First Trust ROI Podcast
On the ROI podcast, we discuss some of the most important questions facing investment professionals today, ranging from macroeconomic views, to perspectives on the equity and fixed income markets, to insights on practice management. We aim to cut through the noise, examine the data, and provide fresh insights to investment professionals as they help their clients find better ways to invest…seeking to generate attractive returns on their investments.
First Trust ROI Podcast
ROI Podcast | Episode 22 | Are Investors Ignoring a More Powerful Secular Growth Theme than AI? | Richard Bernstein | June 3, 2024
Richard Bernstein, CEO/CIO of Richard Bernstein Advisors, discusses deglobalization, the reindustrialization of America, and how most investors are ignoring one of the most powerful secular growth opportunities today.
----------------------------------------------------------------------------------------------
Subscribe Here to the ROI Podcast & other First Trust Market News
Website: First Trust Portfolios
Connect with us on LinkedIn: First Trust LinkedIn
Follow us on X: First Trust on X
Subscribe to the First Trust YouTube Channel
Subscribe to the ROI Podcast YouTube Channel
Hi, welcome to this episode of the First Trust ROI podcast. I'm Ryan Isakainen, etf strategist at First Trust. Today, I'm joined by Richard Bernstein, ceo and Chief Investment Officer at Richard Bernstein Advisors. Rich has been around Wall Street for over 40 years. Most recently, he was the Chief Investment Strategist at Merrill Lynch before starting RBA over a decade ago. We have a wonderful conversation ahead.
Speaker 1:Rich and I are going to talk about themes like deglobalization, what that means for the economy, what that means for inflation and what that means for opportunities in the stock market. Thanks for joining us on this episode of the First Trust ROI Podcast. So, rich, thanks again for agreeing to be on the podcast. We were just talking. One of the last times that I remember you and I were together in the same place was in 2020, and I looked it up in my calendar January of 2020, right before the world shut down, and we were both at a conference in Beverly Hills, had dinner at a nice Greek restaurant, which, again, it was more impactful for me. You probably don't remember this, but one of the things that strikes me as I think back to that time is how everyone at the conference talked about their forecasts, their expectations, what was going to happen and I don't remember a single person that said COVID was going to have anything to do with it.
Speaker 1:And it got me thinking. That's what financial professionals, portfolio managers, have to deal with this sort of uncertain future. How do you deal with that as a strategist, as someone who's been on Wall Street for a long time, that uncertainty about what's coming down the road?
Speaker 2:Ryan, it's interesting that you bring that up, that we start with this topic, because I think that the data show that investors are habitually under-diversified. And why is that? Because nobody wants something in their portfolio that they hate, right. Like you know, everybody has a view of the world and they say this is my view of the world and the portfolio is supposed to adhere to that view of the world, and but you don't have anything that's an insurance policy in case you're wrong. And why don't you have that? Because that's a drag on performance and we're all geared to thinking we have to be the best performer, to be number one.
Speaker 2:Everything else, but if you're going to be diversified, that's an insurance policy, and the cost of that insurance policy is lower returns, steadier, but more but lower returns. And so if you think about COVID and things like that, you know there's no way a risk model can anticipate a pandemic. That's never going to happen. But the question was did people have something in their portfolio that protected them in case their view of the world turned out to be wrong and the answer to that was no, and I think you know.
Speaker 2:Even today, if you think about it, people are punting anything that's diminishing performance. You know, financial advisors are under tremendous pressure from their clients because they're seeing CNBC telling them that the market is up and everything's racing, and so FAs are under tremendous pressure from their clients because they're seeing CNBC telling them that the market is up and everything's racing, and so FAs are under an immense amount of pressure to try to keep up. How do you do that? You punt everything that's not keeping up, you shun diversification and the data show that's what's actually starting to happen. It's not starting, it's happening.
Speaker 1:There have been some really weird I guess weird market dynamics, and you mentioned this to me yesterday, actually, when we were talking about what we're going to talk about today, and I wasn't even sure that I had seen this before. So I'll give you credit for recognizing it. But you pointed out that large cap stocks were outperforming small caps. At the same time, high yield bonds were outperforming high quality bonds, and that doesn't seem like it should work. At the same time, those things going in opposite directions. That seems odd, and so how do you explain what's happening there?
Speaker 2:It's really bizarre. I mean, you know I think you're downplaying this a little bit. In my mind, this is incredibly bizarre that historically, the bond market and the stock market work in tandem. If junk bonds are outperforming, junk stocks either are outperforming or will soon outperform. When quality bonds are outperforming, quality stocks will outperform or soon outperform, and it's just a function of profitability, of cash flows, of everything.
Speaker 2:If the credit quality of junky companies is getting better, it probably means their profits and cash flows are getting stronger, and it goes hand in hand right? If things are getting worse, it's going to affect both markets. So what we have right now is a situation where junk bonds are outperforming, credit spreads are ridiculously tight by some measures, historically tight but yet we have large cap stocks, in fact a very narrow universe of large cap stocks destroying small cap stocks. That is completely bizarre. The bond market is telling you that corporate profits are going to be stronger. The stock market is telling you emphatically that companies are going to go bankrupt, that there's only seven companies in the world that you should be investing in. I mean that is a very bizarre dichotomy.
Speaker 1:So which one's right?
Speaker 2:I kind of think that the small cap side is right, that the junk bond market is correct, that this large cap phenomenon we're seeing is much more speculative and bubble-like than people think. I mean, goldman Sachs put out a report that showed that this is the narrowest stock market we've had since the Great Depression. Now you could argue in the Great Depression that makes perfect sense. Companies are going bankrupt right and left. There's only a handful that are surviving. Narrow leadership makes sense right in a Great Depression. The profit cycle is now accelerating in the United States. Profit growth is up about going to be up this year between 10, 15, maybe 20% in the United States. Why in the world do we have this narrow leadership? There's 170 companies just in the S&P now growing earnings 25% or more.
Speaker 1:So it's not just those mag seven that are growing their earnings? No, not at all.
Speaker 2:There's nothing unique about them. That's what's so amazing about what's going on here. So I think the junk bond market has this one right and the stock market is in some kind of strange bubble, or at least speculative period.
Speaker 1:And when you say the stock market, you're talking about the broad indexes like the S&P 500, you know that are so heavily weighted. Or maybe the overall market, like you said, is very concentrated Extraordinarily so. Just I don't want to put words in your mouth, but it sounds like you're saying some of the smaller stocks within the market are where investors should maybe find opportunities outside of just the largest companies.
Speaker 2:Absolutely so, ryan. The way we've described it is to think that there is no stock market. You know, cnbc likes to talk about the market. Bloomberg or Fox or whatever you like to listen to, they talk about the market. There is no the market right now. Rather, it's a seesaw, and on one side of the seesaw we basically have seven companies. Okay, maybe you want to make it five, maybe you want to get 20. People are going to get the point. One side, you get this very narrow leadership. On the other side of the seesaw, you have everything else in the global equity market and our portfolios are positioned on the other side of the seesaw. We think this is a once in a generation opportunity that we haven't seen this since the tech bubble in 99 and 2000. And people say, wow, who cares about it? It was 24 years ago, yeah, but we put out a report today that points out that since the peak of the bubble in March of 2000,. Energy stocks have outperformed technology stocks over the last 24 years.
Speaker 1:So this is a big deal and nobody cares.
Speaker 2:So it was really pretty wild.
Speaker 1:And that was a pretty concentrated market as well in the lead up to the dot-com bubble.
Speaker 2:Correct. The difference was it wasn't like seven companies becoming 30%, it was one sector becoming 30%. This is actually a little bit more extreme than that was back then, because it's only a handful of companies.
Speaker 1:You know, another market dynamic or maybe economic dynamic that seems a little bit counterintuitive is when you look at, say, the manufacturing PMIs 17 out of 18 of the last reports last month you've had negative or contraction below 50. But at the same time you're seeing over that same time period a lot of growth in construction of factories, which that seems like that shouldn't happen. At the same time We've got a contracting manufacturing sector. At the same time we're building a bunch of factories. What gives there?
Speaker 2:First of all, we have to admit that some of this is because of the CHIPS Act. Right, You're seeing the CHIPS Act was very powerful. It's having the effect that it was supposed to have. You are seeing manufacturing the structures with that semiconductors are related. You're seeing that build up and that was the whole point of that and it's working effectively, whether you like it or not. You know politically you could say, but it is working. Um, that there's two separate issues there. That's number one. Number two is that, um, I think people are still a little too short-sighted with respect to the manufacturing sector in the united states.
Speaker 2:I would argue the manufacturing sector is the growth sector for the next 20 years. It's not technology, it's not AI, it's not all this hype you're hearing. It is actually in the re-industrialization of America. And the reason that's so important is that the United States has a massive trade deficit. In fact, this morning it came out it almost hit $100 billion for the month. You know it's the biggest trade deficit we've had in four years. Now We've got that massive trade deficit combined with deglobalization.
Speaker 2:Now, the way I describe this to people is and this is the government program already why does everybody understand the national security implications of the United States being dependent on the rest of the world for semiconductors, but they don't understand the national security implications of the United States being dependent on the rest of the world for everything, and that I think deglobalization, being dependent on the rest of the world for everything, is a horrific combination. The capital markets have to be smart enough to understand this and redirect capital to where it's needed. I think the big story is the re-industrialization of the American economy. I think that's going to be a massive story.
Speaker 1:So do you think, then that I agree with you, but do you think then that the CHIPS Act just pulled forward spending? That would have happened anyway? I mean the semiconductor companies. They have a lot of capacity constraints at this point, like they're pumping out semiconductors as quickly as they can, and so sometimes I wonder, you know, it seems like a no-brainer, if you're one of these semiconductor companies, that you're going to accept the CHIPS Act money right yeah, why? Not, why not? But it seems like maybe they would have spent that money anyways.
Speaker 2:I think they might have spent it. I'm not sure they would have spent it here in the United States. Oh, okay, that's the difference. I think I think the government has pushed them and I think you know again, I'm not getting into the politics here I think that the smart thing that the government did was to try to reward companies for behavior that helps the American economy and makes the American economy more independent, as opposed to just saying we're going to give you a tax cut and then they go build another plant in Taiwan. I mean, what does that do for us? Many technology companies have gotten tax cuts and they build factories all over the world, but not here.
Speaker 2:This is a story of building them here. I think semiconductors are the tip of the iceberg. I think we're going to see this in a lot of industries where it may not be government outright spending. It may be tax incentives. You know, build a plan here. It's non-taxable for 20 years. You know something, they're going to get creative about it. But I think you're going to see it in a lot of different industries because we're going to have to reassert our economic independence.
Speaker 1:So you've been talking about deglobalization and the reindustrialization of America for over a decade. Is that fair?
Speaker 2:Yeah, it's about 10, 11 years, absolutely.
Speaker 1:When you were 10, 11 years ago first talking about this, what was your thinking then? As compared to now, has it evolved at all or is it the same rationale?
Speaker 2:It's a little bit different. It's a little more immediate, right now, because now globalization is actively contracting right.
Speaker 2:You're seeing this in the Middle East, you're seeing it in Eastern Europe, you're seeing it in our relationship with China, you're seeing it in parts of Africa, you're seeing it in parts of Latin America. De-globalization is happening now, so the immediacy is greater. Then, ten years ago, the story was that it was a simpler story, in that companies had moved overseas for one factor, and the one factor was labor costs, and that was it. And they didn't understand the cost of logistics, the political costs which we're now you know this deglobalization is happening. This is one of the big issues. Costs, which we're now you know this deglobalization is happening, this is one of the big issues. But they didn't understand the political costs. They didn't understand the quality control, the decentralized industrialization, that different factories weren't talking to each other, and so you know there were a lot of things that were going on there.
Speaker 2:What's happened is this has been pushed to the forefront because the political issues that we thought you know were one of many issues back then, but now the political issues or geopolitical issues have pushed it to the forefront immediately.
Speaker 1:Yeah, so is deglobalization happening just between the US and some of our trading partners, or is it happening outside the US with, you know, the trade relationships in some of the other countries?
Speaker 2:as well, it's happening everywhere right now. I mean, in some places it's opening up, you know. I mean, if you think about China and China's trying to establish relationships in the Middle East, they're trying to establish relationships in Africa, you can see that, where they're trying to globalize more to kind of replace our market, right, if you know it's not going to work here, they're going to try and sell someplace else. But you know, the deglobalization theme is in politics all around the world right now. And again, I'm not getting into politics, I'm not saying this is right or wrong. Please don't misunderstand.
Speaker 2:But I think everybody knows that there are nationalistic tendencies in many countries around the world and one of the big themes of nationalism is that globalization is bad. Well, if globalization is bad and I'm not passing judgment you could say that's right or wrong, I don't really care, that's not my day job. But if globalization is bad, you have to realize the United States economy is very dependent on globalization and so what's going to happen to the US economy as nationalistic tendencies grow? So again, you could say nationalism is good or bad. We just have to, as investors, we have to try to figure out what the implications are of that, and I think it means that the United States is really kind of wrong-footed here and the capital markets are going to have to adjust.
Speaker 1:So it seems like globalization over the last few decades, as we've sought lower labor costs and brought the cost of manufacturing down, has been disinflationary, even deflationary. Yeah, absolutely so is the reverse true? Will this be as deglobalization emerges over the next several years? Is that going to be an inflationary force?
Speaker 2:Yeah, I think that's right. I think that's absolutely right. Now let's define what we mean by that first.
Speaker 2:So that everybody does not a hair-on fire forecast. Right, everybody's going. You know, gee, you know they all think that inflation is going to go rampant. No, I mean, you know, inflation over the, you know, from 1992 to roughly 2020, was about 2% a year. Right, and there's reasons I've chosen those dates. But let's say roughly those dates 2% a year. Maybe we're talking 3% a year instead of 2% as a secular trend. Now that doesn't sound. That's not a hair on fire forecast. But if you compound that over 5, 10, 15, 20 years, that's a big difference in pricing. Why did I choose that period? If you look at when core PCE deflator, which is the Fed's favorite measure of inflation, starts hovering around 2%, it amazingly coincides with roughly the introduction of NAFTA.
Speaker 2:That was the beginning of the big period of globalization. And what globalization did was it just simply increased competition, and we all know that when you increase competition, you put downward pressure on prices, and so you know, as the United competition, you put downward pressure on prices. And so you know, as the United States, you know, globalization did what your textbook said it should do Production went to where it was most efficient. Unfortunately, it wasn't in the United States, but it went to where it was most efficient Increased competition, downward pressure on prices we now call that secular disinflation. If we're now going to deglobalize and production is going to go to where it's less efficient, you'd have to say that there's going to be more rather than less inflation. Is that going to be two and a half? Is it going to be three? I wish I was smart enough to tell you. But I think everybody should be positioning portfolios and we are for certainly at RBA positioning portfolios for more inflation rather than less.
Speaker 1:One of the I guess, factors that could push more disinflation, at least in our view, is some of the technology that always has a disinflationary impact, and AI. Everyone's very enthusiastic about AI and the potential and what that could do Right, and you know, one of the things I hear about is the impact on labor costs of that on white-collar jobs. But then you've also got robotics and automation and factories and manufacturing, which also could have a disinflationary impact. Absolutely Does that play into your thinking.
Speaker 2:It does and especially.
Speaker 1:I'm just thinking like. You're making the argument that labor costs are high here and so go overseas, was, you know, a couple of decades ago, the mantra. But if you can automate that, then that brings down costs and maybe leads to de-globalization.
Speaker 2:So I have several answers to your question.
Speaker 1:It was a long question. I don't know.
Speaker 2:But number one. There's an economist at MIT whose name has escaped me right now, but it's not important, not germane to the discussion who points out that about 100, 125 years ago, 40% of all jobs in the United States were in agriculture. Right out that about 100, 125 years ago, 40% of all jobs in the United States were in agriculture, right. And if you went to that 40% of the population and you said a hundred years from now, like today, jobs in agriculture will comprise 4% of the working population, what would they have said? They was it. Oh, the world's gonna come to an end, everybody's gonna lose their jobs. Everything else and he points out his line, not mine they would not have said it's okay, I'll become a website designer.
Speaker 1:Right.
Speaker 2:Right, we have no idea the jobs that will be created from this. So I think we have to downplay some of the hysteria that AI is going to cause us all to be unemployed and we're going to be stupid and the robots are taking over and all this kind of stuff. Let's downplay that a little bit. The second thing is that technology always changes the economy. Always. People say to me isn't AI going to change the economy? My answer is of course it will. I mean why wouldn't it? Of course it will. I mean technology always does.
Speaker 2:My favorite example, which we don't even consider technology anymore, is the light bulb. Right, the light bulb turned the economy into a 24-hour economy. Right, I mean, you can't have a graveyard shift when there's no light bulb. We couldn't do this right now without light bulbs. Right, I mean? Think about it. So we're doing this by candlelight. Imagine that. Right, forgetting that the cameras didn't exist or anything else. So technology always changes the economy.
Speaker 2:But remember, we're investors and as an investor, you have to separate out the economic story from the investment story. The economic story may be very good, that doesn't mean the investment story is going to be good. Case in point 25 years ago, the story was the internet would change the economy, and it did. It changed the economy in ways that we could never have envisioned 25 years ago. I mean fantastic, right. But if you bought NASDAQ at the peak of the bubble, it took you 14 years just to break even. Since the peak of the bubble I mentioned before, energy stocks have outperformed technology stocks 24, 25 years. You know it takes a long time to make up for. You know over-enthusiasm on the investment side. So I don't dispute for a second that AI is going to change the economy. Of course it will Does that mean it's a great investment opportunity.
Speaker 2:Today Not so sure about that.
Speaker 1:Yeah, there is something to the hype cycle and to your point. I think it depends where you are in that hype cycle. If you invested in internet stocks too early, then yeah, it took 14 years to make your money back in some cases. So, thinking again about this theme of deglobalization, it seems to me that a lot of it was pulled forward by COVID, the pandemic, and just the realization of, you know, maybe our supply chains aren't quite as secure as we thought, and some other factors along with that. Do you think that Absolutely?
Speaker 2:I mean, I think COVID kind of exposed the soft underbelly of the US economy right, that all of a sudden we couldn't get anything. And it was really because all the supply chains around the world you know seized up. And that's my point Like in any kind of serious environment, those supply chains are going to seize up. What does that mean for our economy? And I think semiconductors are the most obvious points for that, especially because a lot of semiconductors are made in Taiwan, which is right next to China.
Speaker 2:Of course we all get that. We all understand that. My point is that's the tip of the iceberg. Most people don't understand yet that the bulk of the economy is based on this. Remember, we couldn't get toilet paper, I mean, you know? I mean this is silly stuff, but it just shows that soft underbelly of the economy and how susceptible we are to being beholden to the rest of the world.
Speaker 1:There was a stretch there where you couldn't buy a car, a new car, although lots were empty, because we couldn't find the chips to put in these cars.
Speaker 2:Exactly. I mean, think about that. It's crazy. But I think that was kind of the shot across the bow, if you will, in terms of what the future was holding.
Speaker 1:You know you mentioned the energy sector and one of the things I've been thinking about recently is the impact of some of the technology on demand for energy. If you've got you know, AI server farms that are running all the time and you've got cryptocurrency mining happening and you've got a shift towards electrification in your vehicles and in your homes. It seems like that's a lot of energy demand.
Speaker 2:I think one of the best stories out there is utility infrastructure.
Speaker 1:Yeah.
Speaker 2:Right. I mean you know, we all know that California has that law that by 2035, all vehicles sold in the state of California have to be electric vehicles. Again, we could argue all day long. Is that good or bad public policy? I don't care, not my day job but we all know the California electric grid can't support that. So is it a better investment team to invest in electric vehicle companies or is it a better investment team to invest in the industrial companies that are going to build out California's electric grid? At RBA, we're all over those industrial companies that are going to build out the electric grid, and it's not just California.
Speaker 2:The country has an antiquated electric grid that's basically using technology developed in the early 1900s. It hasn't really changed, which is amazing. And there is ways to change this. And believe it or not, I mean, I'm not pandering for this, but the government has just relieved a lot of regulations on the utility industry to allow them to upgrade their transmission systems. Whether they do or not remains to be seen, but we'll see. But it's a huge story that nobody talks about. You don't wake anybody up at a cocktail party talking about what's it called. Reconductivity is the term the electrical engineers use.
Speaker 1:Yeah, Bloomberg had a statistic in one of the reports that I read. It was a year or two ago now, but I think it was $14 trillion in capital investment over the next three decades globally on the power grid and modernizing it, making it more digital, making it more efficient. It's a lot of money.
Speaker 2:It's absolutely crazy. I mean, there was an article this week I can't remember where it was, maybe the Wall Street Journal, washington Post, actually, I think it was. They talked about new conductivity wires, where you know, the old wires are basically, you know, copper or steel wrapped with aluminum.
Speaker 1:Yeah.
Speaker 2:They don't do well in the heat. There's actually new wires and just by changing the wires you don't have to change the poles. All you got to do is change the wires. You could double the capacity of the US electric grid Just like that.
Speaker 1:It's crazy. So we'll see.
Speaker 2:I think that's a great tip, but you know, nobody gets excited about a cable company.
Speaker 1:Yeah, they're not nearly as flashy as an AI company.
Speaker 2:No, not at all, all right.
Speaker 1:So you have stated a couple times you don't want to get into politics. I'm not going to push you into politics. But what I will ask you is does it matter who the next president is or who the composition? I mean, do those things have a big impact on equities, or should investors and advisors just kind of?
Speaker 2:set them aside and recognize we go through cycles. I'm smiling, I'm kind of laughing. Every political, every presidential election in my entire career, which goes back all the way now to 1980, whoever loses the presidential election says the market's doomed.
Speaker 1:It never fails.
Speaker 2:Yeah Right, I mean 1980, you know, jimmy Carter loses to Ronald Reagan. The Democrats say the market's doomed. Of course we have a bull market, Right? You go on to say Clinton, the Republicans say the market's doomed. We have a bull market, right. You go on to say Clinton, the Republicans say the market's doomed, we have a bull market. You go to Obama, the Republicans say the market's doomed, we have a bull market. You go to Trump, the Republicans say or the Democrats say the market's doomed. We have a bull market. Biden, the Republicans say the market's doomed, we have a bull market.
Speaker 2:I mean, I just think you know everybody's got to chill a little bit. The world is not coming to an end just because the other side wins, and I think you know there's 40-plus years of history there to say I don't know what went on before. So I don't think it makes that much difference. I think the biggest issue in politics right now is what I mentioned before, that not just here in the United States, but in many countries around the world this is not a US phenomenon nationalistic tendencies are growing, and as an investor, you cannot ignore that, because globalization, I would argue, was the major factor that caused secular disinflation, and so you can't sit here and say politics are changing around the world, nothing's going to change in the financial markets, nothing's going to change in the global economy. That doesn't make any sense, and so that I think I think people are too myopically focused on Biden and Trump and not thinking of the bigger issue around the world that's going on here and what that could mean for their portfolio.
Speaker 1:So, with the period of secular disinflation maybe going away, is the Fed going to have a more difficult time bringing inflation down to their 2% target? Is this something they're going to have to rethink?
Speaker 2:RBI. I think most of my, I think all my colleagues would agree with me, rather, that it's very unlikely they're going to hit that 2% target without a sustained period of weakness in the economy. Right, yeah, I mean, if we have a recession, a deep recession, you know, make it as bad as you want. Yes, we'll hit 2% inflation, of course, right. But if there's a healthy economy, the trend lines not gonna be 2% anymore.
Speaker 1:Yeah. Are you surprised that the Fed having raised rates as much as they have so far this cycle, that they haven't had a bigger impact on economic growth?
Speaker 2:This is. It's a great question question. There is no economic model out there that says that the Fed raises interest rates 525 basis points and financial conditions ease. It's just it's lunacy to think that that would happen. But that is what's happening and so there's many reasons why that's happening.
Speaker 2:You could argue that we had 27 percent money growth several years ago, which rivaled us with Peru, something we should all be proud of. And you don't wash out 27% money growth in a short period of time. That's two unchanged times, the fastest money growth ever in US, modern US history. It just doesn't wash out in a year or two, and so you've still got the lingering effects of that. Plus you've got, you know, the fiscal stimulus involved and everything else. So we've got this a huge amount of oomph to the economy. That's not going away.
Speaker 2:I'm not sure the Fed has adequately assessed those factors and they're just kind of going by history and saying, well, we raised rates 525 basis points. That should be slowing the economy. It's questionable, but certainly financial conditions are not tightening and that's really a big thing. Fas financial advisors see this every day. All they have to do is think about how many private debt deals they are seeing every day and they're witnessing financial conditions not tightening. If the Fed had had their desired effect, the banking and monetary system would be really clamping down on lending. That's not happening.
Speaker 1:Yeah, I spoke with you earlier this year and you were very early in saying that the Fed was not going to be nearly as aggressive in lowering rates this year as the market had priced in. You know, coming into the year it was somewhere between 125 and 150 basis points priced in, something like that right, right, it was six times. And yeah, six times, and now I think we're maybe at one time or something like that.
Speaker 1:I think you know, a few months ago you were one of the few people that I talked to that said it might not happen this year. Is that still your expectation?
Speaker 2:It's still our view. I mean, my colleagues at RBA were very confused how the markets were anticipating six rate cuts during the year. The leading indicators of the economy had troughed something that people don't talk about but the leading indicators had troughed. They're not strong on an absolute basis, but they have troughed. That's not usually a sign that the Fed is going to be cutting rates, right. I mean, occasionally they do, but it just didn't sound right. Plus, we have the profit cycle revving up, going from minus 15% growth to plus 15% growth Again, something that doesn't not really conducive to the Fed cutting rates. So all of us thought that the six was way too aggressive. Now I'm not going to tell you that everybody in our firm agreed that they weren't going to cut at all, but we knew that six was way too aggressive. That was pretty clear.
Speaker 2:And so what you find which is really interesting is on days where it looks like the Fed is going to make the cut and like you get a bit of data weakness and everybody thinks the Fed's going to cut, and like you get a bit of data weakness and everybody thinks the Fed's going to cut rates, you find the speculative activity in the financial markets picks up immediately. It's amazing. And then you get some data that's stronger and it all calms down. And so that's something I think the Fed probably doesn't pay attention to but should, because it tells you there's still too much excess liquidity in the economy to be speculated with. You know, when the Fed has done their jobs, people aren't speculating. You know it's like you don't go to a casino when you know financial conditions are really tight and you're probably out of work. But here you have you know casinos are doing well. Speculative activity is doing well Cryptocurrencies are you know?
Speaker 2:I mean you can see all the speculation still in the economy that suggests the Fed hasn't gone enough.
Speaker 1:So this is maybe a philosophical question, for if you're a financial advisor or you know someone else that's advising investor wealth, do we pay too much attention to what the Fed is doing? I mean, as you mentioned, this kind of ebbs and flows, the speculative activity based on expectations, what the Fed's going to do, it's what CNBC and Bloomberg and Fox, what everyone's talking about. Do we talk about it too much?
Speaker 2:or should we? Just? You're aware, and some people watching this probably are I used to be a professor in the grad school at NYU and one of the things I used to discuss a lot with the MBA students was the definition of leading, coincident and lagging indicators and the importance of as an investor. You have to focus on leading indicators, but for some reason, investors tend to focus on lagging indicators and like that intuitively. That shouldn't make sense to people, but it continues.
Speaker 2:What are, you know, leading indicators? Well, leading indicators are things like building permits and jobless claims, which, like CNBC spends a nanosecond talking about. It's like, okay, building permits were up, let's go on to you know something else, and that was it. Lagging indicators are things like unemployment, inflation and the Fed. Look what everybody talks about Inflation, unemployment and the Fed, and so you know, do people spend too much time thinking about the Fed? Yes, I've always been confused as to why investors believe that the Fed starts something when, in fact, they're reacting, and Janet Yellen used to talk about this very openly, although she didn't use my words. She kept saying how they were going to be data dependent, and I always thought that was funny because, like what were they before? If there's something?
Speaker 2:new were they just winging it. But, on the other hand, what she was saying more seriously, what she was saying was that the economy is going to do something, the data is going to be reported, the Fed's going to analyze the data and then set monetary policy. Well, think about that lag time between when the economy acts, the data gets reported, they analyze the data and then they set monetary policy. That's like the definition of a lagging indicator. So I do think that people spend way too much time thinking about the Fed.
Speaker 1:Yeah, okay, you mentioned the profit cycle and that it has shifted a bit. So are we really early in that shift? Do you think that'll be something that continues to trend in the direction of profit growth?
Speaker 2:So far, it looks to us that we've got another several quarters of accelerating profits growth, which we think will take us through the end of 24, maybe into 25, early 25. It's hard to say exactly, but it does look like we're on the upturn in corporate profits and I think, as I said before, there's now like 170 companies in the S&P growing earnings 25% or more. This is the normal stuff that tends to happen. The abnormal thing is that leadership isn't broadening. As fundamentals broaden, the market tends to broaden. Fundamentals are broadening, the market's not broadening. That's the weird thing. That's why I think at RBA, we think this is much more speculative than other people do.
Speaker 1:Yeah, and there's a big difference in valuations from one sector to another. We've talked about energy a couple of times now. Those stocks are still much, much cheaper than some of the other higher growth areas. And same thing with utilities. I mean, they used to be coming into, you know the pandemic everyone was piling into low volatility and those got expensive.
Speaker 2:but not so much anymore. Yeah, no, I think the hype machine is in. All eight cylinders of the hype machine are going big time right now, and I just think you know. To get back to my seesaw analogy, I think because that seesaw is so skewed, the other side of the seesaw which we're positioned in is literally a once-in-a-generation opportunity. You don't see this very often, and so I would encourage everybody to take their eyes off the 10 minutes. These things don't work by the next commercial break. That's not the way investing actually works and think about the next. You know 1, 3, 5, 10 years where these opportunities are. I think they're huge. I mean, I'm actually quite excited about one side of the seesaw, but because you're not excited about the other side of the seesaw, people paint you as being bearish, right right. That makes little sense to me.
Speaker 1:Thank you so much for your insight. I have one more question for you that you know. I think one of the things that I like to try to do is broaden what I'm reading outside of. You know the Wall Street Journal or the, you know New York Times or Washington Post, so I like to read books and.
Speaker 1:I'm always looking for a good book recommendation, so do you have any books that you've either read recently it could be an old but good sort of book or anything on the horizon that you would recommend myself and the viewers of the ROI podcast consider?
Speaker 2:I actually just finished by just I mean last week finished a book called Dark Towers. It is the modern history of deutsche bank really and um. This was particularly fascinating to me because I knew some of the players.
Speaker 2:I'd forgotten that a lot of the people that went to that, that formed the new deutsche bank, all came from merrill lynch, where I had spent 20 years that was early in my career merrill I didn't know them personally I don't want to say like we were buddies or anything but but I do remember the names. They all came from Merrill. But I never kind of understood what happened when they left Merrill. And it's a very interesting story of taking too much risk, the desire to take risk, the lack of accountability, the lack of oversight, and what happens within a bank when you don't have those checks and balances within the bank. There's many stories. It's not a unique story.
Speaker 1:Yeah.
Speaker 2:This has happened in many places. Many banks along the way have failed. We saw one a year and a half or two years ago Silicon Valley Bank and things like that but this is a very interesting story of how different divisions in a bank didn't talk to each other all kinds of things like that Very, very interesting.
Speaker 1:Yeah, well, thanks for the recommendation. Once again, thanks for coming on the podcast and for all your insights and for all that you do for financial advisors.
Speaker 2:Yeah, Well, thanks, Thanks Ryan.
Speaker 1:And thanks to all of you for joining us on the ROI podcast. We'll see you next time.
