:57.560 Any kind of asset that that might really explode in 0:05:57.640 --> 0:05:59.880 value is some future scenario the world, even if it's 0:05:59.880 --> 0:06:02.520 not giving you a cash flow today, you know, may 0:06:02.560 --> 0:06:05.520 become worth quite a lot, and so we're worth buying 0:06:05.560 --> 0:06:09.200 today point liquidity example. And you know there's really no 0:06:09.279 --> 0:06:14.440 alternatives in in conventional UM investment, uh, you know assets. 0:06:14.480 --> 0:06:16.640 So so you know, fixed income for example, you have 0:06:16.680 --> 0:06:20.400 treasury yields at record lows, UM, corporate bond yields incredibly low. 0:06:20.400 --> 0:06:24.080 There's relatively scarce places to generate those kinds of returns. 0:06:24.120 --> 0:06:27.839 And so what we find our investors forming portfolios that 0:06:27.839 --> 0:06:31.040 are kind of a barbell of the tech and maybe 0:06:31.040 --> 0:06:33.839 health care, maybe consumative discretionary stocks that can still grow 0:06:33.880 --> 0:06:37.280 their earnings in a reliable way, UM scarce as they 0:06:37.320 --> 0:06:39.640 are a little bit up those on the one side 0:06:39.680 --> 0:06:41.280 of the portfolio. And then the other side is kind 0:06:41.279 --> 0:06:46.080 of your your liquidity trade UH slightly more speculative part 0:06:46.160 --> 0:06:48.719 where you you know, buy something that might generate some 0:06:48.800 --> 0:06:52.600 outside return someday as long as it's not too expensive 0:06:53.279 --> 0:06:55.640 to own today. And you know that at the underlying 0:06:55.720 --> 0:06:59.040 dynamic here is one in which there's an actually reasonable 0:06:59.600 --> 0:07:02.960 econom rationale I think, I mean, just as as as 0:07:02.960 --> 0:07:06.560 corporate profit growth is scarce, we know economic growth is scarce, 0:07:06.960 --> 0:07:08.960 and so you're starting to see I think the kind 0:07:09.040 --> 0:07:11.040 of inequality on Wall Street that that we've seen on 0:07:11.120 --> 0:07:13.360 Main Street for a very long time. Everyone knows about, 0:07:13.680 --> 0:07:16.600 you know, all those eye popping you know, uh statistics 0:07:16.600 --> 0:07:21.960 about the relative you know, size of income and wealth 0:07:22.040 --> 0:07:24.000 controlled by you know, vast numbers of people on the 0:07:24.040 --> 0:07:28.080 world relative to the handful of very wealthy folks who 0:07:28.240 --> 0:07:30.760 control quite a lot more. And so um, if you 0:07:30.800 --> 0:07:33.320 think about that, I mean, one of my favorite statistics 0:07:33.320 --> 0:07:35.960 on this measure is or in casts cost of thriving 0:07:35.960 --> 0:07:37.400 in deck. So he if you go back to I 0:07:37.400 --> 0:07:42.119 think you know, the average worker making you know, median 0:07:42.200 --> 0:07:45.200 salary um, it might take them. I think it was 0:07:45.280 --> 0:07:48.480 something like twenty maybe twenty five weeks out of the 0:07:48.560 --> 0:07:51.400 year um to to earn enough money to pay for 0:07:51.440 --> 0:07:53.640 the big fixed costs that you have to have for 0:07:53.720 --> 0:07:56.240 sort of a comfortable you know, middle class life, a house, 0:07:56.320 --> 0:08:00.920 to car, education, healthcare, housing. So you fast forward to 0:08:00.920 --> 0:08:03.679 today and I think it takes like fifty three weeks 0:08:03.680 --> 0:08:05.440 out of a fifty two week year to pay for 0:08:05.480 --> 0:08:08.760 those same fixed costs. So the bottom line is, even 0:08:08.760 --> 0:08:12.040 if people can kind of get by, they certainly can't thrive. 0:08:12.080 --> 0:08:14.640 They certainly can't spend on things they like to spend 0:08:14.640 --> 0:08:16.480 because they there their income, so much of their income 0:08:16.560 --> 0:08:20.080 is consumed by the necessities. And and whatever your your 0:08:20.080 --> 0:08:21.800 politics are around that, I think the bottom line is 0:08:21.840 --> 0:08:23.480 that for a country like the United States and which 0:08:23.800 --> 0:08:28.560 consumption is GDP, we can't ever expect to have a 0:08:28.600 --> 0:08:32.439 breakout economic growth in an economy in which most people 0:08:32.520 --> 0:08:36.640 simply don't have enough income to spend on discretionary you know, 0:08:36.679 --> 0:08:39.360 disposable kind of items. Well, that's that's a familiar story. 0:08:39.600 --> 0:08:43.199 Which I think less familiar, perhaps is is the inequality 0:08:43.280 --> 0:08:46.520 that you're seeing that manifest on Wall Street. Where you 0:08:46.559 --> 0:08:49.400 can look at the broad measures of corporate profitability across 0:08:49.520 --> 0:08:52.400 the United States, the National Income Product Account and Input 0:08:52.400 --> 0:08:54.800 measure is a popular one where if you look at 0:08:54.840 --> 0:08:58.439 that measure across all of corporate America, even including small 0:08:58.480 --> 0:09:02.560 medium businesses, profits haven't actually really grown in dollar terms 0:09:03.400 --> 0:09:05.240 since about two thousand and fourteen. I mean, if you 0:09:05.280 --> 0:09:07.240 found you know, obviously excluding the pandemic and the and 0:09:07.280 --> 0:09:09.120 the collapse and profits then, But if you go back 0:09:09.160 --> 0:09:12.640 to the start of before profits really took a nose dive, 0:09:13.440 --> 0:09:16.920 corporate profits at flatline for for many years. Contrast that 0:09:16.920 --> 0:09:20.200 with the SMP five hundred large cap, the really big winners, 0:09:20.440 --> 0:09:23.360 where profit growth has been continuing to explode, you know, 0:09:23.480 --> 0:09:28.200 upside lead primarily by the six or seven big tech 0:09:28.280 --> 0:09:30.040 and and sort of consumer stocks that we can all 0:09:30.080 --> 0:09:32.960 think about. Well, that kind of inequality on on Wall Street, 0:09:32.960 --> 0:09:35.000 where just a handful of firms were able to generate 0:09:35.400 --> 0:09:38.240 the lion's share both of profits and of of market 0:09:38.280 --> 0:09:42.240 returns um is I think exactly the kind of damic 0:09:42.280 --> 0:09:44.800 you've seen across the real economy. That's what drives people 0:09:44.840 --> 0:09:47.280 into these crowded trades. The intuition that we all have 0:09:47.440 --> 0:09:50.840 is this is incredibly extreme. You know, this can't continue forever, 0:09:51.120 --> 0:09:54.000 This won't end well, et cetera. The problem is that 0:09:54.120 --> 0:09:58.360 if you bet against that trend, you've you've gotten burned, 0:09:58.400 --> 0:10:00.880 I think, for for quite quite a long time. And 0:10:00.920 --> 0:10:03.240 so the next question that we always get asked is 0:10:03.559 --> 0:10:07.280 what would cause reversal, what would cause it change? Yeah, 0:10:07.320 --> 0:10:09.800 I think that's the big question, and we're definitely going 0:10:09.840 --> 0:10:12.240 to return to that topic, But just before we do, 0:10:12.920 --> 0:10:16.920 one thing I was wondering is, given this backdrop of 0:10:17.080 --> 0:10:21.600 slow economic growth and abundance of liquidity, how much does 0:10:22.440 --> 0:10:25.920 price of financial assets actually play into all of this? 0:10:26.040 --> 0:10:27.800 And I know it sounds weird, but one thing I 0:10:28.360 --> 0:10:32.800 often think about is if you can't make money through 0:10:33.320 --> 0:10:37.000 UM cash flow of companies because there's sluggish economic growth, 0:10:37.000 --> 0:10:39.600 then one way to actually make money is through asset price. 0:10:40.040 --> 0:10:44.720 Asset prices going up, So it's kind of flows following flows, right, 0:10:44.720 --> 0:10:48.079 You're trying to target the thing where a lot of 0:10:48.120 --> 0:10:50.439 money is flowing into on the hopes that that's going 0:10:50.520 --> 0:10:53.960 to force the price up. And that's basically another way 0:10:53.960 --> 0:10:57.800 of monetizing. Is that something that you observe as well 0:10:58.280 --> 0:11:02.600 in the current UM and vironament, Well, we definitely see, 0:11:03.200 --> 0:11:08.160 you know, periods of speculative flows kind of and price 0:11:08.240 --> 0:11:12.160 bubbles UM, which is maybe the natural outcome of this 0:11:12.240 --> 0:11:15.480 kind of environment. UM. A lot of work done this year, 0:11:15.480 --> 0:11:19.679 I think, for example, on flows among individual investors, especially 0:11:19.920 --> 0:11:23.920 you know, younger and more tech savvy UM investors trading 0:11:23.960 --> 0:11:26.840 in different ways, trading different kinds of assets. I'm not 0:11:26.880 --> 0:11:29.280 sure how much those moves the needle and in overall 0:11:29.320 --> 0:11:32.560 dollar terms relative to the size of the market. But um, 0:11:32.600 --> 0:11:34.800 whether it's in the options market or in or in uh, 0:11:34.880 --> 0:11:37.520 you know, just cash equities. UM. You've certainly seen some 0:11:37.559 --> 0:11:41.079 of those big speculative flows. And I know that if 0:11:41.080 --> 0:11:44.240 you look at a very simple measure, something like the 0:11:44.240 --> 0:11:47.679 the price of the SMP five relative to its it's 0:11:47.679 --> 0:11:51.480 two moving average. In recent weeks, that just that simple 0:11:52.080 --> 0:11:54.480 ratio I think reached the highest level since since two 0:11:54.520 --> 0:11:57.280 thousand and nine. UM, as we had this incredible rally 0:11:57.320 --> 0:12:00.240 fueled by the sense from at least some investor there's 0:12:00.320 --> 0:12:02.040 that you know, markets are only gonna go up for 0:12:02.120 --> 0:12:05.200 quite a while and UM, and when that gets reinforced 0:12:05.240 --> 0:12:08.880 by that ample liquidity by um obviously incredible fiscal support 0:12:08.920 --> 0:12:13.360 this year, it's a great recipe for speculative upside bubbles 0:12:13.400 --> 0:12:17.240 that the then get popped and UM, you know, assets 0:12:17.280 --> 0:12:19.720 be distributed, perhaps in the steady your hands kind of 0:12:20.240 --> 0:12:23.720 the classic old story. What doesn't change are the economic 0:12:23.720 --> 0:12:41.800 fundamentals and the scarcity of that underlying growth. I'm gonna 0:12:41.880 --> 0:12:44.720 I really like the way you sort of characterized earlier 0:12:44.880 --> 0:12:47.840 the sort of some of these speculative assets, like a 0:12:47.840 --> 0:12:50.120 lot of popular tech stocks is sort of being like 0:12:50.160 --> 0:12:54.240 a call option on some future outcome. And so you 0:12:54.320 --> 0:12:59.480 see incredible valuations per se cloud computing stocks how much 0:12:59.800 --> 0:13:01.920 or say Tesla, which maybe one day we'll have an 0:13:01.960 --> 0:13:06.160 autonomous electric vehicle on Mars or something like that, and 0:13:06.440 --> 0:13:09.120 somehow they'll make a ton of money on that. I'm curious, Like, 0:13:09.280 --> 0:13:11.319 one of the things is this art of idea of 0:13:11.360 --> 0:13:14.679 the blooding of liquidity, the collapse and real interest rates. 0:13:14.760 --> 0:13:18.560 Real interest rates are extreally negative? How much? That's really 0:13:18.600 --> 0:13:19.920 the part of the story, because if you talk to 0:13:19.920 --> 0:13:22.160 cloud investors are like, oh, yeah, all these businesses are 0:13:22.160 --> 0:13:24.720 going to the cloud. Uh. If you talk to auto 0:13:24.760 --> 0:13:27.480 investors like all these business all these cars or whatever. Like. 0:13:27.520 --> 0:13:30.280 People have their individual stories, but how much is it 0:13:30.360 --> 0:13:34.120 is simply that when real interest rates are negative, people 0:13:34.200 --> 0:13:36.880 can afford to wait because they're not really losing any 0:13:36.880 --> 0:13:39.880 money in the short term by waiting for those profits 0:13:39.880 --> 0:13:42.520 that they expect to come rolling into the Ye. Look, 0:13:42.559 --> 0:13:45.079 I think I think it's it's It's certainly true that 0:13:45.160 --> 0:13:48.880 each individual industry has its own idios and credit drivers. 0:13:49.360 --> 0:13:53.200 But what gets people to invest and what motivates those flows, 0:13:53.200 --> 0:13:56.520 I think absolutely is is the broader macro story. Yeah, 0:13:57.040 --> 0:13:59.200 just to the overall value versus growth debate, I think 0:13:59.240 --> 0:14:02.880 captures is really well. UM. You know, we we published recently, 0:14:03.000 --> 0:14:06.400 you know on the fact that value versus growth over 0:14:06.480 --> 0:14:09.600 the past ten years is just you know, UM endured 0:14:09.600 --> 0:14:11.760 its worst period of returns in history, worse than the 0:14:11.800 --> 0:14:14.280 dot com bubble. Yeah, that was a great chart, you guys, public. 0:14:15.000 --> 0:14:17.400 Thank you. The bottom line is that is that when 0:14:17.720 --> 0:14:21.760 when growth is scarce, uh, you know, growth stocks outperform. 0:14:21.840 --> 0:14:23.560 It's it's really simple, but you know, we tried to 0:14:23.560 --> 0:14:24.880 get a little bit deeper. If you look at the 0:14:25.200 --> 0:14:28.400 just to to sort of explain the that ratio value 0:14:28.480 --> 0:14:31.120 versus growth. We found that you could you could explain 0:14:31.120 --> 0:14:34.359 about eight percent of the variance with with just three variables. 0:14:34.360 --> 0:14:39.800 It was interest rates, inflation, you know, expectations inflation, compensation 0:14:40.160 --> 0:14:43.800 and in the business cycle proxy by purchasing manager indexes. 0:14:44.000 --> 0:14:46.280 So those are three really common varables everybody looks at 0:14:46.320 --> 0:14:48.800 and they can help for a value percent of the variants. 0:14:48.840 --> 0:14:52.160 What that tells us is that for value to UM 0:14:52.320 --> 0:14:55.920 recover the losses this year relative to growth stocks, you'd 0:14:55.960 --> 0:14:58.840 have to see the ten year treasury yield rise from 0:14:58.880 --> 0:15:01.640 I think like six six percent today to one point 0:15:01.720 --> 0:15:04.680 eight percent. You have to see five year forward inflation, 0:15:05.040 --> 0:15:08.720 you know, expectations rise to two and a half percent 0:15:09.360 --> 0:15:12.320 and keep p M I is very stable and expansion territory. 0:15:12.400 --> 0:15:15.120 So that's a really big recipe. Uh, you know, a 0:15:15.120 --> 0:15:17.680 really big bill to to fill and uh and one 0:15:17.720 --> 0:15:20.720 reason why we think growth stocks can continue. Um. So 0:15:20.880 --> 0:15:23.920 it's absolutely I think a function of you know, very 0:15:24.000 --> 0:15:26.880 low expectations out into the future for growth and for 0:15:26.960 --> 0:15:29.600 inflation and driving a lot of those flows. You saw 0:15:29.640 --> 0:15:31.880 some great evidence of this, by the way, very recently 0:15:31.880 --> 0:15:36.000 when the FED shifted it's it's inflation framework and in 0:15:36.040 --> 0:15:38.800 the chair, it basically made it very clear that we're 0:15:38.800 --> 0:15:41.960 gonna allow inflation to overshoot for some amount of time. 0:15:42.360 --> 0:15:45.480 On those days and and the sessions and market thereafter, 0:15:45.800 --> 0:15:47.960 there was I think that you know, pretty clear rotation 0:15:48.000 --> 0:15:50.280 out of some of those tech and other kind of 0:15:50.320 --> 0:15:53.480 growth names into things like financials and energy, precisely because 0:15:53.960 --> 0:15:56.880 I think investors realized that in terms of these longer 0:15:57.000 --> 0:15:59.560 dated you know, discounting cash flows back to the present 0:16:00.000 --> 0:16:01.600 at some point in the business cycle, if we do 0:16:01.720 --> 0:16:05.240 get to meaningful wage growth in particular, again, you know, 0:16:05.240 --> 0:16:07.640 the FED might really will be more tolerant. It's really 0:16:07.640 --> 0:16:09.600 remarkable if you look at a chart, for example, of 0:16:10.240 --> 0:16:13.960 wages and and just the FED funds rate. However, the 0:16:14.000 --> 0:16:17.000 past three or four cycles, that has always hiked interest 0:16:17.080 --> 0:16:20.880 rates just when you know, the lowest income parts of 0:16:20.920 --> 0:16:23.400 the labor market really start to enjoy, you know, some 0:16:23.480 --> 0:16:25.600 of that juicy upside, and then they cut it off 0:16:25.640 --> 0:16:28.000 and you get a recession. You know shortly thereafter. It's 0:16:28.000 --> 0:16:31.760 always happened in the past. What a coincidence? Yeah, right, 0:16:32.000 --> 0:16:34.360 And so you know that's always happened in the past. 0:16:34.400 --> 0:16:37.120 It's always it's always bad news for growth. You know. 0:16:37.280 --> 0:16:39.920 Although I'm I'm I'm not quite the sort of perennial 0:16:39.920 --> 0:16:42.360 optimists like some folks are about the FED. You know, 0:16:42.360 --> 0:16:44.080 it does seem that if the FED is able to 0:16:44.520 --> 0:16:46.920 make and meet this commitment, that if we do get 0:16:47.200 --> 0:16:49.520 in the next business cycle, you know, we start to 0:16:49.560 --> 0:16:51.960 see wages rise really meaningfully. If the FED does sit 0:16:52.000 --> 0:16:54.680 on its hands and say, look, when I let this continue, um, 0:16:54.680 --> 0:16:57.880 it actually could mean at that future date, who knows 0:16:57.920 --> 0:16:59.760 how long it takes to get there, and it could 0:16:59.880 --> 0:17:03.080 mean some more meaningful upside. I think for the economy 0:17:03.120 --> 0:17:05.919 and for inflation, investors are going to price that in. 0:17:06.040 --> 0:17:10.119 It doesn't mean a radical, permanent shift now, but it 0:17:10.160 --> 0:17:12.680 does mean that I think that the distribution of returns 0:17:13.040 --> 0:17:15.040 can tilt a little bit more in favor of value, 0:17:15.520 --> 0:17:18.200 you know, in that sort of right hand tail future 0:17:18.200 --> 0:17:22.359 state of the world. Yeah, it could actually be different 0:17:22.480 --> 0:17:24.760 this time, or at least the FED spramework is different. 0:17:25.160 --> 0:17:28.359 So you already touched on this a little bit. But 0:17:28.720 --> 0:17:31.720 when it comes to something like the text stocks or 0:17:31.760 --> 0:17:34.400 you know, the typical things that people like to say 0:17:34.480 --> 0:17:38.679 are in bubble territory, what will be the thing that 0:17:38.800 --> 0:17:42.919 sparks the big reversal You just mentioned inflation and the 0:17:42.960 --> 0:17:46.800 return of some wage growth potentially and maybe the FED 0:17:46.840 --> 0:17:49.560 being more patient than it used to be. Um when 0:17:49.560 --> 0:17:52.600 it comes to that, But is there anything else that 0:17:52.960 --> 0:17:58.399 you see that could sort of spark that big repositioning. Well, 0:17:58.400 --> 0:18:01.200 there's there's one sort of markets related catalyst that could 0:18:01.200 --> 0:18:04.520 happen anytime, and then there's a policy related catalysts that 0:18:04.520 --> 0:18:06.919 that I think we could look for as well. The 0:18:06.960 --> 0:18:09.280 markets one is I mean, you know, I wonder whether 0:18:09.400 --> 0:18:12.199 this sort of value under performance, for example, or or 0:18:12.240 --> 0:18:14.840 just the kind of returns we've seen lately cause investors 0:18:14.880 --> 0:18:17.919 to to look at their accounting again and think twice 0:18:17.960 --> 0:18:22.400 about the way that they are interpreting understanding corporate actions 0:18:22.400 --> 0:18:26.480 and businesses. If you think about a conventional value in 0:18:26.520 --> 0:18:29.200 the actual price to book sort of a ratio, But 0:18:29.320 --> 0:18:31.560 what goes into that book value, it's it's it's assets, 0:18:31.640 --> 0:18:35.720 my salabilities. But the assets that typically are included are 0:18:35.760 --> 0:18:39.000 are mostly just tangible assets. Um. We saw one estimate 0:18:39.000 --> 0:18:42.960 from a third party uh claiming that in SMP five companies, 0:18:43.400 --> 0:18:47.040 intangible assets actually account for eighty four percent of their 0:18:47.320 --> 0:18:49.840 other total assets. Now, I think that knows a little 0:18:49.880 --> 0:18:51.520 bit high. It just sounds high to me. But but 0:18:51.560 --> 0:18:54.399 even if you think it's only you know, fifty or sixty, 0:18:54.600 --> 0:18:57.280 I mean it's a it's a huge amount of work 0:18:57.440 --> 0:18:59.960 that's not being accounted for in a lot of convention 0:19:00.000 --> 0:19:02.679 in all models, things like patterns, the output of R 0:19:02.680 --> 0:19:06.440 and D, the training that goes into a workforce, customer loyalty, 0:19:06.520 --> 0:19:08.840 brand value, whatever that's worth. I mean, these things aren't 0:19:08.880 --> 0:19:11.720 worth zero dollars. It should be included. And if you 0:19:11.840 --> 0:19:14.359 if you do include them. There's some academic research and 0:19:14.440 --> 0:19:17.879 some independent work that our team has done suggesting that 0:19:18.000 --> 0:19:21.040 if you include intangible assets and the formula for companies 0:19:21.280 --> 0:19:24.320 book value, you can improve the returns to a value 0:19:24.359 --> 0:19:27.399 strategy by you know, more than three percentage points a 0:19:27.480 --> 0:19:30.320 year versus a conventional benchmark. And that's a pretty meaningful, 0:19:30.840 --> 0:19:33.080 uh you know, meaningful result. If you throw in a 0:19:33.119 --> 0:19:37.080 couple other tricks, things like a quality filter, a small 0:19:37.119 --> 0:19:40.240 cap value byas rather than large cap, you can boost 0:19:40.359 --> 0:19:43.280 returns by another two to three percentage points. Altogether some 0:19:43.320 --> 0:19:46.880 pretty meaningful performance. And I wouldn't be surprised to see 0:19:46.920 --> 0:19:50.560 investors start to rethink their models of how companies are 0:19:50.560 --> 0:19:52.639 built and what they what they look like in the 0:19:52.680 --> 0:19:54.679 future in a way that could shift some flows in 0:19:54.720 --> 0:19:58.120 the meaningful direction towards companies that we don't typically think 0:19:58.160 --> 0:20:00.880 of as you know, as you stocked. We think about 0:20:00.960 --> 0:20:03.160 the winners and losers in this market. We've mentioned tach 0:20:03.240 --> 0:20:05.679 a lot, and and maybe it would include healthcare and 0:20:05.720 --> 0:20:09.000 some consumer discretionary as the big growth sectors. I think 0:20:09.000 --> 0:20:12.160 that's been true historically and the same by the same token, 0:20:12.200 --> 0:20:15.080 our work shows that value index is traditionally have been 0:20:15.080 --> 0:20:19.320 really overweighted into in financials, um and energy. But if 0:20:19.359 --> 0:20:22.520 you start to include intangible assets is actually credible, you know, 0:20:22.560 --> 0:20:26.960 meaningful parts of what makes a company worthwhile. Then financials 0:20:27.040 --> 0:20:29.720 energy don't get quite the big overweights that they that 0:20:29.760 --> 0:20:32.200 they would today, and you can actually as a value 0:20:32.200 --> 0:20:36.000 investor go into some sectors that people don't typically think of, 0:20:36.080 --> 0:20:38.520 things like you know, healthcare, even a little bit of tech, 0:20:38.600 --> 0:20:41.760 even some others. So um, I think that could happen. 0:20:41.800 --> 0:20:43.920 That could me causing the equal shift within the market. 0:20:43.960 --> 0:20:46.840 It obviously doesn't affect the broader economy, you know, in 0:20:47.200 --> 0:20:49.640 the first order way. But I think the more important 0:20:49.680 --> 0:20:51.760 shift to look out for something we've worked on a 0:20:51.800 --> 0:20:54.640 lot this year. It is what happens in public policy 0:20:54.760 --> 0:20:57.840 over the next several quarters, next several years. Because we 0:20:57.920 --> 0:21:00.920 know that if fiscal if monetary policy does what it does. 0:21:00.960 --> 0:21:02.600 We talked about that already, that's not going to move 0:21:02.600 --> 0:21:05.359 the needle independently. It just kind of affects what happens 0:21:05.400 --> 0:21:08.560 really in some far off distant land of of a 0:21:08.600 --> 0:21:12.359 really hot economy. UM, and a fiscal policy, I we've argued, 0:21:12.760 --> 0:21:16.280 only remains limited to providing you know, sort of life support, 0:21:16.320 --> 0:21:19.000 and it's absolutely necessary. The kind of work that we've 0:21:19.000 --> 0:21:22.920 seen this year. Look, this is the biggest and fastest 0:21:22.920 --> 0:21:26.040 fiscal expension in US history outside of World War Two. 0:21:26.240 --> 0:21:29.440 It's been incredibly powerful, incredibly important. But all it does 0:21:29.480 --> 0:21:31.520 is get us back to where we sort of started 0:21:31.520 --> 0:21:33.919 the year. If that's the most we can achieve, we're 0:21:33.920 --> 0:21:36.120 not going to break out of this world of sort 0:21:36.160 --> 0:21:40.560