Speaker 1: Welcome to trainings. I'm Joel Webber and I'm Eric. Oh
Speaker 1: my god, we're looking at each other and not via zoom. Yeah.
Speaker 1: If you're listening and you've listened to once in the past,
Speaker 1: we probably sound really good for a change. And from
Speaker 1: my closet, it's like when back in Bloomberg where Manhattan,
Speaker 1: in the Bloomberg office with all the good stuff looking
Speaker 1: across the table at one another, just like old times.
Speaker 1: Is we have extra weight on each of our bodies.
Speaker 1: But that's okay, we'll lose it back. Yeah, I just
Speaker 1: need to start exercising again. Uh so, Eric, A lot
Speaker 1: has happened in the last year and a half. Um,
Speaker 1: I'm really glad that we can see each other across
Speaker 1: the table from now. But we're not alone either. We
Speaker 1: have a guest and I'm really excited to speak with her.
Speaker 1: She's also here in person. Yeah, we're all in person
Speaker 1: for a change, and it feels good. And this guest, Um,
Speaker 1: besides being my boss, by the way, Um is the
Speaker 1: chief macro strategist and equity strategist for Bloomberg Intelligence and
Speaker 1: so on our team. I always go to her listen
Speaker 1: to her about just what's going on. In the stock market,
Speaker 1: and not only that, what influences the stock market, things
Speaker 1: like inflation value versus growth. Um, how you know interest
Speaker 1: rates in the FED or are looking in earnings? Right,
Speaker 1: So I figured, given the markets had a long nice
Speaker 1: run since March, since the last time I saw you,
Speaker 1: we should check in on how everything's going from like
Speaker 1: a macro strategist point of view. And then obviously E
Speaker 1: T F s or are ways to play those opinions
Speaker 1: and views, but sometimes it's good to just talk about
Speaker 1: the yeah about you know, four thousand foot view of
Speaker 1: the whole thing, and and so to welcome her, I'm
Speaker 1: going to do a thing and I'm surprised. I'm gonna
Speaker 1: surprise you with this thing. It's it's gonna be my
Speaker 1: stadium voice. You ready for it? I don't. I don't know,
Speaker 1: Gina Martin them, that's terrifying. Thank you this time on
Speaker 1: Trillians Looking into the Crystal Ball with Gina Martin Adams. Gina,
Speaker 1: welcome back to Trillians. Thank you, thank you for having me.
Speaker 1: So good to see you in person. Yeah you, um so,
Speaker 1: I remember the last time we talked, and it was
Speaker 1: like you you went some places that I even you know,
Speaker 1: reading Bloomberg coverage all day every day you blew my mind. Well,
Speaker 1: thank you. So I want to talk about inflation. First,
Speaker 1: you do a webinar called Inflation Nation. It has been
Speaker 1: a thing that has been very spooky to the market
Speaker 1: of late um and will remain, I think a source
Speaker 1: of concern for a while. So, so break it down
Speaker 1: for us. What what what's your perspective on it? And
Speaker 1: what are people what should people be watching out for? Yeah,
Speaker 1: so the reason we called the webinar Inflation Nation is
Speaker 1: is because it's our US equity outlook. So just isolating
Speaker 1: the US in the global equity market. The US as
Speaker 1: inflation currently in the nineties percentile of history of the
Speaker 1: entire history, the biggest CPR or pp I print on record.
Speaker 1: Pp I was growing nine percent year over year as
Speaker 1: of the last print. We've never seen a number like
Speaker 1: that before. And everyone thinks that this is a one
Speaker 1: time deal. They think that because we're seeing inflation peak
Speaker 1: and it's going to come down, including the Federal Reserve.
Speaker 1: As long as inflation is peaking now, it's going to
Speaker 1: settle at a lower pace and all it's going to
Speaker 1: be fine into the future. There's a word that gets
Speaker 1: around a little bit transitory. Yeah, this transitory notion, So
Speaker 1: we wanted to explore that. We talked through you know,
Speaker 1: what do you do in an environment where inflation is
Speaker 1: peaking and coming lower. But also really I question this
Speaker 1: notion that we're going to settle at an inflation rate
Speaker 1: that looks like the last cycle for a lot of
Speaker 1: reasons um and most importantly in terms of implementing investment
Speaker 1: strategy around inflation. I think this is a critical turning
Speaker 1: point for cyclical sectors to continue to outperform defense sectors,
Speaker 1: for value sectors to really take the leadership baton over tech,
Speaker 1: consumer staples, large kept growth sectors. And it's because of
Speaker 1: our sort of secular inflation outlook. I don't think we're
Speaker 1: going back to experience at all. I think instead the
Speaker 1: experience that we've had over the last couple of years
Speaker 1: is setting us up for a much faster pace of
Speaker 1: inflation into the long term outlook. So this whole transitory
Speaker 1: discussion really takes away from the implementation of an adequate
Speaker 1: investment strategy that can continue to perform well in an
Speaker 1: environment where inflation is secularly shifting. It's not just about
Speaker 1: this transitory argument, which everyone's focusing on because of the
Speaker 1: short termism of markets in general. It's really about inflation
Speaker 1: is going to settle at a faster pace. What do
Speaker 1: you do because it's not the strategy that you had
Speaker 1: from two thousand nine to twenty or two thousand ten.
Speaker 1: And can you just explain why inflation being high would
Speaker 1: be good for those cyclical sectors? Um and you know
Speaker 1: you said value small cap national stocks. Why is it
Speaker 1: good for those? So for a lot of different reasons,
Speaker 1: it's better for cyclicals because higher inflation is probably going
Speaker 1: to be driven as much by a faster demand cycle
Speaker 1: than we've experienced in the past. Why are we going
Speaker 1: to have faster demand growth? Why are we gonna have
Speaker 1: faster GDP growth? In my mind, we're going to have
Speaker 1: faster GDP growth partly because the private sector in the
Speaker 1: United States is flush with cash. It's a completely polar
Speaker 1: opposite the experience we had coming about out of the
Speaker 1: Great Financial Crisis, when nobody had anything. Households were in
Speaker 1: complete disrepair, they had no cash, they were really struggling
Speaker 1: to get out from under extraordinary debtloads. Corporates likewise really
Speaker 1: didn't have a tremendous amount of cash. They were able
Speaker 1: to continue borrowing to fund growth, but they didn't have
Speaker 1: all this cash stored up. As a function of the
Speaker 1: fact that we had the most extraordinary expansion in fiscal
Speaker 1: and monetary policy in US history, in households and corporates
Speaker 1: in the United States are sitting on more cash than
Speaker 1: they have ever had. The result of that, I think
Speaker 1: is a long term cycle of much faster demand growth.
Speaker 1: Everybody talks about the supply side. They talk about the
Speaker 1: fact that, oh, supply chains are in disrepair and they're
Speaker 1: going to get better. What nobody's talking about is the
Speaker 1: fact that we're going to have faster GDP growth, probably
Speaker 1: for a longer period of time than anyone is seen
Speaker 1: in a long time. That is going to fuel a
Speaker 1: much faster cycle, which generally benefits the faster earners. The
Speaker 1: cyclical though, those segments of the market that are exposed
Speaker 1: to the cycle, right, So that's part of it. Also,
Speaker 1: when you have faster inflation, you generally assume the commodity
Speaker 1: prices are on the up. Commodity sensitive sectors do particularly well.
Speaker 1: We've been through a period of time in which capital
Speaker 1: spending has been absolutely nothing. There's this coiled spring of
Speaker 1: pent up demand for capital spending. That should improve the
Speaker 1: outlook for industrial space. The big laggard in my mind
Speaker 1: and this kind of market is tech. Nobody wants to
Speaker 1: get out of their tech stocks. Everybody loves their tech stocks.
Speaker 1: But I think that that era is largely over environment.
Speaker 1: Part of it is because tech effectively operates as a
Speaker 1: defensive strategy. Tech had faster growth when growth was slow,
Speaker 1: all of the all of the growth sort of concentrated
Speaker 1: in that one segment, right, And now that growth is
Speaker 1: more equally distributed across segments, is more cyclically oriented, is
Speaker 1: more industrially oriented. You have growth opportunities emerge in other spaces. Also,
Speaker 1: when you have those sort of grower when you have
Speaker 1: a very very slow growth environment, you're much more sensitive
Speaker 1: two interest rates moving, You're much more sensitive to margins. Uh,
Speaker 1: and tech has ample amounts of ability to borrow. They
Speaker 1: also have higher margins. So they looked like the darlings
Speaker 1: of the last cycle from a secular perspective, I don't
Speaker 1: think they'll be the darlings of the next one. So
Speaker 1: that was a pretty um us central yes explanation. What
Speaker 1: about inflation elsewhere? Because um, you know, we won't be
Speaker 1: alone if that ends up being the case. Yeah, So
Speaker 1: what's fascinating right now is inflation really is almost a
Speaker 1: US centric phenomenon. It is not happening at an above
Speaker 1: average pace in roughly half of the globe. In much
Speaker 1: of the globe outside of the United States, there's still
Speaker 1: this UM really a significant struggle with rates of coronavirus
Speaker 1: infection via this now next delta variant, also very low
Speaker 1: vaccination rates. So the result is what happens in the
Speaker 1: US is we have much faster inflation because our demand
Speaker 1: growth is accelerating already. On top of that, you have
Speaker 1: much faster inflation because the rest of the world can't
Speaker 1: supply us with the goods that we've become so accustomed
Speaker 1: to getting from the rest of the world. So it
Speaker 1: amplifies the problem for the US. Really, the concentration of
Speaker 1: risk is in developed markets US, Canada, maybe Germany, where
Speaker 1: you have pretty strong rates of vaccination. You also have
Speaker 1: some import dependence, some goods price sensitivity still UM and
Speaker 1: it's very concentrated. It's definitely not a global phenomenon. Most
Speaker 1: of Asia, for instance, has below average inflation prints still.
Speaker 1: So you just talked about these areas that were cyclical
Speaker 1: and and i'll I call them the bench players, value,
Speaker 1: small caps and emerging markets. They've been bad for ten years.
Speaker 1: At the beginning of the year they started to break out.
Speaker 1: Your call was exactly right. In fact, listen this that
Speaker 1: those three areas and ETFs contributed about thirty three percent
Speaker 1: of the flows up through June, but since then only
Speaker 1: two the whole trade, all of those have just fallen
Speaker 1: off a cliff basically, and this sort of tech growth
Speaker 1: has re emerged, you know, ARC and that whole trade,
Speaker 1: the cues And that's been about six weeks now, right,
Speaker 1: You think that's just that's the head fake. It wasn't
Speaker 1: that the five months before was just another long head
Speaker 1: fake from value. Yep. I think that the head it
Speaker 1: is the last six d eight weeks, and it may
Speaker 1: last for another six day eight weeks. It may last
Speaker 1: even longer than that. But it ultimately to me is
Speaker 1: we probably got a little bit too over inflated in
Speaker 1: our expectations near term for inflation to really break out
Speaker 1: in the short term. Inflation indicators peaked in the short
Speaker 1: term as of May June, and that took some of
Speaker 1: the window of the sales of the cyclical value trade.
Speaker 1: That said, none of the long term charts have really crashed,
Speaker 1: especially for things like value and financials. Small caps is
Speaker 1: trading sideways. Emerging markets has been pretty poor, So it's
Speaker 1: the laggard in that grand scheme of things. But I
Speaker 1: attribute a lot of that to what's happening with vaccinations,
Speaker 1: and in my mind, the opportunity is still there. It's
Speaker 1: just a matter of time before the vaccination has become
Speaker 1: well distributed and those economies can start to make their
Speaker 1: way back. But and to that point, um, you know,
Speaker 1: when you think of inflation going up, I tend to
Speaker 1: think interest rates would be correlated with that. But the again,
Speaker 1: the past six weeks, rates have dropped and so we've
Speaker 1: had a Russianto Treasury e t f S. Again. You
Speaker 1: think that is a temporary Yeah, I think it's a
Speaker 1: function of the fact that inflation expectations peaked in the
Speaker 1: short term. Um, I think the Fed has played a
Speaker 1: little bit of a part in this as well, because
Speaker 1: the bond market is appears to be starting to get
Speaker 1: a little bit worried about the FED normalizing policy, and
Speaker 1: the bond market is doing what it does every time
Speaker 1: over the last ten years. Anytime the Fed's talked about
Speaker 1: normalizing policy, everybody ran into bonds. You know, there's just
Speaker 1: a big tantrum, and they they just think, oh my god,
Speaker 1: without the Fed, how can we possibly survive this? And
Speaker 1: so everyone rushes back into bonds. And then we realize, oh,
Speaker 1: actually the economy is still fine. It's just it's just
Speaker 1: a matter of time. In my mind, is there's just
Speaker 1: a little bit of a freak out in the short term.
Speaker 1: I think it's great, frankly for the longevity of the
Speaker 1: trade that folks are so paranoid that it was a
Speaker 1: short term blip. The value rally was such a short
Speaker 1: term blip, and when we look at the long term charts,
Speaker 1: it was barely even a recovery. Value factor is still
Speaker 1: extremely cheap relative to the rest of the factors, so
Speaker 1: I think, but you do have to have a view
Speaker 1: that you're going to settle into a longer term, a
Speaker 1: higher pace of inflation longer term, and that rates are
Speaker 1: ultimately going to go higher in order for the value
Speaker 1: trade to work. I think that the market is just
Speaker 1: sort of really struggling with that view right now. And
Speaker 1: in e. T. F Land, if you were gonna, you know,
Speaker 1: take that thesis and run with it. Who who potentially
Speaker 1: looks like the big winners and breakout stars. Yeah so again,
Speaker 1: value ets have taken in fifty four billion dollars through me.
Speaker 1: Their old annual record is thirty so they're through half
Speaker 1: a year. They've broken the annual record by almost That's
Speaker 1: the how crazy people got for value. I just worry,
Speaker 1: you know, in small caps too, although to a lesser extent,
Speaker 1: but value et f s in particular, a lot of
Speaker 1: the flows and e t F are off these models
Speaker 1: that have these signals, and a lot of them are
Speaker 1: technically driven. And I do wonder because I've seen a
Speaker 1: couple little it's almost like spring leaks and the dam
Speaker 1: of flows out of the value et F And I'm
Speaker 1: wondering if value crushes between some moving averages, do the
Speaker 1: models get triggered and all of a sudden it's this
Speaker 1: downward spiral. And it's worse because it seems to be
Speaker 1: six weeks you start to get to a point where
Speaker 1: the technicals break down though, yeah you do. And there's
Speaker 1: also this coincidence of value and momentum right now where
Speaker 1: if momentum breaks lower, it's going to be because value
Speaker 1: is breaking lower and vice versa. So there's some additional
Speaker 1: risk because value stocks became momentum stocks. In the short run,
Speaker 1: that's set. As long as they hold a long term trend,
Speaker 1: then the sky's the limit. There's so much head. But
Speaker 1: by the way, um there's an e t F called
Speaker 1: m t U M, which is the ires momentum. It's
Speaker 1: the biggest momentum ETF in the world. Really, it only
Speaker 1: rebounces once every six months. And it went from all
Speaker 1: these tech and growthy sectors into financials and sort of
Speaker 1: more defensive areas. On May thirty one, literally the day later,
Speaker 1: the whole thing reversed. It was like it might be
Speaker 1: the worst rebalance in history. Although if Gina's prophecy turns out,
Speaker 1: it'll all work out. But that's the thing about rebalances
Speaker 1: that every six you know, summer quarterly, summer monthly somewhere,
Speaker 1: but as semi annual, you're locked into those stocks. And
Speaker 1: you're right, momentum and value are kind of tied together
Speaker 1: for a while, right yeah, And and that's going to
Speaker 1: create that could create some turmoil short term, but it
Speaker 1: also could create a much longer term tailwind that everybody's ignoring,
Speaker 1: right momentum typically is a pretty good strategy. It just
Speaker 1: breaks every now and then. But longer term, if you're
Speaker 1: in if you're in the momentum stocks, you're generally outperforming.
Speaker 1: We've been it's been a long time since we've been
Speaker 1: in a market where momentum and value together worked as well.
Speaker 1: But if you look over the long term history, those
Speaker 1: are the magic. That's sort of the magic sauce, if
Speaker 1: you will, is to have some momentum and value exposure
Speaker 1: in your portfolio usually outperforms a broader market and momentum.
Speaker 1: When the academics and the practitioners do it, they usually
Speaker 1: don't use the last month, Yes, and it's for this
Speaker 1: reason because there's these noise and head fakes. Right, So
Speaker 1: again though we're now beyond a month, though, so we
Speaker 1: are getting into a point where it's possible he starts
Speaker 1: to show up. It does I you know, I think
Speaker 1: that it's it's a tricky market. Also because the delta
Speaker 1: variant has played a part of this. Right. We talk
Speaker 1: a lot about inflation expectations, but the fact that we
Speaker 1: saw infections rising around the world again did create a
Speaker 1: flight back into defensive strategies. But when you see things
Speaker 1: like the big famig stocks, the biggest stocks in the
Speaker 1: SMP five, all tech centrics still commanding an extraordinary premium
Speaker 1: over the rest of the index. When you see the
Speaker 1: US still expanding, commanding a premium of the rest of
Speaker 1: the world, even though earnings are not going to grow
Speaker 1: faster than the rest of the world over the next
Speaker 1: twelve months, you know that there's some imbalance, and ultimately
Speaker 1: these in balances reconcile themselves. Um. I think right now,
Speaker 1: you've gotta You're just at a point in time where
Speaker 1: very consistently, when infections are rising, US stocks outperform, and
Speaker 1: when infections are following, US stocks underperform. You gotta get
Speaker 1: to a point where infections peak again. It's so simplistic,
Speaker 1: but it just works, and people move defensively as infections
Speaker 1: are rising, and as soon as they peak, they start
Speaker 1: to move offensively again. And I just think that's played
Speaker 1: a huge part of the last month, probably six weeks,
Speaker 1: maybe even eight weeks, where folks get worried about this
Speaker 1: delta variant and they play that strategy. But it's very
Speaker 1: short term. I mean, longer term, I think many of
Speaker 1: us feel pretty optimistic that ultimately we're gonna get vaccinated.
Speaker 1: We're going to figure this out and things are going
Speaker 1: to change. At the same time, you cannot ignore the
Speaker 1: fact that policymakers are completely on your side. You know,
Speaker 1: there's just it kind of blows my mind, frankly, that
Speaker 1: we're this far into recovery and the FEED is still
Speaker 1: operating a crisis era monetary policy. We're still talking about
Speaker 1: spending more money out of fiscal policy, despite the fact
Speaker 1: that we're at all time high share of GDP in
Speaker 1: fiscal spending. Now, you know, I could go into my
Speaker 1: Boomarati theory right now, but why don't you ask about
Speaker 1: the FED? Bomerti is so tempting, But I mean, listen
Speaker 1: to that. We're just gonna put it on a show.
Speaker 1: I'm trying to make this a thing. Yeah, we're gonna
Speaker 1: come right back to it. Okay. So, so the FED
Speaker 1: Chairman j Pal going to be probably uh at the
Speaker 1: FED a little bit longer, although you know, maybe maybe
Speaker 1: jury is still out just a little bit longer on that,
Speaker 1: But that will be a topic of conversation in the
Speaker 1: coming weeks. What do we expect um from the FED
Speaker 1: and and like there will be some shake up, like
Speaker 1: not everybody in in the FED will be in the
Speaker 1: same places when they get done playing musical chairs, right,
Speaker 1: So so what can we expect. I mean, obviously, as
Speaker 1: you just said, we've had a really devish run. Is
Speaker 1: there any reason to believe that turns hawkish really quickly
Speaker 1: with inflation on the rise? No, you know, I think
Speaker 1: that the FETE has made it really clear. They've they've
Speaker 1: started to move the needle on what will make them
Speaker 1: change policy as well, and they've started to basically guide
Speaker 1: the market to say, look, we're willing to tolerate much
Speaker 1: faster inflation than we have in the past. We want
Speaker 1: to resolve social inequities. This is not language that we've
Speaker 1: typically heard from the FED, maybe even since the nineteen sixties.
Speaker 1: This has not been a huge portion of of monetary
Speaker 1: policy making. We're gonna use average inflation prints. Um, you know,
Speaker 1: the standard inflation measures are inadequate. So this is a
Speaker 1: lot to all of this to me, says this FETE
Speaker 1: is going to remain easy to force the hand of
Speaker 1: inflation to be higher than it has been in a
Speaker 1: very long time. And the FETE is very supportive of
Speaker 1: inflation strategies. Now, will they ultimately have to catch up
Speaker 1: and probably create a slightly more painful environment for risk taking. Yes,
Speaker 1: but is it going to be within the near term. No, because,
Speaker 1: especially if you think about what's going to happen next week,
Speaker 1: what's your immediate thing to say. If you're a Federal
Speaker 1: Reserve chairman that wants to air on the side of dubblishness,
Speaker 1: you talk about the delta variant threatening growth, and you
Speaker 1: talk about how we're you know, we're not a certain
Speaker 1: that things are going to be better, so we don't
Speaker 1: need to worry about easing policy. Um. So I think
Speaker 1: that the excuse wagon can go on for a very
Speaker 1: long time, especially if inflation rates are peaking in the
Speaker 1: near term. As long as those inflation rates are coming down,
Speaker 1: there's just no reason for them to get two concerned
Speaker 1: and and they've told us they're not going to be
Speaker 1: so there's no reason to air on, you know, any
Speaker 1: other way. Now. Personally, I think they should be tightening
Speaker 1: like crazy already, because I think that the economy is
Speaker 1: absolutely on fire and no one wants to acknowledge it.
Speaker 1: For whatever reason. It's very unpopular to do. Um. But
Speaker 1: they're not going to well what okay, so let me
Speaker 1: drop the theory on you, okay, because are you going?
Speaker 1: I am so okay? The U S stock market is
Speaker 1: the since we went to four one K plans, all
Speaker 1: of our money is now in this in the stock market.
Speaker 1: That's we don't have pensions anymore. And so isn't there
Speaker 1: a theory that the FED can't let it go down?
Speaker 1: And then if you think who owns the U. S
Speaker 1: Stock market? I don't know, number I think of. It
Speaker 1: is owned by boomers. First of all, only percent of
Speaker 1: the country owned stocks. So by the FED pumping up stocks,
Speaker 1: you are leaving behind. That's a whole another story, that's
Speaker 1: the wealth gap. But by keeping that, yeah, and by
Speaker 1: keeping the fifty up, you certainly are allowing the retirement
Speaker 1: funds of America to be cool. And since the boomers
Speaker 1: have almost all of that money, and the boomers are
Speaker 1: totally in power, whether it's Trump or Biden, they're both boomers,
Speaker 1: whether it's Pal, whether it's the people leading the big
Speaker 1: asset managers, and a lot of them go and work
Speaker 1: with each other, like one person will leave the FED
Speaker 1: and go work at black Rock and vice versa. Is
Speaker 1: there what about this theory that I called the boomarati?
Speaker 1: Maybe there's a better word for it, that that class
Speaker 1: of people in power will never let the stock market
Speaker 1: go down. They can't. It's their retirement money. Well, Mike dropped.
Speaker 1: I stumped her. She never thought of it's that crazy
Speaker 1: the mic has made of tinfoil um. So I don't
Speaker 1: think that that it's possible to never let the stock
Speaker 1: market go down. Right, the stock market crash and three
Speaker 1: weeks last year it crashed more times in the last
Speaker 1: ten year. We had more corrections in the last ten
Speaker 1: years than in any ten years in history. Well, when
Speaker 1: I say crash, I mean like a real, a real
Speaker 1: good one, a one that rips your face off, Like
Speaker 1: we had a fifty percent crash in two thousand eight,
Speaker 1: another fifty percent crash in two thousand, two thousands. These
Speaker 1: have we have actually been through over the last twenty years.
Speaker 1: The reality of the situations were not the FED was
Speaker 1: not really coddling the market in those two crashes. Oh,
Speaker 1: they definitely coddled the market all the way through because
Speaker 1: we had Scott Um. I forget the increasingly coddled the market.
Speaker 1: I will agree with you there, but they've they've coddled
Speaker 1: the market all the way through. And yet the twenty.
Speaker 1: The past twenty years, we've been in a bull market,
Speaker 1: but it's been a very volatile and frankly, extremely difficult
Speaker 1: bowl market to make money, and because you've had these
Speaker 1: very frequent and very vicious corrections in the equity market. Now,
Speaker 1: I think that the equity market historically goes through massive
Speaker 1: bull phases and massive bare phases, and we just happened
Speaker 1: to be in a massive bull phase. Is it all
Speaker 1: because of the FED? I don't necessarily believe that. And
Speaker 1: you know, I do think that there are financial centers
Speaker 1: of power, and you know, I would love to glom
Speaker 1: onto a generational sort of battle, but I'm not sure.
Speaker 1: I'm not I'm just I'm just not sure that you
Speaker 1: know that there is anything people too much. The FED
Speaker 1: does get very sensitive. To be fair, though, the FED
Speaker 1: does get very sensitive to corrections in the equity market,
Speaker 1: and the fact that they respond as fast as they do,
Speaker 1: I would suggest that they do believe the equity market
Speaker 1: has something to say about the economic outlook. Let's just
Speaker 1: leave it at that from me, Yeah, And we asked
Speaker 1: the Janis twenty manager who was managing that fun in
Speaker 1: two thousand when the Internet bubble burst and it went
Speaker 1: down fifty, as you said, and we asked him in
Speaker 1: our interview, you know, did did you ever did do
Speaker 1: you go through your mind that the FED would step
Speaker 1: in and help? And he goes, no, I never had
Speaker 1: that thought. Now it's if markets now five percent off,
Speaker 1: it's all time highest. People like, where's the FED? So
Speaker 1: I also think the investor base is now a little spoiled. Well,
Speaker 1: it's also the market is very correlated to what happens
Speaker 1: in the FED. The market is obviously clearly you know,
Speaker 1: bought into the idea that the FED is a credible
Speaker 1: driver of stock prices to some degree at least. I mean,
Speaker 1: every time they've tried to normalize the balance sheet, it's
Speaker 1: created turmoil for stocks. In both two thousand and eight
Speaker 1: and in as soon as the FEDS stepped in with
Speaker 1: massive intervention, it created a new upswing. So it's very
Speaker 1: relevant for sure. One of the things that you tell
Speaker 1: me sometimes, and I also see people talk about on
Speaker 1: twitters who's leading? Who is the bond market leading the
Speaker 1: stock market or is the stock market leading the bond market? Um,
Speaker 1: I think a lot of the bond world is a
Speaker 1: mystery to most regular people too. I think stocks are more.
Speaker 1: I don't know in their face, but um, can you
Speaker 1: talk about that and where you think that stands right now? Um?
Speaker 1: I do think the bond market generally leads the stock market.
Speaker 1: I mean, look, obviously, the cost capital is determined in
Speaker 1: large part by where interest rates are, so the bond
Speaker 1: market does matter. Where I think we lose the plot
Speaker 1: a little bit is in the long term perspective. So
Speaker 1: for the last twenty years, stocks prices and bond yields
Speaker 1: have been very positively correlated. So when bond yields rise,
Speaker 1: stock prices rise, and vice versa. The twenty years prior
Speaker 1: to that, it was the opposite scenario. What's the big
Speaker 1: difference there? For the last twenty years, we've been contending
Speaker 1: with deflation disinflation. For the twenty years prior to that,
Speaker 1: the general psychology was we are inflation is a bad thing,
Speaker 1: right that that psychological shift or real economic shift even
Speaker 1: created a very different relationship between stocks and bonds. And
Speaker 1: I think you want to keep your eye on this
Speaker 1: very carefully going forward, because in my view, we could
Speaker 1: be at a critical turning point where at some point
Speaker 1: rising bond dealds is no longer a good thing for stocks.
Speaker 1: It's not any time soon. Right now, we still need bonding.
Speaker 1: We can still tolerate much higher bond dealds from where
Speaker 1: we are, and the bond market will likely lead the
Speaker 1: stock market because higher bond deilds is great, It indicates
Speaker 1: an improving economic outlook, improving sentiment toward risk. Lower bond
Speaker 1: deals is generally not so good. Generally leads to worsening
Speaker 1: economic conditions, and the bond market is usually pretty keen
Speaker 1: to forecast is correctly love that. Uh, as long as
Speaker 1: we're talking about relationships, are there any other ones? This
Speaker 1: is what I'm talking about, like going big with Gina.
Speaker 1: Are there any other relationships like that that you you
Speaker 1: think a student investors should be watching going forward? There
Speaker 1: are quite a few. Actually. Um, that's the That's the
Speaker 1: big overwhelming secular relationship that I think is absolutely most
Speaker 1: important to keep your eye on. Uh. The other thing
Speaker 1: that I think you want to keep your eye on
Speaker 1: really carefully as inflation expectations, because I think we've gotten
Speaker 1: accustomed to this notion that, um, any burst in inflation
Speaker 1: expectations are very short lived, kind of like the value story,
Speaker 1: any burst in value of performance has got to be
Speaker 1: shortlived because it hasn't happened, and they have not endured
Speaker 1: over time. But we've gotten a number of new inflation
Speaker 1: prints over the course of the last six weeks, six
Speaker 1: six to eight weeks that have suggested that this inflation
Speaker 1: may endure. We're starting to see signs in wages that
Speaker 1: suggests the inflation um conditions may endure, and a wage
Speaker 1: price spiral starts with consumers saying I think inflation is
Speaker 1: going to be higher for a longer period of time,
Speaker 1: going to their employer and demanding higher wages, and then
Speaker 1: you get a spiral, right, and then inflation stays stronger,
Speaker 1: and it just reads to me, the economic landscape reads
Speaker 1: to me right now that we may be at that
Speaker 1: turning point. So I think you want to watch inflation
Speaker 1: and expectations really, really carefully. In the short run, everything
Speaker 1: is going to revolve around peak growth. We've got peak
Speaker 1: growth and inflation. In short term, peak growth and inflation,
Speaker 1: peak I s M surveys, peak earnings growth. It just
Speaker 1: peak everything this summer, and the sequence of momentum in
Speaker 1: in growth does matter for investment outcomes. I think it's
Speaker 1: the underappreciated story of what happened in the last six weeks,
Speaker 1: we've got peak everything. Where do we go from here?
Speaker 1: We've got to absorb the idea that we're no longer
Speaker 1: going to see that persistent upward momentum in every indicator
Speaker 1: that we follow. So that's another thing that I'm watching,
Speaker 1: um um. And back to the bond thing, which is
Speaker 1: the connection there. When you talked to earlier about yields
Speaker 1: and stock prices, I want to just invert that and
Speaker 1: say that what you were saying is that bonds and
Speaker 1: stocks moved together lately. Yeah. Right, So if you have
Speaker 1: a sixty forty portfolio, which a lot of people do, Um,
Speaker 1: what are you supposed to do with that? Well, it's
Speaker 1: more they both go down together. Well, the yield rises
Speaker 1: when stock prices rise, so bonds sell off when stock
Speaker 1: prices are rising. So that's typically right, that's what's happening now. Yes,
Speaker 1: over the past ten years, they they sometimes will start
Speaker 1: to move in tandem. Everybody just sells everything. That's what
Speaker 1: happened in March and crashes. What often happens is the
Speaker 1: bond market actually just absolutely rallies to the end of
Speaker 1: the earth and the stock market crashes. Um. You know,
Speaker 1: the portfolio and part has worked as well as it
Speaker 1: has because of this relationships occurred over the last twenty years.
Speaker 1: There are a lot of people, you know, you talk
Speaker 1: about broader diversification, there are a lot of people really
Speaker 1: struggling with if I move into an environment in which
Speaker 1: stocks and bonds are no longer correlated to degree that
Speaker 1: they have been in the past, and inflation is a
Speaker 1: very different concern, how do I structure my portfolio. I
Speaker 1: think this is one of the reasons, one of the
Speaker 1: other underappreciated reasons why people are pushing into crypto. It's
Speaker 1: an alternative asset. People are taking from their bond allocation
Speaker 1: and putting it into alternatives of any description, crypto being
Speaker 1: part of them, but private markets being the biggest chunk
Speaker 1: where they're saying, look, I can't tolerate an environment where
Speaker 1: the bond market in the stock market aren't correlated consistently
Speaker 1: over time in my portfolio. What do I do in
Speaker 1: that scenario? And it's one of the most critical questions
Speaker 1: for a longer term asset owner allocator In my mind,
Speaker 1: I have one that just is a little off topic,
Speaker 1: but it's I'm related, it's on topic, but I've been
Speaker 1: doing a lot of research into Jack Bogel, the Vanguard founder,
Speaker 1: for a book project, and in many of his books
Speaker 1: he talks about where returns come from for stocks um
Speaker 1: and I think it's a great way to sell an
Speaker 1: index fund, because if you buy an index fund, you're
Speaker 1: sort of buying the internal rate rate of return of
Speaker 1: the whole Enchilada. It's not as average or basic as
Speaker 1: it seems. You're actually writing capitalism's coattails. What do you get?
Speaker 1: He says, there's two things, earnings, growth and dividends. That's
Speaker 1: really it. I mean, that's what you get in return.
Speaker 1: Then there's this third element that's a little bit of
Speaker 1: a devil, which is speculative return. That is where pees
Speaker 1: go up really high, and that's where people lose their
Speaker 1: minds behaviorally. And I just was in his book and
Speaker 1: when I interviewed him last about five years ago, he said,
Speaker 1: according to my calculations, those two things earning growths and
Speaker 1: dividend dividends, we're only going to get four to six
Speaker 1: percent from the stock market over the next decade. Well
Speaker 1: it's been like triple that. So are we on living
Speaker 1: on borrowed time? Is there too much speculative return? I mean,
Speaker 1: how much do we have to give give back at
Speaker 1: some point to be back on that math. Yeah, So
Speaker 1: I think that there's a lot there's a lot of
Speaker 1: nuance around this, right, because it's really free cash flow.
Speaker 1: It's really cash flow that you're talking about, because cash
Speaker 1: flow drives both the earnings growth in the dividend. If
Speaker 1: the company is acceller, is it creating positive long term
Speaker 1: cash flow. That's what's going to drive the both of
Speaker 1: those factors and drive the price. And cash flows have
Speaker 1: been relatively low, but you get an artificial inflation in
Speaker 1: earnings growth even if cash flow is low. If interest
Speaker 1: rates are low and tax rates are low, and that's
Speaker 1: the environment that has cultivated a much stronger stock market return.
Speaker 1: In my mind, then you would have had just given
Speaker 1: if you were just looking at cash flow growth. You also,
Speaker 1: as a result of the fact that you have those
Speaker 1: low interest rates, you've had an inordinate period of time
Speaker 1: where buy backs have dominated, and buy backs change the
Speaker 1: EPs calculation, so you don't have core earnings. But if
Speaker 1: you look at EPs that the company looks quite different
Speaker 1: because your share account is being reduced. So there are
Speaker 1: a lot of there are a lot of nuances around this.
Speaker 1: I do think ultimately that you derive the value of
Speaker 1: a share price via the cash flows of the company.
Speaker 1: I totally agree with that, but I think you do
Speaker 1: need to discount those cash flows at a certain interest
Speaker 1: rate in order to get the the actual value um
Speaker 1: And I also think you want to pay attention though,
Speaker 1: because if we go into an environment where interest rates
Speaker 1: are rising over on trend and taxes are also increasing
Speaker 1: on trend, it creates a very different scenario for bottom
Speaker 1: line earnings then we've had in a long period of time.
Speaker 1: But maybe we can have faster cash flows to make
Speaker 1: up for that, right, I guess that's the question. And
Speaker 1: that's also where you know the idea that inflation lifts rates,
Speaker 1: which would then you have some of these high flying
Speaker 1: stocks would sell off a little bit. Yes, why ARCS
Speaker 1: tends to be pretty correlated to rates. Lately, ARC has
Speaker 1: been like I don't know, it's like you've got the
Speaker 1: spy than the cues and ARCS really out there in
Speaker 1: terms of being into some of the reverly growthy names.
Speaker 1: And then so there's a lot of people are looking
Speaker 1: at ARC as sort of a being sensitive to to
Speaker 1: rates because they buy a lot of those stocks that
Speaker 1: might not have the cash flow well, and they look
Speaker 1: like they don't have the cash flow necessarily, but they also,
Speaker 1: in an environment where growth is perilously low, look amazingly strong. Right.
Speaker 1: If if you can sort of think about the theory
Speaker 1: of innovative companies, as these are the fastest growing companies
Speaker 1: in the world in an environment where there is no growth,
Speaker 1: they look amazing. Well, what happens in an environment where
Speaker 1: growth is much stronger and more distributed across industries. Suddenly
Speaker 1: maybe that doesn't have quite the panache that it had
Speaker 1: in the past, Right, And I think that that's part
Speaker 1: of the part of the thesis that we have is
Speaker 1: when you're an environment where there is no growth to
Speaker 1: be had, Sure, a lot of these companies look amazing
Speaker 1: because the growth is all concentrated in their in their names,
Speaker 1: and they have all the potential of the future. But
Speaker 1: if the future starts to look a lot brighter and
Speaker 1: a lot of other industries start to participate in that future,
Speaker 1: which has been sort of boxed out of the growth
Speaker 1: environment for so long, all of a sudden, your investment
Speaker 1: opportunities at bronze and you can think about buying an
Speaker 1: industrial company, You can think about buying a consumer company.
Speaker 1: God forbid, you might even you know something else beyond tech. Um.
Speaker 1: I do think they're going to come out with like
Speaker 1: an E t F like stuff you need E t F.
Speaker 1: Like they're going to start to relabel staples and to
Speaker 1: catch your things stuf as T Yeah, I know you want.
Speaker 1: That's for the big one. One of the questions I
Speaker 1: have for you and the way you talk about growth
Speaker 1: and they and the economy and you and I discussed
Speaker 1: this a lot, which is being bullish, being optimistic. You're
Speaker 1: generally gonna get wealthier. That's said as an analyst who's
Speaker 1: looking for readership and to make noise. It's tempting to
Speaker 1: be the bear, to be the top caller, to be
Speaker 1: the big, short, cool guy. Right. You obviously don't do that.
Speaker 1: You tend to generally look at the bright side. You
Speaker 1: find things in the data and if you're following you,
Speaker 1: you've made more money than the person. Because we we
Speaker 1: know there are some who are constantly looking at what's
Speaker 1: going to go wrong, and it looks good, it looks sophisticated,
Speaker 1: looks like you're caring about the about everything. Um, and
Speaker 1: there's no opportunity costs. No one ever goes back to
Speaker 1: the bears and says, oh, you were wrong. I went yeah,
Speaker 1: whereas the bulls, God forbid, the market goes down there,
Speaker 1: Like Gina, you said, it was okay. So can you
Speaker 1: talk about that idea of taking the optimistic road. It's
Speaker 1: very es right. I mean, it may be as a
Speaker 1: function of my age. I don't know, um, but I
Speaker 1: think it's I think it's due to just the popular
Speaker 1: psychology of the last twenty years, particularly in the equity market.
Speaker 1: Since the crash of two thousand, it has been very
Speaker 1: popular to look over your shoulder for that next crash.
Speaker 1: Anytime you can. You know, to the degree that you
Speaker 1: write an article or publish a thought peace on that
Speaker 1: appeals to popular psychology, you're more popular. Unfortunately for me,
Speaker 1: I just don't care if I'm popular. I just want
Speaker 1: to be right. But you know that you could say
Speaker 1: the opposite was true in the nineteen nineties. I would
Speaker 1: imagine if you were writing articles of optimism, you were,
Speaker 1: you know, very popular. In the nineteen nineties. It was
Speaker 1: a very strong bull market condition where everybody had optimism
Speaker 1: about the future of equities. It's just very different. It
Speaker 1: makes me feel great about the durability of the longer
Speaker 1: term bull market. You know, as long as it's very
Speaker 1: unpopular to be positive, it's probably the right call. Um.
Speaker 1: But in words, not everybody is so enthusiastic where you
Speaker 1: feel like, wait, everybody is losing their mind here in
Speaker 1: a positive way, exactly exactly. As long as we're always
Speaker 1: looking over our shoulder for that next big risk, then
Speaker 1: you probably have a much more rational market in general.
Speaker 1: Is it's very healthy to constantly be looking for risk?
Speaker 1: In general? It's it's tough to be an optimist in
Speaker 1: that crowd and get attention. Nonetheless, Nonetheless, it's it's been
Speaker 1: the right call, So I'll stick with that. Okay, I've
Speaker 1: got a final question, which is it's mid year review
Speaker 1: season here at Bloomberg House. Is there anything that that um,
Speaker 1: Eric needs to work on? Oh my gosh, I don't
Speaker 1: think I can possibly air that. Eric's been great. Do
Speaker 1: you know I got one other one for you? And
Speaker 1: I think I've asked you before. Oh, no, favorite et
Speaker 1: F ticker? Oh, I don't know that I have one.
Speaker 1: But I really like M TOM because I'm a technician.
Speaker 1: So the only reason I like it is, yeah, um,
Speaker 1: the only reason I like it is is because I
Speaker 1: do believe the momentum is, over the long term, a
Speaker 1: very very viable equity strategy. So I would just buy
Speaker 1: momentum if I had to buy any individual factors. Good
Speaker 1: Nobody ever said that's a good one. Yeah, yeah, sorry,
Speaker 1: that's not that exciting. Geena Martin Adams, thanks so much
Speaker 1: for joining us on Trillions. Thank you for having me,
Speaker 1: Thanks for listening to Trillions until next time. You can
Speaker 1: find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcast, Spotify,
Speaker 1: and wherever else you like to listen. We'd love to
Speaker 1: hear from you. We're on Twitter, I'm at Joel Webber Show.
Speaker 1: He's at Eric Falcuna's. This episode of Trillions was produced
Speaker 1: by Magnus Hendrickson. Princesca Levi is the head of Bloomberg Podcast. Bye.