Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast.
Speaker 1: My name is Mike Regan. I'm a senior editor at
Speaker 1: Bloomberg numbled On, a higher across asset reporter with Bloomberg,
Speaker 1: And this week on the show, well talk about spring fever.
Speaker 1: The SMP five hundred surged eleven in eleven days, erasing
Speaker 1: most of its loss for the year and this season,
Speaker 1: as the bond market carried on with its anti social behavior,
Speaker 1: with tenure rates hovering near the highest level in three
Speaker 1: years and a crucial part of the yield curve flirting
Speaker 1: with inversion. And obviously that's causing everyone to freak out
Speaker 1: about whether that signals a recession is on the horizon.
Speaker 1: So what's it all mean? Was this just a bear
Speaker 1: market bounce or has normal service been restored to the
Speaker 1: bull market in stocks. We'll get into it with a
Speaker 1: veteran fund manager, but first pull down, I need to know,
Speaker 1: speaking of spring fever, are you are you experiencing any
Speaker 1: spring fever? I would really like the spring to arrive
Speaker 1: in New York City, right we haven't really seen it yet.
Speaker 1: It's been like thirty degrees for the past week. I
Speaker 1: know it doesn't quite feel like spring. Just it. I
Speaker 1: gotta say, there's a woman in my neighborhood, a young
Speaker 1: woman who the minute the sun comes out, she's out
Speaker 1: there sunbathing. Really, it's like forty degrees out and she's sunbathing.
Speaker 1: This is New Jersey. After that, that would only I
Speaker 1: was going to say, that would only happen in New Jersey. Yeah, Florida,
Speaker 1: Florida possibly maybe Florida. Yeah, but they wouldn't have to
Speaker 1: wait forty I'm just worried she's going to have the
Speaker 1: first simultaneous case of frostbite and sunburn. Maybe she's going
Speaker 1: for it, yeah, setting a new uh entry into the
Speaker 1: Journal of American Medicine or something, right, the Guinness Book
Speaker 1: of World Record. But I want to I do want
Speaker 1: to bring in our guests this week. I want to
Speaker 1: welcome David Bianco. He's the chief investment Officer of the
Speaker 1: America's at DWS Group. Thanks so much for joining us, David,
Speaker 1: Thank you, Hello, Vidalia, and Hi Mike, Hi. It's great,
Speaker 1: it's great to have you, and I really just want
Speaker 1: to start out broadly speaking, I was hoping you would
Speaker 1: just lay out your strategy for us and how you're
Speaker 1: making sense of the market, What you're preferring, what you're
Speaker 1: not preferring right now, Well, laying out the strategy broadly,
Speaker 1: I guess as as Mike said, I would try not
Speaker 1: to get frost bite and sunburn at the same time.
Speaker 1: It sounds skiing injury. UM. It's it's a difficult market
Speaker 1: right now. You don't know if you're gonna get burned
Speaker 1: by inflation or get frozen by a recession. Although I
Speaker 1: don't expect a recession in the you know, this year
Speaker 1: or so, we're quite concerned about the longevity of this cycle. UM.
Speaker 1: I feel as if this cycle has aged quickly. UH.
Speaker 1: It's aged mostly from very high inflation, much earlier than
Speaker 1: you typically see in the first couple of years of
Speaker 1: a new economic expansion. The causes, as everybody knows, it's
Speaker 1: the pandemic, UH, the supply chain disruptions from that UH
Speaker 1: they really strong UH monetary and fiscal response and having
Speaker 1: to pay back some of that UM. And then and
Speaker 1: then the war that broke out with Russia's invasion in Ukraine.
Speaker 1: So we're worried about inflation. We're worried that the FED
Speaker 1: might try to fight inflation too quickly or too aggressively.
Speaker 1: That could bring a recession earlier than necessary. But I'm
Speaker 1: just concerned in general about the way inflation is eroding
Speaker 1: the purchasing power of consumers in the United States, and
Speaker 1: inflation at these levels, with this type of volatility and
Speaker 1: associated uncertainty, it begins to disrupt the effectiveness of the economy.
Speaker 1: It disrupts price signals, and when price signals are distorted, manufacturers, consumers,
Speaker 1: capital allocators, we all begin to make bad decisions. And
Speaker 1: I'm concerned that this, uh this economic environment is one
Speaker 1: where the risks are high and it's difficult to navigate it.
Speaker 1: I don't want to get some burned, don't want to
Speaker 1: give frost bite, So trying to pick pick some some
Speaker 1: uh see for investments, And I'm happy to talk about
Speaker 1: that as we continue our chat. Like the word play
Speaker 1: a lot. Yeah, I didn't realize my crazy neighbor would
Speaker 1: turn into an extended metaphor for the current current state
Speaker 1: of play in the markets. This is great. Hopefully she
Speaker 1: doesn't listen to this and come and come burn me
Speaker 1: about something. But but David, you know I mentioned in
Speaker 1: that intro, you know when you see a bounce like
Speaker 1: this in the market, Um, every know it all on
Speaker 1: Wall Street comes out of the woodwork to say, you know,
Speaker 1: the biggest bounces often occur in bear markets, and that's
Speaker 1: true to some extent. I mean, yes, very often, these
Speaker 1: these really fierce rallies that we look at. You know,
Speaker 1: when you go back to look at, well, when was
Speaker 1: the last time we saw an eleven percent move in
Speaker 1: eleven days? It usually is in the middle of the
Speaker 1: bear market, but but not always. But is that thought
Speaker 1: crossing your mind at all? Like that you know that
Speaker 1: this could be sort of a countertrend rally that we
Speaker 1: saw in March. Um, are you worried that will revisit
Speaker 1: those loads or maybe even set some new loads for
Speaker 1: the year. Volatilities elevated, So we we've expected volatility to
Speaker 1: be high this year. It's playing out. And when you
Speaker 1: have volatility, you tend to get it more to the downside. Um.
Speaker 1: But when you've got big declines as we as we
Speaker 1: had um certainly since the outbreak of the war, you
Speaker 1: can get a big rally. And just as you're asking
Speaker 1: the question is what from here? My view is the
Speaker 1: SMP is more likely to return to something like four
Speaker 1: thousand before it breaks the new highs UH such as
Speaker 1: five thousand. Five thousand's not totally out of reach, but
Speaker 1: to me, it's something more of a three um UH
Speaker 1: target rather than this year at this stage. So I
Speaker 1: don't think it's a dead cat bounce, but this cat's injured,
Speaker 1: and I don't think this cat can bounce higher from here.
Speaker 1: And David, I think you actually recently cut your target
Speaker 1: on the SMP five hundreds, so I wanted to ask
Speaker 1: you what you're thinking was behind that. We cut our
Speaker 1: target twice uh so far this year. We went into
Speaker 1: the year with a five thousand target for the SMP
Speaker 1: five hundred at the end of this year, because I
Speaker 1: just said, I'm thinking that's more appropriate for the end
Speaker 1: of three at this stage, maybe a little bit higher
Speaker 1: if inflation finally does come back down close toward the
Speaker 1: FEDS two percent target. But we cut our target from
Speaker 1: five thousand to forty eight hundred in mid February on
Speaker 1: very high inflation and that, you know, causing us some concerns,
Speaker 1: and then all of our fuel being added to the
Speaker 1: inflation fire with the invasion, so then we cut again
Speaker 1: tore on the SMP. What we've tried to explain is
Speaker 1: that we only slightly trimmed our SMP earnings estimates. We
Speaker 1: went into the year with a two eight dollar SMP
Speaker 1: earnings estimate. We trimmed it to two. I do think
Speaker 1: there's a little bit of risk to the downside of
Speaker 1: but we try to convey that we were raising our
Speaker 1: estimates at the energy sector by three or four dollars
Speaker 1: but trimming it everywhere else by about six bucks. And
Speaker 1: I think there's still remains to be seen how well
Speaker 1: the consumer sectors, the manufacturing part of the sm people
Speaker 1: weather this high high costs of production and high costs
Speaker 1: now of of consumption. You know, David, I was. I
Speaker 1: noticed you are overweight banks, which I find interesting. Uh.
Speaker 1: Note you sent us over before the podcast. Uh, you
Speaker 1: wrote that we set the FED fighting inflation with rate
Speaker 1: hikes is good for banks even if the curve goes
Speaker 1: flat or slightly inverted. I wouldn't unpack that a little bit,
Speaker 1: I mean to me, I guess the big question is
Speaker 1: on a lot of people's mind is that notion of
Speaker 1: deposit beta. You know, if if the FED lifts interest rates,
Speaker 1: the short term rates rise in response, banks won't necessarily
Speaker 1: raise those deposit rates right away. Um, you know, and
Speaker 1: I'm curious how you're thinking about that. It seems like
Speaker 1: in the last rate hike cycle, we saw that that
Speaker 1: that banks were very very reluctant to raise deposit rates. Um,
Speaker 1: they're not exactly competing for deposits these days, they have
Speaker 1: plenty of them. Is that is that part of your
Speaker 1: thinking or is there something else about things banks? The
Speaker 1: banks are flush with cash, and the evidence of that
Speaker 1: is simply the reserves that the banks are holding at
Speaker 1: the Federal Reserve. So first, as the Federal Reserve raises rates,
Speaker 1: banks will earn higher interest immediately on the reserves they
Speaker 1: have at the at the Fed. And uh, it's gone
Speaker 1: from zero to five basis points, and the Fed seems
Speaker 1: pretty committed to hike rates six more times this year
Speaker 1: every remaining meeting. Remains to be seen if they slip
Speaker 1: in a couple of fifty basis point hikes, but immediately
Speaker 1: that boots the net interest margins at the banks, and
Speaker 1: to the extent that they are needing to pass some
Speaker 1: of that forward to the deposit base. As you said,
Speaker 1: it looks to me that the biggest banks have so
Speaker 1: much excess cash that they will unlikely be raising rates
Speaker 1: as fast. You can think of the deposit data is
Speaker 1: probably it's gonna below one, probably point five. I have
Speaker 1: a feeling that it's not just there'll be a long
Speaker 1: lag as well. So what you need to keep in
Speaker 1: mind is that net interest margins are are not the
Speaker 1: only part of bank profitability, but they've been the very
Speaker 1: depressed part of bank profitability. And I see that finally
Speaker 1: going in the right direction because the FED is raising
Speaker 1: rates to fight inflation, and therefore we think that banks
Speaker 1: can be a better inflation protection play than most people
Speaker 1: give them credit for. But what's key here is that
Speaker 1: when you look at energy and oil, people think, well,
Speaker 1: that's maybe a more obvious inflation protection play, particularly of
Speaker 1: geopolitical risks. But you have to ask yourself the question,
Speaker 1: how sustainable is oil at these levels? Whereas I think
Speaker 1: the increase in interest rates there'll be plenty more to come,
Speaker 1: and we are finally just moving into more normal interest rates.
Speaker 1: So it's it's a move upward in earnings, but a
Speaker 1: move upward and also sustainable earnings at the banks. Whereas energy, yes,
Speaker 1: they're gonna be very profitable under these conditions, let's see
Speaker 1: how long that lasts. So speaking of the yield curve
Speaker 1: and the inversion that was obviously one of the big
Speaker 1: stories this week. So I have a Reagan special. I
Speaker 1: have a two part question. So it's going to be lengthy,
Speaker 1: but not as lengthy as Reagan's questions usually are. But
Speaker 1: I wanted to ask you about this. You work on that,
Speaker 1: I'll work on it, yeah, But I wanted to ask
Speaker 1: you about the seemingly conflicting signals in the stock market
Speaker 1: versus the bond market. And then the thing that everybody
Speaker 1: is wondering about is is this time different in terms
Speaker 1: of the yield curve inversion. Well, I would just jump
Speaker 1: into saying that the yeld curve is is an important indicator.
Speaker 1: We watch it, watch it all the time, but you
Speaker 1: know it's effectiveness is just not as strong as as
Speaker 1: as it's fable to be um. In fact, the YEO
Speaker 1: curve not It has been wrong. It's been wrong each
Speaker 1: of the long cycles UH in the United States and
Speaker 1: nineteen sixties and the nineteen eighties and the nineteen nineties,
Speaker 1: we had flat to inverted curves on the tenure yield
Speaker 1: to overnight rate or even the three month bill rate,
Speaker 1: which is a part of the curve that we watch.
Speaker 1: Some people debate this. I think of the two to
Speaker 1: ten year part of the curve is more about term premiums.
Speaker 1: But when you look at the overnight rate relative to
Speaker 1: ten years, you're getting more of an economics signal, and
Speaker 1: you're also getting the impact of what the Fed is
Speaker 1: doing to the economy immediately with the Fed funds rate.
Speaker 1: So I look at the tenure yield minus the Fed
Speaker 1: funds rate, and the curve went flat to invert it
Speaker 1: in in nineteen sixty six, u uh and and and
Speaker 1: and and we had an economic expansion that continued. It
Speaker 1: also happened. And what's interesting about that is that of
Speaker 1: the ten times that the curve has really gone flat
Speaker 1: or clearly inverted, three of the times it was wrong,
Speaker 1: we had economic expansion for several more years. And the
Speaker 1: seven out of ten times it was right at the time,
Speaker 1: it still took one or two years for a recession
Speaker 1: to hit. So it's a useful indicator, but it's a
Speaker 1: It's not infallible, and I think of it as being
Speaker 1: just about as accurate as simply the length of the
Speaker 1: economic cycle. And we always have this mental model of
Speaker 1: how long should a US expansion be. We've I have
Speaker 1: moved and most of us have moved from thinking economic
Speaker 1: expansions on average or typically from five to seven years,
Speaker 1: can be ten years or longer um. But you know,
Speaker 1: we've shortened our expected lifespan of this cycle given the
Speaker 1: inflation problems. So just as the cycle ages is as
Speaker 1: much of a prediction of it's of the next procession
Speaker 1: as is the the inversion of the curve. Processions happen.
Speaker 1: That's why the Yel curve is right. Processions just eventually
Speaker 1: typically happen, but they don't happen um in a short
Speaker 1: time frame after YEO curbing versions and the curve has
Speaker 1: been wrong. I would say thirty percent of the time.
Speaker 1: You know, well, Dona, just because I know you're wondering. No,
Speaker 1: I do not remember the inversion of the nineteen sixties
Speaker 1: if if if, if you're wondering, I was wondering well,
Speaker 1: and and and the one he mentioned before that the
Speaker 1: nies and yeah, yeah, out that too, because you know,
Speaker 1: in nineteen sixty six, FED chairman William M. Chase Martin
Speaker 1: was really aggressive with inflation at the time, and he
Speaker 1: hiked aggressively, and there was actually a brief bear market
Speaker 1: um for the SMP five hundred, but he hiked and
Speaker 1: then he eased off cut a little bit, and we
Speaker 1: had economic expansion to nineteen seventies. So not only was
Speaker 1: the curved wrong, uh during nineteen sixty six, but there
Speaker 1: was a soft landing in nineteen sixty seven. There was
Speaker 1: also a soft landing in ninety five after the nine
Speaker 1: eight four hiking, which was kind of vokers, you know,
Speaker 1: last word to markets of I don't think I'm not
Speaker 1: going to fight inflation if it comes again. And then
Speaker 1: nine four, which is the dreaded year to all bond
Speaker 1: investors of of a bond bear market. Well, the FED
Speaker 1: did stop eventually and pulled back a little bit, and uh,
Speaker 1: the the the the economy continued to expand all the
Speaker 1: way through the late nineteen nineties. So I hear people
Speaker 1: say all the time the FED is never engineered or
Speaker 1: soft landing, but it has engineered a soft landing in
Speaker 1: each of the long cycles, just as the curve is
Speaker 1: wrong about the fedsibility to engineer soft landing and those
Speaker 1: long cycles. I actually wanted to ask you about that too,
Speaker 1: because I think we heard a new phrase this week.
Speaker 1: One of the FED members called it a safe landing.
Speaker 1: So I wanted to ask you what what probability you
Speaker 1: put on a soft landing or safe landing this time around? Yeah, fair,
Speaker 1: fair question. I mean, you know, soft landing versus crash landing,
Speaker 1: soft landing versus turbulent bouncy you know kind of you
Speaker 1: get off the plane. Thank got to survive that flight.
Speaker 1: We've all had many of us have had one of those. Uh,
Speaker 1: it's gonna be bouncy. And I think the FED knows that.
Speaker 1: I think they're concerned as the pilot here, and I
Speaker 1: think that's one of the reasons why they're talking so hawkishly,
Speaker 1: is that they probably figured the more hawkishly they speak, hopefully,
Speaker 1: the less hawkish they need to act. So I know
Speaker 1: I I and I I welcome their hawkers speak. I
Speaker 1: welcome their UH fight against inflation, and again it's good
Speaker 1: for the banks. I just hope they don't push too
Speaker 1: hard because I don't know that they can bring inflation
Speaker 1: down as fast as they would like it to given
Speaker 1: the external factors like oil prices geo political conflict driving
Speaker 1: inflation UM so high and above their target. It doesn't
Speaker 1: mean inflation needs to stay at seven eight percent. It
Speaker 1: can work its way down toward the FEDS target, but
Speaker 1: it's gonna take time for the inflation to get back
Speaker 1: to the two percent target. And I don't think the
Speaker 1: feture to Russian I think the fetcher just take actions
Speaker 1: that ensure it's trending the way they wanted to trend. David,
Speaker 1: I wanted to jump Overseas a little bit and talk
Speaker 1: about Asia because I know you are overweight Asia, and
Speaker 1: we talk about a roller coaster when it comes to China.
Speaker 1: You know, not too long ago where everyone was saying
Speaker 1: this market is simply uninvestable. Uh, there's too much regulatory risk,
Speaker 1: too much policy risk. And then boy that that turned
Speaker 1: out to be sort of the wrong take. In the
Speaker 1: short term, it must be keeping up at night watching
Speaker 1: watching that Chinese market. But how are you thinking about
Speaker 1: China specifically? You know now that Shanghai is locking down. Um.
Speaker 1: In your notes you point out, you know, we're not
Speaker 1: quite sure if if China's on our side or the
Speaker 1: Russian side. They're trying to be Switzerland in this and
Speaker 1: who knows where what directions that that's gonna go. But
Speaker 1: how are you thinking about China right now? Are you?
Speaker 1: Are you bullish? Oh? I'm well, yes, I'm overweighted. Uh,
Speaker 1: and and it is still a small part of our
Speaker 1: asset allocation portfolios, but we are overweighted. And I guess
Speaker 1: I would say maybe my conviction does online with the
Speaker 1: with the overweight, um the amount of the overweight, But
Speaker 1: our our view has been that it's worth the weight,
Speaker 1: it's worth the turbulence as long as China shows us
Speaker 1: that they're you know, with the West rather than doing
Speaker 1: something that's against the West. And it's not just a
Speaker 1: matter of you know, will they be hum a good
Speaker 1: player in the world, in the world community, but will
Speaker 1: they also give you know, some freedom to their entrepreneurs
Speaker 1: and their big leading private companies, their tech companies, and
Speaker 1: and and I think this is an economy that needs
Speaker 1: more innovation to address its challenges, and and and and
Speaker 1: and usually frame markets and entrepreneurs help you figure those
Speaker 1: things out. So when it comes to China, we went
Speaker 1: into the year thinking that one kind of conciliatory speech
Speaker 1: from jijimping to the world and and to investors would
Speaker 1: get that market rallying really strongly. But you know, the
Speaker 1: market fell more than we expected. And finally we got
Speaker 1: a little bit of a consuliatory speech from Juli um
Speaker 1: uh sorry lou Lee, who uh and uh and and
Speaker 1: and and and ever since, the Chinese markets has had
Speaker 1: a nice strong bounce off the bottom, but it's still
Speaker 1: had a had a tough year and down a lot
Speaker 1: from the highs. What we're doing from this point on
Speaker 1: is is watching whether China gets distances itself more from Russia.
Speaker 1: I think if China is scared straight by the way
Speaker 1: the West reacts to unacceptable behavior out of Russia, China reacts,
Speaker 1: you know, the right way to that, that should help
Speaker 1: Chinese equities and uh. If they show that they're that
Speaker 1: they really value their free markets and there and there
Speaker 1: their companies, Uh, then I think those equities have a
Speaker 1: long way to climb upward because there at such steep
Speaker 1: discounts given the quality of the businesses that they've got um,
Speaker 1: particularly their technology type businesses and digital consumer type businesses,
Speaker 1: there are big, big discounts to the comparable businesses out
Speaker 1: of the United States. And the thing about China's it's
Speaker 1: like Texas, everything is just bigger. So if they don't
Speaker 1: repress these businesses, they've got a world of potential and
Speaker 1: they can really help trying to find solutions to their challenges.
Speaker 1: What about here at home? What sorts of things do
Speaker 1: you like at home? I think when I was reading
Speaker 1: your note, you like tech on communications and also at
Speaker 1: the same time, what do you not like? Well, we're
Speaker 1: basically equal it on tech in a little overweight on communications.
Speaker 1: And that's the big part of the SMP five. I mean,
Speaker 1: the SMP is a growth index. The SMP is a
Speaker 1: digital index. At this stage. When you add up to
Speaker 1: tech the communications sector, Internet, retailing and a handful of
Speaker 1: other things you can find other industries, um, you get
Speaker 1: the SMP being digital. So our view is a little
Speaker 1: tactically cautious, but long term constructive, particularly if inflation can
Speaker 1: come down on the SMP and thus the same on technlogy.
Speaker 1: But my preferences are healthcare banks as we talked about
Speaker 1: UH and healthcare is just an area where I find
Speaker 1: the valuations to be very on demanding um and and
Speaker 1: not connected to interest rates at all. And we continuously
Speaker 1: see good sales and earnings growth coming out of the
Speaker 1: pharmaceutical companies and the biotech companies, particularly if you just
Speaker 1: lump them all together, because it's hard to even distinguish
Speaker 1: them anymore. They're all medicine makers and they all have
Speaker 1: very enviable economies. Of scale and profitability when they have
Speaker 1: a breakthrough and and and a winner. And I'm optimistic
Speaker 1: on on on innovation. I'm just so encouraged by what
Speaker 1: the medicine makers were able to do around the pandemic.
Speaker 1: And I think they've impressed themselves that they are more
Speaker 1: motivated to reach for um more cures. And I think
Speaker 1: politicians need to understand that the medicine makers are part
Speaker 1: of the solution, not the problem. Healthcare is something we
Speaker 1: all need. It's gonna cost more, and I believe if
Speaker 1: we let these healthcare companies thrive and do what they
Speaker 1: do best without worrying about political interference or interferencial price caps,
Speaker 1: that this sector can do extremely well the rest of
Speaker 1: this decade and longer. What David, I, I know one
Speaker 1: thing you're not super excited about is housing. UM a
Speaker 1: little worried about housing as as rates go up. And
Speaker 1: I wanted to ask, you know, obviously, if if you're
Speaker 1: old enough and you hear a downturn in housing, you
Speaker 1: think back to oh eight oh nine and how vulnerable
Speaker 1: the financial system was to that crisis. Obviously, you know,
Speaker 1: I think the consensus is that it's it's sort of
Speaker 1: you know, in better shape to withstand any any type
Speaker 1: of housing crisis this time. But still, I gotta think
Speaker 1: that a housing slowdown is a pretty nasty drag on
Speaker 1: the economy. You know. I remember reading somewhere that I
Speaker 1: think it was Tom Lee at a fund strat UH
Speaker 1: years ago said that every new how use that's built
Speaker 1: is you know, adds three jobs to the economy something
Speaker 1: like that. Um and who knows if that number is right,
Speaker 1: But no, boy, I gotta wonder about a cooling off
Speaker 1: of housing if that's a major headwin of the economy.
Speaker 1: Is that is that sort of where you would center
Speaker 1: your attention to look for any any sort of ability.
Speaker 1: The thing about housing is that it's an important part
Speaker 1: of the U. S economy and uh and and there's
Speaker 1: also a very important relationship between housing and interest rates.
Speaker 1: And it's not just how interest rates affect the value
Speaker 1: of housing. It's also how housing and the increase in
Speaker 1: the housing stock and the increase in the value of
Speaker 1: the housing stock has a lot to do with loan growth.
Speaker 1: So you know, housing is something that any you know,
Speaker 1: economists thinking about g d P should think a lot about.
Speaker 1: And it also has a lot of influence on interest
Speaker 1: rates back and forth loan growth as well as being
Speaker 1: a big part of the profitability loan growth and and
Speaker 1: and interest rates of banks. So when you're thinking about
Speaker 1: the economy and you're thinking about banks, you should think
Speaker 1: about housing. But the SMP five has never been as
Speaker 1: sensitive to that. The SMP is a lot more sensitive
Speaker 1: to the digital economy, and it's also it's a big
Speaker 1: manufacturer and commodity producer. So what I'm getting at is
Speaker 1: our view on housing is kind of uh. Yet, we
Speaker 1: expected to slow down, and we expected to actually slow
Speaker 1: down quite a bit in the areas of home goods
Speaker 1: and maybe even home improvement. Um. But I do think
Speaker 1: that and and existing home sales have slowed down a lot,
Speaker 1: and I expect loan growth to slow down, but banks
Speaker 1: will still make more money on the interest rates that
Speaker 1: we talked about. I would just point out the nuances.
Speaker 1: I think new single family new housing starts. I think
Speaker 1: they keep grinding higher. I think the prices of housing
Speaker 1: is at a level where it's still quite profitable for
Speaker 1: home builders to build homes. Uh and I think they'll
Speaker 1: keep doing it. And uh So I expected to be
Speaker 1: volatile as we're going through rising interest rates and a
Speaker 1: lot of debates about where interest rates peak. So that's
Speaker 1: not great for home builders, but within the whole housing world,
Speaker 1: I'm comfortable with home builders and I still like banks.
Speaker 1: I don't expect any kind of credit cycle UH downturn,
Speaker 1: but I am cautious on on home goods and and
Speaker 1: home and and and home improvement type retailers. Another story
Speaker 1: that made waves this week was the CEO of Restoration Hardware,
Speaker 1: which I think is just called r H now, but
Speaker 1: he UH on a conference call. He was saying that
Speaker 1: consumer spending was slowing and that there's demand destruction related
Speaker 1: to inflation. So I wanted to ask you to to
Speaker 1: look ahead and talk about what your expectations are for
Speaker 1: this coming earning season and if you're going to be
Speaker 1: looking for those types of stories in terms of, you know,
Speaker 1: what's happening within corporate America. So we're going to go
Speaker 1: into to earning season and in a couple of weeks
Speaker 1: and it will almost certainly be as it always is,
Speaker 1: that two thirds of the companies will beat on earnings
Speaker 1: and maybe half on sales, and companies that miss will
Speaker 1: get beat up really badly, and the companies that beat
Speaker 1: will will go up. But not as much as the
Speaker 1: ones that miss go down. That's just always the case. Uh.
Speaker 1: What I always trying to focus on is the sequential growth.
Speaker 1: And I do believe that Q one earnings, even beyond
Speaker 1: the seasonal effects, will be will be below Q four.
Speaker 1: Q four was about fifty five dos SMP earnings, UH one,
Speaker 1: and I don't think we do as well in Q one,
Speaker 1: despite you know, improving earn earnings at the energy sector,
Speaker 1: and that's where it comes down to the mix of earnings.
Speaker 1: But they just start seeing this shift of earnings going
Speaker 1: into the energy sector, but coming out of the consumer sectors.
Speaker 1: The supply chain disruptions can tinuing at so many manufacturers, industrials, auto,
Speaker 1: um so I think it's not it's not so much
Speaker 1: about a couple of things. It's not so much about
Speaker 1: well the earnings, you know, beat or miss, they'll be
Speaker 1: flattish sequentially, and I expect him to be flatish all
Speaker 1: the way to the fourth quarter of this year. And
Speaker 1: when I look at the earnings that I'm expecting for
Speaker 1: the end of the year fifty eight dollars fifty nine
Speaker 1: dollars per share of the fourth quarter, I think almost
Speaker 1: all of that earnings growth on a year on your
Speaker 1: basis is going to be inflation. So we're finding that
Speaker 1: there's this shift in the earnings from you know, higher
Speaker 1: quality businesses to dare I say lower quality businesses or
Speaker 1: at least the sectors that investors always put lower p
Speaker 1: s on, like energy and uh, even though the earnings
Speaker 1: are going to grind their way higher over the course
Speaker 1: of the year, doesn't look like they're gonna outpace inflation
Speaker 1: over the course of the year. Now, I'll take it,
Speaker 1: we'll take the inflation off set, but we we tend
Speaker 1: to prefer real earnings growth and real returns on SMP investment,
Speaker 1: and it might be a year of no better than
Speaker 1: just inflationary returns on the SMP. Yeah. Uh, you know, David,
Speaker 1: I know you're you're cautious about sort of a slowdown
Speaker 1: in consumer spending, which I think makes sense given you know,
Speaker 1: the higher prices for fuel and food and all the staples. Um,
Speaker 1: I'm curious how you're thinking about if you're and if
Speaker 1: you're thinking at all about sort of the retail spending
Speaker 1: on stocks themselves, because I'm guessing for a guy like you,
Speaker 1: it must have been kind of I don't know if
Speaker 1: frustrating is the word, or or aggravating to to watch
Speaker 1: this whole reddit phenomenon, uh develop and see these sort
Speaker 1: of junk stocks just going crazy because they're they're getting
Speaker 1: pup pupped on social media. I do think though, there
Speaker 1: there must have been some sort of halo effect for
Speaker 1: the entire market though, and you have this new sort
Speaker 1: of speculative massive people just buying, you know, with both
Speaker 1: fists whatever they can. Um Is that a head went
Speaker 1: to the markets who just the you know, sort of
Speaker 1: a lack of of dry powder in in your average
Speaker 1: person's robin Hood or e trade account to just go speculated.
Speaker 1: Is that ultimately a head went to the market? Question?
Speaker 1: And you know, it has been frustrating, maybe for no
Speaker 1: other reason other than it's hard to predict what those
Speaker 1: those investors are going to do, what they're going to value,
Speaker 1: what what what stocks, what causes they're going to support.
Speaker 1: I mean, there are certain companies electric vehicle makers where
Speaker 1: you think, to yourself, this ownership base is really enthusiastic
Speaker 1: about the mission and I kind of get that, and
Speaker 1: arguably maybe they're willing to accept a really low, you know,
Speaker 1: cost of capital or long term return on capital. Hard
Speaker 1: to know because they've made a lot of money so far,
Speaker 1: if they're really comfortable with low returns and in the future.
Speaker 1: But then you get these odd other type of causes,
Speaker 1: like let's just get this movie company some capital to
Speaker 1: go see if they can do something with it. So
Speaker 1: it is frustrating as much as I welcome participation in
Speaker 1: the equity market, because I think the more people that
Speaker 1: participate and the more diverse views you bring to capital markets,
Speaker 1: the more efficient they're likely to be, at least you hope.
Speaker 1: And then the thing I like about capital markets is
Speaker 1: that it's a dollar weighted democracy, if you will. And
Speaker 1: often I scratched my head and I think to myself,
Speaker 1: particularly when you look at, you know, the bigger cap companies,
Speaker 1: how do these individuals have enough money to be swaying
Speaker 1: stocks as much as they might be. So just sharing
Speaker 1: some thoughts. I don't think I have any you know,
Speaker 1: clear views on this one. If anything, I try to
Speaker 1: stay clear of stocks that look to me as if
Speaker 1: you're being you know, swayed by the masses. Not because
Speaker 1: the masses are wrong, but I'm having a hard time predicting,
Speaker 1: you know, how their views might play out or the
Speaker 1: time right the reeks of crowded trades, and a little
Speaker 1: bit too, I guess to somebody, you know, it's just
Speaker 1: a little too sentiment. And while sentiment is important, it's
Speaker 1: really difficult to predict. Well, Donna, you know what else
Speaker 1: is important for us, at least for us that our listeners.
Speaker 1: I believe that I've many many patiently awaiting for Dun
Speaker 1: Dun Dune, the craziest things we saw in markets this week.
Speaker 1: I'm gonna get us started, um for once. Usually I
Speaker 1: saved the best for last, but this time I'm gonna
Speaker 1: get us started. I wish everybody could see me rolling
Speaker 1: my eyes. Oh they can see it. They can see
Speaker 1: it right through their headphones. The Wizard of Oz. I'm
Speaker 1: sure you've seen the Wizard of Oz, right. Do you
Speaker 1: remember the tin Man? Uh? He carried around an oil can.
Speaker 1: So this is timely to today's market. The tin man
Speaker 1: had an oil can because he would rust up and
Speaker 1: they would have to sport some wheel in them to
Speaker 1: keep him moving. Well, CRUs gs W Auctions just auctioned
Speaker 1: off that oil can from the movie, the actual oil can.
Speaker 1: They do not the story and and this is courtesy
Speaker 1: of TMZ. They don't tell us whether or not it
Speaker 1: was actually filled with oil that might move the needle
Speaker 1: on the price given given the current price of oil.
Speaker 1: But it's all for auctions, so it's time to play prices, right, Uh, David,
Speaker 1: let's go with you first? What do you think the
Speaker 1: winning bid for the tin Man's oil can? Wash? I'd
Speaker 1: like to see the certification of the offenic Oh gosh,
Speaker 1: I mean I'm not gonna go I I could see
Speaker 1: how I'm gonna go with dollars. I get a kick
Speaker 1: out of how seriously our guests take this, uh, like
Speaker 1: like their clients are gonna be like, he didn't get
Speaker 1: the tin Man's oil can? Right? How can I trust
Speaker 1: twenty dollars? What's your what's your bid for the Wizard
Speaker 1: of Oz tin Man's oil can? And the rules are
Speaker 1: if I'm If I'm over, then David wins, right, you
Speaker 1: know if if you don't know the rules by now,
Speaker 1: I'm just laying them out again. Closest to the pin,
Speaker 1: closest to the pins. I'm gonna go with one fifty
Speaker 1: for for the tin Men's oil can. I know I'm
Speaker 1: with you, David? Who pays for these things? I don't know,
Speaker 1: but I'll tell you this. Here's a better one. There
Speaker 1: was a violin that was played, uh, that played on
Speaker 1: the Somewhere over the Rainbow track from Wizard of Oz
Speaker 1: eight year old Stratavari violin. They think that's gonna fetch
Speaker 1: twenty million when it goes off up for auction this summer.
Speaker 1: So you'd have to lever up that oil can to
Speaker 1: get the strap to Bory. But those things I think
Speaker 1: go for that kind of money no matter what. There's
Speaker 1: old violence, I think, so yeah, yeah, So this one
Speaker 1: has the added bonus of having played Somewhere over the
Speaker 1: Rainbow on the Wizard of Oz. Anyway, Bilda, can you
Speaker 1: top that? Maybe? Maybe not. My My story is not
Speaker 1: a hundred markets related, but I thought you would really
Speaker 1: like it and our listeners would really like it, so
Speaker 1: I'll make up markets connection. But we know Jersey City
Speaker 1: was in the news recently for basketball, But did you
Speaker 1: know that they were also in the news because they're
Speaker 1: the first place to install a burger vending machine. A
Speaker 1: burger vending machine. Yes, so it's a company called robo Burger.
Speaker 1: You order a burger, you can use Google or ap Apple,
Speaker 1: pay to pay, you can get catch up mustard all
Speaker 1: the akucha bats. It's ready in six minutes and it
Speaker 1: comes out of the vending machine, and I you know,
Speaker 1: it's the perfect place to test this new Jersey of
Speaker 1: So they grow up the burger right there in the
Speaker 1: machine for you. The vending machine does. Yeah. I mean,
Speaker 1: that's kind of surprised it took this long for that.
Speaker 1: Back in my day, I don't know, they used to
Speaker 1: have those automat things where you go and you put
Speaker 1: the quarters in and open thing. But that was some
Speaker 1: ham sandwich that's sat there for like three weeks. This
Speaker 1: is this is burger. All right, Well, I'm gonna go
Speaker 1: try that that burger machine. Sometimes how much does burger?
Speaker 1: We should take a we should take a field trip.
Speaker 1: I don't remember how much it costs, but I just
Speaker 1: imagine this is gonna. I don't know how well it's
Speaker 1: doing in Jersey City, but it could potentially do well elsewhere,
Speaker 1: and then soon this company will be more and more
Speaker 1: in the news. I would just hope that by now
Speaker 1: you would know the price discovery is important on that burger.
Speaker 1: I need to know. I'm sorry, that's pretty good burger
Speaker 1: vending machine. It's not at all markets related, but I
Speaker 1: but I'll allow it. I like, once they're a public company, David,
Speaker 1: for what are you paying for a robot burger? Say?
Speaker 1: That thing comes out quickly and tasty. I picked ten
Speaker 1: bucks for robo burger just to watch it. What it
Speaker 1: happen is pretty exciting. It's seven dollars. It's seven. There
Speaker 1: you go. There's auto activity right there. And I like
Speaker 1: the name. Got to be some big margin on the
Speaker 1: robo burgers. All right, keep an eye on that space.
Speaker 1: That's pretty good. How about you, David, you see anything
Speaker 1: crazy this week? It doesn't compare to anything like the
Speaker 1: robo burger, can um. One of the things that that
Speaker 1: surprised me a little bit this week was this week.
Speaker 1: In the past few weeks, you've had such a big
Speaker 1: upward move in long term interest rates, and yet this
Speaker 1: is the time that utilities decided to break out to
Speaker 1: all time highs UM. And I like utilities, uh and
Speaker 1: natural gas prices do help them, and I think it's
Speaker 1: a terrific bond substitute. But I wasn't expecting utilities to
Speaker 1: break out the all time highs and deliver to refic
Speaker 1: returns just as bonds were taking a slacking. So a
Speaker 1: little bit of a surprise, but doesn't beat the robo
Speaker 1: burger or the so so you know, I didn't want
Speaker 1: to ask you about utility. So what do you think
Speaker 1: is that play there? It's it's actually not sort of
Speaker 1: a yield player, or is it is the dividend yield
Speaker 1: play if if you know their yields, aren't you know?
Speaker 1: I think it? I think it is. You have to
Speaker 1: keep in mind it may not be a giant dividend yield,
Speaker 1: but dividend yields and earnings yields or real yields you
Speaker 1: should get inflation protection. So if you compare the dividend
Speaker 1: yield um to tend your tips yields, which are still
Speaker 1: negative UHT basis points still that is that is a
Speaker 1: lot better than than than bonds and even and even
Speaker 1: tips which do offer some strong inflation protection. There are.
Speaker 1: The thing is that the government's committed to investing in
Speaker 1: the in the grid. Uh, the utilities will benefit from that.
Speaker 1: Natural gas prices tend to set the incremental price of electricity.
Speaker 1: Electricity prices will be going up, and that's gonna be
Speaker 1: tough on consumers, but good for utility companies. And uh, lastly,
Speaker 1: I just think and this is gonna take time. But
Speaker 1: the utility industry, they own the key distribution for for
Speaker 1: for power. You know, we used to energy as coal
Speaker 1: and a solid. Then you know oil and liquid and
Speaker 1: natural gas is really important right now and energy is
Speaker 1: a gas. But the future is energy as a current,
Speaker 1: and the currents go through the wires, and the wires
Speaker 1: are owned by the utility companies. That's interesting. Kind of
Speaker 1: your low volati volatility play on Tesla and and the
Speaker 1: v makers of the world, I guess, and in some
Speaker 1: extent that's that's pretty good. Well, David, always a real
Speaker 1: treat to to catch up with you and hear what
Speaker 1: how you're thinking about things. UM, really appreciate your time
Speaker 1: and I hope we can have you back again, so
Speaker 1: looking forward to it. Take care of Thanks for joining us.
Speaker 1: What goes up. We'll be back next week. Until then,
Speaker 1: you can find us on the Bloomberg Terminal website and
Speaker 1: app or wherever you get your podcasts. We'd love it
Speaker 1: if you took the time to rate and review the
Speaker 1: show on Apple Podcasts so more listeners can find us.
Speaker 1: And you can find us on Twitter. Follow me at Reaganonymous,
Speaker 1: Bilbonna hierrach Is at Bilbonna Hierrich. You can also follow
Speaker 1: Bloomberg podcasts at podcasts. What Goes Up is produced by
Speaker 1: Magnus Hendrickson. The Head of Bloomberg podcast is Francesco Levie.
Speaker 1: Thanks for listening, See you next time.