WEBVTT - Inflation & Valuation Vertigo 0:00:01.040 --> 0:00:04.600 Strap on your parachute. It's time for What Goes Up 0:00:04.720 --> 0:00:14.000 with Sarah Ponzack and Mike Reagan. Hello, and welcome to 0:00:14.040 --> 0:00:17.920 What goes Up, a Bloomberg Weekly Markets podcast. I'm Mike Reagan, 0:00:18.000 --> 0:00:21.720 a senior editor at Bloomberg, and I'm Katie greidfeldt across 0:00:21.760 --> 0:00:24.600 asset reporter at Bloomberg. And this week on the show, 0:00:24.880 --> 0:00:28.720 markets have really become obsessed with the possibility of faster 0:00:28.840 --> 0:00:32.640 than normal inflation this year as the world reopens from 0:00:32.640 --> 0:00:37.360 COVID lockdowns and the economy booms. That's causing some volatility 0:00:37.360 --> 0:00:40.480 in the stock market, obviously, especially among the big tech 0:00:40.479 --> 0:00:43.640 companies that led the bull market over the last decade. 0:00:44.400 --> 0:00:47.040 So how exactly should we think about inflation and what 0:00:47.080 --> 0:00:49.680 it means for the market and what type of inflation 0:00:49.720 --> 0:00:53.400 exactly should we expect. Katie, our guest, has some thoughts, 0:00:54.120 --> 0:00:56.360 and as always, we'll close out the episode with our 0:00:56.440 --> 0:00:59.880 tradition the craziest thing I saw in markets this week? 0:01:00.320 --> 0:01:03.320 And if you spot something crazy, give the Bloomberg Podcast 0:01:03.400 --> 0:01:06.720 hotline a call at six four six three two four 0:01:07.200 --> 0:01:10.080 three four nine zero and leave a voicemail and maybe 0:01:10.120 --> 0:01:12.960 you'll make it onto the show next week, and speaking 0:01:13.000 --> 0:01:15.399 of making it on the show, we have a special 0:01:15.440 --> 0:01:21.360 message from Sarah Ponzack if we could play that. Hi, everyone, 0:01:21.480 --> 0:01:24.880 it's Sarah. Some bittersweet news to share. I'm moving on 0:01:24.920 --> 0:01:27.880 from Bloomberg, which sadly means leaving what goes up behind. 0:01:28.160 --> 0:01:31.200 So I wanted to say thank you to everyone who listened, 0:01:31.360 --> 0:01:34.360 help the show grow, and of course called intertweeted with 0:01:34.400 --> 0:01:38.080 Crazy Things Takes. The podcast is obviously in very great 0:01:38.120 --> 0:01:40.240 hands with Mike. I just hope he can find someone 0:01:40.600 --> 0:01:42.560 who laughs at his jokes as much as I did. 0:01:42.680 --> 0:01:45.400 Of course, my just kidding. But now from the other side, 0:01:45.400 --> 0:01:47.680 I'm going to be an avid listener and I'm very 0:01:47.800 --> 0:01:50.160 very excited for that, So everyone please keep in touch. 0:01:50.160 --> 0:01:52.280 I would love that. I'm at at Sarah pon sec 0:01:52.400 --> 0:01:56.400 and goodbye, a very bitter sweet farewell. As as Sarah 0:01:56.400 --> 0:01:59.000 said Katie, I think the bitternesses on on our end 0:01:59.000 --> 0:02:01.320 and maybe the sweets on her and because we we 0:02:01.400 --> 0:02:04.760 sure are sad to see her go. Absolutely Luckily, we 0:02:04.800 --> 0:02:07.680 do have a good support group here at Bloomberg to 0:02:07.920 --> 0:02:11.040 UH to help us handle this. So UH next over 0:02:11.080 --> 0:02:13.360 the next few weeks and months, you're gonna be hearing 0:02:13.440 --> 0:02:17.680 from quite a few different voices from around the Bloomberg Company, 0:02:17.680 --> 0:02:21.239 around the world, a lot of colleagues with some fresh perspectives, 0:02:21.320 --> 0:02:24.280 and they'll bring in some fresh guests of their own. 0:02:24.320 --> 0:02:27.280 So stick with us. We're gonna we're gonna keep it going. 0:02:27.360 --> 0:02:30.520 We wish sire the best in her new career in 0:02:30.520 --> 0:02:34.639 wealth management, Katie. If I ever actually managed to accumulate 0:02:34.680 --> 0:02:37.440 some wealth, I might I might give her a call. Absolutely, 0:02:37.520 --> 0:02:41.040 She's at the top of my list. Yeah, So anyway, 0:02:41.160 --> 0:02:43.920 let's get to the markets chat now. We are very 0:02:44.000 --> 0:02:46.880 happy to welcome to the show the head of global 0:02:47.000 --> 0:02:51.640 investment research at Footsie Russell. His name is Philip Lawlor. Philip, 0:02:51.680 --> 0:02:55.560 welcome to the show. Hell Peace be with you and Philip. 0:02:55.560 --> 0:02:58.400 It's funny, you know, uh, guests like you helpfully send 0:02:58.480 --> 0:03:02.120 us some notes about what you're thinking about, and oftentimes 0:03:02.160 --> 0:03:05.680 there's sample questions in them. I always feel like I'm 0:03:05.760 --> 0:03:07.440 cheating a little bit when I asked one of the 0:03:07.480 --> 0:03:10.080 sample questions, but your first one was so good that 0:03:10.120 --> 0:03:12.720 I'm just gonna cheat and and ask it to you. 0:03:12.720 --> 0:03:14.840 You you say, and I think this is a really 0:03:14.919 --> 0:03:19.160 important concept for the market right now. Is good news 0:03:19.240 --> 0:03:22.680 bad news again, you know that famous sort of cliche 0:03:22.760 --> 0:03:25.239 that we stumble into when it's really the central banks 0:03:25.280 --> 0:03:28.400 that are that are running the show. And uh, you know, 0:03:28.480 --> 0:03:31.600 green shoots in the economy or inflation, get the bond 0:03:31.600 --> 0:03:34.800 market spooked, get rates going up, and people are worried 0:03:34.800 --> 0:03:37.120 about that the central banks are gonna have to react, 0:03:37.560 --> 0:03:40.760 and what it all means for this euphoric rally we've 0:03:40.800 --> 0:03:43.600 seen in stocks. So what is the answer to that question? 0:03:43.760 --> 0:03:45.600 Is good news bad news? Again? Do you think are 0:03:45.640 --> 0:03:48.000 we in that stage again? Yeah? But I think look, 0:03:48.080 --> 0:03:50.000 just before we get to the actual answer, let's just 0:03:50.040 --> 0:03:52.400 step back and understand a bit of the journey we've 0:03:52.400 --> 0:03:55.240 been on. And clearly, you know, in this reflation trade 0:03:55.320 --> 0:03:57.640 that really kicked off in in the sort of from 0:03:57.720 --> 0:04:04.080 early November on, which that'svaccine optimism, expectations of the genuine 0:04:04.160 --> 0:04:07.400 V shaped recovery kicking in. That built a lot of 0:04:07.400 --> 0:04:11.320 exuberance and we saw that manifested in the scale of 0:04:11.360 --> 0:04:14.480 the market moves. We've seen the pickup in risk appetite. 0:04:15.400 --> 0:04:17.960 But you know, I think there is now a case 0:04:18.560 --> 0:04:22.480 of markets in a way injecting premature pessimist mint into 0:04:22.560 --> 0:04:25.320 the market. They're getting a bit spooked too early in 0:04:25.360 --> 0:04:29.960 this cycle. The good news, clearly is the degree of 0:04:30.000 --> 0:04:33.520 stimulus the scope for the recovery, and that's all been 0:04:33.600 --> 0:04:38.000 duced up by the stimulus package that's come in on 0:04:38.120 --> 0:04:42.320 your side of the pond. But you know, is this 0:04:42.480 --> 0:04:45.120 really a case of excessive stimulus? So I think we 0:04:45.200 --> 0:04:47.880 need to understand that actually what we witnessed last year 0:04:48.000 --> 0:04:51.279 was an economic shock equivalent to a major, major war. 0:04:52.080 --> 0:04:56.360 And it feels still a trifle premature to be worrying 0:04:56.400 --> 0:04:59.440 about it being too hot on the way out before 0:04:59.480 --> 0:05:04.120 we've even ready started that journey. Well, I'm a little upset, Mike, 0:05:04.160 --> 0:05:06.920 because I wanted to steal that question and ask it first. 0:05:07.000 --> 0:05:10.080 But I think Philip, you're answer tizing pretty nicely to 0:05:10.160 --> 0:05:13.760 what I'd like to ask, because I mean, the big 0:05:13.800 --> 0:05:17.080 event this week, of course, was the FED, and uh, 0:05:17.160 --> 0:05:19.799 this meeting was actually exciting. I mean, we knew exactly 0:05:19.839 --> 0:05:21.360 what we were going to do, but we did get 0:05:21.400 --> 0:05:24.520 an updated DOT plot and that turned some heads because 0:05:24.560 --> 0:05:27.320 two more officials now expect a rate hike by the 0:05:27.400 --> 0:05:31.160 end of the medium Dot of course, it's still says 0:05:31.200 --> 0:05:35.160 that they're on hold until but Bloomberg Intelligence and I've 0:05:35.160 --> 0:05:37.640 seen a few others have already said that, you know, 0:05:37.800 --> 0:05:41.520 there's a possibility this view could catch on, and I'm 0:05:41.520 --> 0:05:44.640 curious to hear your thoughts. You know, especially as we 0:05:45.160 --> 0:05:48.360 start to see stimulus checks start to hit bank accounts, 0:05:48.680 --> 0:05:51.279 do you think that view could catch on and we 0:05:51.320 --> 0:05:56.400 start to see more dots move or definitely I think clearly, 0:05:56.760 --> 0:05:59.160 I think there's very little credibility that the Fed are 0:05:59.160 --> 0:06:02.440 going to hold rates a steady as power has told us, 0:06:02.480 --> 0:06:04.680 and quite rightly, the market, and you can see this 0:06:04.760 --> 0:06:08.560 in the futures market is anticipating mid next year is 0:06:08.600 --> 0:06:10.719 when we're going to start to get the upward inflection. 0:06:11.320 --> 0:06:15.360 But the question is is it axiomatic that arise in 0:06:15.360 --> 0:06:18.799 interest rates is bad for risk appetite And the answer 0:06:18.960 --> 0:06:23.240 is no, patently, it isn't if that drive in rising 0:06:23.279 --> 0:06:26.120 interest rates is being driven by a rise in nominal 0:06:26.160 --> 0:06:30.000 GDP growth. And you know, the time that you worry 0:06:30.000 --> 0:06:33.159 about a tightening cycle is when the perception is the 0:06:33.200 --> 0:06:35.800 Federal Reserve are going from just tapping on the brakes 0:06:35.839 --> 0:06:39.400 to slamming on the brakes. You don't risk assets do 0:06:39.560 --> 0:06:43.039 quite well while they're starting the process of notdging rates higher. 0:06:43.279 --> 0:06:47.120 Because typically markets are enjoying the economic environment that's justifying 0:06:47.120 --> 0:06:50.400 the higher rates. So it's all about timing. I think 0:06:50.400 --> 0:06:54.680 the market is just possibly jumping straight to the that 0:06:54.800 --> 0:06:57.920 the slamming on the brakes stage before we've actually even 0:06:58.000 --> 0:07:02.200 started the genuine kicker of the pick up in growth 0:07:02.240 --> 0:07:07.240 and seeing how savings ratios draw down kicks into economies. 0:07:07.320 --> 0:07:09.720 With with this conjecture about that, but we haven't seen 0:07:09.720 --> 0:07:12.280 that actually happen happening yet. We're going through the classic 0:07:12.320 --> 0:07:14.680 cycle in the way we've had the vigilante movie in 0:07:14.720 --> 0:07:17.920 the bond market. The bond market antenna moving first, and 0:07:17.960 --> 0:07:22.120 that's really been expressed through inflation expectations. But arising bond 0:07:22.200 --> 0:07:26.760 deal is giving us a sense that there's some credibility 0:07:26.800 --> 0:07:30.000 about the Fed's position in going forward. So what we've 0:07:30.000 --> 0:07:33.040 then got to get is the FED shifting its guidance 0:07:33.080 --> 0:07:36.160 and then that being manifested through some sort of tapering 0:07:36.240 --> 0:07:38.720 of their quee. And they've got to go through that 0:07:38.840 --> 0:07:43.000 sequence before they even get the actual part period where 0:07:43.000 --> 0:07:46.200 they're tightening interest rates. So there's a journey to be 0:07:46.720 --> 0:07:50.760 work through here. How quickly, how constantina that is is 0:07:50.840 --> 0:07:53.320 hard to say, but you know, we all we've really 0:07:53.320 --> 0:07:57.000 seen is the bond market vigilantes get to work. They 0:07:57.080 --> 0:07:59.560 might well be getting a little bit ahead of themselves 0:07:59.560 --> 0:08:01.920 in terms to the scale of the inflation shock. We 0:08:01.960 --> 0:08:05.120 can discuss that as well. But even if they're right, 0:08:05.560 --> 0:08:08.160 you still really got to see the tone of the 0:08:08.240 --> 0:08:12.040 messaging from the FED changing, which is the dot plots. 0:08:12.080 --> 0:08:14.720 But the more significant one will be just at what 0:08:14.920 --> 0:08:17.440 time do they start to pull in their que program 0:08:17.520 --> 0:08:20.200 from a hundred twenty billion a month down to eighty 0:08:20.360 --> 0:08:23.640 or sixty or or whatever, and that that will be 0:08:23.680 --> 0:08:27.240 the next big step. And as I said, I think 0:08:27.320 --> 0:08:30.760 this will all be conditional on the underlying economic environment 0:08:30.800 --> 0:08:32.360 that they're doing this. They won't be doing this in 0:08:32.400 --> 0:08:35.880 a vacuum. So we've got to really position ourselves if 0:08:35.920 --> 0:08:39.160 they start tapering that they're doing that in the latter 0:08:39.200 --> 0:08:41.640 half of the year when the US economy really is 0:08:41.840 --> 0:08:45.200 kicking back. I've yet to really be convinced that that's 0:08:45.240 --> 0:08:49.840 necessarily going to feed into a discernible risk off mode 0:08:49.840 --> 0:08:52.480 for markets. But felt about you know, you brought up 0:08:52.520 --> 0:08:56.480 that notion of a inflation shock, or at least people 0:08:56.559 --> 0:09:00.600 worried about their being an inflation shark. I think inflation 0:09:00.679 --> 0:09:03.800 is such a fascinating topic because it seems way more 0:09:03.880 --> 0:09:06.880 controversial than it should be. Right, you know, the CPI 0:09:07.000 --> 0:09:10.840 index says one thing, but people say, but my hamburger 0:09:11.200 --> 0:09:14.280 price doubled last week. We're look at the asset price 0:09:14.360 --> 0:09:16.920 inflation in the stock market. So I know you've done 0:09:16.960 --> 0:09:20.679 some work sort of trying to suss out exactly how 0:09:20.720 --> 0:09:23.640 we should think about inflation, like what measures to look at, 0:09:24.040 --> 0:09:26.720 and also the difference between kind of the good and 0:09:26.760 --> 0:09:29.680 the bad types of inflation that we might experience. Walk 0:09:29.760 --> 0:09:31.360 us through sort of some of the work you've done 0:09:32.000 --> 0:09:35.800 dissecting inflation. Sure, you know, we're all talking about inflation 0:09:36.080 --> 0:09:38.200 as though it's a it's a single word, but in 0:09:38.240 --> 0:09:41.240 fact it comes in multiple guises. There are multiple drivers 0:09:41.240 --> 0:09:43.800 of inflation, and some are sinister and some of the nine. 0:09:44.520 --> 0:09:48.040 And what we need to understand really is what are 0:09:48.040 --> 0:09:51.320 the core drivers that the inflation we're seeing in this cycle. 0:09:51.600 --> 0:09:55.520 You know that the really bad, sinister inflation that central 0:09:55.520 --> 0:09:58.440 bank will keep central banks up at night is when 0:09:58.480 --> 0:10:02.320 they see a pick up the inflation expectations driven through 0:10:03.200 --> 0:10:06.600 cost push and wage growth. You know, where the labor 0:10:06.679 --> 0:10:10.360 market is red hot, unemployment is incredibly low, and you're 0:10:10.360 --> 0:10:13.839 seeing wage growth really accelerating. That's the type of inflation 0:10:14.320 --> 0:10:18.360 that really makes sent all central banks break out into 0:10:18.360 --> 0:10:22.120 a sweat. Now, clearly we're not in that environment. Now. 0:10:22.360 --> 0:10:24.319 What we're witnessing now, I think we're all aware of 0:10:24.440 --> 0:10:26.640 is the cost push, which is input costs. This is 0:10:26.679 --> 0:10:31.640 supplied disruption, base effects. You know, disrupted supply hitting a 0:10:31.720 --> 0:10:35.120 pickup in demand is going to have a temporary pickup 0:10:35.160 --> 0:10:38.800 in in input costs, and and you know that's feeding 0:10:38.800 --> 0:10:41.840 through into the cp I. Now the question is is 0:10:41.840 --> 0:10:46.160 that is that a permanent or a temporary shift? Is 0:10:46.200 --> 0:10:48.600 that just because of the base effects kind of wash 0:10:48.679 --> 0:10:52.640 itself out in six months time? And in fact, the 0:10:52.800 --> 0:10:56.880 really big problem for for for the economy is this, 0:10:57.040 --> 0:10:58.720 there's just going to be a replay of what we 0:10:58.760 --> 0:11:01.640 lived through into two thousand and eleven. I don't know 0:11:01.640 --> 0:11:03.600 if you remember in two thousand eleven, but you know, 0:11:03.640 --> 0:11:07.120 we come out of the financial crisis, we'd have quantitative easing. 0:11:07.880 --> 0:11:11.880 Accusations are too much liquidity chasing too few goods, says 0:11:11.920 --> 0:11:16.200 all commodity prices going through the roof cp I went 0:11:16.280 --> 0:11:20.400 from one to three, and the Federal Reserve had a 0:11:20.400 --> 0:11:23.080 lot of criticism, but quite rightly, the Federal Reserve saw 0:11:23.160 --> 0:11:25.920 this is actually just a big one off hit at 0:11:26.000 --> 0:11:29.360 the cost of living that was going to damage real 0:11:29.440 --> 0:11:33.839 disposable income, real incomes. If people's pay is not going up, 0:11:33.880 --> 0:11:36.920 they're not getting big pay rises, and the cost of 0:11:36.960 --> 0:11:40.160 living goes up, it ends up being at the end 0:11:40.160 --> 0:11:44.520 of the day, disinflationary. So I think what we've got 0:11:44.559 --> 0:11:47.439 to be is more sophisticated as to what's driving the inflation. 0:11:47.600 --> 0:11:50.760 I think this is all about this temporary base effect 0:11:51.440 --> 0:11:55.400 supply disruption hitting a pickup in demand. That the risk 0:11:55.600 --> 0:11:57.880 is that this is going to hit an economy where 0:11:58.360 --> 0:12:01.120 the labor market is not going to see wage growth. 0:12:01.800 --> 0:12:04.840 You know, we we we've still got some structural headwinds 0:12:04.840 --> 0:12:07.680 in terms of the labor market as we work through 0:12:07.679 --> 0:12:11.320 this COVID impact, And I think the central banks are 0:12:11.400 --> 0:12:14.160 quite right to most probably just say we've got on 0:12:14.200 --> 0:12:16.959 the side of caution and just wait to see how 0:12:17.000 --> 0:12:19.440 this works its way through. Of course, if that leads 0:12:19.480 --> 0:12:21.800 to a structural shift and we do get that being 0:12:21.840 --> 0:12:25.360 reflected pick up in growth, then they need to respond 0:12:25.360 --> 0:12:28.600 more aggressively, but don't act too quickly because that will 0:12:28.640 --> 0:12:32.120 create what we call a policy mistake. So assuming that 0:12:32.160 --> 0:12:35.360 plays out, and this is sort of a similar one off, 0:12:35.559 --> 0:12:39.839 perhaps transitory, dare I say it boosts and inflation. I mean, 0:12:39.840 --> 0:12:42.680 how do you expect that to trickle out in markets? 0:12:42.760 --> 0:12:46.000 Because obviously the cyclical rally that we've seen, which is 0:12:46.040 --> 0:12:49.880 premised on a sort of sustainable rise and inflation, it's 0:12:49.880 --> 0:12:53.480 come pretty far at this point. Yeah, So I mean, 0:12:53.600 --> 0:12:55.720 very good question that lots of sort of knock on 0:12:56.600 --> 0:12:59.760 plays on this. I suspect, you know what, if we 0:12:59.800 --> 0:13:03.240 look at break even inflation rates using the tips, you know, 0:13:03.360 --> 0:13:05.600 I think you might well find that they've done the 0:13:05.640 --> 0:13:08.360 majority of the heavy lifting already that you know, they're 0:13:08.400 --> 0:13:12.679 back up ready to where they started from. There's been 0:13:12.760 --> 0:13:16.200 mean reversion. I've got a feeling we might not see 0:13:16.240 --> 0:13:19.040 the break even inflation rates moved much higher from here. 0:13:19.040 --> 0:13:22.480 So we've done the hard yards in that regard, and 0:13:22.520 --> 0:13:25.280 I think then we as we see this rippling through 0:13:25.679 --> 0:13:27.880 it's this we're looking at this over a six month 0:13:27.960 --> 0:13:29.880 time frame, was probably through to the end of the 0:13:29.920 --> 0:13:34.240 third quarter before it the base effects then were off 0:13:34.720 --> 0:13:37.360 and in between that time, Yes, I think we've had 0:13:37.360 --> 0:13:40.400 a lot of the we're getting a big shift in 0:13:40.440 --> 0:13:44.760 the valuation impact of rising inflation on on the tech stocks, 0:13:44.800 --> 0:13:49.480 the quality the growth stocks. They the highly priced, highly 0:13:49.559 --> 0:13:53.280 valued stocks. But of course that that does imply if 0:13:53.320 --> 0:13:57.079 the inflation rates starts to level out or as we 0:13:57.280 --> 0:14:01.200 approached the fourth quarter, then that creates more of a 0:14:01.280 --> 0:14:03.000 tail when for those sort of stocks. So I think 0:14:03.000 --> 0:14:06.040 we've still got some more rotation to do. Kirt see 0:14:06.080 --> 0:14:10.600 the high valuation impact the rising bond shields planed the 0:14:11.520 --> 0:14:14.240 into that. But you know, I think we've we've we've 0:14:14.280 --> 0:14:16.280 moved quite a long way here. I mean, bond shields 0:14:16.280 --> 0:14:18.680 are really have reversed all the way back to where 0:14:18.679 --> 0:14:32.600 they were before we have the COVID shop. Let's unpack 0:14:32.640 --> 0:14:36.960 a little bit that that relationship between interest rates and valuations. 0:14:36.960 --> 0:14:40.520 You have a great phrase here, valuation vertigo, you call it. 0:14:40.520 --> 0:14:42.640 I might I might be still on that. I'm fair 0:14:42.680 --> 0:14:44.960 warning I might be still on that and using that one. 0:14:46.000 --> 0:14:48.440 That's good, good alliteration there. But I know you did 0:14:48.440 --> 0:14:52.240 a piece um talking about hypothetically if we should get 0:14:52.240 --> 0:14:56.320 a mean reversion in priced earnings ratios or I guess 0:14:56.320 --> 0:14:58.360 it would work for every valuation metric. But if we 0:14:58.440 --> 0:15:01.720 if we sort of mean reverse on valuations um and 0:15:02.080 --> 0:15:04.800 you raise the question you would this be a painful 0:15:05.480 --> 0:15:09.400 reversion to the mean? My new jerk responses, yes, I 0:15:09.720 --> 0:15:12.640 believe it would be very painful. Walk us through it 0:15:12.800 --> 0:15:15.920 would that type of reversion have to by definition be 0:15:15.960 --> 0:15:18.680 a painful time for the market. Okay, Look, I mean 0:15:18.680 --> 0:15:21.840 there's an inference. We all know that last year's move 0:15:23.120 --> 0:15:26.960 results in a significant rerating the markets, most notably the 0:15:27.080 --> 0:15:31.600 US the Russell one thousands large cap you know, significant 0:15:31.680 --> 0:15:36.200 rerating and that was the key driver of returns. And 0:15:36.240 --> 0:15:39.000 as I said, that created this sense of vertico were 0:15:39.000 --> 0:15:41.360 now so elevated where we're going to go. And the 0:15:41.360 --> 0:15:45.560 the inference from a very high valuation is you can 0:15:45.640 --> 0:15:50.200 have a damaging D rating, which is you're just going 0:15:50.240 --> 0:15:54.160 to get the market correct the price, the P element 0:15:54.200 --> 0:15:58.480 of the P correct to bring it down. And the 0:15:58.520 --> 0:16:01.800 problem with that is there no empirical evidence to show 0:16:01.800 --> 0:16:05.760 that valuations very useful market timing tool. If if you 0:16:05.800 --> 0:16:08.160 were a portfolio manager and you were just working on 0:16:08.200 --> 0:16:12.240 the assumption that very high peas we're going to axiomatically 0:16:12.360 --> 0:16:16.080 lead to a market decline over the next six months, 0:16:16.120 --> 0:16:19.520 that tends not to work. High peas tell you something 0:16:19.560 --> 0:16:22.760 about the long term returns you can get from from equities. 0:16:23.760 --> 0:16:26.800 So there are two ways markets then can deemed typically 0:16:26.880 --> 0:16:30.520 de rate. One is actually through that this this this inflation. 0:16:31.040 --> 0:16:33.360 If you get really a pick up an inflation that 0:16:33.440 --> 0:16:35.480 is can be very can lead to a very big 0:16:35.560 --> 0:16:40.560 D rating. If inflation averages five pc on average, you 0:16:40.640 --> 0:16:43.680 get a pe closer to ten ten times. I mean, 0:16:43.680 --> 0:16:46.160 you would see a halving of markets on that type 0:16:46.160 --> 0:16:49.480 of shift, but that's got to be a structural shift 0:16:49.480 --> 0:16:53.120 in inflation. What we're saying is actually we think we're 0:16:53.120 --> 0:16:55.160 at the stage of the cycle where you could actually 0:16:55.160 --> 0:16:58.680 get what we call a benign D rating. And that's 0:16:58.720 --> 0:17:02.920 again deconstructing the P ratio into its two parts. That's saying, 0:17:03.080 --> 0:17:06.119 let's put what happens to the index the price, to 0:17:06.200 --> 0:17:09.080 one side, and let's just look at the earnings. And 0:17:09.119 --> 0:17:13.760 we're saying, if we are confident about the recovery that's coming, 0:17:13.800 --> 0:17:16.640 and we've seen what the Federal Reserve done with their 0:17:16.680 --> 0:17:18.720 forecast for the US, and we've seen what the o 0:17:18.840 --> 0:17:22.600 ec D you've done on the similar sort of upgrade, 0:17:23.680 --> 0:17:25.720 if we start to see that coming through, you're going 0:17:25.760 --> 0:17:29.280 to get very powerful what we call operating leverage kicking in, 0:17:29.720 --> 0:17:33.920 and that that is understanding that for each pick up 0:17:33.960 --> 0:17:36.960 in nominal GDP growth, you tend to get two percent 0:17:37.080 --> 0:17:42.600 pick up in revenue growth. For for you know, traded 0:17:42.800 --> 0:17:46.800 equities are in AGGREGA, that's a long run historical average 0:17:46.960 --> 0:17:51.320 ratio revenue growth being twice that of nominal GDP. So 0:17:51.359 --> 0:17:53.359 you can just do some very simple modeling and saying 0:17:53.359 --> 0:17:56.000 if we're looking at potentially over the next twelve months, 0:17:56.080 --> 0:18:01.400 US nominal GDP getting close to eight percent, and that's 0:18:01.840 --> 0:18:06.680 looking at goods really substantial double digit revenue growth, and 0:18:06.960 --> 0:18:12.640 that's way above the nine revenue growth analysts are currently forecasting. Now, 0:18:12.680 --> 0:18:15.040 if you were to get that for each one on 0:18:15.119 --> 0:18:18.520 revenue growth, it feeds through to the bottom line EPs 0:18:18.520 --> 0:18:22.560 with a multiplier effect. So the point is analysts of 0:18:22.680 --> 0:18:26.840 upgraded their EPs the E, but I suspect they are 0:18:26.920 --> 0:18:30.120 behind the curve in the sense of factoring this top 0:18:30.160 --> 0:18:33.159 down operating leverage. If you get that big kick in 0:18:33.200 --> 0:18:36.520 the E, you can still if the egoes up at 0:18:36.520 --> 0:18:38.960 a faster rate than the P, you actually get a 0:18:39.040 --> 0:18:41.399 D rating. And we've had lots of episodes of that. 0:18:41.800 --> 0:18:44.520 In one of our bits, which just showed actually what happened, 0:18:45.359 --> 0:18:49.159 you know from seen through to the middle of you know, 0:18:49.200 --> 0:18:53.840 the market went up ten EPs went up. That meant 0:18:53.880 --> 0:18:55.920 the P and the market fell from nineteen and a 0:18:55.920 --> 0:18:59.240 half time to seventeen and a half. That's a painless 0:18:59.320 --> 0:19:02.120 D rating. So I think it's got to be are 0:19:02.160 --> 0:19:07.520 we on the cusp of the P correcting falling the 0:19:07.600 --> 0:19:11.760 P dropping because the market correct Of course that could happen, 0:19:12.160 --> 0:19:15.159 but actually it feels more realistically if we're looking at 0:19:15.200 --> 0:19:18.520 this pick up in growth coming through, I think analysts 0:19:18.800 --> 0:19:23.440 are going to end up chasing these upgrades upwards over 0:19:23.480 --> 0:19:26.560 the next six months. That analysts have a pretty poor 0:19:26.600 --> 0:19:29.560 track record of getting in front of the macro curve. 0:19:30.640 --> 0:19:35.000 So in thinking about what you're describing with valuations and 0:19:35.119 --> 0:19:37.960 with you know, the stimulus we're getting from both the 0:19:38.080 --> 0:19:40.840 Fed and from Congress, I have have status to throw 0:19:40.880 --> 0:19:43.560 at you. Um. I saw this week that it's the 0:19:43.600 --> 0:19:47.840 best quarter since two thousand for stocks with trailing twelve 0:19:47.880 --> 0:19:51.280 month net losses. I saw another stat um these are 0:19:51.280 --> 0:19:53.760 from Goldman Sacks Baskets that we use a lot, that 0:19:54.119 --> 0:19:56.640 companies with weak balance sheets are on track for their 0:19:56.640 --> 0:20:01.000 best quarter on record. Against companies with strong re balance sheets. 0:20:01.520 --> 0:20:03.919 So I mean, I'm curious, is that a trend that 0:20:03.960 --> 0:20:06.560 can continue? You know, if we're truly in a world 0:20:06.640 --> 0:20:09.960 where the phenominal GDP could get up to eight percent 0:20:10.119 --> 0:20:13.840 or do you see that you know? Unsustainable? This is 0:20:13.880 --> 0:20:17.720 this is I mean, we encapsulate that by talking about 0:20:17.720 --> 0:20:21.760 this in terms of factors. This is basically seeing value 0:20:23.000 --> 0:20:26.959 stocks now starting to outperform. And remember that they've been 0:20:27.000 --> 0:20:30.960 structural under performance for five six seven years, so you 0:20:31.240 --> 0:20:35.640 it had been the US market have been a very focused, 0:20:35.920 --> 0:20:41.200 concentrated market. The top fifteen stocks were driving the US returns. 0:20:41.320 --> 0:20:45.400 US was the standout market. And we know those top 0:20:45.440 --> 0:20:49.119 fifteen stocks were all in tech and you know that 0:20:49.320 --> 0:20:53.119 the likes of Amazon and consumer services, and that was 0:20:53.240 --> 0:20:57.160 driving what we call the quality or growth factor. And 0:20:57.240 --> 0:21:02.000 of course growth does well when you when aggregate growth 0:21:02.040 --> 0:21:05.120 in the economies are reasonably scarce resource, when you're you're 0:21:05.280 --> 0:21:10.800 reasonably suppressed nominal growth level. If nominal GDP is picking 0:21:10.880 --> 0:21:15.080 up on a meaningful basis for a sustained period, when 0:21:15.119 --> 0:21:18.439 I mean by sustained is twelve months to twenty four months, 0:21:19.640 --> 0:21:23.320 growth becomes much more commoditized. So Therefore, people quite logically 0:21:23.440 --> 0:21:27.560 are reluctant to pay the high peas for those growth 0:21:27.600 --> 0:21:32.919 stocks and go down the into the value arena. And 0:21:32.960 --> 0:21:36.480 I think that's really what we've been seeing occurring since November. 0:21:36.520 --> 0:21:39.760 The market's got the message and it started that rotation. 0:21:40.320 --> 0:21:42.800 So when you look at those factors, if you want 0:21:42.840 --> 0:21:45.840 to be in the quality factor, you've got to be 0:21:46.000 --> 0:21:50.439 long basically technology and something like healthcare. And in value 0:21:50.480 --> 0:21:55.320 you've basically got to be long financials, and and that's 0:21:55.359 --> 0:21:58.360 really where we're seeing this this this this major rotation 0:21:58.440 --> 0:22:01.119 going on. So yeah, people are looking at beaten up stops. 0:22:01.200 --> 0:22:04.280 It's the value area that's getting the interest, and they're 0:22:04.280 --> 0:22:07.399 doing that because they can see this pickup in growth coming. 0:22:07.840 --> 0:22:10.879 It's interesting, Philip, I think it's kind of a tricky 0:22:11.240 --> 0:22:13.800 era to to be looking at the market through the 0:22:13.920 --> 0:22:18.879 lenses of factors um because of like you mentioned, the 0:22:18.880 --> 0:22:24.280 base effects from last year are so outrageous that, uh, 0:22:24.600 --> 0:22:27.720 last time I checked anyway, the earnings estimates were the 0:22:27.840 --> 0:22:32.280 value indexes were for higher growth than the earnings growth 0:22:32.280 --> 0:22:35.280 for the growth indexes. So so to me, you know, 0:22:35.359 --> 0:22:40.119 it's it's people are still chasing growth, albeit uh, this 0:22:40.320 --> 0:22:43.040 temporary growth that a lot of the members of the 0:22:43.119 --> 0:22:46.720 value factor are gonna show year over year because of 0:22:46.840 --> 0:22:50.639 the lousy uh environment of last year. To me, that 0:22:50.720 --> 0:22:53.439 makes it feel very much like, um, this rotation has 0:22:53.480 --> 0:22:56.119 an expiration data on it, that it's not necessarily a 0:22:56.200 --> 0:22:59.520 multi year thing. How do you think about that? Yeah, 0:23:00.000 --> 0:23:02.120 totally agree with that. I think this this, this will 0:23:02.200 --> 0:23:05.600 last as long as people have confidence that this pickup 0:23:05.600 --> 0:23:08.440 in growth and that operating leverage has said kicks in. 0:23:08.520 --> 0:23:11.240 But it will that will fade. I mean, it's very 0:23:11.240 --> 0:23:13.480 hard to say whether that's going to fade in twelve 0:23:13.480 --> 0:23:16.800