1 00:00:13,880 --> 00:00:17,320 Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast. 2 00:00:17,600 --> 00:00:19,840 Speaker 1: My name is Mike Reagan, I'm a senior editor at. 3 00:00:19,720 --> 00:00:23,680 Speaker 2: Bloomberg, and I'm all Donna Hirich, across asset reporter with Bloomberg. 4 00:00:24,480 --> 00:00:27,640 Speaker 1: And this week on the show, well, don't pinch yourself, 5 00:00:27,680 --> 00:00:30,319 Speaker 1: you're not dreaming, and don't bother to call the IT 6 00:00:30,680 --> 00:00:32,680 Speaker 1: department to adjust your computer monitor. 7 00:00:32,720 --> 00:00:33,560 Speaker 3: It's working fine. 8 00:00:33,960 --> 00:00:36,199 Speaker 1: The stock market really did just put in one of 9 00:00:36,200 --> 00:00:39,400 Speaker 1: the strongest first halfs of a year in well forever, 10 00:00:39,600 --> 00:00:42,440 Speaker 1: at least for the Nasdaq one hundred, which as of 11 00:00:42,479 --> 00:00:45,600 Speaker 1: this recording is up about thirty seven percent so far 12 00:00:45,840 --> 00:00:49,839 Speaker 1: in twenty twenty three. So how exactly did that happen 13 00:00:50,000 --> 00:00:52,559 Speaker 1: when everyone and their dog was calling for a recession 14 00:00:52,600 --> 00:00:55,720 Speaker 1: this year? And what can we expect next? We'll get 15 00:00:55,720 --> 00:00:58,920 Speaker 1: into it with a very special guest. But first of Feldona, 16 00:00:59,520 --> 00:01:03,440 Speaker 1: I think many listeners are probably familiar with the famous 17 00:01:03,440 --> 00:01:09,000 Speaker 1: Bloomberg pantry. We're very lucky to have snacks and coffee 18 00:01:09,520 --> 00:01:10,720 Speaker 1: on soft drinks. 19 00:01:11,000 --> 00:01:13,280 Speaker 3: What's your favorite part of the Bloomberg pantry? 20 00:01:13,319 --> 00:01:16,600 Speaker 2: Bloomberg pantry, Okay, we have these really cool machines that 21 00:01:16,760 --> 00:01:20,800 Speaker 2: I heard are straight from Italy. That make lattes. Do 22 00:01:20,880 --> 00:01:23,959 Speaker 2: you use those? They're like dotted all over the place. 23 00:01:24,720 --> 00:01:27,560 Speaker 2: One of them is a brand new and makes like 24 00:01:27,600 --> 00:01:30,759 Speaker 2: the silkiest latte, So I love those. 25 00:01:31,360 --> 00:01:34,600 Speaker 3: I was going to be corny and say the people. 26 00:01:35,000 --> 00:01:38,959 Speaker 2: Oh my god, please don't make me roll my eyes. 27 00:01:39,680 --> 00:01:42,160 Speaker 3: All right. I was walking through the pantry the other. 28 00:01:42,080 --> 00:01:45,880 Speaker 1: Day, and there is something to being back in the 29 00:01:45,920 --> 00:01:47,960 Speaker 1: office and not working at home all the time, because 30 00:01:47,960 --> 00:01:51,120 Speaker 1: you run in the people. I had my eggs, my 31 00:01:51,560 --> 00:01:55,320 Speaker 1: hard boiled egg, my coffee, a pocket full of red liquorice, 32 00:01:55,800 --> 00:01:58,000 Speaker 1: and I ran into our guests this week and made 33 00:01:58,000 --> 00:01:59,920 Speaker 1: me think, you know what, it's about time we had 34 00:02:00,160 --> 00:02:01,680 Speaker 1: on the show. We have a lot of strategists on 35 00:02:01,720 --> 00:02:04,680 Speaker 1: the show from outside of the firm, but we're lucky 36 00:02:04,720 --> 00:02:07,440 Speaker 1: to have one of the best in the business right here. 37 00:02:08,040 --> 00:02:10,280 Speaker 2: When I see her in the hallways, I never say 38 00:02:10,320 --> 00:02:13,360 Speaker 2: hi because I'm like, oh, no, I'm leaving her alone 39 00:02:13,360 --> 00:02:17,480 Speaker 2: because she needs her time. She's so busy, really really, yes, 40 00:02:19,120 --> 00:02:21,360 Speaker 2: hello to me. Oh I never say hello to you 41 00:02:21,400 --> 00:02:21,960 Speaker 2: on purpose. 42 00:02:22,240 --> 00:02:25,120 Speaker 3: Yeah, turn the other way, completely different reason. 43 00:02:25,120 --> 00:02:27,600 Speaker 2: I guess, turned the other way. Yes, Okay, it's Gina 44 00:02:27,639 --> 00:02:31,119 Speaker 2: Martin Adams, Chief Equity strategist at Bloomberg Intelligence. Since she's 45 00:02:31,160 --> 00:02:32,680 Speaker 2: been on the show before, and we're so lucky to 46 00:02:32,680 --> 00:02:33,920 Speaker 2: have you back. Thank you for joining me. 47 00:02:33,960 --> 00:02:36,280 Speaker 4: Wow, thank you for having me. That was quite an introduction. 48 00:02:36,400 --> 00:02:38,079 Speaker 4: Well we should just stop it right there on that 49 00:02:38,200 --> 00:02:39,520 Speaker 4: high and call it a quit. 50 00:02:39,720 --> 00:02:42,040 Speaker 2: Thanks everybody for listening this week. 51 00:02:42,520 --> 00:02:44,440 Speaker 3: But it's a good week, Gina, to have you on. 52 00:02:44,560 --> 00:02:47,919 Speaker 1: You guys just came out with your mid year outlook 53 00:02:48,160 --> 00:02:51,280 Speaker 1: for equities. Talk to us about sort of your main 54 00:02:51,440 --> 00:02:56,560 Speaker 1: takeaways about this crazy strong rally we've seen this year 55 00:02:56,600 --> 00:02:59,320 Speaker 1: and what we should take away most from the mid 56 00:02:59,400 --> 00:02:59,960 Speaker 1: year outlook. 57 00:03:00,600 --> 00:03:03,440 Speaker 4: Yeah, I think there's a lot to unpack with the 58 00:03:03,480 --> 00:03:05,800 Speaker 4: market so far this year. I think the biggest takeaway 59 00:03:05,840 --> 00:03:10,960 Speaker 4: for me really is we cannot drop the ball on 60 00:03:11,280 --> 00:03:15,200 Speaker 4: following earnings trends and earnings did give us a lot 61 00:03:15,200 --> 00:03:17,360 Speaker 4: of indication that twenty twenty two was going to be weak. 62 00:03:17,440 --> 00:03:19,960 Speaker 4: They also have given us a lot of support in 63 00:03:20,000 --> 00:03:23,440 Speaker 4: twenty twenty three, and I think that many people dismissed 64 00:03:23,440 --> 00:03:25,920 Speaker 4: the gains in the equity market. It has been a 65 00:03:25,919 --> 00:03:28,519 Speaker 4: powerful rally, but remember it comes off of a really 66 00:03:28,639 --> 00:03:31,360 Speaker 4: rough go in twenty twenty two. For that, Nasdaq and 67 00:03:31,440 --> 00:03:34,400 Speaker 4: for some of those tech stocks, so earnings trends very 68 00:03:34,520 --> 00:03:38,960 Speaker 4: very important. Inflation likewise important not only for its impact 69 00:03:38,960 --> 00:03:41,640 Speaker 4: on earnings trends, but because inflation in the seventies and 70 00:03:41,680 --> 00:03:44,480 Speaker 4: eighties was a really great timing mechanism for stock tops 71 00:03:44,480 --> 00:03:49,000 Speaker 4: and bottoms. Once again, inflation peaks, stocks bottom, and we're 72 00:03:49,000 --> 00:03:52,040 Speaker 4: off to the races as inflation is decelerating. So that's 73 00:03:52,080 --> 00:03:55,720 Speaker 4: a big takeaway from US. I think thirdly, sentiment is 74 00:03:55,760 --> 00:03:59,680 Speaker 4: still pretty mixed. A sentiment gave us an indication in 75 00:03:59,680 --> 00:04:01,840 Speaker 4: Octo Tilboro of last year that we should start getting 76 00:04:01,840 --> 00:04:04,920 Speaker 4: more constructive to stocks because everybody else had left the building. 77 00:04:04,960 --> 00:04:07,440 Speaker 4: There was just nobody left that wanted to touch equity markets. 78 00:04:08,040 --> 00:04:12,240 Speaker 4: And sentiment is still somewhat mixed. I do think that 79 00:04:12,280 --> 00:04:17,039 Speaker 4: people are still really nervous about this potential economic recession 80 00:04:17,160 --> 00:04:20,720 Speaker 4: and how deep or long it may be. People are 81 00:04:20,720 --> 00:04:23,760 Speaker 4: still really nervous about the FED. As long as I 82 00:04:23,800 --> 00:04:26,600 Speaker 4: keep getting pushed back from people that we shouldn't be constructive, 83 00:04:26,600 --> 00:04:28,240 Speaker 4: and then we probably should be constructive. 84 00:04:29,680 --> 00:04:32,400 Speaker 2: I really like the very first line of the midyear 85 00:04:32,520 --> 00:04:35,280 Speaker 2: of your mid year outlook, so I want to read it. 86 00:04:35,320 --> 00:04:37,960 Speaker 2: Stocks should breathe a sigh of relief as the inflation 87 00:04:38,080 --> 00:04:40,640 Speaker 2: pig appears to have passed through the S and P 88 00:04:40,760 --> 00:04:44,360 Speaker 2: five hundred earnings Python. That's so good and so visual. 89 00:04:44,520 --> 00:04:44,880 Speaker 4: Thank you. 90 00:04:45,080 --> 00:04:48,440 Speaker 2: And then you also mentioned margin pressures from twenty twenty two. 91 00:04:48,640 --> 00:04:51,520 Speaker 2: They're fading and should offset any revenue weakness. Can you 92 00:04:51,520 --> 00:04:53,680 Speaker 2: talk a little bit about that, And then also about 93 00:04:53,720 --> 00:04:56,720 Speaker 2: the idea I want to bring AI into this as well, 94 00:04:56,760 --> 00:04:59,440 Speaker 2: like if we are expecting all these companies to be 95 00:05:00,000 --> 00:05:02,640 Speaker 2: spending on AI, does that hurt margins? 96 00:05:02,800 --> 00:05:07,560 Speaker 4: Yeah? Really great questions. So I'm I am very well 97 00:05:07,600 --> 00:05:09,800 Speaker 4: known as being obsessed with margins. As a matter of fact, 98 00:05:09,839 --> 00:05:12,480 Speaker 4: one of my associates one time accidentally wrote my name 99 00:05:12,560 --> 00:05:15,159 Speaker 4: Gina Margin Adams on a piece of work instead of 100 00:05:15,160 --> 00:05:17,560 Speaker 4: Gena Martin Adams. She says it was an accident, but 101 00:05:19,160 --> 00:05:23,520 Speaker 4: it's it's just something that I follow very very carefully. 102 00:05:23,720 --> 00:05:28,400 Speaker 4: And margins had been just crashing when inflation was accelerating. 103 00:05:28,480 --> 00:05:32,160 Speaker 4: Margins x energy, which is an important clarification on the 104 00:05:32,240 --> 00:05:35,039 Speaker 4: S and P five hundred, crashed from late twenty twenty 105 00:05:35,080 --> 00:05:37,400 Speaker 4: one right through to the first quarter of this year, 106 00:05:38,240 --> 00:05:41,760 Speaker 4: but started we're starting to see margin improvement occur on 107 00:05:41,800 --> 00:05:44,280 Speaker 4: the index, and that is a direct reflection of the 108 00:05:44,279 --> 00:05:49,440 Speaker 4: inflation landscape. Consumer prices are decelerating, Producer prices growth is 109 00:05:49,480 --> 00:05:52,640 Speaker 4: also decelerating, but consumer price growth is decelerating at a 110 00:05:52,640 --> 00:05:55,880 Speaker 4: slower pace than producer price growth, and that margin is 111 00:05:56,120 --> 00:05:58,640 Speaker 4: directly impacting the S and P five hundred. On top 112 00:05:58,680 --> 00:06:02,440 Speaker 4: of that, we did go through some pretty significant layoffs 113 00:06:02,480 --> 00:06:05,400 Speaker 4: in twenty twenty two, and that's enabling margin recovery for 114 00:06:05,480 --> 00:06:08,400 Speaker 4: some of the index. So what we're starting to see 115 00:06:08,520 --> 00:06:10,479 Speaker 4: is actually green shoots in the earning stream. And we 116 00:06:10,520 --> 00:06:12,880 Speaker 4: started writing about this in the first quarter earning season. 117 00:06:12,960 --> 00:06:15,120 Speaker 4: People were like, you got to be crazy. The economy 118 00:06:15,200 --> 00:06:17,559 Speaker 4: is going to fall apart. You can't have green shoots 119 00:06:17,600 --> 00:06:19,560 Speaker 4: in the earning stream when economy is going to be 120 00:06:19,600 --> 00:06:22,480 Speaker 4: falling apart. But that's what we see, and as long 121 00:06:22,520 --> 00:06:26,640 Speaker 4: as that continues, that fundamental shift in margins should lead 122 00:06:26,640 --> 00:06:29,920 Speaker 4: to much better earning stability for the index going forward, 123 00:06:29,960 --> 00:06:32,800 Speaker 4: in particular for X energy sectors. Now, tech is a 124 00:06:32,839 --> 00:06:37,520 Speaker 4: really interesting phenomenon right now because what's happening in tech 125 00:06:38,440 --> 00:06:41,120 Speaker 4: is in some cases very different from what's happening in 126 00:06:41,160 --> 00:06:43,520 Speaker 4: the rest of the index, and in some cases the same, 127 00:06:43,600 --> 00:06:47,840 Speaker 4: and where it's very different is there is optimism in tech. 128 00:06:48,040 --> 00:06:50,599 Speaker 4: There's optimism nowhere else in the S and P five hundred. 129 00:06:50,600 --> 00:06:52,920 Speaker 4: The equal weighted S and P still trading below its 130 00:06:52,960 --> 00:06:56,520 Speaker 4: pre pandemic average levels, but there's a ton of optimism 131 00:06:56,560 --> 00:07:01,279 Speaker 4: in tech. Tech valuations are at pandemic peace in the 132 00:07:01,440 --> 00:07:05,920 Speaker 4: S and P specifically, and that's a function of both 133 00:07:06,320 --> 00:07:10,040 Speaker 4: margins starting to improve. This really started the tech rally. 134 00:07:10,120 --> 00:07:12,160 Speaker 4: Nobody wants to admit it because everybody thinks it's all 135 00:07:12,200 --> 00:07:16,320 Speaker 4: about AI, but the reality is Tech cut costs. Tech 136 00:07:16,360 --> 00:07:18,880 Speaker 4: cut those costs that created a margin bottom for tech 137 00:07:19,400 --> 00:07:22,960 Speaker 4: and created an uptrend in an updraft in earnings estimate 138 00:07:22,960 --> 00:07:25,800 Speaker 4: revision for that space going into latter the later part 139 00:07:25,800 --> 00:07:28,640 Speaker 4: of this year. So that created the initial rounds of optimism. 140 00:07:29,160 --> 00:07:33,240 Speaker 4: And then what's different is AI and AI certainly is 141 00:07:33,360 --> 00:07:37,280 Speaker 4: driving an anticipated recovery and spending at large, and capital 142 00:07:37,320 --> 00:07:41,440 Speaker 4: spending in particular, that impacts different segments of tech and 143 00:07:41,480 --> 00:07:44,680 Speaker 4: communications and some of the consumer discretionary sectors in very 144 00:07:44,720 --> 00:07:47,760 Speaker 4: different ways. So some of the companies that are big 145 00:07:47,800 --> 00:07:52,440 Speaker 4: beneficiaries of that capital spending obviously can see really significant 146 00:07:52,480 --> 00:07:55,760 Speaker 4: revenue growth to offset any any spend that they have 147 00:07:55,840 --> 00:07:58,760 Speaker 4: to develop product Companies that are simply going to have 148 00:07:58,800 --> 00:08:02,760 Speaker 4: to spend in or to onboard have face a different scenario. 149 00:08:02,880 --> 00:08:05,160 Speaker 4: They'll need to see revenue growth in other spaces. But 150 00:08:05,640 --> 00:08:08,200 Speaker 4: it does appear to be creating this sort of snowball 151 00:08:08,240 --> 00:08:11,560 Speaker 4: effect throughout the entire in the entirety of the tech sector, 152 00:08:12,200 --> 00:08:15,280 Speaker 4: where there is this optimism embedded in prices. That could 153 00:08:15,280 --> 00:08:18,000 Speaker 4: be a risk later this year if tech companies aren't 154 00:08:18,000 --> 00:08:20,520 Speaker 4: starting to post the earnings growth that it's anticipated in 155 00:08:20,520 --> 00:08:24,240 Speaker 4: that valuation, then we could face some downdraft in tech, 156 00:08:24,320 --> 00:08:26,520 Speaker 4: But for now, it looks like it's only creating an 157 00:08:26,600 --> 00:08:28,440 Speaker 4: upwave in expectations. 158 00:08:29,000 --> 00:08:31,600 Speaker 1: You know, one of the most interesting things to me 159 00:08:32,000 --> 00:08:36,040 Speaker 1: in the mid year outlook is you guys have at 160 00:08:36,080 --> 00:08:40,400 Speaker 1: BI Equity Strategy have your own economic regime model. That 161 00:08:40,440 --> 00:08:45,040 Speaker 1: model actually suggests that the recession is come and gone, 162 00:08:46,400 --> 00:08:49,800 Speaker 1: happened in what the second half of twenty twenty two, 163 00:08:50,000 --> 00:08:53,400 Speaker 1: which sort of makes this market make a lot more 164 00:08:53,480 --> 00:08:56,040 Speaker 1: sense than everyone bracing for a recession. But could you 165 00:08:56,040 --> 00:08:58,240 Speaker 1: walk us through sort of the inputs of that model 166 00:08:58,280 --> 00:09:02,360 Speaker 1: and what exactly it's showing and what makes you make 167 00:09:02,400 --> 00:09:05,720 Speaker 1: that analysis that it really looked like a recession last year. 168 00:09:06,120 --> 00:09:09,440 Speaker 4: Yeah, so the economic regime model. We designed this. I 169 00:09:09,480 --> 00:09:11,560 Speaker 4: designed this many many years ago when I was with 170 00:09:11,600 --> 00:09:16,240 Speaker 4: another firm that shall remain nameless. But nonetheless, it is 171 00:09:16,360 --> 00:09:18,760 Speaker 4: designed to give us a read on the current read 172 00:09:18,800 --> 00:09:22,880 Speaker 4: on the economy by indicators that are historically very meaningful 173 00:09:23,040 --> 00:09:26,960 Speaker 4: for predicting stock prices. So we really isolate that read 174 00:09:27,000 --> 00:09:31,400 Speaker 4: on the economy into four factors. We use consumer confidence, 175 00:09:31,440 --> 00:09:35,120 Speaker 4: we use ism, we use capacity utilization, and we use 176 00:09:35,120 --> 00:09:39,720 Speaker 4: continuing claims. And those four factors together have given us 177 00:09:39,840 --> 00:09:42,160 Speaker 4: We put them into a logistic regression. I don't want 178 00:09:42,200 --> 00:09:45,120 Speaker 4: to get too nerdy, but nonetheless, most of the time 179 00:09:45,160 --> 00:09:48,000 Speaker 4: those factors give us an output of a range of 180 00:09:48,040 --> 00:09:50,440 Speaker 4: from zero to one, and most of the time they 181 00:09:50,480 --> 00:09:52,760 Speaker 4: give us an output of near one, which would suggest 182 00:09:52,760 --> 00:09:55,680 Speaker 4: the economies just fine. The input from the economy for 183 00:09:55,720 --> 00:09:58,600 Speaker 4: the equity market is very positive. You should expect positive 184 00:09:58,600 --> 00:10:00,959 Speaker 4: returns over time when they the output is at one. 185 00:10:01,880 --> 00:10:04,840 Speaker 4: When it drops below one, it creates risk to the 186 00:10:04,840 --> 00:10:07,560 Speaker 4: equity market, right, And so this indicator gave us an 187 00:10:08,160 --> 00:10:11,480 Speaker 4: started suggesting there were economic risks emerging for the equity 188 00:10:11,480 --> 00:10:14,520 Speaker 4: market as early as June of last year, and then 189 00:10:14,520 --> 00:10:17,320 Speaker 4: it hit just an outright low level, like a low 190 00:10:17,360 --> 00:10:20,240 Speaker 4: that you never see outside of recession, near zero in 191 00:10:20,280 --> 00:10:24,160 Speaker 4: December of last year. So we effectively had this big 192 00:10:24,240 --> 00:10:27,040 Speaker 4: loss of momentum in the economy that impacted the equity 193 00:10:27,040 --> 00:10:30,200 Speaker 4: market extremely negative between June and December of last year. 194 00:10:30,840 --> 00:10:33,199 Speaker 4: Since December, it's certainly not out of the woods. It's 195 00:10:33,200 --> 00:10:35,760 Speaker 4: still terrible. The reading is awful. It suggests we may 196 00:10:35,760 --> 00:10:37,880 Speaker 4: and we may actually still be in some form of 197 00:10:37,920 --> 00:10:42,160 Speaker 4: an economic correction or recession, but it's off of the low. 198 00:10:42,440 --> 00:10:45,280 Speaker 4: So this is what's really meaningful for price direction is 199 00:10:45,320 --> 00:10:49,520 Speaker 4: as we know, equity prices are driven by shifts in momentum. Right, 200 00:10:49,640 --> 00:10:52,320 Speaker 4: So even if the economy is still in recession, the 201 00:10:52,320 --> 00:10:56,400 Speaker 4: recession reached its big momentum trough according to this indicator 202 00:10:56,559 --> 00:10:59,080 Speaker 4: as of December. Now, this is really contradictory to any 203 00:10:59,080 --> 00:11:01,280 Speaker 4: economic thought out there, and you know every economist will 204 00:11:01,280 --> 00:11:03,360 Speaker 4: tell you no way we're in recession. The job market 205 00:11:03,400 --> 00:11:04,160 Speaker 4: was very stable. 206 00:11:04,640 --> 00:11:06,320 Speaker 1: I was going to ask what was the main driver 207 00:11:06,480 --> 00:11:08,520 Speaker 1: of that? Was it in poor consumer confidence? 208 00:11:08,559 --> 00:11:08,920 Speaker 3: Mainly? 209 00:11:09,440 --> 00:11:12,360 Speaker 4: Oh, it was everything. I mean, you know, remember ism 210 00:11:12,520 --> 00:11:14,520 Speaker 4: peaked all the way back in twenty eleven. We use 211 00:11:14,559 --> 00:11:17,200 Speaker 4: our twenty twenty one. We use ISM as another indicator 212 00:11:17,240 --> 00:11:19,200 Speaker 4: as a component of our market health checklist, and it 213 00:11:19,240 --> 00:11:21,200 Speaker 4: gave us a really early read that things were going 214 00:11:21,280 --> 00:11:23,680 Speaker 4: south as of the end of twenty twenty one. So 215 00:11:23,840 --> 00:11:26,880 Speaker 4: ism was plummeting for much of last year. May have 216 00:11:27,000 --> 00:11:31,200 Speaker 4: crested it's low as well, and that certainly helps. Continuing 217 00:11:31,240 --> 00:11:35,280 Speaker 4: claims were stable to hire, so they weren't particularly great. 218 00:11:35,400 --> 00:11:37,000 Speaker 4: Consumer confidence was awful. 219 00:11:37,200 --> 00:11:40,320 Speaker 2: We had those two back to back negative GDP readings 220 00:11:40,360 --> 00:11:40,760 Speaker 2: as well. 221 00:11:40,960 --> 00:11:43,360 Speaker 4: We did there were definite weaknesses, and we saw that 222 00:11:43,520 --> 00:11:45,599 Speaker 4: really clearly in earnings. And I think that this is 223 00:11:45,640 --> 00:11:48,000 Speaker 4: the important point. I'm not trying to make a forecast 224 00:11:48,040 --> 00:11:50,199 Speaker 4: for the economy. It doesn't matter to me whether we 225 00:11:50,280 --> 00:11:53,600 Speaker 4: fall into a technical recession or not. I need to 226 00:11:53,640 --> 00:11:56,680 Speaker 4: forecast earnings, and I need to forecast what's going to 227 00:11:56,679 --> 00:11:58,760 Speaker 4: happen with or figure out what's going to happen we're 228 00:11:58,880 --> 00:12:01,280 Speaker 4: likely to happen with stock price returns, and these four 229 00:12:01,320 --> 00:12:04,080 Speaker 4: indicators as a group, I've done a very good job 230 00:12:04,160 --> 00:12:07,280 Speaker 4: of suggesting to me where I should be with respect 231 00:12:07,320 --> 00:12:09,640 Speaker 4: to the equity market and how constructive you want to be. 232 00:12:09,800 --> 00:12:12,719 Speaker 4: And basically what it said is go as far away 233 00:12:12,760 --> 00:12:17,000 Speaker 4: from equities as you can in June and in December 234 00:12:17,440 --> 00:12:20,080 Speaker 4: get back in. And that's what the model said to us. 235 00:12:20,240 --> 00:12:22,600 Speaker 4: And it may or may not eventually prove. It could 236 00:12:22,600 --> 00:12:24,400 Speaker 4: be the case that we did or did not fall 237 00:12:24,440 --> 00:12:28,199 Speaker 4: in recession in twenty twenty two, But the economic indicators 238 00:12:28,200 --> 00:12:30,760 Speaker 4: that matter to me as an equity strategist suggest that 239 00:12:30,800 --> 00:12:33,400 Speaker 4: the distress has reached some sort of low point. We're 240 00:12:33,440 --> 00:12:36,240 Speaker 4: still somewhat distressed, but not as distressed as we were 241 00:12:36,320 --> 00:12:36,760 Speaker 4: last year. 242 00:12:42,840 --> 00:12:45,520 Speaker 2: This is really interesting to me because I feel like 243 00:12:45,640 --> 00:12:47,920 Speaker 2: in recent days more and more people have been bringing 244 00:12:48,000 --> 00:12:50,720 Speaker 2: up the fact like we've been waiting for this recession. 245 00:12:51,360 --> 00:12:56,040 Speaker 2: There still aren't crazy great signs that something is happening 246 00:12:56,120 --> 00:12:59,800 Speaker 2: right now. But somebody I spoke with earlier this week said, 247 00:13:00,280 --> 00:13:02,319 Speaker 2: if you're looking at the market, if you look at 248 00:13:02,320 --> 00:13:05,040 Speaker 2: small caps for instance, or you mentioned the eco weight 249 00:13:05,840 --> 00:13:09,440 Speaker 2: SMP index, that actually you could almost make the argument 250 00:13:09,480 --> 00:13:12,760 Speaker 2: that those stocks are pricing in a recession because they're like, 251 00:13:12,880 --> 00:13:13,600 Speaker 2: what do you think of that? 252 00:13:13,800 --> 00:13:15,400 Speaker 4: Yeah, And as a matter of fact, I think large 253 00:13:15,400 --> 00:13:17,680 Speaker 4: caps priced in recession as well. Last year. We were 254 00:13:17,760 --> 00:13:19,880 Speaker 4: on a different model. We call it our fair value model, 255 00:13:19,960 --> 00:13:23,840 Speaker 4: and this is a model that utilizes consensus expectations to 256 00:13:23,960 --> 00:13:26,880 Speaker 4: suggest where the fair value for various equity markets are 257 00:13:26,920 --> 00:13:31,320 Speaker 4: around the world macroeconomic expectations, and that model at the 258 00:13:31,400 --> 00:13:36,160 Speaker 4: lows of last year, was anticipating of fifteen percent decline 259 00:13:36,160 --> 00:13:38,080 Speaker 4: in earnings coming over the next twelve months, So that 260 00:13:38,120 --> 00:13:41,160 Speaker 4: would say that, Okay, if the market is right here 261 00:13:41,880 --> 00:13:45,559 Speaker 4: as of October first, twenty twenty two, we are officially 262 00:13:45,559 --> 00:13:48,760 Speaker 4: headed into a major earnings recession in twenty twenty three, 263 00:13:49,520 --> 00:13:53,280 Speaker 4: a major decline in earnings of fifteen percent more. Because 264 00:13:53,280 --> 00:13:56,120 Speaker 4: remember earnings were already declining by that point in time, 265 00:13:56,240 --> 00:13:58,360 Speaker 4: so that would be equivalent to roughly a twenty percent 266 00:13:58,440 --> 00:14:02,520 Speaker 4: drop in earnings, which is very consistent with historical recession experience. 267 00:14:03,040 --> 00:14:05,920 Speaker 4: We already priced it in the equity market, and unless 268 00:14:05,920 --> 00:14:08,240 Speaker 4: we get a greater than twenty percent drop in earnings, 269 00:14:08,240 --> 00:14:12,520 Speaker 4: those lows are probably pretty firm. Yep, the October lows 270 00:14:12,520 --> 00:14:14,080 Speaker 4: are probably pretty firm. At least that would be what 271 00:14:14,280 --> 00:14:18,080 Speaker 4: was implied in that model at that time. Small caps 272 00:14:18,280 --> 00:14:21,360 Speaker 4: very similarly, small caps are much more economically sensitive or 273 00:14:21,400 --> 00:14:24,600 Speaker 4: sensitive to the movements in the US economy than our 274 00:14:24,680 --> 00:14:27,280 Speaker 4: large caps, so the divergence between large caps and small 275 00:14:27,320 --> 00:14:31,000 Speaker 4: caps could be easily explained by the ongoing weakness and 276 00:14:31,040 --> 00:14:34,880 Speaker 4: the domestic economy, the divergence between what's happening in tech 277 00:14:34,920 --> 00:14:36,400 Speaker 4: and some of the bigger cap names and some of 278 00:14:36,440 --> 00:14:40,080 Speaker 4: the multinationals that are more sensitive to foreign exchange in 279 00:14:40,200 --> 00:14:43,040 Speaker 4: large caps versus small caps, which don't get those benefits 280 00:14:43,040 --> 00:14:46,200 Speaker 4: of the dollar move. Small caps are not as beneficent, 281 00:14:46,520 --> 00:14:49,120 Speaker 4: not as benefited by a re emerging Asia out of 282 00:14:49,200 --> 00:14:52,440 Speaker 4: COVID restrictions, where large caps get a little bit of 283 00:14:52,440 --> 00:14:55,400 Speaker 4: boost there. So there's I think a lot of what's 284 00:14:55,440 --> 00:14:57,440 Speaker 4: happened in the equity market, As much as people think 285 00:14:57,480 --> 00:15:01,600 Speaker 4: it's very mysterious and things are not a explained by fundamentals, 286 00:15:01,640 --> 00:15:04,760 Speaker 4: I actually think the equity advance is largely explained by 287 00:15:04,760 --> 00:15:05,880 Speaker 4: some fundamental shifts. 288 00:15:06,360 --> 00:15:09,360 Speaker 1: Well, you also discuss the notion of a FED pause 289 00:15:09,760 --> 00:15:13,760 Speaker 1: in your outlook and what historically has happened after a pause. 290 00:15:13,800 --> 00:15:17,440 Speaker 1: I guess we don't really know if this is the 291 00:15:17,520 --> 00:15:20,000 Speaker 1: highest that the Fed funds rate will be. Jerome Powell 292 00:15:20,080 --> 00:15:23,800 Speaker 1: keeps saying maybe probably two more quarter point increases this year. 293 00:15:24,040 --> 00:15:26,880 Speaker 1: I feel like the market could digest another half point 294 00:15:27,240 --> 00:15:29,760 Speaker 1: on the Fed funds rate after this, And you know, 295 00:15:30,120 --> 00:15:32,680 Speaker 1: whether this is a pause or it's a pause after 296 00:15:32,760 --> 00:15:35,240 Speaker 1: another fifty basis points. I don't think it's that big 297 00:15:35,240 --> 00:15:37,800 Speaker 1: of a difference, but I do wonder, you know, if 298 00:15:37,800 --> 00:15:41,240 Speaker 1: we do plateau there for a while and the bond 299 00:15:41,360 --> 00:15:44,280 Speaker 1: market falls in line with that, and we have an 300 00:15:44,360 --> 00:15:47,720 Speaker 1: elevated risk free rate compared to what we saw a 301 00:15:47,720 --> 00:15:51,480 Speaker 1: pre pandemic, how does that influence your thinking on what 302 00:15:51,520 --> 00:15:55,200 Speaker 1: the market will do and valuations specifically, does that suggest 303 00:15:55,280 --> 00:15:59,480 Speaker 1: to you a sort of lower ceiling for valuations or 304 00:16:00,240 --> 00:16:04,360 Speaker 1: does this tech euphoria overshadow that and outweigh where the 305 00:16:04,440 --> 00:16:05,720 Speaker 1: risk free rate is going to be. 306 00:16:06,280 --> 00:16:09,440 Speaker 4: Yeah, it's a really good question. I think the equity 307 00:16:09,440 --> 00:16:12,080 Speaker 4: market will really dismiss anything that happens with the FED 308 00:16:12,080 --> 00:16:13,600 Speaker 4: in the short run. I think that we're kind of 309 00:16:13,640 --> 00:16:17,360 Speaker 4: over it, right. It's just, yeah, okay, we're pausing. It 310 00:16:17,440 --> 00:16:20,440 Speaker 4: might hike one or two more times, but it's largely 311 00:16:20,480 --> 00:16:22,600 Speaker 4: been the near term price section is the near term 312 00:16:22,600 --> 00:16:25,280 Speaker 4: action from the FED has been priced. I do think 313 00:16:25,320 --> 00:16:28,120 Speaker 4: there's a risk, though, that the bond market is very 314 00:16:28,160 --> 00:16:30,160 Speaker 4: convinced that this is not a pause. It's just a 315 00:16:30,200 --> 00:16:32,960 Speaker 4: short term pause that leads to a series of cuts 316 00:16:33,720 --> 00:16:38,200 Speaker 4: and we do see that sort of infiltrating equity market 317 00:16:38,280 --> 00:16:43,080 Speaker 4: psychology through valuations for long duration versus loaduration stocks. So 318 00:16:43,560 --> 00:16:46,440 Speaker 4: high duration equities are much more sensitive interest rates. Higdration 319 00:16:46,480 --> 00:16:50,160 Speaker 4: equities are still trading and increasingly trading at a premium 320 00:16:50,200 --> 00:16:55,520 Speaker 4: to low duration equities, which would substantiate that bond market forecast. 321 00:16:55,600 --> 00:16:57,800 Speaker 4: So I think later this year you do have some 322 00:16:57,920 --> 00:17:01,119 Speaker 4: risk if the economy does not comply, we don't ultimately 323 00:17:01,160 --> 00:17:04,880 Speaker 4: fall into that growth malaise or recession. If we don't 324 00:17:04,920 --> 00:17:09,800 Speaker 4: see inflation really viciously come down to more normalized levels, 325 00:17:09,920 --> 00:17:11,920 Speaker 4: then the bond market has to adjust, and that will 326 00:17:11,920 --> 00:17:15,040 Speaker 4: have impacts on the equity market. It won't be as 327 00:17:15,160 --> 00:17:20,240 Speaker 4: negative as the last year's impacts because you have the offset. Right. 328 00:17:20,280 --> 00:17:22,399 Speaker 4: If the bond market is having to adjust to an 329 00:17:22,440 --> 00:17:24,720 Speaker 4: outlook where the Fed Funds rate doesn't have to come 330 00:17:24,760 --> 00:17:29,400 Speaker 4: down and instead stays stable for longer, that only impacts 331 00:17:29,440 --> 00:17:33,400 Speaker 4: valuations because that only happens in an environment where economic 332 00:17:33,400 --> 00:17:36,480 Speaker 4: growth is actually still stronger than anybody had hoped, right, 333 00:17:36,520 --> 00:17:39,280 Speaker 4: and inflation is coming down, And so that offset that 334 00:17:39,520 --> 00:17:42,639 Speaker 4: stronger economic growth than anybody had hoped with a decelerating 335 00:17:42,640 --> 00:17:45,760 Speaker 4: inflation is very good for the earning stream, and it 336 00:17:45,800 --> 00:17:49,000 Speaker 4: really substantiates twenty twenty four forecasts for earnings, which should 337 00:17:49,080 --> 00:17:52,480 Speaker 4: help the equity market sustain that movement, but it will 338 00:17:52,520 --> 00:17:56,320 Speaker 4: create volatility and equities, probably for longer duration equities more 339 00:17:56,320 --> 00:17:59,040 Speaker 4: than short duration equities. That's what I'm worried about with 340 00:17:59,080 --> 00:18:00,800 Speaker 4: respect to the FED. That longer term. 341 00:18:01,400 --> 00:18:04,000 Speaker 2: I remember it was just a couple of weeks ago, 342 00:18:04,080 --> 00:18:07,360 Speaker 2: I think when people some people were suggesting the FED 343 00:18:07,440 --> 00:18:08,560 Speaker 2: was going to start cutting in July. 344 00:18:09,040 --> 00:18:11,920 Speaker 4: Yeah, yeah, now, yeah, But. 345 00:18:11,880 --> 00:18:13,479 Speaker 2: I want to ask you just to go back to 346 00:18:13,520 --> 00:18:17,280 Speaker 2: the AI theme, just broadly speaking, what you make of 347 00:18:17,320 --> 00:18:19,080 Speaker 2: it in terms of it being such a big driver 348 00:18:19,400 --> 00:18:24,200 Speaker 2: for the rally for companies spending on AI, and what 349 00:18:24,240 --> 00:18:28,399 Speaker 2: the possibilities are of it driving not just spending with 350 00:18:28,520 --> 00:18:33,000 Speaker 2: the big megacaps, but also with I don't know, smaller 351 00:18:33,040 --> 00:18:36,320 Speaker 2: companies that might start utilizing AI in different ways, and 352 00:18:36,600 --> 00:18:39,720 Speaker 2: how that might be beneficial or even underpin the ball case. 353 00:18:40,000 --> 00:18:42,159 Speaker 4: Yeah, I think it's really early to say what the 354 00:18:42,200 --> 00:18:45,040 Speaker 4: potential of this is long term, and certainly we'll go 355 00:18:45,080 --> 00:18:46,919 Speaker 4: through the process of trying to price that over the 356 00:18:46,920 --> 00:18:50,040 Speaker 4: next six to twelve months. That said, every cycle starts 357 00:18:50,080 --> 00:18:54,840 Speaker 4: with some new innovation, some new catalyst for growth. And 358 00:18:54,920 --> 00:18:58,240 Speaker 4: what you do tend to find is that if you 359 00:18:58,320 --> 00:19:01,920 Speaker 4: get this catalyst for growth, it emanates throughout and tends 360 00:19:01,960 --> 00:19:06,160 Speaker 4: to broaden in terms of its impact on industries, companies 361 00:19:06,200 --> 00:19:08,800 Speaker 4: and sectors at large. And think about this. If we're 362 00:19:08,840 --> 00:19:11,920 Speaker 4: able to accelerate the utilization of AI and tech, there's 363 00:19:11,920 --> 00:19:15,439 Speaker 4: no reason why that ultimately would not also benefit the 364 00:19:15,440 --> 00:19:18,679 Speaker 4: margins of even consumer staples companies long term. Right, So 365 00:19:19,760 --> 00:19:23,720 Speaker 4: this is right now really being implemented as a driver 366 00:19:23,880 --> 00:19:26,840 Speaker 4: of revenue growth, right and I think that's the psychology 367 00:19:26,920 --> 00:19:29,240 Speaker 4: right now, is that this will help drive revenue growth 368 00:19:29,280 --> 00:19:32,359 Speaker 4: long term for tech. What we haven't thought through and 369 00:19:32,440 --> 00:19:35,880 Speaker 4: probably the second derivative impact of this is Okay, it'll 370 00:19:35,880 --> 00:19:38,520 Speaker 4: help drive revenue growth for tech, and companies will spend 371 00:19:38,560 --> 00:19:41,520 Speaker 4: a little bit more on this. They'll probably shift spending 372 00:19:41,600 --> 00:19:45,360 Speaker 4: so it's not a net net margin drag in that capacity. 373 00:19:45,400 --> 00:19:48,480 Speaker 4: Instead of spending on other capital investments, they'll spend on AI. 374 00:19:49,280 --> 00:19:53,040 Speaker 4: Presumably in that sense, if they're spending the same amount, 375 00:19:53,160 --> 00:19:56,560 Speaker 4: they're elevating the value of revenue or they're elevating revenue 376 00:19:56,560 --> 00:19:59,280 Speaker 4: growth potential for the tech space, which are the producers 377 00:19:59,320 --> 00:20:03,240 Speaker 4: of AI, but then they also are implementing these technologies 378 00:20:03,280 --> 00:20:06,920 Speaker 4: which should reduce their margin pressures or reduce margins longer 379 00:20:07,000 --> 00:20:10,520 Speaker 4: term make their companies much more efficient. And that efficiency 380 00:20:10,560 --> 00:20:13,879 Speaker 4: improvement is the long term, big, big benefit that I 381 00:20:13,880 --> 00:20:15,919 Speaker 4: think we have yet to really price because we just 382 00:20:15,960 --> 00:20:19,040 Speaker 4: don't know how fast can it be implemented, how quickly 383 00:20:19,080 --> 00:20:22,919 Speaker 4: can it actually improve efficiency and drive productivity gains. We 384 00:20:22,960 --> 00:20:26,600 Speaker 4: all have read all the articles about how horribly unproductive 385 00:20:26,640 --> 00:20:30,159 Speaker 4: the US economy is. This is a potential big game changer. 386 00:20:30,400 --> 00:20:32,600 Speaker 4: I don't think that it's at all in the consensus 387 00:20:32,640 --> 00:20:35,280 Speaker 4: forecast right now. I think most people are saying, look, 388 00:20:35,800 --> 00:20:38,000 Speaker 4: you know that we're still going to struggle with this, 389 00:20:38,280 --> 00:20:42,440 Speaker 4: these labor dynamics and very low productivity rates and whatnot. 390 00:20:42,480 --> 00:20:45,120 Speaker 4: So it's a potentially very big game changer longer term, 391 00:20:45,119 --> 00:20:46,520 Speaker 4: but it's going to take us a while to work 392 00:20:46,560 --> 00:20:49,480 Speaker 4: that out. For now, it is very much a driver 393 00:20:49,600 --> 00:20:51,199 Speaker 4: of revenue optimism in tech. 394 00:20:51,640 --> 00:20:52,200 Speaker 3: Yeah. 395 00:20:52,240 --> 00:20:57,040 Speaker 1: Well, I hear efficiency gains and I interpret that as 396 00:20:57,680 --> 00:21:02,200 Speaker 1: job layoffs, which obviously feeds back into your economic models. 397 00:21:02,440 --> 00:21:03,960 Speaker 3: How big of a risk is that, do you think? 398 00:21:05,040 --> 00:21:07,480 Speaker 4: I think it's limited in the short run, mostly because 399 00:21:07,520 --> 00:21:11,440 Speaker 4: we have record levels of available jobs open in the economy. 400 00:21:11,520 --> 00:21:13,720 Speaker 4: As it is, the way that I see the job market, 401 00:21:13,760 --> 00:21:15,679 Speaker 4: I think it's a little different than the way that 402 00:21:15,800 --> 00:21:17,879 Speaker 4: many people have characterized the job market. The way that 403 00:21:17,920 --> 00:21:20,359 Speaker 4: I see it is in twenty twenty, we had a 404 00:21:20,440 --> 00:21:24,119 Speaker 4: mass mass layoff experience, I mean, the worst layoff experience 405 00:21:24,160 --> 00:21:26,960 Speaker 4: that any of us hopefully will ever face in our lives, 406 00:21:26,960 --> 00:21:30,720 Speaker 4: with the unemployment rate just shooting higher, layoffs throughout all 407 00:21:30,800 --> 00:21:35,040 Speaker 4: industries except for tech and to a lesser extent, financials. 408 00:21:35,520 --> 00:21:38,440 Speaker 4: It is therefore no surprise that come twenty twenty two, 409 00:21:39,160 --> 00:21:41,600 Speaker 4: the sectors that did not lay off in twenty twenty 410 00:21:41,880 --> 00:21:45,320 Speaker 4: suddenly had to lay off workers. And so it was 411 00:21:45,400 --> 00:21:47,520 Speaker 4: just this sort of twenty twenty two was kind of 412 00:21:47,520 --> 00:21:51,280 Speaker 4: this mini to me, mini layoff experience, mini recession, whatever 413 00:21:51,320 --> 00:21:54,920 Speaker 4: it might be, however you want to characterize it, reflecting 414 00:21:55,000 --> 00:21:58,840 Speaker 4: the twenty twenty experience. And now we've gotten to the 415 00:21:58,840 --> 00:22:03,240 Speaker 4: point of presum close to stable labor market conditions. And 416 00:22:03,280 --> 00:22:07,040 Speaker 4: I derive this expectation really through an analysis of Challenger layoffs. 417 00:22:07,080 --> 00:22:09,840 Speaker 4: It's not the most popular economic series, but if you 418 00:22:09,880 --> 00:22:13,760 Speaker 4: look at Challenger layoffs, Challenger layoffs really peaked with the 419 00:22:13,800 --> 00:22:17,680 Speaker 4: fourth quarter layoffs in the tech space, they started to descelerate. 420 00:22:17,840 --> 00:22:21,240 Speaker 4: As of the first quarter, they're continuing to decelerate. Can 421 00:22:21,240 --> 00:22:24,120 Speaker 4: that's very consistent with what we're getting out of earnings 422 00:22:24,160 --> 00:22:28,160 Speaker 4: call sentiment and the announcements of layoffs in earnings calls. 423 00:22:28,200 --> 00:22:32,480 Speaker 4: Earnings layoffs announced by US companies in earnings reports peaked 424 00:22:32,480 --> 00:22:35,920 Speaker 4: in the fourth quarter. They decelerated to a lower level 425 00:22:35,920 --> 00:22:38,680 Speaker 4: in the first quarter, and I anticipate that to continue 426 00:22:38,720 --> 00:22:40,960 Speaker 4: in the second quarter. So so far, it looks like 427 00:22:41,000 --> 00:22:44,960 Speaker 4: the labor market weakness is really minimal ultimately long term, 428 00:22:45,000 --> 00:22:47,800 Speaker 4: Do you have some layoffs affiliated with AI or is 429 00:22:47,840 --> 00:22:52,400 Speaker 4: your growth so much faster that those jobs all come 430 00:22:52,480 --> 00:22:55,360 Speaker 4: back even faster, right? I don't know how much transfer 431 00:22:55,400 --> 00:22:58,080 Speaker 4: of labor there is between the layoff worker, the laidoff 432 00:22:58,119 --> 00:23:03,520 Speaker 4: workers and communications and technology industries into AI sorts of positions. Yeah, 433 00:23:03,640 --> 00:23:06,040 Speaker 4: but it is a question. But I don't think we're 434 00:23:06,080 --> 00:23:09,040 Speaker 4: going to face major labor constraints as a result or 435 00:23:09,040 --> 00:23:11,520 Speaker 4: major labor weaknesses as a result of AI for quite 436 00:23:11,520 --> 00:23:12,520 Speaker 4: some time, and. 437 00:23:12,520 --> 00:23:15,880 Speaker 1: It seems like it'll be you know, while the revenue 438 00:23:15,880 --> 00:23:18,280 Speaker 1: lines are moving higher for the chip makers and the 439 00:23:18,320 --> 00:23:24,919 Speaker 1: cloud companies. For companies actually trying to utilize AI to 440 00:23:24,960 --> 00:23:28,040 Speaker 1: boost their own efficiencies, it feels like we're just only 441 00:23:28,040 --> 00:23:29,680 Speaker 1: in the R and D phase for all of that. 442 00:23:29,800 --> 00:23:33,400 Speaker 1: It's not immediately going to be a needle mover for anything. 443 00:23:34,200 --> 00:23:37,160 Speaker 4: From that side of it, it does seem very very 444 00:23:37,200 --> 00:23:40,240 Speaker 4: early in the game. The equity market moves so far 445 00:23:40,480 --> 00:23:43,320 Speaker 4: in advance in so much faster than the economy that 446 00:23:43,400 --> 00:23:45,680 Speaker 4: will feel the economic impacts for five years. In the 447 00:23:45,720 --> 00:23:49,199 Speaker 4: equity market will price itent in six months. So I 448 00:23:49,200 --> 00:23:52,280 Speaker 4: think we do need to respect that dynamic. But nonetheless, 449 00:23:52,960 --> 00:23:55,720 Speaker 4: I do think it's still very very early. And the 450 00:23:55,760 --> 00:23:59,159 Speaker 4: degree to which this took the consensus by surprise was 451 00:23:59,240 --> 00:23:59,880 Speaker 4: quite shocking. 452 00:24:00,280 --> 00:24:04,280 Speaker 1: Well, does that notion of the benefits of AI broadening 453 00:24:04,320 --> 00:24:07,000 Speaker 1: out beyond big tech affect at all? 454 00:24:07,080 --> 00:24:08,080 Speaker 3: How you're thinking about? 455 00:24:08,240 --> 00:24:11,640 Speaker 1: Magnificent seven is the latest new buzzword for the top 456 00:24:11,720 --> 00:24:15,560 Speaker 1: seven weights in the SMP your big megacap alphabets and 457 00:24:15,600 --> 00:24:16,280 Speaker 1: in videos. 458 00:24:16,760 --> 00:24:19,680 Speaker 4: Your team had Magma, we did, we had a few. 459 00:24:19,680 --> 00:24:21,679 Speaker 4: We've tried a Fab five for the Big five. We 460 00:24:21,760 --> 00:24:24,640 Speaker 4: have done the Magnificent seven as well. I've gotten into 461 00:24:24,680 --> 00:24:26,600 Speaker 4: this game and none of them have really taken off. 462 00:24:26,640 --> 00:24:28,160 Speaker 2: So you need to get one that sticks. 463 00:24:28,320 --> 00:24:30,119 Speaker 4: I know I need to find one that sticks. The 464 00:24:30,119 --> 00:24:34,840 Speaker 4: problem is also the market cap concentration shifts are pretty significant. 465 00:24:34,880 --> 00:24:38,240 Speaker 4: So sometimes Tesla's in there, Sometimes Berkshire Hasay, Hathaway is 466 00:24:38,280 --> 00:24:41,000 Speaker 4: in there, Berkshire Hathaway with a bunch of tech companies. 467 00:24:41,040 --> 00:24:41,960 Speaker 4: How do I describe this? 468 00:24:42,359 --> 00:24:44,200 Speaker 3: How are you thinking of that concentration? 469 00:24:44,480 --> 00:24:49,359 Speaker 1: I've heard sort of different arguments from different people that 470 00:24:49,440 --> 00:24:50,679 Speaker 1: a lot of people think, well, the rest of the 471 00:24:50,680 --> 00:24:53,720 Speaker 1: market's bound the catch up eventually, but it's hard to 472 00:24:53,720 --> 00:24:57,919 Speaker 1: see a correction in megacap tech without a really nasty 473 00:24:58,400 --> 00:24:58,639 Speaker 1: s and P. 474 00:24:58,720 --> 00:24:59,280 Speaker 3: Five hundred. 475 00:24:59,359 --> 00:25:01,960 Speaker 1: Have you done any thinking about this type of top 476 00:25:02,000 --> 00:25:05,160 Speaker 1: heavy rally and what we should think will come next? 477 00:25:05,640 --> 00:25:08,280 Speaker 4: Yeah, we actually dedicated a note to it a couple 478 00:25:08,280 --> 00:25:11,840 Speaker 4: of weeks ago. I really looked at concentration risk and 479 00:25:11,840 --> 00:25:14,880 Speaker 4: what it may or may not mean. We are historically 480 00:25:14,920 --> 00:25:18,000 Speaker 4: concentrated in terms of gains, but what it actually means 481 00:25:18,040 --> 00:25:21,840 Speaker 4: going forward as gains might slow. Let me just start there. Yeah, 482 00:25:22,080 --> 00:25:25,280 Speaker 4: but there are two experiences in our past in which 483 00:25:25,280 --> 00:25:28,760 Speaker 4: we have had extraordinary concentration in similar fashion to the 484 00:25:28,840 --> 00:25:33,719 Speaker 4: concentration that we have today. And twenty twenty, and the 485 00:25:33,760 --> 00:25:37,080 Speaker 4: outcome of both of those was totally different. In two thousand, 486 00:25:37,119 --> 00:25:40,520 Speaker 4: the concentrated gains and died in tears right, all of 487 00:25:40,520 --> 00:25:44,120 Speaker 4: the biggest names really crashed. In twenty twenty, the rest 488 00:25:44,160 --> 00:25:48,000 Speaker 4: of the market caught up, and the difference there was 489 00:25:48,040 --> 00:25:52,600 Speaker 4: earning strengths. In two thousand, earnings for the rest of 490 00:25:52,640 --> 00:25:56,360 Speaker 4: the market just kept crashing along with the tech stocks. 491 00:25:56,480 --> 00:25:59,959 Speaker 4: Tech earnings fell. In twenty twenty, the rest of them 492 00:26:00,000 --> 00:26:03,119 Speaker 4: market started experiencing in earnings recovery. So I believe that 493 00:26:03,119 --> 00:26:04,720 Speaker 4: earnings are going to make the difference now when I 494 00:26:04,720 --> 00:26:07,760 Speaker 4: look at the earnings outlook for tech and the rest 495 00:26:07,760 --> 00:26:11,199 Speaker 4: of the sectors, I actually see some justification for this 496 00:26:11,320 --> 00:26:14,800 Speaker 4: concentration risk in earnings as well, because the biggest stocks 497 00:26:14,800 --> 00:26:17,960 Speaker 4: in the index had a magnificent earnings recession in twenty 498 00:26:18,000 --> 00:26:21,480 Speaker 4: twenty two. We're talking twenty twenty five in some cases 499 00:26:21,520 --> 00:26:25,480 Speaker 4: thirty percent declines in EPs. They have started to show 500 00:26:25,520 --> 00:26:28,360 Speaker 4: some signs of stabilization and recovery earlier than the rest 501 00:26:28,359 --> 00:26:33,520 Speaker 4: of the market, which has enabled this rotation. So right 502 00:26:33,560 --> 00:26:35,760 Speaker 4: now they have an earning's edge on the rest of 503 00:26:35,800 --> 00:26:38,120 Speaker 4: the market, if you will. They're the only stocks that 504 00:26:38,280 --> 00:26:41,040 Speaker 4: you know, people feel confident that their earnings recovery is 505 00:26:41,080 --> 00:26:43,879 Speaker 4: already emerging, that they have a longer term outlook for 506 00:26:43,920 --> 00:26:46,760 Speaker 4: earnings growth that is emerging. The rest of the market 507 00:26:46,760 --> 00:26:48,440 Speaker 4: will have to prove the case that they too can 508 00:26:48,480 --> 00:26:52,199 Speaker 4: participate in this. But unless they start failing on that 509 00:26:52,240 --> 00:26:56,440 Speaker 4: earnings recovery, there's no reason to fade it, and I 510 00:26:56,480 --> 00:26:59,320 Speaker 4: think that's important to consider. Maybe they'll start failing on 511 00:26:59,320 --> 00:27:01,760 Speaker 4: the earnings recovery, and that would be a very good 512 00:27:01,800 --> 00:27:04,720 Speaker 4: reason to fade that rally. I'm working on the presumption 513 00:27:04,760 --> 00:27:06,399 Speaker 4: that the rest of the market will broaden out and 514 00:27:06,440 --> 00:27:09,240 Speaker 4: start to catch up to tech in terms of earnings, 515 00:27:09,240 --> 00:27:11,760 Speaker 4: mostly because of the inflation dynamic that we talked about 516 00:27:11,760 --> 00:27:13,879 Speaker 4: the pig and the python at the very beginning, But 517 00:27:13,880 --> 00:27:16,160 Speaker 4: it's important. The other thing I'll say about concentration risk 518 00:27:16,160 --> 00:27:19,879 Speaker 4: that I think nobody talks about is twenty twenty three's 519 00:27:20,000 --> 00:27:24,080 Speaker 4: gains first are not historically unprecedented. They're too short to 520 00:27:24,080 --> 00:27:27,280 Speaker 4: be historically unprecedented. We had a longer period of concentrated 521 00:27:27,320 --> 00:27:30,520 Speaker 4: gains in both twenty two thousand as well as twenty twenty. 522 00:27:30,840 --> 00:27:36,720 Speaker 4: But secondly, they do come off of unprecedented historic losses 523 00:27:36,880 --> 00:27:39,560 Speaker 4: in twenty twenty two. That's the one thing that makes 524 00:27:39,600 --> 00:27:43,800 Speaker 4: this story very different than twenty twenty or two thousand. 525 00:27:44,520 --> 00:27:49,240 Speaker 4: Tech had a horrible year twenty twenty two. This space 526 00:27:49,400 --> 00:27:54,440 Speaker 4: underperformed the market for twelve straight months last year, and 527 00:27:54,720 --> 00:27:57,200 Speaker 4: I think that's really important for setting the background for 528 00:27:57,240 --> 00:28:02,199 Speaker 4: why they're outperforming now, different characteristic than has existed in 529 00:28:02,240 --> 00:28:17,080 Speaker 4: past experiences. 530 00:28:18,359 --> 00:28:20,960 Speaker 2: I want to ask you about one other hot topic, 531 00:28:21,080 --> 00:28:24,800 Speaker 2: which is cash, which basically became its own acid class 532 00:28:24,840 --> 00:28:27,560 Speaker 2: last year because so many people were putting we're going 533 00:28:27,600 --> 00:28:31,280 Speaker 2: into cash. I think in June money market funds saw 534 00:28:31,320 --> 00:28:34,520 Speaker 2: a record high level. There's all these different ways to 535 00:28:34,560 --> 00:28:37,880 Speaker 2: measure people favoring cash over the last year or so. 536 00:28:38,440 --> 00:28:41,160 Speaker 2: But if we're thinking about five percent yields on cash, 537 00:28:41,240 --> 00:28:44,560 Speaker 2: how does that compare now seeing a fourteen percent rise 538 00:28:44,600 --> 00:28:46,760 Speaker 2: in the S and P five hundred thirty seven percent 539 00:28:46,840 --> 00:28:50,200 Speaker 2: rise and then Nazak one hundred and what is the 540 00:28:50,240 --> 00:28:53,680 Speaker 2: possibility of some of that cash actually starting to move 541 00:28:53,960 --> 00:28:55,040 Speaker 2: into the equities market. 542 00:28:55,120 --> 00:28:55,280 Speaker 1: Yeah. 543 00:28:55,560 --> 00:28:57,280 Speaker 4: I think this is a great question, and this is 544 00:28:57,320 --> 00:28:59,160 Speaker 4: one area where I have had a minor amount of 545 00:28:59,240 --> 00:29:03,760 Speaker 4: success and creating a shortcut description. I call this Tara 546 00:29:04,200 --> 00:29:06,840 Speaker 4: instead of Tina. We all remember Tina. There are there 547 00:29:06,880 --> 00:29:09,720 Speaker 4: is no alternative in tarra is. There are reasonable alternatives, 548 00:29:09,760 --> 00:29:11,760 Speaker 4: and some people are adopting this one, so we'll go 549 00:29:11,800 --> 00:29:12,040 Speaker 4: with that. 550 00:29:12,120 --> 00:29:14,000 Speaker 2: Let's make it happen. Yeah, let's make Tara. 551 00:29:14,600 --> 00:29:18,520 Speaker 4: Tara has definitely changed the game for equities. And it's 552 00:29:18,560 --> 00:29:21,640 Speaker 4: not just cash, but it's also bond yields are much 553 00:29:21,720 --> 00:29:24,440 Speaker 4: much higher, So the relative value of equities in a 554 00:29:24,520 --> 00:29:28,920 Speaker 4: multi asset portfolio is quite different than it was for 555 00:29:29,000 --> 00:29:31,680 Speaker 4: much or the last cycle. The way that I think 556 00:29:31,720 --> 00:29:34,280 Speaker 4: about this, the equity risk premium in comparison to bonds 557 00:29:34,320 --> 00:29:37,880 Speaker 4: is probably the most relevant. I think cash is and 558 00:29:38,160 --> 00:29:41,680 Speaker 4: is not competitive with equities. I think people save in 559 00:29:41,760 --> 00:29:46,200 Speaker 4: cash with a different outlook than they save inequities. First 560 00:29:46,200 --> 00:29:48,240 Speaker 4: of all, I think most people think of equities as 561 00:29:48,240 --> 00:29:52,320 Speaker 4: a long term asset for savings, whereas putting money in 562 00:29:52,360 --> 00:29:55,040 Speaker 4: a money market pun fund still makes it quite accessible 563 00:29:55,080 --> 00:29:57,240 Speaker 4: to you for you to utilize. It's kind of a 564 00:29:57,280 --> 00:30:01,160 Speaker 4: different savings mechanism, but nonetheless, yield across the border higher. 565 00:30:01,160 --> 00:30:05,200 Speaker 4: And that's the story which makes the equity risk premium 566 00:30:05,480 --> 00:30:08,760 Speaker 4: much lower than it used to be and equities much 567 00:30:08,840 --> 00:30:12,160 Speaker 4: less attractive relative to bonds than they have been at 568 00:30:12,240 --> 00:30:15,120 Speaker 4: least for the most of the last cycle from two 569 00:30:15,160 --> 00:30:19,280 Speaker 4: thousand and nine to twenty nineteen. Most of that period 570 00:30:19,320 --> 00:30:22,320 Speaker 4: of time, equities were in the fourth quintile of history 571 00:30:22,320 --> 00:30:24,440 Speaker 4: in terms of the equity risk premium relative to bonds. 572 00:30:24,480 --> 00:30:28,200 Speaker 4: That meant you were really getting pushed into equities as 573 00:30:28,240 --> 00:30:31,320 Speaker 4: an asset class. Your expected returns in that kind of 574 00:30:31,360 --> 00:30:35,640 Speaker 4: climate for equities are eleven percent annualized. It's fantastic. It 575 00:30:35,720 --> 00:30:38,200 Speaker 4: was just one of the best periods of time ever 576 00:30:38,480 --> 00:30:42,000 Speaker 4: to be an equity investor, justified by very, very low 577 00:30:42,080 --> 00:30:45,960 Speaker 4: relative yields. You were just forced in. Now equities risk 578 00:30:45,960 --> 00:30:48,320 Speaker 4: premium is closer to the third quintile of history, which 579 00:30:48,360 --> 00:30:52,040 Speaker 4: implies your return expectations for equities are much more limited. 580 00:30:52,080 --> 00:30:55,760 Speaker 4: Your average return per year in that environment, on average, 581 00:30:55,760 --> 00:30:59,040 Speaker 4: would anticipate closer to six percent annualized returns to equities. 582 00:30:59,600 --> 00:31:03,040 Speaker 4: And it really is just a function of math. You know, 583 00:31:03,080 --> 00:31:06,160 Speaker 4: when you're thinking about allocating assets, you can consider now 584 00:31:06,320 --> 00:31:10,840 Speaker 4: yield oriented investments. As a long term investor, you can 585 00:31:11,160 --> 00:31:14,400 Speaker 4: yield actually contributes to your portfolio, and equities have very 586 00:31:14,400 --> 00:31:17,400 Speaker 4: little yield. Even if you look at the dividend yield 587 00:31:17,440 --> 00:31:20,800 Speaker 4: relative to the tenure treasury, it's just not particularly fun. 588 00:31:20,880 --> 00:31:22,720 Speaker 4: It's two percent on the S and P five hundred. 589 00:31:22,720 --> 00:31:25,560 Speaker 4: You're just not going to get a lot. So add 590 00:31:25,560 --> 00:31:28,280 Speaker 4: that to the earnings yield and that's your all out yield. 591 00:31:28,400 --> 00:31:30,640 Speaker 4: You could get really stretchy and add buy back yield 592 00:31:30,720 --> 00:31:33,480 Speaker 4: to it too, and it's still Equities are not that 593 00:31:33,560 --> 00:31:35,320 Speaker 4: attractive relative to bonds anymore. 594 00:31:35,720 --> 00:31:39,520 Speaker 1: Gina, you do all these great models, this great quantitative work. 595 00:31:39,720 --> 00:31:41,360 Speaker 1: I want to take you out of that comfort zone 596 00:31:41,360 --> 00:31:43,880 Speaker 1: a little bit and talk about the things that really 597 00:31:44,160 --> 00:31:48,240 Speaker 1: I think cause a sharp correction in equities is when 598 00:31:48,240 --> 00:31:52,320 Speaker 1: there's something unforeseen, something non predicted or very few predicted. 599 00:31:52,840 --> 00:31:53,920 Speaker 3: And I get go back. 600 00:31:53,800 --> 00:31:56,280 Speaker 1: To the notion of the FED. We have seen this 601 00:31:56,400 --> 00:32:00,280 Speaker 1: aggressive tightening from the FED. We did see the shoes 602 00:32:00,320 --> 00:32:03,280 Speaker 1: with Silicon Valley Bank and a few other First republic 603 00:32:03,480 --> 00:32:07,200 Speaker 1: that duration risk problem they all had. I just wonder, 604 00:32:07,600 --> 00:32:09,920 Speaker 1: the way you look at the universe, is there a 605 00:32:10,000 --> 00:32:14,200 Speaker 1: way to sort of model kind of a black Swan 606 00:32:14,280 --> 00:32:18,600 Speaker 1: thing or something from the FED tightening that's yet to come. 607 00:32:18,640 --> 00:32:21,360 Speaker 1: I think even Jerome Pow this week said there's a 608 00:32:21,360 --> 00:32:23,400 Speaker 1: lot of tightening that still has to work. Its way 609 00:32:23,400 --> 00:32:27,720 Speaker 1: through the economy and the financial system. Is that work 610 00:32:27,760 --> 00:32:30,280 Speaker 1: you can do? I mean, is there another shoe to 611 00:32:30,400 --> 00:32:34,800 Speaker 1: drop from this aggressive rate height campaign? Is there any 612 00:32:34,800 --> 00:32:37,280 Speaker 1: way to predict that or at least prepare for it 613 00:32:37,320 --> 00:32:39,720 Speaker 1: and sort of viewer the way you look at the world. 614 00:32:40,680 --> 00:32:42,760 Speaker 4: I don't think there's a way to model it. I 615 00:32:42,840 --> 00:32:45,960 Speaker 4: think there's a way to think it through. And the 616 00:32:45,960 --> 00:32:49,480 Speaker 4: way to think it through is identify the sectors or 617 00:32:49,520 --> 00:32:53,280 Speaker 4: the space in the economy that benefit most from interest 618 00:32:53,360 --> 00:32:57,160 Speaker 4: rates at zero percent and acknowledge that there probably are 619 00:32:57,400 --> 00:33:03,160 Speaker 4: segments of that group or industry or investment or whatever 620 00:33:03,200 --> 00:33:07,120 Speaker 4: it might be, that are built upon a foundation of 621 00:33:07,200 --> 00:33:10,480 Speaker 4: interest rates remaining low forever and therefore when interest rates 622 00:33:10,480 --> 00:33:13,200 Speaker 4: go higher, will experience some degree of distress and default. 623 00:33:13,920 --> 00:33:17,200 Speaker 4: And so it's not a modeled approach, it's just more logical. 624 00:33:18,120 --> 00:33:20,360 Speaker 4: The question you have to ask yourself as an investor 625 00:33:20,520 --> 00:33:23,880 Speaker 4: is when interest rates were for a very short period 626 00:33:23,920 --> 00:33:26,840 Speaker 4: of time at zero percent in twenty twenty and twenty 627 00:33:26,840 --> 00:33:31,880 Speaker 4: twenty one, where did that money go? Where was the 628 00:33:31,920 --> 00:33:36,239 Speaker 4: most borrowing, How did that manifest itself? And did that 629 00:33:36,320 --> 00:33:41,720 Speaker 4: borrowing result in excess supply of something that is going 630 00:33:41,760 --> 00:33:45,040 Speaker 4: to be subject to a shortfall of demand, like did 631 00:33:45,040 --> 00:33:47,360 Speaker 4: we plan too much for these low interest rates to 632 00:33:47,840 --> 00:33:52,200 Speaker 4: persist in perpetuity? This cycle is particularly difficult on this 633 00:33:52,840 --> 00:33:56,360 Speaker 4: I think that the most frequently presented sort of areas 634 00:33:56,400 --> 00:33:59,520 Speaker 4: of risk are the least likely to be the candidates 635 00:33:59,520 --> 00:34:01,920 Speaker 4: to create the downdraft. And I say that because everyone, 636 00:34:02,080 --> 00:34:05,800 Speaker 4: I think, is looking at things like office and commercial 637 00:34:05,840 --> 00:34:09,720 Speaker 4: real estate. They're looking at residential real estate. They're looking 638 00:34:09,800 --> 00:34:13,040 Speaker 4: at the perpetuators of the last crisis because that's the 639 00:34:13,160 --> 00:34:16,200 Speaker 4: easy spot, and they're thinking, Okay, I live through the 640 00:34:16,200 --> 00:34:19,239 Speaker 4: Great Financial Crisis, and therefore I know what happens when 641 00:34:19,239 --> 00:34:21,920 Speaker 4: interest rates go higher and squeeze off growth, and therefore 642 00:34:22,080 --> 00:34:23,920 Speaker 4: I know that it's going to be residential and commercial 643 00:34:23,920 --> 00:34:26,359 Speaker 4: real estate that are the areas of most risk. I think, 644 00:34:26,400 --> 00:34:29,759 Speaker 4: because we went through the Great Financial Crisis, those are 645 00:34:29,760 --> 00:34:33,840 Speaker 4: the areas of most likely, not the areas of greatest 646 00:34:33,920 --> 00:34:37,120 Speaker 4: risk in the economy. Instead, it's somewhere else that low 647 00:34:37,200 --> 00:34:43,200 Speaker 4: interest rates we're fueling excess borrowing, fueling excess investment that 648 00:34:43,280 --> 00:34:47,960 Speaker 4: was unsustainable. And if there's one area where I think 649 00:34:48,040 --> 00:34:51,920 Speaker 4: that was the case, it probably is private credit, private equity. 650 00:34:52,680 --> 00:34:55,719 Speaker 4: And I don't know how this ultimately works its way 651 00:34:55,760 --> 00:34:58,759 Speaker 4: through the financial markets, how it ultimately works its way 652 00:34:58,800 --> 00:35:02,319 Speaker 4: through the economic to me, because I just don't know 653 00:35:02,320 --> 00:35:05,840 Speaker 4: if those losses will forever be paper losses or will 654 00:35:05,880 --> 00:35:07,840 Speaker 4: be real losses. I think some of them will be. 655 00:35:08,680 --> 00:35:09,800 Speaker 3: I think they're there. 656 00:35:09,880 --> 00:35:12,080 Speaker 4: Yeah, exactly, I just don't. I don't know how this 657 00:35:12,120 --> 00:35:14,120 Speaker 4: is going to work itself out. But there was not 658 00:35:14,239 --> 00:35:16,920 Speaker 4: a ton of housing activity when it creates for zero percent, 659 00:35:17,040 --> 00:35:20,240 Speaker 4: So why would we point our finger there? There wasn't 660 00:35:20,280 --> 00:35:23,600 Speaker 4: We weren't building offices like crazy in twenty twenty. We 661 00:35:23,640 --> 00:35:26,960 Speaker 4: have a shortage of demand of offices for sure, and 662 00:35:27,000 --> 00:35:30,359 Speaker 4: probably it's some excess supply that will ultimately go into 663 00:35:30,400 --> 00:35:33,680 Speaker 4: distress and default. But this is not a phenomenon like 664 00:35:33,680 --> 00:35:35,680 Speaker 4: two thousand and seven, two thousand and eight. So that's 665 00:35:35,680 --> 00:35:37,920 Speaker 4: the way that I think about it. Long story short, 666 00:35:38,680 --> 00:35:41,240 Speaker 4: find those areas of excess, because those are the areas 667 00:35:41,239 --> 00:35:41,759 Speaker 4: that are most in. 668 00:35:41,960 --> 00:35:43,560 Speaker 3: Yeah, yeah, no, that makes a lot of sense. 669 00:35:44,000 --> 00:35:48,160 Speaker 1: Well, Gina Martin Adams, chief equity strategist at Bloomberg Intelligence, 670 00:35:48,440 --> 00:35:51,359 Speaker 1: So great to have you on the show. We can't 671 00:35:51,400 --> 00:35:52,920 Speaker 1: let you go just yet, though we do have the 672 00:35:52,960 --> 00:35:55,640 Speaker 1: tradition on the show to discuss the craziest things we've 673 00:35:55,640 --> 00:35:57,400 Speaker 1: seen in markets. But Donna, what do you have? 674 00:35:58,360 --> 00:36:01,920 Speaker 2: Okay, this is a Bloomberg Store worry. It's about an 675 00:36:01,920 --> 00:36:04,719 Speaker 2: apartment that's listed for sale in New York City. It's 676 00:36:04,760 --> 00:36:08,320 Speaker 2: listed for sale for four million dollars, which apparently is 677 00:36:08,360 --> 00:36:12,720 Speaker 2: a bargain because it comes with a huge catch. There's 678 00:36:12,760 --> 00:36:16,719 Speaker 2: somebody already living in the apartment, has been living there 679 00:36:16,760 --> 00:36:20,640 Speaker 2: for decades, and I don't think has plans to leave. 680 00:36:21,120 --> 00:36:23,760 Speaker 2: And so this tenant pays two three hundred and forty 681 00:36:23,800 --> 00:36:28,120 Speaker 2: six dollars a month and can continue renewing their lease 682 00:36:28,880 --> 00:36:32,799 Speaker 2: even if you know the apartment gets new ownership. It's 683 00:36:32,840 --> 00:36:37,160 Speaker 2: a five thousand, eight hundred square foot apartment oh Manhattan. 684 00:36:37,440 --> 00:36:43,200 Speaker 2: It's rents stabilized, and until the tenant leaves, if you 685 00:36:43,280 --> 00:36:46,320 Speaker 2: own the apartment, you're actually operating at a huge loss 686 00:36:46,360 --> 00:36:50,200 Speaker 2: because just the taxes alone, the monthly taxes are five 687 00:36:50,680 --> 00:36:54,120 Speaker 2: five hundred dollars, and there's common charges of two eight 688 00:36:54,200 --> 00:36:58,040 Speaker 2: hundred dollars, which is more than the tenant pays to 689 00:36:58,120 --> 00:36:58,560 Speaker 2: live there. 690 00:36:59,120 --> 00:37:01,320 Speaker 3: That is wild, but apparently. 691 00:37:00,920 --> 00:37:04,200 Speaker 2: So like in that same building, another apartment went for 692 00:37:04,239 --> 00:37:07,759 Speaker 2: almost eleven million. Another one went for nine point four 693 00:37:07,840 --> 00:37:12,440 Speaker 2: seven five million in February, so you'd be getting a bargain. 694 00:37:12,800 --> 00:37:13,000 Speaker 4: Wow. 695 00:37:13,600 --> 00:37:16,839 Speaker 1: Well yeah, you got to eat those that loss for 696 00:37:17,680 --> 00:37:20,600 Speaker 1: however many years. But that is pretty fascinating. All right, 697 00:37:20,800 --> 00:37:22,319 Speaker 1: that's a good one, Bill, don I'll give you that. 698 00:37:22,640 --> 00:37:26,600 Speaker 1: Mine is has to do with the IPO market, which Gina, 699 00:37:26,600 --> 00:37:29,720 Speaker 1: as you know, has not exactly been the hottest market 700 00:37:29,760 --> 00:37:32,400 Speaker 1: this year. This was not an IPO of a company. 701 00:37:33,000 --> 00:37:36,800 Speaker 1: It was an IPO of a painting, so three courtesy 702 00:37:36,880 --> 00:37:39,040 Speaker 1: of Quartz, and I think they've done this in crypto 703 00:37:39,160 --> 00:37:42,359 Speaker 1: fractional ownership of paintings, but this is more of a 704 00:37:42,400 --> 00:37:47,680 Speaker 1: regular traditional approach to it. It's Francis Bacon's masterpiece, three 705 00:37:47,719 --> 00:37:52,480 Speaker 1: Studies for a Portrait of George Dyer, finished in nineteen 706 00:37:52,560 --> 00:37:57,240 Speaker 1: sixty three, going IPO, I think in a few weeks 707 00:37:57,440 --> 00:38:01,440 Speaker 1: at a specialty exchange that was just created Liechtenstein, of 708 00:38:01,480 --> 00:38:06,160 Speaker 1: all places, Liechtenstein, Liechtenstein. One hundred dollars a share is 709 00:38:06,200 --> 00:38:08,239 Speaker 1: the offering price. I'm not going to tell you how 710 00:38:08,239 --> 00:38:10,720 Speaker 1: many shares are being offered though, because it's time to play. 711 00:38:11,040 --> 00:38:15,480 Speaker 1: The price is precise. Your favorite game show, what do 712 00:38:15,480 --> 00:38:20,399 Speaker 1: you think the total value of Francis Bacon's masterpiece Three 713 00:38:20,480 --> 00:38:24,120 Speaker 1: Studies of a Portrait of George Dyer, the first ever 714 00:38:25,080 --> 00:38:27,239 Speaker 1: painting to be ip oed. And the way this will 715 00:38:27,280 --> 00:38:30,880 Speaker 1: work is you'll buy your share in the painting, but 716 00:38:30,920 --> 00:38:34,400 Speaker 1: then it's going to go be hung in a museum somewhere. 717 00:38:34,440 --> 00:38:36,080 Speaker 3: They don't know which museum yet. 718 00:38:36,360 --> 00:38:39,400 Speaker 1: And basically what you're hoping for is a takeover, a 719 00:38:39,400 --> 00:38:42,840 Speaker 1: hostile takeover of it at a higher level than the 720 00:38:42,880 --> 00:38:43,520 Speaker 1: market cap. 721 00:38:44,160 --> 00:38:45,800 Speaker 3: And as they always say, art. 722 00:38:45,719 --> 00:38:48,759 Speaker 1: Has a pretty reliable fine art has a pretty reliable 723 00:38:49,000 --> 00:38:52,640 Speaker 1: return profile if you believe all these art hucksters. 724 00:38:52,640 --> 00:38:55,600 Speaker 3: I don't know, but name that price. 725 00:38:56,040 --> 00:38:59,200 Speaker 1: What do you think the total market cap is of 726 00:38:59,239 --> 00:39:02,120 Speaker 1: three Studies for a Portrait of George Dyer. I'll tell 727 00:39:02,120 --> 00:39:03,960 Speaker 1: you this, it's not going to make it into the 728 00:39:04,000 --> 00:39:06,799 Speaker 1: magnificant Magnificent seven as far as market cap. 729 00:39:06,880 --> 00:39:07,880 Speaker 3: That's the only hint I'll give you. 730 00:39:08,440 --> 00:39:13,200 Speaker 2: Okay, that's not a very good hint because would billions. 731 00:39:12,880 --> 00:39:15,080 Speaker 3: Right, it's not gonna be a trillion dollars trillions? 732 00:39:15,360 --> 00:39:17,560 Speaker 2: Okay, So you don't even get to own this painting. 733 00:39:17,640 --> 00:39:19,719 Speaker 2: You can't take it home, No, you can. 734 00:39:19,640 --> 00:39:21,680 Speaker 1: Go visit it in the museum, so you own a 735 00:39:21,719 --> 00:39:23,719 Speaker 1: share of it, so that if the hope I guess 736 00:39:23,760 --> 00:39:25,799 Speaker 1: is that some private collector says, wait a minute, this 737 00:39:25,800 --> 00:39:26,520 Speaker 1: thing's a bargain. 738 00:39:28,360 --> 00:39:29,960 Speaker 3: I'm going to go. But you can share. 739 00:39:30,080 --> 00:39:34,000 Speaker 1: If there's a frenzy for the shares in this painting, 740 00:39:34,040 --> 00:39:35,360 Speaker 1: they'll trade like a stock. 741 00:39:35,520 --> 00:39:37,759 Speaker 3: So I see the value will go up and down. 742 00:39:37,760 --> 00:39:40,759 Speaker 1: You could you could unload your shares at a profit, presumably, 743 00:39:40,840 --> 00:39:42,480 Speaker 1: And I got to say, I bet you, I bet you. 744 00:39:42,560 --> 00:39:44,759 Speaker 1: These shares do pretty well, just for the novelty of it. 745 00:39:44,840 --> 00:39:48,359 Speaker 1: Be kind of cool to own ten shares in a masterpiece. 746 00:39:48,680 --> 00:39:50,280 Speaker 2: I'm gonna go with twenty eight million. 747 00:39:50,680 --> 00:39:53,400 Speaker 3: Twenty eight million, all right, Gina, how about you. 748 00:39:54,000 --> 00:39:56,000 Speaker 4: I have no idea how to value art. I'll say 749 00:39:56,000 --> 00:39:56,800 Speaker 4: one hundred million. 750 00:39:57,040 --> 00:40:00,520 Speaker 3: One hundred million, actually fifty five million. 751 00:40:02,239 --> 00:40:03,960 Speaker 2: I thought I was so close. I really thought I 752 00:40:04,040 --> 00:40:08,680 Speaker 2: was so close. Wait, but I still win went over. 753 00:40:08,960 --> 00:40:16,040 Speaker 4: Yeah, I'm sorry, Gina, what I'm talking about. I'm fully 754 00:40:16,040 --> 00:40:16,960 Speaker 4: willing to admit it. 755 00:40:18,920 --> 00:40:21,040 Speaker 1: All right, Well, I think that is all the time 756 00:40:21,120 --> 00:40:23,160 Speaker 1: we have. Unless, Gina, you have a crazy thing you 757 00:40:23,160 --> 00:40:23,640 Speaker 1: want to share. 758 00:40:23,719 --> 00:40:24,120 Speaker 3: I don't know. 759 00:40:24,280 --> 00:40:26,839 Speaker 4: I do not I don't have a really crazy thing. 760 00:40:26,880 --> 00:40:28,839 Speaker 4: The only thing that I think is really crazy right 761 00:40:28,840 --> 00:40:33,359 Speaker 4: now that's actually an investible theme is the heat. I'm 762 00:40:33,719 --> 00:40:36,680 Speaker 4: blown away by the fact that we are going to 763 00:40:36,719 --> 00:40:39,880 Speaker 4: face terrible air quality conditions again in the Northeast as 764 00:40:39,920 --> 00:40:42,760 Speaker 4: a result of these wildfires that we've got. Yeah, people 765 00:40:42,800 --> 00:40:47,760 Speaker 4: actually dying in Texas of overheating. And it's only June. 766 00:40:48,239 --> 00:40:50,520 Speaker 4: So I think this summer is going to be interesting. 767 00:40:50,800 --> 00:40:53,480 Speaker 1: I was wondering if that at some point this smoke 768 00:40:53,600 --> 00:40:57,239 Speaker 1: starts to become macro influential, if it starts having an 769 00:40:57,239 --> 00:41:00,200 Speaker 1: impact on something. I don't know, whether it be crap 770 00:41:00,440 --> 00:41:02,640 Speaker 1: or travel, I don't know. Do you think that's there's 771 00:41:02,640 --> 00:41:04,120 Speaker 1: a potential for that, Well. 772 00:41:04,040 --> 00:41:07,000 Speaker 4: I think it's possible. Remember when the volcano erupted in 773 00:41:07,080 --> 00:41:10,959 Speaker 4: Iceland and all of that volcanic ash in the air 774 00:41:11,239 --> 00:41:16,320 Speaker 4: shut down European travel for a while. It's definitely possible 775 00:41:16,400 --> 00:41:21,359 Speaker 4: because all of this terrible sediment in the air can 776 00:41:21,440 --> 00:41:24,520 Speaker 4: create really big problems. And remember they did have to 777 00:41:24,920 --> 00:41:27,160 Speaker 4: very short term on that terrible air quality day in 778 00:41:27,160 --> 00:41:29,520 Speaker 4: New York, they did have to shut down the airports. 779 00:41:29,760 --> 00:41:31,920 Speaker 3: Yeah, just a short. 780 00:41:31,680 --> 00:41:34,080 Speaker 4: Period of time, but it's so it's certainly possible. 781 00:41:34,520 --> 00:41:36,759 Speaker 1: Yeah, or even that the health effects, you know, if 782 00:41:36,760 --> 00:41:40,279 Speaker 1: there's an uptick in asthma, you know that sort of thing. 783 00:41:40,920 --> 00:41:42,600 Speaker 1: That's something to keep an eye on, for sure. I'm 784 00:41:42,640 --> 00:41:47,000 Speaker 1: surprised it hasn't, you know, started influencing some prices somewhere 785 00:41:47,000 --> 00:41:47,319 Speaker 1: on something. 786 00:41:47,360 --> 00:41:48,800 Speaker 3: I'm sure it has, I just haven't noticed. 787 00:41:48,840 --> 00:41:50,759 Speaker 4: I think it has. I think it will continue to 788 00:41:50,840 --> 00:41:52,040 Speaker 4: influence for sure. 789 00:41:52,000 --> 00:41:55,240 Speaker 2: Or even if people getting getting lunch being too afraid 790 00:41:55,239 --> 00:41:56,560 Speaker 2: to step outside to buy lunch. 791 00:41:57,120 --> 00:41:59,320 Speaker 1: Yeah, yeah, well that's a good crazy thing off the 792 00:41:59,360 --> 00:42:01,080 Speaker 1: top of your head. 793 00:42:02,120 --> 00:42:03,719 Speaker 4: I don't know. I don't know. I'm going to read 794 00:42:03,800 --> 00:42:05,759 Speaker 4: up next time for crazy things before I come. 795 00:42:05,960 --> 00:42:08,280 Speaker 2: I thought you meant the Miami Heat since you're from Florida. 796 00:42:08,320 --> 00:42:11,720 Speaker 4: Oh yeah, I know. You know, I wasn't talking about Miami. 797 00:42:13,440 --> 00:42:18,800 Speaker 1: That after that that last finals performance. They're short shirt 798 00:42:18,840 --> 00:42:22,560 Speaker 1: that team anyway. Gina Martin Adams, chief equity strategist at 799 00:42:22,560 --> 00:42:25,400 Speaker 1: Bloomberg Intelligence. Always such a treat to catch up with 800 00:42:25,440 --> 00:42:28,440 Speaker 1: you and hear how you're thinking about things. I encourage 801 00:42:28,480 --> 00:42:32,440 Speaker 1: all Terminal subscribers go out and read that mid year outlook. 802 00:42:32,440 --> 00:42:35,520 Speaker 1: It's chock full of really a lot of interesting studies 803 00:42:35,600 --> 00:42:37,759 Speaker 1: and outlook for the rest of the year. 804 00:42:37,800 --> 00:42:39,680 Speaker 3: Thank you so much to thank you, Thank. 805 00:42:39,520 --> 00:42:50,560 Speaker 2: You, Gina. What Goes Up. We'll be back next week. 806 00:42:51,040 --> 00:42:53,320 Speaker 2: Until then, you can find us on the Bloomberg Terminal, 807 00:42:53,480 --> 00:42:57,719 Speaker 2: website and app, or wherever you get your podcast. We'd 808 00:42:57,760 --> 00:42:59,319 Speaker 2: love it if you took the time to rate and 809 00:42:59,320 --> 00:43:02,360 Speaker 2: interview the show so more listeners can find us. You 810 00:43:02,440 --> 00:43:06,480 Speaker 2: can find us on Twitter, follow me at Goldana Hirich. 811 00:43:06,960 --> 00:43:10,360 Speaker 2: Mike Reagan is at Reagan Oamous. You can also follow 812 00:43:10,360 --> 00:43:14,920 Speaker 2: Boomer Podcasts at podcasts. What Goes Up is produced by 813 00:43:14,920 --> 00:43:18,160 Speaker 2: Stacey Wong and our head of podcast is Stage Bauman. 814 00:43:18,680 --> 00:43:24,319 Speaker 2: Thanks for listening. We'll see you next week.