WEBVTT - Seema Shah Makes the Case for a Short-Lived Recession 0:00:14.000 --> 0:00:16.840 Welcome to What Goes Up, a weekly markets podcast. I'm 0:00:16.880 --> 0:00:19.520 Moldana Hirich, a market reporter at Bloomberg. 0:00:19.360 --> 0:00:23.320 And I'm Emily Graffeo across asset reporter at Bloomberg. Mike 0:00:23.400 --> 0:00:24.919 Reagan is out this week. 0:00:24.840 --> 0:00:27.040 And this week on the show, our stock's in a 0:00:27.120 --> 0:00:30.000 new bull market or not? There's a raging debate on 0:00:30.040 --> 0:00:32.200 Wall Street as both the S and P five hundred 0:00:32.280 --> 0:00:35.440 and the NAZAQ one hundred continued to search. We'll get 0:00:35.440 --> 0:00:38.120 into it with the chief global strategist for a major 0:00:38.200 --> 0:00:42.320 asset manager. But first, Emily, welcome back to the show. 0:00:42.360 --> 0:00:44.360 We're so happy to have you, Thank you, thank you 0:00:44.400 --> 0:00:49.120 for having me Mike Reagan. On last week's show, Katie 0:00:49.120 --> 0:00:52.479 filled in and she told us one of her deepest 0:00:52.560 --> 0:00:56.280 dark secrets, which is what she's very, very deathly afraid 0:00:56.320 --> 0:00:59.800 of the dark. The dark, So that can't be your 0:00:59.840 --> 0:01:00.520 answer to. 0:01:00.960 --> 0:01:05.640 This isn't really a secret. But I'm very afraid of birds, flying, birds, 0:01:05.760 --> 0:01:08.840 out of control birds, How do you live life? So 0:01:09.440 --> 0:01:12.520 it's when I went to a conference a few months 0:01:12.520 --> 0:01:16.160 ago in Miami for ETFs. I was having a business 0:01:16.319 --> 0:01:18.560 lunch with a source and I was trying to be 0:01:18.640 --> 0:01:22.040 really serious and professional, and there was a bird and 0:01:22.080 --> 0:01:25.920 it kept flying towards us and I was being really 0:01:26.000 --> 0:01:29.600 fantastic and freaking out. But the source was very kind 0:01:29.640 --> 0:01:31.479 about it and he would show it off. 0:01:31.520 --> 0:01:33.760 But I don't beget it though, because there's so many 0:01:33.760 --> 0:01:34.720 birds everywhere. 0:01:34.800 --> 0:01:38.440 The New York City pigeons are different, harmless, they mind 0:01:38.480 --> 0:01:40.759 their own business. It's it's other birds. 0:01:40.959 --> 0:01:45.679 I see you. I don't see our guest this week 0:01:45.720 --> 0:01:48.680 is laughing, so I do want to bring her in. 0:01:49.040 --> 0:01:52.920 It's Sema Sha, chief global strategist for Principal Asset Management. Sima, 0:01:52.960 --> 0:01:54.120 I'm so happy to have you back. 0:01:54.000 --> 0:01:55.840 On the show. Oh, it's great to be here. Thank you. 0:01:55.920 --> 0:01:58.000 Yeah, we have you here in person, which is really great. 0:01:58.480 --> 0:02:01.080 Yeay, it's fun to be hit. Although just twenty four hours. 0:02:01.400 --> 0:02:04.320 Maybe let's just start with some of your views on 0:02:04.320 --> 0:02:07.760 what you're expecting from the economy and from markets. You 0:02:07.840 --> 0:02:11.079 said that a recession is not imminent, but you're still 0:02:11.160 --> 0:02:14.440 forecasting one, so maybe just tell us about your projections. 0:02:15.000 --> 0:02:19.560 Yeah, so we are still expecting a recession, maybe increasingly 0:02:19.600 --> 0:02:21.960 in the minority and actually expecting a full recession to 0:02:22.000 --> 0:02:24.760 come through, but we are expecting it start in Q four. 0:02:25.200 --> 0:02:26.520 I know a lot of people out there who are 0:02:26.560 --> 0:02:28.720 expecting recesion expected to come in Q three. I look 0:02:28.720 --> 0:02:30.640 at the labor market the strength of it, and I 0:02:30.680 --> 0:02:33.760 say that that's almost impossible. But Q four we would 0:02:33.800 --> 0:02:37.520 expect fairly mild negative growth, and then in Q one 0:02:37.600 --> 0:02:40.320 a deeper downturn, but then by Q two this is 0:02:40.320 --> 0:02:43.000 back to recovery. So this is historically a very short 0:02:43.040 --> 0:02:46.119 recession and historically very very mild recession. 0:02:47.520 --> 0:02:51.239 So unlike some strategists on the street that have been 0:02:51.320 --> 0:02:54.920 pushing out their expectations for when this recession is finally 0:02:54.960 --> 0:02:57.160 going to get here, it seems like for a while 0:02:57.480 --> 0:03:00.400 you have been thinking that it's not going to come. 0:03:00.440 --> 0:03:02.960 It's not going to be an imminent recession. How is 0:03:03.000 --> 0:03:06.120 your view though, shifted from the beginning of the year 0:03:06.160 --> 0:03:06.680 to now. 0:03:07.480 --> 0:03:10.360 Yeah, So we have had this expectation for recession in 0:03:10.360 --> 0:03:12.760 the second half of twenty twenty three, since the early 0:03:12.800 --> 0:03:14.400 part of twenty twenty two. So this is a long 0:03:14.440 --> 0:03:17.320 held view for recession. I'm really based on this idea 0:03:17.360 --> 0:03:20.119 of the long and variable aggs all based around fad 0:03:20.160 --> 0:03:22.600 policy is going to trigger a recession. But since the 0:03:22.600 --> 0:03:24.880 beginning of this year, I should actually, even in the 0:03:25.000 --> 0:03:29.239 last two or three months, with this continued outperformance strength 0:03:29.280 --> 0:03:31.600 of the labor market. The one thing that we have 0:03:31.760 --> 0:03:34.000 changed is that we have reduced the duration of recession 0:03:34.040 --> 0:03:37.200 from three quarters to two quarters. I almost wonder if 0:03:37.240 --> 0:03:38.960 this is even going to feel like a recession. You know, 0:03:38.960 --> 0:03:40.960 if you look around, are you going to say, Wow, 0:03:41.040 --> 0:03:43.920 the usism recession probably not beca It's that mild. So 0:03:43.960 --> 0:03:45.960 I think maybe the more important part of this, at 0:03:46.040 --> 0:03:50.360 least from an ass allocation perspective, is what the impact 0:03:50.360 --> 0:03:52.280 on earnings is going to be. And you can already 0:03:52.280 --> 0:03:55.560 see that downward trend. You get into recession, earnings will 0:03:55.600 --> 0:03:57.480 continue to come down, and that's really what's going to 0:03:57.480 --> 0:04:01.000 weigh on asset prices if you don't get a labor market. 0:04:01.000 --> 0:04:03.240 And what we're expecting, I mean, we're you're projecting unemployment 0:04:03.360 --> 0:04:05.400 to rise to four point one percent by year end. 0:04:05.440 --> 0:04:08.160 That is still essentially full employment. So it's not I 0:04:08.200 --> 0:04:10.800 don't think going to be a very very tough recession 0:04:10.840 --> 0:04:11.840 for the population. 0:04:12.080 --> 0:04:14.560 Okay, but that's super interesting. The thing you said about 0:04:14.600 --> 0:04:16.400 is it going to feel like a recession? So what 0:04:16.480 --> 0:04:19.040 will it feel like for the everyday American? 0:04:20.640 --> 0:04:23.440 I wonder if it's going to feel any different to 0:04:24.400 --> 0:04:26.640 when you know, almost over the last year, with living 0:04:26.640 --> 0:04:29.440 costs being quite oppressive, maybe you find out more and 0:04:29.440 --> 0:04:31.280 more people around you are losing their jobs. But then 0:04:31.320 --> 0:04:32.920 that will be a very much of a rolling recession. 0:04:32.920 --> 0:04:35.120 I mean, I do buy into this idea that some 0:04:35.200 --> 0:04:38.440 sectors will continue to be very strong, other sectors will 0:04:38.480 --> 0:04:41.080 be really feeling the pain and almost a continuation of 0:04:41.120 --> 0:04:44.400 what you've seen since actually since last year when housing 0:04:44.440 --> 0:04:47.800 was struggling. Now it's manufacturing, energy struggling at least in 0:04:47.839 --> 0:04:49.880 the earning side, and you're probably going to see rolling 0:04:50.040 --> 0:04:52.920 sectors which are struggling, but maybe just a few more 0:04:52.920 --> 0:04:55.360 of them are feeling the effects by year end. 0:04:55.720 --> 0:04:57.800 What does that mean for what it's going to feel 0:04:57.839 --> 0:04:59.000 like for investors? 0:04:59.120 --> 0:05:02.440 Equity investors, Well, as we've seen already, I mean very 0:05:02.440 --> 0:05:05.640 equally investors, it's confusing. Now it's probably going to become 0:05:05.720 --> 0:05:08.599 even more confusing, and it becomes a very very important 0:05:08.600 --> 0:05:11.000 case if you have to pick your sector very wisely. 0:05:11.720 --> 0:05:14.720 You have to think about your styles very carefully as well, 0:05:15.160 --> 0:05:17.839 and just having a blanket view of the broad equity 0:05:17.880 --> 0:05:19.920 market is simply not going to be enough I want 0:05:19.920 --> 0:05:21.440 to make the plug for active management. I mean, this 0:05:21.480 --> 0:05:23.599 is really the environment that active management should start to 0:05:23.680 --> 0:05:27.080 thrive when you have specific sectors which are struggling. 0:05:27.920 --> 0:05:31.360 And can you say more about what's behind your calculation 0:05:31.680 --> 0:05:34.560 for your projections. Is it that you're just thinking about 0:05:34.600 --> 0:05:37.599 how strong the labor marketers or are there other factors 0:05:37.680 --> 0:05:38.039 at play? 0:05:38.120 --> 0:05:38.240 Two? 0:05:38.760 --> 0:05:40.200 Yeah, so there's a couple of things at place. 0:05:40.279 --> 0:05:40.440 I mean. 0:05:40.520 --> 0:05:42.279 One of the reasons that we expect this to be 0:05:42.360 --> 0:05:45.200 fairly mild and actually not coming through in fact till 0:05:45.480 --> 0:05:47.720 you know, towards the end of this year is back 0:05:47.760 --> 0:05:49.919 to that consumer back to that excess saving story. I 0:05:49.960 --> 0:05:52.440 think we are all very familiar with that story. But 0:05:52.520 --> 0:05:53.960 I think at some point last year there was an 0:05:53.960 --> 0:05:57.000 expectation that at least for some of the household's low 0:05:57.080 --> 0:06:01.000 income households, excess savings have been completely exhausted already. But 0:06:01.080 --> 0:06:02.640 if you look at the data now, and we've just 0:06:02.680 --> 0:06:04.960 done a kind of a rejuvenation of those numbers, and 0:06:05.000 --> 0:06:06.640 it looks like they're still half a trillion to go, 0:06:07.520 --> 0:06:10.160 and that should sustain households at least until your end, 0:06:10.240 --> 0:06:12.640 potentially even longer if they start to change their behavior 0:06:12.680 --> 0:06:15.520 a little bit, so that is what really continues to 0:06:15.560 --> 0:06:19.719 support the broader economy. The thing is with the labor 0:06:19.760 --> 0:06:22.160 market is it is very tight today, but it is 0:06:22.440 --> 0:06:26.360 typically the most lagging indicator of any recession. So it 0:06:26.480 --> 0:06:29.080 stays strong. It's stays strong, and then suddenly it drops 0:06:29.120 --> 0:06:31.200 and then it spirals fairly quickly. So although it looks 0:06:31.240 --> 0:06:33.360 good today, it doesn't mean it's going to stay like 0:06:33.400 --> 0:06:34.960 this forever, which I think a lot of people making 0:06:34.960 --> 0:06:37.920 that mistake. So we are anticipating. Q four is when 0:06:37.960 --> 0:06:40.440 you start to see job losses and it does spiral. 0:06:40.839 --> 0:06:43.800 You've also seen actually the interest rates sensitivity of the 0:06:43.920 --> 0:06:47.400 US economy is considerably lower than it was previously, partly 0:06:47.440 --> 0:06:51.440 because actually debt levels for consumers, households, businesses is lower 0:06:51.480 --> 0:06:54.160 than in previous times. So those are the kind of 0:06:54.200 --> 0:06:57.279 the key factors which are driving this not imminent recession 0:06:57.320 --> 0:06:58.800 but also mild recession. 0:07:00.000 --> 0:07:02.040 What is really interesting in your note about the interest 0:07:02.120 --> 0:07:04.839 rates sensitivity, could you talk a little bit more about 0:07:05.040 --> 0:07:08.799 why in this current cycle we're a little bit less 0:07:08.920 --> 0:07:12.320 sensitive to higher interest rates than prior downturns. 0:07:12.800 --> 0:07:15.480 Yeah. So one of the interesting things, and I say 0:07:15.520 --> 0:07:18.520 this coming from the UK, where actually interest rates sensitivity 0:07:18.920 --> 0:07:21.600 there is a lot higher than the US, and one 0:07:21.600 --> 0:07:23.840 of the reasons is is back to the housing mark 0:07:23.880 --> 0:07:26.840 and back to mortgages. So for example, the United Kingdom, 0:07:27.360 --> 0:07:30.760 you have a majority of mortgages are on the variable 0:07:30.920 --> 0:07:33.080 right side, right, so it's rates have gone up. People 0:07:33.120 --> 0:07:36.559 have really started to see that mortgage costs are fullibility fall, 0:07:37.120 --> 0:07:39.280 whereas in the US there's a greater percentage of fixed 0:07:39.360 --> 0:07:42.000 rate mortgages. So the implication is is that people just 0:07:42.040 --> 0:07:45.480 simply don't feel that pain of these FED rate hikes 0:07:45.640 --> 0:07:47.720 which have been incredibly aggressive. But if you're not feeling it, 0:07:47.720 --> 0:07:50.600 then actually it almost doesn't exist. So that's one thing. 0:07:51.040 --> 0:07:53.680 And then once you start to look at the corporate 0:07:53.880 --> 0:07:57.480 debt imbalances, they are lower than what you see certainly 0:07:57.560 --> 0:08:00.920 during the GFC, but also during previous recession. So as 0:08:01.000 --> 0:08:03.720 interest rates rise, that debt servicing cost is not as 0:08:04.160 --> 0:08:06.560 oppressive as maybe it had been in previous times. So 0:08:06.600 --> 0:08:08.320 that is really the key reason, and I think that 0:08:08.360 --> 0:08:11.600 has actually been a process of I guess, of understanding 0:08:11.640 --> 0:08:15.400 for a lot of economists out there. That history. Of course, 0:08:15.440 --> 0:08:17.480 we look to it as a guide, but it cannot 0:08:17.480 --> 0:08:19.440 be the rule. For as we look forward. 0:08:20.520 --> 0:08:24.480 So what does that mean for the FMC meeting next 0:08:24.520 --> 0:08:27.520 week if we get another rate hike, does it even 0:08:27.760 --> 0:08:29.000 matter that much? 0:08:30.320 --> 0:08:32.360 It's a very good point, I would say, Look, once 0:08:32.400 --> 0:08:35.920 you're getting into just additional twenty five BIPs, no, No, 0:08:36.040 --> 0:08:38.000 I don't think it's it's a thing that's It's not 0:08:38.040 --> 0:08:40.760 like it's it's going to suddenly push the economy over. 0:08:41.480 --> 0:08:44.280 I think the interesting part of that twenty five basis 0:08:44.320 --> 0:08:47.760 point hike is the implication to the market expectations, and 0:08:47.800 --> 0:08:51.079 that's really where you're seeing liquidity conditions, or so I 0:08:51.080 --> 0:08:54.800 should say, financial conditions have been very easy, actually have 0:08:54.960 --> 0:08:56.920 eased in fact over the last couple of months, because 0:08:57.000 --> 0:08:59.600 markets have been so certain that the FAD is going 0:08:59.640 --> 0:09:01.920 to stop hiking, that there's going to be rate cuts. 0:09:02.200 --> 0:09:04.720 But once you start to introduce another rate hike, well 0:09:05.440 --> 0:09:07.920 potentially that could reverse a lot of this easy and 0:09:07.920 --> 0:09:12.640 financial conditions. And alongside that increase in rate hike, potentially 0:09:12.640 --> 0:09:16.000 in June, potentially in July, alongside that you should see 0:09:16.040 --> 0:09:18.520 a continued pricing out of rate cuts. And if I 0:09:18.520 --> 0:09:20.920 think about the broad equity market, one of the reasons 0:09:20.960 --> 0:09:24.840 I think why there is some optimism still is just 0:09:24.880 --> 0:09:27.040 this idea that the food will come to the rescue. 0:09:27.240 --> 0:09:30.000 So the more and more they intervene, then I think 0:09:30.040 --> 0:09:31.440 the less that becomes the truth. 0:09:37.800 --> 0:09:40.959 Okay, before we talk more about what you're expecting down 0:09:41.000 --> 0:09:43.240 the line, what do you think we do get from 0:09:43.280 --> 0:09:45.800 the Fed? Because the market is anticipating in the pause 0:09:45.840 --> 0:09:50.520 in June potentially hike in July. What are you foresee happening? 0:09:51.160 --> 0:09:53.760 So we have had a forecast, I think since last 0:09:53.760 --> 0:09:57.120 October when Powell I'd come out with a fairly hawkish 0:09:57.240 --> 0:10:01.760 commentary that the third will peak at five twenty five 0:10:01.760 --> 0:10:04.080 to five fifty, right, So that for us means that 0:10:04.080 --> 0:10:06.200 there is one more rate hike, I would have said 0:10:06.240 --> 0:10:10.479 June suddenly, looking at the labor market data from from April, 0:10:11.120 --> 0:10:13.520 suddenly there is another rate hike to come. But just 0:10:13.559 --> 0:10:15.560 going by the commentary, the kind of words that are 0:10:15.600 --> 0:10:18.040 coming out from so many the FMC members, they are 0:10:18.120 --> 0:10:20.679 very reluctant, and quite rightly so, in wanting to look 0:10:20.880 --> 0:10:24.360 for the evidence of economic slowdown. You know we talk 0:10:24.400 --> 0:10:26.920 about those long and veriable lags. Well, that means that 0:10:26.960 --> 0:10:28.520 they need to take the time to see how the 0:10:28.520 --> 0:10:31.199 economy is responding to the hikes so far, so I 0:10:31.240 --> 0:10:34.400 think from that perspective, it's more likely that they stop 0:10:34.640 --> 0:10:37.520 in June and then they start again in July. The 0:10:37.600 --> 0:10:40.160 one thing that concerns me, though, to be honest, is 0:10:40.520 --> 0:10:43.000 this is now becoming another consensus forecast for one more 0:10:43.040 --> 0:10:45.920 rate hike. When this a consensus, there's always a little 0:10:45.920 --> 0:10:47.560 bit of a concern around it, because if you do 0:10:47.679 --> 0:10:50.840 get a continuation of hikes, maybe another one in September, 0:10:51.320 --> 0:10:54.840 that is where you start to see some negative surprises. 0:10:54.880 --> 0:10:56.880 And when you've got a market which is doing so well, 0:10:57.280 --> 0:10:58.840 that is where the rest really come from. 0:10:59.040 --> 0:11:01.840 What is behind the June pause? Is it also some 0:11:01.880 --> 0:11:04.440 of the banking sector turmoil that we've seen that they 0:11:04.440 --> 0:11:07.640 are really needing to still figure out and think about. 0:11:08.240 --> 0:11:10.600 Yeah, absolutely so, as well as as you said, you know, 0:11:10.640 --> 0:11:13.640 as well as just looking at the broader economy, how 0:11:13.679 --> 0:11:15.600 is the unemployment rate and how is of course, how 0:11:15.679 --> 0:11:18.160 is inflation behaving. One of the key things that we've 0:11:18.160 --> 0:11:20.800 heard the FMC talk about repeatedly over the last couple 0:11:20.840 --> 0:11:23.200 of months is what the impact of the banking crisis 0:11:23.240 --> 0:11:25.360 is going to be, and the difficulty of the banking 0:11:25.400 --> 0:11:27.319 crisis is is actually a lot of it is down 0:11:27.400 --> 0:11:32.080 to behavioral behavioral economics almost how do people respond, how 0:11:32.120 --> 0:11:34.400 do businesses respond, and how to banks respond. It's one 0:11:34.400 --> 0:11:36.720 of those things that's very very difficult to model for us, 0:11:36.760 --> 0:11:39.320 but also for the FAT too, So they are having 0:11:39.400 --> 0:11:42.319 to track the data and see how lending behavior is continuing. 0:11:42.679 --> 0:11:45.120 Up till this point actually has been fairly healthy, so 0:11:45.160 --> 0:11:46.800 that shouldn't really stand in their way. But I think 0:11:46.840 --> 0:11:49.000 they are looking for as much evidence as they can 0:11:49.040 --> 0:11:52.920 gather before they do a hike, which you know, could 0:11:52.960 --> 0:11:54.960 really unsettle financial markets. 0:11:55.160 --> 0:11:58.360 What about inflation. There's a lot of people that doubt 0:11:58.360 --> 0:12:01.880 we can get to the two percent for quite some time. 0:12:01.960 --> 0:12:04.480 Do you think the Fed would ever redefine the two 0:12:04.559 --> 0:12:05.400 percent target? 0:12:06.840 --> 0:12:10.920 Well, first thing is they cannot redefine a two percent 0:12:11.000 --> 0:12:14.199 target until they've hit two percent, because otherwise they lose 0:12:14.200 --> 0:12:17.960 complete credibility. So would they do it this year. Absolutely not, 0:12:18.000 --> 0:12:20.120 because I am studying the camp that they cannot hit 0:12:20.160 --> 0:12:23.720 two percent in twenty twenty three. If you get a recession, 0:12:23.880 --> 0:12:25.760 well that's probably going to be your process which brings 0:12:25.760 --> 0:12:27.200 it down to two percent, And then maybe at that 0:12:27.200 --> 0:12:30.440 point they can say right, looking at the broader set 0:12:30.440 --> 0:12:32.960 of features, looking at the next ten years, or the 0:12:33.040 --> 0:12:37.760 various structural secular inflationary forces. Maybe we want to shift 0:12:37.760 --> 0:12:39.319 it maybe a little bit more flexible two and a 0:12:39.320 --> 0:12:43.000 half to three percent, but study until they've hit two percent. 0:12:43.040 --> 0:12:45.280 I think that they really risk losing credibility. 0:12:46.120 --> 0:12:48.640 We've had a slew of strategists come out in the 0:12:48.760 --> 0:12:53.040 last couple of weeks and they've been upping their SMP targets. Obviously, 0:12:53.080 --> 0:12:56.240 the market's been rallying quite a bit tax talks and 0:12:56.320 --> 0:12:59.000 the broader market as well. But what are your first see. 0:12:59.000 --> 0:13:02.160 It sounds like you would first see a very charpy 0:13:02.240 --> 0:13:04.640 path for stocks through the end of the year. 0:13:05.440 --> 0:13:07.480 Well, so this is where they think the picture becomes 0:13:07.840 --> 0:13:11.599 extremely confusing because this recession forecast, and even if you 0:13:11.600 --> 0:13:14.960 don't expect recession, but you just anticipate slow down, that 0:13:15.080 --> 0:13:17.320 should suggest that the S and P five hundred is 0:13:17.320 --> 0:13:19.600 going to be under downward pressure. Right, the broad equity 0:13:19.600 --> 0:13:23.199 market is underd downward pressure. That makes sense, But then 0:13:23.200 --> 0:13:25.800 you throw in the tech side and actually everything goes 0:13:25.800 --> 0:13:28.800 completely out the window because a math just doesn't add up. 0:13:29.240 --> 0:13:32.920 So if you believe in the strength of AI and sudden, 0:13:32.960 --> 0:13:34.920 maybe there's a bit of froth in the market. But 0:13:35.000 --> 0:13:38.280 if you believe that AI can continue to push tech 0:13:38.320 --> 0:13:42.000 companies forward, it's actually very difficult to see how you 0:13:42.040 --> 0:13:44.800 get the S and B five hundred back below four thousand, 0:13:44.840 --> 0:13:47.760 and certainly down to the previous September of tow belows. 0:13:48.240 --> 0:13:50.040 So I think that has been one of the reasons 0:13:50.080 --> 0:13:52.120 why you have seen so many strategies upping their S 0:13:52.160 --> 0:13:54.760 and B five hundred forecasts just because of the text 0:13:54.840 --> 0:13:57.280 that the math just doesn't add up cerny. For us, 0:13:57.360 --> 0:14:01.240 we are believers in the text. Last year we were 0:14:01.280 --> 0:14:04.080 in the underweight because of the FED hiking cycle. February 0:14:04.120 --> 0:14:07.000 this year we raised our exposure, mainly for cyclical reasons timely, 0:14:07.679 --> 0:14:10.360 very timely. I can't pretend to have known that in 0:14:10.480 --> 0:14:12.560 video would do what it's doing, but said we had 0:14:12.600 --> 0:14:14.480 a cyclical view on it in terms of there's a 0:14:14.480 --> 0:14:17.160 slowdown coming, the FED is nearing the end of its 0:14:17.240 --> 0:14:20.760 hiking path, and the broader global economy is going to 0:14:20.800 --> 0:14:22.800 do better than the US, and typically large cap has 0:14:22.880 --> 0:14:25.800 a greater international revenue exposure than the middle small caps. 0:14:26.200 --> 0:14:29.040 So that was the reason why we went overweight in February. 0:14:29.360 --> 0:14:32.920 But now you've got, of course, this amazing secular discussion 0:14:33.160 --> 0:14:37.080 around around AI and the potential profits for the sector. 0:14:38.320 --> 0:14:40.240 I have to say, I think it's very difficult to 0:14:40.280 --> 0:14:43.240 see this completely collapse back to what it was last year. 0:14:43.760 --> 0:14:48.480 What is the ballcase on AI? Is it that companies 0:14:48.600 --> 0:14:50.680 have a bunch of cash and they're balance sheets and 0:14:50.720 --> 0:14:53.800 they're going to be spending it towards AI development? Or 0:14:53.920 --> 0:14:57.400 is it and I've seen this slightly gloomier review, which 0:14:57.440 --> 0:15:00.280 is that people are thinking about AI as replace seeing 0:15:00.280 --> 0:15:02.800 a lot of jobs. So they're jumping into the market 0:15:02.800 --> 0:15:05.960 because they want to at least take advantage of the 0:15:06.000 --> 0:15:08.520 market upside, and they want to be part of the rally, 0:15:08.520 --> 0:15:11.479 even if it means that AI is, you know, potentially 0:15:12.120 --> 0:15:13.480 displacing tons of jobs. 0:15:13.560 --> 0:15:16.200 Yeah, AI could be the emotional hedge. So I think 0:15:16.200 --> 0:15:18.160 it's a little bit of both, right. I think the 0:15:18.600 --> 0:15:21.920 rationale for having that special to companies which are investing 0:15:21.920 --> 0:15:25.160 in AI is, you know, I think it's it's not 0:15:25.320 --> 0:15:27.760 just like you having the dot com boom. I think 0:15:27.800 --> 0:15:32.520 it's almost a fundamental change in and I guess that 0:15:32.600 --> 0:15:34.840 the way people live their lives do business is that 0:15:34.880 --> 0:15:36.920 AI is probably something which is here to stay. It's 0:15:36.960 --> 0:15:38.920 not like the metaverse, right, this is something which is 0:15:38.960 --> 0:15:41.640 a lot more meaningful. And these companies have the cash 0:15:41.640 --> 0:15:43.360 and the balanceches and I have the same kind of leverage. 0:15:43.400 --> 0:15:45.720 They have the brand. I mean, there's so many reasons 0:15:45.760 --> 0:15:48.640 to have a positive view for AI, but I also 0:15:49.120 --> 0:15:51.520 I mean one of my lingering concerns for the broader 0:15:51.560 --> 0:15:54.480 market is, you know, one of the consensus views is 0:15:54.520 --> 0:15:55.800 that the next ten years is going to be a 0:15:55.800 --> 0:15:57.760 lot more inflationary than the past ten years, and that 0:15:57.880 --> 0:16:03.840 people point to deglobalization, aging, the shift to green energy. 0:16:03.880 --> 0:16:06.840 But what about AI? I mean AI and the potential 0:16:06.880 --> 0:16:09.160 job loss. And we've already heard from places like IBM 0:16:09.200 --> 0:16:11.960 in the United Kingdom. We heard from British Telecom, which 0:16:12.000 --> 0:16:13.760 is saying that they could I think come almost like 0:16:13.760 --> 0:16:16.160 a third of their workforce within the next few years. 0:16:16.760 --> 0:16:20.480 That is deflationary and that could potentially turn that whole 0:16:20.520 --> 0:16:22.560 discussion of the next ten years and how you really 0:16:22.560 --> 0:16:26.360 want an investment as a strategic perspective upside down. But 0:16:26.400 --> 0:16:29.000 at least for the near term, I think AI technology 0:16:29.320 --> 0:16:30.800 you need to have some kind of exposure to that 0:16:30.800 --> 0:16:31.880 in new portfolios. 0:16:32.960 --> 0:16:36.760 How resilient are these AI linked stocks for the next 0:16:36.920 --> 0:16:41.360 six months from an impending recession and earnings downturn. 0:16:42.880 --> 0:16:46.200 I think they are fairly resilient to the broader economic story, 0:16:46.920 --> 0:16:49.760 simply because they are typically the companies that should thrive 0:16:50.360 --> 0:16:53.840 when things get a little more challenging. It's not like 0:16:53.880 --> 0:16:57.000 they're going to completely avoid the downflow that you see 0:16:57.000 --> 0:16:59.479 for the border economy, but I would expect them to outperform. 0:17:00.720 --> 0:17:02.840 The reason I'm hesitating is because there is clearly a 0:17:02.840 --> 0:17:05.800 little froth in the market. You know, valuations have just 0:17:05.840 --> 0:17:09.679 gone to extreme levels. We would anticipate that there's going 0:17:09.720 --> 0:17:12.080 to be a bit of a pullback. Once you get 0:17:12.080 --> 0:17:15.080 their pullback, increase your exposure because I think this is 0:17:15.080 --> 0:17:16.920 a long term trade. But I do think that maybe 0:17:16.960 --> 0:17:18.960 the next six months could be very, very choppy for 0:17:18.960 --> 0:17:20.840 a lot of things in the market. The other thing 0:17:20.960 --> 0:17:23.560 is is that if you don't see a pullback in 0:17:23.600 --> 0:17:26.720 the market, at least pull back in the AI side, 0:17:27.320 --> 0:17:30.280 does it drag the rest of the market up with it? 0:17:30.359 --> 0:17:32.679 Do you get this kind of melt up, this momentum, 0:17:32.960 --> 0:17:35.760 this improved investor sentiment, And I think that would be 0:17:35.840 --> 0:17:38.879 dangerous because all that happens then is that you get 0:17:39.000 --> 0:17:42.520 the liquidity financial conditions continuing to ease, you get a 0:17:42.560 --> 0:17:44.800 new reburst of inflation, kind of like what you saw 0:17:44.800 --> 0:17:47.960 in the nineteen seventies. You got new FED hikes to come, 0:17:48.080 --> 0:17:50.760 and then you essentially get a deeper downturn. So from 0:17:50.800 --> 0:17:52.760 a recession standpoint, you want to get out this way 0:17:52.960 --> 0:17:55.480 sooner the later it comes, the deeper it's going to be. 0:17:56.160 --> 0:17:59.480 I'm really interested in your super long term view, which 0:17:59.520 --> 0:18:03.800 is you're expecting lower returns and higher volatility. I think 0:18:03.840 --> 0:18:06.240 over the next decade. Maybe we can say, like, can 0:18:06.280 --> 0:18:07.880 you talk about that very long term view. 0:18:08.320 --> 0:18:10.640 So if we think about the last ten years, you've 0:18:10.680 --> 0:18:13.920 had an environment of very low volatility and higher rates. 0:18:13.920 --> 0:18:15.520 And one of the key reasons for that was because 0:18:15.520 --> 0:18:18.120 there was a low rate environment, you had low inflation, 0:18:18.920 --> 0:18:20.920 you had central banks not just a FED, but around 0:18:20.960 --> 0:18:24.399 the world keeping equidity conditions extremely easy. And as a result, 0:18:24.840 --> 0:18:28.000 if you're an investor, it wasn't too hard to make 0:18:28.000 --> 0:18:30.960 a positive for ten your portfolio. But now if you 0:18:30.960 --> 0:18:34.119 look at the next ten years, and for the reasons 0:18:34.119 --> 0:18:40.440 of the globalization, aging society shifted to green energy, you're 0:18:40.480 --> 0:18:42.560 probably looking at a time where inflation is going to 0:18:42.600 --> 0:18:44.439 be I mean not meaningfully higher than what you've had 0:18:44.480 --> 0:18:47.000 over the last ten years. But maybe if you think 0:18:47.119 --> 0:18:49.520 that for the US, inflation has averaged about one point 0:18:49.600 --> 0:18:52.680 two percent over the last ten year period, maybe it 0:18:52.720 --> 0:18:54.119 goes up to about two and a half to three 0:18:54.160 --> 0:18:56.600 percent over the next ten years. That is an environment 0:18:56.640 --> 0:18:59.080 where you are moving away from quantitactive easing. So you 0:18:59.160 --> 0:19:02.399 haven't got zero rate environment anymore. And as long as 0:19:02.400 --> 0:19:05.879 you have that, and it's actually more expensive for companies, 0:19:06.240 --> 0:19:08.439 well then you need to make harder decisions. You need 0:19:08.480 --> 0:19:11.600 to have better analysis. But ultimately that is an environment 0:19:11.600 --> 0:19:15.320 where you have lower returns and higher volatility. You need 0:19:15.359 --> 0:19:18.359 to be a little bit more exotic. I think in 0:19:18.440 --> 0:19:21.440 terms of how you're thinking about investing, can you just 0:19:21.440 --> 0:19:23.359 stick to the traditionalist classes or do you need to 0:19:23.359 --> 0:19:26.080 start thinking a little bit outside of the box. So 0:19:26.119 --> 0:19:27.480