Markets, Trump’s Taxes, and Energy (Podcast)

do this stuff for living. See what we can look forward to. Joe Gilbert, Integrity Asset Management. He's a portfolio manager. There. Uh, Joe, it says you're based in Moreland Hills. I'm just gonna take a guess and say that's Cleveland, correct, Faul, Good morning, Thanks for having me on. Yeah, we're we're on. I'm on the east side of Cleveland. All right, good stuff. Hey, Joe, you know i'd love to get your thoughts. What are you telling your clients right here? What's in your year

ahead outlook letter to your clients? You know? Um, Paul, so similar to you. Um, we're just kind of thrown away to playbook for two and looking forward to three, and so what we're telling clients is that it pays to being more constructive for three. I mean, I think it's applega laid out um. You know, equity markets down and bear market territory, even some fixed income sectors and down bear market territory. And that end will end this year.

So we think looking forward to set up for next year, three will be a lutch greater and we just basically see inflation will come down, um, the Fed will stop raising rates, um as earnings inestiments will go down, and earnings multiples will go up, and we think that will lead to a strong equity performance next year. What's been interesting is the only places to hide Joe have been oil. Energy. Commodity is actually having a really stell a year, but

also the dollar. And I'm interested is to whether that dollar trade, whether that sort of headwind for earnings as well if you're a global related company, is that going to dull back in any sorts as we see perhaps the FED tickets foot off the gas and maybe other central banks keep on pushing by the ECB. You know, I think that's a great point, Caroline. I think that if as we look, the dollar is actually weekend since September.

I think we kind of hit the peak UM in September, and so this last quarter, I think we're kind of getting a preview of how we think the market is going to play out next year. UM investor the starting position that the fedtest towards the end of his his rate hiking cycle. I think this year really has been about the Fed UM and you sprinkle in a little bit of a Ukraine war and UH China COVID zero

COVID policy. So I think that we get to a point that investors are looking forward that the FED will no longer be such a head win for the market, and then the dollars just kind of showing you that. Then that's why you've seen a lot of weakness here in the last quarter. So you know, I'm an equity guy, but I look at the UH fixed income returns this year again, the Bloomberg aggregate total return the next off

twelve three or something like that. People and a fixed income BIS will say that historic lost, historic performance under performance. So being the simple guy that I am, I just say I'm gonna jump in both feet and buy some bonds here. What do you think about that strategy. You know, it's hard to disagree with that. I think that there's you know, similar as I said, the set up, it

looks good for both fixed income and for equities. But next year, you know, as an equity guy, I'm a little more biased because I think that UM, a lot of the bad news for equities has definitely been priced and UM as far as and and granted, there will be different sectors that I'll perform at different points in times next year. Unlike fixed income, I think fixed income obviously will basically as soon as to fit you know, intimates that they're going to be done or they're pausing.

I think you're gonna have a huge rally and fixed income, but they're gonna bring equities along with them. As an equity guy, then can you go as broad brush as industry groups you like? Are you having to be? Look as stock picker is kind of a market at the moment, given as we head into you know, I think that really that that there are some winners and losers. You know.

The way we see it is, you know, we've had you know, the rolling corrections, and we think we're kind of going to see the rolling recession that will come play through next year, and so I think within that, UM, the way we're looking at is is kind of a first and first out Carolina. So it's more of the way we think about it is the companies and the sectors that have underperformed dramatically, UM, the earlier cycle companies, those are where we're actually really looking for opportunities in.

So that looks like more of consumer discretionary names, which are trading still pretty cheaply, pretty close to price the book. UM. We're actually contrariantly and looking at home builders here because we think that the one again it's a it's a

short cycle, it's early cycle, UM. And so if well, if we're right UM, and if FED does cut start raising rates and actually eventually we think they will probably cut toward the end of next year, those are UM sectors that will do well as well as industrials that have very limited inventory. Hey, Joe of you were slash listener just kind of message me and said, hey, how can stocks perform this year? If we've still got some pretty significant earnings risk out there? How do you kind

of factor that in? Well, I think that UM, the way we think about it is stocks went down this year or more depending on where you were, and they went down because you know, stocks discounted forward outlook, so they discounted earnings coming down, and so we think that a lot of that has been pricing. We this year

was really about repricing risk and repricing expectations. So I think that's where we really are and think and most of the time stocks generally rally is you know, close to the last estimate cut, and so we don't know exactly when that will be, but we've presumed that it will be early and early three and that will basically be kind of the clearing event for equities to outperform. Joe, talk to us about what you're going to be taking

your cues from. Is it fundamental data? Are you going to be looking at the big broadbrush data dumps that we get the jobs market, whether it's inflation, shouldn read that, that's what's going to be dictating you. Are you going to be looking more on the individual names, the earnings releases. What's going to be sort of your fuel, your catalyst

to be getting in and out of market. Well, we're fundamental investors, so first you know, firstly, we're gonna always look at what company managements are telling us, and so we we use that as a guide post this year. As far as you know, companies that have been less constructive or you know, most management teams are bullish about their prospects, but on the margin they've gotten a little

less constructive. So we're gonna look towards that. But obviously on a macro sense, we have to have inflation continue to come down. So those are the CPI and the pc reports. Next week is actually gonna be pretty big because we have a payroll number that we think we'll still will show average hourly earnings declining again and probably less added to payroll. Important you know, what we think

there really is going to be. The key is that that will probably make next year not as negative on economics standpoint is that payrolls are probably not going to go negative U because there's a lot of job boarding. As far as company managements have been you know, once been twice shy, they don't want to release workers. They're gonna probably just trying to find a way to keep their payrolls not um in a traditional recession where they will reduce them, they're gonna probably try to keep on flat.

And so I think that We're going to really have to take cues from the inflation data points that come in our hourly earnings and service inflation. All right, Joe, great stuff. Really appreciate you taking the time here on New Year's Eve Eve. Joe Gilbert Integrity Asset Management. He's a portfolio there there in Moreland Hills, Ohio. I just google mapp that it's just kind of like and that the eastern part is Joe saying of Cleveland right near

the lake, so pretty cool part of the country. Appreciate checking in with Joe Gilbert. There's still a lot going on in Washington even today, talk about a data dump on a day before major holiday. Uh, the taxes for former President Donald Trump have been released. We want to get the latest with Lard Davison. It just happened just us to tape recently. Lard Davidson from Bloomberg News joints

us here all right. I know it's early moments of everybody sifting through, uh, the released tax reforms from former President Donald Trump. Any takeaways at this point, yeah, really, I mean one, he has an incredibly complex financial picture. You know, more than a thousand pages worth of documents that were released about an hour ago um detailing both his personal returns as well as his businesses. The businesses themselves were losing money for a lot of these years

from um UM. Parts of those were actual losses, but some of those are all these tax breaks appreciation deductions that are very favorable to real estates. Who was really able to minimize any tax bill that he might have to pay, including in one year when he paid no personal income taxes, And of course we've had him same time and time again that that's a smart thing to do, to use the tax codes as they stand to your advantage. What about the structure of the tax codes? What will

next year bring do you think in anyway? Yeah, so this is the point that Democrats are really raising about this, saying, look, you know, this shows that the tax code is broken. The fact that there are legal tax breaks for people who are very wealthy to be able to basically have a separate tax code from those that you know, normal wage earners might pay is a problem. Unfortunately for Democrats is they're about to lose their House majority going into

next year. The Democrats will retain control of the Senate, Republicans will control the House, which really just spells out gridlock for any sort of tax legislation. It's it's highly unlikely that the two parties will come together on any uh, and any legislation that would come result in raising taxes, particularly if this legislation were the result of some of

the findings from Trump's tax returns. So, Laura, these tax returns being released that will provide some data on the former president's personal income, the income of his businesses, will give observers analysts any sense of his net worth and maybe not really Um. The problem with tax returns is there really just a snapshot in time of um earnings

for a particular year. Um, you know, because of Trump's uh net worth is so tied um into real estate and other deals that is all not really reflected on on these tax returns in terms of valuations and things like that. Uh, that data just isn't there. So in terms of, you know, whether Trump is as rich as he says he is, whether he gained or lost a bunch of his net worth while he was in office,

we can't say from these documents. Of course, you're busy coming on with us rather than having to pull through the thousands of pages. But just talk to us as a report of what you're going to be doing, where are you going to be looking. What do you hope to glean from all of this? Yeah, So the real key question here, um is you know, so how much did Trump benefit from his own tax law? Um? He with the help of Republicans and Congress, passed a big

tax cut in seventeen. These documents give us a perfect example to look at, you know, a couple of years before that law change, after that law change, how we're taxpayers like Trump able to benefit from these law What deductions were he able to claim? And which things where he was he not able to claim? You know, one of the key things was this passed through deduction. Um. That was a key centerpiece of the bill. Helped LLC's

partnerships pastors right off a bunch of their income. Trump actually wasn't able to claim that one because he actually lost money on his businesses those years. But you know, going forward, if he were to make money, he would be able to to take that deduction. Laura, great to have some time with the Thank you so much. We'll let you get back to the realms of documents. A data dump. Indeed, as we have the last day of trade here in New York. We thank Laura Davison over

there in Washington for all things Trump taxes. We dig in a little bit more into the commodity space on Josh Young, chief investment Officer of Decent Interests. Of course you're focused on all on gas on public equities in particular, Josh, just talk to us about in particular the China reopening story. It's sort of good. Everyone scratching their heads, and in the immediate focus, it feels that everyone's a little bit nervous. We're worried about the spread of COVID and how they're

going to manage the short term. But in the longer term, does this mean that commodities could out perform once again? Yeah? I mean I think if you define longer term in terms of more than the two or three months, it looks great. Um. It looks like China is setting a target for a really high return in terms of flights, and we're starting to see congestion essentially traffic on the streets and big cities start to rebound in cities as

they're on the tail end of their COVID waves. So yeah, I think it looks great from a short to medium term perspective, and as China turns back on they also start to turn back on oil demand in other East and Southeast Asian countries, and so there could be a step up in terms of multiple millions of barrels a day of demand relative to where we've been over the last few months. Josh, you're based in Houston, as I recall, Um, you know you've got the energy stacks up almost six

year to date. How good is life in Houston right now? So so it's interesting, Uh, employments actually not up that much on the oil and gas space, capital expenditures are not up that much on the oil and gas space, and the small cap stocks have lagged materially like in

past recoveries. So what it's setting up for is, even though those stocks are up a lot from their lows, it's setting up for a multi year bowl market where we could see maybe XL E and sort of the other like large and majors don't have as much upside here after their significant out performance, but the small caps and oil services stocks, I mean, there's there's real potential there, and there's also a real potential for the revitalization of

Texas and Houston. We we're doing great, but there's real it's not the same as it was in the sort of time frame where Houston was booming. And a lot of that, of course, has to do with federal policymaking, has to do with a pivot in terms of this economy trying to focus it on climate change there as well.

How much are we likely to see the smaller caps that you say in particular maybe start to turn on again, maybe we start to see all output increasing a little bit more in the United States, because that has been this interesting tension between the all producers in the United States and indeed the US government. Yeah, I think we need much higher oil prices to get oil production and growth to be anywhere close to where people were expecting.

So coming into this year, we expected oil production to grow by a few hundred thousand barrels a day, and the consensus was I think it was one point two million barrels a day. That consensus has come down a lot, and we've gotten production a lot closer to our expectation. And so what I think is actually going to drive the small cap rey rate is not going to be

substantial production growth. It's going to be buyouts where we're seeing large caps by private companies at let's say three to four times EBITDA, and many of the small caps are trading as low as two times EBITDA. So there's real potential for a re rate through uh through acquisitions, and then also just when you trade that cheap, you have the potential to pay off debt, buy backstock, pay a dividend, and sort of force ely rate, which is not something you've seen from small cap oil and gas

companies in the last decade. Josh, how do you guys in the energy business think about the big picture of I'm in the fossil fuel business. The world seems to be going green. It's probably gonna take a lot longer than people thought, you know, how do you manage your business? How when you mean, when you talk to these companies, how do they think about the five to ten year timeframe?

So so that's a great question. And one of the really interesting things is that institutional allocators are actually still divesting from the oil and gas space. So even though it's done really well over the last couple of years.

I've noted Goldman and others have talked about this as well, there's still actually funds leaving the space from an institutional allocation perspective, so it's very hard to see capital formation, new companies and new projects funded and uh, you know oil production growth when you actually see divestment, and a lot of that divestment appears to be ideological not economic.

So what I think is going to happen is over the next year or two Goldman's estimate is the next year, we'll see maybe it takes two more years, money will start to flow back into the space from institutional allocators, who again are still pulling capital. Private equity funds are still divesting, insurance companies are still pulling their insurance coverage. When that flips and you start to see capital come back in, I think that's going to be the starting

point for the recovery of production. And the really interesting thing is it takes many years to restore the oil services UH supply base, the ability to supply services to then be able to go drill enough wells to get enough supply to get into an oversupplied situation. So I think we're set up very nicely for a multi year

oil bowl market. And it really comes back to this investment like you're talking about from the space, partly economically because it tasted badly over the last ten years, and partly ideologically, where you know, it's real hard for investment committees at endowments and foundations and family offices to allocate even though it's profitable, and even though other sectors are doing poorly, there's just this big ideological obstacle to investing.

Some have, of course, sort of thought the turning towards natural gas as supply of energy in the US is more funny towards the environment. Natural gas has just been the most extraordinary commodity to follow this year for reasons we well known, and a lot of it to do

with Europe and across the Atlantic. But to hit a high and excessive nine dollars to be back down to now four door, how do you see that part of your world looking for Yeah, so I think I think natural gas is oversupplied actually right now in North America and we will see sort of more normal temperature. So it's been a relatively warm winter so far other than this recent winter storm um and so weather has been

uncooperating and supply has been higher than expectations. My view has been that natural gas would stay in this sort of four to seven dollar price range, and I think there might be a little bit of downside to that in three, but over time supply and demand should balance out, and by there are a number of different elergy export facilities that should finish construction and come on and at that point I think we're set up for a meaningful move higher. But again, it could be pretty rough on

the natural gas side, Josh. If I want to go down to Corpus Corpus Christie or Galveston and build a refinery, could I do that? Could I get regulatory approval? Could I raise capital? Is that even possible in this day and age. Yeah, that's a good question. Honestly. I don't think that refineries are undersupplied, and I think that's been one of the big stories in two where there have been a couple of points where the crack spread so the refiner margin has been really high, and there's been

this story about an insufficient supply of refining capacity. There may be an insufficient supply in a few years. The reality was that that was mostly driven by China lockdowns and millions of barrels a day of Chinese refining capacity, particularly the teapot, the smaller independent informal refiners going offline, and so as those are back online, um, there's actually plentiful refining capacity, and we see that with refining margins getting closer to normal levels. So yeah, it's really hard

to build them. But frankly, we don't really need them talking a lot about us supply demand dynamics in all the natural gas. Just talk to us about OPEC plas or what you're expecting from the next year. In terms of the geopolitical risks around oil, yeah, I think OPEC plus has been sort of undertold story, partly because there have been a couple of different price wars in the

last ten years. UM, it does appear that many of the OPEC plus countries are hitting their peak production capacity and have actually had to produce materially less than their than their production quotas, and so there are a few countries that still have some excess UH production capacity versus

their quotas. But overall it does appear that there is limited spare capacity, and so as China demand comes back on and as Russian barrels may be restricted from the market, we could be in a situation where there's a call on OPEC oil and where OPEC is actually not able to deliver. So this is a really sort of contentious call, but it should be less contentious, I think because even senior executives from Aramco and various OPEC countries, um, they've

talked about limited spirit coup. So you know, I think I think this is potentially three story, potentially story, but I think there's going to be a point where the world wants more oil from OPEC and where OPEC is just not able to deliver. All right, Josh, great stuff, you know what you're talking about, Josh Young Bison interest ce IO given us the latest on the global energy space. I'm looking at w t A crude oil right here as we end the year, seventy eight dollars eighty cents.

Remember earlier we're up aw abowers, so big pullback in crude supply and demand. You have to have a call there when you're thinking about global energy right now, Okay, we've got one efan devil where that stiff used to welcome Minetta, Chief Investment Officer, and we want to sort of discuss even what an extraordinary year two has been, but set us up into the next year. As we put that behind us, are we going to see any

of these asset classes. Let's start with equities. Managed to push through some of these loads, I think we will. It's going to be very segmented um in terms of equities. That tech contagious that we mentioned earlier that we're seeing, not helped by all of the bitcoin to battle the FTX investigation, that's all going to contaminate bitcoin and anything adjacent to digital assets. So I'm not optimistic about the the outlet protec At the moment. Of course, those innovation

trends are still continuing. Nothing is changing there, but that's going to be very long term play. We are going to see some recovery and equities simply because everyone's been talking about horror versus Tina. Is there an alternative or are there reasonable alternatives? At the end of the day, for a high growth portfolio, you still need to be

exposed to equities. So I'll see some pick up in those value names, healthcare industrials, and just in general, just a very broad base of old economy stops we'll see recovering. I look at consumer staples. The consumer is still spending on staples very much. There's an overhang, whether it's revenge tourism or picking up on what they couldn't do during the COVID years. I do expect the holiday season to

have shown some very strong retail sales. Of course, when we look though at January February, that's going to be dismal. There will have been a lot of borrowing from this first quarter in the fourth quarter, and we're going to see that coming through and earnings. But if we learned anything from two is that people are getting very good at telegraphing bad news. They get it out of the system early, and then they can only surprise on the upside.

We've seen the FED telegraphing its intentions, but clearly companies are telegraphing that too. Even talk to us about earnings risk. That is certainly a risk that a lot of people are calling out as it relates to the three outlook, how do you think about that? How do you how do you quantify it? And how much is it kind

of in your calculus. Well, if you get back to that telegraphing point I made earlier, what we saw very much in two was actually earning surprise on the upside because they've been worked down so much in terms of expectations. So when the company gets the bad news out of the way. The expectations are low. When you're on the floor, it's not it's easy to surprise on the upside, and we still saw companies beat expectations. So the key is

where expectations get set. So I actually am not that pessimistic about earnings surprises on the negative side coming in three simply because companies know how to play this game now. There certainly will be a threat to margins though, yes, and a lot of the price pressures maybe we see soothing someone on the producer side of the equation. The big data that we've been getting showing the inflation is moving in the right direction, but the labor side still

seems to be very costly. We've got a very tight labor market. What sort of a picture is that going to be painting for you? And indeed what it means for well, not just the Federal Reserve, but global central banks. I do see the labor market is being bit of a lagging indicator. We're seeing it working through already. Bonuses not having been great in twenty two, we saw some massive layoffs at the end of twenty two, certainly among

some very select sectors, primarily tech. I think some of the froth is going to come out of the labor market. It'll still be tight, though the participation rate remains low, and that's going to provide a strong underpinning to inflation. As far as far as what the FED is doing, though, we can see all of these transmission mechanisms of its tighter monetary policy already working their way through. We've seen it in consumer prices, commodity prices, We've definitely seen it

when it comes to the housing market. That of course is a strong component of people's new purse that they would spend money on. So I think the FED will be assured that much of the inflation that is dampening is moderating. In three perhaps the only issue is employment. But of course the irony is a strong employment means a strong consumer and that's ultimately a stronger economy. So we don't want to see the economy tanking either. We already have all too many recessionary risks on the horizon.

Even talk to us about energy, and we've been talking about commodities a lot today, and energy has been such a great story for one of the you know, few areas where investors, equity investors can make real money this year. Is that trade kind of played out or you think there's more room to go there, There will be a little bit of room to go. We're still seeing quite a bit of rhetoric around the energy complex and this energy terrorism. We're seeing some statements coming out of Russia.

It does seem though, however, that Europe is getting its supply in shape, at least for this winter for sure, and equally for next winter. We're hearing about some stocks increasing and just finding alternative sources. So we have this energy trilema, energycing, purity, energy, pricing, energy, sustainability that all policymakers are juggling right now. It has seemed that a sustainability piece has been on the back burner this year

as we've been focused on pricing and security. But however, the sustainability piece is going to continue to come to the four. So I'm very optimistic about renewable energy sources regardless. If the world is going to continue to grow, our economies will need energy to grow. We'll need to get it from everywhere we can. That mean the wind, solar and other other sources. So I do I'm quite optimistic

for that area. It may just have not received the fanfare that it did towards two because of security concerns, and even of course those securities concerns primarily in Europe, good global for us for a moment. We know that the Dacks ended up the year down twelve percent, and

we actually saw that's closed early for lunch. The foot See one closed and actually managed to eke out a very small not point nine percent annual gain in dollar terms, it was down, but overall we did managed to see the foots in one hundred keep its head above water.

What about the rest of Europe more broadly, positive negative in terms of negative perspect differ because again getting back to expectations, expectations have been so low when it comes to Europe because primarily because of this overhang we've looked at, inflation in Europe has not been demand driven but actually been supplied driven, primarily by energy, so suggesting that the U. S consumer, because of its demand driven inflation, is in

a much better state than the European consumer. The Footsie is interesting, you mentioned that because it really has bucked the trend. Much of that it's due to the old economy nature of the foot See as well as the weaker sterling, which has benefited for it some time before it started to cover towards the end of the year. So across Europe overall, most stock takers I speak to

our seeing pockets of interesting opportunities. These multinational companies which have benefited from a weak euro again there they have not seen massive, massive, massive pressure in terms of the pricing margins, and I actually am looking at good upside for Europe also for US investors, primarily because if the dollar starts to weaken now, that's when those non US exposures will start to come to the four Even do I buy bonds here? Yeah, it's such a brutal year

in they can't go any lower, can they. Well, they certainly can't have that junk lotory that we've seen that kind of step change. Bonds do look very interesting today, getting back to that, there are reasonable alternatives. As acronym, They've been interesting for some time. Cash is no longer trash. We've heard many commentators say that we've also seen an investment grade high grade. Investment grade bonds looking very interesting

from a yield perspective. The question is how much you can get in which you can of your portfolio you can leave in bonds today and a much extra pain you're likely to take because clearly the FED is not done yet, the ECB, the Bank of England, Bank in Japan, nobody has done yet. So there will be a little

bit of more. It will get worse before it gets better in terms of bonds, but in terms of the yields and their own when we see yields at four or after inflation um that that actually actually looks very very meaningful, the inflation number of courses eroding what those yields look like in real terms. But as inflation ticks down, which we expected will those bond deals are really interesting today.

But again edging in inching in, we've very cautious because clearly we don't see that then that that that As I said, this tightening is done yet. Even you started off the conversation by sort of saying how crypto and had perhaps some correlation effects on dragging down technology. But go more broadly cross asset for us, because you do look at alternatives. If you're looking at a sixty that hasn't worked, are there any areas that you're liking outside

the world of bonds and equities? For sure, those clients who have alternatives and diversification in their portfolios have done better. There's been some ballast there, there's been something to take cash away from to re balance into these week equity and bond markets. If you just have sixty four and everything's been falling, there's nothing actually to rebalance with. What we like is private credit again, as certainly as the banks come under pressure, maybe credit ratings start to look

look more more severe. When it comes to the company's the corporate side, we will see the need for this lender of last resort and private credit to continue to take up those private credit managers we speak to our seeing very strong opportunity sets about anything less crowding today, so that that suggests there'll be some nice kind of cash flows that will come from that private equity to venture capital. I'm optimistic across the board there. You've run

thirty eight marathons. I have no idea why anyone would run twenty six point two miles, but there are people that do that. What's the next one? You're gonna run? Next one? Actually Boston. I I actually got a spot in Boston in April, so I'm excited about that. I've done it before, but I was a lot younger. Then I'm looking forward to that. What's the best marathon you've run around the world. I'm so going to say New

York City the first and the best. It is just so diverse in terms of the boroughs that the support from the street is electric. Um that ending in Central Park is just really iconic. And it was my first It wasn't my best time, but it was the first psychological journey I made on that point two miles. That's awesome. Thank you so much. That's good stuff. Efan Devitt Manetta, chief investment officer in Serious marathon runner. Thanks for listening

to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three. On Fall Sweeney, I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio.