Yields, Car Tech, Bank Earnings, and ETFs (Podcast)

of inversion on the twos and tens. And you know, I paid attention most days in business school when I was at Duke, and I remember learning that when the yield curve is inverted, that means a recession. And in fact, our next guest did some some pretty good work on that when he was a PhD guy at Universe Chicago. Professor Cam Harvey joins the He's a finance professor at Duke University, the Fucal school there. Uh he was my professor when I was there at Duke camp. Thanks so

much for joining us here. I mean, you, more than anybody have written about and showed the merits of this inverted yield curve really signaling recessions? How about these days, because it's been inverted for a while. Here my economy seems pretty strong here on the East side of New York. What say you on that yield curve thing? Yeah, so

it's interesting. So I guess, as you said, I'm the one that came up with the idea in my dissertation and at the time, UM, looking at data from night it was four out of four and predicting recessions and uh, it even got the double dip, which nobody got. And then out a sample it's had four inversions and followed by four recessions, including the global financial crisis. And now, um, the tenure MONTHUS three months, that's the one that I

look at. Um, it's inverted, and I'm basically making the case that this is a situation where it's likely a fall signal, and there's a number of reasons behind that. Okay, So just to sound up, you're the one who found this indicator and you've proved it to be UM reliable in terms of predicting a recession. But now you're the one saying this indicator is not telling us that a recession is coming. So why well, the indicator is suggesting

a recession. But the reason is fairly simple, uh, and that is that the economy is very complex, and to think that you've got this model that is going to be perfect forever is really naive. The model looks at a single variable, uh, the difference between long term meals and short term meals, and and to think that that single indicator is going to be perfect forever, Uh, that's just not very scientific. So we know the world is complex, and this particular situation we're in, I think is is

far different than previous recessions. So we know that, um, this time is different every time, but the degree of difference is pretty stark. So what's what's what's different now, Kim in the economy that may make this less predicted this time. Yeah, So there are basically six things that that I look at. So number one, and there's been much discussion about this, is the excess demand for labor. So that means that there's more job openings than people unemployed,

and the gap is large. And what that means is that even if the economy slows down even more, UM, we'll be able to absorb those that get laid off. And even though unemployment will likely go up, it's not going to go up by that much. And that's a key indicator for dating the business cycle. So we know that, uh, that unemployment is a lagging indicator for the business cycle. So you just can't say, well, unemployment is low, therefore it isn't a recession. It's always low before recession. And

that's not my point. My point is the excess capacity, the ability to absorb people that are laid off, um is way different than past recessions. The second thing is the sort of layoffs that we're already seeing are like layoffs from for example, the tech sector, and if you get laid off with the technology job at Twitter or Facebook, uh, you can easily get replaced in the workforce, so you can get another placement, and the duration of your unemployment is very short. Uh. So I think that that is

also an issue. Number three, Consumers are in a far better position today than let's say, before the global of financial crisis. So if you look, for example, in the housing sector, the amount of equity versus debt or mortgage is really high. So so again we can absorb a decrease in housing without causing the same sort of issues

like in the global financial crisis. Number four is the financial sector is much stronger than it was, for example, before the Global Financial crisis, so the financial sector is unlikely to make things worse. UM. And number five has kind of an interesting one. My model, UH at the Anniversity of Chicago is about real yields, so not nominal yields.

And we've got a situation today where the term structure of inflation expectations is very inverted, meaning the short term expectations are far higher than the long term and that's kind of contributing to UM the inversion of the Yeld curve. And number six is very subtle, but it's very important given that my model is talked about now and featured

on Bloomberg Radio. Um, it affects people's behavior. So you would not have had me on the show in two thousand and six because it was a real niche sort of indicator, not that well known, and were talking about on Bloomberg television as well. Yeah, for a long time, it was every day for like three months, that's right, But that did not happen when the Yeel curve was inverted for like a year before the global financial crisis.

And yeah, so think about how it changes behavior. So suppose you're like a CEO going before shareholders in the middle of the global financial crisis, and you basically say, well, I was blindsided. We had no idea this recession was coming, and and nor did my peers, competitors, everybody was blindsided. Uh. Now today that is pretty well impossible to do. So people know that the old curve indicators a out of eight.

So uh, if we do go into a recession, it's really hard for CEO to make the case, well, I was totally surprised. We made this major investment thinking everything was going to be okay. No, you can't do that in front of a record like eight out of eight. So what happens. Uh, Businesses and consumers are more likely to engage and risk management when the Yelk curve is inverted,

so they take actions before a recession actually happens. And we're seeing this like small layoffs, Um, you know here and there where companies are getting ready for a slow down or basically stuff. We don't see that this happening. Companies deciding not to make major investments, delaying until there's more clarity in terms of, uh, you know what's going

to happen in terms of the business cycle. So all of this, just just giving that background, what do you think our Federal Reserve could do should do over the next couple of meetings here? Yeah, So, so given that this is happening, that the deal curve is actually impacting behavior people are engaging in risk management, it actually reduces the chance that the signal, the inverted real curve is actually accurate in forecasting a recession. So the major wild

card here is the FED. And the FED was late to the game with all of this talk about transitory inflation, and it didn't make any sense to so many people, including me. So they're very late to the game. And the major wild card here is whether the FIT is going to be late again. And what I mean by that is that they don't see that inflations under control. They've slowed the economy and this continue, Uh, the rate hikes. You have no reason to continue the rate hikes right now.

So think the last six months inflation has been essentially zero. It's been like point three over six months, So there's no we're talking about basis points. No. Um. Indeed, I thought the last hike was unnecessary. They need to back off the backup is now, Yeah, we understand that. Cam, thanks so much for joining. Cam Harvey, Professor Finance at the Fucal School of Business at Duke University. He taught me. I learned a thing or two. I tried to you know,

it's some tough stuff. He had man lots of math and I was taught they woudn't givena be math in this course. Last week out in Vegas, they had what's probably the biggest convention they have every year out there. It's got to be close to it Consumer Electronics Show. Cees like a couple hundred thousand tech geeks from literally all over the world to send upon Vegas to see all the new technology. But what it's really evolved into over the last ten fifteen years has been an auto

show with some gadgets around it. UM and the auto manufacturers are really taken over because really the auto companies have become technology companies. UM. Kevin Tynan our auto analyst. He was out there with Michael Dean New Covers Autos as well. From London. There are Kevin Tynan's our senior automotive analyst and Bloomberg Intelligence. He's calling in from our beautiful Princeton campus. It's a campus down there, Matt, It's

not just a building. Uh. Kevin talked to us about Vegas, the auto companies, c E S. What's your big takeaway from what Detroit is doing? Uh in the desert of Las Vegas. Yeah, it was wasn't a huge domestic manufacturer presence there, unless I would say the two biggest were Mercedes, Benz and UM the Stilantis brands, which you could argue are still still Dodge, Chrysler, UM, you know, but they they they did show a lot of international stuff, the new RAM pick up. So uh it was connected, autonomous

and electric focused. But those are really the two biggest presentations or displayed that you saw there. UM similar to Detroit back in September. You know, there was about five automakers total there, and I think the markets really changed a little bit. And uh, you know that presence is down significantly. Have you driven the t RX speaking of Ram, I have, yeah, but back a while ago. Production that is thoroughly American truck. You're a truck guy, I'm a

car guy. I look even if you're not a truck guy, it has horse power. Yeah. Um, Now electric vehicles will have that much and more. Really, frankly, yes, I think the I don't know about the So you still the Ford, you still measure it as horsepower, but I know that the Chevy Silverado EV has almost seven horse power and almost as much Torcas anyway, doesn't it doesn't matter. It's neither here nor there. The thing is to me today, the story Kevin Tesla cutting prices is like the first

sign that the damn is breaking. Can all of these automakers, because they're all falling in sympathy with Tesla, can they hold or will they all have to start cutting prices. I don't think any of the legacy automakers are really concerned about what Tesla is doing with their pricing. I think break even UM in the key regions, certainly in North America is considerably lower. And when I say break even, I mean in terms of a total market value you know, uh,

market share number. You know that that could be as low as twelve million units. Now, um, so look at the when this market was at its peak, When the US was at its peak in twenty sixteen, it was seventeen and a half million units. Uh, we're talking about maybe fourteen million for twenty three marks the difference. Right, in twenty seven, sixteen, average transaction price was thirty five

thousand dollars. In December, average transaction price was forty eight five. Right, We're heading to a fifty thousand dollar uh transaction price market here. So when you look at that revenue pool, it's actually eighty two a hundred billion dollars larger now than what it was at its volume peak. So I think everybody focuses on, oh my gosh, the market smaller by three and a half million units. Here comes prices

falling through the floor. And I don't think that's the case, because the revenue pool is actually bigger the better mix. But other prices following. Is Tesla cutting prices because they were simply wildly overpriced or are they cutting prices because they have a specific demand problem that's not industree wide. Well, look what they've done with capacity additions, right, they're opening factories.

You know, essentially, if you rewind, you take your free capital that you got for being a trillion dollar automaker and you start opening factories or building factories all over the world, and I would argue, you don't really have the demand for that kind of capacity at this point so, um, where they would argue they were supply constraint for all this time. It looks like that is not the case anymore.

Where other automakers have gone the other way, right, they've they've either converted production capacity from internal combustion to electrification or they've taken those costs out completely. Kevin, just you know, I don't know much about this business, But do I. If I'm GM and I've got a internal combustion engine factories plants somewhere, can I convert that to electric? And if so, how long does it take and what's the cost?

And are they in fact doing that? Yeah? Well, Ham Trammic in Michigan is you know, was uh you know, a traditional internal combustion plant that'll supposedly be all electric. Um, yeah, so certainly possible. Look to Tesla's Freemont plant was a Toyota and General Motors joint venture, right, uh, New United Manufacturing, which Tesla probably got for less than you paid for your house and uh, you know, and becomes tense and

evs rolling around all over the place. Definitely less than Paul paid for his probably a little more than I paid for my house. Hey, is there any chance that Porsche is gonna cut prices on the leven because I

would like that. I think absolutely not. I think everybody you know, I was just looking at the December numbers, and you know, in the US, at least average transaction price for Mercedes Benzes up in the seventies accurate is fifty five thousand dollars, which was where Mercedes and BMW were not that long ago, you know, maybe one, yeah, exactly right. So any of that stuff that was affordable,

low margin or unprofitable is just dead. You know. So if there's a finite amount of chips, where are you going to put them in your highest trim levels or your most profitable vehicles. Is there still a finite number of chips out there? Haven't We saw the chip thing? Yeah? I never thought it was a thing, but I think I always thought it was an excuse to say, like, hey, we're enriching our mix to our most profitable stuff if

we could only get more of those darn chips. We know, Okay, but there's still there is still a finite amount of chips. It's the car chips are deal in short supply. PC chips were like puking them up. Um so, but Are there any carmakers that you think are at risk, who you know have raised prices too far, too fast other than the e V guys. No, No, I don't. It's Rivan, you know. I I've used the configurator and occasionally put together a nice R one. S love the look, would

love to drive one. They're pretty pricey? Are they overpriced? For the lightning that Paul was in? Awesome? Awesome truck, but very expensive. You know. Um GM's hummer is like a hundred I don't know how much it is. It's like Kevin Kevin, just to reiterate, I did drive a pickup truck. There you go. Are any of those prices gonna come down? Well? Look, here's the question is which you know, what's your supply demand balance? Right? So it's

in in in a vacuum. Prices are what prices are, but the the you're supply demand balance is what's going to determine that. And my argument is if you're a pure play e V builder right now, you might have a problem with that balance. If you're anybody else internal combustion, you don't have a problem with that balance. All right, All right, good stuff. I mean we can talk to Kevin all Day on this good point car stuff. Kevin Tynan, senior Automotive analyst for Bloomberg Intelligence. Uh he and uh

Michael Dean in London. They are just all over the global auto space. They were out in Vegas, uh last week for the CS conference again, a lot of the auto companies out there showing off the technology platforms that they have that also sit on four wheels, so they're autos. It is banks day, so that means it is Alison Williams day. She covers all the banks for Bloomberg Intelligence. So Allison. The stocks had traded off on the news here kind of turning a little bit positive here. I

don't know. I kind of was looking through some of the some of the notes and some of the some of your research and some of the reporting. I mean, the businesses cranking. Yes, they're being a little cautious going forward, but as Matt was just noting, they're pulling in huge amounts of net interest income. The income wasn't great. I know it's all relative to expectations, but the absolute number

seems staggering. The numbers are good, and I think um to your point, it is the net interest income expectations um. That has investors a little bit disappointed, and you know,

to some extent, management could be being conservative. Jamie Diamond said, they're not being conservative, but there's a lot of questions out there, um, and that's why, you know, the cause are being dominated by questions around what are your assumptions for deposit pricings, what are your assumptions for the economy, etcetera. Because you know, the good news that we had this

year it was several fed hikes. Um. You know, now we're starting to see banks getting pressure to raise what they're paying depositors and and that's the squeeze what we're going to be getting in and it's tough to estimate. So I think the banks are trying to be conservative, are trying to get one quarter of guidance and getting boxed into a full year out. You ever play you or spades, because it seems to me like Jamie Diamond

is sandbagging all the time. That guy is sandbagging. You know, there's a hurricane common, we've got to batten down the hatches. This is gonna be a horrible recession. Under promise and over delivered, right, that's more than under promise. That's like he's always setting us up for a lower bar. Is that is he doing that now? Because hasn't he walked back the hurricane comments. Well, I think I think it is um. You know, I think it's prudent for banks, right,

you want them to be prudent and conservative. You don't want them to giving a pine sky estimates. I mean that was a little interesting last year, how quickly he changed his you know, quote weather forecast. I think that, you know, I think the point he was trying to make um even though we all were all focused on the weather forecast, but you know, he was making the point that look, we had we're fine, Like whatever happens,

we're fine. And I think that's you know, if you look at the pretexts, pre provision profits, so what they're earning outside of those credit costs, Uh, they're well covered. And in fact, this quarter returned on tangible equity. That's that's pretty remarkable in a tough environment. They beat their return on equity target um this year. They could probably beat that next year. And and to me, that is really the area of focus versus um you know, versus

cyclical pressures. But much has been said Alison about all of the bad leverage loan debt that these banks have. Paul and I talked about it all year, So if anybody was blindsided, they weren't watching Bloomberg TV or listening to Bloomberg Radio. Um, do we see that borne out in these earnings? Has anyone come out and said, man, we got crushed by all this horrible Tesla debt? Um or have they edged? Have they dealt with it? They have?

I think they have dealt with it. Um. You know, there's there's likely some hit somewhere that we're not we're not seeing. Um. Just you know, banks have to report things depending on the degree of importance for their earnings, right, and so we did see them call out some things in the second quarter, in the third quarter, so you know, mostly radio silent um. This quarter, we're not hearing much

of anything. Keep in mind that the credit markets in general were very good last quarters, so there were opportunities to hedge, there were opportunities to to do some things, and maybe that's how they managed down some of the risks. We did see jeffreyes um in the beginning of this week,

which seems a long time ago now. Um, they did report a sort of a thirty eight million dollar you know hit in their quarter ending November, so a small hit, but in general, the business is so much smaller for the banks than it was at the time of the financial crisis. It's probably about of that size, and bags have been aggressively managing it down all year. Sorry, Twitter

dead is what I meant. I mean, yeah, of course billion dollars of bad Twitter loans can write those down, and it seems like that could be a story, but we haven't seen it yet. It hasn't been all right, JP Morgan Chase chief executive officer Jamie Diamond called the firm's botched acquisition of college financial planning website Frank a quote huge mistake, a vow to share takeaways at a

later date. I didn't know what that meant. I went back to read Matt Levine's Money Stuff column, which is a must read every day set and alert for that as I do, and he was basically just just fraud here. But the question I have is, you know, basically buying this company Frank was to get access to, you know, basically lists of you know, teenagers, college age kids. Is that a big issue for banks to attract some new customers? Here. I mean, I can't think how they do it. I mean,

you try to get these teenagers and young adults. I think the banks are always trying to you know, get consumers as soon as they can in their in their life cycle. Uh. Some of the way that they do that sometimes is in the credit card business. UM. Definitely with the rise of fintech and digital offerings. UM, these banks that have run around a long time want to make sure that they are on top of you know, anything that knew that it's coming out there. They're the

incumbents and they want to stay that way. UM. Disruption tends not to come from the incumbents. So I think that they're just you know, they're they're careful and they're watching. Jamie Diamond and has said that they want to do acquisitions, but they've done very few. They've done a lot of these small little acquisitions. UM. This one working out is is not giving them very good press. But but you know, we think that they still they still have an appetite

for next year. Just all right. So for retail banking, here in our Bloomberg h Q headquarters of fifty nine, elect the Capital one to open up a new quote unquote branch and it is a beautiful space. There's a lot of space, but I would say of the space is a coffee shop with couches and maybe I can actually go up to a teller and I don't know, cash your check or something. I ang did that as well. I know, and there were no tellers. It was just a coffee shop. I didn't get it. It is it

is the changing nature of branches. So you know two things on that, one of which is we know that branches have been shrinking the number of branches, and then the branches that the banks do keep are more more sales focused, right, so they don't want you necessarily, they don't want you coming in and uh cashing a check. They want you to do that on your phone. They do want you to come in and you know, think about a private banking account or wealth services and things

like that. So um and and the other part of it is banks. And this was actually something that uh, Charles Schwab I think learned this lesson and taught us this lesson along time ago, which is people do want to see the name, They do want to see the branch. They want to see the name, They want to maybe have coffee there, but they want to they want something solid to know where their money is, and so it's very difficult, I think, to be all digital, and that's

how they're keeping their brand down. What's interesting on another thing that I know that your banks that you cover are are dealing with at this time of year plus with the slowing economy, is layoffs and the Watsher journals out with a story right now. The Bank of New York Melon plans to cut about three of its workforce this year, or some fift jobs. We've seen it before from Goldman, SAX and what's the feeling is the banking system just just too big, too bloated in terms of

head count. I think it's just it's you know, as you know at that time of year. And it is interesting, you know, Bank of New York Melon and black Rock, those are sort of a couple of announcements that we've had over the past week. We also had the Goldman news, but obviously that's that's a little broad and going into businesses outside the core. So asset managers making some cuts, investment banks, you know, a couple of percent here and

there is something that we would expect. It's it's interesting that the head count has actually gone up at a couple of the banks. Again, we're gonna want to dig through and see, you know where they're adding heads because that that that sometimes it's a symbol for growth and sometimes it's it is related to acquisitions. Goldman Sachs had over five thousand jobs added this year. A lot of those were due to acquisitions. Um and now they're coming back.

All right, good stuff. Alison Williams busy, busy day, covering all the research on all the conference calls, making herself available Bloomberg Television, Bloomberg Radio, Bloomberg News, sharing her analysis. Boy, after a bruising people are looking for what strategies, what actors, maybe the way to go in three and some folks talk about value investing, so we want to break that

down within the roundtable this thing. Francis Oh, CEO of Craft Technologies, and Seawan O'Hara, president of pacer et F s Uh. They joined us via the phone here. Francis, Uh, thanks for joining us. Want to start with you here. Talk to us about how you guys are Craft Technologies, how you're viewing after what was for most investors, whether you're equity or fixed income, was just a brutal two. Yeah, it's totally like the twining was was a little bad

market for both equity and fixed income. And I still believe the I mean the worst may be over um compared to the the literally worst point of compared all the twenty second but they still the chuge amount of uncertainty is is around the market, and especially if you talk about the equity um the strategies of what factors, maybe I'm delivering better performance this year, I still the way on the value could be better delivering against the

growth strategies. For the last one year the period the value actually out performing large gaw value perspectives are performing the per same point over the large gap growth strategy. Uh, it is because of the fundamental changes while you're seeing the macro or the market of the obvious ending of the general interests of police environments for the first time

over the last fifteen years. And we are still like if we like it or now we have to embrace the macro environments in the quite the time, at least in thee then it probably be either better um deposing um the interest or the eyesight into the value strategy and decision as well. Okay, Sean, what's what's your take on What's what's your outlook here? Well, thanks for having me. First off, it's great to be with you guys. We

had a really a solid and our value suite. The cash cows in the US version was essentially flat for the year, which if you think about the backdrop, you know, being the broad market down nineteen and traditional value being down double digits as well or maybe high single digits, our view isn't really changing. We follow free cash flow and free cash flow yield, and free cash flow yield is just a measure of how much you pay for a company in total versus how much cash return you

get on an annual basis. We think the higher that yield, or the more money for the amount you pay, is the way to identify cheap stocks in this world today. You know, the composition of the U S stock market

has been changing for four decades. It's mostly based now on intangible assets, not tangible assets, and so traditional value uses price to book, but there's no real solid book value left anymore, and so free cash flow, we think, is a better way to do that, and it's shifted our portfolios last year away from tech and consumer discretionary and into energy and into healthcare, um and materials are picked up the inflation trade. There on all sides, we're

entering the same exact way. We're overweight energy, we're overwright materials, and we're overweight healthcare. We have started to move a little bit higher on tech, but but on names that you know, like intell and things like that, not on the big sort of mammoth tech names. I'm hoping that they get, you know, cheap enough, you know, as this market sort of settles down, that we get a chance

to include some of them in the portfolios. But in this environment, not much is changing, so you have still have to be careful. The fet is still committed to raising rates. Inflation is still a problem, a little less of a problem today, and so whenever you have those two things going on, the overall market pee has to shrink. It's been shrinking for a year now, there's still potentially

some room to shrink. And so using this free cash one free cash flow yield screen allows you to buy companies at single digit pees that actually earn more than the broad market in terms of earnings, grow pay competitive dividends, and so that's a place where we think investors would be better served than buying the broad market going into

and maybe even beyond. Hey, for instance, I know in your e t F it's the craft AI enhanced us next value of the cibols n v Q in January and the rebalance you added financials at a consumer discretionary and remove the allocation to energy. It gives a sense of kind of what you're thinking they're in January. Yeah, um so um the I literally loved to um. The was echoing the uh lot to show said about the intens of lessens um in terms of the how to

evaluate the company's intrinsic value. UM the conventional the value approaching only like the productift ratios, It only not only is mustly capturing the the tangiblest set which is able to easily able to be taken out the information from the book um the But as the our the daily life is changing and the corporativity changing, how the people are seeing the company's valuation, the metrics are changing right now.

The much bigger part of the company's valuation is coming from intangible asset and we are using the artificial intelligence to try to tackle down to evaluate the better estimation of the corporates UH the intrinsing value, utilizing the maxive amount of the big data at the same time trying to focus on the company's I P and the brand loyalty, etcetera. UM, which can be applied to the most of tech companion utics. But anyway, the our model is we do the balancing

on monthly basis. We do take people's tangible and intangible asset into the core metrics of our The AM models of this is making process. But in this month, by processing the macro data and the fundamentally the price data, the R A M will make some bold move UM. The one of the UM, the the core contributor contributing sector of our m v q et of Lasia was the energy. But this month, after the re balancing, our modal is of pretty much of the UH doing the

profit taking previous. But at the same time we started to increase substantially into the financial sector, especially into regional banking UM under the environment of the higher interest rate regime. So and so sean on it on, you guys do something a little bit different energy at the December rebounds, you increase your energy allocation. Why because the free cash

flow and the energy sector is continuing to grow. Like you know, if you look at Chevron as an example, Chevron's free cash flow and earnings are still grow going up faster than their stock price. Um so we had a very nice performance in our energy sector last year.

We made a lot of money. But we continue to make a lot of money in this energy sector because in spite of the price of oil, the amount of free cashualties energy companies are generating because of the reduction in capital expenditure, it's not poking holes in the ground anymore, kind of randomly, that money all flows to the bottom line.

And so until that formula changes for us, until their earnings in their free cash flow go up slower than their stock price, or until their stock price catches up to that free cash flow and earnings growth, will probably remain overweight energy. We're also overweight healthcare, and we're overweight healthcare again because they're generating a lot of free cash flow.

But healthcare as a sector is a pretty nice defensive play because it's one of the only sectors the last ten years where their earnings and free cash flow went up faster than their overall stock prices and earnings the last decade or so went up about a hundred and sixty seven on healthcare, and the stock prices only went up about a dent, whereas if you look at tech, the earnings went up a d eighty five percent, but

the stock prices went up to fifty. So in an environment where we're not sure about the economy and we're still going to have an aggressive FED and inflation is still going to be a problem, it's it may be a better place to be from a defensive perspective to own stocks and sectors who have not outpaced their free cash flow growth and have not outpaced their earnings growth. And that's essentially what the col Z t F C

O w Z does on a quarterly basis. And Sean, you know, I noticed in your holdings Meta is one of your top ten holdings and I'll love to get your call there. But why there's so much noise around that name? Do you guys try to tune out that noise and kind of just focus on the free cash flow that that's it? I mean, you know, like, um, you know, am I I'm hoping the whole you know, mega tech sector actually comes to us like Meta did,

because like you know, they're high quality names. I mean Mega generates huge me Meta not Megameta generates a huge amount of free cash flow. So that's why it's screened in. We don't even look at you know what the company does. If it's in the RUSSO one thousand and it's not a financial and it's profitable, it has a chance of screening into our hundred stock portfolio based on that free cash flow yield. And that's how the metal wound up

in the portfolio. And you know what's interesting is that, you know, this is a strategy that tends to trade at a lower p to the market, But whenever we get to this bottom of the market, typically we wind up picking up even more high quality names that grow faster than their peers, and so we tend to bounce better off these bottoms because of the selection process by

using free cash flow and free cash flow yield. All right, good stuff, guys talking value investing on the E t F front Shawn O'Hara, president of Pacer E t F and Francis oh CEO of Craft Technologies. But we've all been talking about inflation, inflation, inflation, and you step back and say, oh, there should be an e t F for that and guess what there is and our next guest has it. David Schasler, portfolio manager and head of Quantitative Investment Solutions at Van Eck. He joins us here

in a Bloomberg Interactive Brokers studio. David talked to us about your e t F that kind of tracks this inflation thing lane with are A a X. We created that e t F based on the view that we were going to eventually have a period of high inflation. So we went back, we went we were talking about inflation before inflation was cool, when inflation was one point four percent, with the extreme montary debasement. We were saying that, listen, we think inflation is gonna gonna come, and we think

it's gonna be out of control. Um that happened. We think now inflation is likely to fall from here, but we think it's going to stay elevated for a long period of time. Are we break with consensus and the sense that once inflation materializes at the levels that has now, it typically sticks around for a very very long period of time. The idea that it goes to two percent tomorrow not very likely based off historical standards. So think

about buying assets that can benefit from that regime. Commodities benefit from supply demand and balances. We believe that we're likely in the early stages of an extended commodity supercycle. Commodities run an extended periods of time, so I think twenty years cycles. We think we're in the early stages of that. So we have significant exposure up to around fifty what we call resource assets. So about in commodity futures. The rest of it in resource equities. These are companies

that benefit from higher commodity prices. Think of exploration, production companies, companies that benefit from extracting, sourcing, distributing commodities. Right, that's about half of the fund. Let's talk about the other half financial assets gold, bullion, gold equities. Gold equities are obviously a more speculative play on gold, but if you find yourself in a situation where governments are debased in their currencies like mad historically, that's store value assets being gold.

People got really bummed out about gold because gold hasn't performed as well as a lot of people would have hoped. But if you look back at historical cycles, gold actually performs a lot better at the later end of the cycle. Meaning that it takes a while for people to realize that they have a problem at first. When when you're faced with it with a new regime, a new a new event, your tendency is to think, well, it's gonna go away, back down how it used to be, Well

what if? Right? It actually just takes a few years to change our psyche to understand we actually have a pretty significant inflation problem and history tells us it's not likely to go away. Right. We've seen gold rally from uh I think it was like sixteen hundred in November two over today. Um, what what I'm looking at racks and I see seventy four basis points expense ratio. It's pretty punchy. Um, what's your competition? Where are where's our comfortable?

Who is competition? Yeah? What's your competition? You know? And what are you doing to best them? Our competition our commodity funds, straight natural resource equity funds, and people that invest in individual securities that maybe aren't commodity related, but people that believe can maintain strong profit margins. Right, Our differentiation point is really simple, own the broad based key categories and diversify and be able to maintain a constant

inflation hedge throughout the cycle. So that's why we're about half resource assets financial assets, goal bling gold equities and the rest and income generating real assets. So and why owned this over PIT? Because you have a commodities fund, right The p I T is your van Eck Commodity Strategy fund. I also managed PIT, which is our actively managed commodity TF that just recently launched. So I don't think it's just launched last month. Yes, I don't think

it's either or I think it's both. Commodities are great during a period of supply demand and balances. Listen, the war between Russian Ukraine took the inflation problem. We were on one trajectory. Now weren't completely different. Once you have massive commodity producers and their powerful allies at odds with each other. The structural imbalances because the underinvestment commodities are likely to live on for an extended period of time. So we're not saying don't buy one or the other.

We're saying by both, RAX is a great way to buy both because when you buy it, you're getting right now around a tent allocation to PIT, which is the commodities fund. So but I mean, the narrative now is that inflation has slowed, still high, and like you said, we're gonna go to two percent tomorrow, but you know, we're freaking out about it before. We're raising seventy five bases points at a meeting. Now we're looking at and expecting the plateau at some point. So hasn't that kind

of calmed down? It has, and we think inflation is going to continue to fall. And we think that this is pretty much par for the historical book in the sense of inflation runs hot and cold, peaks and troughs. If you look at the historical inflation cycles, look at the forties, look at the nine seventies, you get peaks of inflation, and then you get troughs. You could even go into disinflationary deflationary events, and then it pops back up.

What we're saying is that we believe based off of history and what we're seeing today, because right now we're fighting inflation through demand destruction. That's not a long term game plan given how much debt that we have, so we don't think we can keep interest rates at these levels for an extended period of time. So we think eventually, unfortunately, not soon, but eventually we roll into recession triggered by

higher interest rates. Were forced to pivot down the inflationary forces that are still there, boil back up high performing or excuse me, highly sensitive inflation fighting assets. Those that actually benefit continue to outperform. That's our basic alright. So we got racks, we got pit what else do we have a been in? We are firm believers right now and this is an exact opposite view of what we had.

So so, I, for one, was particularly barished on yielding assets because super low yields and a lot of interest rates adjustments on the way that's changed. So when I sit here and I think about inflation likely peaked and continuing to fall, and I look at the yields offer in the market, I get excited. And that's why we have INC, which is the dynamic high income et F that I also manage, which invests across the board trying

to find diversified high yield solutions. So think of equities that are high yielding, think of high yield bonds, think of internationally international high yield bonds. So what we're trying to do is give you a diversified allocation of yielding assets and remain remain flexible right adjust those allocations over time based off the risk and rewards in the market. And every when I say risk and rewards, we are we run everything from a quantitative tilt, meaning that observed

risks in the market. So assets acting up being very very volatile, those make us nervous. Assets that are more stable, more consistent, those make us more excited. And that's basically how we BUI as our portfolios too, and from different assets. But it's still a very juicy yield. I see I m C as the ticker net indicated yield of more than eight percent. And you're saying limited risk with this e t F as much as we can we we we limit risk on all of this strategy that we

offer with within our group through diversification. At the end of the day, we express views and we expressed them firmly, but at the end of the day we're always well diversified. And this has a pretty low expense ratio for the class of e t F forty three basis points. Yes, we're excited about it. We think it's super competitive. What's the next thing you guys are thinking about in terms

of maybe some advantages here, break the news here. Yes, we're our Our founder Jan Vanek and started with his father always talks about our shop as a macro shop. So it's not a coincidence that high yielding assets, right, INC, commodities PIT. We just launched the inflation all case ETF, which has been out there for some time. Those are

out there because we think that that's the regime. So the funds that we're working on have been focused towards that, how do we generate this high yield to generate a positive real yield and how do we benefit from real assets and expansion of commodities. So that's the stuff that we're working on. Good stuff. David Schah, portfolio managing head of Quantitative Investment Solutions at van Neck. We got racks, we got PIT, and we got INC right now, maybe

some more to come looking at these markets. And he joined some real legendary I mean music and his father started really legendary shop. Good stuff, so we appreciate that. David Commen and Bloomberg Inactive Workers Studio. 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 V three. And I'm fall Sweeney. I'm on Twitter at pt Sweeney.

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