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Speaker 3: Let's bring in Margie Bttell of Oscaring Global investments. She
Speaker 3: wrote that in twenty twenty five, I expect another decent
Speaker 3: equity year, although not with the total performance that we
Speaker 3: have seen this year. Admittedly, the market looks rather frothy.
Speaker 3: I'm pleased to say Margie joins us now. Margie, thanks
Speaker 3: so much for spending some time with us on this
Speaker 3: holiday shortened week. What are you seeing in terms of
Speaker 3: the frothyness? Where is it most prominent?
Speaker 4: Well, I think it's not so much in the stock market.
Speaker 4: I think you can see this manifestation.
Speaker 5: There's actually a lot of liquidity in the financial markets.
Speaker 4: You see it in crypto, you certainly see it in
Speaker 4: real estate.
Speaker 5: You see it in the explosion of private debt and
Speaker 5: private equity, which has been a big boost to the
Speaker 5: financial markets. And it's really kept the law of the
Speaker 5: Fed's actions out of the control of the FED because.
Speaker 4: It's been in the market. Not like the bank score
Speaker 4: things are typely regulated.
Speaker 5: But as far as a stock market, I'd say it's
Speaker 5: reasonably price for another decent year next year.
Speaker 3: Talk a little bit about the interplay between those private assets,
Speaker 3: whether it's private credit or private equity to a lesser extent,
Speaker 3: and what that means for money flowing into equities.
Speaker 5: Well, I think that the first thing is if you
Speaker 5: think we had the FED make the biggest increase in
Speaker 5: its history in short term rates from basically zero to
Speaker 5: five percent in eighteen months, and yet we didn't have
Speaker 5: a recession as result, that tells you that the money
Speaker 5: flows in the financial system really isn't under the bank sump,
Speaker 5: under the bank sump and the Federal Reserve supervision the
Speaker 5: way it used to be. So you've seen a lot
Speaker 5: of companies that needed liquidity could actually go to these
Speaker 5: private markets and get these terms period. And also better
Speaker 5: terms than.
Speaker 4: They could have gotten in the public market.
Speaker 5: And so I think that's why you could say, well,
Speaker 5: the pe is high, you know, nineteen times something like that.
Speaker 5: But really, when you look at the profit goos under
Speaker 5: that and compare that to our treasure yields are it
Speaker 5: looks rather reasonable to me.
Speaker 6: Well, Marguie, one of the byproducts of the FED raising
Speaker 6: short term rates, as you mentioned, from zero to five percent,
Speaker 6: is that cash looks great here, yields are relatively high,
Speaker 6: and on money markets even still, you have seven trillion
Speaker 6: dollars sitting in cash right now.
Speaker 1: It feels like for the past couple of years.
Speaker 6: People have been calling people moving off of the sidelines
Speaker 6: back more fully into risk markets. Do you see that
Speaker 6: actually happening when you take a look at all that
Speaker 6: money market action.
Speaker 5: Yes, I think you'll see a lot of towel throwing
Speaker 5: from the cash equivalent market, because if.
Speaker 4: You look at it, if you got a good yeald
Speaker 4: historically and.
Speaker 5: Cash just year, say four or five percent, But on
Speaker 5: the other hand, the equity market was up fifteen to
Speaker 5: twenty five percent, depending whether you look at value names
Speaker 5: or more growthing names. That's a big disparity for investors
Speaker 5: and I think people have been hoping and actually believing
Speaker 5: that we would have a recession. The recession hasn't come
Speaker 5: with the FED at least stable of a problem cutting race.
Speaker 5: It's very hard to see how we can have a
Speaker 5: recession in twenty five. So we're thinking one and a
Speaker 5: half two and a half percent economic growth, maybe even
Speaker 5: surprising on the high side. And I think that's going
Speaker 5: to draw money out to say, how many years do
Speaker 5: you want to leave that much of a spread on
Speaker 5: the table.
Speaker 6: Well, Margie, let's say that you have been sitting in cash,
Speaker 6: you've been over allocated, and now you have the luxury
Speaker 6: of having a lot of money here to deploy. When
Speaker 6: you take a look at the relative values of the
Speaker 6: different asset classes, specifically when it comes to fix income
Speaker 6: to equities, where's the best opportunity right now?
Speaker 4: Well, I think it's ad equities. Even though we've had
Speaker 4: two terrific years. I think that if we have the e.
Speaker 5: Connery growing, you know, two plus or minus percent maybe
Speaker 5: on the high side, that should allow corporate profits to
Speaker 5: be up to say ten or twelve percent. Just to say,
Speaker 5: world this year about thirteen percent, even though we had
Speaker 5: more modest economic growth, So that says if that's your
Speaker 5: target on likely you turn on equities. When you look
Speaker 5: at fixed income treasures of say four and a half percent,
Speaker 5: if you look at high.
Speaker 4: Yield, you're only looking at say six and a half
Speaker 4: to seven and a half percent.
Speaker 5: And because we've had rallies in the fixed income market,
Speaker 5: those bonds are really trading in a very small discount
Speaker 5: from parsave around ninety eight cents on a dollar. So
Speaker 5: there's an automot of.
Speaker 4: Capital appreciation in the fixed income world.
Speaker 5: By the same token, defaults have been very low, so
Speaker 5: you have been taking much risk when you dip down
Speaker 5: into below investment grade. So I think that still says
Speaker 5: opinions over on the equity side, we're return should be higher.
Speaker 3: Okay, So with inequities, do you go with what's been
Speaker 3: working all along, the defensives in this case MAGS seven
Speaker 3: big tech type names, or do you go and maybe
Speaker 3: start picking up some of the underperforming sectors in the market,
Speaker 3: whether it's materials companies or energy companies, both those groups
Speaker 3: not moving more than one percent so far this year.
Speaker 7: Yes, well, I.
Speaker 5: Think that you really have to stick with the companies
Speaker 5: that have proven to have profit growth and a lot
Speaker 5: of that has been in the chech sector, some industrial
Speaker 5: sectors that have been tied to the big scenes electrification
Speaker 5: increases in data centers I think are going to continue
Speaker 5: to do well, and even in actually energy, I think
Speaker 5: that gas related names are going to continue to do
Speaker 5: surprisingly well because of benefit from the expansion and gas
Speaker 5: is used to increase our base slow power capacity. But
Speaker 5: I think a low growing company when we've had a
Speaker 5: decent markets mostly, I think stayload groom. So it says
Speaker 5: you have to buy the quality by the higher price
Speaker 5: relative stocks because they probably will continue to have strong
Speaker 5: earnings in twenty twenty five.
Speaker 3: You know, I look at the VICS and it spiked
Speaker 3: up to almost twenty eight on Wednesday after the FED decision.
Speaker 3: Certainly we saw equity sell office on bond sell off.
Speaker 3: It's come right back down though, now just about above
Speaker 3: sixteen and a half. Is the FED going to be
Speaker 3: the source of volatility in twenty twenty five or is
Speaker 3: it going to be the incoming White House?
Speaker 4: Well, the FIT has been pretty dependable.
Speaker 5: Is causing a lot of volatility in the marketplace by
Speaker 5: their actions that haven't really produced positive results.
Speaker 4: So my money is the less offensives, and the more
Speaker 4: in the background they are, the better.
Speaker 5: As far as the new administration, there are lots of
Speaker 5: exciting ideas, lots of frothy talk about what might happen,
Speaker 5: and we'll have to see how practical and how quickly
Speaker 5: some of these ideas that look favorable business can get through.
Speaker 5: I'd say the big positive is that there's no longer
Speaker 5: any talk about raising corporate income texts, which would have
Speaker 5: been a real depressant on the market had that gone through.
Speaker 5: I think to have tax rates for corporations where they
Speaker 5: are even lower will be a positive factor for the
Speaker 5: soft market continuing to do.
Speaker 4: Better next year.
Speaker 6: Well, let's talk about the relationship between what we're talking
Speaker 6: about on the fiscal side and what that could mean
Speaker 6: for monetary policy. Torson slack Over at Apollo put out
Speaker 6: a note of risks in twenty twenty five yesterday, and
Speaker 6: it was nice because he actually put probabilities next to them.
Speaker 6: He assigned forty percent odds that the Fed raises interest
Speaker 6: rates in twenty twenty five. You aren't seeing that being
Speaker 6: priced into the market at all virtually right now. Do
Speaker 6: you think that some of the things that we're talking
Speaker 6: about tariff's taxes, if those come to fruition, should we
Speaker 6: be talking about a potential rate raise next year.
Speaker 5: Well, I'm not so sure about the teriff situation of
Speaker 5: how seman be imposed, what the immediate impact would be
Speaker 5: on price levels, But I think it is interesting to
Speaker 5: think historically you've often seen a second wave of inflation
Speaker 5: after first wave look like things were tamped down, and
Speaker 5: really when you look at these other signs in the marketplaces,
Speaker 5: so there's plenty of liquidity that says maybe inflation is
Speaker 5: going to be much harder for the FED to bring
Speaker 5: down to its target level of two percent.
Speaker 4: So I think it's certainly.
Speaker 5: I'd say forty percent sounds find that there is that
Speaker 5: possibility later twenty five if I could say this.
Speaker 4: Isn't working, we need to raise rates.
Speaker 5: Economies doing fine, So I think it's a possibility. But again,
Speaker 5: that would be if we had I think a pretty
Speaker 5: strong economy. The Fed's always very very sensitive about looking
Speaker 5: at unemployment rates and the economy before they act, but
Speaker 5: a strong economy, I think that's likely.
Speaker 6: What is that spell for the back end of the
Speaker 6: treasury curve? Scarlet and I were talking just a few
Speaker 6: minutes ago about how there's been plenty of demand for
Speaker 6: the short end, and of course you can see that
Speaker 6: in money market funds, you can see that in the auctions.
Speaker 6: The long end of the curve has been a much.
Speaker 1: Harrier place to be.
Speaker 6: What's expectation in twenty twenty five in terms of duration volatility.
Speaker 5: Well, I'm not looking for any big spike up in
Speaker 5: the long end of the treasury market because although I
Speaker 5: think for domestic investors we tend to want to be
Speaker 5: shorter in maturity with things like treasuries and municipals, but
Speaker 5: I think that globally there are many investors international entities
Speaker 5: that would like that very very long duration because there
Speaker 5: aren't motip places where a long term investor can get very,
Speaker 5: very high quality and long duration. So I don't think
Speaker 5: that's going to be a problem that they can always
Speaker 5: change what they issue if there looks like there's pressure
Speaker 5: and one part of the curve or not. But really
Speaker 5: the issue is the amount of financing that the fit
Speaker 5: has to do because of the very very large emphasis,
Speaker 5: meaning that you might have a little bit in my
Speaker 5: opinion of saying excess supply in the treasury market versus
Speaker 5: the stock market versus even corporate bond market high yield
Speaker 5: market where there's a relative supply scarcity, and I think
Speaker 5: that's what's driven spreads in the corporate market narrower, because
Speaker 5: there's been people want that extra yield and the supplies
Speaker 5: rather limited, lot of it been hogged off into the
Speaker 5: product mark. So I think that says to me that
Speaker 5: yield spreads are likely to get narrower and we're not
Speaker 5: going to have any big spike in the long end
Speaker 5: of the curve. Foreign institutional investors and also the fifth
Speaker 5: being able to control what they would just should and
Speaker 5: keep that under control.
Speaker 3: Yeah, you've really outlined some of the big, big technical
Speaker 3: issues that investors need to contend with, whether it's in
Speaker 3: equities or in fixed income. Margie, always a pleasure. Thank
Speaker 3: you so much for joining us. Happy holidays and happy New.
Speaker 1: Year to you.
Speaker 3: Margie Battel of Offspring Global Investments.
Speaker 6: Brian Peterson of Flexport, writing, We're seeing strong demand for
Speaker 6: ocean freight.
Speaker 1: It could be driven by a multitude of factors.
Speaker 6: Fear of a potential i AL strike and tariff increases
Speaker 6: earlier than usual, lunar new year, plus a strong economy.
Speaker 6: Ryan joins us. Now, Ryan really interesting there. When you
Speaker 6: think about this increased demand for ocean free you name
Speaker 6: a number.
Speaker 1: Of factors as we just walked through.
Speaker 6: Is that taking share from other methods or is this
Speaker 6: just the pie growing bigger?
Speaker 8: Well, I think what you're saying is a pull forward,
Speaker 8: So it's taking share from the future that people are
Speaker 8: trying to get goods in before a potential strike or tariffs.
Speaker 7: That if you're concerned about those things, which you.
Speaker 8: Should be, that you know and you have the option,
Speaker 8: you have the flexibility your supply chain, you want to
Speaker 8: get the goods in as soon as possible to avoid
Speaker 8: the disruption.
Speaker 6: And how much can we draw on the experience of
Speaker 6: the twenty sixteen election and the first Trump administration when
Speaker 6: it comes to mapping out the potential impacts of some
Speaker 6: of the tariffs that we're talking about.
Speaker 7: Yeah, I mean we've seen this movie before.
Speaker 8: In many ways, the tariffs weren't as disruptive as people
Speaker 8: maybe expected them to be. Their tariffs have existed, you know,
Speaker 8: throughout all of human history. It's basically how government's always
Speaker 8: funded themselves.
Speaker 7: So people are able.
Speaker 8: To adapt to this. It's not huge shock, but it is.
Speaker 8: You know, the big thing right now is the uncertainty.
Speaker 8: It's like what exactly is going to hit, When is
Speaker 8: it going to hit, how is it going to hit. So,
Speaker 8: for example, this just this week, the President of Mexico
Speaker 8: actually imposed large tariffs against imports from China, and to
Speaker 8: everyone's surprise, those actually affected Mexican fulfillment centers. So these
Speaker 8: are e commerce warehouses who are not shipping into Mexico
Speaker 8: but import to Mexico in order to ship, reship the
Speaker 8: re export those goods to consumers in the US. That's
Speaker 8: a huge way that US e commerce has done is
Speaker 8: actually out of fulfillment centers in Mexico. And this morning,
Speaker 8: you know, the largest or last night, late last night,
Speaker 8: the largest fulfillment centers in Mexico had to like email
Speaker 8: all of their customers and cancel all their contracts. So
Speaker 8: a lot of American businesses are scrambling today to find
Speaker 8: new new fulfillment opportunities, new ways to serve their customers
Speaker 8: in the US, even though it had nothing to do
Speaker 8: with the US government.
Speaker 3: Yeah, and that feels like a complete card. So when
Speaker 3: something like that happens, basically someone throws a deck of
Speaker 3: cards up in the air. How long does it take
Speaker 3: for a new normal to be set in place.
Speaker 8: The fun part about working in logistics, we all figured
Speaker 8: out many years ago there's no such thing as normal,
Speaker 8: and we got to be ready for whatever happens.
Speaker 7: So it's every day a new thing.
Speaker 8: It feels like between the you know, the strikes and
Speaker 8: the Red Sea disrupting ocean freight, you've got tariffs, You've
Speaker 8: got a drought that's affecting the Panama Canal. Sort of,
Speaker 8: you just have to be very nimble and agile if
Speaker 8: you want to run a supply chain in the modern world.
Speaker 1: Yeah, makes sense.
Speaker 3: Going back to the tariffs question that Katie was posing,
Speaker 3: the details, of course, are TBD. We don't know when,
Speaker 3: we don't know how much, but we do know that
Speaker 3: some form of these tariffs are coming on imported goods
Speaker 3: into the US, and the mechanics are pretty clear in
Speaker 3: terms of teriffs tend to reduce demand for these imports,
Speaker 3: at least if you're American. But you also point out
Speaker 3: that we've seen a decrease in ocean freight rates from
Speaker 3: China and that could be an offset. So walk us
Speaker 3: through how that what that might mean for goods that
Speaker 3: are being imported from China, and how manufacturers think about that.
Speaker 8: Yeah, Well, see, our ship freight rates have been quite
Speaker 8: high throughout the year, sort of two to three times
Speaker 8: long run historical averages. And this is in a market
Speaker 8: where the supply side of the market, the number of
Speaker 8: ships at operation in their capacity, has has ballooned. There's
Speaker 8: been a huge number, a huge deployment of new container
Speaker 8: ships that as these carriers made a lot of money
Speaker 8: during the last cycle during COVID, they reinvested that in
Speaker 8: new ships. So one would predict with this huge surge
Speaker 8: of supply that the price will come down. The only
Speaker 8: reason that hasn't happened is because of the Red Sea.
Speaker 8: It's absorbing capacity as ships have to go around the
Speaker 8: southern coast of Africa. If anything is to be done
Speaker 8: and allowing container ships to return through the Red Sea,
Speaker 8: that will instantly bring the price of motion freight down
Speaker 8: by two thirds or so, is our guest, maybe more,
Speaker 8: probably saving companies four to five thousand dollars per container.
Speaker 7: That or that's a pretty big deal. The average value
Speaker 7: of an ocean.
Speaker 8: Container at wholesale the goods inside of it is probably
Speaker 8: one hundred thousand dollars, So if you're talking about twenty
Speaker 8: five percent tariffs.
Speaker 7: That's twenty five.
Speaker 8: Thousand helps a little bit, it's not going to get
Speaker 8: you all the way back there. The twenty five thousand
Speaker 8: dollars per containers are pretty big blow.
Speaker 1: Yeah.
Speaker 6: Absolutely, And I mean, as we've been talking about, there's
Speaker 6: a lot of unknown here and spoils about the levels
Speaker 6: that we're talking about, the final levels, whether or not
Speaker 6: we get deals negotiated with our trade partners. But when
Speaker 6: it comes to actual tariffs. In your notes you write
Speaker 6: that there's basically only two ways that businesses can deal
Speaker 6: with new tariffs. They can absorb the costs themselves, or
Speaker 6: they can increase their prices. And the businesses that you
Speaker 6: work with that you speak to, what are you hearing
Speaker 6: so far about what path they're actually going to follow?
Speaker 8: Yeah, well those are That's a very simplistic way that,
Speaker 8: you know, trying to simplify things for everybody. I think
Speaker 8: that's true in a very short run, you know, if
Speaker 8: you've got goods on the water coming here and not
Speaker 8: much else to do but hey, tariffs, and then you
Speaker 8: have to choose whether it make less money or pass
Speaker 8: it on.
Speaker 7: But in the medium term, there's a lot of strategies available.
Speaker 8: You can by the way make goods in the United States,
Speaker 8: and you don't have to pay the tariffs.
Speaker 5: UH.
Speaker 8: You know, you may own the raw materials, but you
Speaker 8: won't on the on the finished goods, which is most
Speaker 8: of the value. You can make goods in other countries
Speaker 8: that have free trade agreements with the United States.
Speaker 7: UH, there's there's tariff engineering.
Speaker 8: So by understanding at a very detailed level of partnering
Speaker 8: with your customs broker like Sarah Flexport, you can understand
Speaker 8: the raw materials and how those UH create the duty rate,
Speaker 8: and if you change things, you may get a different
Speaker 8: duty rate.
Speaker 7: So there's a lot of.
Speaker 8: Opportunity to uh to reduce tariffs over the medium term.
Speaker 7: And I think companies are getting really smart.
Speaker 8: About this thanks to the last cycle, all of these
Speaker 8: strategies you've been deployed.
Speaker 7: UH. People is if you didn't see this coming at all.
Speaker 8: Sure, people weren't sure that Trump was going to get elected,
Speaker 8: but by the way, Biden's been increasing tariffs too. So
Speaker 8: I think people have been preparing for this for a
Speaker 8: while and and and should be in a reasonably okay
Speaker 8: place to adapt to it.
Speaker 6: Well, Ryan, where are we on the near shoring slash
Speaker 6: on shoring narrative, because that's been a big push over
Speaker 6: the last couple of years, especially gaining steam in the pandemic.
Speaker 1: But you know better than most people that.
Speaker 6: Supply chains are pretty uh slow moving animals. They take
Speaker 6: a long time to actually shift and move them.
Speaker 1: So where are we on that push it?
Speaker 7: Yeah, it really depends on the sector.
Speaker 8: I mean, there's a there's a massive amount of industry
Speaker 8: real industrialization taking place in the United States right now,
Speaker 8: but it tends to be much higher value goods, higher
Speaker 8: complexity things that where and the deployment of things like
Speaker 8: advanced manufacturing robotics. But for low value goods, what you're
Speaker 8: seeing is that the shift down to countries like Vietnam
Speaker 8: to Mexico as well, but even cheaper countries like Vietnam
Speaker 8: and Cambodia. India is having quite a boom right now
Speaker 8: and exports, so it's and then and then certain things.
Speaker 8: You know, China is still just a rate country at manufacturing,
Speaker 8: and there are certain sectors where even with higher tariffs,
Speaker 8: it still makes economic sense to produce there because of
Speaker 8: the quality and the scale of their manufacturing capabilities.
Speaker 7: And you see it.
Speaker 8: You know, I was in China not too long ago,
Speaker 8: and the quality of their cars is remarkable that even
Speaker 8: with high tariffs, I think for much of the world,
Speaker 8: people are gonna still want to import those cars. They're
Speaker 8: so much cheaper and better than what's produced domestically in
Speaker 8: most countries.
Speaker 3: Yeah, and at affordable prices. No less too. Ryan, as
Speaker 3: you speak with your customers, what is the number one
Speaker 3: worry that they have for twenty twenty five beyond tariffs,
Speaker 3: because that is a big unknown and it kind of
Speaker 3: hangs over everything.
Speaker 8: Yeah, I mean, short term, it's definitely this isla, the
Speaker 8: strike on the East Coast that's looming over our heads.
Speaker 8: We had that back in October for four or five days,
Speaker 8: and then the Biden administration stepped in and kind of
Speaker 8: told them, hey, knock it off before the election, So
Speaker 8: they got to stay until January fifteenth, and extension of
Speaker 8: the contract five days before inauguration. Obviously, so we are
Speaker 8: very much in crunch time for what happens with those negotiations.
Speaker 8: My latest understanding was that the two parties weren't even
Speaker 8: speaking to each other to get you know, so the
Speaker 8: odds of.
Speaker 7: A deal seemed kind of low.
Speaker 8: The demands of the union right now is not just
Speaker 8: no more automation and higher wages.
Speaker 7: They've already achieved those.
Speaker 8: The carriers and the employers have agreed to that, but
Speaker 8: they're asking reverse automation, actually eliminate automation that already exists.
Speaker 6: All right, Ryan, great to speak with you and get
Speaker 6: your insight. That is Ryan Peterson of Flex Support. We
Speaker 6: have Stuart Kaiser of City Writing. Our preferred vehicles would
Speaker 6: be large cap tech.
Speaker 1: Quality and growth.
Speaker 6: Given the higher for longer nature of the SEP forecasts
Speaker 6: looking further ahead, payrolls on January tenth are a major
Speaker 6: catalyst given last month's data, the SEP update and markets
Speaker 6: pricing just two cuts in twenty twenty five and a
Speaker 6: ten percent chance of a twenty five basis point cut
Speaker 6: in January.
Speaker 1: And please just say that.
Speaker 6: Stewart joins us in studio right now. It's great to
Speaker 6: see you in person, Warnie. So I want to talk
Speaker 6: about higher for longer trades. We're back to talking about
Speaker 6: that after palace performance last week. Is that the right
Speaker 6: conversation to be having going into twenty twenty five.
Speaker 9: Hi, it's the right conversation if you believe the FED.
Speaker 9: I think if you're worried about risk reward that you're
Speaker 9: probably worried about, you know, the unemployment rate kind of
Speaker 9: rising a little bit, so I mean the FED kind
Speaker 9: of guided you towards unemployment ras king a flat Now.
Speaker 9: Inflation is sticker that we would like, but it's going
Speaker 9: to come down and they're going to do a couple
Speaker 9: insurance cuts next year. That actually sounds a whole lot
Speaker 9: like the front half of twenty twenty four when large
Speaker 9: cap tech and growth did really well. So I think
Speaker 9: that the Fed's prescription would be to be in those stocks.
Speaker 9: The risk to that, I think the market is is
Speaker 9: kind of questioning a little bit this idea that the
Speaker 9: unemployment rate is going to be as friendly as that is.
Speaker 6: Well, you write in your notes that the SEP, of
Speaker 6: course the dot plot as well, was equity positive at
Speaker 6: its core, and that stuck out to me because the
Speaker 6: market reaction was not positive.
Speaker 1: So walk us through that a little bit more.
Speaker 6: That fewer rate cuts in twenty twenty five maybe actually
Speaker 6: good news for risk assets.
Speaker 9: Yeah, I think ultimately the market will come back to
Speaker 9: that view. I think what happened last week is the
Speaker 9: market was kind of had coalesced around the idea that
Speaker 9: we had a strong growth environment. What the Fed did
Speaker 9: is it kind of sprinkled in or added in a
Speaker 9: little bit of additional CPI risk, And I think the
Speaker 9: market traded that negatively last year was that the Fed
Speaker 9: seemed to be a little bit concerned about the pace,
Speaker 9: you know, with which CPI is coming down.
Speaker 7: You also went into that.
Speaker 9: Print with a very very strong, you know, equity momentum,
Speaker 9: very very long positioning and things of that nature. So
Speaker 9: I think what you really got is the core of
Speaker 9: the statement and the core of the SDP et cetera,
Speaker 9: was positive, but you added the new information was not
Speaker 9: super friendly, and that ran into strong positioning and you
Speaker 9: kind of got a little bit of a pullback. You know,
Speaker 9: our view on rate cuts is pretty simple as if
Speaker 9: you're pricing out cuts because growth is strong, that's good
Speaker 9: for equities. If you're pricing out growth because of inflation,
Speaker 9: fiscal and deficit risks, you know that's going to be negative.
Speaker 9: So maybe the market interpreted that last week on the
Speaker 9: negative side of the ledger.
Speaker 3: Well, whatever the catalyst is for yields moving higher, If
Speaker 3: yields on the tenure get to five percent or maybe
Speaker 3: even six percent, how do you expect that to impact equities?
Speaker 9: I think, you know, yields get into five percent, you
Speaker 9: could come up with a good reason why the tenure
Speaker 9: yield can get to five percent, and that reason would
Speaker 9: likely be, you know, tax cuts, the regulation and a
Speaker 9: positive growth impulse. I mean, if you're talking at six
Speaker 9: percent handle, it's hard for me to see the ten
Speaker 9: you're getting to six for quote unquote good reasons. So again,
Speaker 9: I think if you if you go from four to
Speaker 9: sixty to five percent and that's coming from a good place,
Speaker 9: I think equity markets are fine with that. We're a
Speaker 9: little bit more concerned, as Kadie mas Juri, with the
Speaker 9: really long end of the curve, because it's very hard
Speaker 9: to come up with a positive story why the thirty
Speaker 9: year yield would less they get to six percent. So
Speaker 9: I think it's it's that bond term premium and it's
Speaker 9: the long end of the yield curve that I think
Speaker 9: is is probably the bigger risk from a race perspective.
Speaker 9: But again, I think it's the why that matters, and
Speaker 9: we're going to kind of stick to that at least
Speaker 9: for now.
Speaker 3: In terms of the markets move it's been a fairly
Speaker 3: placid move up for twenty twenty four at least in aggregate.
Speaker 3: Talk a little bit about volatility, because you point out
Speaker 3: that implied volatility has gone from cheap to rich in
Speaker 3: just one week. What was behind that and what does
Speaker 3: that signal in terms of where we stand versus other
Speaker 3: asset classes.
Speaker 9: Yeah, I think US secrety markets because of the rally,
Speaker 9: because of the relatively segue view on the FED coming in,
Speaker 9: you had US equity volatility come down substantially when the
Speaker 9: FED kind of surprised to Katie's point a little bit
Speaker 9: to the negative side, which you got, is that impulse
Speaker 9: kind of reversed itself. You know, we do think that
Speaker 9: that's going to kind of calm down. It's very hard
Speaker 9: to keep US equity implied volatility at elevated levels when
Speaker 9: realize VOLU is low, when when the market's you know,
Speaker 9: kind of rallying the way it is. I think the
Speaker 9: really interesting thing in volatility these days is the correlation
Speaker 9: between the volatilities is broken down. So there's just been
Speaker 9: a lot more kind of idiosyncratic risk out there, whether
Speaker 9: that's you know, policy headlines in Brazil, what's going on
Speaker 9: in Korea, what's going on in China, you know, European elections,
Speaker 9: US elections. So really what you're getting is volatile atuity
Speaker 9: is kind of a little bit all over the place.
Speaker 9: And our sort of recommendation there is if you're using
Speaker 9: volatility to head your portfolio hedge at home, you know,
Speaker 9: don't don't try to get creative and say, oh, I'm
Speaker 9: going to head you as equity risk.
Speaker 7: With some China volatility.
Speaker 9: Now that stuff just is it working right now, and
Speaker 9: I think you just need to be pretty conservative about
Speaker 9: how you approach that at the moment.
Speaker 6: Yeah, it's been interesting, of course to see the VIS
Speaker 6: a little bit more elevated than the move index. Haven't
Speaker 6: seen that too often over the past year. I want
Speaker 6: to keep going though on this relationship between the bond
Speaker 6: market and the equity market, because it feels like the
Speaker 6: Magnificent seven can handle anything except in video missing earning
Speaker 6: se expectations of course, But when it comes to other
Speaker 6: areas of the market, when it comes to the small
Speaker 6: caps in particular, that's an area that it feels like
Speaker 6: you really need rates to come down.
Speaker 1: Do you agree with that?
Speaker 9: Yeah, I mean, if you look what happened last week,
Speaker 9: I think I think small cap underformed the S and
Speaker 9: P by by three hundred basis points, So you know
Speaker 9: that smaller cap, lower quality, sort of higher or higher
Speaker 9: credit risk stock is going to be much more sensitive
Speaker 9: to the moving yields. And look how yield spreads also
Speaker 9: rose twenty basis points last week, So I think small
Speaker 9: cap kind of suffered from both higher yields as well
Speaker 9: as kind of wider credit spread. So yeah, there are
Speaker 9: pockets in the market that are going to be much
Speaker 9: more sensitive to that. You know the mag seven large
Speaker 9: cap tech most of those are negative net debt stocks. Anyway,
Speaker 9: you know, the level of yields and refinance risk is
Speaker 9: not really applicable to Microsoft. So I think, look our
Speaker 9: view on small caps, but it's just a very tricky
Speaker 9: trade really for the last six months, because for that
Speaker 9: trade to work, you need a soft landing narrative to
Speaker 9: kind of play out. Higher for longer is a headwind
Speaker 9: because of higher yields. If the economy slows meaningfully, then
Speaker 9: that negative growth impulse is horrible for small caps.
Speaker 7: So small cap.
Speaker 9: You're really kind of threading a needle here. You need
Speaker 9: kind of a soft landing growth narrative and a broadening
Speaker 9: out of earnings.
Speaker 6: I'm glad you brought up that when it comes to
Speaker 6: the big tech stocks, the Magnificent seven, that their net
Speaker 6: debt extremely low.
Speaker 1: And this isn't new, but it feels.
Speaker 6: Like that subverts the textbook explanation of you see higher
Speaker 6: yields and you see tech stocks, you see growth stocks
Speaker 6: kind of go out the window because of of course,
Speaker 6: that longer duration debt. It just feels like market you
Speaker 6: can't really apply that old logic.
Speaker 9: Well, I think you can apply the logic, you just
Speaker 9: can't apply it to the Mac seven. I think your
Speaker 9: smid tech stocks who have that longer duration, Yes, I
Speaker 9: think the rates can really negatively impact them. If you're
Speaker 9: looking at large cap tech, these are negative net det
Speaker 9: huge free cash flow, paid dividends, buy backstock, so you're
Speaker 9: not really as reliant on that long term earning florecast
Speaker 9: as you used to be. I'd argue the duration of
Speaker 9: the mag seven is actually much shorter today than it
Speaker 9: was in the past, so they are a little bit
Speaker 9: less rate sensitive. You've gone to that smid area of
Speaker 9: the tech space, then yeah, I think there is still
Speaker 9: a lot of rate sensitivity there.
Speaker 3: How do you think about the strong dollar and what
Speaker 3: it means for US companies and their ability to rely
Speaker 3: on overseas markets, especially with a president Electrump intent on
Speaker 3: imposing tariffs on incoming goods in order for US to
Speaker 3: be able to sell more goods to those countries. Certainly,
Speaker 3: a strong US dollar says one thing about our energy
Speaker 3: companies versus some of our consumer companies.
Speaker 9: Yeah, the strong dollars, but it's been kind of a
Speaker 9: tricky one because is the strong dollar strong becomes of
Speaker 9: US exceptionalism, which I like, or is a drug dollars
Speaker 9: strong because of you know, some of the tire for
Speaker 9: and other risks. So in our review on the dollar
Speaker 9: is you generally need a pretty big move, and you
Speaker 9: need that move to be fairly sustainable for it to
Speaker 9: really start to get into US equities.
Speaker 1: A seven percent move.
Speaker 3: In twenty twenty four is pretty sizable.
Speaker 7: Yeah, it is.
Speaker 9: And I think if you look at if you broke
Speaker 9: down foreign versus domestic revenue stocks within the US, you
Speaker 9: have seen that trade actually perform, you know, quite well
Speaker 9: since the election. So I'm not sure it's going to
Speaker 9: impact the S and P at the sort of top level,
Speaker 9: but if you get below the surface and you really
Speaker 9: kind of isolate the stocks that are either from a
Speaker 9: supply chains perspective or a revenue perspective.
Speaker 7: More exposed to it.
Speaker 9: You are seeing that because you have seen a pretty
Speaker 9: big move, but that move has not been sort of
Speaker 9: large enough to disrupt kind of I think index level performance.
Speaker 1: At this point, we've.
Speaker 3: Really seen healthcare companies come under pressure now because of
Speaker 3: policy concerns, specifically anyone with a pharmacy benefits manager kind
Speaker 3: of in the bullseye of President elect Trump. How are
Speaker 3: you thinking about this sector because there was so much
Speaker 3: excitement about its ability to leverage technology going forward, and
Speaker 3: of course the fundamental growth store behind healthcare expenses, but
Speaker 3: that kind of changes now with the policy angle that
Speaker 3: a Health and Human Services Secretary R. F. K. Junior
Speaker 3: would bring.
Speaker 9: Yeah, look, coming into the election, our view is like
Speaker 9: banks is the clean trade, Both healthcare and energy are
Speaker 9: sort of much more nuanced from a sector perspective, And
Speaker 9: you know, I think the logic there and today is
Speaker 9: that find if let's say the Democrats win, you get
Speaker 9: broad based you know, healthcare spending. You know, that may
Speaker 9: be positive for parts of the sector, but they also,
Speaker 9: let's say, wanted to negotiate drug prices. And now you're
Speaker 9: seeing from a Trump election win that you also are
Speaker 9: getting some mixed signals here where Yes, he may be
Speaker 9: positive for M and A and maybe that's good for biotech,
Speaker 9: but maybe he's a headwin for the farms and benefit
Speaker 9: managers or kind of the larger cap healthcare sectors. So
Speaker 9: we're seeing a lot of people hide out in medical technology,
Speaker 9: you know, to your point, that is still sort of
Speaker 9: an active theme. But the sector itself, I would say,
Speaker 9: is a little bit discombobulated. And we're seeing a very
Speaker 9: similar thing on the energy side of things. So I
Speaker 9: think like those two in particular, they're very complex sectors
Speaker 9: and different you know, sort of gifts level two kind
Speaker 9: of industry groups are being impacted much much differently by
Speaker 9: the by the election outcome.
Speaker 1: All right, Stuart, we have to leave it there. It's
Speaker 1: great to see you. Happy holidays to you.
Speaker 6: That is Stuart Kaiser of City.
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