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Investing, Markets, And The SALT Tax · Bloomberg Intelligence

• 0:00
  Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside
• 0:04
  Speaker 1: my co host Matt Miller. Every business day we bring
• 0:06
  Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
• 0:11
  Speaker 1: with essential market moving news. Find the Bloomberg Markets podcast
• 0:15
  Speaker 1: called Apple Podcasts or wherever you listen to podcasts, and
• 0:18
  Speaker 1: at Bloomberg dot com slash podcast. All right, let's get
• 0:22
  Speaker 1: to a topic that is near and dear to my heart,
• 0:24
  Speaker 1: and that is E t F s. We have Sean
• 0:27
  Speaker 1: o'harroll with us president of Pacer E t F s
• 0:30
  Speaker 1: irish much Oh, happy St. Patrick's day, Shawn. Yeah, good
• 0:35
  Speaker 1: timing on that. Wherever book me today? Me on the
• 0:37
  Speaker 1: right day? Right, Yeah, I didn't even remember that it was.
• 0:41
  Speaker 1: Normally I have one and a half beers every day
• 0:43
  Speaker 1: after work when I go home, but today one and
• 0:45
  Speaker 1: a half. It's gonna be too go crazy, Yeah, Sean,
• 0:49
  Speaker 1: talk to me about your business. I mean it's huge, right,
• 0:52
  Speaker 1: The the E t F boom has been going on
• 0:54
  Speaker 1: since before the long before the pandemic, but this just
• 0:58
  Speaker 1: boosted I think um interest in exchange traded funds. Well,
• 1:05
  Speaker 1: I mean, I'm not sure I would tie it to
• 1:07
  Speaker 1: the pandemic. The momentum has been building for a number
• 1:10
  Speaker 1: of years, and you know, markets evolve, and you know,
• 1:14
  Speaker 1: improvements get made. And perhaps the biggest thing in terms
• 1:17
  Speaker 1: of the improvement to what would be traditionally the way
• 1:20
  Speaker 1: people would invest, which is a you know, the traditional
• 1:23
  Speaker 1: forty act mutual fund. The e t F is sort
• 1:25
  Speaker 1: of a cousin of that structure, except it has some
• 1:28
  Speaker 1: inherent advantages that I think UH investors find UH more attractive.
• 1:33
  Speaker 1: You can trade during the day as opposed to deciding
• 1:35
  Speaker 1: to sell and having to wait to the close. There's
• 1:37
  Speaker 1: some tax efficiencies that go along with e t s.
• 1:40
  Speaker 1: You can get sort of more targeted exposures, and and
• 1:43
  Speaker 1: on average, the the average cost of owning an e
• 1:46
  Speaker 1: t F in terms of the management fee is lower.
• 1:49
  Speaker 1: So I think there's been this evolution that sort of
• 1:52
  Speaker 1: has been building. The momentum certainly has been picking up um,
• 1:56
  Speaker 1: you know, and if you look at the last you know,
• 1:59
  Speaker 1: five to seven years, you know, for every dollar that's
• 2:01
  Speaker 1: come out of traditional mutual funds, it seems to be
• 2:03
  Speaker 1: finding its place in its way into an exchange traded funds.
• 2:07
  Speaker 1: And and honestly, I still think we're fairly early in
• 2:10
  Speaker 1: the cycle. So Sean, given all the bricks in the
• 2:14
  Speaker 1: wall of worry, whether it's the geopolitical issues which are
• 2:18
  Speaker 1: relatively new, slowing economy, inflation, rising interest rates, what's your
• 2:23
  Speaker 1: market call here? I think that there's a an inverse
• 2:29
  Speaker 1: relationship between interest rates and inflation and PEA s the
• 2:32
  Speaker 1: price you're willing to pay for the amount of earnings
• 2:34
  Speaker 1: you get on the stock. And so for the last
• 2:36
  Speaker 1: decade or so, we've had very low inflation, very low
• 2:39
  Speaker 1: and declining interest rates and accommodative FED and so in
• 2:42
  Speaker 1: that environment, I think you could you could justify paying
• 2:46
  Speaker 1: above average market multiples for the earnings that you're getting.
• 2:49
  Speaker 1: And then what sort of is distorted it in the
• 2:51
  Speaker 1: middle was COVID because we're you know, we went through
• 2:54
  Speaker 1: a series of earnings announcements this quarter where you had
• 2:57
  Speaker 1: thirty and year over your increases. I don't think those
• 3:01
  Speaker 1: are organic. I think they are just uh an output
• 3:05
  Speaker 1: of you know, the economy being shut down and now
• 3:07
  Speaker 1: things opening back up. Um. So if we're going to
• 3:10
  Speaker 1: enter an environment where rache you're gonna rise and inflation
• 3:13
  Speaker 1: is going to rise, I think investors should expect the
• 3:15
  Speaker 1: p S will have to come down unless we continue
• 3:17
  Speaker 1: to get blowout earnings of thirty here, which I don't
• 3:20
  Speaker 1: think is likely. So then in this environment, I think
• 3:23
  Speaker 1: investors need to sort of shift their focus away from
• 3:25
  Speaker 1: the broad market and start to focus on putting their
• 3:28
  Speaker 1: money in places where they have a better chance of
• 3:32
  Speaker 1: getting the returns that they expect, given the way that
• 3:35
  Speaker 1: the individual stocks are. Structures like we love free cash
• 3:38
  Speaker 1: flow and free cash flow yield as a strategy to
• 3:41
  Speaker 1: screen broad market for a smaller group of names. And
• 3:44
  Speaker 1: so is the CEO w Z the cash house that's
• 3:51
  Speaker 1: your biggest products, and it's up here to date and
• 3:55
  Speaker 1: the markets down eight percent as of yesterday. So but
• 3:58
  Speaker 1: where are we positioned today? Are overweight energy and material
• 4:01
  Speaker 1: that's inflation and oil. We're overweight staples versus discretionary. That's
• 4:05
  Speaker 1: you know, people with inflation and with all of the
• 4:08
  Speaker 1: stimulus going away, the consumer is going to get squeezed
• 4:10
  Speaker 1: and so they're probably at some point gonna have to
• 4:12
  Speaker 1: make a decision to buy the things they need versus
• 4:14
  Speaker 1: the things that they want. We're overweight healthcare in this
• 4:17
  Speaker 1: environment because healthcare hasn't been one of those sectors that
• 4:19
  Speaker 1: has had this big run up even though their earnings
• 4:22
  Speaker 1: grow faster than the overall market, and so that in
• 4:25
  Speaker 1: this environment, I think you need to be more selective.
• 4:27
  Speaker 1: We've had a nice run. Acknowledge that and start thinking
• 4:30
  Speaker 1: about going forward. What kind of stocks will do better
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  Speaker 1: in this environment? Will energy materials are your inflation play?
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  Speaker 1: And then generally speaking, stocks that have a lot of
• 4:39
  Speaker 1: free cashle and a high free cash flow yield are
• 4:42
  Speaker 1: able to absorb those higher financing input costs that will
• 4:45
  Speaker 1: go along with rising rates. And so I think that's
• 4:47
  Speaker 1: why our portfolio sort of acting the way it is
• 4:49
  Speaker 1: right now. And you have a lot of products that
• 4:51
  Speaker 1: focus on those kind of stocks, not just the cows,
• 4:54
  Speaker 1: but the You've got a global um cash cow z
• 4:57
  Speaker 1: et F. You've got to developed markets. You a calf
• 5:00
  Speaker 1: which I like, which is a small cap, a little
• 5:03
  Speaker 1: a little baby cow. They got wall And to continue
• 5:08
  Speaker 1: this is silly naming conventions. We actually have a fund
• 5:10
  Speaker 1: of funds version of our cash cows which we have
• 5:13
  Speaker 1: give the ticker h E R D heard exactly. You
• 5:17
  Speaker 1: also have an American Energy Independence e t f UM. Yes,
• 5:21
  Speaker 1: and uh year to date return thirteen point two per
• 5:25
  Speaker 1: cent um. Yes, this has to be one of your
• 5:29
  Speaker 1: strongest products at least year to date. Yeah, it's I
• 5:33
  Speaker 1: think it's probably our best performing U E t F
• 5:35
  Speaker 1: year to date, followed by g Cow and then Cows.
• 5:38
  Speaker 1: But the U S Energy Independent is basically focused on
• 5:41
  Speaker 1: the midstream energy names, which is essentially storage and transportation
• 5:44
  Speaker 1: of energy, oil and gas. And you know, they had
• 5:47
  Speaker 1: a tough time for a while, but they're entering a
• 5:50
  Speaker 1: phase in the market where if you think about environmentally,
• 5:53
  Speaker 1: the shutting of the Keystone pipeline, so the discontinuation of
• 5:57
  Speaker 1: that progress made the on the ground existing pipe companies
• 6:01
  Speaker 1: by virtue of that more more more more valuable. Um,
• 6:04
  Speaker 1: they're basically just toll roads. They're they're pricing is tied
• 6:09
  Speaker 1: to p p I. So if we do have runaway inflormation,
• 6:12
  Speaker 1: the fees they're going to get for transport victory, it's
• 6:16
  Speaker 1: going to go up as well. All right, Sean, I'm
• 6:18
  Speaker 1: gonna have to leave it there just because of time.
• 6:20
  Speaker 1: Appreciate as always getting your thoughts. Shawn O'Hara, President PACER
• 6:23
  Speaker 1: E t F S. I'm gonna bring in a Bloomberg reporter, um,
• 6:31
  Speaker 1: but not just a Bloomberg reporter. Bachelor's degree from Stanford,
• 6:37
  Speaker 1: completed two years at Oxford, Rhodes Scholar Bloom j d.
• 6:41
  Speaker 1: From Harvard. Alright, not bad, uh, Asia back box, she
• 6:45
  Speaker 1: knows what she's talking about. Yeah, Asia, thanks so much
• 6:48
  Speaker 1: for joining us in the limited time we have you,
• 6:51
  Speaker 1: because I assume that you're off to a giant law
• 6:53
  Speaker 1: firm or Supreme court yourself very soon. Um, let's talk
• 6:56
  Speaker 1: a little bit about salt what uh, what is the
• 6:59
  Speaker 1: possibility that some legal action spurs the salt deduction cap
• 7:05
  Speaker 1: to be lifted. I would not say that the possibility
• 7:10
  Speaker 1: is huge. There are a couple lawsuits going on that
• 7:15
  Speaker 1: states have brought to try to either get the cap
• 7:20
  Speaker 1: struck down in court and get a court to say
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  Speaker 1: it's un constitutional, or to allow workarounds for their residents
• 7:28
  Speaker 1: to try to get around the cap. But the biggest
• 7:30
  Speaker 1: one that's at the Supreme Court right now. The states
• 7:34
  Speaker 1: have lost at the lower courts. Uh, and for a
• 7:36
  Speaker 1: few different reasons. I think the Supreme Court is probably
• 7:40
  Speaker 1: not going to take up the lawsuits. So my guess
• 7:44
  Speaker 1: is a legislative remedy is going to be the state's
• 7:48
  Speaker 1: best option. But we're gonna have to wait and see
• 7:51
  Speaker 1: why are states saying that this tax law is unconstitutional?
• 7:57
  Speaker 1: They's pointed to a couple different arguments. Uh. You know.
• 8:01
  Speaker 1: One argument they make is they basically say that even
• 8:04
  Speaker 1: though the Constitution doesn't explicitly mandate that you get assaults
• 8:09
  Speaker 1: deduction for your your state and local taxes, UM, it's
• 8:13
  Speaker 1: kind of implicit in the Constitution. It's embedded in some
• 8:16
  Speaker 1: ideas around federalism, basically the breakup of power between the
• 8:20
  Speaker 1: federal and state governments. UM. They point to the history
• 8:24
  Speaker 1: around the salt deduction that Congress never repealed it until uh,
• 8:30
  Speaker 1: and they say that history really shows that this is
• 8:34
  Speaker 1: embedded in the Constitution itself. It's embedded and the taxing
• 8:39
  Speaker 1: powers the Constitution creates for Congress that they have to
• 8:43
  Speaker 1: provide this kind of deduction. And then they also point
• 8:46
  Speaker 1: to an amendment in the Constitution. It's the tenth Amendment,
• 8:50
  Speaker 1: and that basically reserves to the states all the powers
• 8:53
  Speaker 1: that aren't explicitly given to the federal government and the Constitution.
• 8:57
  Speaker 1: And they say part of that amendment is you can
• 9:00
  Speaker 1: coerce states um through federal tax policy, and that basically
• 9:05
  Speaker 1: the salt cap is doing it. It's affecting their fiscal
• 9:09
  Speaker 1: situations so much that they have to uh find ways
• 9:13
  Speaker 1: to um reduce the tax burden on their residents. It's
• 9:17
  Speaker 1: going to affect their fiscal policy in ways that the
• 9:20
  Speaker 1: federal government isn't allowed to to do to course them
• 9:23
  Speaker 1: to do. It does seem kind of nuts that I
• 9:25
  Speaker 1: have to pay my state and local income pacts with
• 9:29
  Speaker 1: after tax dollars. Would make more sense if I've paid
• 9:33
  Speaker 1: at all with pre tax dollars. M m um, yeah,
• 9:38
  Speaker 1: I mean, you know, part of the argument from people
• 9:41
  Speaker 1: who are suffering from this is that there's double taxation
• 9:44
  Speaker 1: going on. Um, if you live in a high tax state,
• 9:47
  Speaker 1: and those are the states that are disproportionately impacted by
• 9:51
  Speaker 1: the seventeen uh change in the tax laws. Um, it's
• 9:56
  Speaker 1: it's going to increase your burdens when you're already facing
• 9:59
  Speaker 1: higher burdens with in the state and local jurisdictions where
• 10:02
  Speaker 1: you live. So is there any argument here that hey,
• 10:06
  Speaker 1: for those of us, it was clear it was a
• 10:08
  Speaker 1: political issue, uh that the elimination or the reduction in
• 10:12
  Speaker 1: the saw tech deduction. Is there any you mean? Donald
• 10:15
  Speaker 1: Trump was punishing New York and New Jersey for in
• 10:18
  Speaker 1: California for not supporting it, So it was very clear
• 10:21
  Speaker 1: to many observers that that is actually what the driver
• 10:25
  Speaker 1: was here. Is there any legal recourse to that issue?
• 10:30
  Speaker 1: The states have raised that, They said that this was
• 10:33
  Speaker 1: politically targeting states that were primarily not states that voted
• 10:37
  Speaker 1: for Donald Trump, but so far courts have rejected that.
• 10:41
  Speaker 1: You know, there was a decision out of a New
• 10:43
  Speaker 1: York federal district court and then the appeals court that
• 10:46
  Speaker 1: UM governs both New York State and some other UM,
• 10:49
  Speaker 1: some other states, and it basically said, yes, it's true
• 10:53
  Speaker 1: that the cap disproportionately affected UM states that didn't mirror
• 10:59
  Speaker 1: the political already of people in power when the law
• 11:01
  Speaker 1: was passed. But one reason it's disproportionately impacting them is
• 11:05
  Speaker 1: is that the deduction that existed before disproportionately helped them.
• 11:11
  Speaker 1: And so the court didn't find that to be UM
• 11:14
  Speaker 1: persuasive argument and also basically said that formally speaking, UM,
• 11:19
  Speaker 1: the law applies to everyone, even if it ends up
• 11:22
  Speaker 1: impacting some states more than others based on the tax
• 11:25
  Speaker 1: policy they already have in place. And you're probably the
• 11:28
  Speaker 1: wrong person to ask this, but as a legal expert,
• 11:30
  Speaker 1: but why are my taxes so much higher? How come
• 11:33
  Speaker 1: New Jersey and New York residents are paying such massive
• 11:37
  Speaker 1: state and local income taxes almost a much as I
• 11:40
  Speaker 1: pay in federal income tax Good schools, Right, Well, you're
• 11:44
  Speaker 1: right that I'm mostly a legal expert, but there are
• 11:48
  Speaker 1: some answers to that. You know, now your state local
• 11:52
  Speaker 1: tax deduction on your federal taxes, it's it's capped at
• 11:55
  Speaker 1: ten tho dollars and you only get the deduction if
• 11:58
  Speaker 1: you itemize. This standard deduction right now is I think
• 12:02
  Speaker 1: between twelve and thirteen thousand, and the number depends on
• 12:06
  Speaker 1: what your tax here we're talking about UM, but you
• 12:10
  Speaker 1: have to have itemized deductions that exceed that for it
• 12:13
  Speaker 1: even to be worth your while. UM. As I recall,
• 12:18
  Speaker 1: I think one third of New York taxpayers were claiming
• 12:22
  Speaker 1: UM deduction before UM the change in the tax law.
• 12:27
  Speaker 1: So you can you can imagine how many people are
• 12:29
  Speaker 1: impacted by this, and I think it reflects how much
• 12:31
  Speaker 1: they're paying already in the state and local taxes. This
• 12:34
  Speaker 1: applies to property taxes, and it applies to either sales
• 12:39
  Speaker 1: or income taxes within said politics. There I shall bay
• 12:42
  Speaker 1: legal reporter for Bloomberg Industry Group Joinings here. Let's get
• 12:48
  Speaker 1: to UM. Mike vogel Song, He is the chief investment
• 12:51
  Speaker 1: officer and managing director for Cap Trust. I don't think
• 12:55
  Speaker 1: that's Miami beach, Mike. We had the FED begin the
• 13:00
  Speaker 1: well messaged interest rate rising regime yesterday. Can stocks perform
• 13:06
  Speaker 1: in that kind of environment? Well, first of all, it's
• 13:09
  Speaker 1: cold and raining here in north in Raleigh, North Carolina,
• 13:11
  Speaker 1: so not quite not quite Miami, No for sure. UM.
• 13:15
  Speaker 1: I'm sorry your your your question. Your question was about
• 13:17
  Speaker 1: the stock market. Yeah, just in a rising interest rate environment. Tough. Yeah,
• 13:22
  Speaker 1: I think that's that's the that's the sixty four all
• 13:25
  Speaker 1: the question, right, I mean, UM, In some ways, of course,
• 13:28
  Speaker 1: interest rates rising means that the economy is reflating and
• 13:31
  Speaker 1: that and that we have economic activity back to life
• 13:34
  Speaker 1: after a decade of quee UM, and in some ways
• 13:37
  Speaker 1: that that's that's a positive thing. But obviously the discounting
• 13:39
  Speaker 1: mechanism that the bonds create and and are really pushes
• 13:44
  Speaker 1: the other direction. So what we've seen is those those
• 13:48
  Speaker 1: stocks that are that are sensitive to that, that benefit
• 13:52
  Speaker 1: from higher interest rates. You think banks have generally done
• 13:55
  Speaker 1: quite well over the last six months. But of course,
• 13:58
  Speaker 1: the UM, the super aggressive money losing massively long duration
• 14:04
  Speaker 1: assets UH and stocks and companies have seen their prices
• 14:08
  Speaker 1: just get absolutely destroyed. So there's been a huge rotation
• 14:11
  Speaker 1: in the market over the last you know, six six
• 14:14
  Speaker 1: six months, maybe even a year if you go back
• 14:16
  Speaker 1: far enough to February of last year. UM and and
• 14:20
  Speaker 1: that's that's that's the that's the dynamic round interest rates, right,
• 14:23
  Speaker 1: it's helps someone hurts others. How much have the FED,
• 14:27
  Speaker 1: you know, talking tough but not really willing to to
• 14:30
  Speaker 1: go the full length in terms of rates. That's the
• 14:34
  Speaker 1: that's the that's the really important question. I think, you know,
• 14:38
  Speaker 1: the J. Powell came out yesterday and said that, you know,
• 14:41
  Speaker 1: there's no particular worry about going into recession next year.
• 14:45
  Speaker 1: And and it was, by the way, the same day
• 14:47
  Speaker 1: that the O E c D came out and said that,
• 14:51
  Speaker 1: you know, higher oil prices in the war in Ukraine
• 14:53
  Speaker 1: will take a percentage point off of global GDP. I mean,
• 14:57
  Speaker 1: that's that's a massive amount. Of course, the US is
• 14:59
  Speaker 1: the largest second artist, depending on how you menor economy
• 15:02
  Speaker 1: in the world, so a lot of that growth is
• 15:04
  Speaker 1: going to come from the US. So you're getting mixed
• 15:06
  Speaker 1: messages from different organizations and different different economic and governmental organizations. Uh.
• 15:13
  Speaker 1: We were having this conversation this morning among some of
• 15:16
  Speaker 1: our investment committee, and and the question is really, um,
• 15:20
  Speaker 1: does you know is power simply talking a good game?
• 15:26
  Speaker 1: So it gives him the freedom and flexibility to raise
• 15:28
  Speaker 1: interest rates higher than he would otherwise. UM. You know,
• 15:33
  Speaker 1: my my sense is that that he he kind of
• 15:36
  Speaker 1: chafes under the dual mandate that the Federal Reserve had.
• 15:40
  Speaker 1: Um that you know, this is this idea of full
• 15:42
  Speaker 1: employment and and stable stable dollar or stable purchasing power. Um.
• 15:48
  Speaker 1: And you know he's basically saying, look, we've got such
• 15:51
  Speaker 1: we've got the best employment picture in a generation. We're
• 15:54
  Speaker 1: going to get interest rates back to where they need
• 15:56
  Speaker 1: to be, regardless of what happens to the economy. UM.
• 16:00
  Speaker 1: Kind of his pull Volger moment, almost in a different
• 16:02
  Speaker 1: contexts at a different time, But that's sort of what
• 16:05
  Speaker 1: it felt like for us yesterday. UM. I'm not sure
• 16:11
  Speaker 1: he's gonna be able to get away with seven this
• 16:12
  Speaker 1: year and getting all the way up two and a
• 16:14
  Speaker 1: half Percentum. Ay I just about thirty seconds. It's recession,
• 16:18
  Speaker 1: recession and material risk to you. I think it is
• 16:23
  Speaker 1: We're we're concerned about it. Um. And that's that's why
• 16:27
  Speaker 1: we're trying to square what Paul said yesterday with some
• 16:29
  Speaker 1: of the data that we're seeing. Um. You know, there's
• 16:32
  Speaker 1: the books who are absolutely convinced we're going to be
• 16:34
  Speaker 1: in recession by first quarter. Uh. And and paula basically
• 16:38
  Speaker 1: too cold water on that. So um, that that is
• 16:41
  Speaker 1: the debate in the economic world. And I think that
• 16:43
  Speaker 1: has implications obviously for bond rates, that it has implications
• 16:46
  Speaker 1: to the equity mark. Hey, Mike, thanks so much for
• 16:48
  Speaker 1: joining us. I really appreciate getting your thoughts and insights.
• 16:52
  Speaker 1: Mike Voguson, chief investment Officer and managing director at Cap
• 16:55
  Speaker 1: Trust based in Raleigh, North Carolina. Let's dive in right
• 17:03
  Speaker 1: here with David Coodla. He is the founder, CEO and
• 17:06
  Speaker 1: c of Mainstay Capital Management. David, what's an investor to
• 17:09
  Speaker 1: do when we've got rising interest rates, we've got slowing growth,
• 17:14
  Speaker 1: we've got geopolitical tensions. Do I just throw in the
• 17:18
  Speaker 1: towel and go to cash? Good morning, Matt and Paul. Um.
• 17:23
  Speaker 1: I don't think that that's uh the best approach. And
• 17:26
  Speaker 1: and for a couple of reasons, Uh, you know, we
• 17:29
  Speaker 1: always say within our investment committee, we want to hedge
• 17:33
  Speaker 1: against risk, but we don't want to hedge against making money.
• 17:36
  Speaker 1: And when we go to cash, you went to FED
• 17:38
  Speaker 1: raising FED funds right yesterday. Cash still yields basically nothing,
• 17:43
  Speaker 1: and there's more creative. We just think there's more creative
• 17:46
  Speaker 1: ways to get at it. UM. One of our favorite
• 17:49
  Speaker 1: ways to diversify over the past several months and especially
• 17:53
  Speaker 1: this year, has been with commodities, which have just been
• 17:56
  Speaker 1: on a tear and and that's been important because have
• 18:00
  Speaker 1: been no help you know this year. Uh, you know,
• 18:03
  Speaker 1: we've got US aggregate bonda decks down more than five
• 18:07
  Speaker 1: percent year to date, but but commodities have done very well.
• 18:10
  Speaker 1: Now more recently, we've been through a bit of a
• 18:12
  Speaker 1: roller coaster ride because of the Ukraine War. We had
• 18:15
  Speaker 1: UM an even bigger risk premium priced into a lot
• 18:19
  Speaker 1: of commodities, let up oil, gas metals. That's somewhat come
• 18:25
  Speaker 1: back out and uh, come down quite a bit, but
• 18:29
  Speaker 1: we're back on that trend line of growth for commodities.
• 18:32
  Speaker 1: You look at the environment we're in, there's questions about
• 18:35
  Speaker 1: a recession in the offering, there's questions about you know
• 18:38
  Speaker 1: what happened economy. But what we know is in front
• 18:40
  Speaker 1: of us are the ingredients for stagflation. If you look
• 18:43
  Speaker 1: back in the nine seventies, where do you investoring stagflation commodities?
• 18:47
  Speaker 1: I want to ask your thoughts on the recession probability.
• 18:50
  Speaker 1: And by the way, you are the second Stanford grad
• 18:53
  Speaker 1: we've had on in the past hour. Everywhere, they're all
• 18:56
  Speaker 1: over the place. Um, we're a dime a dozen. What
• 19:00
  Speaker 1: what are your thoughts on the recession probability here, David?
• 19:05
  Speaker 1: Because we do have rising commodity prices, a commodity price shock. Really,
• 19:09
  Speaker 1: we do have a yield curve that looks like well
• 19:13
  Speaker 1: we saw the fives tens and the seven tens invert
• 19:15
  Speaker 1: already today. Um. And we do have a FED that
• 19:18
  Speaker 1: wants to raise interest rates about eleven twelve times over
• 19:22
  Speaker 1: the next twenty four months. So you know, do we slip? Yeah,
• 19:27
  Speaker 1: it gets to be a complicated picture. But here's how
• 19:29
  Speaker 1: we see it. Um. You know, we've got you know,
• 19:32
  Speaker 1: we typically looked at tues to tends. Is that recession indicator?
• 19:37
  Speaker 1: I know some some now are looking at I want
• 19:39
  Speaker 1: to look at three months it tends, but tues to
• 19:42
  Speaker 1: tens or you know, the spread on Tuesday tens is
• 19:44
  Speaker 1: down around twenty basis points, So we are getting very
• 19:47
  Speaker 1: close that collapsing down to yield curved version. That's been
• 19:51
  Speaker 1: a pretty good predictor of a recession out in twelve
• 19:53
  Speaker 1: to eighteen months. And I think the concern is, though,
• 19:56
  Speaker 1: besides you know those kind of um yield curve predictors,
• 20:01
  Speaker 1: is that the Fed has a very difficult task in
• 20:05
  Speaker 1: front of it. I mean, what if you look at
• 20:07
  Speaker 1: the the statements right from uh JEROMEE Pow yesterday. You
• 20:13
  Speaker 1: know he's talking about things if inflation doesn't calm down,
• 20:17
  Speaker 1: the Policy Committee will hammer it even harder. The labor
• 20:21
  Speaker 1: market has tightened to an unhealthy level. What does that mean?
• 20:25
  Speaker 1: Too many people have jobs. But what it means to
• 20:27
  Speaker 1: a policy maker is, uh, they know, they just know
• 20:31
  Speaker 1: that they've they've let this run too far. And they
• 20:35
  Speaker 1: at least they're talking tough, right, We got to see
• 20:37
  Speaker 1: if they'll walk the talk. But they're talking tough. And
• 20:40
  Speaker 1: I think if we get anywhere near seven rate hikes
• 20:43
  Speaker 1: that's in the dot plot and still on a lot
• 20:45
  Speaker 1: of the forecasts out there, Uh, there is a real
• 20:48
  Speaker 1: risk they could usher in a recession. At least at
• 20:50
  Speaker 1: least a significant slowdown. It's on our base case, but
• 20:53
  Speaker 1: the risk is definitely there. Hey David, we got the
• 20:55
  Speaker 1: oil ripping again today after a little bit of a
• 20:58
  Speaker 1: pullback w T I crude back over a hundred dollars
• 21:01
  Speaker 1: of barrel. Have I missed the energy trade? No, I
• 21:04
  Speaker 1: don't think so. UM, I think, you know, there's a
• 21:08
  Speaker 1: lot of runway ahead for energy. You know, our our
• 21:11
  Speaker 1: theme and energy is is our favored commodity of energy
• 21:16
  Speaker 1: and base metals. If you look at UM, you know
• 21:20
  Speaker 1: what's been happening in the energy patch unfortunate. It's it's
• 21:23
  Speaker 1: been exacerbated by the Ukraine War. But there's been the
• 21:28
  Speaker 1: you know, this push towards an energy transition, UH an
• 21:32
  Speaker 1: investment there under in fast under investment or disincentives for
• 21:37
  Speaker 1: UH the oil companies to invest further and fossil fuel infrastructure.
• 21:41
  Speaker 1: And now we do have this energy crunch, this energy shock,
• 21:44
  Speaker 1: and you know, the the energy companies are reluctant to
• 21:48
  Speaker 1: invest more. So as prices rise, they're increasing UH their
• 21:54
  Speaker 1: free cash fill, their profitability. You know, look at what happened.
• 21:56
  Speaker 1: You know, look at Occidental Petroleum today at about eight
• 21:59
  Speaker 1: percent UH so I think that there there's runway ahead
• 22:03
  Speaker 1: for several more months here UM and I think that
• 22:06
  Speaker 1: that we are significantly overweighting our portfolios. Think investors would
• 22:10
  Speaker 1: do well to continue to hold commodities and specifically UM
• 22:15
  Speaker 1: energy and their equity equities allocation. All right, David, thanks
• 22:18
  Speaker 1: so much for joining us. Pleasure to get your insight.
• 22:21
  Speaker 1: Always look forward to your interviews. David Coodlove, there is
• 22:23
  Speaker 1: the CEO of Mainstay Capital Management. Thanks for listening to
• 22:28
  Speaker 1: the Bloomberg Markets podcast. You can subscribe and listen to
• 22:32
  Speaker 1: interviews with Apple Podcasts or whatever podcast platform you prefer.
• 22:36
  Speaker 1: I'm Matt Miller. I'm on Twitter at Matt Miller. Three
• 22:41
  Speaker 1: p on Fall Sweeney. I'm on Twitter at pt Sweeney.
• 22:43
  Speaker 1: Before the podcast. You can always catch us worldwide at
• 22:46
  Speaker 1: Bloomberg Radio