1 00:00:10,800 --> 00:00:14,640 Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast. 2 00:00:14,680 --> 00:00:18,799 Speaker 1: I'm Joe wasn't All and I'm Tracy Halloway. So, Tracy, 3 00:00:18,840 --> 00:00:21,400 Speaker 1: you know, every once in a while, um, I feel 4 00:00:21,440 --> 00:00:23,400 Speaker 1: like every few months we have to do like a 5 00:00:23,800 --> 00:00:26,160 Speaker 1: like a sort of macro episode. I mean, we talk 6 00:00:26,239 --> 00:00:29,360 Speaker 1: about topics in macro, but it's also good to just 7 00:00:29,360 --> 00:00:32,120 Speaker 1: sort of take stock of like where we are right 8 00:00:32,159 --> 00:00:37,240 Speaker 1: now with the economy, FED and markets. Yeah that's fair enough, 9 00:00:37,400 --> 00:00:39,680 Speaker 1: but I feel like at this moment in time, I 10 00:00:39,680 --> 00:00:43,440 Speaker 1: mean I should mention we're recording on March. There is 11 00:00:43,440 --> 00:00:45,640 Speaker 1: a FED meeting coming up, so maybe things will change, 12 00:00:46,000 --> 00:00:48,960 Speaker 1: But at this moment in time, the macro environment is 13 00:00:49,040 --> 00:00:52,360 Speaker 1: really interesting because of course we've seen this big backup 14 00:00:52,440 --> 00:00:55,960 Speaker 1: in yields which has impacted stocks, and now we're watching 15 00:00:55,960 --> 00:01:00,120 Speaker 1: out to see what the central banks actually do about it. Yeah, 16 00:01:00,000 --> 00:01:03,160 Speaker 1: it's just a very interesting environment for exactly that. In 17 00:01:03,200 --> 00:01:06,559 Speaker 1: addition to the backup and rage, we've seen this fairly 18 00:01:06,640 --> 00:01:09,640 Speaker 1: dramatic rotation the likes of which we haven't seen for 19 00:01:09,680 --> 00:01:12,200 Speaker 1: a while, where we have a lot of like banks 20 00:01:12,480 --> 00:01:15,039 Speaker 1: and Energy Company is leading the way, and a lot 21 00:01:15,080 --> 00:01:18,399 Speaker 1: of the tech darlings for the last year, if not 22 00:01:18,600 --> 00:01:23,640 Speaker 1: the last decade, arguably pretty pretty severely underperforming. We're seeing 23 00:01:23,640 --> 00:01:27,320 Speaker 1: this commodity boom ongoing, something that we recently talked about 24 00:01:27,360 --> 00:01:32,520 Speaker 1: with Jeff Curry. We're seeing expectations continue to get ratcheted 25 00:01:32,600 --> 00:01:34,080 Speaker 1: up for what growth is going to look like in 26 00:01:35,000 --> 00:01:39,360 Speaker 1: one and maybe so we're definitely like at a turning point, 27 00:01:39,680 --> 00:01:42,600 Speaker 1: which makes a of some sorts, which makes a good 28 00:01:42,600 --> 00:01:47,199 Speaker 1: time to like take stock of the macro right now. Yeah, 29 00:01:47,240 --> 00:01:49,760 Speaker 1: And I guess whenever you have these big turning points 30 00:01:49,760 --> 00:01:52,320 Speaker 1: in markets, or when it feels maybe like you're seeing 31 00:01:52,320 --> 00:01:54,480 Speaker 1: a turning point in market, the question always comes up 32 00:01:54,520 --> 00:01:57,600 Speaker 1: about how you should actually position for it, And it 33 00:01:57,720 --> 00:02:01,560 Speaker 1: does seem in this particular environ ronament. I don't know 34 00:02:01,600 --> 00:02:03,800 Speaker 1: how you feel about it, but like I feel that 35 00:02:04,080 --> 00:02:07,960 Speaker 1: it's more difficult than normal, I guess because bonds are 36 00:02:07,960 --> 00:02:10,760 Speaker 1: selling off because people are positioning for growth, and at 37 00:02:10,800 --> 00:02:14,000 Speaker 1: the same time, all the stock market winners that we've 38 00:02:14,000 --> 00:02:16,360 Speaker 1: seen for the past couple of years are also selling off. 39 00:02:16,400 --> 00:02:18,519 Speaker 1: So I don't know, it feels a little bit tricky 40 00:02:18,560 --> 00:02:23,079 Speaker 1: at the moment. If if you're in charge of allocating assets, yeah, 41 00:02:23,160 --> 00:02:25,600 Speaker 1: I mean, you know, I think for the last for 42 00:02:25,639 --> 00:02:28,200 Speaker 1: a long time. You could have had a real like 43 00:02:28,240 --> 00:02:30,640 Speaker 1: sort of set it and forget it port portfolio, like 44 00:02:30,639 --> 00:02:32,679 Speaker 1: a sixty forty type thing, or we have a bunch 45 00:02:32,680 --> 00:02:35,959 Speaker 1: of stocks, you have a bunch of treasuries, and you 46 00:02:36,040 --> 00:02:38,440 Speaker 1: just don't worry about it. But a there's a lot 47 00:02:38,440 --> 00:02:40,959 Speaker 1: of talk that maybe the treasury component isn't gonna work 48 00:02:40,960 --> 00:02:45,040 Speaker 1: that well, especially in an environment that's reflationary, higher rates 49 00:02:45,600 --> 00:02:49,160 Speaker 1: that has impact on the stocks. So there is a 50 00:02:49,160 --> 00:02:52,120 Speaker 1: a broad reckoning, or at least questioning of whether a 51 00:02:52,160 --> 00:02:53,920 Speaker 1: lot of the strategies that have worked well for a 52 00:02:54,000 --> 00:02:56,960 Speaker 1: very long time, longer than a decade, really are just 53 00:02:57,000 --> 00:03:00,320 Speaker 1: going to continue to be so easy. M hm. Anyway, 54 00:03:00,600 --> 00:03:03,200 Speaker 1: the good news for us is that we're just journalists 55 00:03:03,760 --> 00:03:05,720 Speaker 1: and so we don't actually have to answer these questions 56 00:03:05,760 --> 00:03:07,760 Speaker 1: ourselves because it's not our job to get it right. 57 00:03:07,960 --> 00:03:11,600 Speaker 1: That's true. But our guest is very special episode today. 58 00:03:11,680 --> 00:03:14,360 Speaker 1: So our guest Nat only used to be a journalist, 59 00:03:14,720 --> 00:03:16,840 Speaker 1: but it actually used to work for me, and you're 60 00:03:16,880 --> 00:03:19,760 Speaker 1: tracing this episode makes me very happy because we're going 61 00:03:19,800 --> 00:03:22,680 Speaker 1: to have one of our old colleagues on and not 62 00:03:22,800 --> 00:03:25,840 Speaker 1: only was he an excellent journalist, but he's gone on 63 00:03:26,160 --> 00:03:29,960 Speaker 1: I think, to be an excellent strategist at a real bank. 64 00:03:30,000 --> 00:03:33,840 Speaker 1: And it's really nice when you see someone who has 65 00:03:34,320 --> 00:03:37,720 Speaker 1: who has expertise in markets, who sort of translates that 66 00:03:37,840 --> 00:03:41,400 Speaker 1: expertise into UH I guess something other than writing about it, 67 00:03:41,440 --> 00:03:44,960 Speaker 1: and actually takes an active role or position in it, 68 00:03:45,160 --> 00:03:49,400 Speaker 1: putting theory into practice. Right, So we just write about it, 69 00:03:49,480 --> 00:03:51,720 Speaker 1: we just talk about it. But our guest today used 70 00:03:51,720 --> 00:03:53,600 Speaker 1: to do that and now he actually has to make 71 00:03:53,640 --> 00:03:57,400 Speaker 1: these calls. So we're going to be speaking with Luke Kala, 72 00:03:57,560 --> 00:04:01,960 Speaker 1: our longtime colleague. He is UH asset allocation strategist at 73 00:04:02,120 --> 00:04:05,760 Speaker 1: UBS Asset Management. We references work a lot. We talked 74 00:04:05,760 --> 00:04:08,080 Speaker 1: about his business. We cover ones which will probably come 75 00:04:08,160 --> 00:04:11,600 Speaker 1: up today. Luke, thank you very much for joining us. Guys, 76 00:04:11,600 --> 00:04:14,560 Speaker 1: it's a it's my pleasure in the warm, fuzzy feelings 77 00:04:14,560 --> 00:04:18,560 Speaker 1: are very much mutual here. So is this a tough time, 78 00:04:19,120 --> 00:04:21,880 Speaker 1: like as Tracy set out, like, does this seem like 79 00:04:21,920 --> 00:04:26,560 Speaker 1: a particularly sort of tricky moment for thinking through problems 80 00:04:26,640 --> 00:04:30,760 Speaker 1: in the question of asset allocation? I mean, this is 81 00:04:30,800 --> 00:04:33,479 Speaker 1: the thing about uncertainty, right, It's always supposed to be 82 00:04:33,520 --> 00:04:36,760 Speaker 1: above average, but at the at the risk, at the 83 00:04:36,839 --> 00:04:39,000 Speaker 1: risk of you know, contradicting tracy, which I guess I'm 84 00:04:39,000 --> 00:04:41,840 Speaker 1: allowed to do now. It's uh, it almost seems that 85 00:04:41,960 --> 00:04:44,960 Speaker 1: one of the one of the more difficult parts right 86 00:04:45,000 --> 00:04:48,719 Speaker 1: now dealing with this environment is is letting it fully 87 00:04:48,880 --> 00:04:51,000 Speaker 1: play out. We know that we have, you know, some 88 00:04:51,080 --> 00:04:54,240 Speaker 1: incredible fiscal stimulus in the pipeline. We're pretty sure we 89 00:04:54,279 --> 00:04:58,280 Speaker 1: have you know, sustained monetary support over a reasonable enough 90 00:04:58,600 --> 00:05:02,600 Speaker 1: forecast horizon. So now it's a lot about just making 91 00:05:02,600 --> 00:05:05,680 Speaker 1: sure that you know, the fundamentals are still aligned with 92 00:05:05,680 --> 00:05:08,000 Speaker 1: with your thesis coming into this year and you know 93 00:05:08,080 --> 00:05:10,719 Speaker 1: so far, I think I think that's that's been the key. 94 00:05:10,760 --> 00:05:13,200 Speaker 1: And if you look at kind of the current environment 95 00:05:13,240 --> 00:05:15,520 Speaker 1: we're in, something that it reminds me of a lot, 96 00:05:15,640 --> 00:05:18,599 Speaker 1: not in macro implications, but in terms of just letting 97 00:05:18,640 --> 00:05:22,400 Speaker 1: it play out. Would be the kind of the oil 98 00:05:22,440 --> 00:05:25,600 Speaker 1: shock whose ramifications in terms of, you know, how what 99 00:05:25,640 --> 00:05:27,719 Speaker 1: it did to what it did for bond yields, what 100 00:05:27,760 --> 00:05:31,800 Speaker 1: it did for commodities generally commodity currencies, that that essentially 101 00:05:31,920 --> 00:05:34,760 Speaker 1: lasted for like an eighteen month period in which it 102 00:05:34,839 --> 00:05:38,800 Speaker 1: was a chief catalyst for performance across the board. Right now. 103 00:05:39,080 --> 00:05:42,320 Speaker 1: That's that's kind of how I'm envisioning the degree of 104 00:05:42,360 --> 00:05:45,240 Speaker 1: fiscal that's in the system right now, and the kind 105 00:05:45,279 --> 00:05:49,240 Speaker 1: of earnings rotation that's that it's supporting underlying underlying markets. 106 00:05:49,880 --> 00:05:52,200 Speaker 1: So I have a ton of questions just based on that. 107 00:05:52,279 --> 00:05:54,760 Speaker 1: But I think maybe to begin with, we have to 108 00:05:54,839 --> 00:05:57,600 Speaker 1: start with your or at least talk about it a 109 00:05:57,640 --> 00:06:00,880 Speaker 1: little bit, your transition to the real world, you know, 110 00:06:00,920 --> 00:06:04,880 Speaker 1: moving away from journalism actually putting what you write about 111 00:06:04,880 --> 00:06:09,080 Speaker 1: in practice, Like what made you want to do that 112 00:06:09,279 --> 00:06:13,320 Speaker 1: to start with? And obviously obviously you can avoid saying 113 00:06:13,560 --> 00:06:16,640 Speaker 1: bad things about Bloomberg, but you know, why were you 114 00:06:16,680 --> 00:06:21,680 Speaker 1: interested in making that switch? Yeah? And nothing, nothing but 115 00:06:22,080 --> 00:06:24,719 Speaker 1: nothing but love on my end for former and current 116 00:06:24,920 --> 00:06:28,040 Speaker 1: current employers on that front. But yeah, I think it 117 00:06:28,160 --> 00:06:31,120 Speaker 1: just there there was time in my in my career 118 00:06:31,160 --> 00:06:35,120 Speaker 1: where I wanted to definitely take a take a learning 119 00:06:35,160 --> 00:06:38,960 Speaker 1: step and you know, figure out whether kind of my 120 00:06:39,040 --> 00:06:41,760 Speaker 1: ideas and the way I thought about things could uh, 121 00:06:41,960 --> 00:06:44,680 Speaker 1: you know, could translate into the real world. But also 122 00:06:44,760 --> 00:06:47,120 Speaker 1: to uh, you know, to start fresh again and be 123 00:06:47,360 --> 00:06:50,200 Speaker 1: the definitely be the dumbest guy in the room. And 124 00:06:50,240 --> 00:06:52,640 Speaker 1: that's that's a position I I relish and I enjoy 125 00:06:52,680 --> 00:06:55,080 Speaker 1: and I'm in in every meeting i'm in. So just 126 00:06:55,240 --> 00:06:59,000 Speaker 1: the ability to really to learn to rewire my brain 127 00:06:59,560 --> 00:07:02,480 Speaker 1: and to you know, to solve problems on a on 128 00:07:02,520 --> 00:07:04,680 Speaker 1: a more prolonged basis, because I think, you know, one 129 00:07:04,720 --> 00:07:07,800 Speaker 1: of the things with with journalism that's fun and exciting 130 00:07:07,800 --> 00:07:09,440 Speaker 1: and what I what I loved about it when I 131 00:07:09,480 --> 00:07:11,800 Speaker 1: was doing it, is that when you when you go 132 00:07:11,880 --> 00:07:14,960 Speaker 1: in every day, you have really no clue what you're doing. 133 00:07:14,960 --> 00:07:17,760 Speaker 1: The market is going to dictate kind of what you're doing, 134 00:07:17,880 --> 00:07:20,640 Speaker 1: and you know whether whether you're covering commodities that day 135 00:07:20,760 --> 00:07:24,400 Speaker 1: or options or bonds, etcetera, etcetera. I do like the 136 00:07:24,440 --> 00:07:27,160 Speaker 1: idea of of a little more structure and working to 137 00:07:27,240 --> 00:07:30,120 Speaker 1: solve problems where you know, the half life and the 138 00:07:30,120 --> 00:07:32,720 Speaker 1: payoff period is going to be longer than that one 139 00:07:32,760 --> 00:07:34,640 Speaker 1: day where we're going to have some stay in power, 140 00:07:34,960 --> 00:07:38,200 Speaker 1: we're going to be building results for for our clients 141 00:07:38,240 --> 00:07:41,360 Speaker 1: together over a prolonged period of time. So that's something 142 00:07:41,440 --> 00:07:43,680 Speaker 1: that really appealed to me. And you know, I love 143 00:07:43,760 --> 00:07:45,560 Speaker 1: the people I worked with when I was at Bloomberg 144 00:07:45,600 --> 00:07:49,200 Speaker 1: and I love the team I'm on here. So talk 145 00:07:49,280 --> 00:07:52,000 Speaker 1: through a little bit more the process. I mean, it's 146 00:07:52,040 --> 00:07:54,640 Speaker 1: one thing to like have calls, right, It's like, okay, 147 00:07:54,720 --> 00:07:57,520 Speaker 1: rates are going to rise or commodities are going to 148 00:07:57,560 --> 00:08:01,440 Speaker 1: continue to rally or whatever. Butbviously to make a call 149 00:08:01,560 --> 00:08:03,400 Speaker 1: like that, you have to have some sort of like 150 00:08:03,520 --> 00:08:06,400 Speaker 1: deeper you know, something has to proceed that some sort 151 00:08:06,440 --> 00:08:11,560 Speaker 1: of like process for incorporating new information into a call. 152 00:08:11,960 --> 00:08:15,360 Speaker 1: Talk to us about how you and your colleagues begin 153 00:08:15,520 --> 00:08:19,640 Speaker 1: to think through these problems translating inputs and the markets 154 00:08:19,800 --> 00:08:23,240 Speaker 1: in the economy and policy and turning them into the 155 00:08:23,320 --> 00:08:28,680 Speaker 1: question of um, you know, decisions on asset allocation. Basically yes. 156 00:08:28,760 --> 00:08:31,280 Speaker 1: So I think there's a really actually good tie into 157 00:08:31,680 --> 00:08:35,000 Speaker 1: journalism here because I think, Bloomberg, the interview question you're 158 00:08:35,040 --> 00:08:36,880 Speaker 1: always asked, I think there is one of the most 159 00:08:36,880 --> 00:08:39,920 Speaker 1: important things as a journalist, and it's accuracy and accuracy 160 00:08:39,960 --> 00:08:41,839 Speaker 1: are the two most important because I think what you're 161 00:08:41,840 --> 00:08:44,520 Speaker 1: supposed to answer, and then when it when it comes 162 00:08:44,520 --> 00:08:47,719 Speaker 1: to investing, I think the the answer there would be 163 00:08:48,080 --> 00:08:52,240 Speaker 1: accuracy and asymmetry. So essentially what we're trying to doing 164 00:08:52,400 --> 00:08:57,440 Speaker 1: is is trying to identify convex opportunities that are based 165 00:08:57,480 --> 00:09:01,560 Speaker 1: on underlying macro themes we expect to play out. Now, 166 00:09:02,080 --> 00:09:05,440 Speaker 1: what is something that provides, you know, the convexity or 167 00:09:05,440 --> 00:09:09,319 Speaker 1: the outsized return or the the best expression of a thesis, 168 00:09:09,679 --> 00:09:13,000 Speaker 1: so to speak. It's probably going to be a combination 169 00:09:13,160 --> 00:09:17,760 Speaker 1: of both valuation and catalyst. So it's it's really working, 170 00:09:18,080 --> 00:09:22,760 Speaker 1: working through and doing doing the work to identify assets 171 00:09:22,800 --> 00:09:26,040 Speaker 1: that do appear undervalued and that we do believe have 172 00:09:26,200 --> 00:09:30,080 Speaker 1: like a reasonable macro case to expect these valuation gaps 173 00:09:30,120 --> 00:09:33,640 Speaker 1: to remedy based on an improvement in the underlying fundamentals. 174 00:09:33,760 --> 00:09:36,480 Speaker 1: And I think that's key. It's not just hoping that 175 00:09:36,520 --> 00:09:39,600 Speaker 1: this valuation gap will close if you have that, but 176 00:09:39,679 --> 00:09:42,800 Speaker 1: you don't have the here's how part, And that's what 177 00:09:42,880 --> 00:09:45,240 Speaker 1: we spend a lot of our time doing. It's easy too, 178 00:09:45,280 --> 00:09:47,480 Speaker 1: It's easy to kind of identify and just know where 179 00:09:47,480 --> 00:09:50,680 Speaker 1: the valuation gaps are. How you avoid value traps is 180 00:09:50,720 --> 00:09:53,800 Speaker 1: really finding that catalyst and making sure it will be 181 00:09:53,880 --> 00:09:56,880 Speaker 1: there within a reasonable period of time, so you have 182 00:09:57,000 --> 00:09:59,680 Speaker 1: your your mergence safety built on valuation, and you have 183 00:09:59,679 --> 00:10:04,400 Speaker 1: your the list that provides for meaningful upside exposure. The 184 00:10:04,480 --> 00:10:07,800 Speaker 1: catalyst point is interesting because I always thought that this 185 00:10:07,880 --> 00:10:10,360 Speaker 1: is probably one of the things that I I would 186 00:10:10,360 --> 00:10:13,720 Speaker 1: certainly struggle with if I made the switch. You know, 187 00:10:13,760 --> 00:10:16,960 Speaker 1: it's one thing to write you think rates are too 188 00:10:17,000 --> 00:10:19,880 Speaker 1: low or the dollar is miss priced or something, but 189 00:10:19,960 --> 00:10:22,079 Speaker 1: it's a whole other thing to actually come up with 190 00:10:22,160 --> 00:10:27,040 Speaker 1: an actionable trade based on that idea. And the other 191 00:10:27,080 --> 00:10:29,520 Speaker 1: thing I've been thinking about is you could argue that, 192 00:10:29,800 --> 00:10:33,080 Speaker 1: you know, markets get stuff wrong. Um, although I guess 193 00:10:33,080 --> 00:10:34,760 Speaker 1: some people would take issue with that, but you could 194 00:10:34,840 --> 00:10:38,400 Speaker 1: argue that markets, you know, stay irrational longer they then 195 00:10:38,440 --> 00:10:41,600 Speaker 1: you can say, solvent things like that. That's probably why 196 00:10:41,600 --> 00:10:44,560 Speaker 1: the catalysts becomes so important. But how do you sort 197 00:10:44,600 --> 00:10:48,520 Speaker 1: of deal with that aspect of it. Especially in recent 198 00:10:48,800 --> 00:10:53,199 Speaker 1: months or years, we have seen this frothiness in markets 199 00:10:53,240 --> 00:10:56,320 Speaker 1: and you can say that valuations are way too high, 200 00:10:56,640 --> 00:10:59,720 Speaker 1: but they can just keep going up and up and 201 00:10:59,800 --> 00:11:04,080 Speaker 1: up without you know, a catalyst on the horizon. I 202 00:11:04,080 --> 00:11:06,720 Speaker 1: think this is something that plays in very well to 203 00:11:06,880 --> 00:11:09,440 Speaker 1: the kind of the the biggest debate that you alluded 204 00:11:09,480 --> 00:11:12,040 Speaker 1: to and the in the preamble, which is essentially the 205 00:11:12,280 --> 00:11:15,400 Speaker 1: growth versus value trade right now, because I think that 206 00:11:15,600 --> 00:11:18,199 Speaker 1: you know that essentially is a good parallel for for 207 00:11:18,480 --> 00:11:21,520 Speaker 1: you know, what underlies your question there, and for the 208 00:11:21,600 --> 00:11:24,160 Speaker 1: longest time you could say, well, you know, these these 209 00:11:24,240 --> 00:11:26,640 Speaker 1: valuations are getting to the most stretched since the dot 210 00:11:26,640 --> 00:11:29,679 Speaker 1: com bubble, totera, etcetera. At certain point this is going 211 00:11:29,720 --> 00:11:33,199 Speaker 1: to snap back the situation we have here, and people 212 00:11:33,240 --> 00:11:36,240 Speaker 1: can people can point to the rates market as a 213 00:11:36,320 --> 00:11:38,920 Speaker 1: you know, as a catalyst for this rotation or as 214 00:11:38,960 --> 00:11:42,200 Speaker 1: accentuating this rotation. When you really look at this under 215 00:11:42,200 --> 00:11:45,280 Speaker 1: the hood, it's it's just the fact that the earnings 216 00:11:45,480 --> 00:11:48,280 Speaker 1: the bottom line for value stocks are expected to grow 217 00:11:48,280 --> 00:11:50,520 Speaker 1: at a faster pace than growth stocks for the first 218 00:11:50,559 --> 00:11:53,120 Speaker 1: time in quite quite a while. So if you look 219 00:11:53,160 --> 00:11:56,720 Speaker 1: at finally getting the catalyst to realize some of that 220 00:11:57,200 --> 00:11:59,360 Speaker 1: some of that out performance, and that's you know, that's 221 00:11:59,440 --> 00:12:03,720 Speaker 1: unlocked byvaccinations, that's unlocked by fiscal stimulus. So right now, I, 222 00:12:04,120 --> 00:12:06,599 Speaker 1: you know, I I view that as much more fundamental 223 00:12:06,960 --> 00:12:11,439 Speaker 1: to the cause of value versus growth performance. Then then 224 00:12:11,480 --> 00:12:13,680 Speaker 1: the rates market. If you're going to run like correlations 225 00:12:13,720 --> 00:12:18,040 Speaker 1: for three month rolling performance of NASDAC versus SMP five 226 00:12:18,280 --> 00:12:21,079 Speaker 1: D versus the movement and tenure rates or real rates, 227 00:12:21,280 --> 00:12:25,120 Speaker 1: you're not going to get incredibly strong signals. That's it's 228 00:12:25,120 --> 00:12:28,400 Speaker 1: a bit of a a quasi myth. So it's it's 229 00:12:28,440 --> 00:12:31,320 Speaker 1: really looking into what's been driving the out performance. Is 230 00:12:31,320 --> 00:12:33,760 Speaker 1: it the earnings growth? And do we expect that's reversed? 231 00:12:33,760 --> 00:12:36,480 Speaker 1: And that's that's our view that based on just the 232 00:12:36,480 --> 00:12:38,679 Speaker 1: the amount of physcal stimulus in this in the system, 233 00:12:39,000 --> 00:12:43,400 Speaker 1: given vaccinations, laying the groundwork for return to economic normality, 234 00:12:43,720 --> 00:12:46,559 Speaker 1: that that's going to happen. And so that's the that's 235 00:12:46,559 --> 00:12:49,080 Speaker 1: the kind of scenario that I'm talking about. Just letting 236 00:12:49,080 --> 00:12:51,880 Speaker 1: it play out because the earnings in this case are 237 00:12:51,960 --> 00:12:55,560 Speaker 1: the catalyst, and you come late this year midpoint of 238 00:12:55,600 --> 00:12:59,040 Speaker 1: this year, we'll be talking about, Okay, how can this 239 00:12:59,120 --> 00:13:01,760 Speaker 1: be sustained? Do we have the policy action to sustain this? 240 00:13:02,320 --> 00:13:04,440 Speaker 1: Or are we going to migrate back into the into 241 00:13:04,480 --> 00:13:06,760 Speaker 1: the regime we have before? And that's when you you 242 00:13:06,800 --> 00:13:10,160 Speaker 1: return to monitoring your policy milestones and how do you 243 00:13:10,200 --> 00:13:12,400 Speaker 1: know attempt to attempt to you discern the tea leaves here. 244 00:13:13,320 --> 00:13:16,880 Speaker 1: I mean you you basically anticipated my next question, so 245 00:13:18,600 --> 00:13:22,920 Speaker 1: expected to be blistering fast growth. I mean we might 246 00:13:22,920 --> 00:13:25,680 Speaker 1: get I think I've seen estimates for like potential GDP 247 00:13:25,800 --> 00:13:27,760 Speaker 1: growth of like eight percent for the year. It's like 248 00:13:27,840 --> 00:13:31,160 Speaker 1: going to be something nuts because the reopening, the vaccine, 249 00:13:31,640 --> 00:13:34,480 Speaker 1: the stimulus. I think two will probably have some of 250 00:13:34,520 --> 00:13:37,440 Speaker 1: that and also be pretty decent. But then there's a 251 00:13:37,520 --> 00:13:42,120 Speaker 1: question about what's next. So how do you start thinking about, 252 00:13:42,160 --> 00:13:44,920 Speaker 1: as you say, those policy milestones and the degree to 253 00:13:45,040 --> 00:13:48,280 Speaker 1: which they'll sort of like continue to affect the like 254 00:13:48,800 --> 00:13:51,920 Speaker 1: what's next? The weather value continues to outperform what do 255 00:13:52,000 --> 00:13:53,920 Speaker 1: you like getting? What do you what are you gonna 256 00:13:53,920 --> 00:13:56,000 Speaker 1: be thinking about? Thinking ahead? What are you gonna be 257 00:13:56,000 --> 00:13:58,240 Speaker 1: thinking about for the end of In terms of that 258 00:13:58,320 --> 00:14:01,080 Speaker 1: what's next? I think the important part is not to 259 00:14:01,320 --> 00:14:03,320 Speaker 1: not to think ahead too much, not to not to 260 00:14:03,400 --> 00:14:07,200 Speaker 1: think too fast, like the kind of the the biggest 261 00:14:07,480 --> 00:14:09,839 Speaker 1: mistake that could be made in the in the coming 262 00:14:09,920 --> 00:14:14,240 Speaker 1: months is essentially saying, okay, we've had peak policy support, 263 00:14:15,000 --> 00:14:17,160 Speaker 1: what's next to the kind of the kind of show 264 00:14:17,200 --> 00:14:19,400 Speaker 1: me story and using that as a reason to get 265 00:14:19,480 --> 00:14:22,080 Speaker 1: you know, bearish when you know, we know it's a 266 00:14:22,080 --> 00:14:25,480 Speaker 1: it's a popular to quote another of our former colleague, 267 00:14:25,480 --> 00:14:28,640 Speaker 1: samro you know stocks usually go up, that's the that's 268 00:14:28,640 --> 00:14:33,000 Speaker 1: the thing. So I think importantly kind of anchoring, anchoring 269 00:14:33,080 --> 00:14:35,400 Speaker 1: on that and realizing that, you know, as long as 270 00:14:35,440 --> 00:14:38,200 Speaker 1: we're still expected to get earnings growth. It's just you know, 271 00:14:38,200 --> 00:14:40,480 Speaker 1: a matter of making sure you're on the right side 272 00:14:40,480 --> 00:14:42,760 Speaker 1: of the rotation. But in terms of things to watch, 273 00:14:43,320 --> 00:14:47,320 Speaker 1: I think an encouraging development lately has been the degree 274 00:14:47,320 --> 00:14:51,840 Speaker 1: of Chinese policy support that hasn't really contracted as significantly 275 00:14:52,320 --> 00:14:54,680 Speaker 1: as you know some may have feared coming into the year. 276 00:14:54,720 --> 00:14:58,640 Speaker 1: That's that's removed a pretty pretty key downside risk. A 277 00:14:58,720 --> 00:15:03,000 Speaker 1: second would be the the continuation of US fiscal support, 278 00:15:03,080 --> 00:15:06,760 Speaker 1: not only through the anticipated infrastructure bill that we know 279 00:15:07,280 --> 00:15:09,760 Speaker 1: then Congress will begin to work on soon and hash 280 00:15:09,800 --> 00:15:12,120 Speaker 1: out over the course of the year, but also whether 281 00:15:12,240 --> 00:15:15,440 Speaker 1: some of the provisions and the most recently past one 282 00:15:15,440 --> 00:15:19,360 Speaker 1: point nine trillion stimulus are actually extended and made more permanent. 283 00:15:19,680 --> 00:15:22,040 Speaker 1: Those kind of things they do add up, and they 284 00:15:22,120 --> 00:15:24,480 Speaker 1: just do show that the policy boat is you know, 285 00:15:24,520 --> 00:15:27,680 Speaker 1: continuing to move in the right direction, and that that 286 00:15:27,760 --> 00:15:31,280 Speaker 1: allows kind of the more cyclical traits to continue to 287 00:15:31,320 --> 00:15:51,280 Speaker 1: have the wind at their back. Um, you mentioned China there, 288 00:15:51,320 --> 00:15:53,880 Speaker 1: and I do want to get into that, but before 289 00:15:53,880 --> 00:15:56,240 Speaker 1: we do, maybe maybe if I just ask the bonds question, 290 00:15:56,320 --> 00:15:59,080 Speaker 1: that would be a good segue into it. We're talking 291 00:15:59,120 --> 00:16:02,920 Speaker 1: about how stocks in the long run tend to go up. 292 00:16:02,960 --> 00:16:06,440 Speaker 1: But I'm curious how you feel about bonds at the 293 00:16:06,520 --> 00:16:09,440 Speaker 1: moment because I imagine, you know, if you're in the 294 00:16:09,480 --> 00:16:13,720 Speaker 1: business of asset allocation, I just don't think selling you know, 295 00:16:13,840 --> 00:16:17,400 Speaker 1: a big position in US treasuries is that um, I 296 00:16:17,400 --> 00:16:19,800 Speaker 1: don't know, it can't get people that excited at the moment, 297 00:16:19,920 --> 00:16:22,800 Speaker 1: right like it, It doesn't really it doesn't really work 298 00:16:22,880 --> 00:16:26,160 Speaker 1: to um to offset losses in stocks anymore, or at 299 00:16:26,240 --> 00:16:29,240 Speaker 1: least it hasn't this year. The yields are incredibly low. 300 00:16:29,520 --> 00:16:32,600 Speaker 1: It's just very very hard to see the attraction in 301 00:16:33,000 --> 00:16:36,840 Speaker 1: US debt at the moment. So how are you feeling 302 00:16:37,360 --> 00:16:42,840 Speaker 1: about the role of you know, US treasuries in a portfolio. Well, 303 00:16:42,880 --> 00:16:46,520 Speaker 1: I think bonds full stop, do still playing an important 304 00:16:46,600 --> 00:16:50,560 Speaker 1: role in portfolios in US treasuries due to like think 305 00:16:50,600 --> 00:16:53,720 Speaker 1: think about the nature of the quote unquote shock and 306 00:16:53,760 --> 00:16:56,760 Speaker 1: I'm using air quotes on that because we're still pretty 307 00:16:56,840 --> 00:16:59,840 Speaker 1: much even at all time highs after this this rate shock. 308 00:17:00,520 --> 00:17:02,520 Speaker 1: And it's the thing about bonds is that they aren't 309 00:17:02,560 --> 00:17:05,080 Speaker 1: intended to touch the shock. They're intended to hedge the 310 00:17:05,240 --> 00:17:08,159 Speaker 1: downside shock to growth. And that's something that you know, 311 00:17:08,200 --> 00:17:10,960 Speaker 1: we were we were able to to overcome and deal 312 00:17:11,000 --> 00:17:15,240 Speaker 1: with last year in bonds. You performed pretty well throughout 313 00:17:15,240 --> 00:17:18,160 Speaker 1: that I think you can say, especially after the liquidity 314 00:17:18,520 --> 00:17:21,880 Speaker 1: crisis stages of the of the COVID chuck has passed. 315 00:17:21,920 --> 00:17:24,359 Speaker 1: But right now, from from our point of view at 316 00:17:24,520 --> 00:17:28,760 Speaker 1: GUBS were under we're underweight global duration, and that's just 317 00:17:29,320 --> 00:17:32,720 Speaker 1: based on the view that we're getting we're getting a recovery, 318 00:17:32,720 --> 00:17:36,879 Speaker 1: and bond yields haven't fully priced in the magnitude of 319 00:17:36,920 --> 00:17:39,800 Speaker 1: the recovery or the about or the amount of growth 320 00:17:39,840 --> 00:17:42,520 Speaker 1: we're about to get that's in the pipeline. But you know, 321 00:17:42,920 --> 00:17:46,560 Speaker 1: being underweight bonds doesn't mean kind of abandoning them completely. 322 00:17:46,920 --> 00:17:49,320 Speaker 1: So that's that's the kind of the rule we see 323 00:17:49,359 --> 00:17:51,480 Speaker 1: that the give and take. It's certainly not a time 324 00:17:51,920 --> 00:17:54,439 Speaker 1: in our view to be to be overweighting bonds. We 325 00:17:54,520 --> 00:17:58,480 Speaker 1: prefer equities to bonds, we prefer credit to bonds. So 326 00:17:58,560 --> 00:18:00,600 Speaker 1: that's that kind of gives you a sense of of 327 00:18:00,640 --> 00:18:04,479 Speaker 1: where we are positionally. So just on the idea of 328 00:18:04,600 --> 00:18:07,960 Speaker 1: bonds as a diversification play, and the fact that you 329 00:18:08,000 --> 00:18:12,560 Speaker 1: mentioned the Chinese economic performance recently and the fact that 330 00:18:13,359 --> 00:18:16,960 Speaker 1: monetary policy hasn't been as tight as maybe some people 331 00:18:17,119 --> 00:18:20,080 Speaker 1: were worried that it could be. How do you see 332 00:18:20,160 --> 00:18:22,760 Speaker 1: Chinese bonds at the moment, because I got to say, like, 333 00:18:22,800 --> 00:18:25,600 Speaker 1: one of the things that we've been watching out here 334 00:18:25,840 --> 00:18:30,200 Speaker 1: um in Asia is the enormous inflows that we've seen 335 00:18:30,320 --> 00:18:35,159 Speaker 1: into Chinese government debt in and one like, it's just 336 00:18:35,200 --> 00:18:40,920 Speaker 1: such a step change in China's position in investment portfolios 337 00:18:40,960 --> 00:18:43,879 Speaker 1: and also in the global financial system because it's getting 338 00:18:43,960 --> 00:18:46,560 Speaker 1: very close to moving from an exporter of capital to 339 00:18:46,640 --> 00:18:50,120 Speaker 1: an importer of capital, and that's just really interesting to see. 340 00:18:50,160 --> 00:18:56,080 Speaker 1: So I'm curious from an investment strategy perspective, what's going 341 00:18:56,080 --> 00:18:58,720 Speaker 1: on with Chinese debt, Like what is the attraction right now? 342 00:18:59,560 --> 00:19:02,160 Speaker 1: So I think the attraction starts with just the most 343 00:19:02,200 --> 00:19:05,720 Speaker 1: simple component, and that's that's the yield premium relative to 344 00:19:05,800 --> 00:19:08,280 Speaker 1: the rest of the world. So essentially, coming into this 345 00:19:08,600 --> 00:19:10,560 Speaker 1: coming into this year, you had you know, the Chinese 346 00:19:10,560 --> 00:19:13,960 Speaker 1: tenure at a near record premium two G three yields, 347 00:19:14,000 --> 00:19:17,040 Speaker 1: So that that in itself is going to drive attention, 348 00:19:17,119 --> 00:19:20,639 Speaker 1: especially with central banks signaling at the time that you know, 349 00:19:20,680 --> 00:19:23,720 Speaker 1: we nobody was anticipating the kind of the results we 350 00:19:23,800 --> 00:19:26,280 Speaker 1: got in Georgia or for yields to move the way 351 00:19:26,320 --> 00:19:28,280 Speaker 1: they had. So that's something that just off the hop 352 00:19:28,680 --> 00:19:32,119 Speaker 1: is going to naturally lead people to gravitate towards a 353 00:19:32,160 --> 00:19:35,440 Speaker 1: you know, a higher yielding solution. But I think a 354 00:19:36,160 --> 00:19:38,760 Speaker 1: deeper part of this, and this is something that it's 355 00:19:38,760 --> 00:19:40,760 Speaker 1: part of a collection that me and my colleagues have 356 00:19:40,840 --> 00:19:44,520 Speaker 1: written called Upgrade Draft Allocation. And the second paper in 357 00:19:44,520 --> 00:19:48,560 Speaker 1: this series deals with enhancing diversification in the context of 358 00:19:48,600 --> 00:19:50,960 Speaker 1: a low yield world. So how are you going to 359 00:19:51,080 --> 00:19:54,160 Speaker 1: make sure portfolios are are well buffered in an environment 360 00:19:54,480 --> 00:19:57,359 Speaker 1: where bonds might be at an effective lower bound? Which 361 00:19:57,960 --> 00:20:00,119 Speaker 1: still an interesting part of the COVID chuck is that 362 00:20:00,200 --> 00:20:02,960 Speaker 1: no central bank took rates more negative to deal from it. 363 00:20:03,040 --> 00:20:05,639 Speaker 1: So it seems like, you know, the appreciation of that 364 00:20:05,720 --> 00:20:09,400 Speaker 1: policy tool might might be might be fading in its 365 00:20:09,640 --> 00:20:12,040 Speaker 1: in its role going forward. And so when we looked 366 00:20:12,040 --> 00:20:15,200 Speaker 1: across the spectrum of different different fixed and co instruments, 367 00:20:15,280 --> 00:20:18,879 Speaker 1: we just believe that Chinese bonds, because the yield premium 368 00:20:18,920 --> 00:20:22,320 Speaker 1: and because of the the economic maturity, the People's Bank 369 00:20:22,359 --> 00:20:25,120 Speaker 1: of China has now a reasonable history of being able 370 00:20:25,160 --> 00:20:29,399 Speaker 1: to move move countercyclically, so you know, enable to you 371 00:20:29,440 --> 00:20:32,680 Speaker 1: know ease when conditions are bad and tighten when conditions 372 00:20:32,680 --> 00:20:36,280 Speaker 1: are getting better. That kind of supports the stock bond 373 00:20:36,280 --> 00:20:38,800 Speaker 1: correlation you would like to see and helps you have 374 00:20:38,920 --> 00:20:41,280 Speaker 1: faith that it will be there in the future. But 375 00:20:41,480 --> 00:20:43,760 Speaker 1: I think what's more important is what Tracy just mentioned. 376 00:20:44,040 --> 00:20:47,200 Speaker 1: The fact that Chinese bonds are getting all of these 377 00:20:47,240 --> 00:20:50,160 Speaker 1: inflows and receiving all of this uh, you know, all 378 00:20:50,200 --> 00:20:54,320 Speaker 1: this more institutional adoption and appreciation is something that itself 379 00:20:54,320 --> 00:20:58,639 Speaker 1: will perpetuate and kind of reinforce this, this negative correlation 380 00:20:59,040 --> 00:21:02,560 Speaker 1: between between stocks and Chinese bonds in particular because if 381 00:21:02,560 --> 00:21:04,359 Speaker 1: you look at also the you know, if you go 382 00:21:04,440 --> 00:21:07,480 Speaker 1: through the growth shocks or the you know, any reasonable 383 00:21:07,520 --> 00:21:10,679 Speaker 1: pullbacks we've had in the past few years, it's you know, 384 00:21:10,760 --> 00:21:15,919 Speaker 1: China and sixteen China divil. Obviously, Chinese component yields go 385 00:21:16,000 --> 00:21:19,600 Speaker 1: down during this, and global stocks go down earlyen the 386 00:21:19,760 --> 00:21:23,200 Speaker 1: you know, the Valmageddon experience not clearly not a China matter, 387 00:21:23,280 --> 00:21:28,560 Speaker 1: but yields down materially to fen not really a China story. 388 00:21:28,880 --> 00:21:31,239 Speaker 1: You can argue it might be about trade, maybe not, 389 00:21:31,359 --> 00:21:34,399 Speaker 1: but yields down a lot during that, and COVID is 390 00:21:34,600 --> 00:21:37,679 Speaker 1: certainly a story that China was first into from an 391 00:21:37,680 --> 00:21:41,879 Speaker 1: economic and risk market perspective, and yes, yields down. So 392 00:21:41,920 --> 00:21:45,200 Speaker 1: if you're trying to tell any story about the global 393 00:21:45,240 --> 00:21:48,680 Speaker 1: economy and you know macroeconomic cycles and ebbs and flows, 394 00:21:48,880 --> 00:21:51,119 Speaker 1: it's very likely that China is going to be a 395 00:21:51,119 --> 00:21:53,439 Speaker 1: mover and shaker in that story. So it's you know, 396 00:21:53,520 --> 00:21:56,840 Speaker 1: it's very likely that beyond the yield premium of the offer, 397 00:21:57,119 --> 00:22:00,760 Speaker 1: that the negative correlation will still be there. That's super interesting. 398 00:22:00,920 --> 00:22:03,639 Speaker 1: So you mentioned something early on in that answer I 399 00:22:03,680 --> 00:22:05,560 Speaker 1: want to go back to, which is we didn't see 400 00:22:05,600 --> 00:22:09,400 Speaker 1: any major central banks go deep into negative rates during 401 00:22:09,560 --> 00:22:12,680 Speaker 1: this crisis um And what we have seen, at least 402 00:22:12,720 --> 00:22:15,560 Speaker 1: in the US context is that, you know, in lieu 403 00:22:15,880 --> 00:22:19,119 Speaker 1: of perhaps more monetary using, we've had this something of 404 00:22:19,160 --> 00:22:21,840 Speaker 1: a handoff to fiscal that people have been talking about 405 00:22:21,880 --> 00:22:25,000 Speaker 1: for a long time. A our negative rates as a 406 00:22:25,000 --> 00:22:28,639 Speaker 1: policy tool likely done like sort of discredited or not 407 00:22:28,720 --> 00:22:32,760 Speaker 1: likely to be pursued again. And be more broadly, does 408 00:22:32,800 --> 00:22:35,879 Speaker 1: it change the business of asset allocation to think about 409 00:22:35,880 --> 00:22:40,040 Speaker 1: a world in which there is this policy asymmetry and 410 00:22:40,359 --> 00:22:44,359 Speaker 1: we're more likely to get um a fiscal impulse as 411 00:22:44,400 --> 00:22:47,680 Speaker 1: opposed to just a monetary one. When there's a downturn. 412 00:22:49,240 --> 00:22:51,560 Speaker 1: So on the on the negative rates question, I guess 413 00:22:51,680 --> 00:22:54,480 Speaker 1: I mean, the the only thing that keeps me from, 414 00:22:54,680 --> 00:22:57,360 Speaker 1: you know, in my view saying that it's definitely going 415 00:22:57,400 --> 00:22:59,640 Speaker 1: the way of the wooly mammoth is the Bank of England. 416 00:23:00,200 --> 00:23:01,640 Speaker 1: That would be kind of the only thing that gives 417 00:23:01,720 --> 00:23:03,520 Speaker 1: me gives me pause, because they do seem to be 418 00:23:03,520 --> 00:23:07,120 Speaker 1: at least laying the groundwork in the financial system to 419 00:23:07,240 --> 00:23:10,200 Speaker 1: do that if needed. And it's a it's a real consideration, 420 00:23:10,280 --> 00:23:12,000 Speaker 1: but that could also be part of the you know, 421 00:23:12,160 --> 00:23:16,040 Speaker 1: the Ben Bernanke constructive ambiguity when it comes to negative rates, 422 00:23:16,080 --> 00:23:18,840 Speaker 1: even talking about them is a is a form beforeward 423 00:23:18,840 --> 00:23:20,879 Speaker 1: guidance set can kind of help keep the front of 424 00:23:20,880 --> 00:23:24,439 Speaker 1: the curve well anchored and and well behaved when it 425 00:23:24,480 --> 00:23:27,920 Speaker 1: when it comes to the policy asymmetry point, I think 426 00:23:27,920 --> 00:23:31,639 Speaker 1: it's I think it plays out in two important ways. 427 00:23:31,760 --> 00:23:36,280 Speaker 1: One is, again, you reasonably might not be able to 428 00:23:36,320 --> 00:23:39,560 Speaker 1: expect to bonds to deliver the same degree of performance 429 00:23:40,119 --> 00:23:42,320 Speaker 1: during risk off that they have in the past just 430 00:23:42,359 --> 00:23:44,879 Speaker 1: because of the lower starting point. So that's that's a 431 00:23:44,920 --> 00:23:48,439 Speaker 1: mathematical kind of construct there. When you move to the 432 00:23:48,480 --> 00:23:51,919 Speaker 1: handoff to fiscal I think that that's where it moves 433 00:23:51,960 --> 00:23:56,360 Speaker 1: more into the realm of equity rotation and equity risk premium. 434 00:23:56,800 --> 00:23:59,480 Speaker 1: So if we're if we're moving into into an environment 435 00:23:59,520 --> 00:24:03,960 Speaker 1: where policymakers have say, hey, we've discovered the real solution 436 00:24:04,000 --> 00:24:07,720 Speaker 1: to counter cyclical policy. It's it's giving people money, it's 437 00:24:08,040 --> 00:24:12,720 Speaker 1: giving businesses money. It's making sure that liquidity crisis don't 438 00:24:12,760 --> 00:24:15,800 Speaker 1: moll morph into solvency crisis. And actually we do that 439 00:24:15,920 --> 00:24:18,480 Speaker 1: role better than central banks do it. We're going to 440 00:24:18,520 --> 00:24:22,359 Speaker 1: continue this playbook going forward. What does that do to 441 00:24:22,480 --> 00:24:26,480 Speaker 1: the cyclicality of earnings for cyclical companies? And in my view, 442 00:24:26,480 --> 00:24:28,800 Speaker 1: this is something that would make them less cyclical if 443 00:24:28,800 --> 00:24:32,600 Speaker 1: we're going to constantly underrate the business cycle using fiscal policy. 444 00:24:33,000 --> 00:24:36,000 Speaker 1: So the valuation gap that we talked about earlier between 445 00:24:36,080 --> 00:24:38,360 Speaker 1: value and growth, if you also, you know, kind of 446 00:24:38,520 --> 00:24:42,560 Speaker 1: just reframe that as cyclical versus defensive. If you're less 447 00:24:42,560 --> 00:24:45,920 Speaker 1: worried about the cyclicality of earnings for cyclical companies because 448 00:24:45,920 --> 00:24:49,399 Speaker 1: of fiscal policy taking a more muscular role, that's something 449 00:24:49,480 --> 00:24:52,159 Speaker 1: that can act as a conduit to over time that 450 00:24:52,280 --> 00:24:56,120 Speaker 1: valuation discrepancy narrowing. Sorry, So just on that point. I mean, 451 00:24:56,800 --> 00:25:00,880 Speaker 1: you mentioned the nineteen seventies oil crisis, So I'm just curious, 452 00:25:01,000 --> 00:25:06,200 Speaker 1: as the shift from monetary policy to fiscal stimulus gets underway, 453 00:25:06,320 --> 00:25:09,600 Speaker 1: how are you thinking about This is such an obvious question, 454 00:25:09,600 --> 00:25:14,760 Speaker 1: but how are you thinking about inflation? There's inflation is 455 00:25:14,760 --> 00:25:17,080 Speaker 1: a show me story still, right, Like the FED has 456 00:25:17,280 --> 00:25:21,680 Speaker 1: essentially told us that inflation is not is not something 457 00:25:21,720 --> 00:25:24,400 Speaker 1: they're going to react to. It's uh, you know the FED, 458 00:25:24,720 --> 00:25:29,760 Speaker 1: Jerome Powell is Fed Ben Berniki looking through inflation, not 459 00:25:29,840 --> 00:25:33,360 Speaker 1: the Fed of kind of you know, preemptive setting off 460 00:25:33,359 --> 00:25:37,440 Speaker 1: a taper tantrum. So that's so the reactivity of financial 461 00:25:37,480 --> 00:25:41,200 Speaker 1: markets too near term inflation outcomes. I think we've been 462 00:25:41,359 --> 00:25:43,439 Speaker 1: we've been well prepared for that, and you see that 463 00:25:43,560 --> 00:25:47,359 Speaker 1: already in the the backup in yields we've had looking 464 00:25:47,400 --> 00:25:49,399 Speaker 1: forward over a long period of time. And I know 465 00:25:49,640 --> 00:25:52,359 Speaker 1: Joe loves to post charts of essentially a bunch of 466 00:25:52,359 --> 00:25:55,720 Speaker 1: core inflation measures that are just hanging out close to 467 00:25:55,880 --> 00:25:59,719 Speaker 1: but not above two. So that's the history we're fighting. 468 00:26:00,040 --> 00:26:02,239 Speaker 1: But that was a history that we had in the 469 00:26:02,280 --> 00:26:05,600 Speaker 1: context of monetary policy doing all the lifting. So it's 470 00:26:05,600 --> 00:26:08,320 Speaker 1: you know, Sysiphus posting the boulder up the hill. Monetary 471 00:26:08,359 --> 00:26:11,120 Speaker 1: policy can't do it on its own, boulder back down. 472 00:26:11,200 --> 00:26:13,639 Speaker 1: We try it again. This time it's different because you 473 00:26:13,680 --> 00:26:16,280 Speaker 1: know Hercules is pushing the boulder too. You have fiscal 474 00:26:16,320 --> 00:26:20,240 Speaker 1: policy much more on board. So it's it's a wait 475 00:26:20,320 --> 00:26:22,800 Speaker 1: and see and monitor because you know, at this point 476 00:26:22,880 --> 00:26:26,000 Speaker 1: we can't judge the degree of fiscal stimulus and how 477 00:26:26,000 --> 00:26:28,240 Speaker 1: long it will be there. What we can do is 478 00:26:28,280 --> 00:26:32,119 Speaker 1: look at, okay, what kinds of realized inflation outcomes would 479 00:26:32,119 --> 00:26:35,680 Speaker 1: really cause us to re examine the stock bond correlation 480 00:26:36,000 --> 00:26:38,760 Speaker 1: and the you know, the potential negative effect on portfolios. 481 00:26:39,040 --> 00:26:41,600 Speaker 1: And so a couple of my colleagues, Mkelly Gambera and 482 00:26:41,680 --> 00:26:44,320 Speaker 1: Lewis Finney have done some great work on this, and 483 00:26:44,359 --> 00:26:47,600 Speaker 1: what they found is that the point where the correlation 484 00:26:47,680 --> 00:26:51,520 Speaker 1: flips where you should be very, very worried or at 485 00:26:51,600 --> 00:26:54,960 Speaker 1: least concerned or taking steps to monitor you know that 486 00:26:55,119 --> 00:26:58,240 Speaker 1: the bond part of your portfolio isn't providing the protection 487 00:26:58,280 --> 00:27:01,200 Speaker 1: you might think it is. Is when core CPI is 488 00:27:01,400 --> 00:27:04,639 Speaker 1: has averaged two point five for a thirty six month period. 489 00:27:05,040 --> 00:27:07,679 Speaker 1: So when you think about that in the context of 490 00:27:07,720 --> 00:27:11,160 Speaker 1: average inflation targeting, that's that's almost what we're looking for. 491 00:27:11,200 --> 00:27:15,159 Speaker 1: So we're almost targeting basically getting back to us to 492 00:27:15,200 --> 00:27:18,840 Speaker 1: the point where bonds might not be providing good protection, 493 00:27:19,119 --> 00:27:22,159 Speaker 1: but you still might also be. So we're going to 494 00:27:22,240 --> 00:27:25,960 Speaker 1: be flirting with that line under a policy success regime. 495 00:27:26,840 --> 00:27:29,199 Speaker 1: This super interesting and super important. I also want to 496 00:27:29,240 --> 00:27:33,320 Speaker 1: note again we are recording this Monday, March fifteen. Um, 497 00:27:33,320 --> 00:27:35,240 Speaker 1: by the time you'll have listened to this, we will 498 00:27:35,280 --> 00:27:38,280 Speaker 1: have had a FED meeting, the context of which is 499 00:27:38,359 --> 00:27:43,560 Speaker 1: partly this backup and rates growing economic optimism, but this 500 00:27:43,720 --> 00:27:47,119 Speaker 1: general sense that this doesn't change much yet for the FED. 501 00:27:47,720 --> 00:27:52,560 Speaker 1: How confident are you generally that this really is, as 502 00:27:52,600 --> 00:27:56,200 Speaker 1: you put it, the eleven FED right now or certainly 503 00:27:56,240 --> 00:28:02,439 Speaker 1: not FED, and it's willing this to tolerate a level 504 00:28:02,600 --> 00:28:06,840 Speaker 1: of inflation and tolerate a drop in the unemployment rate 505 00:28:07,400 --> 00:28:09,320 Speaker 1: that doesn't make them nervous in a way that we 506 00:28:09,400 --> 00:28:13,800 Speaker 1: didn't see um with the FED pre crisis. I can 507 00:28:13,920 --> 00:28:15,960 Speaker 1: I can tell you things that will make me more 508 00:28:16,080 --> 00:28:19,000 Speaker 1: confident in that going forward. I think just on a 509 00:28:19,040 --> 00:28:22,440 Speaker 1: on a basic level, for the inflation point, it's it's 510 00:28:22,480 --> 00:28:25,800 Speaker 1: almost as if all this the policy review was for 511 00:28:25,880 --> 00:28:29,399 Speaker 1: not unless it produces some kind of concrete change and 512 00:28:29,400 --> 00:28:32,240 Speaker 1: the fed's reaction functions so that that in itself, there's 513 00:28:32,720 --> 00:28:35,560 Speaker 1: there's some sunk costs into this new framework that does 514 00:28:35,640 --> 00:28:39,280 Speaker 1: suggest that he yes, it will continue to be an 515 00:28:39,280 --> 00:28:43,080 Speaker 1: operable one that produces different results than the than the 516 00:28:43,080 --> 00:28:46,600 Speaker 1: previous economic cycle. So I think, uh, you know, from 517 00:28:46,600 --> 00:28:48,480 Speaker 1: a from a starting point, that's a that's a good 518 00:28:48,480 --> 00:28:51,800 Speaker 1: place to anchor to what going forward? I think what 519 00:28:51,840 --> 00:28:55,640 Speaker 1: would increase my confidence that this is really a different FED? 520 00:28:56,000 --> 00:28:58,520 Speaker 1: And you hear you hear FED members talk about this 521 00:28:58,800 --> 00:29:02,280 Speaker 1: fairly often. They're talking about more economic metrics outside of 522 00:29:02,280 --> 00:29:04,480 Speaker 1: the unemployment rate that's in the that's in the Summary 523 00:29:04,520 --> 00:29:08,800 Speaker 1: of Economic Projections. They're talking about the employment to population ratio. 524 00:29:08,880 --> 00:29:13,000 Speaker 1: They're talking about how labor market outcomes are are unequal 525 00:29:13,080 --> 00:29:15,440 Speaker 1: based on race, and that you know, that is something 526 00:29:15,480 --> 00:29:18,360 Speaker 1: that over the fullness of time, a hot labor market 527 00:29:18,680 --> 00:29:22,320 Speaker 1: can start to correct. If the FED gave us in 528 00:29:22,360 --> 00:29:25,240 Speaker 1: their in their dashboard and their Summary of Economic Projections 529 00:29:26,080 --> 00:29:29,240 Speaker 1: the outlook for how some of those variables are expected 530 00:29:29,320 --> 00:29:33,160 Speaker 1: to unfold and suggested that those are what's moving into 531 00:29:33,160 --> 00:29:37,000 Speaker 1: being targeted as measures a full employment, I think that 532 00:29:37,040 --> 00:29:41,080 Speaker 1: would very much increase my confidence that there won't be 533 00:29:41,240 --> 00:29:43,280 Speaker 1: kind of the there won't be as much of a 534 00:29:43,320 --> 00:29:45,840 Speaker 1: preemptive tightening, and we won't be you know, we won't 535 00:29:45,840 --> 00:29:47,920 Speaker 1: be tightening even as soon as we see the whites 536 00:29:47,920 --> 00:29:50,240 Speaker 1: of inflations eyes. But we can we can see a 537 00:29:50,240 --> 00:29:51,680 Speaker 1: little more than that. We can see the iris and 538 00:29:51,720 --> 00:29:56,880 Speaker 1: the pupil. So you've talked um or you've mentioned a 539 00:29:56,920 --> 00:29:59,880 Speaker 1: couple of times now this idea of waiting and see 540 00:30:00,000 --> 00:30:04,719 Speaker 1: sing how durable the fiscal policy response actually is. And 541 00:30:04,720 --> 00:30:08,400 Speaker 1: this is something that I've thought about at various times 542 00:30:08,400 --> 00:30:13,000 Speaker 1: throughout the years. But how difficult is it as an 543 00:30:13,040 --> 00:30:16,360 Speaker 1: investment strategist or you know, as an analyst or something 544 00:30:16,400 --> 00:30:21,440 Speaker 1: like that to be gauging policy and to be looking 545 00:30:22,000 --> 00:30:26,920 Speaker 1: at economic policies through a political lens. And I remember 546 00:30:26,920 --> 00:30:29,240 Speaker 1: the first time this came up was in the context 547 00:30:29,320 --> 00:30:34,040 Speaker 1: of the European Union and the Eurozone debt crisis. There, 548 00:30:34,080 --> 00:30:37,000 Speaker 1: you know, everything hinged on what the EU would actually 549 00:30:37,040 --> 00:30:40,040 Speaker 1: do and what sort of political will there was for 550 00:30:40,160 --> 00:30:43,080 Speaker 1: burden sharing or fiscal austerity and that sort of thing, 551 00:30:43,320 --> 00:30:45,600 Speaker 1: and it just seemed really, really difficult if you were 552 00:30:46,360 --> 00:30:50,080 Speaker 1: a strategist who is basing their decisions on you know, 553 00:30:50,320 --> 00:30:53,520 Speaker 1: actual fundamentals to suddenly switch to trying to figure out 554 00:30:53,560 --> 00:30:57,720 Speaker 1: what a certain politician was thinking and how they were 555 00:30:57,720 --> 00:31:00,440 Speaker 1: playing to their base and what political calcul relations that 556 00:31:00,520 --> 00:31:05,160 Speaker 1: were making. So I'm curious, like how difficult were easy 557 00:31:05,400 --> 00:31:10,960 Speaker 1: is it to incorporate political motivations and mechanations into your 558 00:31:11,000 --> 00:31:16,360 Speaker 1: investment thesis. I think it's incredibly different difficult because as 559 00:31:16,400 --> 00:31:19,400 Speaker 1: you kind alluded to, your biases will will tend to 560 00:31:19,440 --> 00:31:21,800 Speaker 1: creep in and infect the process. And I think that's 561 00:31:21,880 --> 00:31:25,400 Speaker 1: where you know, being a being a global bank and 562 00:31:25,400 --> 00:31:28,520 Speaker 1: I'm on a global team, this is where that that 563 00:31:28,560 --> 00:31:31,600 Speaker 1: really comes in handy because you do have more kind 564 00:31:31,640 --> 00:31:35,000 Speaker 1: of boots on the ground closer to home, domestic knowledge 565 00:31:35,040 --> 00:31:37,560 Speaker 1: and pretty much every market. So I think as a 566 00:31:37,560 --> 00:31:41,840 Speaker 1: starting point, that's very helpful. And beyond that, it's recognizing 567 00:31:41,920 --> 00:31:45,200 Speaker 1: your your limitations, recognizing that I'm not I'm not a 568 00:31:45,240 --> 00:31:48,680 Speaker 1: congressional analyst. I'm not a political analyst, but I talked 569 00:31:48,680 --> 00:31:51,120 Speaker 1: to people who are. It's it's still doing that research, 570 00:31:51,200 --> 00:31:54,520 Speaker 1: doing that work, and that's where there's so much symbiosis. 571 00:31:54,560 --> 00:31:58,240 Speaker 1: I think between between news and UH and asset management. 572 00:31:58,280 --> 00:32:01,160 Speaker 1: We we rely on the we rely on good reporting. 573 00:32:01,200 --> 00:32:04,640 Speaker 1: We're around the desk, we're sharing Tracy Alloway or or 574 00:32:04,640 --> 00:32:09,360 Speaker 1: Stephen Spratt or occasionally Joe Wisenthal articles and discussing the 575 00:32:09,440 --> 00:32:12,800 Speaker 1: information in this and whether it's whether it's changing our priors, 576 00:32:12,800 --> 00:32:15,520 Speaker 1: whether it's changing our views, whether it's changing our thesis. 577 00:32:15,600 --> 00:32:17,960 Speaker 1: So I think it's it's a lot of humility. It's 578 00:32:18,000 --> 00:32:20,600 Speaker 1: knowing what you don't know. It's knowing that there's someone 579 00:32:20,640 --> 00:32:22,800 Speaker 1: around you who has a better idea than you do, 580 00:32:23,040 --> 00:32:26,080 Speaker 1: deferring to them, and then continuing to sneak out proberating 581 00:32:26,120 --> 00:32:45,000 Speaker 1: evidence from actual experts on the subject. So this might 582 00:32:45,040 --> 00:32:48,640 Speaker 1: be a good time to pivot a little bit to journalism. 583 00:32:48,640 --> 00:32:52,280 Speaker 1: We mentioned in the beginning we sometimes cite your work 584 00:32:52,280 --> 00:32:55,560 Speaker 1: here at Bloomberg, and I think, uh, just over a 585 00:32:55,600 --> 00:32:57,840 Speaker 1: year ago. I think it was last February, right before 586 00:32:57,840 --> 00:33:00,360 Speaker 1: the crisis hit. You kind of had this legend Dairy 587 00:33:00,400 --> 00:33:04,560 Speaker 1: Business Week cover when the bull market gets weird about 588 00:33:04,600 --> 00:33:06,720 Speaker 1: what was then the sort of nascent thing which has 589 00:33:06,760 --> 00:33:10,560 Speaker 1: grown way bigger, about the role of sort of Robin 590 00:33:10,600 --> 00:33:13,840 Speaker 1: Hood and Wall Street bets and this thing that's really 591 00:33:13,880 --> 00:33:16,280 Speaker 1: taken on a life of its own. Talk to us 592 00:33:16,280 --> 00:33:20,920 Speaker 1: about um when you think about impact on portfolio thinking 593 00:33:20,920 --> 00:33:25,280 Speaker 1: about portfolios, an impact on the market. How the introduction 594 00:33:25,440 --> 00:33:30,280 Speaker 1: of this new phenomenon of this really intent retail participation, 595 00:33:31,000 --> 00:33:34,520 Speaker 1: call buying meme stocks, all kinds of stuff like that 596 00:33:34,520 --> 00:33:38,040 Speaker 1: that has become very mainstream in the last year. How 597 00:33:38,080 --> 00:33:40,920 Speaker 1: would uh, how it intersects with your broader thinking about 598 00:33:41,240 --> 00:33:45,080 Speaker 1: portfolios and how markets behave. Yeah, I've got to say 599 00:33:45,120 --> 00:33:47,360 Speaker 1: it was this. This was the moment in a time 600 00:33:47,360 --> 00:33:49,040 Speaker 1: where I think, my you know, my brain had been 601 00:33:49,080 --> 00:33:51,920 Speaker 1: successfully rewired. When you when you see some of this 602 00:33:51,960 --> 00:33:54,200 Speaker 1: activity and then you you immediately don't go okay, I 603 00:33:54,240 --> 00:33:56,240 Speaker 1: need to check this or that forum. It's okay, Like, 604 00:33:56,600 --> 00:33:59,760 Speaker 1: how is this going to affect the broader market? Ecose, 605 00:33:59,800 --> 00:34:02,880 Speaker 1: it's them so kind of from the highest, highest possible 606 00:34:02,960 --> 00:34:05,960 Speaker 1: level of view, if we're going to have a new 607 00:34:06,160 --> 00:34:10,720 Speaker 1: material source of funds generally entering the market, that's this. 608 00:34:10,719 --> 00:34:12,920 Speaker 1: This is going to put downward pressure on the equity 609 00:34:13,000 --> 00:34:15,280 Speaker 1: risk premium. This is going to be kind of positive 610 00:34:15,280 --> 00:34:18,759 Speaker 1: for asset valuations. So from that high level perspective, that's 611 00:34:18,800 --> 00:34:21,480 Speaker 1: the that's the first order from which I would view 612 00:34:21,520 --> 00:34:24,400 Speaker 1: it is that this increased these increased flows from this 613 00:34:24,520 --> 00:34:29,120 Speaker 1: cohort is positive for equities full stop. The the increased 614 00:34:29,400 --> 00:34:33,560 Speaker 1: kind of footprint of this of this cohort, the higher turnover, 615 00:34:34,160 --> 00:34:36,440 Speaker 1: and I think what we saw at the end of January, 616 00:34:36,880 --> 00:34:39,640 Speaker 1: it's it's a reminder to me about how a lot 617 00:34:39,680 --> 00:34:43,040 Speaker 1: of the the pullbacks we've gotten in recent years are 618 00:34:44,320 --> 00:34:49,120 Speaker 1: they really do have a liquidity accelerant kicker here. And 619 00:34:49,239 --> 00:34:51,880 Speaker 1: so from an asset management perspective, if we're able to 620 00:34:51,960 --> 00:34:57,760 Speaker 1: identify a situation where sharply swinging flows are what's essentially 621 00:34:57,880 --> 00:35:01,399 Speaker 1: driving the move in headline markets and the fundamentals haven't 622 00:35:01,480 --> 00:35:04,000 Speaker 1: changed a bit, well, then there's there's a pretty good 623 00:35:04,080 --> 00:35:07,719 Speaker 1: opportunity for us. That's the that's the evaluation and the 624 00:35:07,760 --> 00:35:10,719 Speaker 1: catalyst that's opened up thanks to these flows. We can 625 00:35:10,760 --> 00:35:13,719 Speaker 1: expect that to remedy, and you know therefore that that's 626 00:35:13,719 --> 00:35:19,000 Speaker 1: an opportunity. I think another element that's really unique to 627 00:35:19,360 --> 00:35:23,120 Speaker 1: retail participation is the timing. The fact that this came 628 00:35:23,160 --> 00:35:27,759 Speaker 1: about during a period in which buy backs obviously fell 629 00:35:27,880 --> 00:35:32,360 Speaker 1: tremendously because of profitability and because of you know, regulatory rules, 630 00:35:32,800 --> 00:35:35,920 Speaker 1: and it was a time when the macro economy was 631 00:35:36,120 --> 00:35:38,960 Speaker 1: not doing well. So I think this leads to a 632 00:35:38,960 --> 00:35:41,920 Speaker 1: bit of a you know, an over focused on retail, 633 00:35:42,080 --> 00:35:44,960 Speaker 1: which certainly you can you can see the visible footprint, 634 00:35:45,040 --> 00:35:47,560 Speaker 1: but it's important like not to be doing partial equilibrium 635 00:35:47,560 --> 00:35:51,239 Speaker 1: analysis here. We also do have to consider how, you know, 636 00:35:51,400 --> 00:35:54,879 Speaker 1: how flows are going to improve from buy backs, how 637 00:35:54,920 --> 00:35:59,000 Speaker 1: flows might improve for more autopilot flows as uh, you know, 638 00:35:59,040 --> 00:36:03,080 Speaker 1: as employment does grow, and so you know, that's that's 639 00:36:03,160 --> 00:36:06,280 Speaker 1: something in a wholesome manner, that's kind of how we 640 00:36:06,280 --> 00:36:09,160 Speaker 1: we think about it. Sorry, I gotta ask this as 641 00:36:09,200 --> 00:36:12,600 Speaker 1: a slightly flippant question, but one thing that I've said 642 00:36:12,640 --> 00:36:16,000 Speaker 1: about the game stop phenomenon and Wall Street bets is 643 00:36:16,040 --> 00:36:20,080 Speaker 1: this idea of flows before pros, So that idea that 644 00:36:20,680 --> 00:36:24,200 Speaker 1: money can sort of, um, I guess, trump the economic 645 00:36:24,200 --> 00:36:27,719 Speaker 1: fundamentals and at some point, you know, asset prices that 646 00:36:27,960 --> 00:36:31,080 Speaker 1: used to be self limiting because at some point valuations 647 00:36:31,080 --> 00:36:34,240 Speaker 1: would just be excessive now can kind of keep going forever. 648 00:36:34,440 --> 00:36:38,439 Speaker 1: Because it's the momentum that really matters to investors. People 649 00:36:38,440 --> 00:36:42,520 Speaker 1: are just trying to catch the next wave. I'm very curious, 650 00:36:42,600 --> 00:36:45,520 Speaker 1: or sorry, let me rephrase that. I'm wondering now that 651 00:36:45,600 --> 00:36:49,640 Speaker 1: you're a pro at U B s um, how do 652 00:36:49,680 --> 00:36:53,239 Speaker 1: you feel about the flows, Like, what's it like internally 653 00:36:53,280 --> 00:36:56,239 Speaker 1: at ubs when you see something like you know, game 654 00:36:56,320 --> 00:37:00,759 Speaker 1: Stop rising to four hundred dollars. This is where kind 655 00:37:00,800 --> 00:37:03,640 Speaker 1: of the we're we're very top down oriented and don't 656 00:37:03,640 --> 00:37:07,360 Speaker 1: do anything related to single stocks. And that's where this 657 00:37:07,360 --> 00:37:09,319 Speaker 1: this is where it helps here is that you can 658 00:37:09,320 --> 00:37:15,200 Speaker 1: see that clearly in late January you're having dislocations and 659 00:37:15,320 --> 00:37:20,040 Speaker 1: you're having headline indexes decline because of flows related to 660 00:37:20,320 --> 00:37:24,759 Speaker 1: retail trading and associated de leveraging. Nothing about the fundamentals 661 00:37:24,840 --> 00:37:28,279 Speaker 1: change for the for the better or worse, and very 662 00:37:28,320 --> 00:37:31,480 Speaker 1: soon thereafter all time highs. Again, So thinking about it 663 00:37:31,520 --> 00:37:35,600 Speaker 1: from the index level perspective, it doesn't seem that these 664 00:37:35,680 --> 00:37:38,279 Speaker 1: you know, that these flows are kind of overpowering the 665 00:37:38,280 --> 00:37:40,680 Speaker 1: fundamentals at any point in time. Might that be true 666 00:37:40,680 --> 00:37:43,520 Speaker 1: at the at the single stock level. That's mercifully something 667 00:37:43,560 --> 00:37:45,560 Speaker 1: I don't I don't have to have an opinion on 668 00:37:45,600 --> 00:37:50,360 Speaker 1: it anymore. Okay, So we're talking a lot about flows 669 00:37:50,400 --> 00:37:54,319 Speaker 1: and how you actually pitch investment strategies. Uh, once you 670 00:37:54,400 --> 00:37:58,759 Speaker 1: become a professional strategist. So another thing that's been really 671 00:37:58,800 --> 00:38:02,279 Speaker 1: hot this year is or in recent years really is 672 00:38:02,360 --> 00:38:07,720 Speaker 1: E S G and you know, environmentally and socially friendly investments. 673 00:38:07,960 --> 00:38:11,120 Speaker 1: And I have to admit that I've become very cynical 674 00:38:11,120 --> 00:38:15,200 Speaker 1: about it, probably because I receive at least eight emails 675 00:38:15,200 --> 00:38:18,839 Speaker 1: a day and you know, ten other press releases about 676 00:38:18,920 --> 00:38:20,920 Speaker 1: someone starting an e s G fund or how a 677 00:38:20,920 --> 00:38:24,520 Speaker 1: particular bank is doing something new in e s G. Whatever. 678 00:38:25,320 --> 00:38:27,759 Speaker 1: It seems like the thing, the bandwagon that everyone really 679 00:38:27,760 --> 00:38:31,560 Speaker 1: wants to hop on. How how is that playing out 680 00:38:32,160 --> 00:38:35,759 Speaker 1: at ubs? Or you know, how how are you approaching it? 681 00:38:35,800 --> 00:38:40,799 Speaker 1: Like is it something that you're pitching because clients are 682 00:38:40,920 --> 00:38:43,880 Speaker 1: demanding it? Or is it something that you're pitching because 683 00:38:43,880 --> 00:38:47,440 Speaker 1: it feels like the right thing to do, or that 684 00:38:48,120 --> 00:38:49,480 Speaker 1: I don't know how to phrase this. I guess I'm 685 00:38:49,520 --> 00:38:51,920 Speaker 1: just curious how how you all are thinking about e 686 00:38:52,040 --> 00:38:54,000 Speaker 1: s G at the moment and how much of it 687 00:38:54,160 --> 00:38:58,560 Speaker 1: is a trend for better or worse When I when 688 00:38:58,560 --> 00:39:01,040 Speaker 1: I think about E s G. And this is what 689 00:39:01,120 --> 00:39:03,919 Speaker 1: I'm primarily going to kind of focus on, is that 690 00:39:04,560 --> 00:39:07,720 Speaker 1: there's a paper again. I'll give MICHAELA. Gambera another showed 691 00:39:07,719 --> 00:39:11,000 Speaker 1: out because he's he's it's in the process of review. 692 00:39:11,040 --> 00:39:14,040 Speaker 1: But another paper that I'll try not to cannibalize or 693 00:39:14,080 --> 00:39:16,520 Speaker 1: pre empt too much. It's about how do we how 694 00:39:16,520 --> 00:39:19,160 Speaker 1: do we think about incorporate E s G into the 695 00:39:19,160 --> 00:39:23,080 Speaker 1: asset allocation process because I think the a big underlying 696 00:39:23,160 --> 00:39:26,359 Speaker 1: question to this is is there a trade off if 697 00:39:26,360 --> 00:39:28,040 Speaker 1: you think this is a if you think this is 698 00:39:28,080 --> 00:39:30,840 Speaker 1: a bad, if you think this you know, doesn't produce 699 00:39:30,920 --> 00:39:35,200 Speaker 1: optimal return results, what are the what are the associated costs? 700 00:39:35,239 --> 00:39:39,120 Speaker 1: Are there any And there's there's precious few academic studies 701 00:39:39,239 --> 00:39:42,160 Speaker 1: or work on this, and michaelis is among the first 702 00:39:42,520 --> 00:39:45,440 Speaker 1: in this field. And so how we're viewing it is 703 00:39:45,480 --> 00:39:49,879 Speaker 1: that the traditional kind of investment process you're balancing risk 704 00:39:49,920 --> 00:39:52,839 Speaker 1: and return. With E s G, you're adding a time 705 00:39:52,880 --> 00:39:56,440 Speaker 1: dimension and you're also adding preferences that are going to 706 00:39:56,560 --> 00:40:00,319 Speaker 1: the preferences are going to guide the investment universe, and 707 00:40:00,400 --> 00:40:03,440 Speaker 1: that could be by kind of regulatory fiat, or that 708 00:40:03,480 --> 00:40:06,759 Speaker 1: could be because of you know, the values of you 709 00:40:06,760 --> 00:40:10,799 Speaker 1: know of certain boards, firms, endowments, etcetera. And the time 710 00:40:10,840 --> 00:40:14,239 Speaker 1: dimension is I think something is something interesting. It's the 711 00:40:14,280 --> 00:40:18,319 Speaker 1: idea that more and more E s G is much 712 00:40:18,440 --> 00:40:21,799 Speaker 1: less a you know, here's here's something we would like 713 00:40:21,880 --> 00:40:26,279 Speaker 1: to encourage by kind of by rules by flows, etcetera. 714 00:40:26,360 --> 00:40:29,440 Speaker 1: And it's going to become much more something that drives 715 00:40:29,480 --> 00:40:33,239 Speaker 1: bottom line activity if it's not. It's not just kind 716 00:40:33,239 --> 00:40:36,200 Speaker 1: of regulations saying you know, you must you must do this, 717 00:40:36,320 --> 00:40:39,600 Speaker 1: you must do that. It's governments making steps beyond that, 718 00:40:39,719 --> 00:40:42,840 Speaker 1: using fiscal policy to support E s G goals and 719 00:40:42,920 --> 00:40:46,719 Speaker 1: particularly related to E. So that's that's what provides a 720 00:40:46,719 --> 00:40:50,040 Speaker 1: lot of opportunity on the on the time dimension side 721 00:40:50,080 --> 00:40:52,920 Speaker 1: of things. Is that you know, I'll give you the 722 00:40:53,200 --> 00:40:57,280 Speaker 1: coals note punchline of of the forthcoming paper, and it's 723 00:40:57,400 --> 00:41:01,040 Speaker 1: essentially that we believe through our search is that there's 724 00:41:01,080 --> 00:41:04,040 Speaker 1: there will not be a trade off between risk and return, 725 00:41:04,160 --> 00:41:07,399 Speaker 1: any negative trade off by adopting E s G, and 726 00:41:07,600 --> 00:41:10,719 Speaker 1: that you can make essentially a lot of portfolios that 727 00:41:10,760 --> 00:41:14,280 Speaker 1: are have the same factor components as the parent index, 728 00:41:14,360 --> 00:41:17,000 Speaker 1: the non U s G index, you know, pretty easily, 729 00:41:17,040 --> 00:41:20,560 Speaker 1: even using some more some brute exclusion techniques. So it's 730 00:41:20,600 --> 00:41:24,080 Speaker 1: something that you know, regulators seem to be demanding. It's 731 00:41:24,120 --> 00:41:27,319 Speaker 1: something that clearly if you look across the industry, there's 732 00:41:27,520 --> 00:41:29,840 Speaker 1: there's interest in and it's something that's going to be 733 00:41:29,880 --> 00:41:34,360 Speaker 1: affecting bottom line results for corporates more and more. I 734 00:41:34,440 --> 00:41:36,879 Speaker 1: have a sorry, I have one more question. But this 735 00:41:36,960 --> 00:41:40,879 Speaker 1: is also something I've always wondered. So in journalism, as 736 00:41:40,960 --> 00:41:44,160 Speaker 1: you know, we get a lot of feedback on our work, 737 00:41:44,239 --> 00:41:46,560 Speaker 1: Like I think it's one of the few jobs where 738 00:41:46,680 --> 00:41:49,960 Speaker 1: you published to a relatively large audience and you can 739 00:41:49,960 --> 00:41:54,280 Speaker 1: get feedback almost instantaneously, either through comments on your stories 740 00:41:54,440 --> 00:41:57,760 Speaker 1: or through social media or people emailing you or whatever. 741 00:41:58,600 --> 00:42:02,799 Speaker 1: What sort of feedback you get as an investment strategist 742 00:42:03,000 --> 00:42:08,920 Speaker 1: and what sort of um, what oh consequences? Yes? Okay, 743 00:42:08,920 --> 00:42:12,439 Speaker 1: so what sort of consequences happen? Like if you get 744 00:42:12,480 --> 00:42:16,040 Speaker 1: something wrong or right? Like do clients come come back 745 00:42:16,040 --> 00:42:18,959 Speaker 1: to you and say, like, this call is incorrect? Why 746 00:42:19,000 --> 00:42:21,840 Speaker 1: why did you think that? Or you know, does anything 747 00:42:21,880 --> 00:42:24,960 Speaker 1: happen if you actually get something wrong? I know Joe 748 00:42:25,000 --> 00:42:27,239 Speaker 1: and I were joking earlier about how when you're a 749 00:42:27,280 --> 00:42:30,000 Speaker 1: journalist you don't always have to be right, but presumably 750 00:42:30,160 --> 00:42:33,680 Speaker 1: when you're doing this professionally, uh, you want to be 751 00:42:33,719 --> 00:42:36,360 Speaker 1: reasonably um, well you said it earlier, you want to 752 00:42:36,360 --> 00:42:40,000 Speaker 1: be reasonably accurate, And you're thinking, what what gives you feedback? 753 00:42:40,040 --> 00:42:43,399 Speaker 1: Is the market kind of instantaneously and always is giving 754 00:42:43,440 --> 00:42:46,520 Speaker 1: you feedback on whether you're you're right or wrong, and 755 00:42:46,560 --> 00:42:49,759 Speaker 1: that'll you know, that'll play out over time. But for us, 756 00:42:49,800 --> 00:42:52,040 Speaker 1: it's very important. You know, this is this is a 757 00:42:52,080 --> 00:42:55,719 Speaker 1: result oriented business, but it's very important to keep process 758 00:42:56,160 --> 00:42:59,359 Speaker 1: in mind that at all times. And that's that's why 759 00:42:59,400 --> 00:43:02,640 Speaker 1: it's important to to build a lot of consensus for 760 00:43:02,719 --> 00:43:05,120 Speaker 1: new positions and new trades and have them you know, 761 00:43:05,200 --> 00:43:10,040 Speaker 1: thoroughly vetted battered around. So that's the the consequence is 762 00:43:10,160 --> 00:43:14,080 Speaker 1: everyone having buy in, everyone having understanding of the of 763 00:43:14,120 --> 00:43:16,920 Speaker 1: the factors, of the milestones that could affect a trade 764 00:43:17,200 --> 00:43:19,480 Speaker 1: when you go into it, and and being able to 765 00:43:19,520 --> 00:43:21,720 Speaker 1: monitor it so you know when the conditions are shifting, 766 00:43:21,760 --> 00:43:24,200 Speaker 1: you know, when there's been a thesis violation, or you 767 00:43:24,239 --> 00:43:26,640 Speaker 1: know when things have gone according to plan but the 768 00:43:26,680 --> 00:43:31,200 Speaker 1: price just hasn't. So the the way to avoid or 769 00:43:31,680 --> 00:43:35,239 Speaker 1: to kind of mitigate quote unquote consequences is uh, the 770 00:43:35,280 --> 00:43:38,680 Speaker 1: dissemination of information in a in a manner that allows 771 00:43:38,880 --> 00:43:41,520 Speaker 1: a lot of these these priors or these questions to 772 00:43:41,600 --> 00:43:44,239 Speaker 1: be challenged before you actually do it, and then it's 773 00:43:44,280 --> 00:43:46,480 Speaker 1: just you know, then it's just a matter of monitoring 774 00:43:46,719 --> 00:43:49,120 Speaker 1: and figuring out our things going according to plan are 775 00:43:49,120 --> 00:43:51,200 Speaker 1: they not and and why and if you've done the 776 00:43:51,239 --> 00:43:53,839 Speaker 1: work beforehand, you you know you have a pretty good 777 00:43:53,840 --> 00:43:57,440 Speaker 1: based to go off with their. Well, Luke, thank you 778 00:43:57,480 --> 00:44:00,680 Speaker 1: so much for joining us. Is great to be um 779 00:44:00,840 --> 00:44:03,520 Speaker 1: for to be reunited and hopefully we'll see you again 780 00:44:03,600 --> 00:44:08,000 Speaker 1: one day in person. But congratulations and we miss you. 781 00:44:08,120 --> 00:44:12,759 Speaker 1: And this was a fantastic and fascinating discussion. Real pleasure, guys. 782 00:44:12,760 --> 00:44:15,160 Speaker 1: Thanks for having me on, Luke. We're all so proud 783 00:44:15,200 --> 00:44:17,759 Speaker 1: of you. Yeah, seriously, Oh, thank you guys very much. 784 00:44:17,840 --> 00:44:20,120 Speaker 1: It's you know, it's so great to be speaking to 785 00:44:20,160 --> 00:44:23,000 Speaker 1: you guys again. And hopefully you know, a a karaoke 786 00:44:23,120 --> 00:44:26,200 Speaker 1: at sometime when Tracy's back in the year. Yeah, we'll 787 00:44:26,239 --> 00:44:37,960 Speaker 1: definitely do it. Take care of Look, Tracy. I thought 788 00:44:38,000 --> 00:44:41,960 Speaker 1: that was great catching up with Luke, but way too long, obviously. 789 00:44:42,640 --> 00:44:45,920 Speaker 1: I really liked everything that last answer to your question. 790 00:44:45,960 --> 00:44:48,759 Speaker 1: I thought it was like super interesting, like how they 791 00:44:48,760 --> 00:44:54,320 Speaker 1: think about like feedback and uh anticipating just everything related 792 00:44:54,360 --> 00:44:57,200 Speaker 1: to like process. It was super interesting to me. Yeah, 793 00:44:57,280 --> 00:45:00,640 Speaker 1: I've always wondered, I guess how your evaluated it UM 794 00:45:00,680 --> 00:45:03,360 Speaker 1: in a position as an investment strategist, Like is it 795 00:45:03,640 --> 00:45:07,960 Speaker 1: how good your research and you're thinking was around a 796 00:45:07,960 --> 00:45:11,160 Speaker 1: certain investment decision or is it based on absolute returns? 797 00:45:11,200 --> 00:45:15,360 Speaker 1: Like even if you had the smartest thesis in the world, 798 00:45:15,800 --> 00:45:18,440 Speaker 1: could you get a really bad year because the market 799 00:45:18,560 --> 00:45:21,960 Speaker 1: just goes against you and you're considered unlucky, like you know, 800 00:45:22,000 --> 00:45:24,200 Speaker 1: all those perma bears. I'm not saying Luke is a 801 00:45:24,239 --> 00:45:26,560 Speaker 1: permit bear at all, but you know the permit bears 802 00:45:26,640 --> 00:45:29,279 Speaker 1: who for the past ten years have been you know, 803 00:45:29,360 --> 00:45:31,359 Speaker 1: talking about how stocks are going to crash and things 804 00:45:31,400 --> 00:45:34,279 Speaker 1: like that, and they're very, very popular. They have a 805 00:45:34,360 --> 00:45:38,080 Speaker 1: huge following among buy side and journalists. But if you 806 00:45:38,200 --> 00:45:40,160 Speaker 1: looked at you know, if you actually did what they 807 00:45:40,160 --> 00:45:42,320 Speaker 1: were telling you for the past ten years, you probably 808 00:45:42,360 --> 00:45:44,799 Speaker 1: would have missed out on a lot. Well, you would 809 00:45:44,840 --> 00:45:47,399 Speaker 1: have made money for about five minutes last March, So 810 00:45:47,719 --> 00:45:51,000 Speaker 1: you know, yes, that's the thing. I guess. No, I 811 00:45:51,040 --> 00:45:54,080 Speaker 1: totally agree. I also thought like Luke did a really 812 00:45:54,080 --> 00:45:57,200 Speaker 1: good job like clarifying a couple of really interesting thoughts 813 00:45:57,200 --> 00:46:01,320 Speaker 1: in my mind. One is that discussion um Chinese bonds, 814 00:46:01,360 --> 00:46:03,560 Speaker 1: which I think we should probably do an episode on soon, 815 00:46:03,640 --> 00:46:06,319 Speaker 1: just like the Chinese government bond market and how it's 816 00:46:06,360 --> 00:46:10,279 Speaker 1: become this big International asset class, his explanation of why 817 00:46:10,320 --> 00:46:13,160 Speaker 1: the money's rushing in how it sort of is serving 818 00:46:13,200 --> 00:46:18,280 Speaker 1: as this sort of countercyclical um anchor, super interesting topic 819 00:46:18,360 --> 00:46:21,279 Speaker 1: and very well explained. And also this idea of like 820 00:46:21,320 --> 00:46:25,359 Speaker 1: the value verse growth valuation gap, and this idea that 821 00:46:25,400 --> 00:46:30,000 Speaker 1: like in a world of more physical activism, um maybe 822 00:46:30,040 --> 00:46:32,480 Speaker 1: you could put it in a world where policy makers 823 00:46:32,920 --> 00:46:36,520 Speaker 1: react more aggressively to cap downside that that then sort 824 00:46:36,560 --> 00:46:39,680 Speaker 1: of like cuts off the left tail of value companies earnings, 825 00:46:39,680 --> 00:46:43,080 Speaker 1: and you potentially get this sort of valuation rerating. Super 826 00:46:43,120 --> 00:46:45,440 Speaker 1: interesting topic, and I think that will be something to 827 00:46:45,480 --> 00:46:49,200 Speaker 1: like keep watching going forward to see if like what 828 00:46:49,320 --> 00:46:54,319 Speaker 1: we call value stocks meaningfully reprice on changes in expected 829 00:46:54,600 --> 00:46:58,600 Speaker 1: UH policy in and exchanges changes in the expected fiscal 830 00:46:58,640 --> 00:47:04,160 Speaker 1: policy stands. Yeah, but just on that point Luke's, you know, 831 00:47:04,200 --> 00:47:06,560 Speaker 1: the way Luke framed it, this idea of not trying 832 00:47:06,640 --> 00:47:10,440 Speaker 1: to call the tipping point or the big change in markets, 833 00:47:10,440 --> 00:47:15,640 Speaker 1: but actually waiting and seeing how durable the shift towards 834 00:47:15,680 --> 00:47:19,000 Speaker 1: fiscal actually is. I thought that was a really important point. 835 00:47:19,080 --> 00:47:22,520 Speaker 1: And I know markets are always racing ahead to identify 836 00:47:22,680 --> 00:47:26,680 Speaker 1: significant turning points, but maybe this is in fact a 837 00:47:26,719 --> 00:47:28,920 Speaker 1: moment where you sort of step back and say, Okay, 838 00:47:29,120 --> 00:47:31,880 Speaker 1: we've had the big, big stimulus bill. Now we actually 839 00:47:31,920 --> 00:47:35,279 Speaker 1: see whether it translates into growth and whether or not 840 00:47:35,440 --> 00:47:39,640 Speaker 1: it might translate into inflation. Do you think a journalist 841 00:47:39,719 --> 00:47:41,239 Speaker 1: could get away with that? It's like, what do you 842 00:47:41,239 --> 00:47:43,520 Speaker 1: have coming today? And it's like, just relax. I'm just 843 00:47:43,560 --> 00:47:45,960 Speaker 1: waiting to see how this all plays out. I'm not 844 00:47:46,440 --> 00:47:48,759 Speaker 1: I'm not rushing the next narrative. Just just let me 845 00:47:48,840 --> 00:47:50,799 Speaker 1: let's just see how this plays out. I don't think 846 00:47:50,800 --> 00:47:52,520 Speaker 1: that would work. I don't think that would uh fly. 847 00:47:52,760 --> 00:47:55,520 Speaker 1: I think we're in danger of getting into a conversation 848 00:47:55,520 --> 00:47:58,840 Speaker 1: about the pros of short term horizons versus long term horizons. 849 00:47:58,880 --> 00:48:01,400 Speaker 1: So we better step away quickly. Maybe we should leave 850 00:48:01,400 --> 00:48:04,520 Speaker 1: it there. Let's leave it there. Okay. This has been 851 00:48:04,600 --> 00:48:08,080 Speaker 1: another episode of the All Thoughts Podcast. I'm Tracy Alloway. 852 00:48:08,160 --> 00:48:11,040 Speaker 1: You can follow me on Twitter at Tracy Alloway and 853 00:48:11,080 --> 00:48:13,200 Speaker 1: I'm Joe wi Isn't All. You can follow me on 854 00:48:13,239 --> 00:48:16,799 Speaker 1: Twitter at The Stalwart. Follow Luke Kawa on Twitter He's 855 00:48:16,840 --> 00:48:21,120 Speaker 1: at l J Kwa. Follow our producer Laura Carlson, She's 856 00:48:21,200 --> 00:48:24,400 Speaker 1: at Laura M. Carlson. Followed the Bloomberg head of podcast 857 00:48:24,480 --> 00:48:28,120 Speaker 1: Francisco Levi at Francisco Today, and check out all of 858 00:48:28,160 --> 00:48:32,240 Speaker 1: our podcasts at Bloomberg under the handle at podcasts. Thanks 859 00:48:32,239 --> 00:49:01,120 Speaker 1: for listening, Ey,