Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lots podcast.
Speaker 3: I'm Joe Wisenthal and.
Speaker 4: I'm Tracy Allaway.
Speaker 2: Tracy, it's my favorite time of year.
Speaker 4: Do you know what I was going to say, the
Speaker 4: exact same thing. I was going to make, the exact
Speaker 4: same comment.
Speaker 2: It's Outlook season, twenty twenty five Outlook season, and our
Speaker 2: inboxes get flooded with various flavors of big picture outlooks,
Speaker 2: micro picture outlooks. Fifteen things to watch for within the
Speaker 2: industrial and trucking segments of the economy. Fifteen big questions
Speaker 2: we have.
Speaker 4: For Here's a list of all the things Trump is
Speaker 4: going to make great again.
Speaker 2: Yeah, all these things, and these are some of my
Speaker 2: favorite cell side notes to read every year, but they
Speaker 2: always make for a thoughtful something to do around this
Speaker 2: time of year.
Speaker 4: Here's the big question. Do you go back and look
Speaker 4: at the twenty twenty three outlooks?
Speaker 3: I never do.
Speaker 2: I people always in our industry joke about that, they like,
Speaker 2: let's go back, and I've seen it happen twice.
Speaker 4: But on a serious note, I know the analysts who
Speaker 4: produce these outlooks like it is their actual job to
Speaker 4: try to forecast the future. But like I find it
Speaker 4: so difficult, especially in the current context with so many
Speaker 4: uncertainties and the new administration coming in. I just I
Speaker 4: don't even know how you begin to, like try to
Speaker 4: figure out what the level of the S and P
Speaker 4: five hundred is going to be under those like very
Speaker 4: uncertain conditions.
Speaker 2: Well, you know, most of the time stocks go up
Speaker 2: and the economy grows.
Speaker 4: And that that would be your outlook is like, well,
Speaker 4: stocks are probably going to go up.
Speaker 2: Stocks will go up with the economy will grow. In
Speaker 2: two and a half, three and a half. Anyway, we
Speaker 2: have much better guests.
Speaker 4: Yes, we have people who actually do.
Speaker 2: That and are really truly some of the best in
Speaker 2: the industry. And it is a real treat. We actually
Speaker 2: have them both together, which makes for an extraordinary opportunity.
Speaker 2: So I'm very excited. We have two guests, two of
Speaker 2: the perfect guests, I should say. We're gonna be speaking
Speaker 2: with Jan Hatziis, chief economist and head of Global Investment
Speaker 2: Research at Goldman Sachs, and David Coston, chief US equity
Speaker 2: strategist at Goldman SACS. David and Jana, this is such
Speaker 2: a thrill to have you on both at the same
Speaker 2: time and just talk about what twenty twenty five is like,
Speaker 2: because there's obviously a lot to talk about. I don't
Speaker 2: know to start it with you Yan, like, actually, do
Speaker 2: you accept the premise that it's a difficult time. It
Speaker 2: feels difficult, it feels tricky, it feels like there's a
Speaker 2: lot of questions and uncertainties. Do you accept the premise
Speaker 2: that it's an unusually tricky time to be making a
Speaker 2: short term or medium term forecast?
Speaker 5: I think it is a difficult time just because there's
Speaker 5: more uncertainty than normal about the policy environment. So you
Speaker 5: have all the usual uncertainties around whether the consumer is
Speaker 5: going to continue to spend we think yes, where inflation
Speaker 5: that's going to continue to trend down X, any new
Speaker 5: shocks we think yes, Whether the Fed will still deliver
Speaker 5: cuts just based on the underlying trend in the economy.
Speaker 5: And then you have to think about the potential impulses,
Speaker 5: both on the positive and the negative side, and obviously
Speaker 5: we'll get into those, but that just adds to the
Speaker 5: variability around the central forecast.
Speaker 4: I have a lot of procedural questions when it comes
Speaker 4: to the outlooks. My first one is do you guys
Speaker 4: like talk to each other before you do your respective outlooks,
Speaker 4: because I imagine what the market does is obviously going
Speaker 4: to depend a lot on what the economy does.
Speaker 6: There are I guess nearly a thousand people in the
Speaker 6: research department at Goma. Yan is the head of the
Speaker 6: research department, and within Macro probably one hundred people, and
Speaker 6: we are pretty coordinated. Every week have a conversation about
Speaker 6: what's happening in the different regions around the world economically,
Speaker 6: in commodities, in strategy and rates. So we're pretty coordinated
Speaker 6: at the macro level.
Speaker 4: Do you ever disagree we do?
Speaker 5: I do think that we spend a lot of time
Speaker 5: trying to get to the bottom of what the disagreement
Speaker 5: is about, and that often brings views more closely together.
Speaker 5: I think in the end we do try to present
Speaker 5: a coherent overall picture, but that doesn't mean that every
Speaker 5: nuance is exactly the same. I mean, I think there
Speaker 5: is sort of a spectrum between having just one view
Speaker 5: of the world where there's zero room for individual kind
Speaker 5: of creativity, and just having a bunch of people that
Speaker 5: have independent views that are not coherent. You have to
Speaker 5: find a place somewhere in the middle. I think we're
Speaker 5: more towards the coherent side than what I see, you
Speaker 5: know in many other research organizations where it's really more
Speaker 5: individuals than a team effort.
Speaker 2: We're going to get into all the actual details, but
Speaker 2: I kind of like asking some of these procedural questions. Okay,
Speaker 2: so you make an S and P. Five hundred forecast
Speaker 2: for the year twenty twenty five, you talk to clients,
Speaker 2: et cetera. You know, I can't imagine there are that
Speaker 2: many people in the investment industry. Maybe I'm wrong, And
Speaker 2: tell me if I'm wrong, who's like David says, the
Speaker 2: SMP is going to X, so that's what we're gonna
Speaker 2: buy or we're gonna sell or et cetera. How do
Speaker 2: you view, like, what is your goal when you're talking
Speaker 2: to clients, when you're putting out a forecast for the
Speaker 2: S and P five hundred, and when you think about
Speaker 2: the value that you bring to clients from making these
Speaker 2: forecasts that Tracy and I love getting in our inboxes
Speaker 2: this time of year, Like, what are you hoping is
Speaker 2: the end fruit of that?
Speaker 6: Well, there's a variety of customers or clients that we
Speaker 6: think about, and I would say framing the issues is
Speaker 6: probably the most important thing we do. Identifying investment strategies
Speaker 6: inside of the market is a big area of focus.
Speaker 6: We think about segmenting the clients of Goldman Sachs. We
Speaker 6: have hedge funds, mutual funds, pension funds, insurance companies, endowments,
Speaker 6: sovereign funds. Each of those constituencies are looking for something
Speaker 6: a little bit different the mixed asset portfolio. On the
Speaker 6: part of number of endowments and pension funds, sovereign wealth funds,
Speaker 6: they're quite interested in the index level because they think
Speaker 6: about the alternatives between equities and credit, private credit, public credit, commodities,
Speaker 6: private equity, etc. And so those are issues for those
Speaker 6: type of clients. If you're thinking about and when we
Speaker 6: talk to and interact on a daily basis with hedge
Speaker 6: funds and mutual funds, they're focused on oftentimes investment strategies
Speaker 6: inside of the market, and those are some of the reasons.
Speaker 6: But in terms of your specifics on how you think
Speaker 6: about the index level, that is something people think about broadly.
Speaker 6: Do they put more risk on or do they take
Speaker 6: less risk? Is the market going to pay for excitement
Speaker 6: or is it going.
Speaker 5: To pay for boredom?
Speaker 6: How do you think about shifting your portfolio to reflect
Speaker 6: those Those are basically the variety of conversations that we
Speaker 6: have on a daily basis.
Speaker 4: So this time last year, I think we were still
Speaker 4: maybe not as much as earlier, but we were still
Speaker 4: kind of in recession expectation mode. And you know that
Speaker 4: obviously went on for like two years with the yield
Speaker 4: curve inversion and the surveys showing that the vibes were down,
Speaker 4: and everyone worried that consumer spending would eventually drop off
Speaker 4: and that sort of thing. And yet here we are,
Speaker 4: tail end of twenty twenty four. Recession hasn't emerged. The
Speaker 4: Fed is now cutting rates, which presumably takes some of
Speaker 4: the pressure off. Yeah, you were one of the economists
Speaker 4: who I think got this right. You were in the
Speaker 4: soft landing camp. From what I remember when we spoke
Speaker 4: to you. What was it that you saw that kind
Speaker 4: of played out effectively in twenty twenty four.
Speaker 5: I'd say the key to the soft landing call over
Speaker 5: the last couple of years was, I think to recognize
Speaker 5: that this is a very different business cycle that was
Speaker 5: much more driven by the pandemic and the post pandemic
Speaker 5: ambalanced US that emerged really in twenty twenty twenty one,
Speaker 5: and climbing out of a hole that was really a
Speaker 5: supply side hit is very different from squeezing down inflation
Speaker 5: that had emerged because of an overheating. If you have
Speaker 5: an overheated economy and the level of activity is just
Speaker 5: too high and the level of demand is too high,
Speaker 5: to bring that back to normal, you almost have to
Speaker 5: have a decline in economic activity, which is almost the
Speaker 5: definition of a recession. But if you're climbing out of
Speaker 5: a hole on the supply side, and supply chains go
Speaker 5: back to normal, libor force participation goes back to normal,
Speaker 5: we get an additional boost to supply from immigrants coming
Speaker 5: into the workforce, and you know, we'll get into some
Speaker 5: of these things. All of that means you can see
Speaker 5: declining inflation and increases in real output and employment at
Speaker 5: the same time time, and that's basically what we've been
Speaker 5: seeing over the last couple of years. So for me,
Speaker 5: that's the most important difference. I think there was too
Speaker 5: much extrapolation from past business cycles, and too many people
Speaker 5: looked at when inflation is at five percent or six percent,
Speaker 5: there's always been a recession because those were much more
Speaker 5: demand driven cycles rather than supply driven cycles.
Speaker 2: So we're recording this, by the way, on November twenty sixth.
Speaker 2: The S and P as of the moment I'm saying
Speaker 2: this is that six four point seventy two extraordinary gains,
Speaker 2: nearly twenty six percent gains from the start of the year.
Speaker 3: I guess I'm not surprised.
Speaker 2: David that, given this sort of easy mode disinflation that
Speaker 2: we had in twenty twenty four, that we've had such
Speaker 2: a great year for the stock marketing. You have a
Speaker 2: call of sixty five hundred for your your in twenty
Speaker 2: twenty five target, which is about a little over seven
Speaker 2: seven percent from where we are.
Speaker 3: How come how much?
Speaker 2: So it's gonna be it's gains, And you know, I
Speaker 2: think a lot of people would be happy with seven
Speaker 2: percent gains.
Speaker 3: You do that for ten straight years of.
Speaker 4: Age Shoe's thesis that stocks go up.
Speaker 3: Yeah, Well, so how do you get there?
Speaker 6: All right, let's talk about some of the building blocks
Speaker 6: for how we get there. Number one is earnings, and
Speaker 6: earnings are expected to grow in our model around eleven
Speaker 6: percent this year, meaning twenty twenty five looking ahead, and
Speaker 6: about seven percent in calendar twenty twenty six. We've got
Speaker 6: a couple of years of continued expansion in earnings. How
Speaker 6: do we get the earnings, Well, we can think about
Speaker 6: sales growing roughly five percent. Most companies over time grow
Speaker 6: their sales and their revenues by roughly nominal GDP, so
Speaker 6: we'll call that around five percent, a little bit of
Speaker 6: a margin expansion, and that's going to lead to the
Speaker 6: growth rate. Now, the growth rate of eleven percent is a
Speaker 6: little higher than that. You have some issues around healthcare
Speaker 6: in particular. We are not expecting the write off of
Speaker 6: so much in process R and D, and so we
Speaker 6: get very very specific about some things. But our models
Speaker 6: would show around eleven percent earnings growth for the coming year,
Speaker 6: and we are affecting that the multiple actually come down slightly. Currently,
Speaker 6: the market multiples around twenty or nearly twenty three times
Speaker 6: forward earnings market prices consensus as opposed to our earnings estimates,
Speaker 6: which is a little bit below consensus, and the idea
Speaker 6: of the multiple declining Joe of maybe twenty one and
Speaker 6: a half times is our model. So the bottom line,
Speaker 6: how do we get there? You're looking at eleven percent
Speaker 6: earnings growth. By this time next year, the market will
Speaker 6: be pricing off of the twenty twenty six earnings. That's
Speaker 6: why we have to look out for two years. And
Speaker 6: the idea of a market multiple or multiple of around
Speaker 6: twenty one and a half times what is ultimately a
Speaker 6: twenty twenty six estimate supports six five hundred is it target?
Speaker 4: So you're talking about earnings expansion. All of us presumably
Speaker 4: woke up to headlines this morning about Trump imposing tariffs
Speaker 4: on Some.
Speaker 3: Of us checked the news last night before that.
Speaker 4: Okay, well, I didn't I want to sleep early. I
Speaker 4: was blissfully unaware of global politics and trade policy. But anyway,
Speaker 4: presumably higher input costs would eventually feed into corporate earnings.
Speaker 4: I guess is that on your radar at all?
Speaker 5: Well, it certainly should be. As far as China tariffs
Speaker 5: are concerned, I mean, we do expect a significant increase
Speaker 5: in China tariffs, and we're building in about a twenty
Speaker 5: percentage point increase in the average rate on US imports
Speaker 5: from China. I think it's also pretty likely that we'll
Speaker 5: get some additional tariffs outside of China. We're thinking auto tariffs,
Speaker 5: potentially on Europe and Mexico. And then of course there
Speaker 5: were some announcements or threats of broader tariffs on both
Speaker 5: Mexico and Canada. You know, we'll have to see whether
Speaker 5: that ultimately happens. There is a renegotiation of the US
Speaker 5: Mexico or Canada trade agreement that will have to occur
Speaker 5: over the next couple of years. So I think there
Speaker 5: still will be a number of rounds before this actually
Speaker 5: gets finalize. But clearly tariffs are the in all of you,
Speaker 5: the biggest risk to what otherwise is quite a positive outlook.
Speaker 5: I mean, we're pretty optimistic on the US growth outlook
Speaker 5: for twenty twenty five. We're you know, two and a
Speaker 5: half percent again, half a percentage point or a little
Speaker 5: more above the current Bloomberg consensus. But we're watching the
Speaker 5: tariff situation closely, and I'm sure there's going to be
Speaker 5: many twists and turns before all of this becomes totally clear.
Speaker 2: Our turiff's inflationary, because I could see it both ways. Right,
Speaker 2: on the one hand, they throw sand into the gear,
Speaker 2: so to speak, of the global economy, and that is
Speaker 2: in a costly process. Right, there's a readjustment et cetera.
Speaker 2: On the other hand, I think new Treasury Secretary nominee
Speaker 2: Scott Best and made some quotes they don't have to
Speaker 2: be per se inflationary, because yes, imports may cost more,
Speaker 2: but then you know, sort of a kind of it
Speaker 2: struck me as sort of a monitor's framework. There's less
Speaker 2: money in households, and then that reduces demand elsewhere, and
Speaker 2: that brings prices lower, and so the overall price level
Speaker 2: or the rate of inflation doesn't change as much as
Speaker 2: an economist. Someone asks you our terriff's inflationary. How do
Speaker 2: you think through that question, I.
Speaker 5: Would say tariffs raised prices, and we can see that
Speaker 5: very clearly from when they have been applied, including some
Speaker 5: of the China tariffs in the first Trump administration. They
Speaker 5: fed through to prices in the categories the relatively few
Speaker 5: categories where they were applied, and.
Speaker 4: This is such achanical it's really good.
Speaker 5: So yes, I would say that's quite clear. Whether that
Speaker 5: is ongoing inflation, that's much less clear because these are
Speaker 5: really price level effects. They're sort of like value added
Speaker 5: tax increases in various European countries. We've seen this time
Speaker 5: and time again. There's a one time increase in the
Speaker 5: price level, a one time increase in inflation, but the
Speaker 5: inflation then drops out twelve months after. Assuming that there
Speaker 5: are no major second round effects through inflation expectations, then
Speaker 5: of course central banks would become a lot more concerned
Speaker 5: if you did see a big increase in inflation expectations,
Speaker 5: wages ongoing escalation, if there is a you know, tit
Speaker 5: for tat trade war that keeps going, obviously that would
Speaker 5: also have a longer tail, But initially it is a
Speaker 5: price level impact.
Speaker 4: David, I'm going to ask what is possibly an unfair question,
Speaker 4: but can you pretend to be the entire stock market
Speaker 4: right now and tell me, like, what is happening today?
Speaker 4: Stocks are up about point four to oh percent off
Speaker 4: the back presumably of those tariff headlines we had, like
Speaker 4: a drop in Asia stocks overnight, but US stocks recover
Speaker 4: pretty quickly. What is it that investors see here?
Speaker 6: Well, the biggest discussion point that I'm in having with
Speaker 6: portfolio managers has to do with the expectation that small
Speaker 6: business confidence is likely to increase sharply. That was the
Speaker 6: experience at the beginning of the first Trump administration. Actually,
Speaker 6: it started to happen between the election, and actually the
Speaker 6: inauguration that took place back in twenty sixteen early twenty seventeen,
Speaker 6: it was a surge in small business optimism. And so
Speaker 6: the discussions are and around the expectation that portfolio managers
Speaker 6: have that this is going to be a repeat of
Speaker 6: the last administration, and there's a lot of enthusiasm the
Speaker 6: expectation that there's less sort of muscular antitrust environment, that
Speaker 6: there is an idea of small businesses investing, and that
Speaker 6: optimism is therefore likely to benefit a lot of companies
Speaker 6: whose customers are small and medium sized businesses, and that's
Speaker 6: one of the investment strategies we have for the current year.
Speaker 6: We work with the individual analysts at Goldman and we've
Speaker 6: identified a group of stocks where more than fifty percent
Speaker 6: of their revenues are coming from small and medium sized businesses.
Speaker 6: And so there's investment opportunities that we look at on
Speaker 6: the back of the expectation of a more robust economic
Speaker 6: or more positive business environment. And again it's about the expectations,
Speaker 6: the perception of what is like could happen. And so
Speaker 6: as back to your question, Tracy, that's the topic is
Speaker 6: that not necessarily the topic of today, not necessarily, but
Speaker 6: that broadly in the last couple of weeks has been
Speaker 6: the central topic right now that the last NFIB survey
Speaker 6: was around the thirteenth percentile versus history, so quite low,
Speaker 6: and the expectation of many as it's going to surge
Speaker 6: in the coming months.
Speaker 2: You mentioned the regulatory environment one of your other themes
Speaker 2: for twenty twenty five, and this has come up a lot,
Speaker 2: as expectations of more liberal m and a regulatory environment,
Speaker 2: more deals being relighted. I think we can understand that
Speaker 2: you also are still bullish on the really big megacap stocks,
Speaker 2: and you said something in your twenty twenty five out
Speaker 2: look that I kind of take an issue with. You said, like,
Speaker 2: the primary question for mutual fund managers over the last
Speaker 2: two years is whether they got the big megacap story right,
Speaker 2: which is true, but it's also true for arguably like
Speaker 2: fifteen years at this point, because really what we should
Speaker 2: have all been doing for the last fifteen years is
Speaker 2: just by Microsoft and Alphabet and Meta and really ignore
Speaker 2: everything else. You're still bullish on them. What would have
Speaker 2: to change, What conditions would have to change such that
Speaker 2: the mag seven or whatever permutation is hot? Maybe one
Speaker 2: pops in and one drops out. What would have to
Speaker 2: change for these handful of stocks to not be the
Speaker 2: big winners of the market going forward.
Speaker 6: So, Joe, the driver of these stocks over the past
Speaker 6: decade has been superior earnest growth, saparitor sales growth, superior
Speaker 6: earnest growth in terms of the comparison with the rest
Speaker 6: of the market, and so that has been a terrific
Speaker 6: investment strategy for for a long time. The largest companies
Speaker 6: really driving the index well, our analysis would sugges just
Speaker 6: that most of the market, including the largest stocks, are
Speaker 6: trading around fair value right now, and that it is
Speaker 6: earning's growth in the coming year that's likely to drive
Speaker 6: the performance of the market. Well, the superior earnings growth
Speaker 6: of these largest stocks is likely to diminish, in our opinion,
Speaker 6: in the coming year. So let's put some numbers around that.
Speaker 6: This year Counter twenty twenty four, the largest companies, the
Speaker 6: Magnificent seven as they're called. Those companies had thirty three
Speaker 6: percent expected. Well, now, Spectacles is the fourth quarter, but
Speaker 6: let's use that as a full year number. Earnings growth
Speaker 6: around thirty three percent, and that compares around three percent
Speaker 6: for the four hundred and ninety three remaining companies in
Speaker 6: the SMB five hundred. That's thirty percentage points excess growth rate.
Speaker 6: And the coming year the expectations use consensus for a
Speaker 6: moment is around eighteen percent versus twelve percent. That's a
Speaker 6: six percentage point gap. So from thirty percentage points to
Speaker 6: six percentage points, and you look into twenty twenty six
Speaker 6: and that's going to narrow yet further until around four
Speaker 6: percentage points. So relative earnings growth is going to be
Speaker 6: the explanation in our view of a narrowing premium return.
Speaker 6: And so if I put some numbers around that, very specifically,
Speaker 6: you had sixty three percentage points of outperformance excess return
Speaker 6: of the largest docks versus the market in twenty twenty three.
Speaker 6: It's running around twenty two percentage points this year, and
Speaker 6: our forecast next year is probably around seven percentage points.
Speaker 6: So the largest cap stocks likely to continue to perform
Speaker 6: in our view, but by a much much smaller margin
Speaker 6: than has been last couple of years.
Speaker 4: I want to go back to what David was saying
Speaker 4: about animal spirits and maybe bringing yan and my question
Speaker 4: is going to sound very weird, but bear with me.
Speaker 4: Do animal spirits actually matter for the economy. And the
Speaker 4: reason I ask that is because you know, for the
Speaker 4: past couple of years, the surveys have been coming in terrible.
Speaker 4: You know, if you looked at the consumer sentiment surveys,
Speaker 4: it was like the worst economic period ever or in many,
Speaker 4: many years, but the economy kept.
Speaker 3: Growing spending consumers.
Speaker 5: Yeah, I mean, I agree you have to take a
Speaker 5: lot of these survey results with a large grain of salt.
Speaker 5: There is also evidence that even relative to the pre
Speaker 5: pandemic period, where it was already a mistake to extrapolate
Speaker 5: one to one from surveys into activity, that that relationship
Speaker 5: has gotten even looser. And I think you have to
Speaker 5: be particularly careful with surveys that ask how are you feeling,
Speaker 5: as opposed to what are you doing? If you take
Speaker 5: them somewhat more objective surveys that ask about production and
Speaker 5: orders and inventories and employment, you can put a bit
Speaker 5: more weight on that, But if it's really pure confidence surveys,
Speaker 5: you do have to be pretty careful. I mean, I
Speaker 5: agree that the small business survey is likely to show
Speaker 5: very large increase over the next couple of months, but
Speaker 5: I would only feed a relatively small portion of that
Speaker 5: into our expectations on actual capital spending. We do expect
Speaker 5: some lift up in terms of cap X in an
Speaker 5: environment that is viewed as friendlier from a regulatory perspective,
Speaker 5: where we'll probably also get a bit of additional tax cuts.
Speaker 5: I mean, it's mostly about extending the twenty seventeen tax cuts,
Speaker 5: but we do think there will probably be some additional
Speaker 5: fresh tax cuts. I think all of that is going
Speaker 5: to be supportive, but more at the margin. I don't
Speaker 5: think it's going to be a massive pickup, you know. Overall,
Speaker 5: my basic view is the economy has been recovering at
Speaker 5: a generally better than expected pace, and I think that's
Speaker 5: going to continue. If we're looking at consensus service going
Speaker 5: into twenty twenty.
Speaker 6: Five, and that's largely priced into the market, which is
Speaker 6: now trading around twenty three times forward earnings, which are
Speaker 6: historically a very high multiple, and that is reflective in
Speaker 6: our interpretation of the backdrop that Yan has described.
Speaker 2: There's obviously a lot of policy uncertainty, and we'll talk
Speaker 2: more about it with the new Trump administ and its
Speaker 2: visions and how seriously it's going to take tariffs and
Speaker 2: deportations and rebuilding American manufacturing all these questions, there is
Speaker 2: a short term uncertainty, however, which is that there's still
Speaker 2: some ambiguity about the trajectory of inflation itself. And at
Speaker 2: one point it looked like a December rate cut was
Speaker 2: going to be a total lock, and actually right now
Speaker 2: it looks like, according to the market, it's like a
Speaker 2: sixty forty scenario, So it's not guaranteed. There are still
Speaker 2: some lingering questions about the inflation trajectory. Question to both
Speaker 2: of you, which is a y sort of like where
Speaker 2: do you see this sort of short term push and
Speaker 2: pull in terms of the rate trajectory? And then to David,
Speaker 2: how much when you think about valuation specifically, is it
Speaker 2: contingent on some of these questions about what's going on
Speaker 2: with the further cutting cycle and.
Speaker 5: So forth on inflation. I think the underlying trends are
Speaker 5: looking quite favorable, and I base that not just on
Speaker 5: the actual price number, okay, but also on the rebalancing
Speaker 5: that we've seen in the labor market. And we're basically
Speaker 5: back to where we were in twenty nineteen in terms
Speaker 5: of the supply demand balance in the labor market, if
Speaker 5: not a little bit looser We've seen, for example, declines
Speaker 5: in the quit rate and in some of the surveys
Speaker 5: of labor shortages to levels that are a little bit
Speaker 5: below where they were in twenty nineteen. We've seen deceleration
Speaker 5: in wage growth. All of that, to me says that
Speaker 5: this inflation process is on track. There is an upside
Speaker 5: risk again maybe more price level effect, but an upside
Speaker 5: risk from the terriffs. But X that, I think we're
Speaker 5: on a path back to around two percent by the
Speaker 5: end of next year, which then because of our terraff assumptions,
Speaker 5: becomes two point four percent in terms of our actual forecast.
Speaker 5: But X that around two percent, and I think in
Speaker 5: that kind of environment, the Fed's going to say, you know,
Speaker 5: four and a half to four and three quarter, that's
Speaker 5: still a very high nominal funds rate, which will become
Speaker 5: a higher real funds rate as you go through next year.
Speaker 5: So I think they're still going to want to deliver
Speaker 5: several cuts. A December cut is all forecast, it's certainly
Speaker 5: not a foregone conclusion. We'll get some important data before then,
Speaker 5: and then we have ongoing cuts as we go through
Speaker 5: next year, and we think ultimately will land in the
Speaker 5: low to mid threes for the funds rate, which is
Speaker 5: a bit below what markets are pricing now. But I
Speaker 5: would remind you that if you go back a couple
Speaker 5: of months, markets who are priced for terminal fed funds
Speaker 5: rate in the two point seven percent range, So that
Speaker 5: was clearly very low relative to you know, certainly what
Speaker 5: we expected. Now. I think the market's price may be
Speaker 5: a little bit higher than is appropriate in our view.
Speaker 6: So there's a lot of things happening on the back
Speaker 6: of your question and the idea of investment strategies around inflation.
Speaker 6: What's the source of the inflation that may occur, And
Speaker 6: we can think of US companies that are selling abroad
Speaker 6: compared with US companies that are selling domestically. If you're
Speaker 6: concerned about tariffs and what that might be from a
Speaker 6: price level point of view, the risk of retaliatory tariffs
Speaker 6: is certainly there, and so owning companies whose customer base
Speaker 6: is in the United States, while of course long the
Speaker 6: supply chain, they may have increased the prices the idea
Speaker 6: of those type of stocks generally doing better. As part
Speaker 6: of our view, you can think about wage inflation as well.
Speaker 6: We have companies where labor costs are relatively low. And
Speaker 6: when I talk about labor costs, I think of the wage,
Speaker 6: not just wages, salaries and bonuses and stock based compensation
Speaker 6: and healthcare benefits, which of course in the US are
Speaker 6: born by the corporate sector. And there are companies where
Speaker 6: that's quite low, relatively low labor intensive companies is compared
Speaker 6: with high labor cost companies. And think that's a area
Speaker 6: again we're looking for strategies, investment strategies around these different
Speaker 6: macro themes that Yan has described and we talk about
Speaker 6: in our teams at Gobenzachs.
Speaker 4: One thing I'm wondering as we enter another Trump administration.
Speaker 4: You know, Joe and I and other journalists, we have
Speaker 4: it kind of easy where we either see the headlines
Speaker 4: at night before we go to bed, or if we're
Speaker 4: saying people, we see them in the morning when we
Speaker 4: wake up, and all we have to do is write
Speaker 4: them up. Basically what Trump is saying. When you wake
Speaker 4: up and see the headlines in the morning, how like
Speaker 4: reactive is your work to some of the stuff coming
Speaker 4: out of Donald Trump's mouth? And I guess the count
Speaker 4: true social account yeah, And I guess the consensus right
Speaker 4: now is you should take Trump seriously, but perhaps not literally.
Speaker 4: And I guess my question is like when does that change.
Speaker 5: Well, it certainly changes once you have actual government policy
Speaker 5: that can be implemented. During the transition. Of course, that's
Speaker 5: not the case. So in terms of changing our forecast,
Speaker 5: you know, the hurdle now would be quite a bit
Speaker 5: higher than once we actually were back in the second
Speaker 5: Trump administration. In terms of providing a comment on some
Speaker 5: of these announcements or tariff threats, yeah, there's a lot
Speaker 5: of demand for that, and so we did write a
Speaker 5: comment on yesterday's announcements around the Canada, China, Mexico tariffs,
Speaker 5: but ultimately said, some of this is very consistent with
Speaker 5: what we had been assuming, namely the China tariffs, and
Speaker 5: maybe even a little bit lower than what ultimately is
Speaker 5: likely to materialize. But then on Mexico and Canada, we
Speaker 5: would take this with more of a grain of salt
Speaker 5: because there will be a whole process around that renegotiation.
Speaker 5: And ultimately we did have some similar tariff threats in
Speaker 5: the first Trump administration on Canada and Mexico, which ultimately
Speaker 5: didn't materialize because NAFTA effectively just became USMCA, but not
Speaker 5: with a huge number of changes.
Speaker 6: Think about it in terms of horizon arbitrage. There is
Speaker 6: lots of price noise that happens every day. And then
Speaker 6: there's investment themes that may be less connected with the administration,
Speaker 6: whether it's Donald Trump, Joe Biden, what have you. The
Speaker 6: idea of artificial intelligence AI that everyone talks about, well,
Speaker 6: that's really less affected by some of the government policies.
Speaker 6: It may be depending on the policies that get implemented,
Speaker 6: but the idea of more productivity growth, or idea of
Speaker 6: more efficiency, or the infrastructure build out relating to AI,
Speaker 6: those are some of the themes that are probably independent
Speaker 6: of the administration. These are the things that are having
Speaker 6: in the technology world. And that's a discussion point that
Speaker 6: I look at with portfolio managers who may have an
Speaker 6: investment horizon that may be three to five years out.
Speaker 6: What stocks should they own, how should they position their
Speaker 6: portfolio as compared with maybe some more focusing on the
Speaker 6: day to day announcements of tariffs, which may be implemented,
Speaker 6: may not be Maybe that may be variable.
Speaker 5: One thing I would just say is that on tariffs,
Speaker 5: this is to a large extent up to the president
Speaker 5: and up to the White House. So it does deserve
Speaker 5: more attention than some other policy pronouncements, which require Congress
Speaker 5: to hash out a reconciliation bill and ultimate tax legislation.
Speaker 5: So it is important to focus on the things when
Speaker 5: there are announcements that are effectively under the control of
Speaker 5: the White House.
Speaker 2: The Treasury Secretary nominee has, according to report, been pitching
Speaker 2: Trump on this idea three three threes, improved growth via deregulation,
Speaker 2: smaller deficits, and more barrels of oil. Let's set aside
Speaker 2: the oil for a second. Do you see any prospect
Speaker 2: of a meaningful change in the spending trajectory? And do
Speaker 2: you see any meaningful opportunity for further pickup in trend
Speaker 2: growth from more favorable regulatory environment.
Speaker 5: So I think these are aspirational goals. They're both pretty ambitious.
Speaker 5: I mean both a three percent of GDP federal deficit.
Speaker 5: That's not what we're expecting. That's not what the Congressional
Speaker 5: Budget Office is expecting. I mean, we think it's going
Speaker 5: to be closer to six percent. Probably maybe we can
Speaker 5: bring that down. Bringing it down to three percent would
Speaker 5: be certainly very desirable. I think we will ultimately need
Speaker 5: to bring it back down to something like three percent,
Speaker 5: and to bring the primary deficit, the x interest federal
Speaker 5: budget deficit back down to somewhere around zero, depending on
Speaker 5: where growth and real interest rates ultimately balance out. But
Speaker 5: that's going to be a process that's going to require
Speaker 5: an enormous amount of effort, and.
Speaker 2: That would take real political effort to cut into very sensitive,
Speaker 2: veryos spending.
Speaker 4: Right.
Speaker 5: That's right, because such a large chunk of government spending
Speaker 5: is basically entitlement programs, defense, and debt service. That doesn't
Speaker 5: leave a lot of discretionary non defense spending that's maybe
Speaker 5: a little bit easier to cut than some of those
Speaker 5: other categories. You know, fifteen percent or so of total
Speaker 5: federal spending is you know, non defense discretionary, so a
Speaker 5: relatively small share. And that then leaves the tax side,
Speaker 5: and you know, obviously there's no desire to deliver a
Speaker 5: sizeable tax cut, certainly not with this administration. So it's
Speaker 5: going to be very difficult. On the growth side. We're
Speaker 5: on the optimistic side of at least the economist consensus
Speaker 5: if you take the federal reserve, the media, and longer
Speaker 5: term GDP growth rate is one point eight percent. We're
Speaker 5: at two point one percent. You know, maybe that can
Speaker 5: be lifted somewhat. Getting to three again would be very
Speaker 5: difficult urely, given the demographics. If you have the labor
Speaker 5: force grow at only a pretty slow pace, you know,
Speaker 5: not a lot of natural population growth because of low
Speaker 5: birth rates, and probably much lawer immigration. So even if
Speaker 5: you're a productivity optimist, and I would say I'm on
Speaker 5: the more optimistic side as far as productivity is concerned,
Speaker 5: getting to three will be difficult.
Speaker 4: Let's talk about immigration, because, as you pointed out, you know,
Speaker 4: tariffs are largely under the purview of the president. Maybe
Speaker 4: immigration is a little bit different. What's been the impact
Speaker 4: of immigration on the economy from the past, you know,
Speaker 4: three or four years or so, and how do you
Speaker 4: see that unfolding going forward, given that we don't really
Speaker 4: know what's coming. We could have mass deportations, or we
Speaker 4: could have something you know, around the edges, or maybe
Speaker 4: nothing happens.
Speaker 5: So it's been very important in boosting growth and nevertheless
Speaker 5: bringing down inflation. So it's obviously a very controversial topic
Speaker 5: from a political perspective, But if you just look at
Speaker 5: the economics, if you bring more people into the workforce,
Speaker 5: especially at a time of very serious labor supply constraints,
Speaker 5: and in particular, very serious labor supply constraints at the
Speaker 5: bottom end of skill distribution in twenty twenty one twenty
Speaker 5: two in areas like bars and restaurants, you know, in
Speaker 5: other areas like that construction, having that large influx of
Speaker 5: people has boosted growth and probably at the margin also
Speaker 5: helped to bring down inflation. At least has helped to
Speaker 5: bring down wage inflation in some of these areas to
Speaker 5: levels that are more sustainable. Now there is already a
Speaker 5: deceleration in the immigrant inflow if you look at it
Speaker 5: on a you know, month on month kind of annual
Speaker 5: rate perspective. In late twenty twenty three, we were running
Speaker 5: above three million at an annual rate. Are now probably
Speaker 5: a little bit between one and a half and two million,
Speaker 5: and that is likely to you know, come down further,
Speaker 5: even before you see an additional tightening of restrictions on
Speaker 5: people coming in and increased deportations. You know, we'll see
Speaker 5: how large the deportations are ultimately going to be. If
Speaker 5: you go back to say the Obama administration, we were
Speaker 5: averaging something like four hundred thousand per year. You know,
Speaker 5: I think it's probably going to be higher than that,
Speaker 5: but whether it's going to be dramatically higher than that
Speaker 5: that I think is still less clear. Yes, it is
Speaker 5: up to the executive branch, it's up to the president.
Speaker 5: But unlike with tariffs, there are going to be a
Speaker 5: lot more logistical issues around deportations and moving immigration to
Speaker 5: much lower levels or into negative territory than with tariffs.
Speaker 5: With tariffs, it's administratively relatively easy. So if I'm thinking about,
Speaker 5: you know, supply the sort of growth negative tariffs on
Speaker 5: the one side, and then immigration on the other, I'm
Speaker 5: more worried about tariffs than I am about immigration.
Speaker 2: David, you mentioned you know we're talking, you talk to clients,
Speaker 2: and one of the dominant conversations Scott Bessant gets named
Speaker 2: Treasury Secretary nominee. Maybe his three percent deficit to GDP
Speaker 2: goal is very aspirational. Maybe some of his growth ambitions
Speaker 2: are aspirational, But it strikes me that, like, ultimately he
Speaker 2: does not strike me as some sort of like major
Speaker 2: shake up, We're going to totally rethink how the economy works.
Speaker 3: Guy.
Speaker 2: He sort of has a traditional macro background, seems to
Speaker 2: have very good understanding when you talk to clients. How
Speaker 2: far does that go, you know, in terms of thinking,
Speaker 2: being able to think long term and avoiding the noise
Speaker 2: of the day to day headlines. The fact that Scott
Speaker 2: Bessont is likely going to be the Treasury secretary, the
Speaker 2: fact that, according to reports that just hit the headlines,
Speaker 2: someone fairly mainstream like Kevin Hassett is going to be
Speaker 2: running a ne EC. Is this the kind of thing
Speaker 2: that just makes investors? Do they get comfortable when they
Speaker 2: hear these headlines?
Speaker 3: What are those chats like?
Speaker 6: I would say that is a pretty good characterization of
Speaker 6: how portfolio managers are thinking about it right now. Based
Speaker 6: on his background. Number of people myself included known him
Speaker 6: for some period of time as a portfolio manager, and
Speaker 6: he's viewed again perception as sort of more mainstream. Of course,
Speaker 6: a lot of the policies will depend on the president,
Speaker 6: and so it'd be up to the treasure Secretary and
Speaker 6: the other cabinet members to carry out those policies, and
Speaker 6: that remains asion indicated that some uncertainty around what those
Speaker 6: ultimately will be.
Speaker 4: So one of the reasons we'd like to talk to
Speaker 4: you is because you go out and talk to other
Speaker 4: people too. Your clients, portfolio managers. As you just mentioned,
Speaker 4: what are some of the more interesting questions that you
Speaker 4: are getting this year and what's maybe different to this
Speaker 4: time in twenty twenty three.
Speaker 5: Well, it's much more around policy and much less around
Speaker 5: the underlying path of the economy. I mean, I think
Speaker 5: where again, going through beyond the policies which we've discussed
Speaker 5: a little bit of the concern around higher inflation. It's
Speaker 5: certainly true that the last couple of prints have been
Speaker 5: a little bit higher. We talked about it earlier. I'm
Speaker 5: not super concerned about it, but it wouldn't be shocking
Speaker 5: if we saw the next few months a little bit
Speaker 5: of upward pressure. First quarter has been a sort of
Speaker 5: seasonally higher sequential inflation period, I think partly because seasonal
Speaker 5: adjustment is difficult, especially post pandemic, and there is some
Speaker 5: residual seasonality which we may see again. So there are
Speaker 5: definitely questions around inflation. There are questions around, you know,
Speaker 5: the longer term neutral funds rate. Our star know to
Speaker 5: what extent has it risen relative to the pre pandemic period.
Speaker 5: You know, our view is that it probably never was
Speaker 5: quite as low as many people thought in twenty eighteen
Speaker 5: twenty nineteen. We were never that sold on the secular
Speaker 5: stagnation story, and you know, it might not be quite
Speaker 5: as high as many observers now think. I mean, we're
Speaker 5: still in the low to mid threes and nominal terms,
Speaker 5: low to mid ones in real terms, but there's certainly
Speaker 5: a lot of discussion around that. There's a lot of
Speaker 5: discussion around Europe and the impact potentially of higher tariffs
Speaker 5: or maybe just the trade policy uncertainty. You know, in
Speaker 5: advance of any actual tariff increases on Europe, what is
Speaker 5: that doing to an economy that's already pretty soft. And
Speaker 5: it's an area where we're actually well below consensus. We
Speaker 5: have a zero point eight percent forecast for EU area
Speaker 5: growth in twenty twenty five, which is four or five
Speaker 5: tenths below the Bloomberg consensus or the ECB and and
Speaker 5: a lot of that is around trade policy uncertainty, which
Speaker 5: seems to have a particularly negative impact in Europe. So
Speaker 5: definitely another big topic of conversation.
Speaker 3: David, and take a stab at the same question.
Speaker 6: Sure, there's a variety of things that portfolio managers are
Speaker 6: focused on right now, and the first is something you
Speaker 6: reference earlier, Joe, which is the idea of the largest
Speaker 6: stocks in the market are now representing more than a
Speaker 6: third of the S and P five hundred equity capitalization.
Speaker 6: So the question is, you know, how does one position
Speaker 6: in that. You look at the mutual fund community, for example,
Speaker 6: seventy five percent of mutual funds are lagging their benchmark.
Speaker 6: It's not a criticism, it's just the data so far
Speaker 6: and those companies. What's been consistent about those funds has
Speaker 6: been they have been underweight these positions in the largest stocks,
Speaker 6: and so the idea of perhaps having an index weight
Speaker 6: for the largest companies and then choosing to generate alpha
Speaker 6: or seek alpha in the rest of the market is
Speaker 6: probably the better strategy. That's number one. That was something
Speaker 6: that the twenty five percent of the mutual funds that
Speaker 6: are outperforming have tended to tended to do. That's number one.
Speaker 6: Number two, relating to Yon's observe as, it's a perpetual
Speaker 6: question of well, what about these global markets Europe, Asia, China, Japan,
Speaker 6: Is this their opportunity to outperform the US. The relevant
Speaker 6: evaluation metrics are really really eye catching, which is that
Speaker 6: the multiple forward pe multiple for the US equity markets
Speaker 6: now roughly twenty three times, and it's about thirteen times
Speaker 6: for Europe and Japan and China is even lower than that.
Speaker 6: And so that question is well for a decade, it's
Speaker 6: still been the US. Is this the time? Is the
Speaker 6: valuation gap so significant that the opportunity set at the
Speaker 6: lower end of the valuation scale? Does that represent good opportunities?
Speaker 6: So I'd say those are two major questions. The third
Speaker 6: question that is highly debated is on AI and the
Speaker 6: idea is of the huge capital investments that some of
Speaker 6: the hyperscalers and other companies making these investments, what will
Speaker 6: the ROI turn on investment be of the AI that
Speaker 6: they're making, And so that is a question that's and
Speaker 6: flowed over the course of the year. A lot of
Speaker 6: the companies who are involved in the infrastructure build out
Speaker 6: have done particularly well. Those pe multiples have expanded and
Speaker 6: the share prices have done better than the growth rate
Speaker 6: in the underlying growth of earnings, and so our focus
Speaker 6: has been on companies in the third phase. As we
Speaker 6: think about it, the third phase of AI infrastructure build out.
Speaker 6: First phase is Navidia's own kind of unique story. The
Speaker 6: second phase is the infrastructure and the third phase is
Speaker 6: the companies we think of whose revenues will be enhanced
Speaker 6: by AI, and a lot of the software companies and
Speaker 6: their price return this year have basically matched the earnings
Speaker 6: growth trajectory, and so the opportunity does exist there in
Speaker 6: some cases for a multiple expansion, So that would be
Speaker 6: an area of focus. So those are some of the
Speaker 6: topics that are debated with fund manager right now.
Speaker 3: Tracy.
Speaker 2: First of all, it feels like international out performance is
Speaker 2: always one year away.
Speaker 4: Or oh, I know, we're always waiting for EM.
Speaker 2: We're always waiting for EM and Japan and Europe. One
Speaker 2: day they're going to have their day. But also to
Speaker 2: refor it's another shops performers. But I always love looking
Speaker 2: at the via AML hedge fund survey and one of
Speaker 2: the things they ask is what's the most crowded trade?
Speaker 2: And it's always big tech, and it's always big tech
Speaker 2: that wins. And I think about how glad I am
Speaker 2: that I'm not a portfolio manager, and how sick to
Speaker 2: my stomach of it have to be did the big
Speaker 2: source of l F I just have to ride the
Speaker 2: most crowded trade? Anyway, I'm glad I don't have that
Speaker 2: job where I have to just do the same trade
Speaker 2: as everyone else to outperform.
Speaker 4: We're all glad to Yeah. Well, actually, speaking of jobs,
Speaker 4: Joe and I came up with a contrarian trade idea
Speaker 4: based on AI, which is by Europe as a beneficiary
Speaker 4: of productivity enhancing technology hormachical because their productivity is really low.
Speaker 4: Would that work? You guys should see the expression on
Speaker 4: David's face.
Speaker 3: Right, he looks like he did bit into a lemon.
Speaker 4: No one likes our contrarian ideas.
Speaker 5: It could work.
Speaker 6: I think maybe you used to think about it in
Speaker 6: terms of M and A activity. The idea of the
Speaker 6: companies in the stays much higher profit margins, and the idea,
Speaker 6: I guess Tracy your hypothesis is perhaps their margin expansion
Speaker 6: would be potentially enhanced by the adoption of AI. That
Speaker 6: one question is on the source of the potential margin enhancement.
Speaker 6: Is that labor driven and you have more efficiency therefore
Speaker 6: fewer jobs. Is that sort of a orthogonal to what
Speaker 6: the objective are? Has seem a lot of the European governments,
Speaker 6: and so I think there's some debate around that. Could
Speaker 6: it be a trade?
Speaker 4: I'm not a buyer Goleman isn't going to set up
Speaker 4: that index.
Speaker 2: Just do you have ai macro thoughts? And to my
Speaker 2: mind there's potentially two ways it could go down. One
Speaker 2: is just the macro impact of all the capital spending.
Speaker 2: Does it move the dial at all in any sort
Speaker 2: of categories that are important on the top level. But
Speaker 2: I guess more importantly, you know, looking a few years
Speaker 2: out when you think about productivity, when you think about
Speaker 2: labor growth, are we at the stage yet where you
Speaker 2: can make interesting predictions about the impact of this stuff.
Speaker 5: So on the near charm impact, we generally have not
Speaker 5: viewed that as all that large. I mean, these are
Speaker 5: huge numbers in a very small part of the economy,
Speaker 5: but in terms of boosting you know, near term growth,
Speaker 5: it's very difficult to get anything more than you know,
Speaker 5: a very small sort of tenth of a percentage point
Speaker 5: or something like that. And in terms of the broader
Speaker 5: impact on potential growth, I think we're also still probably
Speaker 5: several years away. But then we're actually pretty optimistic when
Speaker 5: it comes to sort of late twenty twenties, early two
Speaker 5: thousand and thirties, and a little over a year ago
Speaker 5: we raised our long term potential growth estimate for the
Speaker 5: US by four tenths of a percentage point. We were
Speaker 5: at one point eight percent for the sort of years
Speaker 5: around two thousand and thirty. We're now two point two percent,
Speaker 5: which is no, that's a pretty sizable boost, and it's
Speaker 5: really driven by the fact that AI can replace a
Speaker 5: lot of the tasks, not necessarily the jobs, but the
Speaker 5: tasks within certain jobs that are being done, you know,
Speaker 5: at sort of low and mid levels of white collar
Speaker 5: work at the moment, and that is ultimately going to
Speaker 5: be productivity enhancing. Of course, it does mean some labor
Speaker 5: market upheaval, although we would emphasize that the labor market
Speaker 5: impact is going to occur over a period of time
Speaker 5: and there will also be new jobs that will be created.
Speaker 5: So historically, when you go back, it's actually not that
Speaker 5: easy to find instances of technological unemployment that were visible,
Speaker 5: you know, in the overall economy. Typically when you have
Speaker 5: large increases in productivity growth, those are actually typically low
Speaker 5: unemployment periods rather than high unemployment periods, even though at
Speaker 5: the individual job level or industry level you might see
Speaker 5: quite a lot of job destruction. But overall we're optimistic
Speaker 5: over the longer term, but in the short term it's
Speaker 5: probably still going to be more limited.
Speaker 4: I can't wait to be a prompt engineer, generating AI
Speaker 4: written podcasts. That's our future.
Speaker 3: We can already are. Yeah, we're already data providers.
Speaker 4: Yeah, that's true, David. I just have one more question,
Speaker 4: which is whose ideal was it to write the Equity
Speaker 4: Outlook through the lens of lessons learned from the Art
Speaker 4: of the Deal.
Speaker 6: Well, last year we referenced Taylor Swift. We said the
Speaker 6: subtitle of the report was all you need to do
Speaker 6: is stay invested, and that was the strategy for calendar
Speaker 6: twenty twenty four. And a reference to your first question
Speaker 6: of this podcast, you asked, do anyone look back and
Speaker 6: see what we wrote in you do here? We certainly
Speaker 6: do and think about it as a report card. What
Speaker 6: was the impetus for the Art of the Deal and
Speaker 6: why we titled that or subtitled that for our twenty
Speaker 6: twenty five outlook. Part of it is the M and
Speaker 6: A environment and the idea that our forecast is for
Speaker 6: a twenty five percent increase in M and A in
Speaker 6: calendar year twenty twenty five. That's part driven by our
Speaker 6: forecast of the use of cash of corporate America S
Speaker 6: and P five hundred companies will spend about four trillion
Speaker 6: dollars of cash next year, and a good portion of
Speaker 6: that we have a twenty percent gain or increase in
Speaker 6: the cash devoted to M and A activity. So that
Speaker 6: was one of the impetuses that thought about the Art
Speaker 6: of the Deal. And then it is remarkable and for
Speaker 6: all the listeners of the Outloud's podcast, I would suggest
Speaker 6: you go back and read the report. Read the book.
Speaker 6: The Art of the Deal was written or co ghost
Speaker 6: written perhaps by Donald Trump thirty seven years ago, and
Speaker 6: many of the characterizations of the transactions in his whole
Speaker 6: thought process was pretty interesting. So we went back revisited
Speaker 6: that in my first edition copy for when I was
Speaker 6: way back in the day, and that was the impetus
Speaker 6: for why we thought about that as an organizing structure
Speaker 6: for our Outlook report.
Speaker 4: Do you have a first edition?
Speaker 6: Are you used to nineteen eighty seven?
Speaker 3: Wow? Oh wow, I'm gonna have to go read it.
Speaker 3: I should read it. I will read it.
Speaker 4: Yeah, I haven't read it either. Isn't there a sequel
Speaker 4: as well? Oh?
Speaker 6: There's many many books.
Speaker 5: Yeah, we did references.
Speaker 6: There's the art of the comeback that he wrote ten
Speaker 6: years later nineteen ninety seven, and a whole sequence of
Speaker 6: books that he's written.
Speaker 4: Oh my gosh.
Speaker 2: Okay, David and Jon, thank you so much for coming
Speaker 2: on out launch. This is a true treat to have
Speaker 2: you both and maybe I don't know, let's make it
Speaker 2: an annual tradition.
Speaker 3: We'll do it again next year.
Speaker 5: Thank you, Thank you exciting us.
Speaker 3: Thank you so much. That was Thank you, Tracy. That
Speaker 3: was a real treat. That was really fun having David
Speaker 3: and On together.
Speaker 4: I know, I wonder if they've ever done an external
Speaker 4: appearance together, like.
Speaker 3: An external media appearance.
Speaker 4: Yeah, that's what I mean.
Speaker 3: I guess we could have asked them.
Speaker 4: I'm sure they have spoken to clients.
Speaker 3: Yeah.
Speaker 2: But there was, you know, just one random thing that
Speaker 2: stuck out from me that I hadn't realized, like I
Speaker 2: knew it or I had a good idea in my
Speaker 2: mind that the reason big tech companies have done so
Speaker 2: well is because they're earnings juggernauts. Right. There's other things
Speaker 2: that go on flows and there, but like, they make
Speaker 2: so much money and they're so large, and yet they
Speaker 2: still put up like thirty percent numbers.
Speaker 3: It's insane. But I had not realized like.
Speaker 2: A quite how wide that gap has been and over
Speaker 2: the last two years between their earnings growth and everyone
Speaker 2: the other four hundred ninety three stocks, and b that
Speaker 2: the consensus is for a major shrinking in that gap
Speaker 2: going into twenty twenty five.
Speaker 4: Yeah, that's right. Well. The other thing I was thinking
Speaker 4: was the differentiation between different Trump policies as well, and
Speaker 4: like maybe dividing them up by how much is under
Speaker 4: the purview of the president versus like what things need
Speaker 4: congressional approvement and where there are those sort of political
Speaker 4: limits and guideposts in place. I guess like that seems
Speaker 4: a reasonable way to view some of these risks. I
Speaker 4: still think there's a lot of stuff up in the air.
Speaker 2: Yeah, And you know, it seems to me and we
Speaker 2: sort of joked in the beginning that like the GDP
Speaker 2: usually grows like two and a half three percent and
Speaker 2: stocks usually go up, And that's true. And it seems
Speaker 2: like even with the sort of some of the unorthodox
Speaker 2: or heterodox economic views of the incoming Trump administration, the
Speaker 2: impacts right now expected to be marginal. Right, so even
Speaker 2: tariffs aren't expected if they go through as expected, aren't
Speaker 2: expected to have a radical change to say the inflation
Speaker 2: trajectory or whatever. And you know, it seems like what
Speaker 2: people are anxious about, what you're talking about, maybe some
Speaker 2: clients are talking about, is the idea of like genuine
Speaker 2: policy uncertainty. And that means not a debate about ten
Speaker 2: percent versus twenty percent tariffs, which is, you know, you
Speaker 2: shave some percents off GDP, you shave some earnings off,
Speaker 2: and life goes on, versus like the seeming potential for
Speaker 2: some gen andly radical rethink of how we do business
Speaker 2: with the rest of the world.
Speaker 4: Yeah, totally. And I think that's like that's a.
Speaker 3: Po's the big one, right, it seems plausible. Yeah.
Speaker 4: Yeah, Well, in the meantime, sign up for our twenty
Speaker 4: twenty five investment outlook titled GDP normally increases two to
Speaker 4: three percent and stocks normally go up.
Speaker 2: This way, we're gonna title our newsletter on Mondays.
Speaker 3: Out Let's do it all?
Speaker 1: Right?
Speaker 4: Shall we leave it there?
Speaker 3: Let's leave it there.
Speaker 4: This has been another episode of the All Thoughts podcast.
Speaker 4: I'm Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 2: I'm Joe Wisenthal. You can follow me at The Stalwart
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