Speaker 1: This is Masters in Business with very Rid Holds on
Speaker 1: Bloomberg Radio. This week on the podcast, I have another
Speaker 1: extra special guest. Rich Bernstein is a legend in finance circles.
Speaker 1: He was the chief investment strategist at Merrill Lynch, where
Speaker 1: he worked for more than twenty years. Launched his own
Speaker 1: firm right into the teeth of the collapse in oh nine,
Speaker 1: which turned out to be quite a fortuitous time to
Speaker 1: launch an asset management shop. He is a macro top
Speaker 1: down guy with a strong quantity of background. If you're
Speaker 1: at all interested in thinking about asset allocation top down analysis,
Speaker 1: how to think about the world of investing, not as
Speaker 1: a stock picker, but as a broad macro perspective, none
Speaker 1: better than Rich Bernstein. I found this conversation to be fascinating,
Speaker 1: and I think you will also, with no further ado.
Speaker 1: RBA's Richard Bernstein. Let's start talking a little bit about
Speaker 1: your career. You get a BA in economics from Hamilton's College,
Speaker 1: you get an NBA from NYU, You go to a
Speaker 1: few firms before you end up at Merrill Lynch in
Speaker 1: nineteen eighty eight, not too long after the crash. Correct
Speaker 1: tell us a little bit what mother Merrill was like
Speaker 1: in the late eighties. So Merrill was a fantastic place
Speaker 1: to work. I had, as you pointed out, early in
Speaker 1: my career, I had bounced around a bunch of investment banks,
Speaker 1: and what I learned through time was it was important
Speaker 1: when I interviewed to interview the investment bank as it
Speaker 1: was for them to interview me. Each investment bank had
Speaker 1: a different corporate culture, and it was clear that some
Speaker 1: of them I liked and someone I didn't. And Merrill
Speaker 1: was just a fantastic corporate culture. It was Wall Street.
Speaker 1: So I don't want to make it sound like we
Speaker 1: were all best buddies or anything, but it was a
Speaker 1: very collegial, a very success oriented culture. It was a
Speaker 1: great place to work. So what was your first job?
Speaker 1: That did you start as an analyst? So truth be told, Um,
Speaker 1: I actually lied about my age to get my first job,
Speaker 1: because because back then you could ask people how old
Speaker 1: they were, and I was twenty nine, and I knew
Speaker 1: that if I told people I was twenty nine, they
Speaker 1: would think it was a kid. So I told him
Speaker 1: I was thirty, you know, the twenty nine ninety nine thing.
Speaker 1: So by the time I actually had the op, that's
Speaker 1: very fun. Yeah. And so by the time I got there,
Speaker 1: I was thirty. But to be honest, I mean, what
Speaker 1: is a twenty nine year old. No, but by the
Speaker 1: time you're thirty, you've got it all figured out exactly.
Speaker 1: That's what I figured. So, um, so I was hired
Speaker 1: to be, uh, the quantitative analyst. Um. This was in
Speaker 1: the late eighties. Quantitative analysis was really starting to gain momentum,
Speaker 1: and everybody thought they needed a quant of one form
Speaker 1: or another. And I'm not sure Merril knew what a
Speaker 1: quant did back then, but they knew it was a
Speaker 1: slot that got voted on an institutional investor and they
Speaker 1: wanted an analyst to fill the slot. And I was
Speaker 1: probably the cheapest. And that's how I go empty seats
Speaker 1: at the table, all right, exactly. I don't know if
Speaker 1: we're gonna win, but let's at least get nominated. Exactly.
Speaker 1: So you know, I figured I was there. But what
Speaker 1: was interesting and I think, you know, for anybody who's listening,
Speaker 1: who's who is starting as a young person in this industry,
Speaker 1: I think what I did learn was I took some
Speaker 1: of my experiences from business school in the business school
Speaker 1: case studies and there were a lot of very established
Speaker 1: senior analysts in Merrill, and the question was, how was
Speaker 1: I going to make an impact? Right, Who's going to
Speaker 1: listen to the twenty nine thirty year old guy. When
Speaker 1: you've got guys that are, you know, fifty fifty five
Speaker 1: sixty men and women that are fifty fifty five sixty,
Speaker 1: have multiple cycles, tons of experience, some of the best
Speaker 1: in the industry, why would they listen to me? And
Speaker 1: so I quickly figured out I couldn't do what everybody
Speaker 1: else was doing. I had to find something different, and
Speaker 1: I had to find a niche. And in the eighty
Speaker 1: nine nine recession, value managers did very, very poorly, and
Speaker 1: I just figured if I could help those value managers,
Speaker 1: it would solve a problem and it would create a
Speaker 1: need for my work. And that's how I started. All Right,
Speaker 1: so obvious question, it's nineteen ninety technology is about to explode.
Speaker 1: How do you help a value manager? Short of saying
Speaker 1: go by growth? Yes, Like, what do you do? Yeah?
Speaker 1: So in what we did was we figured out the
Speaker 1: economic rational, the macroeconomic influences about why growth and value
Speaker 1: work at any point in time. And so even if
Speaker 1: value managers weren't going to outperform. They could explain to
Speaker 1: their investors what was going on and why value was
Speaker 1: out of favor, and they could point to our work
Speaker 1: as an independent source, not their own marketing people defending
Speaker 1: their work. And so in the nineties, you know, the
Speaker 1: middle part of the nineties was kind of value orient
Speaker 1: did but you're right Berry, as we got to the
Speaker 1: late part of the nineties, nobody cared about value. That
Speaker 1: whole irrational exuberance era from ninety six, from the speech
Speaker 1: to two thousand that could be the best for you
Speaker 1: run in market history. It was crazy. It was It
Speaker 1: was really crazy. And I think you know, the way
Speaker 1: you can tell whenies are expensive is by the investment
Speaker 1: banking activity, because nobody sells a company when it's cheap.
Speaker 1: Everybody wants to sell a company when they get a
Speaker 1: good valuation. And so the investment banking activity started to explode.
Speaker 1: It was like mushrooming, like crazy um and people couldn't
Speaker 1: get enough. And that was that was a pretty good
Speaker 1: warning signed as to what we were adding for. So
Speaker 1: you start as the head of quant a department of one,
Speaker 1: how do you go from that to chief investment strategist?
Speaker 1: What is that career path like? So it was, it was.
Speaker 1: It wasn't a straight line, I can assure you. Um,
Speaker 1: I went from being the quantitative analyst to being the
Speaker 1: manager of quantitative analysis, to being the quantitative strategists, to
Speaker 1: being the chief US strategist, to being the chief quantitative strategists,
Speaker 1: and and you know, each step along the way, same office,
Speaker 1: same department, like they just changed the business card. Now. No,
Speaker 1: I actually fortunately I got I got more responsibility, bigger staff,
Speaker 1: and eventually a bigger office, yes, and everything that comes
Speaker 1: along with that. But but it took a while. That's
Speaker 1: a twenty year career, right, I mean, And as I said,
Speaker 1: Merril was a good place. If you worked hard and
Speaker 1: you did well, you were definitely rewarded at a place
Speaker 1: like Meryl. So you're there for twenty years, from nineteen
Speaker 1: eighty eight to two thousand and nine, and you say,
Speaker 1: you know, I think now is the time to go
Speaker 1: hang my own shingle. Given this whole financial crisis we've
Speaker 1: just been through. What was that experience like launching a
Speaker 1: firm right into the teeth of that mess. Yeah, so
Speaker 1: you know, two thousand and nine, what had happened was
Speaker 1: I was very burnt out. I mean, being a cell
Speaker 1: side strategist is a very, very difficult job. You're on
Speaker 1: the road a lot. I was on the road forty
Speaker 1: fifty sixty percent at the time, depending on what time
Speaker 1: of year was or something like that, all around the world.
Speaker 1: And you know, I actually remember when this kind of
Speaker 1: hit me. I was in Taiwan for like the you know,
Speaker 1: twentieth time or whatever it was, and a lot of
Speaker 1: my colleagues were going out and they said, do you
Speaker 1: want to come out with those like no, I'm just
Speaker 1: gonna watch TV. And then I'm watching TV and I realized,
Speaker 1: I'm one of the greatest cities of the world. I'm
Speaker 1: in Taipei, and all I want to do is watch TV.
Speaker 1: There's something wrong with my life. And that's when it
Speaker 1: kind of hit that I need to do something else.
Speaker 1: And so the question was what was I going to do?
Speaker 1: And um, I just figured, man, let's see if this
Speaker 1: stuff I've been telling everybody to do for all these years,
Speaker 1: let's see if it actually works. And I figured, let's
Speaker 1: let's start a firm. Now why why? Then? Well, I
Speaker 1: really thought, and I think some of my associates thought
Speaker 1: that two thousand and nine, was was a major market loan.
Speaker 1: We were going to enter one of the biggest bull
Speaker 1: markets of our careers, and we simply thought, if you're
Speaker 1: going to start a firm, now's the time. Now's the times. Absolutely,
Speaker 1: And how often in the US is down fifty six
Speaker 1: percent in equities not a good entry? Even twenty nine, Yeah,
Speaker 1: thirty two kind of you felt the pain, but still
Speaker 1: anytimes was equities a cut in half? Not a bit entry? No,
Speaker 1: And people were were not only figuratively but literally under
Speaker 1: their desk in the fetal position. And when we started
Speaker 1: our firm, what was very interesting and really kind of
Speaker 1: confirmed what we were talking about was that people would
Speaker 1: refuse to invest with us because we were too bullish. Now,
Speaker 1: keep in mind, I know you and David Rosenberg as
Speaker 1: the twin bears of the absolutely Right. Rosie, who's been
Speaker 1: on the show a couple of times and now runs
Speaker 1: Rosenberg Research, was the chief economist, you were the chief strategist,
Speaker 1: and in the mid two thousands, right, arguably a little early,
Speaker 1: but not that early. You guys were like uber bears,
Speaker 1: and you were wrong, wrong, and then wildly right. Ye.
Speaker 1: So um, it's funny to hear someone say that Rich
Speaker 1: Bartensting guy way too bullish. Yeah, it was. It was shocking.
Speaker 1: I mean it was something I didn't expect. But people
Speaker 1: literally would not invest with us because we were too bullish.
Speaker 1: They wanted to hear a Bearer's story post tooth thousand
Speaker 1: and nine. They wanted to be cautious. And our marketing materials.
Speaker 1: If you go back and look at all our marketing
Speaker 1: materials from twenty nine, ten, eleven, twelve, you'll see little
Speaker 1: things about what we call fire extinguishers that we were
Speaker 1: put in the portfolio. Things you could pull off the
Speaker 1: wall in case there was an emergency to put out
Speaker 1: the fire in the portfolio. And that was a that
Speaker 1: was a key part of our marketing back then. So
Speaker 1: were you when you launched the firm? Obviously it was
Speaker 1: macro focused. Also, how quantitative was it in twenty nine
Speaker 1: and ten? You're still bringing the same tools, the same
Speaker 1: philosophy along with correct So what we did the way
Speaker 1: our firm works is that we are very much active managers.
Speaker 1: We don't know anything about coke versus PEPSI. That that
Speaker 1: that's you know, I don't want to lead anybody astray.
Speaker 1: Who's listening your top down macro nut bottom ups completely completely.
Speaker 1: We do no individual stock selection. When we form portfolios
Speaker 1: of individual stocks. We're always forming baskets of stocks. Think
Speaker 1: of it as that we're forming our own ETFs, so
Speaker 1: to speak. That's that's what we're doing. Um And so
Speaker 1: what we do is we combine line a process driven
Speaker 1: macro assessment with quantitative portfolio formation. So we want to
Speaker 1: know what the risk is we're taking. You know, it's
Speaker 1: always good to say like, oh, you should go do
Speaker 1: this from a macro perspective. The question then is can
Speaker 1: you actually do it? And meaning can you express that
Speaker 1: investment thesis in a portfolio in a portfolio without taking
Speaker 1: ridiculous amounts of risk? And so what we do is
Speaker 1: we balance out those macro views with the risk assessment,
Speaker 1: the quantitative assessment to form a realistic portfolio. And how
Speaker 1: has that been working out? Knock on wood, We've been
Speaker 1: doing okay. I think well. Twenty twenty two clearly was
Speaker 1: a macro investors paradise at least if you got it right.
Speaker 1: It's no fun when you're the macro tourist in the
Speaker 1: wrong place, but you're bringing a certain discipline and quantitative analysis.
Speaker 1: Tell us a little bit about and we'll talk in
Speaker 1: depth more about your process. But it's late twenty one,
Speaker 1: SMP up twenty eight percent from the previous low, from
Speaker 1: the COVID low. In twenty twenty, I think the SMP
Speaker 1: gained sixty eight percent to finish the year, So up
Speaker 1: eighteen or nineteen percent for the year. You see those
Speaker 1: spectacular numbers. What does that do to your macro perspective
Speaker 1: heading into twenty twenty oh end? Inflation is ticked up
Speaker 1: through two percent in March and has begun to really
Speaker 1: move higher in twenty one. Right, So what people forget
Speaker 1: is going into the into the pandemic, the US economy
Speaker 1: was actually starting to slow and slow pretty dramatically. Nobody
Speaker 1: remembers that anymore because the pandemic, but that was starting
Speaker 1: to happen, and so we you'l curve inverted. The curve
Speaker 1: inverted was some definite expectations of a recession. Profits were
Speaker 1: profits were slowing very dramatically. Employment growth was negative year
Speaker 1: on year. I mean, there were all these things were
Speaker 1: starting to happen. So we were calming down the risk
Speaker 1: in our portfolios, becoming more and more defensive. Obviously, when
Speaker 1: the pandemic hit, we did very well, not that we
Speaker 1: saw the pandemic coming, but we saw the economy slowing,
Speaker 1: and so we ended up doing very well, a little
Speaker 1: bit of luck, I will readily admit on that one. Um.
Speaker 1: Then coming out of the pandemic, we were very defensively
Speaker 1: positioned and we weren't sure what was going to happen.
Speaker 1: There's no playbook for a pandemic. You can't go back
Speaker 1: and say, like, what, how does the macroeconomy respond after
Speaker 1: a pandemic? There's no cycle. Nineteen eighteen wasn't a big
Speaker 1: hell no, no zero guidance. So so so we we
Speaker 1: just decided as a group, we said, look, if we're
Speaker 1: going to be wrong, what's going to benefit the most
Speaker 1: from that environment. What's one hundred and eighty degrees away
Speaker 1: from where we are positioned right now, Let's own some
Speaker 1: of that in case we're completely wrong. One hundred eighty
Speaker 1: degrees away from what we were owning was energy to
Speaker 1: the right, and which had a fabulous fantast last year.
Speaker 1: I mean it was it was surprising given that oil
Speaker 1: was negative on that year, Yeah, which always shocks people. Yeah,
Speaker 1: it was it was you know, if you think about
Speaker 1: twenty one to twenty two, twenty one, well, at one
Speaker 1: point actually had a negative was priced with a negative
Speaker 1: sign in front of it. I don't understand anything could
Speaker 1: be priced with a negative sign, but sure enough it did.
Speaker 1: And you know, some of the major oil companies had
Speaker 1: you know, eight and ten percent dividend yields and things
Speaker 1: like that. So we just figured, Okay, if we're gonna
Speaker 1: be wrong, let's not take a lot of risks. This
Speaker 1: seems like a good opportunity that's played out very well
Speaker 1: over the last couple of years. But I think, um,
Speaker 1: you know, for us, twenty twenty one in general, was
Speaker 1: towards the end of the year got very hard, right.
Speaker 1: We had a big speculative burst in the marketplace. Um,
Speaker 1: you know, every it was all about tech innovation, disruption, cryptocurrencies.
Speaker 1: It couldn't be sexier, you know, that type of thing.
Speaker 1: And so that's not us. We're not momentum investors at all,
Speaker 1: and so we lagged there. But then twenty twenty two,
Speaker 1: when the momentum faded as the FED was tightening and
Speaker 1: monetary conditions changed and profits began to slow, we did
Speaker 1: very well. So the question I have about that environment,
Speaker 1: you have all these conflicting crosscurrents happening. At the same time,
Speaker 1: employment is strong but rates of going up. Margins are falling,
Speaker 1: but lots of companies seem to be able to pass
Speaker 1: along input costs to their end consumers, and the consumers
Speaker 1: had plenty of stimulus money in their wallets they continue
Speaker 1: to spend. As a macro strategist, how do you look
Speaker 1: at all these seemingly canceling sign waves to get to
Speaker 1: the signal amongst the noise. To paraphrase, absolutely your book.
Speaker 1: So I think I think the first thing that one
Speaker 1: has to do in the current environment is understand that
Speaker 1: the central bankers in the nineteen seventies were not stupid, right.
Speaker 1: They were faced with varying pressures. They were they were
Speaker 1: vased with some of the conflicting data that you you're
Speaker 1: talking about, Barry, and obviously lots of politics involved as well.
Speaker 1: And I think the thing we all have to remember
Speaker 1: is that fighting is not easy. There's this kind of
Speaker 1: notion that, Okay, the FED is raised rates, the worst
Speaker 1: is behind us, it's all over. Well, it'll be fine,
Speaker 1: we can go right back to where we were. History
Speaker 1: says that's not quite the way it works. And so
Speaker 1: I think in the current environment. You have to kind
Speaker 1: of understand that we're reliving the past to some extent,
Speaker 1: and I'm not sure it's an evolution. I'm not sure
Speaker 1: we're any smarter than we were in the seventies that
Speaker 1: the same pressures and the same conflicts and all that
Speaker 1: kind of data are still there. So I think that,
Speaker 1: you know, our story has been that the FED will
Speaker 1: be tighter for longer than people think that it's this
Speaker 1: this tightening cycle is not going to end quickly and
Speaker 1: right now. I think the biggest thorn, which you point out, Berry,
Speaker 1: is the labor market. That is a huge thorn in
Speaker 1: the FED side. You know, I think if we had
Speaker 1: said this to going into this, the Federal Reserve would
Speaker 1: raise interest rates four d seventy five basis points. What
Speaker 1: would happen to the demand for labor? We would all
Speaker 1: say it would fall over. Well, the demand for laborer
Speaker 1: has actually gotten marginally stronger. I mean, it's crazy to
Speaker 1: think that way, but that's kind of what's going on.
Speaker 1: So that is a big thorn in the side of
Speaker 1: the FED. And I think that if you think about
Speaker 1: what it means to weaken the labor market and what
Speaker 1: that means from the political side. You can then start
Speaker 1: understanding the cross currents that are facing the FED right now,
Speaker 1: really interesting, Let's talk a little bit about that model
Speaker 1: kind of similar to what you did at Meryl. Tell
Speaker 1: us about who you work with, who your clients are, right, So,
Speaker 1: our clients are financial advisors and institutions, as you point out,
Speaker 1: and the methodology that we use is very similar to
Speaker 1: what we originally constructed at Meryl. I mean, the original
Speaker 1: research was like the early nineteen nineties. We're now on
Speaker 1: sort of, you know, the fifth or six or seventh
Speaker 1: generation of that original research. But you know, our goal,
Speaker 1: my goal always was as a researcher was to try
Speaker 1: and understand what the macro influences were on the stock market.
Speaker 1: You know, most people try to look at individual stocks
Speaker 1: and they try to figure out why company A is
Speaker 1: outperforming company B, and they forget about the macro influences.
Speaker 1: And so my job has always been to try and
Speaker 1: figure out what in the macro environment is causing things
Speaker 1: to happen. And my attitude has always been if you
Speaker 1: can understand that and you can identify what the macro
Speaker 1: causes are, you can generally take advantage at in the marketplace.
Speaker 1: So you describe your firm's quantitative approach as really having
Speaker 1: three drivers, profits, liquidity, and sentiment. So let's talk about
Speaker 1: all three. Obviously profits very important to company valuation, growth, metrics, growth,
Speaker 1: all those sort of fun things. So I don't know
Speaker 1: how much detail we have to deal into profits. Let's
Speaker 1: talk a little bit about liquidity and sentiment. What do
Speaker 1: you look at when you're looking at liquidity, So liquidity, Barry,
Speaker 1: we look at at liquidity can do in roughly forty
Speaker 1: or forty five different countries around the world. Obviously get
Speaker 1: more detail in the United States than you would in
Speaker 1: an emerging market, but we still look at about forty
Speaker 1: or forty five different countries. Liquidity is really necessary for
Speaker 1: people to take risk. And so what you want you
Speaker 1: want to look at corporate profits because you want fundamentals
Speaker 1: to be improving, of course, but then you want to
Speaker 1: have liquidity so that people can take advantage of that
Speaker 1: of those improving fundamentals. And so what do we look
Speaker 1: at to gauge liquidity? What we look at central bank policies.
Speaker 1: Of course, we look at slopes of yeld curves. We
Speaker 1: look at banks willingness to lend, because you remember central
Speaker 1: banks at least in true capitalist economies, moving not so
Speaker 1: much in a command economy. Even in a true capitalist economy,
Speaker 1: the central bank can only set the table, and they
Speaker 1: can't force banks to lend or stop lending. You know,
Speaker 1: we all hear about the lags of monetary policy. That's
Speaker 1: one of the reasons why there are legs. So the
Speaker 1: FED could lower interest rates, it doesn't guarantee the banks
Speaker 1: are going to be willing to land at the moment
Speaker 1: they lower interest rates, or they can raise interest rates.
Speaker 1: It doesn't mean that banks are going to stop lending
Speaker 1: the second they raise interest rates. So we look at
Speaker 1: how banks erecting and bank the willingness of banks to
Speaker 1: lend as well. So I have a vivid recollection. Back
Speaker 1: in the days when I was on a trading desk,
Speaker 1: M three would come out, money supply would come I
Speaker 1: don't even know if we report M three any it's
Speaker 1: two now, right, So they went to a I think
Speaker 1: it's M one, M two, M three, M three was
Speaker 1: the narrowest, the broadest, the broadest, the broadest, right, I
Speaker 1: didn't remember. But nobody talks about money supply anymore in
Speaker 1: those terms. But that theoretically was liquidity, That would find
Speaker 1: its way into stock markets, do we When you talk
Speaker 1: about liquidity, how do you think about the dollar and
Speaker 1: the availability of sure free capital sure, so you know
Speaker 1: it's it's it's kind of interesting even relative to the
Speaker 1: last cycle where you know, money growth M two growth.
Speaker 1: Getting back to your question, before M two growth got
Speaker 1: up to about twenty seven twenty eight percent, which was
Speaker 1: the highest in his story that we can find. Put
Speaker 1: it put the United States on par with Peru at
Speaker 1: the time, just to put it in proper perspective, and
Speaker 1: given that during the pandemic, not a lot of business
Speaker 1: was going on, so you had tons of liquidity going
Speaker 1: into the economy and really no place for it to go.
Speaker 1: So that means it's going to go to savings. If
Speaker 1: it's going to savings, where's it going to end up.
Speaker 1: It's going to end up in the stock market. And
Speaker 1: I think that was one of the reasons why we
Speaker 1: saw the bull market um developed much more quickly than
Speaker 1: people thoughts through the pandemic. Post pandemic, YEA makes a
Speaker 1: lot of sense. And last is sentiment. So so there's
Speaker 1: always a challenge looking at sentiment because it's so noisy,
Speaker 1: except that extremes. How do you use sentiment in your
Speaker 1: your spot on on that? And we tend to fade
Speaker 1: some of the more accepted sentiment indicators, the kind of
Speaker 1: short term you know, put call ratios, things like that,
Speaker 1: because call odd lots was a big deal years ago.
Speaker 1: I mean all these things, just m three odd lots
Speaker 1: is like a great so. And the reason why is
Speaker 1: because exactly what you point out is that they're so volatile,
Speaker 1: and as an investor is opposed to a short term trader,
Speaker 1: it's questionable as to whether you get a consistent signal,
Speaker 1: so you can actually take an investment position in that.
Speaker 1: So we tend to look at sentiment a little more
Speaker 1: structurally by looking at at various measures that try to
Speaker 1: figure out how people are truly allocating their assets, not
Speaker 1: trading their assets, but literally allocating their assets. The other
Speaker 1: thing we do bury is we group valuation as a
Speaker 1: sentiment indicator. So we do a lot of valuation work.
Speaker 1: And some people say, well, why do you consider a
Speaker 1: sentiment Well, you can't have an overvalued market that people hate,
Speaker 1: and you can't have an undervalued market to people. So
Speaker 1: valuation will reflect sentiment, and so we include valuation in
Speaker 1: our sentiment work. So effectively, if you think about profits, liquidity, sentiment,
Speaker 1: and valuation, what we're looking for places where profitability and
Speaker 1: fundamentals are improving, there's liquidity to take advantage of it,
Speaker 1: and nobody cares, right, that's a pretty good combination. Or
Speaker 1: vice versa. Fundamentals are deteriorating, liquidity is drawing up and
Speaker 1: everybody loves it. That would be a warning sign. Huh,
Speaker 1: that's really that's really intriguing. Which raises the question which
Speaker 1: is the harder environment to stand out from? I don't
Speaker 1: even want to ask which is more challenging, Which is
Speaker 1: it harder to draw a distinction in where rates are low,
Speaker 1: capitalist free in the market is screaming higher, or where
Speaker 1: inflation is up. Rates are going higher and people are
Speaker 1: a little bit of cautious, right, so you know, let's
Speaker 1: let's talk about it from an investment point of view,
Speaker 1: in a marketing point of view for a second. From
Speaker 1: an investment point of view, the extremes are always very intriguing, right,
Speaker 1: And I think our firm is relatively indifferent whether it's
Speaker 1: we should be really bullish or really bearish, but they're
Speaker 1: they're both kind of a very interesting periods From a
Speaker 1: marketing point of view. However, remember you you pointed out
Speaker 1: on the CEO and the CIO right, The EO within
Speaker 1: me doesn't like these extremes because the extremes are when
Speaker 1: a firm like ours looks really stupid and people think
Speaker 1: you know nothing. So it's a very difficult period for
Speaker 1: us to market, for us to have exactly right, and
Speaker 1: so that's when we rely more heavily on our investor
Speaker 1: relations people, on our marketing people all that because it's
Speaker 1: very important to be very transparent as to what you're
Speaker 1: thinking and what you're doing. We don't expect everybody to
Speaker 1: agree with us all the time, but we want them
Speaker 1: to know what our thinking of is so that there's
Speaker 1: not a surprise. There's nothing like you know, they just
Speaker 1: don't know what they're doing. So tell us a little
Speaker 1: bit about the sweetest services our MBA offers. How do
Speaker 1: you work with advisors who say, hey, you know, I
Speaker 1: have good financial planning with my clients, but I don't
Speaker 1: want to run the portfolios. What can rich Bernstein do
Speaker 1: for me exactly? Well, one of the one of the
Speaker 1: greatest things that we can do for financial advisor right
Speaker 1: now is free up their time line. There is an
Speaker 1: immense amount of pressure on financial advisors. Rightly or wrongly,
Speaker 1: I'm not passing judgment, but but there's a lot of
Speaker 1: pressure on financial advisors to grow assets, and so that
Speaker 1: makes it more difficult for them to manage portfolios like
Speaker 1: they used to. You know, it used to be that
Speaker 1: the financial advisor was also a portfolio manager. That's becoming
Speaker 1: very difficult. The role that we play for a lot
Speaker 1: of financial advisors is that kind of portfolio manager, almost
Speaker 1: an outsourced CIO, if you will. I was about to
Speaker 1: say that, yes, and so we can we can play
Speaker 1: that role. Obviously there's going to be all kinds of
Speaker 1: specialists that are going to be in that portfolio as well,
Speaker 1: but we're kind of we played the role very often
Speaker 1: is kind of a core of a basic portfolio. So
Speaker 1: there's a phrase in your literature that kind of cracked
Speaker 1: me up. Pactive management. Yes, what is that? Who came
Speaker 1: up with? It? Is a trademarked What is pactive? To me?
Speaker 1: It's passive active. Yeah, it is trademarked. It is trademarks.
Speaker 1: So don't get any bright ideas dot com to give
Speaker 1: that exactly. But pactive is for the active management of
Speaker 1: passive investments. You know, if you go back to you know,
Speaker 1: Jack Bogel and the whole idea, and I always to
Speaker 1: my career, I had tremendous respect for Jack, both as
Speaker 1: a businessman as an investor. And Jack's whole thing was
Speaker 1: that you want to be a passive investor. Okay, we
Speaker 1: could argue whether that's right or wrong. But what Jack
Speaker 1: would never do, and what no true passive investor does
Speaker 1: is they never tell you what index to buy and when.
Speaker 1: And people can say, well, I should just hold an
Speaker 1: index fund for the long term. Well what's your definition
Speaker 1: of the long term? Because there are times where if
Speaker 1: you make the wrong decision, and if you're in the
Speaker 1: wrong index at the wrong time, it can take you five, ten,
Speaker 1: fifteen in one case that we found seventeen years to
Speaker 1: break even. Is that, you know, isn't that an important decision?
Speaker 1: So pactive investing is all about, yeah, look, maybe you
Speaker 1: want to be passive, but being passive is an active
Speaker 1: decision in and of itself, and that you have to
Speaker 1: decide what index to buy and when we think we're
Speaker 1: pretty good at that at the pactive side of investing.
Speaker 1: And I get the sense that you're an investor, not
Speaker 1: a trader, especially given you your recent research note earlier
Speaker 1: this year. Don't speculate on speculation, tell us, tell us
Speaker 1: what that means. So it's it's really our view right now, Barry,
Speaker 1: that the market is in another speculative phase, that the
Speaker 1: rally so far this year has largely been in the
Speaker 1: speculative stocks of technology and worse the company was the better. Yeah,
Speaker 1: and I think of the Goldman basket of profitless stocks
Speaker 1: exact is one of the market lead right. And now
Speaker 1: you know, somebody could say, well, that's a that's a
Speaker 1: fundamentally based rotation, maybe from value to growth or or
Speaker 1: to more economically sensitive companies. I get that, except for
Speaker 1: one thing. Cryptocurrencies are rough thirty to fifty percent. Yeah,
Speaker 1: where we are like twenty three twenty four on bitcoin, Yeah,
Speaker 1: from sixteen. That's a big move, it is. And now
Speaker 1: I may offend a lot of your listeners, but I
Speaker 1: don't believe there is anything fundamental about cryptocurrencies. So when
Speaker 1: cryptocurrencies erupted so much at the same time that we're
Speaker 1: seeing tech and innovation and disruption and profitless stocks and
Speaker 1: meme stocks and everything go up at the same time,
Speaker 1: that says to me, this is a speculative environment. This
Speaker 1: is not fundamentally driven. And I think what that is
Speaker 1: really relating to as people's hopes that inflation is going
Speaker 1: to subside very quickly, the FED will go back to
Speaker 1: a period of cheap and abundant liquidity, which is a
Speaker 1: cornerstone of speculative investment. Right. Unfortunately, transitory is taking a
Speaker 1: lot longer than expect it correct. Right, So, given that
Speaker 1: since you brought up the FED, how significant is the
Speaker 1: path of rate hikes, how high they go, how long
Speaker 1: they stay that way relative to consensus expectations. Yeah, well,
Speaker 1: you know, I love Barry that everybody has like a
Speaker 1: terminal rate. They know exactly what it's going to be
Speaker 1: and when it's exactly I mean, like, I love the decision.
Speaker 1: I mean I wish I were that smart. I'm really
Speaker 1: not that smart, you know, But I think that what
Speaker 1: we're going to find is that that terminal rate will
Speaker 1: be higher, and it'll be farther around the future than
Speaker 1: people think right now. It's it's just very hard to
Speaker 1: kill inflation in an economy. This is not. This inflation
Speaker 1: in our economy right now is not because of supply
Speaker 1: chain disruptions. That was an early story but that was
Speaker 1: the early story in the seventies too. We just didn't
Speaker 1: call them supply chain disruptions. We called them oil embargoes.
Speaker 1: But they were supply chain disruptions. So let me push
Speaker 1: back on that. Okay, sure we have the oil embargo,
Speaker 1: and oil is the lifeblood of the economy, but dear lord,
Speaker 1: everybody is stuck at home for a year, right, You
Speaker 1: can't get paper towels, forget bleach or you know, lysol
Speaker 1: or anything like that. Semiconductors are shut. There's a shortage
Speaker 1: of homes, there's a shortage of people workers, there's a
Speaker 1: shortage of containers for container ships about even to move goods.
Speaker 1: You know, when everybody stuck at home, we go from
Speaker 1: a service economy to a goods economy, and you can't
Speaker 1: ramp up goods when demand sturges twenty now, so you
Speaker 1: would expect some of this to legitimately be pandemic lockdown related.
Speaker 1: Absolutely the first year. What happens in the second year.
Speaker 1: So what happened in the seventies even was that it
Speaker 1: moved from oil and from the embargoes into the general
Speaker 1: economy and then into wages. So a prominent economist recently
Speaker 1: about a year ago said to me that we don't
Speaker 1: have a wage and price spiral because wages aren't keeping
Speaker 1: up with prices. And my answer was, Okay, we don't
Speaker 1: have a wage and price spurrol. Maybe we have a
Speaker 1: price and wage spiral. I'm not sure which comes first,
Speaker 1: the chicken or the egg, the wager the price, and
Speaker 1: does it make any difference? And so I think that
Speaker 1: now we're in that wage portion where wages are starting
Speaker 1: to catch up. I mean, I'm sure you saw today
Speaker 1: one of the airlines came out with a new agreement
Speaker 1: with their pilots for like seven big increase, seven and
Speaker 1: a half percent increase per year for the next four years.
Speaker 1: But to be fair, they had been cutting, freezing pilot
Speaker 1: wages absolutely. In fact, my big complaint about wages as
Speaker 1: a driver of inflation. Hey, where were you for the
Speaker 1: past thirty years, where at least the bottom half of
Speaker 1: the wage pool was inflation? Absolutely, minimum wage legs everything
Speaker 1: from productivity to corporate profits to c suite to inflation.
Speaker 1: The minimum wage, if it kept up with anything, would
Speaker 1: be fourteen sixteen box something like that. Yeah, So so
Speaker 1: suddenly wages finally start to catch up. Oh my goodness,
Speaker 1: this is the end of the world, says the FED.
Speaker 1: We have to stop this. Yeah right. So so, first
Speaker 1: of all, let me you know a little known fact
Speaker 1: about Rich Bernstein. I'm a two time union member. Not
Speaker 1: only have I had my entire career on Wall Street,
Speaker 1: but I'm a two time union member. Once worked for
Speaker 1: the International Chemical Workers Union and suing one I was.
Speaker 1: I was a maintenance in a pharmaceutical plant, right and
Speaker 1: and I also worked for the United Auto Workers. When
Speaker 1: I was on the adjunct faculty at NYU, we were
Speaker 1: represented by, of all things, the United Auto Workers. Of
Speaker 1: a two time union member, I believe me. I'm not
Speaker 1: anti union. I'm not anything like that, I understand. I've
Speaker 1: always thought that unions were the comparable to like CEOs
Speaker 1: have lawyers and agents, and whose sports people have agents.
Speaker 1: For everyday folks, it is called the union, right, well,
Speaker 1: at least they used to. Unions are still. Even though
Speaker 1: people talk about the rise of Amazon this and yeah,
Speaker 1: union membership is a fraction of what year it's very
Speaker 1: love ye, it's very long. Now it is creeping up
Speaker 1: because as we have a very tight labor market, power
Speaker 1: is starting to revert back to the workers in some respect.
Speaker 1: And I'm not. I'm not Carl Marks don almost understand
Speaker 1: the point here. I sent my entire career on Wall Street.
Speaker 1: But these are just some of the realities that are
Speaker 1: going on now in a tight labor market. Analysts of
Speaker 1: the world unite Street. I love that. But so let's
Speaker 1: let's stick with labor a little bit because it's kind
Speaker 1: of interesting. Was having this conversation with David Kotok of
Speaker 1: Cumberland and he points out, you have the highest level
Speaker 1: of disability people leaving the workforcesibility over the past twenty years.
Speaker 1: Then you have all these people, you know, a million
Speaker 1: plus dying of COVID and another depending on which study
Speaker 1: you believe, ten fifteen twenty million people with long COVID immigration.
Speaker 1: And as much as people blame Trump, it started before
Speaker 1: him and continued after legal immigration has continues to trend downwards.
Speaker 1: If we want there too, if we want to get um,
Speaker 1: if we want to get wages sort of under control
Speaker 1: in a way that works out, don't we need to
Speaker 1: bring a whole bunch more workers and absolute labor force. Absolutely?
Speaker 1: Why haven't. Now I'm going to ask you a policy
Speaker 1: question which is outside of your expertise. No, no, but
Speaker 1: why aren't we bringing in more skilled labor from outside
Speaker 1: of the country. I think we actually have to. I
Speaker 1: think there's been part of the story of the US
Speaker 1: economy for decades and decades and decades, and I think
Speaker 1: we have to. But Barry, you bring up a very
Speaker 1: important point. When I talk about about the labor markets
Speaker 1: and the tightness of labor markets, people always want like
Speaker 1: one reason why it has happened. It's really a perfect
Speaker 1: storm of about four or five or six different things
Speaker 1: all coming together at the same time, and there's no
Speaker 1: one reason. But the end result is that we do him.
Speaker 1: I would argue, the tightest labor market in our lifetimes.
Speaker 1: Isn't that always the case? Though people want Jacques one
Speaker 1: simple here's why everything is terrible. It's always so much
Speaker 1: more complicated, it's so much more nuanced, and that makes
Speaker 1: people unhappy when the answer to what appears to be
Speaker 1: a simple question is well, it's really complicated and here
Speaker 1: are the forty seven factors that but that's just reality.
Speaker 1: That is that is reality. But I think that makes
Speaker 1: the fed's job very very difficult right now, because, as
Speaker 1: I said before, if you think about that, the FED
Speaker 1: is trying to curtail demand for labor. If they're trying
Speaker 1: to ease up the labor market. Politically, that's not very palatable.
Speaker 1: So let's talk a little bit about the challenges of
Speaker 1: being a top down macro investor in a very conflicted environment.
Speaker 1: How dependent are you on what the FED says? What
Speaker 1: Jerome Powell questions get asked him at a conference, the
Speaker 1: random ways people seem to misinterpret it in the morning
Speaker 1: and then reverse it in the afternoon. How crazy is
Speaker 1: it operating like this? So, Barry, being a macro investor,
Speaker 1: one of the things that's important for us is that
Speaker 1: we are not event driven. We are certainly a macro firm.
Speaker 1: But as you point out, everybody wants to know, like
Speaker 1: what's the FED doing, what's happening today? That's not us,
Speaker 1: And we are very very process driven. So very often
Speaker 1: I get calls from people that say, like, you know,
Speaker 1: what do you think of the FED? And my answer
Speaker 1: is I don't know, you know, And that's not satisfying
Speaker 1: yourself in DC right, right, you're supposed to have like
Speaker 1: a very sophisticated answer. And but for us, the problem is,
Speaker 1: and I think if you look at macro hedge funds
Speaker 1: and the lack of success of macro hedge funds. The
Speaker 1: reason why is because everything has become an event. Everything
Speaker 1: is a hair on fire event these days, and it's
Speaker 1: hard to figure out what is true investment information and
Speaker 1: what is pure noise. And so what we've been arguing
Speaker 1: and what I argued through my entire career has been
Speaker 1: the way to sift out the true investment information is
Speaker 1: to stick to a hardcore process. No matter what happens,
Speaker 1: come hell or high water, do not deviate from that process.
Speaker 1: And as we were talking about before, for us, it's profits, liquidity,
Speaker 1: sentiment evaluation. We never deviate from that. So, yes, we
Speaker 1: know what's going on, we know what the Fed's doing,
Speaker 1: we know what everything, and we're aware of that. But
Speaker 1: we stick to our process and we stick to our
Speaker 1: models and to our indicators to keep the hardcore process
Speaker 1: and not just flail around every five seconds. So, since
Speaker 1: we're talking about the FED and not giving a hot take,
Speaker 1: let's take a longer term look at inflation. Where are
Speaker 1: we in the inflation cycle? Is it safe to say
Speaker 1: inflation peaked six or eight months ago already? Well, the
Speaker 1: answer I'm going to give you kind of the economist answer,
Speaker 1: On the one hand, yes, we have probably peaked in
Speaker 1: terms of the near term inflation. But on the other hand,
Speaker 1: and I think what's much more important for investors. I
Speaker 1: think secular inflation has changed. I don't think we are
Speaker 1: going back to the period that we saw for the past,
Speaker 1: you know, thirty years or so, where we could always
Speaker 1: count on secular disinflation. I think that now the story
Speaker 1: is secular inflation. Now what does that mean right all
Speaker 1: of a sudden, you know, does that mean at six
Speaker 1: eight percent? What does that mean? Well, most forecasts of
Speaker 1: secular inflation right now range between two and three percent,
Speaker 1: which makes a lot of sense because long term inflation
Speaker 1: in the United States is roughly two and a half.
Speaker 1: So you can see how the forecaster are there. So
Speaker 1: that means as an investor, you have to kind of
Speaker 1: take an over UNDERBD. Is it going to be less
Speaker 1: than two The lower end of that range were higher
Speaker 1: than three. Above the higher end of the range. Right
Speaker 1: now the markets are making a huge bit. It's going
Speaker 1: to be sub two. In other words, going back to
Speaker 1: the period of cheap and abundant liquidity. Our story is
Speaker 1: three percent or more. That's it. We think that meaningfully
Speaker 1: changes the way people have to manage. So let's let's
Speaker 1: stay with that because that's so interesting. So, the key
Speaker 1: forces that were drivers of deflation in the eighties, nineties,
Speaker 1: two thousand, in the post Vulcar era was we had globalization,
Speaker 1: so manufacturing went to wherever it was cheapest. We had
Speaker 1: software and automation and technology that made everything more productive.
Speaker 1: And then and then lastly, productivity across the board finally
Speaker 1: started showing up in the statistics after it famously was
Speaker 1: everywhere except in the data. Um, have any of those
Speaker 1: things really changed materially or have we just wrung out
Speaker 1: all of the deflationary forces from globalization, automation and productivity
Speaker 1: that we can see in our lifetimes. So so Barry,
Speaker 1: I would argue that the number one factor that caused
Speaker 1: secular disinflation was globalization. That I would I would suggest
Speaker 1: it started with NAFTA in the early nineties. And what
Speaker 1: it did was it it consistently opened markets around the world,
Speaker 1: and what that meant was that we were consistently increasing
Speaker 1: competition around the world. Right, Inflation, for all the fancy
Speaker 1: ways people think about it, I think it's very easy
Speaker 1: to think of inflation as when demands greater than supply.
Speaker 1: We know, prices go up when demands greater than supply
Speaker 1: for an extended period of time, we call that inflation.
Speaker 1: And what globalization did was it it increased the supply
Speaker 1: of suppliers. In other words, it increased competition. So the
Speaker 1: that's the old commodity trader joke. The cure for high
Speaker 1: prices is high prices exactly. And so what happened was
Speaker 1: as you had more and more and more suppliers, greater
Speaker 1: and greater and greater competition, you had downward pressure m prices. Well,
Speaker 1: it looks like globalizations now starting to contract. This is
Speaker 1: not going to happen in five minutes or five months.
Speaker 1: It's five, ten, fifteen, twenty years. As was NAFTA a
Speaker 1: thirty year story or globalization a thirty year story, we're
Speaker 1: now going back in the other way. Now, Look, it
Speaker 1: could be that we're all going to sit around a
Speaker 1: campfire and sing Kumbaya around the world, or like the
Speaker 1: old coke commercial where we're on a hill, you know,
Speaker 1: holding hands and teaching the world to sin. Exactly that
Speaker 1: that could happen. I'm skeptical that that's really going to say.
Speaker 1: So I'm glad you brought that up because I've heard
Speaker 1: this the end of globalization story, and it smells like
Speaker 1: a lot of a lot of political noise. All right,
Speaker 1: we'll build a semiconductor plant in Arizona asutely. But the
Speaker 1: massive shift in global economy where manufacturing is done here
Speaker 1: and all these other countries are coming online, whether it
Speaker 1: was first was Japan, and was South Korea, now it's
Speaker 1: Vietnam and Turkey and Mexico and go around the world.
Speaker 1: Are we really going to meaningfully reverse that? Is globalization
Speaker 1: gonna shrink beyond low single digits? I don't think right
Speaker 1: now we can see how that could happen. But again,
Speaker 1: I'm talking about, you know, a ten twenty thirty year
Speaker 1: phenomenon here. I think if we had said thirty years
Speaker 1: ago that globalization was going to cause the environment that
Speaker 1: we ended up with, people would have said you were nuts.
Speaker 1: Right in the in the early nineteen nineties, you know,
Speaker 1: Ross Perot was the one who was anti the great
Speaker 1: sucking sound, which which which turned out to be to
Speaker 1: some extent correct. But what he didn't allow for were
Speaker 1: the benefits of the society, what globalization might do. Well,
Speaker 1: you you lost the you know, hosiery and furniture manufacturing
Speaker 1: and replaced it with software and quantitative an out correct
Speaker 1: exactly right. And and so our argument at our firm
Speaker 1: is that we're going to see a slow progression back
Speaker 1: in the other direction, what we keep calling a shift
Speaker 1: from cute wiener dogs in the metal to real productive assets.
Speaker 1: That's not going to happen in two weeks, but we
Speaker 1: think that's going to happen over three years, five years,
Speaker 1: ten years, fifteen years. So so given where we are
Speaker 1: in the in the broad world, it seems like the
Speaker 1: stock market in twenty twenty three is hanging on every
Speaker 1: economic report, every CPI release, every non farm payrolls, every
Speaker 1: FOMC meaning like even when we get the FOMC notes,
Speaker 1: they're they're always a month old, and yet people wait
Speaker 1: with bated breath. Yes, tell us what they were thinking
Speaker 1: a month ago, like like that really is going to
Speaker 1: move markets, but it certainly causes some volatility. Is there
Speaker 1: too much focus on these big macro events today? I'm
Speaker 1: not sure there's too much focus, but I think the
Speaker 1: minutia and the decimal point focus is not very healthy.
Speaker 1: You know, I think if you if you think about
Speaker 1: the the CPI report, that's you know the February CPI
Speaker 1: report that comes out in March. I think the consensus
Speaker 1: is for something like point four for March. If you
Speaker 1: look at Bloomberg, I think that's the that's the consensus.
Speaker 1: And you know, which would be under a five handle
Speaker 1: annualized it which is not bad? Which is not it.
Speaker 1: But if it comes in at point five instead of
Speaker 1: point four, we know the markets are going down. If
Speaker 1: it comes into point three instead of point four, we
Speaker 1: know the markets are going up. Now, well, we in
Speaker 1: this phase where bad news is good news, because does
Speaker 1: point three mean that the FED is done? And if
Speaker 1: the market rallies, hey hey, not so fast. It seems
Speaker 1: like every time the market rallies in anticipation of the
Speaker 1: FED ending their tightening regime, the FED says, slow your roll. Yeah,
Speaker 1: I think that's I think we're definitely in that kind
Speaker 1: of an environment. But the point that I was just
Speaker 1: trying to make was the descal point precision, which is
Speaker 1: so spurious if you think about it. The point three
Speaker 1: means everything's okay, and point five means it's the end
Speaker 1: of the free world as we know it. That's very silly.
Speaker 1: And getting to your question, you know, what does this
Speaker 1: mean or people looking at this too too closely. I
Speaker 1: would say yes, I think that people should be taking
Speaker 1: a more longer term holistic view, which is kind of
Speaker 1: what we try to do with our firm. All right, So,
Speaker 1: given all the focus on the FED and last year
Speaker 1: we were talking about the end of Tina for a
Speaker 1: long time, you know, you yield getting no yield in bonds.
Speaker 1: Now I think the what is it, six months, nine months,
Speaker 1: you're about five percent. You're really seeing some decent yield.
Speaker 1: How do you look at the world of bonds when,
Speaker 1: for the first time in a decade or longer, you're
Speaker 1: actually getting paid to lend Uncle Sam some money. Yeah, So, Barry,
Speaker 1: two things relative to that question. Number one is one
Speaker 1: has to remember that that's what the FETE is trying
Speaker 1: to do by raising short term interest rates. They are
Speaker 1: trying to disintermediate the economy, get liquidity out of the economy,
Speaker 1: slow the economy, and of course you're going to put
Speaker 1: it in short term instruments. That's the whole point of
Speaker 1: monetary policy. And so people are saying, oh, short term
Speaker 1: rates are competitive again, Yeah, no kidding, that's what the
Speaker 1: FETE is Watch that happened, right, That's what they're trying
Speaker 1: to do. Second thing is is that I think that
Speaker 1: if we're right and the secular inflation backdrop is changing,
Speaker 1: I think fixed income money management will change dramatically over
Speaker 1: the next five, ten, fifteen, twenty years. It's been meaning
Speaker 1: become a whole lot more attractive. It'll be a lot
Speaker 1: more difficult. Oh really, because look over the in our careers,
Speaker 1: it's been pretty easy to be a fixed income money manager.
Speaker 1: You could have been the worst fixed income money manager
Speaker 1: and secular disinflation bailed you out. You could have been
Speaker 1: completely wrong, but you still made money for your client.
Speaker 1: Just just ride the wave from when Volker took rates
Speaker 1: to a million percent and it's been a forty year
Speaker 1: bullmarket wasn't eighty one to twenty one. Yeah, that's a
Speaker 1: good run. That is now. If we're right and the
Speaker 1: inflation backdrop is changing, it means that money management or
Speaker 1: fixing come money management doesn't have the wind that they're
Speaker 1: back anymore. It means you're gonna have to be more tactical.
Speaker 1: You're gonna have to constantly change duration depending on what's
Speaker 1: going on with interest rate. You're gonna have to chang
Speaker 1: quality depending on what's going on with company fundamentals and
Speaker 1: earnings and things like that and fixing. Company managers have
Speaker 1: never had to be that nimble. You know, if you
Speaker 1: look at the data, they say, oh, well, we're active managers,
Speaker 1: but maybe they change duration from ninety two percent of
Speaker 1: benchmark to ninety four percent of benchmark duration. Right, that's
Speaker 1: hardly being an active planager. A lot of active bond
Speaker 1: managers because there's so many more types of bonds than stocks,
Speaker 1: just don't own the worst half and your way ahead
Speaker 1: of everybody ahead. So let's let's talk about duration. If
Speaker 1: you shorten up your duration last year, you did okay,
Speaker 1: I'm getting into great in bonds, but you didn't do
Speaker 1: as bad as as the benchmark. They get into as
Speaker 1: poorly as the benchmark. So here we are, It's first
Speaker 1: quarter of twenty twenty three. Where should our duration be set?
Speaker 1: With an inverted yield curve and a FED that keeps
Speaker 1: telling us, hey, guys, higher for longer, right, So Barry,
Speaker 1: we are bar build right now on the curve. We
Speaker 1: have very short term because the FED is raising rates,
Speaker 1: and as you pointed out before, you can get reasonable
Speaker 1: returns and the short reasonable yield at the short end
Speaker 1: of the curve. But then we've also begun to extend
Speaker 1: duration because in every cycle the fed goes too far
Speaker 1: and the long end of the curve starts to starts
Speaker 1: to rally. I'm not going to tell you we're smart
Speaker 1: enough to pick that to the day, but we're at
Speaker 1: the point in the cycle where we think it pays
Speaker 1: to start extending duration because they are going to make
Speaker 1: a mistake at some point. So when you say longer term,
Speaker 1: do you mean five to seven, you mean ten to twenty,
Speaker 1: where so we have nothing in the middle of the curve.
Speaker 1: The belly of the curve, we're very short term, let's
Speaker 1: say under two years, and then we're a ten years plus. Okay,
Speaker 1: that's that's kind of how we're positioning. What's the ten
Speaker 1: year yielding when the six month is about four and
Speaker 1: a half five tenure right now is about three ninety four, Yeah,
Speaker 1: something like that, all right, So you're actually it's it
Speaker 1: always feels so weird to say, listen, I'll give you
Speaker 1: four percent if you tie your money for either six
Speaker 1: months or a decade, right, And that's just the nature
Speaker 1: of an inverted curve. And but the way we think
Speaker 1: about it is not so much for the yield. We
Speaker 1: think it's total return investors, and maybe we're going to
Speaker 1: get that yield, But will we get you know, five
Speaker 1: or ten percent capital apprecation on top of that, that
Speaker 1: would be that makes for a pretty good total return.
Speaker 1: So let's talk a little bit about the current environment.
Speaker 1: I've been told the sixty forty portfolio is dead. Is
Speaker 1: that true? Or are we no longer looking at a
Speaker 1: balanced portfolio as a viable investment thesis, or have higher
Speaker 1: rates resurrected sixty forty back from the dead. So, Barry,
Speaker 1: I think both the sixty and the forty, if you're
Speaker 1: just buying indicase, probably not a good idea over the
Speaker 1: next five to ten years. It's probably not a good deal. However,
Speaker 1: if you're actively managing within the sixty and you're actively
Speaker 1: managing within the forty, I think what you buy will
Speaker 1: have a meaningful difference on performance. So I don't think
Speaker 1: the sixty forty is dead, but I do think the
Speaker 1: traditional passive sixty forty is going to have a very
Speaker 1: tough time. So let's stick with that. We have rates
Speaker 1: approach five percent from the FED, very different than where
Speaker 1: we were just two years ago, when we were at zero.
Speaker 1: How does that impact your tactical allocation decisions if inflations
Speaker 1: continues moderating and rates stay high, what sectors look attractive
Speaker 1: to Yeah, so, Barry, you know, it's it's kind of funny.
Speaker 1: I think I mentioned this before. We're not really very bearish,
Speaker 1: but we're we don't like three sectors. We don't like
Speaker 1: US tech, we don't like US consumer discretionary, and we
Speaker 1: don't like US communications. We think those are the three
Speaker 1: very speculative bubbles. And by the way, they dominate the
Speaker 1: US market even with their bear market, those three sectors
Speaker 1: is still about forty five of the US If you
Speaker 1: remove those three sectors that we think are very speculative,
Speaker 1: everything else is basically fair game. It's almost every other
Speaker 1: sector in the United States, and the menu of global
Speaker 1: opportunities is big two. Because the United States is very
Speaker 1: unique in that we are dominated by those three sectors.
Speaker 1: Most other developed markets are not. So let's talk about that.
Speaker 1: Because the rest of the world has lagged the US
Speaker 1: markets for ten to fifteen years, it's the it could
Speaker 1: be the longest period of outperformance I think in market history.
Speaker 1: So when you look around the world, since you're active,
Speaker 1: not passive, what parts of the world do you look at?
Speaker 1: Are you looking at em or developed x US? And again,
Speaker 1: since you're not passive, what particular specific countries you find appeal.
Speaker 1: So um, first, it's it's important to start this part
Speaker 1: of the conversation by saying that in twenty twenty two,
Speaker 1: seventy percent seven zero seventy percent of non US markets
Speaker 1: outperformed the United States in twenty twenty two, even even
Speaker 1: in US dollar terms. So the fact that most people
Speaker 1: aren't aware of that shows that investors have become a
Speaker 1: little geographically myopic. And and why did the country bias
Speaker 1: is absolutely huge, huge and but why did that happen?
Speaker 1: It happened because what I said before, most other markets
Speaker 1: aren't domin needed by those three sectors that were dominated
Speaker 1: by the United States Tech, consumer, discretionary, and communications. So
Speaker 1: you actually had in twenty twenty two was a global
Speaker 1: sector event, not a country event. And one of the
Speaker 1: things that we try to do is we look at
Speaker 1: size and style and industries and sectors not only in
Speaker 1: the United States but around the world. But most investors
Speaker 1: think of global investing is what country do I invest in?
Speaker 1: Not as they were a global sector event or global
Speaker 1: style event going on, and I think twenty twenty two
Speaker 1: was very much a global sector event. So let's talk
Speaker 1: about a specific sector. Since the financial crisis and only
Speaker 1: eight o nine since you launched rich Bernstein Associates, finance
Speaker 1: really hasn't been much to write home about. Right. It's
Speaker 1: been a giant laggard. When does the financial sector start
Speaker 1: to see a little love from investors? Right? So there's
Speaker 1: a confounding issue with the financial sector, namely the financial
Speaker 1: crisis and the increased regulation that which kind of threw
Speaker 1: them off for a loop and really constrain their business activity.
Speaker 1: I mean, one of the reasons that today the financial
Speaker 1: sector is so healthy is because of all that regulation.
Speaker 1: But you had to give up all the growth that
Speaker 1: maybe we're going to get from all the leverage and
Speaker 1: everything else. But to be fair, not blowing up and
Speaker 1: destroying the world economy. That's a fair trade. You're healthy
Speaker 1: and you're still around, but you're only growing at five
Speaker 1: percent instead of ten percent. Seems like a reasonable trade
Speaker 1: off exactly. So let's let's just remove that from the discussion. Historically,
Speaker 1: if you take out that period, you'll find that the
Speaker 1: yel curve is a pretty good representation of when you
Speaker 1: want to buy financials and when you don't, and when
Speaker 1: you have a steeper Yeel curve, it says that net
Speaker 1: lending margins are going to be higher, deposits are cheaper
Speaker 1: than lending. What you're getting on the loans, the interest
Speaker 1: rate you're getting on the loans, and so your profitability
Speaker 1: goes up. And when the curve inverts, not only is
Speaker 1: it a signal of a recession, but the inverted curve
Speaker 1: itself starts shutting down the economy. Because the deposit rate
Speaker 1: is higher than the lending rate, nobody wants to lend.
Speaker 1: And so what we've got right now is an inverted
Speaker 1: Yeel curve. Historically not a great time to overweight financial stocks.
Speaker 1: It's too early till we have a steep garve. Correctly,
Speaker 1: we've seen some of the utilities and defensives underperformed. Yes,
Speaker 1: Also now some people have argued, hey, that's suggesting the
Speaker 1: worst of the economic slowdown is behind us. How do
Speaker 1: you look at these different sectors as a foretelling of
Speaker 1: what might happen in the next quarter or two. Right, So,
Speaker 1: we talked about early on about the importance of corporate
Speaker 1: profits and the profits cycle and what we tend to
Speaker 1: do in our firm is look a little bit more
Speaker 1: and profit cycles as opposed to economic cycles. In the
Speaker 1: United States, we could argue, whether we're going to an
Speaker 1: economic recession, we are definitely falling into a profit's recession,
Speaker 1: despite twenty twenty two having profits hold up shockingly well,
Speaker 1: considermendously that was going on tremendously well. But now those
Speaker 1: hard comparisons, everything are coming home to roosts, increasing labor costs,
Speaker 1: everything that we've been a base exactly. And so when
Speaker 1: you're going to a profit's recession, and what tends to
Speaker 1: work defensive type sector is because there's kind of this
Speaker 1: ridiculously obvious statement that we're going to make, but people
Speaker 1: forget it. The cycle, by definition, is determined by cyclicals.
Speaker 1: And so when you're in a cyclical when you're in
Speaker 1: a cyclical downturn, you don't want to hold cyclical stocks.
Speaker 1: When you're in a cyclical upturn, you do. And and
Speaker 1: so we're in a position right now we think we're
Speaker 1: entering a profit recession, which would be a cyclical downturn.
Speaker 1: You want to be very careful about the cyclicals that
Speaker 1: you hold. So the profit recession in a cyclical downturn.
Speaker 1: Everybody's been focused on the landing. Is it a soft landing,
Speaker 1: is it a hard landing? Towards than Slock of Apollo
Speaker 1: has been talking about a no landing um at Thanksgiving.
Speaker 1: The question is, hey, we can have a recession or not, right,
Speaker 1: So how do you look at that? Or you less
Speaker 1: concerned with the economic recession and more focused on the
Speaker 1: earning side. Well, we are more focused on the earnings.
Speaker 1: But to the point about about the landing, I think
Speaker 1: we're circling the airport. I don't think we're landing yet.
Speaker 1: And I don't think it's right to say there won't
Speaker 1: be a landing, because I don't think the fit can
Speaker 1: effectively fight inflation without some kind of landing. Whether it's
Speaker 1: hard or soft, to some extent in artwork, it doesn't matter.
Speaker 1: You're gonna have the same defensive strategy for a landing.
Speaker 1: It's just a question whether it's a single, a double,
Speaker 1: a triple, a homer, or grand slam as to how
Speaker 1: successful it's going to be. But you're not really going
Speaker 1: to change We're not going to change our portfolios depending
Speaker 1: on the type of landing. Really interesting, I got a
Speaker 1: curveball question for you. You have two books which we
Speaker 1: haven't talked about, Style Investing Unique Inside into Equity Management.
Speaker 1: The second one I love the title, Navigate the Noise,
Speaker 1: Investing in the New Age of Hype and media, media
Speaker 1: and Hype. You donate the profits from both of those
Speaker 1: books to charity. Tell us where those profits go and
Speaker 1: what motivated that decision. So I don't want to make
Speaker 1: it sound like they've been hugely profitable millions millions of
Speaker 1: exactly so, but with out as a realization, the profits
Speaker 1: have long gone. They're very small now because the books
Speaker 1: have been around for a long time. But originally they
Speaker 1: went to Doctors Without Borders. Oh that's nice. Yeah, that
Speaker 1: was the that was the chests really interesting. What led
Speaker 1: you to choose that particular chance. Well, if you think
Speaker 1: the first book was written in two thousand, I think
Speaker 1: it was in nineteen ninety nine, Doctors Without Borders won
Speaker 1: the Nobel Priests product. That's right, and so I, um,
Speaker 1: they've always I've always had a place on my heart
Speaker 1: for that organization because one of my when I was
Speaker 1: a kid, my childhood doctor took a month off to
Speaker 1: go ten to earthquake victims in Nicaragua. Wow. And I
Speaker 1: thought that was so cool, right, not golf on Wednesday,
Speaker 1: Not golf on Wednesday. He actually went to help people,
Speaker 1: and so that just stayed with me, and so my
Speaker 1: wife and I have consistently donated to that charity. So
Speaker 1: before we get to our favorite questions, I have a
Speaker 1: couple of other things I have to throw at you. First.
Speaker 1: You could be barish but still have a ten percent
Speaker 1: return target for the SMP five hundred every year discuss
Speaker 1: you could be bears but have a ten percent Well,
Speaker 1: you know, it's kind of funny when obviously at Merrill
Speaker 1: people wh would always ask me from my expected returns
Speaker 1: and everything on the markets, and I would always say
Speaker 1: eight to ten percent because that's what the market did
Speaker 1: over the long term, but in any one year it
Speaker 1: never actually did eight to ten percent. So I used
Speaker 1: to just throw that out and people would be satisfied,
Speaker 1: I think, despite your reputation as a perma bear. Yeah, yeah, yeah,
Speaker 1: perma bear, eight to ten percent always, I always said
Speaker 1: eight to ten percent. And because the odds are look,
Speaker 1: the market goes up about two thirds to three quarters
Speaker 1: of the time historically, so you know, you really don't
Speaker 1: want to be a perma bear. That doesn't really pay.
Speaker 1: But but you know, I think we don't have to
Speaker 1: realize the probability of a hitting eight to ten percent
Speaker 1: in one year is probably pretty low. This is one
Speaker 1: of my favorite questions. When the firm wide cell side
Speaker 1: indicator turns positive, it's preferable to leave the firm and
Speaker 1: start your own shop. Then go on the call and
Speaker 1: tell everybody about the cell side indicator. Tell us about that.
Speaker 1: By the way, I have great research. I was gonna
Speaker 1: say that's a good one. I'd like to know worry,
Speaker 1: but but no, I mean it. The sell side indicator
Speaker 1: to which you refer really is a gauge of Wall
Speaker 1: Street bullish embarrash. And what it's always shown is that
Speaker 1: when Wall Street doesn't like equities, it's a great time
Speaker 1: to buy equities. And you know, I describe it as
Speaker 1: people being under their desk in the fetal position. In
Speaker 1: two thousand and nine, I really thought we had hid
Speaker 1: an ultimate under your desk in the fetal position, and
Speaker 1: there was probably a good time to start a firm
Speaker 1: generational load, to say the least. And finally, our last question,
Speaker 1: and this will be the big reveal on Wall Street,
Speaker 1: a midlife crisis doesn't have to involve a ferrarian hair plugs,
Speaker 1: A mini cooper, a leather, rubber and metal man bracelet
Speaker 1: will do just fine. Does that Does that sound remotely familiar?
Speaker 1: I'm not quite sure about all of that. Sevita Subramanian's
Speaker 1: farewell speech to you when you left the firms and
Speaker 1: thanks to her Frankel first scaring that up. But a
Speaker 1: midlife prisis doesn't always have to involve a ferrarian hair plugs.
Speaker 1: Sounds like a good approach to life. Yeah, that was
Speaker 1: not me, as you can tell with people on the
Speaker 1: radio can't see me. But I am as bald as
Speaker 1: could be. And this has kind of been your look
Speaker 1: for a long time. It has been. It has not
Speaker 1: like that's why you look timeless. Like the first time
Speaker 1: I met you, I don't think you look very different
Speaker 1: than you do today. Um well, thank you for saying that.
Speaker 1: I think I probably do look a little different, right
Speaker 1: because I'm twenty years older or whatever. But um, yeah,
Speaker 1: you know, I mean I kind of go through My
Speaker 1: attitude is being um, just go with the flow. That's
Speaker 1: a good attitude. When when markets do what they do,
Speaker 1: that means you're not finding the tape, You're not finding
Speaker 1: the fed You're letting Price tell you, Hey, here's what's happening. Yeah, exactly.
Speaker 1: So I got some of those questions from ten lessons
Speaker 1: learned over twenty years. That was Savida's farewell speech at
Speaker 1: your exit. A few weeks ago, we had Neil dutta
Speaker 1: On who worked under David Rosenberg. You and Rosie were like,
Speaker 1: you know, the fearsome tusome. What was it like the
Speaker 1: two of you working with the reputation you guys had
Speaker 1: constantly on the All Star team, constantly described as bears,
Speaker 1: but you were fairly constructive and useful to your clients.
Speaker 1: It wasn't like you would just sell everything. What was
Speaker 1: it like working with Rosie back then? Well, I think
Speaker 1: we had a blast. I mean we were traveling all
Speaker 1: over the world together. It was it was fantastic. But
Speaker 1: I think, you know, our bearish views, especially when markets
Speaker 1: get very heady. It's a testament to Merrill that they
Speaker 1: allowed us to say what we really thought we were
Speaker 1: going to say and not trying to muzzle us to
Speaker 1: do better, to do more business. I think that was
Speaker 1: really testament to them. And I can't tell you how
Speaker 1: much both Rosie and I appreciated that. Really interesting. All right,
Speaker 1: so let's jump to our f questions that we ask
Speaker 1: all our guests, starting with tell us, what kept you
Speaker 1: entertained during lockdown? What were you streaming? What was I streaming? Well?
Speaker 1: What are you streaming now? When am I streaming? Now?
Speaker 1: Right now? I'm streaming Fauda, the Netflix Oh my God
Speaker 1: series about the Palestinians and Israelis. It's I have to say,
Speaker 1: we have a rule in my house we will not
Speaker 1: start that after nine o'clock because it's so gripping. You
Speaker 1: just won't go to sleep. You won't go to sleep
Speaker 1: right in heartoun it is fantastic. I mean we my
Speaker 1: wife and I are just about the finished series season two,
Speaker 1: but fantastic. The acting, everything is just wonderful and heart
Speaker 1: wrenching and you never figured thrilling, frightening. It's just like,
Speaker 1: oh my god, it's just you can't look away. No,
Speaker 1: it's amazing. Let's talk about mentors. Who was helped guide
Speaker 1: your career over the years. Ah, that's a that's an
Speaker 1: interesting question. Well, first and foremost, I would have to
Speaker 1: point to Chuck Klowd. Chuck was the chief investment strategist
Speaker 1: who at Merrill who fired me at Merrill, and he
Speaker 1: gave me two good lines of advice, which I once asked,
Speaker 1: Chuck if you remember he said this, and he did not.
Speaker 1: But line one was I went to him like my
Speaker 1: first day at Merrill, and I said, what do you
Speaker 1: think I should do? And he said, I don't really care,
Speaker 1: just don't make a fool of yourself. That was number one.
Speaker 1: And number two, the best line anybody's ever said to
Speaker 1: me is make sure you're a star and not a
Speaker 1: Roman candle. Fantastic line. Fantastic line. And I have lived
Speaker 1: my entire career thinking there's a big difference between being
Speaker 1: a star and being a Roman candle. Really interesting. Let's
Speaker 1: talk about books. What are some of your favorites and
Speaker 1: what are you reading right now? What am I read?
Speaker 1: I don't even know the title of the book I'm
Speaker 1: reading right now. I hate to say that, but it's
Speaker 1: I always love spy espionage, Cold War spy espionage, and
Speaker 1: I'm reading one right now, which is a true story
Speaker 1: about one of the heads of the KGB that they
Speaker 1: turned and became an informant for him. I six, huh,
Speaker 1: that's really interesting. So last two questions, what sort of
Speaker 1: advice would you give to a recent college grad who
Speaker 1: was interested in a career in finance or asset manage. Oh.
Speaker 1: I actually speak to a lot of college grads and
Speaker 1: the one thing I always tell them is keep a
Speaker 1: very open mind about what you want to do. When
Speaker 1: you're graduating college. You really don't understand what the financial
Speaker 1: sector is all about. You don't understand what Wall Street's
Speaker 1: all about as much as you might think you do.
Speaker 1: And don't put on blinders and say this is what
Speaker 1: I'm going to do. Wall Street changes so dramatically. You
Speaker 1: don't want to be caught saying this is what I'm
Speaker 1: going to do and then whatever you want it to
Speaker 1: do becomes obsolete. Be very flexible. As I said before,
Speaker 1: go with the flow. There's many different things in finance
Speaker 1: that people never consider. And our final question, what do
Speaker 1: you know about the world of investing today? You wish
Speaker 1: you knew forty years so years ago when you were
Speaker 1: first starting out. Oh, just the experience of living through cycles.
Speaker 1: I mean, you know you can't you can't back in time.
Speaker 1: There's no way to replace this, but living through cycles, remembering,
Speaker 1: keeping notes, living history, I think is very very important
Speaker 1: if you're going to be a true investor. If you're
Speaker 1: going to be a market observer or anything like that
Speaker 1: is living history. Realize you're living history and don't forget it.
Speaker 1: Really interesting. Thanks rich for being so generous with your time.
Speaker 1: We have been speaking with rich Bernstein, CEO and CIO
Speaker 1: of Richard Bernstein Associates. If you enjoy this conversation, well,
Speaker 1: I'll be sure and check out the previous four hundred
Speaker 1: and sixty seven we've done over the past eight or
Speaker 1: nine years. You can find those at iTunes, Spotify, YouTube,
Speaker 1: wherever you find your favorite podcasts. Check out my daily
Speaker 1: reading list at Ridhaltz dot com. Follow me on Twitter
Speaker 1: at Ridholtz, follow all of the Bloomberg podcasts at podcast
Speaker 1: I would be remiss if I did not thank the
Speaker 1: crack team that helps put these conversations together each week.
Speaker 1: My audio engineers were Justin Milner and Robert bragg Atico.
Speaker 1: Val Bron is our project manager. John Russo is my
Speaker 1: head of research. Paris Wold is my producer. I'm Barry Ratults.
Speaker 1: You've been listening to Masters in Business on Bloomberg Radio