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mention you heard it here on the Meb

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Faber show. Welcome back

1:40

everybody. We got an awesome show today.

1:42

Our guest is Savita Subramanian. Savita is

1:44

the head of US equity strategy and

1:47

US quantitative strategy in one of the

1:49

most followed investment strategists on Wall Street.

1:51

We've been trying to get around the

1:53

show for like three years. I'm super

1:55

excited to talk to Savita today about

1:58

markets, what she expects in 2025. of

2:00

you to welcome the show. Thanks so

2:02

much, ma'am. It's great to be here.

2:04

I'm stoked to have you on.

2:06

We've had this period of US stocks

2:08

just romping and stomping. And I

2:10

try to tell people, I did

2:13

a poll on Twitter, and I

2:15

was like, what do you think

2:17

stocks have done since the bottom

2:19

of 2009? Do you think they've

2:21

doubled? Do you think they've tripled?

2:23

And you talk about this in

2:25

your recent piece where you

2:27

said S&P, 666, 666, I don't feel

2:30

like people really appreciate, and it's

2:32

not just the performance, it's the

2:34

performance relative to everything else. Yeah,

2:36

exactly. It's just been one direction for

2:39

the S&P, whereas there have been a

2:41

lot of other indices that have

2:43

just flatlined or done much less

2:45

exciting things. So I think it has caught

2:47

everyone by surprise. I think one of the

2:50

reasons that it doesn't feel so great is

2:52

I think there are still a lot of

2:54

folks out there who are under allocated to

2:57

equities. Well, you guys, kudos to you, you

2:59

guys wrote a piece last February and it

3:01

said why a 95th percentile PE shouldn't

3:03

keep you up at night. A lot of

3:05

people get hung up on valuation. You guys

3:07

put out some of the best research on

3:09

the street, particularly with quantitative

3:12

behavioral lens. Talk to me a

3:14

little bit about that thesis because

3:16

so many folks, we talk a

3:18

lot about valuation, but so many

3:20

folks get in their head about

3:22

valuation. They're like... That means I got

3:24

to be all in or all out. The

3:26

stock market's going to crash, it's a bubble,

3:29

blah, blah, blah. But you guys said,

3:31

hey, despite being crazy expensive, maybe

3:33

that's not terrible. What was

3:35

your thesis back then? Because

3:37

25% later, you guys were right.

3:40

Well, yeah. I mean, so far

3:42

so good, knockwood. Really, the idea

3:44

was valuation obviously matters. A price

3:46

you're paying for future earnings needs

3:49

to be rational. The way we

3:51

measure evaluation using these snapshot

3:53

multiples of price divided by

3:55

trailing for quarter earnings or

3:58

forward earnings or even these

4:00

cyclically adjusted estimates like the Schiller

4:02

P. I mean, there's no great

4:04

way to value the market that

4:07

will capture what it actually is.

4:09

And our point in that note,

4:11

thanks for reading our note last

4:14

February, our point was really the

4:16

idea that when you're buying the

4:18

S&P today, you can't compare its

4:21

multiple, however you value it, to

4:23

the S&P of 1980 because. Today,

4:25

50% of the benchmark is asset

4:28

like labor light, tech, health care

4:30

growth, high margin industries and companies,

4:33

whereas in the 80s, 70% of

4:35

the benchmark was manufacturing asset intensive

4:37

capital intensive business models with structurally

4:40

lower margins, etc. So it's kind

4:42

of like an apples to oranges

4:44

thing. And then on top of

4:47

that, I think what folks are

4:49

worried about is that the market

4:51

looks more expensive and in particular

4:53

the equity risk premium is much

4:55

lower than it has been over

4:57

the last say 10 or 20

4:59

years. So the equity risk premium

5:01

is kind of the opposite of

5:04

a market multiple. If the equity

5:06

risk premium is low that means

5:08

the market's expensive. And if the

5:10

equity risk premium is high, it

5:12

means you're being compensated a lot

5:14

for taking risk in buying equities.

5:16

And what's unnerving to a lot

5:18

of investors that we talked to

5:20

is that the equity risk premium

5:22

is actually kind of 20 year

5:24

lows at this point. And that

5:26

sounds scary. But our other point in the

5:29

note was really when you look at the

5:31

last 20 years, it has been a nerve.

5:33

rattling period because we've been

5:35

in this environment where it's

5:37

hard to predict future growth.

5:40

And I say that because a lot

5:42

of the growth and earnings that we

5:44

saw over the last 10 or 15

5:46

years was driven by the fact that

5:48

we were at zero interest rates. So

5:51

the big question was, yeah, okay, these

5:53

companies are doing levered buybacks, they're generating

5:55

per share earnings growth, but how long

5:57

can they do that if interest rate?

6:00

rates don't stay at zero. So that

6:02

was another kind of maybe harder

6:04

to predict aspect of the market

6:06

was that we were in this

6:08

unusual environment of zero interest rates.

6:10

And then on top of that,

6:12

when you look at margin expansion

6:14

over the last 20 or 30

6:16

years, a big chunk of it

6:18

has come from just global arbitrage.

6:20

So. You know, if you look at margins of

6:22

companies that make stuff, maybe they found that

6:25

it was too expensive to hire labor in

6:27

the US, so they moved their plant property

6:29

and equipment. to a cheaper labor area

6:32

of the world. And that's great.

6:34

That's a smart way to cut

6:36

costs, but it doesn't work in

6:38

an environment where there is geopolitical

6:41

strife. So the other component of

6:43

this that made it harder to

6:45

predict run rate earnings was the

6:47

idea that a lot of this

6:49

margin expansion relied on being friends

6:51

with the rest of the world, where

6:54

we always gonna be friends with China

6:56

and Mexico and all these other regions,

6:58

maybe. But I think the idea that

7:00

we're now at a point where we

7:03

understand that there is geopolitical

7:05

risk, we have decoupled from the

7:07

rest of the world in terms

7:09

of a lot of reassuring and

7:11

a lot of shifting supply chain

7:13

closer to the US consumer, I

7:15

mean, those make quality of earnings

7:17

that much more sustainable and predictable,

7:19

if you will. So on this

7:21

February chart, you guys have

7:24

some just really epic charts. The

7:26

first exhibit is great, because you

7:28

have 2030 different, valuation metrics and

7:31

they're all read. Some of these

7:33

go back to 1700s, which is amazing.

7:35

Some of them to the 1800s, some

7:37

of them just in 1980s. But exhibit

7:40

two is really interesting because this

7:42

has been all over Fintuit in

7:44

the past couple weeks because I

7:47

think Howard Marx put this in

7:49

his oak tree letter where it was

7:51

a chart of the S&P long-term

7:53

valuations. I think he used maybe four

7:55

P. Trail and Key, I don't even

7:57

know, Cape, doesn't really matter. And then

7:59

future. And people are all, all the

8:01

quants are all over them, because these

8:04

are overlapping periods. And my point was

8:06

it doesn't really matter. And I was

8:08

like, because this, you could do it

8:10

every 10 years, you get the same

8:12

results, you could do it in other

8:14

countries. But your exhibit too is

8:16

this chart of valuation matters in the

8:18

near term, but it's all that matters

8:20

in the long term. So you show

8:23

the, I think it's the R squared

8:25

by holding period. And so one to

8:27

two years, there's like no predictability.

8:29

You go out to like eight, nine,

8:31

ten, twelve, and it's like the only

8:33

thing that matters, which I thought was

8:35

such a good chart. Yeah, I mean, we

8:37

do have overlapping periods in there,

8:40

but to your point, if you

8:42

just look at, you know, kind

8:44

of single periods, it's a less

8:46

exciting chart because there's fewer data

8:48

points on it, but it's basically

8:50

the same conclusion. One of the things

8:52

that we did when I got the job

8:55

was I said, okay, we have to make

8:57

this market forecast. What are the best market

8:59

timing models out there? And I got tested everything

9:01

I could get my hands on. And

9:03

valuation was actually one of the worst

9:05

predictors for the next 12 months. So

9:08

we're just like, you know, what do

9:10

we even do with this? We do incorporate

9:12

it into our market call, but we use

9:14

it as more of a ballist or a

9:16

longer term component of our forecast.

9:18

But I think what's interesting is

9:20

that the entry point where

9:23

at which you buy the

9:25

market doesn't necessarily tell you what's

9:27

going to happen over the next

9:29

year, but that multiple tells

9:31

you what's going to happen over

9:33

the next 10 years. And actually

9:35

we went through the sort of

9:37

exhaustive exercise of testing every valuation

9:40

measure that we show in that

9:42

table. And we found that the

9:44

best way or kind of the

9:46

strongest R squared is. from normalizing

9:48

earnings. So you can't just look

9:50

at snapshot 12 months earnings. Even

9:53

10 year average earnings isn't good

9:55

enough. So what we've found is

9:57

that you have to take this

9:59

log linear. trend line of operating

10:01

earnings over the full cycle,

10:03

and that basically accommodates, you

10:05

know, kind of cyclical shifts, you

10:08

smooth out the cyclicality, but you

10:10

also accommodate some of the secular

10:12

shifts in earnings. So, for example,

10:14

if you look at the 80s

10:16

and 90s, that slope was much

10:18

flatter, and then as you moved

10:21

to the 2000s and 2010s, you

10:23

started to see that slope steep

10:25

in a bit. And I think that's important.

10:27

That slope is telling you that something's going

10:29

on, that earnings, that run rate earnings growth

10:32

is a little bit faster than it was

10:34

in a prior era. What this taught us

10:36

was that, you know, you have to

10:38

pay attention and evaluation. Like when you're

10:40

thinking about how to invest your son's

10:43

college money, you should really pay attention

10:45

to evaluation. But when you're thinking about

10:47

how do I trade for the

10:49

next week, you know, inauguration week,

10:52

that's where you should throw valuation

10:54

out the window, because it really

10:56

doesn't matter. Oddly enough, what we

10:59

did find was a very reliable,

11:01

predictive market timing model over a

11:03

12-month time horizon. It's a

11:05

model that my former boss,

11:07

Rich Bernstein, developed at Merrill

11:10

Lynch way back when. what he

11:12

did and what we continue to

11:14

do to this day is you

11:16

pull all the strategists and you

11:18

get their all the other Wall

11:20

Street strategists and you get their

11:22

recommended allocations to stocks in a

11:24

balanced fund. So when you go

11:26

to your broker and he or

11:28

she says put 60% of your

11:30

money in stocks. We take those

11:33

numbers from, you know, 15 or

11:35

20 bulge bracket firms across Wall

11:37

Street. We average them together. And

11:39

of course, this turns out to

11:41

be a very reliable contrary

11:43

indicator for allocating

11:45

your capital. So when everybody is saying,

11:47

put all the money that you have

11:49

in stocks and we got to it

11:52

as high as like a 70% allocation

11:54

right after the tech bubble. That's

11:56

precisely when you want to sell and

11:58

vice versa. So it's. of an interesting

12:00

exercise to see that a lot

12:02

of these models like the Fed

12:05

model or even PE, adjusted PE, cyclically

12:07

adjusted PEs, don't necessarily predict

12:09

the next 12 months that

12:11

well, but using the cell

12:13

site as a contrary indicator

12:15

is actually the recipe for

12:18

success. So that led you guys

12:20

to kind of say, okay, like,

12:22

evaluations are high, but last year

12:24

things still look okay as we

12:26

kind of lead in to 2025. Is

12:29

it look similar or how things

12:31

look to you? Or is anything

12:33

firing red, yellow? Or is it

12:35

all green stoplights as far

12:37

as I can see? We're not

12:39

forecasting returns like what we saw

12:41

last year, but I would say

12:44

nothing that we're looking at is

12:46

telling us, you know, it's time to sell.

12:48

I mean, I do think that a

12:50

lot of our work is suggesting it's

12:52

time to get more selective.

12:55

So, you know, we've devoted a

12:57

lot of the research that we

12:59

write to the idea that don't

13:01

buy the index by stocks,

13:03

right? By stocks that look

13:06

attractive within the index, but

13:08

the index itself is is

13:10

essentially skewed by a handful

13:13

of mega cab companies. I'm not

13:15

a stock analyst, so I can't

13:17

tell you what those companies are

13:19

going to do. But I do

13:21

think that there are opportunities that

13:23

look more attractive from

13:25

evaluation and earnings growth

13:28

and just an expectational

13:30

perspective than those mega

13:32

cap tech companies that

13:34

have dominated the index. And

13:36

even sentiment, I mean, when we

13:39

look at holdings of any investor

13:41

cohort. We've seen this convergence of

13:43

assets into those mega cap tech

13:45

companies. And it's almost like, and

13:48

you know this because you're a

13:50

portfolio manager, you almost have to

13:52

own those companies if you want

13:54

to be competitive with the benchmark

13:56

because they have been increasing in

13:59

their weight. the benchmark. And our

14:01

view is that that thesis is

14:03

not necessarily going to

14:05

continue forever. And we think this

14:07

is the year where you really

14:10

want to get selective, look for

14:12

value, look for opportunities within the

14:14

benchmark that might not be in that

14:16

top 10 market cap bucket. One

14:19

of the best comments you made

14:21

earlier is, you know, this profit margin,

14:23

which everyone is expected to mean

14:25

or verve, but just keeps going

14:27

to the moon, right? It just

14:29

keeps going higher and higher and

14:31

higher. How do you think about

14:33

drilling in more for size style,

14:36

opportunities, potholes, etc. Yeah, I

14:38

mean, I think that this

14:40

margin expansion story has been wonderful,

14:42

and maybe it doesn't continue at

14:44

the same pace. But where I

14:46

see a real bullcase for equities

14:49

is around the notion that... We

14:51

were talking about this earlier,

14:53

like I think the fact that

14:55

we've exited this period

14:57

of what I would call lower

15:00

quality earnings growth, that

15:02

makes me happy. And in

15:04

fact, what we've seen is

15:07

corporations adapt to this brave

15:09

new world of massive

15:11

inflation volatility. We've had

15:13

inflation go from negative

15:15

to 9% to 3%

15:17

and yet corporate margins

15:19

have been unfazed and I find

15:21

that remarkable. I mean that was

15:23

really a testament to the fact

15:25

that you know the minute companies

15:27

saw some labor inflation they started

15:30

to worry again and they said

15:32

okay wait we can't just move

15:34

back to China or Mexico we

15:36

got to figure out how to

15:38

be more efficient. So this is

15:40

the real bull case for equities

15:42

and it has nothing to do

15:44

with policy or tech. It maybe has

15:46

a little bit to do with

15:48

AI, but it's really the idea

15:50

that companies are doing the hard

15:52

work again of focusing on productivity

15:55

and efficiency. And what that means

15:57

is we could be in an

15:59

environment where. earnings are more predictable

16:01

because if you replace people with

16:03

processes, you remove a lot of

16:06

the risk to your business model.

16:08

If you look at the PC revolution,

16:10

you had a lot of automation,

16:13

you had a lot more efficiency

16:15

gains when it came to white

16:17

collar jobs, and that translated into

16:19

higher margins. It didn't necessarily mean.

16:22

people suffered and lost their jobs.

16:24

It actually meant that we could

16:26

do more. We were more efficient

16:28

and quality of life improved, etc.

16:31

etc. So I think that's the

16:33

argument from here is that you've

16:35

got all these new tech tools,

16:37

plus you've got companies that are

16:40

incented by the fact that labor

16:42

inflation is back and maybe not

16:44

going anywhere anytime soon. You've

16:46

got a structurally tight labor

16:48

market from both demographics as

16:50

well as this new added

16:53

risk around immigration. So I

16:55

think that's the key right

16:57

now is to focus on

16:59

the companies that are figuring

17:01

out how to do more with

17:04

fewer people, fewer assets, you know,

17:06

kind of that efficiency

17:08

store is really exciting.

17:10

If you look at a couple of

17:12

the maligned investors in the

17:14

US, It's certainly been people who

17:17

focus on mid or small

17:19

caps, particularly small caps, but

17:22

also people in general that

17:24

smoke that focus more on

17:26

value style securities. Is that opportunity

17:29

where they're just in

17:31

for more pain? Is there opportunities

17:33

there? Are they the same trade? Are

17:35

they different? It's kind of... hard

17:37

to talk about value and growth. I

17:40

mean, it's easy to talk about small,

17:42

mid and large because it's a very

17:44

clear constraint, the market capitalization.

17:47

When you think about market cap, I

17:49

mean, what I worry about is I

17:51

think that small caps are maybe structurally

17:54

different from what we used to think

17:56

of them as. So the Russell 2000 used

17:58

to be this, you know, this. benchmark of

18:00

either nascent new shiny IPOs

18:03

or the new growth stocks

18:05

that were going to grow

18:07

up to be big blue

18:10

chip companies of you know

18:12

10 years from now or

18:15

it was economically sensitive more

18:17

domestically oriented companies so the

18:20

multinationals tended to be bigger.

18:22

So the idea 10, 15, 20

18:24

years ago was if you bought

18:27

small caps, you were either getting

18:29

these sort of credit sensitive growth

18:32

companies or you were getting domestic

18:34

US GDP plays. Today, a

18:36

big chunk of the benchmark

18:38

is companies that can't get

18:40

bigger and maybe used to

18:42

be bigger but drifted into

18:45

the small cap benchmark after

18:47

the Fed started hiking interest

18:49

rates. And When you look at

18:51

the percentage of losers, money losers,

18:53

in the Russell 2000, it's hit,

18:56

I think, all-time highs. And that

18:58

is really because of the refinancing

19:00

risk. So the thing is, most

19:02

companies in the S&P

19:05

500 have relatively healthy

19:07

balance sheets, but the stocks that

19:09

were going to be hurt by

19:11

5% interest rates basically were managed

19:13

out of the S&P by shrinking

19:15

and market cap by underperforming and

19:17

moving into the Russell 2000. I

19:19

like mid caps. I think mid

19:22

caps are real companies. I think

19:24

those are companies that have less

19:26

refinancing risk. So I think that's

19:28

the idea is that you

19:30

don't necessarily need the Fed

19:32

to continue cutting in order

19:34

for mid-caps to work. These

19:36

are real companies that can

19:38

actually grow their earnings. They generate

19:41

free cash flow. They're not

19:43

riddled with floating rate risk.

19:45

They're much healthier cohort,

19:47

I think. You mentioned interest

19:50

rates a few times, and at

19:52

some point, it's hard to kind

19:54

of get stocks bonds, can get great

19:56

signals as far as the equity market

19:58

but in general we know that assets

20:01

compete and certain assets like

20:03

if bonds were yielding five,

20:05

six, seven, eight, nine, ten, you know

20:07

that those would compete with equities.

20:09

How do you think about fixed

20:11

income and particularly as

20:14

either an alternative asset to equities

20:16

where it starts to put on

20:18

pressure, but also as you mentioned

20:20

funding sources, other sources, what

20:22

do you think about kind of

20:25

where we are today? I still think

20:27

that one of the riskiest

20:29

investments right now is the

20:32

risk-free rate, the 10-year treasury,

20:34

because that was basically the

20:37

center of the bubble created

20:39

by QE Central Bank's

20:41

cutting rates to zero. I

20:43

mean, I think that's the area

20:46

where you really want to tread

20:48

carefully, because when you think about

20:50

the yield you're getting on

20:53

a 10-year treasury, let's say,

20:55

you know, 5% or thereabouts, 4.5%. Sounds

20:57

good, but way better than

20:59

zero. But when you think

21:02

about inflation in your

21:04

real return, it's actually

21:06

not that great. Even

21:08

if inflation drops to 3%,

21:11

you've got... a 2% real yield on

21:13

your T bonds. And that's a

21:15

lot of opportunity costs to take

21:17

over the next 10 years. So

21:19

when I think about retirees who

21:21

are, you know, basically sitting in

21:24

either money market or medium duration

21:26

or long duration bonds, money market

21:28

makes sense because cash yields are

21:30

still pretty high and there's not

21:32

as much duration risk. But if

21:34

you're locked into a real return

21:36

that's like sub 3% I don't

21:38

think that makes a lot of

21:40

sense, especially even you can get

21:42

that dividend yield on the average

21:44

stock in you know in the highest dividend

21:47

yield in quintile of the Russell

21:49

1000. So my sense is where

21:51

we are now where everybody owns

21:53

either bonds or mega cap tech

21:55

and that's the barbell, I think

21:58

that's going to shift towards high.

22:00

income yielding equities. You

22:02

know, credit looks pretty

22:04

expensive relative to

22:06

the value benchmark. The investment

22:09

grade credit yield is not

22:11

as attractive as it has

22:14

been on average. So, you

22:16

know, I feel like there

22:18

is this really screaming opportunity

22:21

to buy large half

22:23

value stocks at a

22:26

relatively inexpensive price. It

22:28

could be the beneficiary of inflows

22:30

from retirees who are realizing

22:32

that money market, you know, if

22:34

the Fed continues to cut, they're

22:36

going to get less on their

22:39

money market funds. If the Fed

22:41

doesn't cut, that means their real

22:43

yield is even worse because inflation

22:45

has come back. So I think

22:47

that's the natural spot that looks

22:49

much more attractive than bonds from

22:51

an income perspective. I must feel

22:54

it's it's it's kind of like

22:56

the Tina argument for equities a

22:58

few years ago. It still holds

23:00

in my view when it comes

23:02

to inflation protection and income because

23:04

if we're not out of

23:06

the woods on inflation, but

23:09

we still need income because

23:11

the bulk of assets sit

23:13

on retiree balance sheets. There

23:15

is no alternative to equity

23:17

income in that type of

23:19

environment and the Russell 1000

23:22

value benchmark which nobody talks

23:24

about anymore Nobody benchmarks to

23:26

anymore is actually a really

23:28

attractive spot from a rate

23:31

risk from an inflation risk

23:33

perspective If you just look

23:35

at the historical spreads on fixed

23:38

income you have Almost every market

23:40

is exceptionally tight, corporate bonds, junk bonds. I

23:42

feel like that's very well understood at this

23:44

point, but people keep buying them. And I

23:46

said recently on Twitter, it's like, I'm more

23:49

of an equity guy too, and I look

23:51

at fixed income, and I'm like, this doesn't

23:53

make sense to me. Why, if you look at

23:56

the historical spread relationships, a lot of

23:58

these bond markets should already be... six,

24:00

seven, eight, nine, ten, and they

24:02

don't. So. Do you think that

24:04

that is just another form

24:07

of risk aversion? I mean,

24:09

I feel like we're living

24:11

amongst a very risk

24:13

averse investment crowd. And

24:15

that risk aversion is

24:17

manifesting in the idea

24:19

of, well, equities are

24:21

junior to credit, right? So

24:23

you're going to get paid.

24:25

in a bankruptcy situation in your

24:27

credit before you get your equity,

24:30

your equity goes to zero. So

24:32

I think that's just smacks of

24:34

like that continued risk aversion we

24:36

have that basically started in the

24:39

financial crisis. Even though the market's

24:41

gone up a whole bunch and

24:43

it feels like everyone's bullish, when

24:45

you look at the average professional

24:48

money manager, their exposure to cyclical

24:50

versus defensive sectors is close to

24:52

record lows. It's not like folks

24:54

are buying GDP sensitive, you

24:56

know, high beta companies.

24:59

They're buying themes, AI,

25:01

GLP1, or they're buying

25:03

defense. They're buying food

25:05

stocks, health care, you

25:07

know, recession-proof stocks. So it's

25:09

not like we're in this environment

25:11

where folks are taking on a

25:13

lot of risk. And I think

25:16

that's also... you know, a driver for

25:18

why credit spreads are so tight compared

25:20

to the dividends you can get on

25:23

the average large-cap value stock.

25:25

So I think it's kind of interesting

25:27

to see that risk aversion. In

25:29

our surveys of investors, we have

25:31

a report that my colleague publishes

25:34

called the Global Fund Manager Survey,

25:36

and our chief investment strategist Michael

25:38

Hartnab publishes this survey every

25:41

month, and it's interesting to

25:43

see that even though...

25:45

investors have gotten a little

25:47

bit more positive on the

25:49

world and on the macro environment.

25:52

50% of our clients

25:54

still think that stagflation

25:56

is the most likely

25:58

scenario for the global economy

26:01

over the next 12 months. 50% I

26:03

mean, stagflationary economic

26:05

environments happen very infrequently. That's

26:07

why it's called the tail

26:09

risk, right? It's a tail

26:11

of the distribution. Yet half

26:13

of our clients are prepared

26:15

for that tail risk. And

26:18

I think that is another

26:20

missed opportunity in the market

26:22

because. When you actually look

26:24

at the US economy, when

26:26

you look at inflation, when

26:28

you look at all of

26:30

these different macrobarometers, we're kind

26:32

of in that sweet spot

26:34

that we all write about where when

26:36

do you want to buy equities, when

26:38

real rates are positive, but not above,

26:41

you know, 3% or 2.5%, you want

26:43

to buy equities when inflation is around

26:45

3 or 4%. You want to buy

26:47

equities when rates are not too low,

26:50

not too high, but just right. Here

26:52

we are and nobody is really that

26:54

excited about cyclical companies. Yeah, I has

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27:32

maybe that much of in this cycle. is

27:34

like the traditional IPO window and maybe

27:36

it's companies that just like I don't

27:38

want to be public that's too much

27:40

of a pain but then you have

27:43

things like SpaceX which are 300 billion

27:45

dollar companies on market cap now although

27:47

I saw yesterday that the Jurassic Park

27:49

bring back the mammoth company just got funded

27:52

at 10 billion dollars so there you

27:54

know who knows what's going on but

27:56

but are we gonna see an IPO

27:58

window open up is that just for

28:00

the course now where companies are

28:02

going to stay private? What do

28:04

you think? Yeah, it's a really

28:07

good question. And I think that

28:09

maybe private capital just remains a

28:11

much bigger part of the allocation

28:13

going forward than it has been.

28:15

I do think that one of the

28:18

problems with IPOs is that there was

28:20

a lot of credit extended, if

28:22

you look at private credit

28:24

and private equity, you add

28:26

up all the assets under

28:28

management. that pool of money

28:31

basically doubled between 2017 and

28:33

2021. And remember back in

28:35

2017, 18, 19, 20, we

28:38

weren't talking about inflation at

28:40

3%. We weren't talking about

28:42

rates of 5%. We were

28:45

talking about secular stagnation, lower

28:47

for longer, everything, disinflation forever,

28:50

negative real rates were being

28:52

forecast by economists and rates

28:54

teams. This was a totally

28:57

different environment where the hurdle

28:59

rate was basically zero. And I think

29:01

that a lot of that private capital,

29:04

those ideas that were funded, are not

29:06

necessarily as attractive in a 5% interest

29:08

rate environment. So, you know, I think

29:10

one of the problems is that the

29:12

prices you can get for an IPO,

29:14

what you were thinking in 2017 is

29:17

not going to materialize any time soon.

29:19

So waiting for that reset evaluations

29:21

may be a long, long wait.

29:23

And I think that's why we've

29:25

seen a lot of companies just

29:27

stay private over the last couple

29:29

of years is that we have

29:31

a different hurdle rate. I do

29:33

think that, you know, the other

29:35

interesting kind of activity we're seeing

29:37

in terms of public versus private

29:40

is that the number of

29:42

privatization that have occurred since

29:44

the Fed started hiking interest

29:46

rates has jumped. And what this

29:49

tells you is that there's still

29:51

a lot of private capital sloshing

29:53

around looking for good ideas. And

29:55

where they're finding them is not

29:58

necessarily in Silicon Valley or Star.

30:00

they're finding it in publicly

30:02

traded equities that have

30:04

been marked to the

30:06

current rate and inflation

30:09

environment. So the problem that I

30:11

see right now with private investments

30:13

is that some of that

30:15

money was minted during a

30:18

period where, I guess, you know,

30:20

the vintage from 2017 to

30:22

2021, you got to worry

30:24

about what the expectations were

30:26

from a rates and an

30:29

inflation perspective. Whereas today, private

30:31

equity and private credit

30:33

funds are finding better

30:35

opportunities in marked assets

30:37

and public equity, that's why

30:40

I'm worried less about stocks

30:42

than I am about other

30:44

areas. Because I think that

30:46

unlike private capital, what you get

30:48

in the S&P 500 and what

30:51

you get in the Russell 2000

30:53

even, it's been marked to today's.

30:55

level of rates, inflation,

30:57

macro, everything. It's marked on

31:00

a micro-second basis. Whereas private

31:02

capital is unmarked, it's kind

31:05

of this more opaque, less

31:07

transparent area where we don't

31:10

really know what the true

31:12

valuation is. I texted to one of

31:14

my biotech PM buddies this past week

31:16

and I said, man, biotech stocks ever

31:19

going to go up again. It's been

31:21

this like period where for many years,

31:23

these kind of flat returns. I actually

31:25

love, as the contrarian, I mean, loves

31:27

markets that have gone nowhere for 5,

31:29

10, 20 plus years. I start to

31:31

get excited on the sentiment side and

31:33

watching like China, for example, or other

31:35

places that like you look at the

31:37

equity returns Europe all sorts of places

31:40

that just like man you're like man

31:42

that this entire generation has had

31:44

no returns relative to what's

31:46

going on. If you're into that theme

31:48

you should really like large cap value.

31:50

Well I do. I mean they've done

31:52

nothing. I mean they've done nothing.

31:54

I mean, it's interesting though,

31:57

your point about markets that have

31:59

done nothing. It's funny because I

32:01

feel like the client base that I

32:03

talked to the institutional investors and hedge

32:06

funds and pension funds, there's kind of

32:08

two camps right now. There's one camp

32:10

that really likes what's worked, which is

32:13

large cap growth, and that's the idea

32:15

that You know, the Fed moved rates

32:17

up pretty aggressively. There's got to be

32:19

a recession coming. Maybe it takes a

32:22

little bit longer, but I don't want

32:24

to buy cyclicals ahead of this inevitable

32:26

recession. And then the folks that are

32:29

really kind of more optimistic on the

32:31

economy and the global economy are

32:33

more interested in the really distressed

32:35

bombed out. small cap arena. But

32:38

there's not much of a bid

32:40

right now for mid caps and

32:42

large cap value, which is where

32:45

I think it gets really interesting

32:47

because it's kind of those forgotten

32:49

markets that nobody even thinks about

32:52

anymore. That's where you can see

32:54

these surprising returns. As we

32:56

look into 2025, let's talk

32:58

about some just general forces

33:00

at play. Obviously, we have

33:02

a new administration. a lot of

33:04

another word cloud that I feel

33:07

like I have to almost mute

33:09

on social and everywhere else is

33:11

something like tariffs that everyone's talking

33:13

about. But there's a good phrase.

33:15

I saw one of your reports

33:18

talking about shifts from everyone spinning

33:20

on tech to tech spending on

33:22

everything, which I thought was such a

33:24

unique and spot on comment with, you

33:26

know, tech companies investing in. nuclear power

33:29

plant type of type of utilities. What

33:31

an interesting time we live in. What

33:33

are some of the big themes you

33:35

see for 2025 and perhaps beyond as

33:38

far as kind of the macro and

33:40

the economy and what's going on? So

33:42

everybody's worried about tariffs, but

33:45

meanwhile you've got this sort

33:47

of... very quiet but

33:49

steady reshoring boom happening in

33:51

the economy where, you know,

33:54

US multinationals have been moving

33:56

operating facilities, plant property equipment,

33:59

people, sourcing. back to the

34:01

US, which has created a little

34:03

bit of inflation, but it's also

34:05

created a lot of economic activity.

34:07

And a lot of these companies

34:09

that are building plant in

34:11

the US are tech companies.

34:13

Tech companies are some of

34:15

the most multi-national, most globally

34:18

exposed companies in the S&P

34:20

500. On top of that, you've got

34:22

this AI boom where the bottleneck is

34:24

power and... power means you got

34:26

to build data centers and

34:28

infrastructure around, you know, just

34:30

getting, getting, firing up all

34:32

those chips. So I think

34:34

what's interesting is that if

34:36

you look at CAPX trends,

34:38

the 20-year period before 2021,

34:41

most companies in the

34:43

S&P were spending CAPX. The

34:45

only companies that weren't spending

34:47

CAPX were tech companies, which

34:49

were taking CAPX. And all

34:52

the other companies were spending

34:54

on tech. Now we've got

34:56

an environment where tech companies

34:58

are spending on energy and

35:01

lumber and metals and utilities

35:03

and commodity companies are actually

35:06

taking in more capbacks. You've

35:08

got sort of a higher

35:10

structural demand for commodities from

35:13

the idea that we're reshoring

35:15

rather than moving stuff out

35:17

of the US into other

35:19

areas. You've also got a

35:21

lot more activity taking place on

35:23

U.S. soil. So one thing that

35:25

I thought was really interesting is

35:28

that, you know, I talked to

35:30

our munis analyst every now and

35:32

then, and I feel like

35:34

our munis analyst has the

35:36

most interesting data points right

35:39

now because what he's telling us

35:41

is that the U.S. just got

35:43

a whole bunch of activity dropped

35:45

back onto it, right? After COVID

35:47

we all started driving way more than we

35:49

used to because we could and we were

35:51

so sick of being at home. You have all

35:54

this reassuring and you know moving stuff

35:56

from Canada to Mexico and like you

35:58

know lots of lots of roads. use

36:00

of the US infrastructure.

36:02

US infrastructure is super old.

36:04

We haven't seen a refurbishment

36:07

cycle in the US in

36:09

a very long time. So

36:12

what's happening is you're seeing

36:14

accident rates, breakage, dams busting,

36:16

you're seeing a lot of

36:19

like engineering concerns. in

36:21

a very short period of time.

36:23

So I think what that is

36:25

all telling us is when you

36:27

drop a bunch of activity back

36:29

on the US, when you've got

36:32

AI, which is requiring building data

36:34

centers and, you know, kind of,

36:36

you know, every piece of dirt,

36:38

every plot of soil in the

36:40

US is potential for being turned

36:42

into some kind of a harvest

36:45

or a power. That requires a

36:47

much better infrastructure than what

36:49

we're sitting on. So just

36:51

that infrastructure refurbishment could be

36:54

a profound investment theme over the

36:56

next cycle. I feel like people have

36:58

been talking about this infrastructure upgrade

37:00

for forever. But I was like,

37:02

I was laughing because I was

37:05

like, when is the last time

37:07

someone said, all right, my muni

37:09

analyst had something really interesting to

37:11

say. Nobody talks to our immunity's

37:13

analysts, but people should be talking

37:15

to them. They're in the basement. You got

37:18

to go down all the way to, you

37:20

know, a floor sub minus three to find

37:22

the poor immunity analyst. You know, it's funny,

37:24

by the way. So as you were talking

37:26

about small caps earlier, your former boss had

37:28

a great quote from last year. where he

37:30

said, when I got in this business, small

37:33

caps were ripping. Senior analysts

37:35

followed the small cap stocks and the

37:37

large cap stocks were considered boring and

37:39

followed by junior analysts, just to show

37:41

how much things can change just by

37:43

the regime and what's what's going on

37:46

in the world. So who knows, maybe

37:48

the muni analyst is gonna be the

37:50

star of the show. I think that could

37:52

happen. We haven't really seen a lot of

37:54

activity in mun in a very, very long

37:56

time, but now all of a sudden, I

37:58

mean, if you think about it. as a

38:00

city, these cities are in a little

38:03

bit of an arms race

38:05

to have the best infrastructure

38:07

in court all this new

38:10

business to be built in

38:12

their municipalities. So I think

38:15

there are a lot of

38:17

really interesting tentacles right

38:19

now that are shifting

38:22

from globalization and cheap capital

38:24

to real hard assets. infrastructure

38:28

spending and it's not just about

38:30

AI and power there's also just

38:32

you know a replacement cycle in

38:35

equipment that is is necessary to

38:37

see I mean I think you

38:39

know I was talking about productivity

38:42

earlier and I think productivity could

38:44

mean many things it could mean

38:46

replacing people with AI but it

38:48

also could mean just taking your

38:51

ancient equipment and upgrading it

38:53

right and all of those

38:55

things are part of what's likely to

38:57

be in store for corporate America over

38:59

the next cycle. But I think only

39:02

one little slice of it, which is

39:04

AI, is getting a lot of attention.

39:06

And that's a much more sexy story

39:09

than replacing farming equipment. But I think

39:11

both of them are equally lucrative.

39:13

You're seeing this, you know, kind of

39:15

the tentacles get in every part of

39:18

the economy. And it's fun to watch.

39:20

It's a little scary. It's fun to

39:22

watch. It's a little scary. Well, I

39:24

think people, the assumption being is that

39:26

their jobs, their livelihood, you know, is

39:28

going to be taken over. But, you

39:31

know, if you look back at the

39:33

long arc of history with technology, it's

39:35

usually, yes, some jobs go away, but

39:37

a lot more just augmented or different

39:39

jobs are, you know, created. And

39:41

it's already happening, right? Like

39:44

software versus hardware demand, you

39:46

know, all the programmers are

39:48

getting fired, but they're quickly

39:50

retraining to be, you know,

39:52

hardware people. So it's just,

39:54

I think it just happens

39:56

a little faster now. People love

39:58

to come up with a analog and

40:00

maybe you don't have any but

40:03

is this period remind you of

40:05

anything at all you know when

40:07

the macro within the stocks is

40:09

there a time last hundred years

40:11

or like you know the 1940s

40:13

or whatever maybe is anything

40:15

that this has got some rhymes

40:18

to it yeah I mean I

40:20

think that they're clear similarities

40:22

between now and you know

40:24

late 90s early 2000s and

40:26

that tech is dominating the

40:29

market and it's you know

40:31

very narrow and fun managers

40:33

are hard-pressed to outperform unless

40:35

they own wads of tech. But

40:37

I don't think it's the same level

40:40

of speculative frenzy that

40:42

we saw back in 99 2000.

40:44

You know I think what's

40:47

interesting with big tech companies

40:49

today is that they have

40:51

options right these are companies

40:53

like they can morph into value stocks

40:55

if they want to right and we

40:58

saw that happen in 2023 we

41:00

saw these tech companies that got

41:02

clobbered in 22 basically admit defeat

41:04

say you know we're not going

41:06

to grow as fast as we

41:08

thought we were we over hired

41:10

we overbuilt so a bunch of

41:13

these big tech companies cut cappocks

41:15

they fired people They did huge

41:17

buybacks, a couple of them

41:19

initiated dividends, you know, they

41:21

turn into value companies. And

41:24

I think that's another attractive

41:26

aspect of equities that bonds

41:28

don't have is this call option

41:30

to shift your duration risk, right?

41:32

You can pull forward your cash

41:34

if you want, as long as

41:37

you're making money, you can pull

41:39

it forward rather than push it

41:41

out and that shortens your duration.

41:43

This is also, it

41:45

smacks of the, you

41:47

know, kind of the

41:50

post 70s period of

41:52

rampant inflation, you know,

41:54

Volker hiking very aggressively,

41:57

and then the

41:59

after. And I think

42:01

what was interesting is that

42:03

in the 80s, it was kind

42:06

of like what we're starting

42:08

to see. So we were

42:10

coming out of this inflation

42:12

shock. Companies were kind

42:15

of, you know, laser

42:17

focused on inflation of

42:19

input costs and wages.

42:21

And that basically was

42:23

how. you know, I think another

42:25

productivity cycle was born. We

42:28

have a productivity measure that

42:30

we use in our work, which

42:32

is not the economic measure. It's

42:35

really just an equity focused measure

42:37

of real dollars of sales of

42:39

a company divided by the number

42:41

of people that work at that

42:43

company. So it's just kind of

42:46

like an efficiency ratio per

42:48

company. in the S&P. And what

42:50

was interesting is that in the

42:52

80s, 90s, and early 2000s, you

42:55

saw massive efficiency gains. You saw

42:57

fewer people, more dollars in real

42:59

terms. So it was just a

43:02

period where companies were figuring

43:04

out how to do more, make us

43:06

do more and get more out of

43:08

their employees. And that was a great

43:10

time to be in stocks. You mean,

43:13

you saw great returns for the S&P,

43:15

you saw, you know, real rates were

43:17

even higher than they are today. So

43:19

I don't think that rates are the

43:21

big scary, you know, monster that is

43:24

going to hit equities. I think rates

43:26

can go up for good reasons. And

43:28

they've been higher than where they are

43:30

today in an environment where growth. was

43:32

good, equity returns were positive and strong.

43:35

You know, I think that's kind of

43:37

what we're moving into. So I feel

43:39

like when I look at the equity

43:42

risk premium today, it looks kind of

43:44

the same as where it was in the

43:46

80s and 90s, lower. So that makes everybody

43:49

think that stocks are too

43:51

complacent. But I think that

43:53

it was lower because earnings

43:55

were more visible and predictable.

43:57

We weren't relying on global growth

43:59

or being friends with everybody in

44:01

the world or zero interest rates,

44:03

we were in an environment where

44:06

companies were actually hustling and getting

44:08

more efficient. And also you didn't necessarily

44:10

see consumers stop spending in that

44:12

period. I think it was interesting

44:14

to see that the quality of

44:16

life improved. So spending on entertainment

44:18

actually increased during that period because

44:20

you had more time maybe. So

44:23

maybe that's where we're going with

44:25

this. I mean, I would like

44:27

to have more time. I would

44:29

like AI to give me more

44:31

time so I could like, you

44:34

know, watch more series on TV

44:36

and go to games with my

44:38

kids and things like that. Good.

44:40

I need some I need some new series.

44:42

I'm looking for something. You guys

44:44

do a lot of screens. Who knows? What

44:47

is it? But you guys do some fun

44:49

ones. Do you want to tell us

44:51

about some of your favorite? Yeah. So

44:53

one of my favorite screens is probably

44:56

the most boring screen you can think

44:58

of. And it's basically taking the Russell

45:00

1000 index, cutting it into quintile.

45:03

So all the stocks that pay

45:05

a dividend, you quintile it. You

45:07

take those companies and you cut

45:09

that, cut that pool of stocks

45:12

into fists. And if you buy

45:14

that second quintile, not the first

45:16

quintile, but the second quintile, so

45:19

the second highest dividend

45:21

yielders in the Russell

45:23

1000, if you track that

45:25

strategy over time, it would

45:28

have offered you the highest

45:30

total return with the lowest

45:32

percentage of negative years in

45:34

terms of percentage losses. And

45:36

I think the reason it works

45:39

is that you've got this very

45:41

disciplined strategy for buying, you know,

45:43

the boring companies that nobody talks

45:45

about that haven't run up in

45:47

valuation. They're paying a dividend. That

45:49

dividend is not super high because when

45:52

you get to quintile one, some of

45:54

those are the distressed stocks that where

45:56

their prices are, you know, tanking and

45:58

it's they're telling you. they're about to

46:01

cut their dividend. So it's just like

46:03

the steady Eddie strategy that anybody can

46:05

run who has access to like, you

46:07

can get the state off the internet

46:10

for free. You can run it yourself

46:12

every month. And it's just been

46:14

like a really kind of an

46:16

interesting, very, very boring, unsexy strategy

46:18

that seems to work in most

46:21

market environments. Yeah, it makes a lot

46:23

of sense. We're darn near plumbing the lows

46:25

all time on S&P dividend yield. It's like

46:27

one point. two and I think the record

46:29

in 2000 was 1.1. Did you see a

46:32

shift at all? I mean, I know a

46:34

ton of companies love their buybacks, but, you

46:36

know, theoretically, you've had Apple and a bunch

46:38

of these big tech companies start to pay

46:41

dividends over the past number of years.

46:43

Do you see a trend at all

46:45

of this potentially increasing? Or is this

46:47

just sort of the lay of the

46:49

land from here on out? No, I

46:51

think it definitely increases. This is,

46:53

you know, part of our call

46:55

is that. we're going back to

46:57

this total return world and we

46:59

all forgot about total return because

47:02

it's been so wonderful to just

47:04

you know look at prices double

47:06

over the last 10 or 15

47:08

years you know it's interesting because

47:10

the contribution of dividends to total

47:13

return over the last 10 years

47:15

has been something like you know

47:18

less than 15 percent but if

47:20

you look back historically dividends have contributed

47:22

almost half of your total returns if

47:24

you buy the S&P 500. And I

47:27

think we're going back to that type

47:29

of world because again, when you look

47:31

at the investors that have the most

47:33

money, it's retirees, they're sitting in bonds

47:36

or tech stocks, they want dividends. I

47:38

don't think it's an accident that, you

47:40

know, two big mega cap tech companies

47:43

initiated new dividends in the last 12

47:45

to 24 months. So it's, you know,

47:47

I think that's the theme as you

47:49

look for total return. You forget about the

47:52

idea of that, you know, you know, you know,

47:54

the way to make money in stocks is from

47:56

multiples expanding. And think about the companies that are

47:58

actually going to pay you steady divv- We have

48:00

a chart that I inherited

48:02

from my former boss that

48:05

shows that your total return

48:07

in the S&P Utilities Index

48:10

versus your total return in

48:12

the NASDAQ is almost always

48:15

neck and neck. Isn't that

48:17

interesting? Because you think the

48:19

NASDAQ is this wonderful, like

48:21

this amazing benchmark that returns,

48:23

you know, wads and wads,

48:25

it's like doubles and triples.

48:27

But if you just buy

48:29

the S&P utilities index and

48:31

you reinvest your dividends, you're

48:33

gonna make generally a equivalent

48:35

return to the same strategy in

48:37

the NASDAQ over long periods of

48:39

time. There's an ETF idea. utilities half

48:41

NASDAQ probably balance each other out I

48:44

saw somebody post on Twitter today they're

48:46

like all these people that are you

48:48

know falling head over heels over the

48:50

cues you know if you take this

48:52

back to their inception they've had the

48:54

same return as mid caps right like

48:57

or whatever the the comparison was is

48:59

so full cycle these things have a

49:01

way of balancing themselves. Yeah

49:03

exactly exactly you mentioned your

49:05

former boss when you guys get

49:08

together what's like the number one

49:10

investment thing you guys would disagree

49:12

on either him with you you

49:14

with him both where you're just

49:16

like oh dude you butt heads

49:18

about if there is anything that

49:20

where you're like you know what yeah

49:22

rich Bernstein well look I agree with

49:25

most of what rich says because you

49:27

know I work for rich for the

49:29

first you know I started a Merrill

49:32

Lynch in 2001 with Rich Bernstein

49:34

and I worked with him for

49:36

the the formative years of my

49:38

career as a cell side strategist.

49:40

There's not a lot that I

49:43

would disagree with him on. I think

49:45

maybe, you know, the idea that the

49:47

valuations of tech companies

49:49

right now are bubble-like, I

49:51

don't necessarily agree there because

49:53

I think the valuations

49:55

are extended and maybe they come

49:57

in a little bit, but I

50:00

I think that it's different from

50:02

the late 90s 2000s in that

50:04

these are companies that make

50:06

money and they have options, right?

50:09

I think what's most exciting to

50:11

me about large cap growth as

50:13

an index is that these are

50:15

companies that have the option to

50:18

shorten their duration and they

50:20

flex that when they need to.

50:22

So I think that that makes

50:24

me a little less bearish on

50:26

the S&P. and more optimistic

50:28

on even the large cap

50:30

growth cohort of the S&P

50:32

500. As you go and sit down

50:34

in New York with a bunch of

50:37

your peers, you guys are having a

50:39

coffee or happy hour at lunch, whatever,

50:41

and you guys are like, all right,

50:43

let's talk about some ideas. And Savita,

50:46

you know, says something out loud and

50:48

the entire table shakes their head. So

50:50

meaning this is a belief. that you

50:52

hold that probably 75% of

50:55

your peers are gonna say,

50:57

she's crazy, what's she talking

50:59

about? Anything come to mind? Oh

51:01

yeah, I think it's the idea

51:04

that we could see real rates

51:06

continue to rise and stocks are

51:08

gonna do just fine. I mean,

51:10

I think it's the idea that, you

51:12

know, everybody thinks that like 5%

51:15

is some kind of like witching

51:17

our number where the market goes

51:19

to zero. I don't know why

51:21

we all think that. It's just

51:23

a nice round number I think.

51:26

It's like people gravitate towards it.

51:28

I mean you mentioned it's like

51:30

such a sweet spot right now

51:32

as far as interest rates, inflation.

51:34

I feel like people have a

51:37

little PTSD from the crowd that

51:39

remembers the 70s, the older crowd

51:41

and they see the possibility that

51:43

you know inflation is going to go

51:46

nutty again and that's like

51:48

imprinted on their brain. I don't

51:50

know. The other theme that we've

51:52

been writing about is just the

51:54

idea that, you know, old economy

51:57

stocks could actually lead the market

51:59

because there the most inefficient. So

52:01

it's like, you know, do you

52:03

have to own all of these

52:05

new economy growth stocks? Maybe not.

52:07

Maybe we're in an environment where,

52:09

you know, the companies that are

52:11

the clunkiest and most inefficient

52:14

have the most to gain

52:16

at this point by a

52:18

productivity cycle. So it's almost

52:21

like the companies that look

52:23

most at risk of obsolescence

52:25

because they've got the easy

52:27

low-hanging fruit opportunities to get

52:30

efficient. And you know, I think our

52:32

fundamental analysts are really good

52:34

at sussing out which companies

52:36

in an old clunky sector

52:38

have the right management team

52:40

in place to get them

52:42

to the net level in

52:44

terms of efficiency. So that's

52:46

where I think that maybe

52:48

I have the most out

52:50

of consensus or sort of like

52:52

kind of... weird view is

52:55

the idea that, you know, old

52:57

economy actually can do really well

52:59

over the next cycle of efficiency

53:02

and productivity gains because they've got

53:04

like kind of the easiest road

53:06

ahead of them in terms of

53:09

getting efficient. That's a really interesting

53:12

take. I'm looking forward to someone

53:14

doing the least. the worst poorly

53:16

managed least efficient company ETF like

53:18

I'm trying to think of who

53:20

would who would even be in

53:23

there I don't know if I

53:25

can call it any names but

53:27

that's a fascinating idea. You

53:29

want to know something interesting?

53:31

There's also another ETF idea

53:33

for you. It's like this

53:36

in 2024 the highest percentage

53:38

of companies change CEOs. I

53:40

think that part of it is

53:42

just the idea of who's going to

53:44

get it right in each sector? Like

53:47

if you look at a sector and

53:49

you say, okay, these guys grew really

53:51

fast and these guys didn't, we

53:53

want to fix that. And 2024

53:55

was this year where I think

53:57

it was all about the companies.

53:59

And what they were doing with these

54:02

new tools, and that's why I think

54:04

we're not going to be in a

54:06

market that's dominated by one sector forever,

54:08

like we've been, you know, for the

54:10

last 10 or 15 years, it's about

54:13

company specifics now, it's not about. what

54:15

stops are going to move with

54:17

rates or you know what's the

54:19

Fed going to do? It's about

54:21

management teams and execution and technology

54:23

and efficiency which is very company

54:25

specific and our fundamental analysts can

54:28

actually figure that out better than

54:30

us macro folks right? I know

54:32

you focus mostly on the US but

54:34

we do talk about competing assets

54:36

as we mentioned fixed income. As

54:38

you look around the rest of

54:40

the world at what point you

54:43

know I mean they've underperformed, again,

54:45

arguably it's one of the biggest

54:47

periods in history for

54:49

foreign and emerging. When

54:51

do they get their act together?

54:53

Do they? I think that we

54:55

could see a lot of levers

54:58

turned that help the rest of

55:00

the world. and not just the

55:02

U.S. So I obviously focus on

55:04

the U.S. I see a lot

55:07

of unique opportunities and benefits that

55:09

the U.S. has that the rest

55:11

of the world doesn't. Like we

55:13

have the U.S. dollar, it's the

55:16

reserve currency, it's not changing any

55:18

time soon. There's no alternative, so

55:20

that's at least a solution we

55:23

have when it comes to debt.

55:25

exactly Japan. But you know I think

55:27

that's one one benefit but then when

55:29

I think about you know kind of

55:32

and we produce energy I think

55:34

that's another huge benefit is that

55:36

we have energy independence and energy

55:38

and food security I think are

55:40

big issues for countries at this

55:42

point. I guess when I look

55:44

at a kind of you know

55:47

policy and what could change over

55:49

the next two years I mean

55:51

lots of things could change right

55:53

it's a dizzying array of things

55:55

that could change. Things could stay

55:57

the same you know who knows

56:00

kind of extract more oil or produce

56:02

more oil or get more oil out

56:04

of the ground and move it around

56:06

more like we did in the Trump

56:09

1.0 administration. That could lower the cost

56:11

of oil and heating, which is a

56:13

benefit to Europe, benefit to India, benefit

56:15

to China, all three economies are oil

56:18

price takers. I think those are some

56:20

of the benefits that can actually juice

56:22

up global growth a bit.

56:24

Tech, you know, right now the

56:26

US has the whole position, but

56:29

that could change. I mean, you

56:31

know, I think that's what we

56:33

want to watch. This is not

56:35

a war war. It's a tech

56:37

war. We're in an environment where

56:39

U.S. consumers have a benefit of

56:42

fixed rate mortgages and they're not

56:44

necessarily feeling the pinch of, you

56:46

know, rising rates. But the downside

56:48

of that is that if we do

56:51

see a reset and we do start

56:53

to see more transactions take place amongst

56:55

residential real estate in the U.S., prices

56:57

could be set a lot lower. It's

57:00

kind of like private equity, right? Like

57:02

once you start to see these things

57:04

get marked. where the price is actually

57:06

going to settle. And I worry about

57:08

that a lot living in New York

57:11

City. But you know, I think that

57:13

there are risks that the U.S. has,

57:15

there are advantages. And I think that

57:17

there are advantages that the U.S. has

57:19

that can be exported to other regions

57:22

like lower oil prices or even, you

57:24

know, the idea that multinationals

57:27

to avoid the tariffs. I mean,

57:29

you know, if you think about

57:31

a Europe multinational company, let's say

57:33

that we come out with really

57:35

scary tariff numbers, a way to

57:38

avoid that is just to expand

57:40

your plant in the US, take

57:42

advantage of a lower tax rate

57:44

today than most major European regions,

57:47

and avoid the tariffs, right? So

57:49

I think there are also other benefits

57:51

that can be had by other regions

57:53

of the world, even in a, in

57:56

what feels like, you know, a tariff

57:58

war, a trade war. you know,

58:01

US dominating everything. I think

58:03

there's a lot of externalities

58:05

or, you know, ways that

58:07

other regions can benefit. I

58:10

think India is an interesting

58:12

region because when you think

58:14

about India, the US and China

58:17

are clearly at loggerheads,

58:19

but you've got India, third

58:21

largest economy, potentially, you

58:24

know, an ally. to the US.

58:26

This is the major largest economy

58:28

that doesn't have an aging demographics

58:30

problem. So I think that's when

58:32

to watch. India is interesting

58:34

because you've seen for so long they kind

58:36

of move in lockstep with China and

58:38

then over the last couple years,

58:40

particularly the stock market, has absolutely

58:43

decoupled India has been booming and

58:45

China's been moving the other way. Exactly,

58:47

yeah, it's an interesting dichotomy. Yeah,

58:49

and I mean, investing in India

58:52

has become democratized, you know, it's

58:54

kind of an interesting new story.

58:56

It's not that new, I mean,

58:58

the market's obviously done really well,

59:01

but I think that just parsing

59:03

that thesis, it could be fruitful.

59:05

What's been your most memorable investment?

59:08

You look back on your career, good

59:10

bad in between, anything come to mind?

59:12

It could also be your

59:14

most memorable investing call like

59:16

or research piece. It could

59:19

be something that's just seared

59:21

in your brain. One memorable report

59:23

that we wrote that I feel

59:25

like today I look back on

59:28

I mean we wrote a lot

59:30

of things that didn't happen but

59:32

one one report we wrote

59:34

back in 2018 everybody was

59:36

asking you know. What's the level

59:38

of interest rates? This was back

59:40

in, you know, when rates were

59:42

zero or negative or whatever, real

59:45

rates were negative. And, you know, folks

59:47

were asking you, how high can

59:49

interest rates get without hurting the

59:51

equity market? And we ran all these

59:53

different scenarios, we looked at all this

59:56

different data, we have this report that

59:58

I can send you. we looked at

1:00:00

this like five different ways and the

1:00:03

number we came up with was around

1:00:05

5% and it's interesting because when we

1:00:07

wrote that report I think everybody thought

1:00:09

we were crazy that was the note

1:00:12

that we wrote where everyone looked at

1:00:14

me like I had three heads and

1:00:16

you know they're like that's impossible you

1:00:18

can't get to five five is going

1:00:21

to be like the the SME is

1:00:23

going to be at like 200 and here

1:00:25

we are. 5% interest rates and

1:00:27

the markets at all-time eyes. I

1:00:29

think it's kind of interesting, right?

1:00:31

So I think that, you know, probably

1:00:33

some of the most memorable experiences

1:00:36

I've had are just unanchoring myself

1:00:38

from the current state of affairs

1:00:40

and just like kind of blue-sky

1:00:42

and sitting, you know, sitting there

1:00:45

I'm thinking, okay, what level of

1:00:47

rates can this equity market tolerate?

1:00:49

What level of rates can the

1:00:51

consumer tolerate? And not necessarily tethering

1:00:54

it to... where we are today.

1:00:56

I think that's the problem that

1:00:58

we all have is when we

1:01:00

write something where the number just

1:01:02

seems way too out of whack

1:01:04

with where we're sitting right now.

1:01:06

People look at us like we're crazy,

1:01:08

but a lot of times if that's

1:01:10

where your analysis gets you. be true

1:01:12

to it and stick with it because

1:01:14

there's a reason that your your work

1:01:16

is getting you to a certain point

1:01:18

that seems kind of ridiculous. So where

1:01:21

can people find you? They want to

1:01:23

they want to track what you're doing.

1:01:25

I published research Bank of America

1:01:27

securities. We write research for our

1:01:29

institutional investor clients and our individual

1:01:31

clients. You know, I meet with

1:01:34

financial advisors, institutional investors, you know,

1:01:36

all through the week and I

1:01:38

mean, I literally have the best

1:01:40

job on the planet. I love

1:01:42

my job. Well, listeners, if you

1:01:44

can get a hold of her research and

1:01:46

her teams, it's some of the best on

1:01:48

the street. I look forward to it every

1:01:50

time I see it. Savita, thanks so much

1:01:52

for joining us today. Podcast listeners

1:01:55

will post show notes to today's

1:01:57

conversation at mebfaver.com, for slash pod.

1:01:59

If you love the show, if you

1:02:02

hate it, shoot us feedback at the

1:02:04

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1:02:06

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1:02:08

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1:02:10

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1:02:12

good investing.