Surveillance: Recession Risk with Dudley (Podcast)

speak today. It will be a sober conversation, a sober set of Q and A, and part of it will be reading William Dudley's essay for Bloomberg Opinion this morning, where Bill Dudley, former President the New York Fat of course for decades of golden sex, simply says, learn how to spell it. It is a hard landing, Bill Dudley. How do you know or discern a recession coming? The distinction of a soft landing looking at a Goldilocks reset, should, if you will, of green span or a more difficult recession.

How do you get out front of that Intellectually? I don't think it has to be a really deep recession. I mean keep recessions typically occur when something breaks like the global financial crisis is a good example of that. I think what the Fed reserve has to do is generated enough slack in the economy bring down inflation. That means the unemployer rate has to go up. The problem that the FED has it's very hard to push the

unemployer rate up only a little bit. Every time the unemployer rates going up by more than a half a percent, you've had a full blown reception. There's no reason to think that it's going to be any different this time. Will the Chairman today say what you say in your essay, that suddenly employment is a mandate is subservient? Is that where we're heading. Well, that's what the FIT already told us in their FLOMC statement. They took out the reference

to the labor market remains so strong. They're very much focused now on inflation as opposed to employment, because the layer market is too tight as opposed to not tight enough. So I think he'll reiterate the message that we heard that we heard in his press conference last week. I think also though he will not talk about a hard landing, the FETE is still going for a soft landing, and of course they should. The problem is it's just gonna

be very difficult for them to pull this off. But a lot of people in the market right now are trying to draw a distinction between a soft recession or a shallow one, and one that is much more damaging. What is the characteristic of the hard landing you and vision. I think it's going to be a relatively mild recession at this point, because the fit the financial system looks like it's pretty solid. Household in business, balance sheets look

like they're pretty solid. You really get a deep downturn when things in the financial system break and the ability to supply credit to people becomes impaired. I don't expect that they happen this time, So I would expect a mild recession like or or two thousand and one, not the deep recession like seventy three, seventy four, or of

course the Great Financial Price. A lot of people would push back Bill and say that this FED has no appetite for causing a recession, they don't seem to want to do that, and that they will eventually pivot away from raising rates as much as people currently expect. Why do you think that's not the case. Why do you think they're going to take a page from haul Ulcer? Well,

I don't think they want a recession. The problem is that if you're going to get inflation down, you need more slack in the economy, and it's very hard to generate more slack in the economy without actually generating recession. So that they're they're they're definitely going for a soft lane. It's gonna be almost impossible for them to pull it off. But as the assumption you're making bill that they're not going to blink even when the data turns more dramatically

than we already have seen it having. I mean, Larry Summers was talking about a five percent unemployment rate over the next five years. Where do you think they're tolerances Well, I think that I think what Larry is talking about is certainly reasonable. I think the reason why they're not going to blink at the end of the day is they know that if they blink and don't get inflation down, then they have to do even more later. Postponing procrastinate

is not a great option. We saw what happened in the nineties, sixties and seventies and the Feeder Reserve was slow to tackle inflation. What happened was and station got out of hand and Paul Broker had to come in and put the U s econmy through the ringer. So the fact wants to do what's necessary in the near term, so they don't have to do a lot more in the longer term. But it is in the longer term that you really see the full effects of monetary policy

taking shape. It operates with a lag. We all understand that. So I guess the question is if they're front loading and aggressive, are they going to see it reflected in the actual data we're getting or do they risk just moving way too aggressively and then the data turns all at once. Well, that's that's what could actually happen, because right now the ECMMY has considerable for momentum as the

commy reopens and imperial games are very strong. Household balance sheets are still very solid, boosted by the fiscal stimus that we got over the last couple of years. But beneath that things are trouble. Uh Inflation is rising faster

and wages financial conditions have tightened a great deal. So what I think is going to happen is the economy be fine over the next few months, and then we're going to see a very sharp slow down the probably in the first half But I just want to build on something that Kaylee was talking about with that five percent unemployment figure from Larry Summers over the next five years, and that that's what he thinks is necessary to bring

inflation down. What happens if you start to see the unemployment numbers climb, but the inflation figures do not come down because of those lag effects like rents, for example, that are continuing to climb. How does the FED handle that? Based on your conversations and your experience on the Central Bank, Well, I think you're right that inflation is probably not gonna come down that quickly because there are leads in price

in companies raising prices. Also, I think the Ukraine Russia war complicates things enormously because it looks like the energy price shock and the food shock is gonna last longer because of the war. So I think that the FED has gotten very unlucky in terms of the kind the inflation shocks that we're seeing. They're likely to be persistent and that's gonna make it difficult for the FED to reverse course. Bill Dudley John Taylor's at a school you

may know it across the bay from Berkeley. It's stand Stanford I think is what it's called. And I can just see John Taylor with a full balloon in as freshman economics class, letting the air out of it ever so slowly. We have a fiscal balloon some thirty of g d P. How long will it take to let the air out of that fiscal balloon? Is a central bank is at a three year project or do you really see it out almost to a decade. I don't

think it should take as long as a decade. But fiscal policy is a factor behind why we're probably going to see a sharp slowdown at some point. Because fiscal policy, while it has been very stimular over the last two years, that steamless is over. We've also seen households begin to

pull down their savings race. So the savings rate was very elevated as a fiscal policy stamless with being put in place, but the savings rate now has already fallen below it's long one app which tells you that consumers are a little bit stressed, that are starting to experience a little bit of stress in terms of their balance sheets. Bill Dudley required reading folks before the testimony of Chairman Powell.

The Humphrey Hawkins testimony a monetary report by the Chairman of the Federal Reserve, and we'll get Bill Dudley out on social here as quick as we can. You can see that, of course at Bloomberg dot com. He speaks of a hard uh landing. Uh uh is Well, you know, Bill, I look at this and I think if Jerome Powell was to read your essay, you wonder how he would

amend his discussion today. I mean, he's not gonna say hard landing, but how does he give up the how does he address the probabilities the set of outcomes that we may see. Well, he's made it more clear that it's going to be more difficult the longer inflation stays as high as it's been the heart of the fast jobs, and he's he's admitted that in his his press conference. So I think today he's going to make it clear that this is not gonna be easy. He's gonna talk

about that there is a path of soft learning. I think that path is extraordinarily narrow. You won't talk about how narrow that path is. They'll just talk about that's what the Fed Reserve is trying to seek and pull off this time. Bill, what kind of financial breaking do you foresee being a trigger for the Fed? And I say this as the end weekends to the weakest levels we've seen versus the dollar since and people are starting

to get concerned about deteriorating liquidity in certain bond markets. Well, I think the biggest area stress, frankly is going to be low and moderate income countries who are hurt by want a stronger dollar, higher grain prices and higher energy prices. For poorer countries, grain and energy is a pretty significant portion of the household consumption basket, so they're gonna hit be hit very severely over the next twelve to eighteen months.

So I expect a lot of sovereign debt problems in the next year or two, and that's going to just be more problematic for the global economy. So, Bill, at what point does a strong dollar create a real issue? And this is something that I was thinking about, especially is a growing number of investors see the dollar are as the main hedge against equity weakness. At what point

is it a trigger for the Fed? Well, the fact actually is not unhappy with the dollar being stronger because the stronger dollar holds down US inflation by making import prices cheaper, and it also slows down the economy by

reducing US export competents. So when you think about the FED once tighter financial conditions, higher bonnials, looperstock prices, stronger dollar, the dollar is actually the most attractive of those three things because the stronger dollar actually increases your purchasing power. So the dollar strength is not something the Federal Reserved views as a bug. Thank you, this is a feature. Well.

Speaking of the financial markets, we heard from Tom Barkin yesterday we will again today, but he essentially said that you want to get back to where you want to go as fast as you can without breaking anything, talking about not wanting to cause undue harm, not just to the economy but to financial markets. What harm would that be? What would make the FED put kicked back in Bill?

I think you'd have to see some sort of calamity and financial markets that impeded market function, impeded the ability of thanks to lend money to households and businesses. I don't expect that. I think the reforms that we made following the Great Financial Crisis, in terms of the banking system, more capital, more liquidity, better risk management, better governance, those have shown to work. And I think they'll work this time as well. Bill, I just want to say, and

you're wonderful, essay. I don't know which is more important that you quoted the great economist Claudia Sam or you quoted the other economist, Wiley Coyote. I'll let you decide which one. I think. That's uh great to see her, Bill Dudley, thank you so much. The former president of the New York Right now, Professor Abbie Joseph Cohen joins us. She is entrenched at the Columbia Business School and of course for decades at Golden sas is a partner. Uh, professor,

how's it going? What a shift to go from the twenty five hour week of Goldman Sachs down to the cushy job as a professor at one of our acclaimed schools. How abrupt is a shift? Ban? Well, it was twenty five hours a day, not a week. Correct that. That's that's quite all right. Um. It has been a wonderful adjustment for me. Frankly, you know, I was an adjunct of Columbia for almost a decade, so I knew what I was getting into. Um. I love the students that Columbia.

Half of them are from overseas, and it's a terrific faculty, and I'm spending I'm spending time with a lot of the faculty working on new curriculum materials for them, incorporating the real world aspects into the academic work. And the foundation here, folks, is something that the right of passage. If you're in the racket, you must read either nineteen thirty four Graham Dot or maybe you catch up with

Graham Dot and Coddle. Right now we look at Graham Dot and Joseph Cohen, which is going to be the new definitive book out of Columbia Business School. How do you take the fundamentals that we were weaned on and drag them forward and Jerome Powell's Modern Age, Tom, that is a wonderful question. But first let me set the stage, and that is to say, for the last few years, the fundamentals have mattered less than things like momentum and

investor enthusiasm. Now you take a look, for example, of the strong correlation between the technology stocks, cryptocurrency and so on, and basically say, these are types of financial assets in

which valuation approaches really didn't matter very much. And I think we're now back into a period in which it does matter, where it's the fundamentals of earnings, the fundamentals of margins, the fundamentals of inflation and interest rates, and putting that all together in terms of appropriate valuation models that will make a big difference for investors going forward.

I mean, how do you model the fundamentals at a time when people can't come out whether we're going to have a sanguid economy or a hard landing that looks something like a depression. At what point do you game out recessionary outcomes and your fundamental analysis. Yeah, you know, there are two different ways to look at that, Leasta.

First of all, we can game out alternative scenarios, so we have some sense of what the range of possibilities might be, not just for equities but other financial assets. But of course, at the end of the day, an investor portfolio manager has to say, what do I think is the most likely scenario. You can always plan for the worst if you have very little risk tolerance. You can always plan for the best if you're highly risk averse.

But I think many portfolio managers are aiming for something in the middle, where they're trying to identify what is the most likely scenario, And as some of your earlier guests indicated, what seems to be priced in right now is a mild recession. Uh, certainly not a severe recession.

When you look at the parameters, do you look at the end of the era of money or do you look at just simply a pause, a momentary reprieve from the ultra low rates of more than a decade as we try to curtail inflation, and then our aversion back to that at the end. Yeah, let me adjust the question just a little bit, Lisa, and to say that money isn't free anymore, but in many cases it's not

particularly expensive, particularly by historical standards. And so while we have seen this rise and interest rates, and the FED is likely to continue to move those short rates higher, we've already seen quite an increase in the intermediates and the longs and the rates that affect consumers, for example

through mortgages. UH. And so what we have to recognize is that when money becomes more expensive in some ways, investors households become much more careful with it UM because if it's no longer free, UM, you're going to see less leverage, which is a good thing. In portfolios. For example, we've had incredible returns, and some private equity portfolios maybe the basic returns were good, but in some cases they've

been turbo charged by significant amounts of leverage. We sort of hide the underlying a skill set, if you will, of of the portfolio manager. And then, of course there are many corporations that took advantage of very inexpensive money to leverage up their results um and so when money is no longer free, we get to see a better picture of whether those corporate managers and those portfolio managers

are actually doing a good job. Well, Abby, you talk about how people are more careful with their money in this kind of environment, and we know that it wasn't just you know, corporations and big institutional investors that were moving money around during the pandemic free money area. You also had stimulus that was fueling the retail investor and they have been a force within these markets. What happens

when that goes away? Uh. What we are looking at, of course, as a situation in which individuals in many cases became overly enthusiastic about some areas of the market, equities and elsewhere, including digital currencies that offered good momentum um. And what we are moving into and have already gone to see is what happens when the momentum breaks down and you need to start looking at the valuations per se. Now, individual investors, of course, have many different factors that they

need to be concerned about. Some of it has to do with how much longer they have in their investment arizon, what else they might need, uh, the capital for and and so on, and so we in fact see less money. And we have already seen us going into things like cap weighted dtfs. We've not yet seen the intermediate aspect, and I don't think it's going to be all that bad just looking at the demograph. I say this in great honor of your two thousand five paper, which is definitive, folks.

It's basically codified within the CIFA Institute Aristotle on Investment decision Making. We have dragged ourselves, Professor, from the elegance of two thousand five to a two thousand twenty two discussion of what's called a Cathartic puke. How does catharsis play into fundamental analysis and the confidence to own equities? Do I need to go down substantially to find a base to own equities. We are now, I believe tom in a situation where beta will be less important than alpha.

And that explain that, please, that's what that's really important. Explain that investors always think that they are smart in a bull market, right, So if you're invested in a bull market, almost anywhere in able market, the beta of the market, and that has to do just with slopes of of lines and so on. UM. Don't confuse um basically a bowl market for genius and and so that's beta. Alpha is security selection UM. And one of the curious things about the last two to three years in particular,

is that there's it's been really hard to get alpha. UM. So investors professionals who have used sophisticated approaches trying to identify what particular securities they wanted to invest in often stumbled because alpha didn't matter very much. With this dramatical reset in the markets, the overall decline number one, Number two the breakdown of the momentum orientation, and number three

the recognition that the economic cycle itself is shifting. We see a move now, I believe towards alpha, and that's not just within the US equity market. It's likely to happen in other developed markets as well. And also think of it were broadly in terms of asset categories that are no longer all going to be moving in locks. That's exactly where I wanted to go, abby, and we

just have about a minute left. Does this mean that's the end of the sort of standard sixty forty in terms of just working and needing a more nuanced, scalpeled approach even with acid allocation. Let's recognize that that thirty year plus period in which inflation and interest rates were under good control and continue to move lower is over. That doesn't mean that a year or two from now inflation will be under incredible uncontrolled and interest rates still

dramatically rising. I don't expect that, but we are exiting that thirty year period in which fixed income securities were a very good place to be invested, and that rule right now may not be uh, you know, such a clever thing. One of the point, if I may that Aristotle paper talks about the importance of understand ending the data. Let me give you one example. Right now, there's so

much focus on headline CPS CPI. You guys have done a great job of contrasting headline CPI to course cp I. What the fit is looking at is the better message measure, which is core PC, which is running three to four percentage points below the headline cp I. So rather than looking at like an eight percent number, they're looking at a number which is five percent, maybe a little bit lower. It's still arise in inflation. I don't mean to suggest not, but it is not quite as awful looking as the

headlines would suggest. Daddy, Joseph Cohin, thank you so much for joining Bloomberg and Bloomberg Surveillance today at Columbia Business School. Lisa shallatt from the meeting of Alliance Capital and Sanford Bernstein years ago over to her duties as chief investment officer at Morgan Stanley Wealth Management. Been there done that she has seen the dreaded conversation of recession. Lisa, how foolish is it for Morgan Stanley clients to angst over

the guestimates of what recession will be? Look I I We've always said, um that you know, it's it's foolish for for clients to to try to guess. I mean one of the things, uh, that we were talking about with clients yesterday is um. You know, even you know, some of the folks who get paid to do this, i e. At the FED have never gotten recession forecast correct. Ever. I think this is something that David Rosenberg also wrote about yesterday, uh in in his wonderful piece that he

puts out daily. UM. And And the fact of the matter is, you know, the best we can do is um, try to ascertain direction uh and relative order of magnitude and other than that, I don't think we can try to you know, hand ring about you know where the bottom is uh and you know how far will it go?

And what you know is going to be effected until we're really you know, kind of in it well hand ringing aside, when you look at the tea leaves and this idea that certain tech companies in particular are starting to lay off at members of their staff or cut back on hiring plans, Lisa, have we entered a new phase of the economic cycle that is beginning on the edges and requires a shifting strategy. Look, I think that we're actually you know, as you know, markets always you know,

are are six to nine months ahead of reality. I do. I am in the camp UM that that the price action we have seen us far this bear market has probably discounted at least you know, two thirds to seven eighths of the way there to what we're guessing, and I use the word guessing UH is going to be

UM a shallow recession. UM. In that spirit, I think what's different about the labor market this time, UH is that you know, we have never had UM the number of job openings and the ratio of job openings UM to applicants that you know, we came into this period having.

And so while we are starting to see some modest uptick UH in layoffs from you know, some uh handful of companies, UM, I think that that what's going to be different this time UH is that labor and the unemployment rate is actually gonna hold up much better because we have this cushion that what companies will do first, UH is eliminate their job openings as opposed to going immediately to firings and staff reductions. Well, on the subject of labor, higher labor costs obviously are one of the

higher cost companies are facing. Raising the question of margin pressure. Is there's continued kind of inflationary dynamics in this economy. What are your thoughts on the trajectory of margins from here, Lisa, and if if expectations of them are still too high. Absolutely. Look, I mean, uh, you know, back in the fourth quarter of last year, one of the things you know, that we were you know, trying to be very loud about

was the unsustainability of margins. We felt that, you know, when we were seeing these peak operating margins for the SMP five well into the double digits, uh, you know, profits as a share of GDP where they were UM that we were witnessing, you know, record operating leverage that was a result of this mismatch between UM, you know, the pricing power that companies had UH at the beginning of the reopening of the economy, and their actual costs and their lags because of the way we account for

inventory and the way we hire UH and the way you know we expense cap acts and thinks of that nature. Now we're in the catch up phase and our view is that margins are are really going to be vulnerable. And this has been one of the you know, great mysteries I think, UM is why the cell side has been so so so complacent. That's earnings estimates. This is critical. This is right where I wanted to go, running out

of time. If the cell side has been complacent, are we going to be surprised by corporate use of cash that shrinks potentially? And I think that that you know, this has been the problem is that the cell side analysts have stopped actually doing work since the era of you know, regg f D, and you know, they just listened to what executives say and anything until the exact

minute that their lawyers. Lisa, I've been screaming here. You don't see this, folks off camera, but I've been screaming about regg f D and the effect here on surprise. I mean, Lisa, it's tangible. They can't talk until they're right there. They can't talk until they're right there. And the analysts have stopped doing work and they just listen to the words coming out of the mouths of either corporate managements or our Federal Reserve chairman. It is really awful.

And you know investors are smarter than that. Uh, And our gases is that you know, there is a large amount of the earnings disappointment that has been priced in. UM. We just need to see those estimate cuts kick in so that we can ascertain what is the real price earnings ratio of this market? I mean, right now, I think it's a bit artificial bottle it. Lisa Shell out there with a quote of the week, Lisa Shell, Morgan Stanley, thank you so much. An extraordinary time, Tim, to cut

to the chase in the I e A report. What is the distinction that the Prime Minister, in the leader of labor need to know. What do they need to know right now from I e A. I think one thing they need to know is that we simply haven't been putting enough capital into the energy sector in recent years. I'm and that's true whether you look at it from

the perspective of energy transitions. So we haven't been investing enough in clean and then partially because we haven't done that, that means that the amount of money going into the traditional sector, so oil and gas has also been in not enough to avoid the sort of volatility that we're seeing today. Tim, I've got a really basic question. Has Russian oil actually been taken off the market or just rediverted through China, through India and the refineries they are

then sold back to the West. So there is clearly some impacts on Russia already of the measures that are in place. But if you look at the data for exports, there hasn't been a huge amount of chain since the invasion in February, and so there is that evidence of a reorientation rather than a reduction when it comes to Russian flows into international markets. So who's pocketing the difference?

I mean, if you're dealing with the gas and and and and the crew that's being sold at a discount from Russia, and then it's being sold at anything but a discount everywhere else within the developed world, who's getting that delta? I mean, it's it's it's an unusually profitable moment to be in the refining business right now. I mean there are refining margins are very high, and refining margins are particularly high if your input crude is heavily

discounted Russian crew. Well, but quickly here, tim, there is an allegation that some people have that actually India and refineries there are benefiting on all sides, and a lot of the gasoline and the refined goods the United States and other nations in the developed world are importing are actually Russian crewde that just have been funneled into a form that they can use. Is that accurate? I think it's very difficult to tell the provenance of the molecules

that come out of a refinery. There's no that there's no way to distinguish the outputs of a refinery based on the normally based on the on the on the origins of the crew. So I think that's that's a very difficult question to answer directly. Okay to him, Well, you're an economist. And as the Buying Administration pushes Congress to enact a pause on the gasoline tax here in America to provide some relief at the pump, will that actually work as intended even if it got through Congress?

I think. I mean, we're very focused on the underlying dynamics, and the fact is that um oil and gas upstream investment has come down by half since and that's added to some of the pressures that we see on markets today. So what we're focused on is which way do we get out of today's today's crisis. And essentially there's two

baskets of options. One is around doubling down on on fossil fuels and and the other one investing in new areas of of of the energy economy, and certainly from an I A perspective, we're very keen that the upswing that we've seen in clean energy investment in two, we're keen to see that gain further momentum because we think that's the only lasting way out of the crisis that we're having today. Well and tim of course, by nature,

it is a transition. We don't just arrive at a moment in which we are entirely reliant on clean energy. You still need fossil fuels. There is a back stop because many of these clean energy sources are intermitted by nature. The sun doesn't always shine, the wind isn't always blowing. How do both of these things play together. Where we can't wean ourselves off of fossil fuels, you can't get to green energy at the same time. Does that make sense? Yeah?

I think. I mean that's one of the things that we try and avoid saying, is that there's a very sort of binary clean dirty element. You just need to scale up one and reduce the other. There is this sort of coexistence of energy systems for many, many years to come, and you need to make sure at all parts of that system of functioning in a way that allows us to have affordable, secure energy. So I very

much agree. You know, we need to focus also on all of the energy services, the reliability that you can still get from traditional forms of supply. Tim Gould, the thickness of the I e A effort here. I think of Adam Saminski's work over the years, and then I look at Christian Mailik and J. Fren Worrion we're in long pages. They say the foundation of all of this is population growth in emerging markets. You own this i e. A. You've had the courage to go beyond the developed countries

and look at emerging markets as well. Is the case for higher oil prices simply a burgeoning population in emerging markets? I think it's I think it's more than that. It's about the economic growth. It's the rising incomes. It's the aspirations that many people in emerging markets and developing economies have for their lifestyles that they that we have in many advanced economies, and that is going to drive developments

in the energy sector for many years to come. But the question is what sort of model are these countries going to be pursuing Is it the same one, Is it the same path that we've trodden all these years, or is there a new lower emissions path that is now available because of some of the increasingly accessible and affordable clean technologies that are on the market. Tim, thank you so much for this report from the International Energy Association. Tim Goldwin this morning, Paul, I gotta get to this

real quickly here, because it's too important, least not. I was watching Dodgers Reds. Really counseling is just unbelievable, Aid and oh there's people comparing in the coffex, and I'm like, I'm getting hard into the color. I'm getting upset. Even though Cofax went to University of Cincinnatias a walk on basketball player. We got to get straight on this right now, joining us Douglas cast on the markets will get to it.

But I'm sorry this guy having a career here with the Dodgers Dot cass He's no Sandy Kofax is he one year? Does not a career? Making there we go. Oh, by the way, did you see the statue? Um? Yes, what do you think last week? Yeah? Okay, Doug, I got to get to this because I just think it's too important. Baseball has gotten boring. And one of the things that co Fax to the Gonsilan is also doing is limiting their walks per game. That's like the heart of the matter. It's just I mean, that's what made

Sandy Kofax in three. He just cut down on the walks. So there is to it. I'm just trying to avoid the market, the rules doing everything. And by the way, baseball is not boring. It's boring to you, not boring to the York Yankees. That's true. That's right, they're killing it. Okay, Doug. The market, let's get right to it. Is just Paul alluded to earlier. Can you buy stocks? Can you own stocks?

Can you be long? Given the gloom? Yeah? There is an English Russian encapsulates the markets that's claimed to be a translation of traditional Chinese curses. That expression is may you live in interesting times? And we certainly live in interesting times. I think that the one has to be struck by the change in the market side. Guys today versus six months ago. Um, when I was negative and now I'm substantially less cautious, and I have been solely

accumulating in that long position. Uh six months ago, if you remember remember there was a preponderance of negative optionality of expected outcome. Speculation was acute. Valuations were priced to perfection and very high by his dark standards. There was a bull marketing complacency and that was manifested by someone you mentioned you are Danny earlier in an earlier segment, who was looking for like Belsky in excess of five thousand in the SMP and six months ago, bears were

ridiculed as Cassandra's Today. Uh, Cassandra's Uh. You know, the Trojan Lioness is being lionized. UM stocks are no longer priced to perfection. Valuations have retreated from twenty three to sixteen times, you know the numbers, and many good stocks have been re rated by fifty or six without a real material change in fundamentals. And I think speculation and froth has been rooted out of the markets. Look at Caravana, which has gone from three seventy six to coin based

robin hood. I can you know we have a host of companies like that. The market is literally pall littered with an unprecedented accumulation of disasters, and even the perma bowles have materially lowered their SMP price targets, and Yar Danny is a very good example. He seems to have thrown in the town the towel um. I think the one point I want to make today is that we don't invest in the present. Recent or coincident events don't move stocks. The rate of future change move stocks. Good

news has permeated the market six months ago. Today bad

news surrounds us and it's spreading. And equities are a discounting process and mechanism that helps to explain why bear markets are born out of good news, and why bull markets are born out of bad news, and when this bad news, like if you recall back to February, in March of the future was murky and we had a humongous rally off the COVID low and I so I think basically, to summarize, we're rapidly moving from a period of gross uh you can say, excessive speculation, elation, complacency

on the part of most market participants, and the expectations of only positive outcomes, to a period in which speculation has been decimated, investors have to do risks and de gross stock valuations and economic profit expectations have been reset lower fear in the vix are rising. I don't know if you saw the Bank of America's bull bear indicator yesterday. It's a zero out of one zero, not one out

of our UM. So the general consensus of expectation now consists of mostly negative outcomes, and I will I'm the first one to admit that conditions are far from an ideal. The negative headwinds have become accepted and to some degree are in the process of being discounted. And there are to me notable opportunities and selected stocks. Do I have to be a stock picker here or can I just

go out and buy an SPS? I think the average investor, retail investors should probably buy just by the spy A passive a passive each So what are some of that? But but you're a professional. You did this for a living. Um, you started at Kidder Peabody way back. Uh, exactly a Kidder Peabody as a housing analyst. What stocks are you looking at? Well? Uh? The first thing to say is that I have doubled my net long position decline. So

that's important to note. I'm still about only net long and um, to quote Andy Grove, only the powernoids the five. So I come in every day putely on the lookout and at least to an open mind. Um I and I as I've learned from Druck and Miller and Soros that sizing is seven or eight percent of the equation whether you're right, how much you make when you're write,

how much you lose when you're wrong. So the stock the sector that I really like to answer your questions specifically, Paul, are the banks Okay, okay, we're gonna have it relatively sold and brief we're running out of time. We'll get you back on to talk about the banks. Also the co Fax trophe uh statue, which is wonderful as well. But what he just said, they're folks, and position sizing is gospel, absolute gospel. This is the Bloomberg Surveillance Podcast.

Thanks for listening. Join us live weekdays from seven to ten am Eastern. I'm Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, its investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom Keene, and this is Bloomberg.