00:00Look, we're going back to a pre-GFC world. It's clear, you know, on inflation, on rates,
00:06on, you know, more industrial economy, less of a financialization of the economy. And you can see
00:13it. COVID really was the break in what we had before. And we're going back to what we all grew
00:19up with. And yes, I was born, you know, after 1987. But 5% in a world where we're growing
00:266.5%
00:28in a world where the market has increasingly priced in rates. You know, if I told you oil's
00:34at $105 a barrel, the 10-year's at 5%, the 30's at 5.3. And by the way, the S
00:42&P is up double digits.
00:43And small cap is also up double digits, outpacing the S&P. Would you have believed me? The answer
00:49is no. And by the way, an AI bot will not take the place of a strategist because of that.
00:53We hope. A Fed hike today, maybe the beginning of maybe one or two or three hikes. Does that end
01:01the bull market? So I don't think it ends the bull market. But we cannot pretend that hikes are good
01:08for multiples or good for marginal areas of the market that require funding. So we can't talk
01:17ourselves in and out of, like, it doesn't matter. So I think the rotation you're seeing, some of the
01:23struggles you're seeing in duration, that is going to be real. This is more of a dispersed market.
01:29The top line of the S&P is hung in there, less than 3% from the high, because other
01:34sectors are
01:35going to work when others are negative. Very, very hard here, I think, just market-wise. You're best
01:42off, I think, just buying the index, because some will work very well in this environment.
01:47It's been an earnings-driven equities market here. Can we expect not the same earnings next
01:52year that we've been getting this year, but still decent earnings next year?
01:55Look, we just did this exercise this week. We raised our earnings for next year for mid-range,
02:00about $430 in S&P share. Really?
02:03We were at $395. Was Jeffrey Yu medicated?
02:12But, you know, our price targets have not changed on the S&P, because we have to confront
02:17the fact that the multiple is moving lower. We're at 19 times now. The tech sector is at 21 times
02:25forward earnings. In 1999, that was 46 times. So we're not really expensive by any stretch of the
02:32imagination. So we're going to have them muddled through into midterms.
02:35Alexis, can I do partial differentials this morning?
02:38Oh, I would love for you to-
02:39Okay, partial differentials with Alicia Levine, BNY. So I got nominal GDP as two players,
02:44inflation and real GDP. Their dynamic is they raise rates one-eth, two-eth, three-eth,
02:51whatever the number is. Which of those two, which partial differential there's going to move the most
02:57to bring nominal GDP down from a banana republic level?
03:01So look, I think it's probably a little bit on the growth side, because ultimately the inflation
03:06is being driven by supply shocks. And the Fed needs to raise rates because the market's telling
03:12the Fed it needs to raise rates. And the rhetoric has been that if we don't, we lose credibility,
03:18and so therefore they have to. It's a circular argument, but there it is. I think the issue is,
03:24and for me, I think that the hawks must explain why inflation is not higher. Because if you think
03:32about the shocks we've had, we've had tariffs, we've had an oil shock for six months, we've had two wars,
03:39we've had a supply shock in the biggest AI. Plus your kids' tuition bill. Plus my kids' tuition bill.
03:45And you should see what's going on with housing in Ithaca. Oh my God. And why is core inflation at
03:502.4%.
03:52And so I see the need for the Fed to hike, but the hawks really have to explain why inflation's
03:57not
03:58higher. That's why I don't think that the hiking cycle is necessarily going to affect the inflation
04:05that we're seeing and that we all feel that we all talk about. Let's not pretend it's not real.
04:09It is definitely real, but it's going to affect growth on the margin. It will.
04:13You say you like materials. Is that a commodities call there?
04:17So it's about the AI build-out, but it's also on the commodity side. We just raised our allocation
04:22to real assets about two months ago. Real assets being? Infrastructure, commodities, real estate,
04:28because we are in that 3% inflationary world because we are post-GFC. We are back to the
04:35future. We are in a nominal world. We're in a world where central banks may be hiking,
04:40but we're not getting back to 2% anytime soon. And we are in a reshoring, I don't want to
04:46call
04:46it de-globalization, but we are in a block world. We've got the Western Hemisphere. We've got what's
04:52going on with China. And then we've got Europe and maybe Canada too is part of that, which whatever it
04:59is, it's 2% of the world economy. But in the end, we are in that nominal world and you
05:06need real
05:06assets in a nominal world. So that's why we like materials because it's also part of the
05:11industrialization. The global manufacturing PMI is extraordinary. You've got 90% of regions
05:19in expansion. It's extraordinary. So we have a global investing cycle here.
05:24Interesting. What's the AI trade for you guys these days? It's always evolving. Now we've got
05:30the whole discussion of whether we need guardrails on AI. And people are trying to figure out what
05:34that means for spending that's been driving, not just the tech space, but maybe the global economy.
05:40Well, look, it definitely drives GDP because it's about one third to one half of US GDP this year
05:47because the imports are so high for AI. Like the imports are taking away from top line GDP because
05:53you have to subtract it. Think of the chips we're importing from Korea and Taiwan, right?
05:58I got to get this in this morning. Paul and I are going to discuss this later for us. Thomas
06:02Friedman
06:02over at the New York Times with a blistering. Are you guys kidding me on AI? So you're in a
06:08meeting with
06:08all the abilities of BNY. We had a mutual fund manager yesterday. He's number one holding
06:13Bank of New York, which I thought was very cool. Alicia Levine, how should our listeners and viewers
06:20maintain their holdings in MAG-7 given the uproar that Tom Friedman and Parmy Olson and others
06:28describe? Look, I think two things are true at the same time. I think we have to maybe pause. It's
06:33also
06:34true. We're in a foot race with China and it is naive and worse to think it doesn't matter.
06:40Like this is about the national defense. This is about national security. Ultimately,
06:44I think we all know that. But these models are smart. I mean, you see how they learn. It's actually
06:50quite extraordinary. In the end, you keep the holdings. You keep the holdings and you have to
06:55you can't start picking sectors here. I think it's too volatile. But what we know is that the investment
07:01will continue. So are you still continuing? Are you cashing out your Nvidia to buy three bedrooms,
07:09two baths up in Ithaca? I mean, I mean, this is like the parent thing. I want to be a
07:14landlord
07:14in Ithaca. You want to be a landlord in Ithaca? I want to be a landlord. I want to buy
07:17those
07:17dilapidated houses and charge God knows what. High above Cayuga's waters. You're going to go up
07:23there. Are you really going to do this? I thought about it, actually. You thought about it?
07:26No. So yes, real assets, right? Real assets. It's a nominal world. And so your investing has to take
07:33into account real assets at a higher inflationary world. We are underweight fixed income. Right.
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