WEBVTT - How U.S. Yields Could Go Negative 0:00:13.680 --> 0:00:16.960 Hello, and welcome to What Goes Up, a Bloomberg Weekly 0:00:17.040 --> 0:00:20.520 Markets podcast. I'm Sara pan Zac, a reporter on the 0:00:20.560 --> 0:00:23.600 Cross Asset team, and I'm Mike Reagan, a senior editor 0:00:23.680 --> 0:00:26.000 on the Markets team. This week on the show, the 0:00:26.079 --> 0:00:29.480 FED cut rates for the third straight time, but they 0:00:29.560 --> 0:00:32.920 signaled that's all for now, Plus some of the biggest 0:00:32.920 --> 0:00:35.920 tech names reported earnings. Our guests will help us break 0:00:35.920 --> 0:00:38.720 it all down, and as always, will close out the 0:00:38.760 --> 0:00:43.200 episode with the craziest things we saw in markets this week, Sarah, 0:00:43.240 --> 0:00:45.120 week or two ago? Is awkward where you and I 0:00:45.200 --> 0:00:47.559 both picked the same crazy thing? Was it awkward? I 0:00:47.560 --> 0:00:49.840 thought it was actually pretty great. I'm gonna tell you. 0:00:50.280 --> 0:00:53.200 I am guarantee you did not pick the same one 0:00:53.760 --> 0:00:55.440 as me this week, and I'll tell you why. It 0:00:55.480 --> 0:00:58.800 involves a very nerdy hobby I've gotten into lately, you 0:00:58.880 --> 0:01:02.600 never know, very saying you never know not the nerdiest hobby. 0:01:02.640 --> 0:01:04.080 I'll tell you that. I was telling a friend about it. 0:01:04.120 --> 0:01:06.679 I said, I've just gotten sucked into the nerdiest hobby 0:01:06.720 --> 0:01:08.800 of all time and he goes, oh, are you Are 0:01:08.840 --> 0:01:13.600 you grinding your own telescope lens? Oh? Okay, it was 0:01:13.640 --> 0:01:16.120 so nerdy. I was offended, but but oddly intrigued, so 0:01:16.280 --> 0:01:18.920 I might start grinding my own telescope lenses as well. 0:01:18.920 --> 0:01:21.480 It's a thing, apparently all right, we'll be excited to 0:01:21.480 --> 0:01:24.000 hear it. And remember, we have our very own Bloomberg 0:01:24.040 --> 0:01:26.440 Podcast hotline. So if you guys want to share your 0:01:26.560 --> 0:01:30.360 crazy market statistics or whatever it may be with us, 0:01:30.400 --> 0:01:32.360 give us a call, leave us a message at six 0:01:32.480 --> 0:01:36.160 or six three two four three four nine zero, and 0:01:36.240 --> 0:01:38.600 we may even play it on the show. And of course, 0:01:38.600 --> 0:01:41.560 our guests this week hopefully have some crazy things they 0:01:41.640 --> 0:01:44.280 brought along with us. Uh first time on the show. 0:01:44.360 --> 0:01:48.360 Joining us is Lauren Goodwin. She's an economist and multi 0:01:48.400 --> 0:01:52.240 asset portfolio strategist at New York Life Investments. Lauren, welcome 0:01:52.280 --> 0:01:53.880 to the show. Thanks so much for having me, and 0:01:53.880 --> 0:01:55.160 I'm not gonna put you on the spot, but if 0:01:55.200 --> 0:01:57.280 you do have any really nerdy hobbies, you know you 0:01:57.400 --> 0:02:00.920 feel free to share them with us perfect anything. I'm 0:02:00.960 --> 0:02:04.560 just I love watching monetary policy meetings, does that gal? 0:02:04.680 --> 0:02:10.160 That's and also returning to the show is Bloomberg Opinion 0:02:10.160 --> 0:02:13.800 technology columnist Shira Overday. Sure, I think your nerdiest hobby 0:02:13.840 --> 0:02:18.079 is just reading ten K reports. Yeah, yeah at all though, right, 0:02:19.720 --> 0:02:22.120 I think it's pretty normal for Bloomberg. Yeah right, right, 0:02:22.160 --> 0:02:23.800 that's that's kind of the run of the mill hobby. 0:02:23.840 --> 0:02:25.880 But uh, but learn let's start with you. I was 0:02:25.919 --> 0:02:28.440 reading some of the notes you sent over, and uh, 0:02:28.560 --> 0:02:32.600 one thing popped out at me immediately. You say there's 0:02:32.600 --> 0:02:37.280 a chance U s yields could move into negative territory. Um, 0:02:37.480 --> 0:02:42.040 don't dun't done? That is shocking. Uh, not entirely shocking. 0:02:42.040 --> 0:02:44.480 I guess it's you know, of all the craziest things 0:02:44.480 --> 0:02:47.000 we've seen in markets this year, that probably would not 0:02:47.040 --> 0:02:49.480 be that crazy. But what it intrigued me is you 0:02:49.520 --> 0:02:52.200 also said you think the FED is done after this 0:02:52.320 --> 0:02:54.800 last rate cuts. So what takes what would take your 0:02:54.919 --> 0:02:58.320 fields negative? If not the Feds sort of helping to 0:02:58.320 --> 0:03:00.720 push them down. Well, the Fed's done for now, They're 0:03:00.720 --> 0:03:03.239 not done for forever, but we can talk about that later. 0:03:03.280 --> 0:03:06.200 I'll answer your question about yields, which is two major 0:03:06.320 --> 0:03:09.639 things go into US yields. One of them is expectations 0:03:09.680 --> 0:03:12.520 for the FED funds rate, which could go to zero, 0:03:12.600 --> 0:03:15.079 would go to zero if we're in if we move 0:03:15.080 --> 0:03:17.800 into recession in the US. The other thing is the 0:03:17.919 --> 0:03:21.160 term premium. So that's just what investors expect to get 0:03:21.320 --> 0:03:23.480 for taking the risk of holding a bond over cash 0:03:23.560 --> 0:03:28.000 or any other cash like instrument. So what makes term 0:03:28.080 --> 0:03:31.320 premiums zero or even negative as they've been in the 0:03:31.440 --> 0:03:35.480 US even this year, are things like investor fears um 0:03:35.520 --> 0:03:38.320 some of the concerns that we've seen about global growth, 0:03:38.360 --> 0:03:40.960 trade wars, etcetera. And so if you see the U 0:03:41.080 --> 0:03:43.560 s inch a little bit closer to recession and some 0:03:43.640 --> 0:03:46.119 of these fears take hold, add it together you can 0:03:46.160 --> 0:03:50.400 easily see US negative yields doesn't mean necessarily a negative 0:03:50.440 --> 0:03:53.760 ten year yield. I also think that the the bar 0:03:53.960 --> 0:03:57.880 for the Fed moving policy rates negative is high. That's 0:03:57.880 --> 0:04:00.480 a completely different issue. But yields on this short end 0:04:00.600 --> 0:04:03.720 totally possible. And that's intriating to me because of this 0:04:03.960 --> 0:04:07.600 so much supply uh to fund the depth sit We're 0:04:07.640 --> 0:04:10.240 looking at a potentially another chillion dollar depth sit in 0:04:10.560 --> 0:04:13.400 every foreseeable year. A lot of that on that on 0:04:13.440 --> 0:04:15.480 the short end. But you think, would it sort of 0:04:15.480 --> 0:04:18.480 be that rush to cash money market mutual fund type 0:04:18.480 --> 0:04:21.800 of situation that would that really crush the short end? Yeah, 0:04:21.880 --> 0:04:25.400 you know, you just you can't get positive yield anywhere 0:04:25.440 --> 0:04:27.599 in safe assets, and so it's really there is no 0:04:27.680 --> 0:04:30.920 alternative type of story when you have um as we 0:04:30.960 --> 0:04:34.119 do right now. Japanese insurance companies willing to move into 0:04:34.279 --> 0:04:37.080 an investment grade, which is credit, even if it's if 0:04:37.080 --> 0:04:40.440 it's investment grade credit, instead of being in these super 0:04:40.440 --> 0:04:44.880 safe government securities, then moving into US super safe securities 0:04:44.960 --> 0:04:47.440 makes a lot of sense. That can totally squeeze the frienend. 0:04:47.640 --> 0:04:49.880 Let's back up the truck a little bit. So before 0:04:50.000 --> 0:04:53.480 we were to potentially get to negative interest rates, you 0:04:53.480 --> 0:04:56.440 would imagine that the data would have to worsen, maybe 0:04:56.440 --> 0:05:00.279 the FED would go back to cutting once a again. 0:05:00.480 --> 0:05:03.400 But for now, like you said, the FED is on hold. However, 0:05:03.839 --> 0:05:06.200 the market is still pricing in rate cuts as soon 0:05:06.240 --> 0:05:10.320 as next year. What is it that gets us to 0:05:10.800 --> 0:05:14.880 that point? What brings that disconnect closer together? I think 0:05:14.920 --> 0:05:18.000 it makes sense that the market is pricing in cuts 0:05:18.040 --> 0:05:20.520 next year. We're on the last legs of this expansion. 0:05:20.720 --> 0:05:24.320 The FED has bought us time. Some of the risk 0:05:24.480 --> 0:05:27.839 on behavior, some of the risks that we've seen becoming 0:05:27.960 --> 0:05:30.440 less pronounced also helps buy us a little bit of 0:05:30.440 --> 0:05:33.880 time in investor world, that helps us rebalance our portfolios. 0:05:34.080 --> 0:05:37.440 But we're looking at an economic cycle, and specifically a 0:05:37.440 --> 0:05:42.400 company profit cycle that is just moving closer to recession. 0:05:42.680 --> 0:05:45.440 And so while we're not calling for recession in the 0:05:45.480 --> 0:05:49.800 next twelve months, in the twelve to eighteen um time period, 0:05:49.920 --> 0:05:54.960 that's absolutely a likely scenario from from my perspective, And 0:05:55.000 --> 0:05:57.839 so the Feds on pause for now, saying, look, until 0:05:57.880 --> 0:06:00.559 we see that data deteriorate further, we're fine. They also 0:06:00.560 --> 0:06:02.760 have seen over the course of the year, even before 0:06:02.800 --> 0:06:05.600 they actually started cutting rates, some improvement in interest rates 0:06:05.680 --> 0:06:09.960 sensitive indicators, just because folks expected it to come, um, 0:06:10.200 --> 0:06:13.640 wait and see. But once we see um, the debt 0:06:13.640 --> 0:06:16.040 burdens that companies are facing start to take hold, and 0:06:16.080 --> 0:06:20.080 those profit margins really start to see, um, the pressure 0:06:20.200 --> 0:06:22.120 that they've been under for the past couple of years. 0:06:22.160 --> 0:06:24.359 Then then you start to see the FED getting worried again. 0:06:24.960 --> 0:06:28.039 So uh, safe to describe you is not exactly bullish 0:06:28.120 --> 0:06:31.960 these days that that is that is correct. We're um, 0:06:32.000 --> 0:06:34.920 but but I will say strategically speaking, we're defensive in 0:06:34.960 --> 0:06:38.160 our portfolios, so we invest for the long term. Most 0:06:38.200 --> 0:06:41.800 of our investors are thinking about retirement or institutional clients 0:06:41.839 --> 0:06:45.200 really thinking um in the in terms of years, not months. 0:06:45.480 --> 0:06:48.760 So strategically speaking, we've moved more defensive. I'm glad you 0:06:48.760 --> 0:06:50.160 brought that up by you read my mind. I was 0:06:50.200 --> 0:06:51.839 going to ask you about that. You said, you know, 0:06:51.880 --> 0:06:55.920 contrary to market moves, were holding tight on our defensive 0:06:56.080 --> 0:06:59.479 portfolio positioning. This is a really fascinating topic to me 0:06:59.560 --> 0:07:01.760 because is I've heard a lot of people say this, 0:07:02.600 --> 0:07:04.240 but I'd like to unpack it a little bit what 0:07:04.279 --> 0:07:06.920 you mean by defensive and I pick it up. I 0:07:07.320 --> 0:07:10.640 was fascinated. I looked this week at the Investco Defensive 0:07:10.760 --> 0:07:12.840 e t F, which is really done well is year 0:07:12.840 --> 0:07:17.240 it's up, uh, you know, better than the SMP itself. 0:07:17.760 --> 0:07:20.239 And I was thinking, well, when I think defensive, I think, Okay, 0:07:20.280 --> 0:07:23.840 you're gonna buy Johnson Johnson, you're gonna buy utilities, You're 0:07:23.840 --> 0:07:27.520 gonna buy those sort of state safe consumer staples. This 0:07:27.640 --> 0:07:31.200 CTF is fascinating because, okay, healthcare is ten percent. That's 0:07:31.240 --> 0:07:35.720 kind of uh classic defensive there. But of its other allocations, 0:07:36.360 --> 0:07:40.760 um more than five percent is allocated to software, more 0:07:40.800 --> 0:07:43.680 than five percent to electronics, more than five percent to 0:07:43.800 --> 0:07:46.920 diversified financials, and we're than five percent to banks. So 0:07:47.000 --> 0:07:49.840 more than ten percent of this quote unquote defensive e 0:07:49.960 --> 0:07:52.600 t F is financial firms, which kind of blows my mind. 0:07:52.680 --> 0:07:55.000 So that's all a long set up to just kind 0:07:55.000 --> 0:07:58.200 of help us unpack what you mean by defensive m 0:07:59.160 --> 0:08:02.520 A in the stock kid, obviously, but also outside of 0:08:02.520 --> 0:08:04.160 the stock market, you know where sort of in the 0:08:04.200 --> 0:08:07.480 treasury curve would you be looking at that sort of thing. Great, 0:08:07.480 --> 0:08:08.920 you set up an A and B for me. That's 0:08:08.920 --> 0:08:13.920 perfect in uh in in equities, defensive means and this 0:08:13.960 --> 0:08:15.920 is UM. This is a story that's gotten a lot 0:08:15.920 --> 0:08:19.480 of airtime. Frankly, UM it means high quality companies that 0:08:19.520 --> 0:08:23.480 are making consistent earnings and they're consistently giving those earnings 0:08:23.480 --> 0:08:27.640 back to sharedholders. It doesn't necessarily mean only yield, because 0:08:27.640 --> 0:08:31.160 there can be dividend yield traps, but really security by security, 0:08:31.160 --> 0:08:34.960 not even necessarily sector by sector, identifying the companies that 0:08:34.960 --> 0:08:37.200 are going to return that value back to shareholders. From 0:08:37.200 --> 0:08:40.920 an investor perspective, when you're expecting a more volatile environment, 0:08:41.000 --> 0:08:44.760 that's that's safer. When you move outside of UM the 0:08:44.880 --> 0:08:50.640 equity markets, defensive strategies generally include moving up in quality, 0:08:50.679 --> 0:08:53.520 but where you've seen a big shift and move up 0:08:53.520 --> 0:08:55.560 in quality like in high yield for example, you also 0:08:55.559 --> 0:08:58.240 have to go shorter duration um and so those are 0:08:58.240 --> 0:09:01.839 the general types of secure yours. Again, when you're expecting 0:09:02.640 --> 0:09:05.199 um a lot of investor uncertainty, when you're near the 0:09:05.320 --> 0:09:08.760 end of the profits cycle and you have high debtloads 0:09:08.800 --> 0:09:12.160 within companies, you just have to be really uh secure. 0:09:12.360 --> 0:09:14.880 So it's more what companies have the balance sheets with 0:09:14.960 --> 0:09:18.760 standard recession rather than what companies are in industries that 0:09:18.880 --> 0:09:21.760 tend not to be crushed by precisely, and in which 0:09:21.760 --> 0:09:23.880 companies are going to pay you cash in the meantime. 0:09:23.960 --> 0:09:26.440 Even within equities, right, it's not just fixed income, but 0:09:26.520 --> 0:09:29.000 where where can you get a little bit of of 0:09:29.000 --> 0:09:31.960 of carrie while you hold those equities? If, for example, 0:09:31.960 --> 0:09:34.120 you don't think recession is right around the corner, so 0:09:34.280 --> 0:09:37.120 bear with me. Then are we almost seeing a divergence 0:09:37.200 --> 0:09:39.720 in the stock market because as you mentioned, you guys 0:09:39.720 --> 0:09:43.360 are sticking with your defensive positioning. That counter to almost 0:09:43.400 --> 0:09:45.319 what we've been seeing over the past couple of weeks 0:09:45.360 --> 0:09:49.120 where we've started to see cyclicals outperforming, those classic bond 0:09:49.160 --> 0:09:53.160 proxies like staples, like utilities like real estate underperforming, but 0:09:53.200 --> 0:09:55.200 at the same time, it does seem as though all 0:09:55.240 --> 0:09:59.400 of a sudden, investors really care about corporate profits, So 0:09:59.559 --> 0:10:03.640 investor do care about quality to a sense? Do the 0:10:03.840 --> 0:10:07.480 two go counter to one another? Do they actually fit together? Well, 0:10:07.520 --> 0:10:10.000 we're in this part of the cycle that's really uncomfortable 0:10:10.000 --> 0:10:12.240 when the data is mixed, and so, Um, if you 0:10:12.320 --> 0:10:14.520 had a different guest on in ten minutes, they could 0:10:14.559 --> 0:10:16.800 say the exact opposite of what I'm saying, and I 0:10:16.840 --> 0:10:22.079 would think that they were reasonable. Um, what we're seeing is, uh, 0:10:22.120 --> 0:10:24.800 we're laying in the cycle. We've already had two mid 0:10:24.840 --> 0:10:30.600 cycle slowdowns, and so not only are the structural elements 0:10:30.640 --> 0:10:34.040 of the economy we've talked about debt loads and profit margins, 0:10:34.040 --> 0:10:37.000 not only are those creeping closer and closer to recession 0:10:37.120 --> 0:10:41.080 like qualities, but also from a higher position than we've 0:10:41.080 --> 0:10:43.600 been in the other two mid cycle slowdowns, and equity 0:10:43.679 --> 0:10:47.880 prices have moved higher all along, and so you can 0:10:48.040 --> 0:10:53.520 see as an investor short term cyclical opportunities. So, for example, 0:10:53.840 --> 0:10:57.600 um risk has been such a factor in the markets 0:10:57.640 --> 0:10:59.920 across the board this year and last year. When you 0:11:00.040 --> 0:11:02.760 get a little bit of that risk, premium pulled off 0:11:02.880 --> 0:11:06.840 because there's positive rumors about a trade deal, for example, 0:11:07.040 --> 0:11:10.160 you can have a short term cyclical opportunity, and so 0:11:10.200 --> 0:11:12.959 it does. It's not necessarily bifurcating. You're just playing sort 0:11:12.960 --> 0:11:15.199 of a long game short game. And so what we do, 0:11:15.280 --> 0:11:18.720 for example, when we're when we're making these more defensive shifts, 0:11:19.320 --> 0:11:23.240 is um as we moved up in quality, quality gets expensive. 0:11:23.320 --> 0:11:25.920 So when you start taking off a little bit of 0:11:26.640 --> 0:11:29.960 high beta exposure at market highs, for example, or in 0:11:30.480 --> 0:11:32.520 asset classes that we don't like as much, like high 0:11:32.600 --> 0:11:34.520 yield or bankloads, you can use that cash to take 0:11:34.520 --> 0:11:38.880 advantage of those short term cyclical opportunities without completely abandoning 0:11:39.080 --> 0:11:42.360 your long term story, which is what which is, which 0:11:42.400 --> 0:11:45.320 is where we're positioned right now. Sure, let's bring you 0:11:45.360 --> 0:11:49.680 in here and switch gears from defensive to companies that 0:11:49.840 --> 0:11:55.560 are perhaps offensive for various reasons. And and I'm thinking 0:11:55.640 --> 0:11:59.880 of the facebooks, the alphabets, the twitters. We had a 0:12:00.320 --> 0:12:04.000 whole lot of quote unquote fang type of companies report 0:12:04.640 --> 0:12:06.880 over the last week or so. Is are there any 0:12:06.920 --> 0:12:11.560 sort of common themes, common takeaways from the whole sort 0:12:11.559 --> 0:12:14.880 of communications and tech sector earning season. I mean, it's 0:12:15.000 --> 0:12:17.640 it's a little bit hard to draw generalities about the 0:12:17.679 --> 0:12:22.120 tech sector in general because I think the big tech 0:12:22.160 --> 0:12:24.960 companies that you mentioned, the sort of fangs or famis 0:12:25.559 --> 0:12:30.880 whatever people call them, the Facebook fam, which is includes Microsoft. 0:12:30.920 --> 0:12:35.320 I think that's the right fam um. So those large 0:12:35.400 --> 0:12:39.880 five or six technology companies seem to be doing very well. 0:12:39.960 --> 0:12:43.559 That growth for the most part has um continued at 0:12:43.600 --> 0:12:46.840 a pretty good rate, albeit um has come down for 0:12:46.920 --> 0:12:50.600 many of those companies. Again, the profit margins have come down, 0:12:50.600 --> 0:12:55.040 but it's all relative, right. So Facebook this week reported earnings. 0:12:55.679 --> 0:12:58.320 They are spending a lot more money. The growth rates 0:12:58.320 --> 0:13:02.200 have come down, but we're still talking out growth um 0:13:02.320 --> 0:13:06.280 year over year, and they're operating profit margins are about 0:13:07.120 --> 0:13:10.640 So if you're talking about, you know, defensive kind of companies, 0:13:11.000 --> 0:13:13.880 those giant tech companies start to look a little bit 0:13:13.920 --> 0:13:17.320 more safe, I guess. But on the other hand, you 0:13:17.440 --> 0:13:21.080 have these younger companies that are valued almost entirely on 0:13:21.120 --> 0:13:23.520 their growth rates, and there it's a little bit of 0:13:23.559 --> 0:13:26.600 a mixed bag. So again, we had grub Hub this 0:13:26.640 --> 0:13:32.000 week that absolutely terrible and to me, the scary thing 0:13:32.040 --> 0:13:36.520 about what grub Hub said was they feel like the 0:13:37.480 --> 0:13:40.600 promise of that industry of kind of food delivery, the 0:13:40.720 --> 0:13:43.360 on demand you push a button on an app and 0:13:43.360 --> 0:13:46.280 get anything delivered to your home at almost no cost. 0:13:46.480 --> 0:13:48.920 That they really think that that string is playing out, 0:13:48.960 --> 0:13:52.240 that there is no way economically that there can be 0:13:52.320 --> 0:13:55.959 multiple companies fighting each other to get something to your 0:13:55.960 --> 0:13:59.160 house as fast and cheap as they possibly can. And 0:13:59.200 --> 0:14:02.880 at the same time they feel like, um, the hyper 0:14:02.880 --> 0:14:07.120 growth phase of that industry is pretty much over um, 0:14:07.160 --> 0:14:09.199 which is kind of a scary one to punch. Is 0:14:09.440 --> 0:14:11.679 it a word of attrition at this point in that space? 0:14:11.760 --> 0:14:14.640 And that's what grubub thinks. And look, they're not wrong 0:14:14.760 --> 0:14:18.000 that in the United States. I'll leave the overseas market 0:14:18.000 --> 0:14:19.560 out of this, but in the United States you have 0:14:19.600 --> 0:14:24.240 a number of companies that are all chasing the same restaurants, 0:14:24.280 --> 0:14:27.960 the same diners, right, Uber Eats, Grubhub, door Dash, Postmates, 0:14:28.360 --> 0:14:31.840 you can go on down the list and so um. Yeah, 0:14:31.920 --> 0:14:33.920 there is a little bit of a of a war 0:14:34.000 --> 0:14:36.320 of attrition going on. Lauren, I want to touch on 0:14:36.400 --> 0:14:39.720 something that Shira said, and that's that somehow these big 0:14:39.760 --> 0:14:43.200 tech companies start to look safer. Is this something that 0:14:43.240 --> 0:14:45.880 comes up in discussion with you and your team. I mean, 0:14:45.960 --> 0:14:47.960 I can say, I've heard many investors say to me 0:14:48.000 --> 0:14:52.000 this year, oh well, now tech is defensive. It makes 0:14:52.000 --> 0:14:54.920 a lot of sense to me. And if you think 0:14:54.960 --> 0:14:59.040 even just in traditional economic terms, to say that the 0:14:59.080 --> 0:15:03.960 model of not only economic growth but also company growth 0:15:04.040 --> 0:15:08.200 and sustainable growth has changed from you know, when we're 0:15:08.320 --> 0:15:12.440 more industrial or manufacturing focused, for example, so when we 0:15:12.440 --> 0:15:15.720 were a year ago we were really holding out on 0:15:15.840 --> 0:15:18.080 productivity in the US, that that we would that that 0:15:18.320 --> 0:15:20.480 this would be what saved the economic cycle, and that 0:15:20.480 --> 0:15:23.920 that we'd see investment translated into productivity. We haven't seen that. 0:15:24.320 --> 0:15:27.080 But the main sort of core tenant of that argument 0:15:27.080 --> 0:15:30.040 I think is absolutely still true, which is that these 0:15:30.120 --> 0:15:33.800 big tech companies are the only ones investing in themselves 0:15:34.080 --> 0:15:36.840 and so um an interesting thing to think about is 0:15:36.880 --> 0:15:39.240 what is the next step? What is the investment strategy 0:15:39.280 --> 0:15:42.520 of the future look like? And something I think is 0:15:42.600 --> 0:15:45.840 really compelling there is companies that are investing not through 0:15:45.920 --> 0:15:47.920 CAPEX or some of these indicators that we're used to 0:15:47.960 --> 0:15:51.440 looking at, but op X. What are the logistics companies 0:15:51.680 --> 0:15:55.760 that are investing in you know, next generation software to 0:15:55.840 --> 0:15:59.080 make sure that the supply chains disruptions with China or 0:15:59.600 --> 0:16:01.960 or EU up are are not an issue for their 0:16:02.040 --> 0:16:05.280 for their profits. That's really interesting. That's a really interesting 0:16:05.320 --> 0:16:08.760 type of sort of secure safe investment. I think that 0:16:08.800 --> 0:16:13.000 this growth versus value, cyclical versus defensive sort of general 0:16:13.920 --> 0:16:17.200 named indicasar are starting to break down. So I completely 0:16:17.200 --> 0:16:19.320 agree with Serra, And just to say something a little 0:16:19.320 --> 0:16:21.880 bit scary though, I will just point out that of 0:16:22.000 --> 0:16:25.280 the giant tech companies that now seem a little bit safe, 0:16:26.520 --> 0:16:31.080 almost without exception, and Microsoft is the exception. Um, those 0:16:31.120 --> 0:16:34.120 companies haven't really lived through a recession, at least not 0:16:34.240 --> 0:16:37.640 in their kind of current giant company status. So I 0:16:37.680 --> 0:16:41.680 don't think we really know what Amazon looks like, for example, 0:16:42.200 --> 0:16:45.080 in a recessionary period. And again, obviously they were around 0:16:45.080 --> 0:16:47.240 in two thousand nine, two thousand ten, but they were 0:16:47.320 --> 0:16:51.560 significantly smaller company, less sprawling, um e commerce was kind 0:16:51.560 --> 0:16:55.280 of a significantly smaller share of US spending. So I 0:16:55.440 --> 0:16:59.680 just I do not know what happens even to the biggest, safest, 0:17:00.200 --> 0:17:03.680 most profitable giant tech companies in a recessionary environment. Well, 0:17:03.680 --> 0:17:06.879 and you add the one more giant spooky element in 0:17:06.880 --> 0:17:09.080 the room, which is the potential for regulation. And so 0:17:09.080 --> 0:17:13.120 when we're talking about these specific big tech companies. Um, 0:17:13.160 --> 0:17:16.879 the risks are are pronounced when it comes to um not. 0:17:17.040 --> 0:17:20.480 This isn't just a political issue. This is a substantial 0:17:21.240 --> 0:17:25.520 structural issue around inequality and data protection and really big 0:17:25.600 --> 0:17:27.480 questions that I think are here to stay. And so 0:17:27.520 --> 0:17:29.959 when we talk about these specific companies, they are surely 0:17:30.040 --> 0:17:32.800 risks in the coming years. Um. When you're looking though 0:17:32.840 --> 0:17:51.680 at at an investment, that's a that's a compelling story, Lauren. 0:17:51.720 --> 0:17:53.639 I think you stole my notes because I was that 0:17:53.960 --> 0:17:56.000 was my next segue, and I was going to give 0:17:56.000 --> 0:17:58.600 a gratuitous plug to a story that Sarah worked on 0:17:59.080 --> 0:18:02.840 this week about it's kind of becoming the big buzzy 0:18:02.960 --> 0:18:07.160 zeitgeist on Wall Street now is the specter of possible 0:18:07.240 --> 0:18:10.399 Elizabeth Warren presidency. I was like, which story are you 0:18:10.440 --> 0:18:18.280 talking about? Remember you work? But and I wrote about 0:18:18.280 --> 0:18:21.440 it to another gratuitous plug a couple of weeks ago. 0:18:21.520 --> 0:18:25.359 But um, obviously Elizabeth Warren has everyone on Wall Street 0:18:25.400 --> 0:18:29.879 freaked out and many people predicting this big bear market 0:18:30.000 --> 0:18:34.360 if she should sort of ascend in the polls any further. Sure, 0:18:34.440 --> 0:18:36.560 let's start with you, though I'm curious if her name 0:18:36.960 --> 0:18:39.919 came up at all on any of the conference calls 0:18:40.040 --> 0:18:43.840 or any of the analyst notes UM and Part B, 0:18:44.280 --> 0:18:46.600 since if you guys will both accept A and B questions. 0:18:47.119 --> 0:18:49.800 Part B, I'm just curious, how would you go about 0:18:49.840 --> 0:18:54.400 breaking up, say a Facebook, an Alphabet, and an Amazon. 0:18:55.280 --> 0:18:59.480 Um and would that necessarily be a negative for shareholders 0:18:59.480 --> 0:19:02.440 in this company? You know? I'm thinking, wouldn't the SMPB 0:19:02.720 --> 0:19:05.560 better off if it had a Google and uh, a 0:19:05.640 --> 0:19:10.040 YouTube and an Instagram and an Amazon Cloud and an 0:19:10.040 --> 0:19:12.239 Amazon retail I mean, you're talking about a lot of 0:19:12.280 --> 0:19:15.040 sort of interesting businesses that would suddenly be their own companies? 0:19:15.080 --> 0:19:18.240 What is what's the thinking on this from your world? Okay, 0:19:18.240 --> 0:19:22.040 so now I have to do A and B. A. UM, Yes, 0:19:22.160 --> 0:19:26.760 I think the regulation obviously is now I think a 0:19:26.840 --> 0:19:30.399 regular part of reality for these companies. The sort of 0:19:30.440 --> 0:19:32.560 difficult thing I think, both for the companies and for 0:19:32.640 --> 0:19:37.000 investors honestly, is just it's impossible to know how this 0:19:37.080 --> 0:19:40.000 plays out and how long it takes. Right, you're talking 0:19:40.000 --> 0:19:44.440 about a federal, federal and state now antitrust investigations involving 0:19:44.520 --> 0:19:48.399 basically all the giant tech companies with the exception of Microsoft, 0:19:48.760 --> 0:19:51.800 And what if it takes ten years I don't know. 0:19:52.080 --> 0:19:54.280 I don't know what happens. So it's one of these 0:19:54.359 --> 0:19:59.119 kind of storm clouds, but it's unclear exactly how it 0:19:59.200 --> 0:20:02.000 ends or how exactly to to play for it. Am 0:20:02.000 --> 0:20:04.000 I the only one who finds it funny that Microsoft 0:20:04.080 --> 0:20:05.639 is the one they're not talking about. Yes, it is 0:20:06.040 --> 0:20:08.399 extremely I think if you had told like two thousand 0:20:08.560 --> 0:20:12.359 ten Shia that there would be anti trust investigations and 0:20:12.400 --> 0:20:15.439 Microsoft would be completely uninvolved, that they look like the 0:20:15.480 --> 0:20:18.399 white hats and all this, it would seem preposterous spying 0:20:18.480 --> 0:20:21.479 under the there we haven't such a part about actually 0:20:21.480 --> 0:20:24.280 breaking these com plain about part B. I definitely have 0:20:24.400 --> 0:20:27.040 seen the sell side analysts talking about, you know, we 0:20:27.080 --> 0:20:30.120 think Facebook or would be more valuable or Google would 0:20:30.119 --> 0:20:32.119 be more valuable if it were split in pieces. I 0:20:32.160 --> 0:20:36.160 think that is nuts. Um that I mean, I can 0:20:36.200 --> 0:20:38.760 go company by company, but if you think about a 0:20:38.800 --> 0:20:42.280 company like Facebook, and I think the Elizabeth Warren types 0:20:42.320 --> 0:20:46.920 who were talking about Facebook and antitrust, what they're talking 0:20:46.920 --> 0:20:50.679 about largely is pulling out the companies that Facebook acquired 0:20:50.720 --> 0:20:53.679 in the last ten years, so that's primarily Instagram and 0:20:53.760 --> 0:20:58.720 WhatsApp and uh to say that Facebook is more valuable. 0:20:58.760 --> 0:21:02.080 If you pull out those two companies is just bad. 0:21:02.280 --> 0:21:06.800 It is wrong that, particularly on the usage side right um, 0:21:07.200 --> 0:21:11.120 Instagram is the growth story for Facebook right now. It's 0:21:11.200 --> 0:21:15.480 important with younger people, it's important with advertisers who want 0:21:15.520 --> 0:21:18.639 to reach younger people. And what's app is also an 0:21:18.680 --> 0:21:23.639 important element of Facebook's growth outside of North America in 0:21:23.760 --> 0:21:27.280 countries like India, like the Middle East where what's app 0:21:27.359 --> 0:21:31.280 is extremely popular. And look, Facebook hasn't successfully figured out 0:21:31.280 --> 0:21:34.320 how to make money from what'sapp, but that's an asset 0:21:34.400 --> 0:21:37.760 that has um more and we don't know exactly how many, 0:21:37.760 --> 0:21:40.480 but more than a billion users worldwide, and that is 0:21:41.040 --> 0:21:44.679 extremely valuable to Facebook and that's an extremely important part 0:21:44.760 --> 0:21:47.439 of the investment thesis for Facebook. Lauren, what about your 0:21:47.480 --> 0:21:50.359 guys take not on just the regulatory aspect and the 0:21:50.440 --> 0:21:52.960 risks that poses not even just to the tech companies 0:21:52.960 --> 0:21:56.280 but the market at large, but also just everything going 0:21:56.400 --> 0:22:00.359 on in politics right now, whether it is impeachment, press eatings, 0:22:00.359 --> 0:22:03.399 are looking forwards to the election. When you have the 0:22:03.480 --> 0:22:06.040 likes of Paul Tutor Jones for example this past week 0:22:06.040 --> 0:22:08.200 coming out and saying if it's if Elizabeth Warren wins 0:22:08.480 --> 0:22:11.760 the SMP will drop. I mean, how can you even 0:22:11.800 --> 0:22:14.520 go about making predictions like this or trying to at 0:22:14.600 --> 0:22:20.320 least take these ideas and inform your investments. I'll make 0:22:20.359 --> 0:22:24.800 a shameless plug for myself and that we UH wrote 0:22:25.119 --> 0:22:28.760 a piece on political and geopolitical risk and portfolio management 0:22:28.800 --> 0:22:32.440 and found that not only do investors UM and again 0:22:32.440 --> 0:22:35.520 I'm I'm thinking investors for the medium or longer term 0:22:35.880 --> 0:22:40.399 tend not to pay very close attention but probably shouldn't. Um, 0:22:40.680 --> 0:22:44.920 we may maybe we get a sell off if Elizabeth 0:22:44.920 --> 0:22:48.160 Warren gets the nomination or wins the election. We thought 0:22:48.280 --> 0:22:51.200