WEBVTT - Richard Bernstein on Quantitative Analysis 0:00:01.960 --> 0:00:06.040 This is Masters in Business with very Rid Holds on 0:00:06.200 --> 0:00:11.799 Bloomberg Radio. This week on the podcast, I have another 0:00:11.920 --> 0:00:16.520 extra special guest. Rich Bernstein is a legend in finance circles. 0:00:16.800 --> 0:00:19.840 He was the chief investment strategist at Merrill Lynch, where 0:00:19.880 --> 0:00:22.960 he worked for more than twenty years. Launched his own 0:00:23.040 --> 0:00:26.000 firm right into the teeth of the collapse in oh nine, 0:00:26.360 --> 0:00:28.880 which turned out to be quite a fortuitous time to 0:00:29.080 --> 0:00:33.200 launch an asset management shop. He is a macro top 0:00:33.280 --> 0:00:38.239 down guy with a strong quantity of background. If you're 0:00:38.280 --> 0:00:44.400 at all interested in thinking about asset allocation top down analysis, 0:00:44.840 --> 0:00:47.879 how to think about the world of investing, not as 0:00:47.920 --> 0:00:53.560 a stock picker, but as a broad macro perspective, none 0:00:53.600 --> 0:00:57.560 better than Rich Bernstein. I found this conversation to be fascinating, 0:00:57.640 --> 0:01:01.000 and I think you will also, with no further ado. 0:01:01.480 --> 0:01:06.319 RBA's Richard Bernstein. Let's start talking a little bit about 0:01:06.360 --> 0:01:10.360 your career. You get a BA in economics from Hamilton's College, 0:01:10.360 --> 0:01:14.399 you get an NBA from NYU, You go to a 0:01:14.400 --> 0:01:17.480 few firms before you end up at Merrill Lynch in 0:01:17.600 --> 0:01:20.640 nineteen eighty eight, not too long after the crash. Correct 0:01:20.840 --> 0:01:23.160 tell us a little bit what mother Merrill was like 0:01:23.240 --> 0:01:27.480 in the late eighties. So Merrill was a fantastic place 0:01:27.520 --> 0:01:29.880 to work. I had, as you pointed out, early in 0:01:29.880 --> 0:01:32.319 my career, I had bounced around a bunch of investment banks, 0:01:32.440 --> 0:01:35.600 and what I learned through time was it was important 0:01:35.600 --> 0:01:38.000 when I interviewed to interview the investment bank as it 0:01:38.080 --> 0:01:40.240 was for them to interview me. Each investment bank had 0:01:40.240 --> 0:01:43.000 a different corporate culture, and it was clear that some 0:01:43.040 --> 0:01:45.199 of them I liked and someone I didn't. And Merrill 0:01:45.440 --> 0:01:48.600 was just a fantastic corporate culture. It was Wall Street. 0:01:48.640 --> 0:01:50.160 So I don't want to make it sound like we 0:01:50.160 --> 0:01:52.440 were all best buddies or anything, but it was a 0:01:52.520 --> 0:01:56.800 very collegial, a very success oriented culture. It was a 0:01:56.800 --> 0:01:59.960 great place to work. So what was your first job? 0:02:00.080 --> 0:02:04.880 That did you start as an analyst? So truth be told, Um, 0:02:04.920 --> 0:02:08.160 I actually lied about my age to get my first job, 0:02:08.400 --> 0:02:11.320 because because back then you could ask people how old 0:02:11.400 --> 0:02:13.920 they were, and I was twenty nine, and I knew 0:02:13.919 --> 0:02:15.600 that if I told people I was twenty nine, they 0:02:15.639 --> 0:02:17.760 would think it was a kid. So I told him 0:02:17.760 --> 0:02:19.840 I was thirty, you know, the twenty nine ninety nine thing. 0:02:20.320 --> 0:02:25.400 So by the time I actually had the op, that's 0:02:25.560 --> 0:02:27.600 very fun. Yeah. And so by the time I got there, 0:02:27.639 --> 0:02:30.280 I was thirty. But to be honest, I mean, what 0:02:30.400 --> 0:02:32.800 is a twenty nine year old. No, but by the 0:02:32.840 --> 0:02:35.280 time you're thirty, you've got it all figured out exactly. 0:02:35.320 --> 0:02:38.840 That's what I figured. So, um, so I was hired 0:02:38.880 --> 0:02:44.160 to be, uh, the quantitative analyst. Um. This was in 0:02:44.200 --> 0:02:48.720 the late eighties. Quantitative analysis was really starting to gain momentum, 0:02:49.280 --> 0:02:51.919 and everybody thought they needed a quant of one form 0:02:52.000 --> 0:02:54.519 or another. And I'm not sure Merril knew what a 0:02:54.600 --> 0:02:56.760 quant did back then, but they knew it was a 0:02:57.120 --> 0:02:59.920 slot that got voted on an institutional investor and they 0:03:00.080 --> 0:03:02.720 wanted an analyst to fill the slot. And I was 0:03:02.720 --> 0:03:05.560 probably the cheapest. And that's how I go empty seats 0:03:05.560 --> 0:03:07.240 at the table, all right, exactly. I don't know if 0:03:07.280 --> 0:03:09.680 we're gonna win, but let's at least get nominated. Exactly. 0:03:09.840 --> 0:03:12.800 So you know, I figured I was there. But what 0:03:12.960 --> 0:03:15.840 was interesting and I think, you know, for anybody who's listening, 0:03:15.840 --> 0:03:18.880 who's who is starting as a young person in this industry, 0:03:18.919 --> 0:03:21.400 I think what I did learn was I took some 0:03:21.440 --> 0:03:23.560 of my experiences from business school in the business school 0:03:23.560 --> 0:03:26.919 case studies and there were a lot of very established 0:03:26.919 --> 0:03:29.880 senior analysts in Merrill, and the question was, how was 0:03:29.919 --> 0:03:31.959 I going to make an impact? Right, Who's going to 0:03:32.040 --> 0:03:34.240 listen to the twenty nine thirty year old guy. When 0:03:34.240 --> 0:03:37.200 you've got guys that are, you know, fifty fifty five 0:03:37.320 --> 0:03:39.800 sixty men and women that are fifty fifty five sixty, 0:03:39.840 --> 0:03:42.280 have multiple cycles, tons of experience, some of the best 0:03:42.280 --> 0:03:44.440 in the industry, why would they listen to me? And 0:03:44.520 --> 0:03:46.800 so I quickly figured out I couldn't do what everybody 0:03:46.800 --> 0:03:49.720 else was doing. I had to find something different, and 0:03:49.920 --> 0:03:52.960 I had to find a niche. And in the eighty 0:03:53.000 --> 0:03:56.840 nine nine recession, value managers did very, very poorly, and 0:03:57.000 --> 0:03:59.160 I just figured if I could help those value managers, 0:03:59.200 --> 0:04:01.720 it would solve a problem and it would create a 0:04:01.840 --> 0:04:04.240 need for my work. And that's how I started. All Right, 0:04:04.280 --> 0:04:08.800 so obvious question, it's nineteen ninety technology is about to explode. 0:04:09.520 --> 0:04:12.480 How do you help a value manager? Short of saying 0:04:13.440 --> 0:04:16.040 go by growth? Yes, Like, what do you do? Yeah? 0:04:16.080 --> 0:04:18.800 So in what we did was we figured out the 0:04:18.839 --> 0:04:23.000 economic rational, the macroeconomic influences about why growth and value 0:04:23.000 --> 0:04:25.280 work at any point in time. And so even if 0:04:25.360 --> 0:04:28.480 value managers weren't going to outperform. They could explain to 0:04:28.520 --> 0:04:31.440 their investors what was going on and why value was 0:04:31.480 --> 0:04:33.039 out of favor, and they could point to our work 0:04:33.080 --> 0:04:36.120 as an independent source, not their own marketing people defending 0:04:36.160 --> 0:04:39.240 their work. And so in the nineties, you know, the 0:04:39.240 --> 0:04:41.080 middle part of the nineties was kind of value orient 0:04:41.120 --> 0:04:42.680 did but you're right Berry, as we got to the 0:04:42.760 --> 0:04:45.560 late part of the nineties, nobody cared about value. That 0:04:45.960 --> 0:04:49.720 whole irrational exuberance era from ninety six, from the speech 0:04:49.720 --> 0:04:52.800 to two thousand that could be the best for you 0:04:52.960 --> 0:04:55.719 run in market history. It was crazy. It was It 0:04:55.760 --> 0:04:58.400 was really crazy. And I think you know, the way 0:04:58.440 --> 0:05:02.039 you can tell whenies are expensive is by the investment 0:05:02.040 --> 0:05:05.760 banking activity, because nobody sells a company when it's cheap. 0:05:05.800 --> 0:05:07.400 Everybody wants to sell a company when they get a 0:05:07.400 --> 0:05:11.920 good valuation. And so the investment banking activity started to explode. 0:05:12.040 --> 0:05:15.840 It was like mushrooming, like crazy um and people couldn't 0:05:15.839 --> 0:05:17.480 get enough. And that was that was a pretty good 0:05:17.560 --> 0:05:20.240 warning signed as to what we were adding for. So 0:05:20.320 --> 0:05:24.120 you start as the head of quant a department of one, 0:05:24.680 --> 0:05:28.240 how do you go from that to chief investment strategist? 0:05:28.279 --> 0:05:31.480 What is that career path like? So it was, it was. 0:05:32.080 --> 0:05:35.000 It wasn't a straight line, I can assure you. Um, 0:05:35.000 --> 0:05:37.960 I went from being the quantitative analyst to being the 0:05:38.040 --> 0:05:44.280 manager of quantitative analysis, to being the quantitative strategists, to 0:05:44.480 --> 0:05:48.760 being the chief US strategist, to being the chief quantitative strategists, 0:05:48.800 --> 0:05:52.840 and and you know, each step along the way, same office, 0:05:52.880 --> 0:05:56.120 same department, like they just changed the business card. Now. No, 0:05:56.240 --> 0:05:59.400 I actually fortunately I got I got more responsibility, bigger staff, 0:05:59.440 --> 0:06:03.000 and eventually a bigger office, yes, and everything that comes 0:06:03.000 --> 0:06:05.000 along with that. But but it took a while. That's 0:06:05.000 --> 0:06:08.280 a twenty year career, right, I mean, And as I said, 0:06:08.360 --> 0:06:10.560 Merril was a good place. If you worked hard and 0:06:10.640 --> 0:06:13.880 you did well, you were definitely rewarded at a place 0:06:13.920 --> 0:06:18.120 like Meryl. So you're there for twenty years, from nineteen 0:06:18.120 --> 0:06:20.920 eighty eight to two thousand and nine, and you say, 0:06:21.040 --> 0:06:23.160 you know, I think now is the time to go 0:06:23.240 --> 0:06:27.080 hang my own shingle. Given this whole financial crisis we've 0:06:27.120 --> 0:06:32.200 just been through. What was that experience like launching a 0:06:32.360 --> 0:06:35.520 firm right into the teeth of that mess. Yeah, so 0:06:37.040 --> 0:06:39.200 you know, two thousand and nine, what had happened was 0:06:39.240 --> 0:06:42.160 I was very burnt out. I mean, being a cell 0:06:42.240 --> 0:06:45.320 side strategist is a very, very difficult job. You're on 0:06:45.360 --> 0:06:47.320 the road a lot. I was on the road forty 0:06:47.320 --> 0:06:50.480 fifty sixty percent at the time, depending on what time 0:06:50.480 --> 0:06:52.919 of year was or something like that, all around the world. 0:06:53.440 --> 0:06:56.359 And you know, I actually remember when this kind of 0:06:56.400 --> 0:06:59.279 hit me. I was in Taiwan for like the you know, 0:06:59.520 --> 0:07:03.120 twentieth time or whatever it was, and a lot of 0:07:03.120 --> 0:07:05.000 my colleagues were going out and they said, do you 0:07:05.000 --> 0:07:06.200 want to come out with those like no, I'm just 0:07:06.200 --> 0:07:08.600 gonna watch TV. And then I'm watching TV and I realized, 0:07:08.839 --> 0:07:10.600 I'm one of the greatest cities of the world. I'm 0:07:10.640 --> 0:07:13.240 in Taipei, and all I want to do is watch TV. 0:07:13.280 --> 0:07:15.040 There's something wrong with my life. And that's when it 0:07:15.160 --> 0:07:17.760 kind of hit that I need to do something else. 0:07:18.280 --> 0:07:19.880 And so the question was what was I going to do? 0:07:20.840 --> 0:07:23.800 And um, I just figured, man, let's see if this 0:07:23.840 --> 0:07:25.840 stuff I've been telling everybody to do for all these years, 0:07:25.920 --> 0:07:28.720 let's see if it actually works. And I figured, let's 0:07:28.960 --> 0:07:32.240 let's start a firm. Now why why? Then? Well, I 0:07:32.320 --> 0:07:34.800 really thought, and I think some of my associates thought 0:07:34.880 --> 0:07:37.360 that two thousand and nine, was was a major market loan. 0:07:37.360 --> 0:07:38.800 We were going to enter one of the biggest bull 0:07:38.880 --> 0:07:42.080 markets of our careers, and we simply thought, if you're 0:07:42.080 --> 0:07:45.080 going to start a firm, now's the time. Now's the times. Absolutely, 0:07:45.120 --> 0:07:47.560 And how often in the US is down fifty six 0:07:47.680 --> 0:07:52.800 percent in equities not a good entry? Even twenty nine, Yeah, 0:07:52.920 --> 0:07:55.480 thirty two kind of you felt the pain, but still 0:07:55.800 --> 0:07:58.960 anytimes was equities a cut in half? Not a bit entry? No, 0:07:59.160 --> 0:08:02.840 And people were were not only figuratively but literally under 0:08:02.840 --> 0:08:06.880 their desk in the fetal position. And when we started 0:08:06.920 --> 0:08:08.800 our firm, what was very interesting and really kind of 0:08:08.800 --> 0:08:11.720 confirmed what we were talking about was that people would 0:08:11.720 --> 0:08:15.200 refuse to invest with us because we were too bullish. Now, 0:08:15.360 --> 0:08:20.080 keep in mind, I know you and David Rosenberg as 0:08:20.160 --> 0:08:23.160 the twin bears of the absolutely Right. Rosie, who's been 0:08:23.200 --> 0:08:25.800 on the show a couple of times and now runs 0:08:26.200 --> 0:08:30.960 Rosenberg Research, was the chief economist, you were the chief strategist, 0:08:31.360 --> 0:08:36.439 and in the mid two thousands, right, arguably a little early, 0:08:36.520 --> 0:08:40.160 but not that early. You guys were like uber bears, 0:08:40.480 --> 0:08:43.840 and you were wrong, wrong, and then wildly right. Ye. 0:08:44.360 --> 0:08:47.719 So um, it's funny to hear someone say that Rich 0:08:47.800 --> 0:08:51.840 Bartensting guy way too bullish. Yeah, it was. It was shocking. 0:08:51.880 --> 0:08:54.240 I mean it was something I didn't expect. But people 0:08:54.840 --> 0:08:57.880 literally would not invest with us because we were too bullish. 0:08:57.960 --> 0:09:00.280 They wanted to hear a Bearer's story post tooth thousand 0:09:00.320 --> 0:09:04.600 and nine. They wanted to be cautious. And our marketing materials. 0:09:04.640 --> 0:09:06.040 If you go back and look at all our marketing 0:09:06.040 --> 0:09:09.000 materials from twenty nine, ten, eleven, twelve, you'll see little 0:09:09.000 --> 0:09:11.199 things about what we call fire extinguishers that we were 0:09:11.240 --> 0:09:13.000 put in the portfolio. Things you could pull off the 0:09:13.040 --> 0:09:15.559 wall in case there was an emergency to put out 0:09:15.559 --> 0:09:17.960 the fire in the portfolio. And that was a that 0:09:18.040 --> 0:09:20.319 was a key part of our marketing back then. So 0:09:20.440 --> 0:09:23.679 were you when you launched the firm? Obviously it was 0:09:23.800 --> 0:09:29.400 macro focused. Also, how quantitative was it in twenty nine 0:09:29.440 --> 0:09:32.800 and ten? You're still bringing the same tools, the same 0:09:32.880 --> 0:09:35.319 philosophy along with correct So what we did the way 0:09:35.320 --> 0:09:38.680 our firm works is that we are very much active managers. 0:09:38.679 --> 0:09:40.840 We don't know anything about coke versus PEPSI. That that 0:09:40.840 --> 0:09:42.640 that's you know, I don't want to lead anybody astray. 0:09:42.679 --> 0:09:47.080 Who's listening your top down macro nut bottom ups completely completely. 0:09:47.120 --> 0:09:50.079 We do no individual stock selection. When we form portfolios 0:09:50.120 --> 0:09:53.679 of individual stocks. We're always forming baskets of stocks. Think 0:09:53.720 --> 0:09:55.360 of it as that we're forming our own ETFs, so 0:09:55.400 --> 0:09:58.920 to speak. That's that's what we're doing. Um And so 0:09:58.960 --> 0:10:02.760 what we do is we combine line a process driven 0:10:02.840 --> 0:10:09.240 macro assessment with quantitative portfolio formation. So we want to 0:10:09.240 --> 0:10:10.840 know what the risk is we're taking. You know, it's 0:10:10.840 --> 0:10:12.720 always good to say like, oh, you should go do 0:10:12.760 --> 0:10:15.240 this from a macro perspective. The question then is can 0:10:15.280 --> 0:10:18.679 you actually do it? And meaning can you express that 0:10:19.559 --> 0:10:23.600 investment thesis in a portfolio in a portfolio without taking 0:10:23.679 --> 0:10:26.840 ridiculous amounts of risk? And so what we do is 0:10:26.840 --> 0:10:29.640 we balance out those macro views with the risk assessment, 0:10:29.640 --> 0:10:33.840 the quantitative assessment to form a realistic portfolio. And how 0:10:33.840 --> 0:10:36.520 has that been working out? Knock on wood, We've been 0:10:36.520 --> 0:10:41.320 doing okay. I think well. Twenty twenty two clearly was 0:10:41.559 --> 0:10:45.600 a macro investors paradise at least if you got it right. 0:10:45.880 --> 0:10:48.880 It's no fun when you're the macro tourist in the 0:10:48.920 --> 0:10:55.239 wrong place, but you're bringing a certain discipline and quantitative analysis. 0:10:56.240 --> 0:10:58.640 Tell us a little bit about and we'll talk in 0:10:58.720 --> 0:11:02.080 depth more about your process. But it's late twenty one, 0:11:02.920 --> 0:11:07.400 SMP up twenty eight percent from the previous low, from 0:11:07.400 --> 0:11:10.800 the COVID low. In twenty twenty, I think the SMP 0:11:10.920 --> 0:11:15.280 gained sixty eight percent to finish the year, So up 0:11:15.320 --> 0:11:18.240 eighteen or nineteen percent for the year. You see those 0:11:18.240 --> 0:11:22.240 spectacular numbers. What does that do to your macro perspective 0:11:22.640 --> 0:11:25.920 heading into twenty twenty oh end? Inflation is ticked up 0:11:25.960 --> 0:11:29.240 through two percent in March and has begun to really 0:11:29.280 --> 0:11:32.440 move higher in twenty one. Right, So what people forget 0:11:32.640 --> 0:11:37.640 is going into the into the pandemic, the US economy 0:11:37.679 --> 0:11:40.480 was actually starting to slow and slow pretty dramatically. Nobody 0:11:40.520 --> 0:11:42.760 remembers that anymore because the pandemic, but that was starting 0:11:42.760 --> 0:11:46.000 to happen, and so we you'l curve inverted. The curve 0:11:46.040 --> 0:11:49.600 inverted was some definite expectations of a recession. Profits were 0:11:49.640 --> 0:11:52.920 profits were slowing very dramatically. Employment growth was negative year 0:11:52.960 --> 0:11:54.600 on year. I mean, there were all these things were 0:11:54.600 --> 0:11:56.760 starting to happen. So we were calming down the risk 0:11:56.800 --> 0:12:00.600 in our portfolios, becoming more and more defensive. Obviously, when 0:12:00.600 --> 0:12:03.080 the pandemic hit, we did very well, not that we 0:12:03.080 --> 0:12:05.959 saw the pandemic coming, but we saw the economy slowing, 0:12:06.360 --> 0:12:08.400 and so we ended up doing very well, a little 0:12:08.400 --> 0:12:11.439 bit of luck, I will readily admit on that one. Um. 0:12:11.559 --> 0:12:16.000 Then coming out of the pandemic, we were very defensively 0:12:16.040 --> 0:12:18.040 positioned and we weren't sure what was going to happen. 0:12:18.080 --> 0:12:20.640 There's no playbook for a pandemic. You can't go back 0:12:20.640 --> 0:12:23.000 and say, like, what, how does the macroeconomy respond after 0:12:23.000 --> 0:12:25.719 a pandemic? There's no cycle. Nineteen eighteen wasn't a big 0:12:25.760 --> 0:12:31.440 hell no, no zero guidance. So so so we we 0:12:31.600 --> 0:12:34.280 just decided as a group, we said, look, if we're 0:12:34.320 --> 0:12:37.720 going to be wrong, what's going to benefit the most 0:12:38.120 --> 0:12:40.760 from that environment. What's one hundred and eighty degrees away 0:12:40.800 --> 0:12:43.440 from where we are positioned right now, Let's own some 0:12:43.520 --> 0:12:46.480 of that in case we're completely wrong. One hundred eighty 0:12:46.520 --> 0:12:49.319 degrees away from what we were owning was energy to 0:12:49.480 --> 0:12:53.079 the right, and which had a fabulous fantast last year. 0:12:53.120 --> 0:12:56.240 I mean it was it was surprising given that oil 0:12:56.720 --> 0:13:00.560 was negative on that year, Yeah, which always shocks people. Yeah, 0:13:00.600 --> 0:13:03.560 it was it was you know, if you think about 0:13:03.840 --> 0:13:06.520 twenty one to twenty two, twenty one, well, at one 0:13:06.520 --> 0:13:08.720 point actually had a negative was priced with a negative 0:13:08.760 --> 0:13:10.600 sign in front of it. I don't understand anything could 0:13:10.600 --> 0:13:13.079 be priced with a negative sign, but sure enough it did. 0:13:13.160 --> 0:13:16.360 And you know, some of the major oil companies had 0:13:16.720 --> 0:13:18.960 you know, eight and ten percent dividend yields and things 0:13:19.040 --> 0:13:21.160 like that. So we just figured, Okay, if we're gonna 0:13:21.200 --> 0:13:23.400 be wrong, let's not take a lot of risks. This 0:13:23.440 --> 0:13:26.480 seems like a good opportunity that's played out very well 0:13:26.480 --> 0:13:30.079 over the last couple of years. But I think, um, 0:13:30.520 --> 0:13:33.440 you know, for us, twenty twenty one in general, was 0:13:33.760 --> 0:13:35.640 towards the end of the year got very hard, right. 0:13:35.679 --> 0:13:39.520 We had a big speculative burst in the marketplace. Um, 0:13:39.880 --> 0:13:43.600 you know, every it was all about tech innovation, disruption, cryptocurrencies. 0:13:43.640 --> 0:13:45.880 It couldn't be sexier, you know, that type of thing. 0:13:46.320 --> 0:13:50.040 And so that's not us. We're not momentum investors at all, 0:13:50.160 --> 0:13:53.240 and so we lagged there. But then twenty twenty two, 0:13:53.760 --> 0:13:56.240 when the momentum faded as the FED was tightening and 0:13:56.400 --> 0:13:59.880 monetary conditions changed and profits began to slow, we did 0:14:00.280 --> 0:14:04.319 very well. So the question I have about that environment, 0:14:04.880 --> 0:14:09.439 you have all these conflicting crosscurrents happening. At the same time, 0:14:09.800 --> 0:14:13.480 employment is strong but rates of going up. Margins are falling, 0:14:13.600 --> 0:14:15.560 but lots of companies seem to be able to pass 0:14:15.559 --> 0:14:19.760 along input costs to their end consumers, and the consumers 0:14:19.920 --> 0:14:23.280 had plenty of stimulus money in their wallets they continue 0:14:23.320 --> 0:14:27.600 to spend. As a macro strategist, how do you look 0:14:27.600 --> 0:14:34.360 at all these seemingly canceling sign waves to get to 0:14:33.880 --> 0:14:38.440 the signal amongst the noise. To paraphrase, absolutely your book. 0:14:38.560 --> 0:14:40.160 So I think I think the first thing that one 0:14:40.200 --> 0:14:42.520 has to do in the current environment is understand that 0:14:42.560 --> 0:14:46.360 the central bankers in the nineteen seventies were not stupid, right. 0:14:46.440 --> 0:14:48.880 They were faced with varying pressures. They were they were 0:14:49.000 --> 0:14:51.480 vased with some of the conflicting data that you you're 0:14:51.480 --> 0:14:56.480 talking about, Barry, and obviously lots of politics involved as well. 0:14:56.960 --> 0:14:59.080 And I think the thing we all have to remember 0:14:59.200 --> 0:15:02.280 is that fighting is not easy. There's this kind of 0:15:02.320 --> 0:15:05.240 notion that, Okay, the FED is raised rates, the worst 0:15:05.320 --> 0:15:07.440 is behind us, it's all over. Well, it'll be fine, 0:15:07.480 --> 0:15:10.120 we can go right back to where we were. History 0:15:10.120 --> 0:15:12.880 says that's not quite the way it works. And so 0:15:13.240 --> 0:15:15.360 I think in the current environment. You have to kind 0:15:15.360 --> 0:15:20.120 of understand that we're reliving the past to some extent, 0:15:20.720 --> 0:15:23.600 and I'm not sure it's an evolution. I'm not sure 0:15:23.640 --> 0:15:26.360 we're any smarter than we were in the seventies that 0:15:26.440 --> 0:15:28.840 the same pressures and the same conflicts and all that 0:15:28.920 --> 0:15:32.240 kind of data are still there. So I think that, 0:15:32.440 --> 0:15:35.320 you know, our story has been that the FED will 0:15:35.360 --> 0:15:39.520 be tighter for longer than people think that it's this 0:15:39.760 --> 0:15:41.800 this tightening cycle is not going to end quickly and 0:15:41.920 --> 0:15:44.880 right now. I think the biggest thorn, which you point out, Berry, 0:15:45.080 --> 0:15:48.280 is the labor market. That is a huge thorn in 0:15:48.320 --> 0:15:50.920 the FED side. You know, I think if we had 0:15:50.920 --> 0:15:53.800 said this to going into this, the Federal Reserve would 0:15:53.840 --> 0:15:56.320 raise interest rates four d seventy five basis points. What 0:15:56.360 --> 0:15:58.840 would happen to the demand for labor? We would all 0:15:58.880 --> 0:16:01.440 say it would fall over. Well, the demand for laborer 0:16:01.480 --> 0:16:04.600 has actually gotten marginally stronger. I mean, it's crazy to 0:16:04.680 --> 0:16:06.600 think that way, but that's kind of what's going on. 0:16:06.680 --> 0:16:09.200 So that is a big thorn in the side of 0:16:09.200 --> 0:16:12.440 the FED. And I think that if you think about 0:16:12.480 --> 0:16:15.240 what it means to weaken the labor market and what 0:16:15.280 --> 0:16:17.480 that means from the political side. You can then start 0:16:17.560 --> 0:16:20.200 understanding the cross currents that are facing the FED right now, 0:16:20.680 --> 0:16:24.360 really interesting, Let's talk a little bit about that model 0:16:25.080 --> 0:16:27.320 kind of similar to what you did at Meryl. Tell 0:16:27.400 --> 0:16:29.920 us about who you work with, who your clients are, right, So, 0:16:29.960 --> 0:16:35.480 our clients are financial advisors and institutions, as you point out, 0:16:36.600 --> 0:16:39.760 and the methodology that we use is very similar to 0:16:39.800 --> 0:16:42.680 what we originally constructed at Meryl. I mean, the original 0:16:42.680 --> 0:16:45.840 research was like the early nineteen nineties. We're now on 0:16:46.000 --> 0:16:47.840 sort of, you know, the fifth or six or seventh 0:16:47.920 --> 0:16:51.400 generation of that original research. But you know, our goal, 0:16:51.520 --> 0:16:54.640 my goal always was as a researcher was to try 0:16:54.840 --> 0:16:59.760 and understand what the macro influences were on the stock market. 0:17:00.480 --> 0:17:03.000 You know, most people try to look at individual stocks 0:17:03.000 --> 0:17:05.320 and they try to figure out why company A is 0:17:05.359 --> 0:17:10.120 outperforming company B, and they forget about the macro influences. 0:17:10.200 --> 0:17:12.760 And so my job has always been to try and 0:17:12.760 --> 0:17:16.359 figure out what in the macro environment is causing things 0:17:16.400 --> 0:17:19.840 to happen. And my attitude has always been if you 0:17:19.840 --> 0:17:21.960 can understand that and you can identify what the macro 0:17:22.040 --> 0:17:25.800 causes are, you can generally take advantage at in the marketplace. 0:17:26.119 --> 0:17:32.480 So you describe your firm's quantitative approach as really having 0:17:32.680 --> 0:17:38.640 three drivers, profits, liquidity, and sentiment. So let's talk about 0:17:38.680 --> 0:17:46.119 all three. Obviously profits very important to company valuation, growth, metrics, growth, 0:17:46.160 --> 0:17:48.719 all those sort of fun things. So I don't know 0:17:48.760 --> 0:17:52.040 how much detail we have to deal into profits. Let's 0:17:52.080 --> 0:17:54.639 talk a little bit about liquidity and sentiment. What do 0:17:54.680 --> 0:17:58.080 you look at when you're looking at liquidity, So liquidity, Barry, 0:17:58.119 --> 0:18:01.280 we look at at liquidity can do in roughly forty 0:18:01.320 --> 0:18:03.840 or forty five different countries around the world. Obviously get 0:18:03.880 --> 0:18:06.000 more detail in the United States than you would in 0:18:06.320 --> 0:18:08.240 an emerging market, but we still look at about forty 0:18:08.280 --> 0:18:13.080 or forty five different countries. Liquidity is really necessary for 0:18:13.119 --> 0:18:15.960 people to take risk. And so what you want you 0:18:16.000 --> 0:18:18.200 want to look at corporate profits because you want fundamentals 0:18:18.240 --> 0:18:20.399 to be improving, of course, but then you want to 0:18:20.440 --> 0:18:22.880 have liquidity so that people can take advantage of that 0:18:22.960 --> 0:18:26.280 of those improving fundamentals. And so what do we look 0:18:26.280 --> 0:18:28.800 at to gauge liquidity? What we look at central bank policies. 0:18:28.840 --> 0:18:32.240 Of course, we look at slopes of yeld curves. We 0:18:32.320 --> 0:18:35.879 look at banks willingness to lend, because you remember central 0:18:35.880 --> 0:18:39.840 banks at least in true capitalist economies, moving not so 0:18:39.920 --> 0:18:42.560 much in a command economy. Even in a true capitalist economy, 0:18:42.800 --> 0:18:45.480 the central bank can only set the table, and they 0:18:45.520 --> 0:18:48.639 can't force banks to lend or stop lending. You know, 0:18:48.680 --> 0:18:51.560 we all hear about the lags of monetary policy. That's 0:18:51.600 --> 0:18:53.560 one of the reasons why there are legs. So the 0:18:53.600 --> 0:18:56.600 FED could lower interest rates, it doesn't guarantee the banks 0:18:56.600 --> 0:18:58.240 are going to be willing to land at the moment 0:18:58.280 --> 0:19:00.880 they lower interest rates, or they can raise interest rates. 0:19:00.920 --> 0:19:02.760 It doesn't mean that banks are going to stop lending 0:19:02.960 --> 0:19:05.320 the second they raise interest rates. So we look at 0:19:05.359 --> 0:19:08.800 how banks erecting and bank the willingness of banks to 0:19:08.920 --> 0:19:11.960 lend as well. So I have a vivid recollection. Back 0:19:12.000 --> 0:19:13.960 in the days when I was on a trading desk, 0:19:14.880 --> 0:19:17.159 M three would come out, money supply would come I 0:19:17.160 --> 0:19:18.959 don't even know if we report M three any it's 0:19:19.119 --> 0:19:23.600 two now, right, So they went to a I think 0:19:23.640 --> 0:19:26.040 it's M one, M two, M three, M three was 0:19:26.119 --> 0:19:28.879 the narrowest, the broadest, the broadest, the broadest, right, I 0:19:28.880 --> 0:19:32.919 didn't remember. But nobody talks about money supply anymore in 0:19:32.960 --> 0:19:37.160 those terms. But that theoretically was liquidity, That would find 0:19:37.160 --> 0:19:39.600 its way into stock markets, do we When you talk 0:19:39.600 --> 0:19:43.760 about liquidity, how do you think about the dollar and 0:19:43.880 --> 0:19:47.560 the availability of sure free capital sure, so you know 0:19:47.600 --> 0:19:50.199 it's it's it's kind of interesting even relative to the 0:19:50.240 --> 0:19:52.800 last cycle where you know, money growth M two growth. 0:19:53.000 --> 0:19:55.440 Getting back to your question, before M two growth got 0:19:55.480 --> 0:19:58.520 up to about twenty seven twenty eight percent, which was 0:19:58.560 --> 0:20:01.520 the highest in his story that we can find. Put 0:20:01.560 --> 0:20:03.679 it put the United States on par with Peru at 0:20:03.680 --> 0:20:06.320 the time, just to put it in proper perspective, and 0:20:06.440 --> 0:20:08.600 given that during the pandemic, not a lot of business 0:20:08.640 --> 0:20:11.760 was going on, so you had tons of liquidity going 0:20:11.760 --> 0:20:14.440 into the economy and really no place for it to go. 0:20:15.160 --> 0:20:17.160 So that means it's going to go to savings. If 0:20:17.160 --> 0:20:19.159 it's going to savings, where's it going to end up. 0:20:19.200 --> 0:20:21.679 It's going to end up in the stock market. And 0:20:21.920 --> 0:20:24.320 I think that was one of the reasons why we 0:20:24.400 --> 0:20:27.720 saw the bull market um developed much more quickly than 0:20:27.760 --> 0:20:31.119 people thoughts through the pandemic. Post pandemic, YEA makes a 0:20:31.119 --> 0:20:35.560 lot of sense. And last is sentiment. So so there's 0:20:35.600 --> 0:20:40.520 always a challenge looking at sentiment because it's so noisy, 0:20:41.000 --> 0:20:47.080 except that extremes. How do you use sentiment in your 0:20:47.160 --> 0:20:50.800 your spot on on that? And we tend to fade 0:20:50.960 --> 0:20:54.000 some of the more accepted sentiment indicators, the kind of 0:20:54.040 --> 0:20:56.760 short term you know, put call ratios, things like that, 0:20:57.000 --> 0:20:59.720 because call odd lots was a big deal years ago. 0:21:00.040 --> 0:21:03.119 I mean all these things, just m three odd lots 0:21:03.280 --> 0:21:06.960 is like a great so. And the reason why is 0:21:06.960 --> 0:21:09.640 because exactly what you point out is that they're so volatile, 0:21:09.920 --> 0:21:13.040 and as an investor is opposed to a short term trader, 0:21:13.320 --> 0:21:15.600 it's questionable as to whether you get a consistent signal, 0:21:15.640 --> 0:21:18.399 so you can actually take an investment position in that. 0:21:18.800 --> 0:21:20.640 So we tend to look at sentiment a little more 0:21:21.200 --> 0:21:25.800 structurally by looking at at various measures that try to 0:21:25.800 --> 0:21:29.240