WEBVTT - Sunburn and Frost Bite 0:00:12.480 --> 0:00:16.040 Hello, and welcome to What Goes Up, a weekly markets podcast. 0:00:16.160 --> 0:00:18.320 My name is Mike Regan. I'm a senior editor at 0:00:18.320 --> 0:00:22.000 Bloomberg numbled On, a higher across asset reporter with Bloomberg, 0:00:22.760 --> 0:00:25.880 And this week on the show, well talk about spring fever. 0:00:26.320 --> 0:00:30.920 The SMP five hundred surged eleven in eleven days, erasing 0:00:30.960 --> 0:00:33.800 most of its loss for the year and this season, 0:00:33.840 --> 0:00:37.120 as the bond market carried on with its anti social behavior, 0:00:37.240 --> 0:00:40.160 with tenure rates hovering near the highest level in three 0:00:40.240 --> 0:00:43.080 years and a crucial part of the yield curve flirting 0:00:43.120 --> 0:00:46.440 with inversion. And obviously that's causing everyone to freak out 0:00:46.440 --> 0:00:49.120 about whether that signals a recession is on the horizon. 0:00:49.800 --> 0:00:52.080 So what's it all mean? Was this just a bear 0:00:52.200 --> 0:00:55.040 market bounce or has normal service been restored to the 0:00:55.080 --> 0:00:57.800 bull market in stocks. We'll get into it with a 0:00:57.920 --> 0:01:01.440 veteran fund manager, but first pull down, I need to know, 0:01:01.760 --> 0:01:04.680 speaking of spring fever, are you are you experiencing any 0:01:04.720 --> 0:01:08.760 spring fever? I would really like the spring to arrive 0:01:09.040 --> 0:01:11.479 in New York City, right we haven't really seen it yet. 0:01:11.520 --> 0:01:14.880 It's been like thirty degrees for the past week. I 0:01:14.959 --> 0:01:17.840 know it doesn't quite feel like spring. Just it. I 0:01:17.880 --> 0:01:20.280 gotta say, there's a woman in my neighborhood, a young 0:01:20.319 --> 0:01:23.840 woman who the minute the sun comes out, she's out 0:01:23.880 --> 0:01:29.840 there sunbathing. Really, it's like forty degrees out and she's sunbathing. 0:01:30.080 --> 0:01:31.959 This is New Jersey. After that, that would only I 0:01:32.000 --> 0:01:35.560 was going to say, that would only happen in New Jersey. Yeah, Florida, 0:01:35.720 --> 0:01:38.959 Florida possibly maybe Florida. Yeah, but they wouldn't have to 0:01:39.000 --> 0:01:42.039 wait forty I'm just worried she's going to have the 0:01:42.080 --> 0:01:50.160 first simultaneous case of frostbite and sunburn. Maybe she's going 0:01:50.240 --> 0:01:54.920 for it, yeah, setting a new uh entry into the 0:01:55.000 --> 0:01:58.640 Journal of American Medicine or something, right, the Guinness Book 0:01:58.640 --> 0:02:02.920 of World Record. But I want to I do want 0:02:02.920 --> 0:02:04.840 to bring in our guests this week. I want to 0:02:04.880 --> 0:02:07.840 welcome David Bianco. He's the chief investment Officer of the 0:02:07.840 --> 0:02:11.440 America's at DWS Group. Thanks so much for joining us, David, 0:02:12.040 --> 0:02:16.320 Thank you, Hello, Vidalia, and Hi Mike, Hi. It's great, 0:02:16.360 --> 0:02:18.399 it's great to have you, and I really just want 0:02:18.400 --> 0:02:20.960 to start out broadly speaking, I was hoping you would 0:02:21.000 --> 0:02:23.680 just lay out your strategy for us and how you're 0:02:23.720 --> 0:02:25.799 making sense of the market, What you're preferring, what you're 0:02:25.800 --> 0:02:30.040 not preferring right now, Well, laying out the strategy broadly, 0:02:30.080 --> 0:02:32.840 I guess as as Mike said, I would try not 0:02:32.880 --> 0:02:35.160 to get frost bite and sunburn at the same time. 0:02:35.240 --> 0:02:40.560 It sounds skiing injury. UM. It's it's a difficult market 0:02:40.760 --> 0:02:42.480 right now. You don't know if you're gonna get burned 0:02:42.520 --> 0:02:47.080 by inflation or get frozen by a recession. Although I 0:02:47.080 --> 0:02:49.840 don't expect a recession in the you know, this year 0:02:49.919 --> 0:02:54.600 or so, we're quite concerned about the longevity of this cycle. UM. 0:02:54.639 --> 0:02:57.720 I feel as if this cycle has aged quickly. UH. 0:02:57.840 --> 0:03:02.240 It's aged mostly from very high inflation, much earlier than 0:03:02.280 --> 0:03:04.720 you typically see in the first couple of years of 0:03:04.720 --> 0:03:09.119 a new economic expansion. The causes, as everybody knows, it's 0:03:09.120 --> 0:03:13.400 the pandemic, UH, the supply chain disruptions from that UH 0:03:13.480 --> 0:03:18.960 they really strong UH monetary and fiscal response and having 0:03:18.960 --> 0:03:22.120 to pay back some of that UM. And then and 0:03:22.160 --> 0:03:25.440 then the war that broke out with Russia's invasion in Ukraine. 0:03:26.040 --> 0:03:30.000 So we're worried about inflation. We're worried that the FED 0:03:30.400 --> 0:03:33.480 might try to fight inflation too quickly or too aggressively. 0:03:33.960 --> 0:03:37.320 That could bring a recession earlier than necessary. But I'm 0:03:37.360 --> 0:03:41.200 just concerned in general about the way inflation is eroding 0:03:41.240 --> 0:03:44.560 the purchasing power of consumers in the United States, and 0:03:44.680 --> 0:03:47.880 inflation at these levels, with this type of volatility and 0:03:47.880 --> 0:03:53.120 associated uncertainty, it begins to disrupt the effectiveness of the economy. 0:03:53.680 --> 0:04:00.119 It disrupts price signals, and when price signals are distorted, manufacturers, consumers, 0:04:00.440 --> 0:04:04.440 capital allocators, we all begin to make bad decisions. And 0:04:04.520 --> 0:04:07.520 I'm concerned that this, uh this economic environment is one 0:04:07.600 --> 0:04:10.680 where the risks are high and it's difficult to navigate it. 0:04:10.800 --> 0:04:12.720 I don't want to get some burned, don't want to 0:04:12.720 --> 0:04:16.320 give frost bite, So trying to pick pick some some 0:04:16.920 --> 0:04:20.119 uh see for investments, And I'm happy to talk about 0:04:20.120 --> 0:04:22.920 that as we continue our chat. Like the word play 0:04:22.960 --> 0:04:26.200 a lot. Yeah, I didn't realize my crazy neighbor would 0:04:26.200 --> 0:04:29.400 turn into an extended metaphor for the current current state 0:04:29.440 --> 0:04:31.960 of play in the markets. This is great. Hopefully she 0:04:32.000 --> 0:04:34.920 doesn't listen to this and come and come burn me 0:04:35.240 --> 0:04:37.479 about something. But but David, you know I mentioned in 0:04:37.520 --> 0:04:40.400 that intro, you know when you see a bounce like 0:04:40.520 --> 0:04:43.120 this in the market, Um, every know it all on 0:04:43.160 --> 0:04:45.480 Wall Street comes out of the woodwork to say, you know, 0:04:45.720 --> 0:04:50.120 the biggest bounces often occur in bear markets, and that's 0:04:50.120 --> 0:04:53.039 true to some extent. I mean, yes, very often, these 0:04:53.080 --> 0:04:55.880 these really fierce rallies that we look at. You know, 0:04:55.920 --> 0:04:57.760 when you go back to look at, well, when was 0:04:57.760 --> 0:05:00.240 the last time we saw an eleven percent move in 0:05:00.240 --> 0:05:02.599 eleven days? It usually is in the middle of the 0:05:02.600 --> 0:05:04.880 bear market, but but not always. But is that thought 0:05:04.960 --> 0:05:07.760 crossing your mind at all? Like that you know that 0:05:07.880 --> 0:05:09.800 this could be sort of a countertrend rally that we 0:05:09.839 --> 0:05:13.080 saw in March. Um, are you worried that will revisit 0:05:13.120 --> 0:05:15.880 those loads or maybe even set some new loads for 0:05:15.880 --> 0:05:21.039 the year. Volatilities elevated, So we we've expected volatility to 0:05:21.080 --> 0:05:24.400 be high this year. It's playing out. And when you 0:05:24.480 --> 0:05:28.080 have volatility, you tend to get it more to the downside. Um. 0:05:28.120 --> 0:05:30.480 But when you've got big declines as we as we 0:05:30.560 --> 0:05:35.120 had um certainly since the outbreak of the war, you 0:05:35.160 --> 0:05:37.120 can get a big rally. And just as you're asking 0:05:37.120 --> 0:05:39.919 the question is what from here? My view is the 0:05:40.040 --> 0:05:43.840 SMP is more likely to return to something like four 0:05:43.920 --> 0:05:47.520 thousand before it breaks the new highs UH such as 0:05:47.560 --> 0:05:50.920 five thousand. Five thousand's not totally out of reach, but 0:05:51.480 --> 0:05:55.240 to me, it's something more of a three um UH 0:05:55.560 --> 0:05:59.880 target rather than this year at this stage. So I 0:06:00.080 --> 0:06:04.359 don't think it's a dead cat bounce, but this cat's injured, 0:06:04.920 --> 0:06:07.640 and I don't think this cat can bounce higher from here. 0:06:09.520 --> 0:06:12.320 And David, I think you actually recently cut your target 0:06:12.400 --> 0:06:14.520 on the SMP five hundreds, so I wanted to ask 0:06:14.560 --> 0:06:17.600 you what you're thinking was behind that. We cut our 0:06:17.640 --> 0:06:22.520 target twice uh so far this year. We went into 0:06:22.600 --> 0:06:24.960 the year with a five thousand target for the SMP 0:06:25.080 --> 0:06:27.000 five hundred at the end of this year, because I 0:06:27.080 --> 0:06:29.960 just said, I'm thinking that's more appropriate for the end 0:06:29.960 --> 0:06:32.679 of three at this stage, maybe a little bit higher 0:06:33.000 --> 0:06:36.200 if inflation finally does come back down close toward the 0:06:36.200 --> 0:06:39.440 FEDS two percent target. But we cut our target from 0:06:39.480 --> 0:06:43.120 five thousand to forty eight hundred in mid February on 0:06:43.880 --> 0:06:48.040 very high inflation and that, you know, causing us some concerns, 0:06:48.440 --> 0:06:51.440 and then all of our fuel being added to the 0:06:51.440 --> 0:06:54.839 inflation fire with the invasion, so then we cut again 0:06:55.440 --> 0:07:00.240 tore on the SMP. What we've tried to explain is 0:07:00.279 --> 0:07:04.880 that we only slightly trimmed our SMP earnings estimates. We 0:07:04.920 --> 0:07:08.320 went into the year with a two eight dollar SMP 0:07:08.560 --> 0:07:13.560 earnings estimate. We trimmed it to two. I do think 0:07:13.560 --> 0:07:15.240 there's a little bit of risk to the downside of 0:07:16.600 --> 0:07:19.160 but we try to convey that we were raising our 0:07:19.360 --> 0:07:23.080 estimates at the energy sector by three or four dollars 0:07:23.120 --> 0:07:26.960 but trimming it everywhere else by about six bucks. And 0:07:27.000 --> 0:07:30.160 I think there's still remains to be seen how well 0:07:31.160 --> 0:07:35.119 the consumer sectors, the manufacturing part of the sm people 0:07:35.160 --> 0:07:39.600 weather this high high costs of production and high costs 0:07:39.640 --> 0:07:43.600 now of of consumption. You know, David, I was. I 0:07:43.680 --> 0:07:47.560 noticed you are overweight banks, which I find interesting. Uh. 0:07:47.880 --> 0:07:51.000 Note you sent us over before the podcast. Uh, you 0:07:51.080 --> 0:07:53.640 wrote that we set the FED fighting inflation with rate 0:07:53.720 --> 0:07:56.239 hikes is good for banks even if the curve goes 0:07:56.280 --> 0:07:59.880 flat or slightly inverted. I wouldn't unpack that a little bit, 0:08:00.000 --> 0:08:02.240 I mean to me, I guess the big question is 0:08:02.720 --> 0:08:04.400 on a lot of people's mind is that notion of 0:08:04.480 --> 0:08:07.680 deposit beta. You know, if if the FED lifts interest rates, 0:08:07.760 --> 0:08:12.280 the short term rates rise in response, banks won't necessarily 0:08:12.520 --> 0:08:16.200 raise those deposit rates right away. Um, you know, and 0:08:16.240 --> 0:08:18.560 I'm curious how you're thinking about that. It seems like 0:08:18.560 --> 0:08:21.040 in the last rate hike cycle, we saw that that 0:08:21.040 --> 0:08:25.640 that banks were very very reluctant to raise deposit rates. Um, 0:08:26.080 --> 0:08:29.040 they're not exactly competing for deposits these days, they have 0:08:29.120 --> 0:08:30.960 plenty of them. Is that is that part of your 0:08:30.960 --> 0:08:33.360 thinking or is there something else about things banks? The 0:08:33.400 --> 0:08:36.720 banks are flush with cash, and the evidence of that 0:08:36.800 --> 0:08:39.520 is simply the reserves that the banks are holding at 0:08:39.520 --> 0:08:44.280 the Federal Reserve. So first, as the Federal Reserve raises rates, 0:08:44.720 --> 0:08:48.679 banks will earn higher interest immediately on the reserves they 0:08:49.120 --> 0:08:52.960 have at the at the Fed. And uh, it's gone 0:08:53.000 --> 0:08:58.160 from zero to five basis points, and the Fed seems 0:08:58.160 --> 0:09:01.840 pretty committed to hike rates six more times this year 0:09:01.880 --> 0:09:05.000 every remaining meeting. Remains to be seen if they slip 0:09:05.000 --> 0:09:08.120 in a couple of fifty basis point hikes, but immediately 0:09:08.200 --> 0:09:11.880 that boots the net interest margins at the banks, and 0:09:12.080 --> 0:09:15.040 to the extent that they are needing to pass some 0:09:15.080 --> 0:09:17.959 of that forward to the deposit base. As you said, 0:09:19.280 --> 0:09:21.560 it looks to me that the biggest banks have so 0:09:21.640 --> 0:09:27.319 much excess cash that they will unlikely be raising rates 0:09:27.400 --> 0:09:30.160 as fast. You can think of the deposit data is 0:09:30.280 --> 0:09:34.440 probably it's gonna below one, probably point five. I have 0:09:34.480 --> 0:09:37.200 a feeling that it's not just there'll be a long 0:09:37.320 --> 0:09:40.640 lag as well. So what you need to keep in 0:09:40.679 --> 0:09:44.640 mind is that net interest margins are are not the 0:09:44.679 --> 0:09:47.880 only part of bank profitability, but they've been the very 0:09:47.920 --> 0:09:52.120 depressed part of bank profitability. And I see that finally 0:09:52.160 --> 0:09:55.440 going in the right direction because the FED is raising 0:09:55.520 --> 0:09:57.960 rates to fight inflation, and therefore we think that banks 0:09:57.960 --> 0:10:00.720 can be a better inflation protection play than most people 0:10:00.760 --> 0:10:04.559 give them credit for. But what's key here is that 0:10:04.920 --> 0:10:08.120 when you look at energy and oil, people think, well, 0:10:08.200 --> 0:10:11.680 that's maybe a more obvious inflation protection play, particularly of 0:10:11.679 --> 0:10:14.319 geopolitical risks. But you have to ask yourself the question, 0:10:14.320 --> 0:10:17.600 how sustainable is oil at these levels? Whereas I think 0:10:17.600 --> 0:10:20.640 the increase in interest rates there'll be plenty more to come, 0:10:21.320 --> 0:10:24.360 and we are finally just moving into more normal interest rates. 0:10:24.400 --> 0:10:27.839 So it's it's a move upward in earnings, but a 0:10:27.920 --> 0:10:32.719 move upward and also sustainable earnings at the banks. Whereas energy, yes, 0:10:32.760 --> 0:10:35.760 they're gonna be very profitable under these conditions, let's see 0:10:35.760 --> 0:10:46.040 how long that lasts. So speaking of the yield curve 0:10:46.080 --> 0:10:48.760 and the inversion that was obviously one of the big 0:10:48.800 --> 0:10:52.120 stories this week. So I have a Reagan special. I 0:10:52.160 --> 0:10:54.559 have a two part question. So it's going to be lengthy, 0:10:54.679 --> 0:10:58.480 but not as lengthy as Reagan's questions usually are. But 0:10:58.520 --> 0:11:00.800 I wanted to ask you about this. You work on that, 0:11:01.840 --> 0:11:04.960 I'll work on it, yeah, But I wanted to ask 0:11:04.960 --> 0:11:08.000 you about the seemingly conflicting signals in the stock market 0:11:08.120 --> 0:11:11.239 versus the bond market. And then the thing that everybody 0:11:11.400 --> 0:11:15.360 is wondering about is is this time different in terms 0:11:15.400 --> 0:11:21.600 of the yield curve inversion. Well, I would just jump 0:11:21.600 --> 0:11:24.359 into saying that the yeld curve is is an important indicator. 0:11:24.400 --> 0:11:27.360 We watch it, watch it all the time, but you 0:11:27.400 --> 0:11:31.160 know it's effectiveness is just not as strong as as 0:11:31.200 --> 0:11:34.600 as it's fable to be um. In fact, the YEO 0:11:34.720 --> 0:11:39.800 curve not It has been wrong. It's been wrong each 0:11:39.840 --> 0:11:42.560 of the long cycles UH in the United States and 0:11:42.640 --> 0:11:45.520 nineteen sixties and the nineteen eighties and the nineteen nineties, 0:11:45.880 --> 0:11:50.120 we had flat to inverted curves on the tenure yield 0:11:50.120 --> 0:11:52.319 to overnight rate or even the three month bill rate, 0:11:52.360 --> 0:11:53.960 which is a part of the curve that we watch. 0:11:54.440 --> 0:11:56.560 Some people debate this. I think of the two to 0:11:56.640 --> 0:11:59.439 ten year part of the curve is more about term premiums. 0:12:00.080 --> 0:12:02.680 But when you look at the overnight rate relative to 0:12:02.720 --> 0:12:06.240 ten years, you're getting more of an economics signal, and 0:12:06.280 --> 0:12:09.360 you're also getting the impact of what the Fed is 0:12:09.440 --> 0:12:12.559 doing to the economy immediately with the Fed funds rate. 0:12:12.960 --> 0:12:15.640 So I look at the tenure yield minus the Fed 0:12:15.679 --> 0:12:19.360 funds rate, and the curve went flat to invert it 0:12:19.400 --> 0:12:25.319 in in nineteen sixty six, u uh and and and 0:12:25.320 --> 0:12:28.640 and and we had an economic expansion that continued. It 0:12:28.679 --> 0:12:34.199 also happened. And what's interesting about that is that of 0:12:34.240 --> 0:12:37.240 the ten times that the curve has really gone flat 0:12:37.360 --> 0:12:40.480 or clearly inverted, three of the times it was wrong, 0:12:40.600 --> 0:12:43.760 we had economic expansion for several more years. And the 0:12:43.960 --> 0:12:47.040 seven out of ten times it was right at the time, 0:12:47.280 --> 0:12:49.640 it still took one or two years for a recession 0:12:49.640 --> 0:12:53.040 to hit. So it's a useful indicator, but it's a 0:12:53.559 --> 0:12:57.080 It's not infallible, and I think of it as being 0:12:57.160 --> 0:13:00.600 just about as accurate as simply the length of the 0:13:00.640 --> 0:13:04.080 economic cycle. And we always have this mental model of 0:13:04.440 --> 0:13:08.840 how long should a US expansion be. We've I have 0:13:08.920 --> 0:13:11.439 moved and most of us have moved from thinking economic 0:13:11.480 --> 0:13:14.640 expansions on average or typically from five to seven years, 0:13:14.640 --> 0:13:17.720 can be ten years or longer um. But you know, 0:13:17.760 --> 0:13:21.160 we've shortened our expected lifespan of this cycle given the 0:13:21.200 --> 0:13:25.600 inflation problems. So just as the cycle ages is as 0:13:25.720 --> 0:13:29.040 much of a prediction of it's of the next procession 0:13:29.559 --> 0:13:32.559 as is the the inversion of the curve. Processions happen. 0:13:32.920 --> 0:13:35.880 That's why the Yel curve is right. Processions just eventually 0:13:36.160 --> 0:13:39.480 typically happen, but they don't happen um in a short 0:13:39.520 --> 0:13:42.280 time frame after YEO curbing versions and the curve has 0:13:42.320 --> 0:13:44.200 been wrong. I would say thirty percent of the time. 0:13:45.360 --> 0:13:47.400 You know, well, Dona, just because I know you're wondering. No, 0:13:47.559 --> 0:13:50.280 I do not remember the inversion of the nineteen sixties 0:13:50.360 --> 0:13:53.800 if if if, if you're wondering, I was wondering well, 0:13:53.840 --> 0:13:55.840 and and and the one he mentioned before that the 0:13:55.960 --> 0:14:01.640 nies and yeah, yeah, out that too, because you know, 0:14:01.880 --> 0:14:07.080 in nineteen sixty six, FED chairman William M. Chase Martin 0:14:07.440 --> 0:14:09.800 was really aggressive with inflation at the time, and he 0:14:09.880 --> 0:14:12.960 hiked aggressively, and there was actually a brief bear market 0:14:13.520 --> 0:14:17.880 um for the SMP five hundred, but he hiked and 0:14:17.920 --> 0:14:21.280 then he eased off cut a little bit, and we 0:14:21.320 --> 0:14:24.080 had economic expansion to nineteen seventies. So not only was 0:14:24.120 --> 0:14:28.240 the curved wrong, uh during nineteen sixty six, but there 0:14:28.320 --> 0:14:31.840 was a soft landing in nineteen sixty seven. There was 0:14:31.960 --> 0:14:35.440 also a soft landing in ninety five after the nine 0:14:35.680 --> 0:14:38.200 eight four hiking, which was kind of vokers, you know, 0:14:38.400 --> 0:14:40.920 last word to markets of I don't think I'm not 0:14:40.960 --> 0:14:43.480 going to fight inflation if it comes again. And then 0:14:43.600 --> 0:14:47.280 nine four, which is the dreaded year to all bond 0:14:47.360 --> 0:14:51.440 investors of of a bond bear market. Well, the FED 0:14:51.520 --> 0:14:55.320 did stop eventually and pulled back a little bit, and uh, 0:14:55.520 --> 0:14:58.480 the the the the economy continued to expand all the 0:14:58.480 --> 0:15:01.520 way through the late nineteen nineties. So I hear people 0:15:01.520 --> 0:15:03.840 say all the time the FED is never engineered or 0:15:03.840 --> 0:15:07.800 soft landing, but it has engineered a soft landing in 0:15:07.880 --> 0:15:10.920 each of the long cycles, just as the curve is 0:15:10.960 --> 0:15:14.840 wrong about the fedsibility to engineer soft landing and those 0:15:15.160 --> 0:15:19.520 long cycles. I actually wanted to ask you about that too, 0:15:19.520 --> 0:15:22.800 because I think we heard a new phrase this week. 0:15:23.080 --> 0:15:25.920 One of the FED members called it a safe landing. 0:15:26.280 --> 0:15:28.720 So I wanted to ask you what what probability you 0:15:28.800 --> 0:15:33.680 put on a soft landing or safe landing this time around? Yeah, fair, 0:15:33.800 --> 0:15:37.080 fair question. I mean, you know, soft landing versus crash landing, 0:15:37.240 --> 0:15:40.880 soft landing versus turbulent bouncy you know kind of you 0:15:40.920 --> 0:15:42.920 get off the plane. Thank got to survive that flight. 0:15:43.240 --> 0:15:46.400 We've all had many of us have had one of those. Uh, 0:15:46.480 --> 0:15:49.680 it's gonna be bouncy. And I think the FED knows that. 0:15:50.160 --> 0:15:55.320 I think they're concerned as the pilot here, and I 0:15:55.360 --> 0:15:58.720 think that's one of the reasons why they're talking so hawkishly, 0:15:59.480 --> 0:16:03.960 is that they probably figured the more hawkishly they speak, hopefully, 0:16:04.000 --> 0:16:07.920 the less hawkish they need to act. So I know 0:16:07.960 --> 0:16:11.520 I I and I I welcome their hawkers speak. I 0:16:11.600 --> 0:16:15.360 welcome their UH fight against inflation, and again it's good 0:16:15.360 --> 0:16:17.880 for the banks. I just hope they don't push too 0:16:17.920 --> 0:16:21.120 hard because I don't know that they can bring inflation 0:16:21.160 --> 0:16:23.840 down as fast as they would like it to given 0:16:24.040 --> 0:16:29.120 the external factors like oil prices geo political conflict driving 0:16:29.160 --> 0:16:33.000 inflation UM so high and above their target. It doesn't 0:16:33.040 --> 0:16:35.200 mean inflation needs to stay at seven eight percent. It 0:16:35.240 --> 0:16:38.200 can work its way down toward the FEDS target, but 0:16:38.240 --> 0:16:40.520 it's gonna take time for the inflation to get back 0:16:40.520 --> 0:16:42.440 to the two percent target. And I don't think the 0:16:42.480 --> 0:16:44.680 feture to Russian I think the fetcher just take actions 0:16:44.680 --> 0:16:49.480 that ensure it's trending the way they wanted to trend. David, 0:16:49.520 --> 0:16:52.960 I wanted to jump Overseas a little bit and talk 0:16:53.000 --> 0:16:56.320 about Asia because I know you are overweight Asia, and 0:16:56.520 --> 0:16:59.360 we talk about a roller coaster when it comes to China. 0:16:59.560 --> 0:17:01.800 You know, not too long ago where everyone was saying 0:17:01.840 --> 0:17:05.800 this market is simply uninvestable. Uh, there's too much regulatory risk, 0:17:05.840 --> 0:17:08.680 too much policy risk. And then boy that that turned 0:17:08.680 --> 0:17:10.520 out to be sort of the wrong take. In the 0:17:10.520 --> 0:17:13.639 short term, it must be keeping up at night watching 0:17:14.040 --> 0:17:16.440 watching that Chinese market. But how are you thinking about 0:17:16.600 --> 0:17:21.480 China specifically? You know now that Shanghai is locking down. Um. 0:17:22.240 --> 0:17:23.879 In your notes you point out, you know, we're not 0:17:24.000 --> 0:17:26.800 quite sure if if China's on our side or the 0:17:26.880 --> 0:17:29.320 Russian side. They're trying to be Switzerland in this and 0:17:29.440 --> 0:17:31.760 who knows where what directions that that's gonna go. But 0:17:32.320 --> 0:17:33.960 how are you thinking about China right now? Are you? 0:17:33.960 --> 0:17:40.600 Are you bullish? Oh? I'm well, yes, I'm overweighted. Uh, 0:17:41.040 --> 0:17:43.359 and and it is still a small part of our 0:17:43.400 --> 0:17:47.880 asset allocation portfolios, but we are overweighted. And I guess 0:17:47.920 --> 0:17:50.720 I would say maybe my conviction does online with the 0:17:51.000 --> 0:17:56.000 with the overweight, um the amount of the overweight, But 0:17:56.400 --> 0:17:59.399 our our view has been that it's worth the weight, 0:18:00.040 --> 0:18:04.000 it's worth the turbulence as long as China shows us 0:18:04.119 --> 0:18:07.680 that they're you know, with the West rather than doing 0:18:07.760 --> 0:18:11.320 something that's against the West. And it's not just a 0:18:11.359 --> 0:18:15.160 matter of you know, will they be hum a good 0:18:15.200 --> 0:18:19.000 player in the world, in the world community, but will 0:18:19.040 --> 0:18:24.560 they also give you know, some freedom to their entrepreneurs 0:18:24.600 --> 0:18:28.360 and their big leading private companies, their tech companies, and 0:18:28.160 --> 0:18:30.439 and and I think this is an economy that needs 0:18:30.480 --> 0:18:36.040 more innovation to address its challenges, and and and and 0:18:36.040 --> 0:18:38.720 and usually frame markets and entrepreneurs help you figure those 0:18:38.760 --> 0:18:42.200 things out. So when it comes to China, we went 0:18:42.240 --> 0:18:45.880 into the year thinking that one kind of conciliatory speech 0:18:45.960 --> 0:18:49.440 from jijimping to the world and and to investors would 0:18:49.440 --> 0:18:53.080 get that market rallying really strongly. But you know, the 0:18:53.119 --> 0:18:56.080 market fell more than we expected. And finally we got 0:18:56.080 --> 0:19:00.200 a little bit of a consuliatory speech from Juli um 0:19:00.440 --> 0:19:05.040 uh sorry lou Lee, who uh and uh and and 0:19:05.040 --> 0:19:07.399 and and and ever since, the Chinese markets has had 0:19:07.400 --> 0:19:09.960 a nice strong bounce off the bottom, but it's still 0:19:10.040 --> 0:19:12.400 had a had a tough year and down a lot 0:19:12.440 --> 0:19:15.560 from the highs. What we're doing from this point on 0:19:15.800 --> 0:19:20.560 is is watching whether China gets distances itself more from Russia. 0:19:20.960 --> 0:19:23.720 I think if China is scared straight by the way 0:19:23.720 --> 0:19:29.080 the West reacts to unacceptable behavior out of Russia, China reacts, 0:19:29.160 --> 0:19:30.800 you know, the right way to that, that should help 0:19:30.880 --> 0:19:35.639 Chinese equities and uh. If they show that they're that 0:19:35.720 --> 0:19:39.080 they really value their free markets and there and there 0:19:39.359 --> 0:19:42.879 their companies, Uh, then I think those equities have a 0:19:42.880 --> 0:19:45.760 long way to climb upward because there at such steep 0:19:45.800 --> 0:19:50.080 discounts given the quality of the businesses that they've got um, 0:19:50.119 --> 0:19:54.760 particularly their technology type businesses and digital consumer type businesses, 0:19:55.119 --> 0:19:58.840 there are big, big discounts to the comparable businesses out 0:19:58.840 --> 0:20:02.120 of the United States. And the thing about China's it's 0:20:02.160 --> 0:20:05.320 like Texas, everything is just bigger. So if they don't 0:20:05.320 --> 0:20:09.359 repress these businesses, they've got a world of potential and 0:20:09.400 --> 0:20:12.240 they can really help trying to find solutions to their challenges. 0:20:13.600 --> 0:20:16.080 What about here at home? What sorts of things do 0:20:16.119 --> 0:20:17.960 you like at home? I think when I was reading 0:20:17.960 --> 0:20:21.040 your note, you like tech on communications and also at 0:20:21.080 --> 0:20:24.720 the same time, what do you not like? Well, we're 0:20:24.960 --> 0:20:28.640 basically equal it on tech in a little overweight on communications. 0:20:28.640 --> 0:20:31.119 And that's the big part of the SMP five. I mean, 0:20:31.160 --> 0:20:34.600 the SMP is a growth index. The SMP is a 0:20:34.640 --> 0:20:38.760 digital index. At this stage. When you add up to 0:20:38.840 --> 0:20:42.520 tech the communications sector, Internet, retailing and a handful of 0:20:42.560 --> 0:20:46.480 other things you can find other industries, um, you get 0:20:47.160 --> 0:20:52.320 the SMP being digital. So our view is a little 0:20:52.359 --> 0:20:56.800 tactically cautious, but long term constructive, particularly if inflation can 0:20:56.840 --> 0:21:00.480 come down on the SMP and thus the same on technlogy. 0:21:01.520 --> 0:21:06.560 But my preferences are healthcare banks as we talked about 0:21:07.200 --> 0:21:09.520 UH and healthcare is just an area where I find 0:21:09.520 --> 0:21:13.520 the valuations to be very on demanding um and and 0:21:13.640 --> 0:21:17.359 not connected to interest rates at all. And we continuously 0:21:17.440 --> 0:21:21.040 see good sales and earnings growth coming out of the 0:21:21.440 --> 0:21:24.960 pharmaceutical companies and the biotech companies, particularly if you just 0:21:25.080 --> 0:21:28.080 lump them all together, because it's hard to even distinguish 0:21:28.119 --> 0:21:31.600 them anymore. They're all medicine makers and they all have 0:21:31.760 --> 0:21:36.040 very enviable economies. Of scale and profitability when they have 0:21:36.119 --> 0:21:40.800 a breakthrough and and and a winner. And I'm optimistic 0:21:41.080 --> 0:21:45.640 on on on innovation. I'm just so encouraged by what 0:21:46.000 --> 0:21:48.359 the medicine makers were able to do around the pandemic. 0:21:48.359 --> 0:21:51.120 And I think they've impressed themselves that they are more 0:21:51.200 --> 0:21:57.480 motivated to reach for um more cures. And I think 0:21:57.480 --> 0:22:00.240 politicians need to understand that the medicine makers are part 0:22:00.280 --> 0:22:03.480 of the solution, not the problem. Healthcare is something we 0:22:03.520 --> 0:22:06.000 all need. It's gonna cost more, and I believe if 0:22:06.000 --> 0:22:09.360 we let these healthcare companies thrive and do what they 0:22:09.400 --> 0:22:14.360 do best without worrying about political interference or interferencial price caps, 0:22:14.359 --> 0:22:16.960 that this sector can do extremely well the rest of 0:22:16.960 --> 0:22:21.600 this decade and longer. What David, I, I know one 0:22:21.640 --> 0:22:25.199 thing you're not super excited about is housing. UM a 0:22:25.240 --> 0:22:28.159 little worried about housing as as rates go up. And 0:22:28.200 --> 0:22:31.480 I wanted to ask, you know, obviously, if if you're 0:22:31.480 --> 0:22:33.879 old enough and you hear a downturn in housing, you 0:22:34.200 --> 0:22:37.200 think back to oh eight oh nine and how vulnerable 0:22:37.280 --> 0:22:41.199 the financial system was to that crisis. Obviously, you know, 0:22:41.200 --> 0:22:44.159 I think the consensus is that it's it's sort of 0:22:44.440 --> 0:22:47.120 you know, in better shape to withstand any any type 0:22:47.119 --> 0:22:50.200 of housing crisis this time. But still, I gotta think 0:22:50.280 --> 0:22:52.840 that a housing slowdown is a pretty nasty drag on 0:22:52.880 --> 0:22:55.520 the economy. You know. I remember reading somewhere that I 0:22:55.520 --> 0:22:58.320 think it was Tom Lee at a fund strat UH 0:22:58.440 --> 0:23:00.760 years ago said that every new how use that's built 0:23:00.960 --> 0:23:04.480 is you know, adds three jobs to the economy something 0:23:04.520 --> 0:23:07.080 like that. Um and who knows if that number is right, 0:23:07.160 --> 0:23:11.400 But no, boy, I gotta wonder about a cooling off 0:23:11.440 --> 0:23:13.920 of housing if that's a major headwin of the economy. 0:23:13.960 --> 0:23:15.879 Is that is that sort of where you would center 0:23:15.920 --> 0:23:18.600 your attention to look for any any sort of ability. 0:23:19.240 --> 0:23:21.720 The thing about housing is that it's an important part 0:23:21.720 --> 0:23:26.119 of the U. S economy and uh and and there's 0:23:26.160 --> 0:23:29.000 also a very important relationship between housing and interest rates. 0:23:29.000 --> 0:23:31.240 And it's not just how interest rates affect the value 0:23:31.240 --> 0:23:35.000 of housing. It's also how housing and the increase in 0:23:35.000 --> 0:23:37.040