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Hello, and welcome to What Goes Up, a weekly markets podcast.
My name is Mike Regan.
I'm a senior editor at Bloomberg.
And I'm Valdana Hierarch, a cross-asset reporter with Bloomberg.
At this week on the show, well, don't pinch yourself.
You're not dreaming.
And don't bother to call the IT department to adjust your computer monitor.
It's working fine.
The stock market really did just put in one of the strongest first haps of a year in forever,
at least for the Nasdaq 100, which as of this recording is up about 37% so far in 2023.
So how exactly did that happen when everyone in their dog was calling for a recession this
year?
And what can we expect next?
We'll get into it with a very special guest.
But first, Valdana, I think many listeners are probably familiar with the famous Bloomberg
pantry.
We're very lucky to have snacks and coffee and soft drinks.
What's your favorite part of the Bloomberg pantry?
Bloomberg pantry.
Okay, we have these really cool machines that I heard are straight from Italy that make
lattes.
Yeah.
You use those?
I do.
They're like dotted all over the place.
One of them is brand new and makes like the silkyst latte.
So I love those.
I was going to be corny and say the people.
Oh my God.
Please don't make me roll my eyes.
All right.
I was walking through the pantry the other day and there is something to being back in
the office and not working at home all the time because you're running the people.
I had my eggs, my hard boiled egg, my coffee, a pocket full of red licorice.
And I ran into our guests this week and made me think, you know what, it's about time
we had her on the show.
We have a lot of strategists on the show from outside of the firm.
But we're lucky to have one of the best in the business right here.
When I see her in the hallways, I never say hi because I'm like, oh no, I'm leaving
her alone because she needs her time.
She's so busy.
Really?
Really?
Yes.
I never say hello to me.
Oh, I never say hello to you on purpose.
I'm like, oh, turn the other way.
Completely different reason.
I guess.
Turn the other way.
Yes.
Okay.
It's Gina Martin Adams, chief equity strategist at Bloomberg Intelligence and she's been
on the show before and we're so lucky to have you back.
Thank you for joining us.
Well, thank you for having me.
That was quite an introduction.
Well, you should just stop it right there on that high note and call it a quiz.
Thanks everybody for listening me this week.
But it's a good week.
Gina to have you on you.
You guys just came out with your mid-year outlook for equities.
Talk to us about sort of your main takeaways about this crazy strong rally we've seen
this year and what we should take away most from the mid-year outlook.
Yeah.
I think there's a lot to unpack with the market so far this year.
I think the biggest takeaway for me really is we cannot drop the ball on following
earnings trends and earnings did give us a lot of indication that 2022 was going to
be weak.
They also have given us a lot of support in 2023 and I think that many people just missed
the gains in the equity market.
It has been a powerful rally but remember it comes off of a really rough go in 2022 for
that NASDAQ and for some of those tech stocks.
So earnings trends very, very important inflation likewise important not only for its impact
on earnings trends but because inflation in the 70s and 80s was a really great timing
mechanism for stock tops and bottoms once again inflation peaks tax bottom and we're off
to the races as inflation is decelerating so that's a that's a big takeaway from us.
I think thirdly sentiment is still pretty mixed a sentiment gave us an indication in
October of last year that we should start getting more constructive to stocks because
everybody else had left the building.
There was just nobody left that wanted to touch equity markets and sentiment is still
somewhat mixed.
I do think that people are still really nervous about this potential economic recession and
how deep or long it may be people are still really nervous about the Fed as long as I keep
getting pushed back from people that we shouldn't be constructive then we probably should
be constructive.
I really like the very first line of the mid year of your mid year outlook.
So I want to read it, stocks should breathe a sigh of relief as the inflation pig appears
to have passed through the S&P 500 earnings Python that's so good and so visual thank you.
And then you also mentioned margin pressures from 2022 they're fading and should offset
any revenue weakness.
Can you talk a little bit about that and then also about the idea I want to bring AI into
this as well like if we are expecting all these companies to be spending on AI does that
hurt margins?
Yeah.
Really great questions.
So I am very well known as being obsessed with margins as a matter of fact one of my associates
one time accidentally wrote my name Gina Margin Adams on a piece of work instead of Gina
Martin.
She says it was an accident but it's just something that I follow very, very carefully and
margins had been just crashing when inflation was accelerating margins X energy which is
an important clarification on the S&P 500 crashed from late 2021 right through to the
first quarter of this year but started and we're starting to see margin improvement occur
on the index and that is a direct reflection of the inflation landscape consumer prices
are decelerating producer prices growth is also decelerating but consumer price growth
is decelerating the slower pace than producer price growth and that margin is directly impacting
the S&P 500.
On top of that we did go through some pretty significant layoffs in 2022 and that's enabling
margin recovery for some of the index.
So what we're starting to see is actually green shoots in the earnings stream and we started
writing about this in the first quarter of the earnings season people were like you got
to be crazy the economy is going to fall apart you can't you can't have green shoots
in the earnings stream when the economy economy is going to be falling apart but that's
what we see and as long as that continues that fundamental shift in margins should lead
to much better earnings stability for the index going forward in particular for X
energy sectors.
Now tech is a really interesting phenomenon right now because what's happening in tech
is in some cases very different from what's happening in the rest of the index and in
some cases the same and in where it's very different is there is optimism in tech there's
optimism nowhere else in the S&P 500 the equal weighted S&P is still trading below its
pre-pandemic average levels but there's a ton of optimism in tech tech valuations are
at pandemic peaks and the S&P specifically and that's a function of both margins starting
to improve this really started the tech rally nobody wants to admit it because everybody
thinks it's all about AI but the reality is tech cut costs tech cut those costs that created
a margin bottom for tech and created an uptrend an up draft in earnings estimate revision
for that space going into later that later part of this year so that created the initial
rounds of optimism and then what's different is AI and AI certainly is driving an anticipated
recovery and spending at large and capital spending in particular that impacts different
segments of tech and communications and some of the consumer discretionary sectors in
very different ways so some of the companies that are big beneficiaries of that capital
spending obviously can see really significant revenue growth to offset any any spend that
they have to develop product companies that are simply going to have to spend in order
to on board have face a different scenario they'll need to see revenue growth in other
spaces but it does appear to be creating this sort of snowball effect throughout the
entire in the entirety of the tech sector where there is this optimism embedded in prices
that could be a risk it later this year if tech companies aren't starting to post the
earnings growth that it's anticipated in that valuation then we could face some down draft
in tech but for now it looks like it's only creating an up wave in expectations gee one
of the most interesting things to me in the mid year outlook is you guys have at at
BI equity strategy have your own economic regime model that model actually suggests that
the recession is coming gone that it's happened in what the second half of 2022 which sort
of makes this market make a lot more sense than everyone bracing for a recession but could
you walk us through sort of the inputs of that model on what exactly it's showing and what
makes you make that analysis that it really look like a recession last year yeah so the
economic regime model we we designed this I designed this many many years ago when I was
with another firm that shall remain nameless but nonetheless it is designed to give us a
read on the current read on the economy by indicators that are historically very meaningful
for predicting stock prices so we really isolate that read on the economy and into four
factors we use consumer confidence we use ISM we use capacity utilization and we use continuing
claims and those four factors together have given us we put them into a logistic regression I don't
want to get too nerdy but nonetheless most of the time those factors give us an output of a
range of from zero to one and most of the time they give us an output of near one which would
suggest the economy is just fine the input from the economy for the equity market is very positive
you should expect positive returns over time when the when the output is at one when it drops
below one it creates risk to the equity market right and so this indicator gave us an
it started suggesting there were economic risks emerging for the equity market as early as June
of last year and then it hit just an outright low level like a low that you never see outside of
recession near zero in December of last year so we effectively had this big loss of momentum in
the economy then impacted the equity market extremely negative between June and December of last
year since December it's certainly not out of the woods it's still terrible the reading is awful
it suggests we may and we may actually still be in some form of an economic correction or recession
but it's off of the low so this is what's really meaningful for price direction is as we know
equity prices are driven by shifts in momentum right so even if the economy is still in recession
the recession reached its big momentum trough according to this indicator as of December now this
is really contradictory to any economic thought out there and you know every economist will tell you
no way we're in recession the job market was very stable I was going to ask what was the main
driver of that was it poor consumer confidence mainly oh it was everything I mean you know
remember ISM peaked all the way back in 2011 we use or 2021 we use ISM as another indicator as
a component of our market health checklist and it gave us a really early read that things were going
south as of the end of 2021 so ISM was plummeting for much of last year may have crested
it's low as well and that certainly helps continuing claims were stable to higher so they weren't
particularly great consumer confidence was awful we had those two back-to-back negative GDP
readings as well we did there were definite weaknesses and we saw that really clearly in earnings
and I think that this is the important point I'm not trying to make a forecast for the economy
it doesn't matter to me whether we fall into a technical recession or not I need to forecast earnings
and I need to forecast what's going to happen with or figure out what's going to happen we're
likely to happen with stock price returns and these four indicators as a group I've done a very
good job of suggesting to me where I should be with respect to the equity market and how
constructive you want to be and basically what it said is go as far away from equities as you can
in June and in December get back in and that's what the model said to us and it may or may not
eventually prove to be the case that we did or did not fall in recession in 2022 but
the economic indicators that matter to me as an equity strategist suggest that the distress
has reached some sort of low point we're still somewhat distressed but not as distressed as we were
last year with all the chaos and turmoil in the news it feels like we never get to hear about
the good happening in our world we're on a mission to change that welcome to the good stuff I'm Jacob
Schick a third generation combat Marine and I'm his co-host and wife Ashley Schick we believe
everyone has a story to tell not only about the peaks but the valleys they've been through to
get them to where they are today as we get to tell stories of inspiration and perseverance
we're joined by some amazing guests who share the lessons they've learned that shape two
they are and what they're doing to pay it forward and give back our guests range from some of my
fellow warriors to NFL cheerleaders to extreme sports legends to New York City firefighters
who survived 9-11 listen to the good stuff on the iHeartRadio app Apple podcasts or whatever you
get your podcast
there's so much news happening around the world that we're somehow supposed to stay on top of
that's why we launched the big tick it's a daily podcast from Bloomberg and iHeartRadio that
turns down the volume a bit to give you some space to think I'm Wes Kosova each weekday I dig
into one important story and talk about why it matters listen to the big tick on the iHeartRadio app
Apple podcasts or wherever you listen this is really interesting to me because I feel like in
recent days more and more people have been bringing up the fact like we've been waiting for this
recession there still aren't crazy great signs that something is happening right now but somebody
I spoke with earlier this week said if you're looking at the market if you look at small caps for
instance where you mentioned the eco weight S&P index that actually you could almost make the
argument that those stocks are pricing in a recession because they're what do you make of that
yeah and as a matter of fact I think large caps priced in recession as well last year we run a
different model we call it our fair value model and this is a model that utilizes consensus
expectations to suggest where the fair value for various equity markets are around the world
macro economic expectations and that model at the lows of last year was anticipating a 15% decline
in earnings coming over the next 12 months so that would say that okay if the market is right here
as of October 1st 2022 we are officially headed into a major earnings recession in 2023
a major decline in earnings of 15% more because remember earnings were already declining by that
point in time so that would be equivalent to roughly a 20% drop in earnings which is very
consistent with historical recession experience we already priced it in the equity market
and unless we get a greater than 20% drop in earnings those lows are probably pretty firm
yep the October lows are probably pretty firm at least that would be what was implied in that
in that model at that time small caps very similarly small caps are much more economically
sensitive or sensitive to the the movements in the US economy than our large caps so the
divergence between large caps and small caps could be easily explained by the ongoing weakness
in the domestic economy the divergence between what's happening in tech and some of the bigger
cap names and some of the multinationals that are more sensitive to foreign exchange in large caps
versus small caps which don't get those benefits of the dollar move small caps are not as
beneficial not as benefited by a re-emerging Asia out of COVID restrictions where large caps get
a little bit of boost there so there's I think a lot of what's happened in the equity market as
much as people think it's very mysterious and things are not explained by fundamentals I actually
think the the equity advances largely explained by some fundamental shifts well you also discuss
the notion of a fed pause in your outlook and what historically has happened after a pause I guess
we don't really know if yeah this is the highest that the fed funds rate will be Jerome Powell keep
saying maybe probably two more quarter point increases this year I feel like the market could digest
another half point on on the fed funds rate after this and and you know whether this is a pause or
it's a pause after another 50 basis points I don't think is that big of a difference but I do wonder
you know if we do plateau there for a while and the bond market falls in line with that and we have
an elevated risk free rate compared to what we saw a pre pandemic how does that influence
you're thinking on what the market will do and valuations specifically does that suggest to you a
a sort of lower ceiling for valuations or does this tech euphoria overshadow that and out way
where the risk free rate is going to be yeah I it's a really good question I think the equity market
will really dismiss anything that happens with the Fed in the short run I think that we're kind of
over it right it's just yeah okay we're pausing you might hike one or two more times but it's
largely been the near term price action is the near term action from the Fed has been priced
I do think there's a risk though that the bond market is very convinced that this is not a pause it's
just a short term pause that leads to a series of cuts and we do see that sort of infiltrating
equity market psychology through valuations for long duration versus slow duration stocks so
hydration equities are much more sensitive interest rates hydration equities are still trading
increasingly trading at a premium to low duration equities which would substantiate that bond
market forecast so I think later this year you do have some risk if the economy does not comply if
we don't ultimately fall into that growth malaise or recession if we don't see inflation really
viciously come down to more normalized levels than the bond market has to adjust and that will
have impacts on the equity market this it won't be as negative as the last year's impacts because
you have the offset right if the bond market is having to adjust to then an outlook where the
Fed funds rate doesn't have to come down and instead stays stable for longer that only impacts
valuations because that only happens in an environment where economic growth is actually still
stronger than anybody had hoped right and inflation is coming down and so that offset that
stronger economic growth than anybody had hoped with a decelerating inflation is very good for
the earnings stream and it really substantiates 2024 forecasts for earnings which should help
the equity market sustain that movement but it will create volatility and equities probably for
longer duration equities more than short duration equities that's what I'm worried about with respect
to the Fed that longer term I remember it was just a couple of weeks ago I think when people
some people were suggesting the Fed was going to start cutting in July yeah yeah is now yeah
but I want to ask you just to go back to the AI theme just broadly speaking what you make of it in
terms of it being such a big driver for the rally for companies spending on AI and what the
possibilities are of it driving not just spending with the big mega caps but also with I don't know
smaller companies that might start utilizing AI in different ways and how that might be beneficial
or even underpin the bull case yeah I think it's really early to say what the potential of this
is long-term and certainly we'll go through the process of trying to price that over the next six
to 12 months that said every cycle starts with some new innovation some new catalyst for growth
and what you do tend to find is that if you get this catalyst for growth it emanates throughout
and tends to broaden in terms of its impact on industries companies and sectors at large
and think about this if we're able to accelerate the utilization of AI and tech there's no reason
why that ultimately would not also benefit the margins of even consumer staples companies long-term
right so this is right now really being implemented as a driver of revenue growth right and I
think that's the psychology right now is that this will help drive revenue growth long-term for tech
what we haven't thought through and probably the second derivative impact of this is okay
it'll help drive revenue growth for tech and companies will spend a little bit more on this
they'll probably shift spending so it's not a net net margin drag in that capacity instead of
spending on other capital investments they'll spend on AI presumably in that sense if they're
spent spending the same amount they're elevating the value of revenue or they're elevating
revenue growth potential for the tech space which are the producers of AI but then they also
are implementing these technologies which should reduce their margin pressures or reduce margins
longer term make their companies much more efficient and that efficiency improvement is the long-term
big big benefit that I think we have yet to really price because we just don't know how fast
can it be implemented how quickly can it actually improve efficiency and drive productivity gains
we all have read all the articles about how horribly unproductive the US economy is this is a
potential big game changer I don't think that is at all in the consensus forecast right now I think
most people are saying look you know that we're still going to struggle with this these labor dynamics
and very low productivity rates and and whatnot so it's a potentially very big game changer
longer term but it's going to take us a while to work that out for now it is very much a driver
of revenue optimism and tech yeah well I hear efficiency gains and I interpret that as job
layoffs which obviously feeds back into your economic models how big of a risk is that do you think
I think it's limited in the short run mostly because we have record levels of available jobs
open in the economy as it is either way that I see the job market I think it's a little different
than the way that many people have characterized the job market the way that I see it is
in 2020 we had a mass mass layoff experience I mean the worst layoff experience that any of us
hopefully will ever face in our lives with the unemployment rate just shooting higher layoffs
throughout all industries except for tech and to a lesser extent financials it is therefore no
surprise that come 2022 the sectors that did not lay off in 2020 suddenly had to layoff workers
and so it was just this sort of 2022 was kind of this mini to me mini layoff experience many
recession whatever it might be we want however you want to characterize it reflecting the 2020
experience and now we've gotten to the point of presumably close to stable labor market conditions
and I derive this expectation really through an analysis of challenger layoffs it's not the most
popular economic series but if you look at challenger layoffs challenger layoffs really peaked with
the fourth quarter layoffs in the tech space they started to decelerate as of the first quarter
they're continuing to decelerate can that's very consistent with what we're getting out of earnings
call sentiment and the announcements of layoffs in earnings calls earnings layoffs announced by US
companies in earnings reports peaked in the fourth quarter they decelerated to a lower level in
the first quarter and I anticipate that to continue in the second quarter so so far it looks
like the labor market weakness is really minimal ultimately long term do you have some layoffs
affiliated with AI or is your growth so much faster that those jobs all come back even faster
yeah right I don't know how much transfer of labor there is between the layoff worker the
layoff workers and communications and technology industries into AI sorts of positions
yeah but I it is a question but I don't think we're going to face major labor constraints as a
result or major labor weaknesses as a result of AI for quite some time and it seems like it'll be
you know while the revenue lines are moving higher for the chip makers and the cloud companies
for companies actually trying to utilize AI to boost their own efficiencies it feels like we're
just only in the R&D phase for all of that it's not it's not immediately going to be a needle
mover for anything from that side of it it does seem very very early in the game the equity
market moves so far in advance and so fat much faster than the economy that will feel the economic
impacts for five years in the equity market will price it in in six months so I think we do
need to respect that dynamic but nonetheless I do think it's still very very early and the degree
to which this took the consensus by surprise was quite shocking well does that notion of the
benefits of AI broadening out beyond big tech affected all how you're thinking about magnificent
seven is the latest new buzzword for the top seven weights in the SMP your big mega cap alpha
bets and Nvidia your team had magma we did we had a few we tried fab five for the big five we
have done the magnificent seven as well I've gotten into this game and none of them have really
taken off so we need to get one that sticks I know I need to find one that sticks the problem is
also the market cap concentration shifts are pretty significant so sometimes Tesla's in there
sometimes Berkshire Hathaway Hathaway Hathaway Hathaway Hathaway with a bunch of tech companies how
do I describe this how are you thinking of that concentration I've heard sort of different arguments
from different people that a lot of people think well the rest of the market's bound to catch up
eventually but it's hard to see a correction in mega cap tech without a really nasty
SMP 500 have you done any work thinking about this type of top heavy rally and what we should think
will come next yeah we actually dedicated a note to it a couple of weeks ago really looked at
concentration risk and what it may or may not mean we are historically concentrated in terms of
gains but what it actually means going forward as gains might slow let me just start there yeah
but there are two experiences in our past in which we have had extraordinary concentration in
similar fashion to the concentration that we have today 2000 and 2020 and the outcome of both
of those was totally different in 2000 the concentrated gains ended with in tears right all of the
biggest names really crashed in 2020 the rest of the market caught up and the difference there
was earnings trends in 2000 earnings for the rest of the market just kept crashing along with
the tech stocks tech earnings fell in 2020 the rest of the market started experiencing an earnings
recovery so I believe that earnings are going to make the difference now when I look at the earnings
outlook for tech and the rest of the sectors I actually see some justification for this concentration
risk in earnings as well because the biggest stocks in the index had a magnificent earnings recession
in 2022 we're talking 2025 some in some cases 30% declines in APS they have started to show some
signs of stabilization and recovery earlier than the rest of the market which has enabled this rotation
so right now they have an earnings edge on the rest of the market if you will they're the only
stocks that you know people feel confident that their earnings recovery is already emerging that they
have a longer term outlook for earnings growth that is emerging the rest of the market will have to
prove the case that they too can participate in this but unless they start failing on that earnings
recovery there's no reason to fade it and I think that's important to consider maybe they'll
start failing on the earnings recovery and that would be a very good reason to fade that rally
I'm working on the presumption that the rest of the market will broaden out and start to catch up
to tech in terms of earnings mostly because of the inflation dynamic that we talked about the
pig and the python at the very beginning but it's important the other thing I'll say about
concentration risk that I think nobody talks about is 2023's gains first are not historically
unprecedented they're too short to be historically unprecedented we had a longer period of concentrated
gains in both 22,000 as well as 2020 but secondly they do come off of unprecedented historic losses
in 2022 that's the one thing that makes this story very different than 2020 or 2000 tech had a
horrible year 2022 this space underperformed the market for 12 straight months last year and I
think that's really important for setting the background for why they're outperforming now
very different characteristic than has existed in past experiences
with all the chaos and turmoil in the news it feels like we never get to hear about the good
happening in our world we're on a mission to change that welcome to the good stuff I'm Jacob
Schick a third generation combat Marine and I'm his co-host and wife Ashley Schick we believe
everyone has a story to tell not only about the peaks but the valleys they've been through to get
them to where they are today as we get to tell stories of inspiration and perseverance we're
joined by some amazing guests who share the lessons they've learned that shape to they are and
what they're doing to pay it forward and give back our guests range from some of my fellow warriors
to NFL cheerleaders to extreme sports legends to New York City firefighters who survived 9-11
listen to the good stuff on the iHeartRadio app apple podcasts or wherever you get your podcast
there's so much news happening around the world that we're somehow supposed to stay on top of
that's why we launched the big take it's a daily podcast from Bloomberg and iHeartRadio that
turns down the volume a bit to give you some space to think I'm Wes Kosova each weekday I dig
into one important story and talk about why it matters listen to the big take on the iHeartRadio
app apple podcasts or wherever you listen I want to ask you about one other hot topic which is
cash which basically became its own as a class last year because so many people were putting
were going into cash I think in June money market funds saw a record high level there's all these
different ways to measure people favoring cash over the last year or so but before you're thinking
about 5% yields on cash how does that compare now seeing a 14% rise in the S&P 500 or 37% rise in the
Nasdaq 100 and what is the possibility of some of that cash actually starting to move into the
equities market yeah I think this is a great question and this is one area where I have had a
minor amount of success in creating a shortcut description I call this Tara instead of Tina we
all remember Tina there are there is no alternative and Tara is there are reasonable alternatives and
some people are adopting this one so we'll go with that let's make it happen yeah let's make
Tara has definitely changed the game for equities and it's not just cash but it's also bond yields
are much much higher so the relative value of equities in a multi asset portfolio is quite different
than it was from us to the last the last cycle the way that I think about this the
activity risk premium in comparison to bonds is probably the most relevant I think cash is
and is not competitive with equities I think people save in cash with a different outlook
than they save in equities first of all I think most people think of equities as a long term asset
for savings whereas putting money on a money market fund still makes it quite accessible to you
for you to utilize it's kind of a different savings mechanism but nonetheless yields across the
border higher and that's the story which makes the equity risk premium much lower than it used to be
and equities much less attractive relative to bonds than they have been at least for the most
of the last cycle from 2009 to 2019 most of that period of time equities were in the fourth quintile
of history in terms of the equity risk premium relative to bonds that meant you were really getting
pushed into equities as an asset class your expected returns and that kind of climate for equities are
11% annualized it's fantastic it was just one of the best periods of time ever to be an equity
investor justified by very very low relative yields you were just forced in now equities risk premium
is closer to the third quintile of history which implies your return expectations for equities are
much more limited your average return per year in that environment you on average would anticipate
closer to 6% annualized returns to equities and it really is just a function of math you know
when you're thinking about allocating assets you can consider now yield oriented investments
as a long-term investor you can yield actually contributes to your portfolio equities have very
little yield even if you look at the dividend yield relative to the 10 year treasury it's just not
particularly fun it's 2% on the S&P 500 you're just not going to get a lot so add that to the
earnings yield and that's your all-out yield you could get really stretchy and add buyback yield
to it too and it's still equities are not that attractive relative to bonds anymore
Gina you do all these great models this great quantitative work I want to take you out of that
comfort zone a little bit and talk about the things that really I think cause a sharp correction
in equities is when there's something unforeseen something no one predicted or very few predicted
and I get go back to the the notion of the Fed we have seen this aggressive tightening from the
Fed we did see the issues with Silicon Valley Bank and a few other first republic that duration
risk problem they all had I just wonder the way you look at the universe is there a way to sort of
model kind of a black swan thing or something from the Fed tightening that's yet to come I think
even Jerome Powell this week said there's a lot of tightening that still has to work its way
through the economy and the financial system is is that work you can do I mean is there another
shoe to drop from this aggressive rate height campaign is there any way to predict that or at
least prepare for it and sort of your the way you look at the world I don't think there's a way to
model it I think there's a way to think it through and the way to think it through is identify
the sectors or the space in the economy that benefit most from interest rates at 0% and acknowledge
that there probably are segments of that group or industry or investment or whatever it might be
that are built upon a foundation of interest rates remaining low forever and therefore when
interest rates go higher will experience some degree of distress and default and so it's not a
model approach it's just more logical yeah the question you have to ask yourself as an investor
is when interest rates were for a very short period of time at 0% in 2020 in 2021 where did that
money go where was the most borrowing how did that manifest itself and did that borrowing
results in excess supply of something that is going to be subject to a shortfall of demand like
did we plan too much for these low interest rates to persistent perpetuity this cycle is particularly
difficult on this I think that the most frequently presented sort of areas of risk are the least likely
to be the candidates to create the down draft and I say that because everyone I think is looking at
things like office and commercial real estate they're looking at residential real estate they're
looking at the perpetrators of the last crisis because that's the easy spot and they're thinking okay
I live through the great financial crisis and therefore I know what happens when interest rates go
higher and squeeze off growth and therefore I know that it's going to be residential and commercial
real estate that are the areas of most risk I think because we went through the great financial crisis
those are the areas of most likely not the areas of greatest risk in the economy instead it's
somewhere else that low interest rates we're fueling excess borrowing fueling excess investment
that was unsustainable and if there's one area where I think that was the case it probably is private
credit private equity and I don't know how this ultimately works its way through the financial
markets how it ultimately works its way through the economic the economy because I just don't know
of those losses will forever be paper losses or will real we be real losses I think some of them
will be I think certainly they're yeah exactly I just don't I don't know how this is going to work
itself out but there was not a ton of housing activity when the rates were zero percent so why would
we point our our finger there there wasn't we weren't building offices like crazy in 2020 we have
a shortage of demand of offices for sure and probably some excess supply that will will ultimately
go into distress and default but this is not a phenomenon like 2007 2008 so that's the way
that I think about it long story short find those areas of excess because those are the areas
that are most yeah yeah that makes a lot of sense well Gina Martin Adams chief equity strategist
at Bloomberg intelligence so great to have you on the show we can't let you go just yet though
we do have the tradition on the show to discuss the craziest things we've seen in markets
Madonna what do you have okay this is a Bloomberg story it's about an apartment that's listed
for sale in New York City it's listed for sale for four million dollars which apparently is a
bargain because it comes with a huge catch there's somebody already living in the apartment
has been living there for decades and I don't think has plans to leave and so this tenant pays
2346 dollars a month and can continue renewing their lease even if you know the apartment gets
new ownership it's a 5,800 square foot apartment oh my god it's rents stabilized and until the
tenant leaves if you own the apartment you're actually operating at a huge loss because just the
taxes alone oh yeah the monthly taxes are five thousand five hundred dollars and there's
common charges of two thousand eight hundred dollars which is more than the tenant pays to live
there that is wild but apparently so like in that same building another apartment went for almost
eleven million another one went for nine point four seven five million in February so you'd be
getting a bargain well yeah you got to eat those that loss for however many years but that is
pretty fascinating all right that's a good one Vildon I'll give you that mine is has to do with
the IPO market which Gina as you know is not exactly been the hottest market this year this was not
an IPO of a company it was an IPO of a painting so story courtesy of courts and I think they've
done this in crypto fractional ownership of paintings but this is more of a regular traditional
approach to it it's Francis Bacon's masterpiece three studies for a portrait of George
Dyer finished in 1963 gone IPO I think in a few weeks at a specialty exchange that was just created
in Lichtenstein of all places Lichtenstein Lichtenstein hundred dollars a share is the offering
price I'm not going to tell you how many shares are being offered though because it's time to play
the price is precise your favorite game show what do you think the total value of
Francis Bacon's masterpiece three studies of a portrait of George Dyer the first ever
painting to be IPO and the way this will work is you'll you'll buy your share in the painting but
then it's going to go be hung in a museum somewhere they don't they don't know which museum yet
and basically what you're hoping for is a takeover a hospital takeover of it at a higher level
than the market cap and as they they always say art has a pretty reliable fine art has a pretty
reliable return profile if you believe all these art hucksters I don't know but name that price
what what do you think the total market cap is of three studies for a portrait of George Dyer I'll
tell you this it's not going to make it into the magnificate magnificate seven as far as market
cap that's the only hit I'll give you okay that's not a very good hint because it's not going to be
a trillion billion okay so you don't even get to own this painting you can't take it home no you
can go visit it in the museum I see but you want to share of it so that if it the hope I guess is
that some private collector says wait a minute this thing's a bargain I'm going to go but you can
share if there's a frenzy for the shares in this painting they'll trade like a stock so I see
the value will go up and down you could you could unload your shares at a profit presumably and I
got to say I bet you to I bet you these shares do pretty well just for the novelty of it if you
kind of cool down 10 shares at a masterpiece I'm going to go with 28 million 28 million all right
Gina how about you I have no idea how to value all right I'll say a hundred million a hundred
million actually 55 million oh I thought I was so close I really thought I was so close
wait but I still win because Gina went over yeah sorry Gina that's such day I have no idea I'm
talking about yeah it's all right fully willing to admit it all right well I think that is all
the time we have unless Gina you have a crazy thing you want to share I don't know I do not I
don't have a really crazy thing the only thing that I think is really crazy right now it's that's
actually an investible theme is the heat I'm blown away by the fact that we are going to face terrible
air quality conditions again in the Northeast as a result of these wildfires that we've got yeah
people actually dying in Texas of overheating and it's only June so I think this summer is going
to be interesting I was wondering if that at some point this smoke starts to become macro
influential if it starts having an impact on something I don't know whether it be crops or travel
I don't know do you think that's there's a potential for that well I think it's possible remember
when the volcano erupted in Iceland oh yeah all of that volcanic ash in the air shut down European
travel for a while it's definitely possible because all of this terrible sediment in the air is
can create really big problems and remember they did have to very short term on that terrible
air quality day in New York they did have to shut down the airports yeah yeah just a short
period of time but it's so it's certainly possible yeah or even that the health effects you know
if there's an object in asthma you know that that sort of thing that's something to keep an eye
on for sure I'm surprised it hasn't you know started influencing some prices somewhere on something
I'm sure it has I just haven't noticed I think it has I think it will continue to influence for sure
or even if people getting getting lunch being too afraid to step outside to buy lunch yeah yeah
well that's a good crazy thing off the top of your head Gina oh thanks I don't know I don't
know I'm gonna read up next time for crazy things before I come I thought you meant the Miami
heat since you're from Florida oh yeah no I wasn't talking about Miami
not after that uh that last finals performance they're they're short short that team anyway
Gina Martin Adams chief equity strategist at Bloomberg Intelligence always such a treat to
catch up with you and hear how you're thinking about things I encourage all terminal subscribers
go out and read that mid-year outlook it's chock full of really a lot of interesting studies
and and outlook for for the rest of your thank you so much Gina thank you thank you Gina
what was up we'll be back next week until then you can find us on the Bloomberg terminal website
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