Bloomberg Audio Studios, Podcasts, radio news.
This is the Bloomberg Surveillance Podcast. I'm Tom Keene along with Paul Sweeney. Join us each day for insight from the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our global headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and always I'm Bloomberg Radio,
the Bloomberg Terminal, and the Bloomberg Business App. Here's the secret, folks, guy asked me. Wonderful guy email me this weekend. He said, how in God's name do you do it? And the answer is you read, reread. And I learned decades ago that if you read anything from Outlage Press, you will be happy. It is a esteemed British firm. This little jewel, one hundred and sixty five pages came in. This should be in the CFA curricula. Immediately he's with federator or
MESI has to put up with Steve Off. Daniel Parris joins US historian PhD. And this is about what Paul Sweeney cares about more than anything, the ownership dividend. It is a magnificent global Wall Street primer on dividends. Daniel Paris, thank you so much for joining us today. You have the Paul Sweeney page, which is Cliff Asnes at AQR saying we've done the work, don't worry about paying taxes on dividends. Dividends are good. What does that mean for our listeners, our viewers?
You know, Tom, thank you for having me on the show. The way I phrased it a little bit differently is that in my day job, I do run into a lot of advisors and clients who really really want to subordinate investment policy to tax minimization. It seems to be more important to them than the investment policy. And I make the simple statement that's a choice, not a necessity.
Academic finance is really really strong on tax minimization. There's nothing wrong with that, but I take a stand as a business owner that investment policy should not be subordinated to tax minimization policy. And while the tax code is often adverse, you know, it's a sign of success or victory if you find yourself having to.
Pay a bit.
So it's one of the biggest issues I run into on a daily basis.
Page fifty three, Philip Fisher. There was the Old Testament, the New Testament, and then there was common stocks in uncommon profits a million like a generation ago. Danielle Paris, Should Apple raise their dividends?
Yeah?
The biggest pushback I get from this book and Apple's are perfec example of that is listen, buybacks are fine, and I don't dispute the utility of buybacks in certain circumstances, not how they're widely used. But I'm challenged and said, well, you know where would these dividends come from. We don't want to starve companies of growth opportunities, and of course
we don't companies should invest in positive MPV projects. But when there's close to a trillion dollars spent from the S and P five hundred companies, notably concentrated in a handful of very very large tech companies on buybacks, shifting some of that over time, which I believe will happen as interest rates have stopped falling, is not going to come at the expense of investment and growth. It's going
to come out out of the buybacks. And Apple and many of the other companies that say they can't afford to pay a dividend because they've got so many good growth projects are also buying their shares backhand over fist. Looks good in a rising market. They need to do so when they're issuing shares out the back door to employees. But yeah, the payout ratio for the large tech companies which is currently pretty low, and for well, it's called the Nasdaq one hundred, whether they're in the Nasdaq one
hundred or not. But I'm just talking about the large, mature tech companies. I believe over the next couple years, over the next five to ten years, you're going to see many of them follow in the footsteps of Meta And.
There we go. So, Daniel, is there an ideal payout ratio? What does the academic research say?
You just stepped on an academic land mine. I don't know if we want to go there. In nineteen sixty one, the issue of whether there's an ideal pay at ratio was raised and answered definitively. So the answer is no, and I don't dispute that finding from nineteen sixty one, though, much of my work is historically critical of academic finance,
of modern academic finance, some would say very critical. But in the book I do argue that listen, I don't know what the payout ratio is going to be in the yield of the S and P five hundred is going to be. I just know it's going to be higher than it is now. We've had a thirty year anomaly of declining yields, declining payout ratios, rising buybacks, and other phenomena which I think, as the book articulates, kind
of came to an end starting in twenty twenty. And is the yield of the S and P five hundred ready? Is everyone sitting down you know? Is it going to be three percent, four percent, four and a half. I don't know. I think it's going to normalize in that direction.
If Tim if Lucas was here from Apple, he'd say, all of our research as shareholders don't want to big text on that four percent SPX dividend.
So what do you say to that, Daniel about that the tax implications here? What's the Kundter argument? I guess if there is one?
Yeah, the only difference right now, remember long term capital gains and qualified dividends attacked at the same rate. So from a purely investment perspective, or there's no penalty. When modern academic finance and when that Apple executive was being trained, tax rates were higher on dividends than they were on capital gains. That's no longer case, and it hasn't been since two thousand and three. The only difference is timing so that a investor can time a capital gain or
capital loss. Again, investors can harvest capital losses as easily as they can harvest capital gains, but investor can time that. Where's a dividend occurs more regularly. My answer, and it's really the theme of the book, and it's in the title and you caught it, Tom, is a harvested capital gain is a market outcome for which many many people, when the market moves up into the right, are very
happy with. A dividend payment is a business outcome. You can choose to play the market, or you can choose to be a business owner. Now there are a lot of young people in particular who don't care about being a business owner. They just think of stocks by low, sell high repeat frequently. It goes up to the right and that's fine. There's nothing wrong with them that kind of a client tele effect. There are a lot of
people very satisfied with that. I'm just pointing out, if you bring a business owner sensibility to stocks the same way you might turn real estate or a private enterprise, you view a harvesting capital gain as something dramatically different from a dividend pact.
I got one minute left. Daniel Paris is Zuckerberg the executive of the year because he turned here here and just simply said, no, we're going to change this. We're going to do this like a conservative, measured company.
I just think he's a quick reader. So the book came out one day and the very next day, and that it made its decision. So I applaud him for reading getting a copy and reading it quickly.
Daniel, thank you so much. He's the federator Mez. But I just can't say enough about the history of this, folks. This goes back to my grandparents. It's that strong. It's got eminem in it, Mertin and Medigliani, all sorts of theories. V body, if you're listening up, it be you this morning, your great corporate team. This is a book for you The Ownership Dividend. It's a pro book, folks. I'm not
going to kid you. Lots of footnotes, lots of what you'd expect in an academics treaties from the PhD historian Daniel Parris. The Ownership Dividend. The coming paradigm shift is the stock market catches up with Paul Sweeney. That's a good Paul, take that book.
Take it.
I'm going to give it to mister Tim Cook that I see him this spring on the campus of university.
This is the conversation of the day, flat out. I'm gonnay. We're gonna talk to Sarah a rap report about Queen in the next hour. This is, without question, the conversation of the day. Patrick Armstrong believes in the frenzy. He says, it's not a frenzy, and you gotta own Amazon the rest and what date matters. Here's the date that matters, market on your surveillance calendar, May twenty fourth in Nvidia reports Again, Patrick Armstrong, why do you own in Vidia?
Well, it's obviously a great company. It's the epicenter of everything that's AI, and it's not trading at a ridiculous multiple. Stock is up four hundred percent over the last fourteen months. Earnings are up over one thousand percent over that time. It's a thirty two times twelve month forward earnings twenty six times twenty four months forward. So elevated multiple great company, incredible margins, and it can produce as much as there
is demand for his product. So I love companies with pricing power that basically set the price and people are clamoring to get whatever they can from whatever it produces.
Over the weekend. And thanks to shout out to zero head, he does a great service on this. They have the Golden Sax Hedge fund by side long only long short report. It's absolutely spectacular. Thank you for that service. And Patrick, it's simple. In the last x number of days institutions have sold what Patrick Armstrong owns in retail is bought what Patrick arms Strong owns. What's that signal to you.
I don't know if it's a strong signal either way, but you always have an instinct to take profits on something that's gone up so much. But I just look at the valuations versus the price, and valuations aren't rising. It's the price that's rising for in video, So I'm sticking with it right now. You've got the earnings in May that you just reference. But in March, the middle of March, they're coming out with their next generation chip.
What that's capable of as well, And I think that's going to be a really important date that you don't schedule that ahead after incredible blowout earnings unless you know you're going to really shop the market again and just basically create that momentum that everyone's clamoring for on the retail side of things. But it's not two thousand type bubble, right,
it's maybe the estimates are too high. That's possibility basically if another company comes in with a competing chip and then in video all of a sudden has to compete on price. They don't have to compete on price right now. But it's not a multiple story. It may be overall domestic earning macimates, but I actually believe those area.
Listening to Patrick Armstrong Neil Datta at run Back, thank you Neil for getting off the Delta airplane, and Neil says it's simple consensus is wrong. He agrees with the optimistic tone that we are from mister Armstrong.
So Patrick, in addition to Nvidia, how do you feel about those other big cap magnificent five six names. You know, whether it's the Amazon's, the Googles and metas, do you have a similar level of conviction to remain long those names here?
So I own Google, I own Meta And those are companies that aren't trading at demanding multiples. They're trading at discounts to the Nasdaq, trading almost in line with the SMP. But they're growing at a faster rate. They're buying back shares at a faster rates, still producing a lot of free cash flow. You've got a lot of advertising risk with that, but you've got an incredibly resilient consumer, and I think advertising is going to continue to drive revenue
growth to those companies. So I owned both of those. I own Amazon as well, which is again a play on the US consumer that's just very strong.
All right, So wow, I know who?
Yeah, yeah, doubt you're exactly right town doubt component today. All right, So Patrick, you and Tom you're both long the big tech names that have been working. Both of you guys are just clipping coupons. The rest of us are out there working for our money here. How about energy? What do you feel about ENERGYE? Looking at WTI crude here at seventy six bucks a barrel. How do you think about the energy space.
I like the oil and gas companies for a number of reasons. I think you get an in built geopolitical hedge against unfortunate events that might be happening in the Middle East or with Russia, or the war expanding in the Middle East, where more sanctions come on around things like that. But if you look at the future strip, bought prices for WTI are the same as they were six months ago and twelve months ago, but the longer dated contracts are up to thirty percent over that time.
So oil and gas stocks are flat over the last twelve months, but they're implied profitability based on the future strip going out the next ten years. That part of the curve is really jumped higher, and I think the companies aren't really reflecting that higher for longer food prices, and I do think they'll start to move that way.
So it's interesting here because we're looking at the supply and demand out there for energy, and again I'm not sure what's driving this thing is it's the supply side of the equation of the demand side of the equation, But I guess if you feel like the economies in the US are going to remain strong, that would suggest maybe higher oil. Is that how you think about it.
I'm not sure if it's going to be higher, But the bolt case on oil and gas companies don't need higher oil. They need oil to maintain these prices because right now, the cash flows they're producing are incredible, and they've paid off a big chunk of debt over the last twelve months. They've bought back shares, paying dividends as well, and all of those things are boring compared to the
technology companies. But the market is going to re rate as you see persistently high food prices based on going demand and supply not quite keeping up. Basically, there's not been enough capex to probably deliver the new supply that's going to be needed to meet demand.
What shorts have been working for you, guys, Patrick, So you.
Talked about the auto companies, we're short Rivian short forward and yeah, I love companies that have pricing power. I hate companies that are market takers of price. And unfortunately, if you're an EV producer, there's still demand for what you're producing, but you've really got to compete on the truck.
Looks really cool though, product, but I've yet to see a positive review. Yeah seriously, Yeah, I mean Lisa took one for driving this week. Lisa, what do you think of the Tesla? The car? Yeah?
Would you feel like you're out of a version of Mad Max?
You know we're not, Patrick, We're just going to Lisa to talk, you know, cyber truck and all that. Patrick, I want to ask your pro question. You got your own PLAAMI Capital. Now, what would you do as a portfolio manager if they said, Patrick, you own thirteen percent in Meta, you own ten percent in Amazon, you got to lighten up based on prospectus. How would you respond to that?
Well, in our useage funds, we do have those restrictions. In Europe, there's a five to ten forty rule, meaning you can only have ten percent in one position. But with global mandates that's more than enough for me. Anyway, in a US centric mandate, you might start to feel constrained by those kind of things. I'm happy to run in a global mandate less than ten percent of those kind of stocks. So I don't want my portfolios to
be one stop. That's a client can do that themselves, but we manage a thirty stock portfolio, so that's not a constraint for me really that I worry about.
So Patrick, what's your aside from the big tech here? What are there any themes that you're playing here in twenty twenty four and beyond.
So we like the big cap tech, We like Energy, Novo, nordist Eli, Lilly. Those are the other market darlings that I still think.
Maybe Okay, So yeah, you're right, there are all the good spots there, tech and weight loss.
I can't say enough the value of talking to Patrick Arnstein. Look for his work been quoted in essays in the Financial Times as well. Patrick Armstrong, thank you so much. Form Plurimi Wealth their chief investment.
Officers Society General great offices in Paris. Man I was there. I love those offices there. Subajo Rajapa joints that she's head of US rate strategy for Society General or is the old school we call it sac gen Sbajo. What is our Federal Reserve going to do next? Because we've had some guests come in here the past couple of weeks, I would say that, say you have in your scenario analysis, you have to have a rate hike in your scenario analysis, I'm like, what a rate hike? I'm just like, when
are they cutting and how fast can they cut? Is there a scenario where maybe they think about pushing rates up a little bit?
I don't see that scenario at least as of now. Perhaps the off chance and we see a sharp prize in geopolitical risks leading to supply chain destruct options and the economy remaining resilient under the circumstances could argue for
a policy adjustment. But really, everything we've heard from our FED speakers so far has been that yields have peaked, so we're looking towards perhaps, you know, if anything, if the economy remains strong and resilient, that they might that they might cut rates later than the market expects, okay, and less than the market expects, but not necessarily hike from here on for.
Better or worse. It's a presidential year. How does that factor into kind of the Fed's behavior. Do you think a lot of folks are saying they probably got to do something no later than June because you don't want it to feel like you're starting a rate cutting cycle in an election period.
I guess so.
Paul has told us that they're not, you know, partisan in any way. They're not focused on the political scenario, and they tend to do what's what's right for the economy, and I do believe them in that. But that said, there is no precedence for the FED cutting rates or
adjusting policy just before an election. So in some respects that argues for perhaps a May or June rate cut kind of get that process started, even though if they don't deliver on subsequent meetings, I think that they might space outcuts, but I don't think they take it all the way to November to cut rates.
I want you to overlay your world into the equity melt up we're seeing right now, largely from Globin Sachs was just done, and he made very clear it's an economics call, a productivity call, better economy up, everything goes. Do you buy that? How do you link fixed income into the equity melt up we're living?
You know, the equity melt up in the strength of the economy is definitely caught everybody by surprise. We have very strong growth momentum going into the second half of last year, and the momentum in the first quarter is also very.
To get ahead of this because the time because Paul wants to jump in here, what's it mean in the fixed income space? What does CFOs do? Are we going to have an issue ince frenzy? Because times are good.
We've already seen a little bit of an issuance frenzy in the first month of the year, and that's carrying over into February with tenny yields coming from say five percent last year to around four and a quarter percent now. But broadly speaking, it is a buyer's market in bonds because yields are very attractive, whether it be in investment
grade or high yield, as well as in treasures. I mean, we get two year and five year bonds being issued, you know, this week, and you're going to see a pretty decent amount of demand from investors because of the higher interest rates that you can and yield that you can pick up.
So I'm looking at a ten year like four point two four percent here. Are we going meaningfully higher here? Or can are Do you expect rates in the back half of this year to come down as we look at our yield curve, I.
Do expect rates to come down gradually during the course of this year. I think the tenure yields around four and a quarter percent is a buy. In my view, investors are going to be looking at you know, two years around four seventy five and tens around for twenty five as a buying opportunity. And every time you know, bonds sell off, I see the buye the dip mentality come in and put a cab on how high yields
can rise. So that's our base case, and I think we think teny yields will probably decline to around you know, three seventy five sometime in the middle of this year, and then perhaps start rising towards the end of the year.
Again, what does the tenure really you'ld do with a three seventy five nominal yield? You take the nominal yield, folks, you subtract out Sivadra's best guess on inflation, and that gives you the residualtion adjusted yield. What's that number? Can you get down to two point zero zero? One point zero zero?
So tenre yields around ten real yields I should say around two percent or higher is again a buying opportunity over the long run, because inflation expectations aren't really moving that much ten year break heavens have been anywhere between two and two and a half percent.
So you have a three seventy five nominal. Right, you just said that, where does the ten year real yield end?
It's going to probably be, you know, about two percent lower from there, given that low one.
Yeah, this is really important, Paul, because you say to yourself, how do you get a roaring twenties like your Denny's talking about. That's precisely how you get there.
Yep, absolutely, So what is my what is my feeder reserve doing here? With its balance sheet? Are they still tightening here? I don't hear as much about that these days.
So I think the.
Fed is going to want to continue to run off its balance sheet.
Is like sixty what is it, sixty billion a month or something?
Sixty billion? It's the runoffs are capped at sixty billion for treasuries, and I think that they're probably going to lower that cap sometime in the second half from sixty
billion to thirty billion. But I think that they're going to want to continue to run off the balance sheet for the remainder of the year, perhaps into the early part of twenty twenty five and That's really where we have a little bit of an outer consensus call because the FED, I believe, is going to try to reduce its balance sheet as it's cutting rates, which hasn't done in the past, because they want to right size the balance sheet and get that liquidity or the access liquidity
in the system out of the system as they're unwinding their balance sheet.
So, I mean, a lot of folks feel like the Federal Reserve is already late to the game here. They should have been cutting rates like now, because if you look at the real time data, inflation has in fact been beaten and they should be cutting rates now. Think what do you say to those folks.
The way I think the FED looks at the markets is holistically. Inflation is one piece of the puzzle. Yes, if you look at the three month and six month annualized rates and core PC it's around two percent. But growth has been extraordinarily resilient. They want to avoid what happened in the seventies and eighties where they cut rates
prematurely and they saw a resurgence in inflation. So the FED is very much focused on both the inflation dynamics as well as the growth dynamics, and as long as growth remains relatively strong, I think that they're going to hold out on cutting rights.
Yes, all right, Sabaja, thank you so much for joining Sabaja Djappa from Society General giving us our thoughts on the rate outlooking.
You take a look at the front pages around the world, a zillion stories. She was in here early. She got unked six fifty or something that at the newspaper's lease. So what do you got?
All right? The New York Times, this one really stood out to me.
So they are reporting that unused money in college saving accounts can now go toward your child's retirement. So this really stood out to me because there are parents out there who don't open the five twenty nine because they're worried that what if my child changes his mind, you know, he decides not to go to college. What if they choose a more affordable school and you're left with this
chunk of money. What if they get a scholarship and you're you're left with this chunk of money, what do you do without without getting the taxes taken out of it? Because you get that, you know, the taxes have to get taken out of it. So that's what they're saying. Sometimes you can pass it on to a sibling. For example, I'm doing that with my son. He decided to stop a little bit early, so that money is going.
To a sister. But some people don't hook up the siblings.
So this new rule, under a federal law, it allows up to thirty five thousand dollars in a five twenty nine account to be rolled over to a wroth retirement account for the beneficiary if certain conditions are met.
One of them.
Conditions it has to be have have been open for at least fifteen years that five twenty nine account. No contributions or earnings from the past five years can be transferred. I mean, there's a few other rules in there, but it's opening a new conversation.
You know what, the conversation. We don't have time for me to get up in a soapbox and go mental about this. This is the problem with Arisa beec in nineteen seventy four is the solution for legislators is complexity. It's simple. You put money aside for your kid, you're not going to use it, put it in the parent's retirement account. Because the parents can't afford to retire because they're raising the kids. That's a national issue that we have right now. Paul can help me here.
Yeah, that's the first thing I thought. I was like, Hey, if the kids aren't gonna use it, I'm taking it back.
Yeah, but I take it back after Now you got.
To okay, a rawth or whatever. But this Roger Ferguson is expert on this at TIA Craft, the former vice chairman. Make it simple, and I refuse to do that because you're afraid Paul Sweeny's gonna get away with murder.
Yes, all there is exactly next.
Okay, this is about the housing market.
So a lot of renters, what they're starting to do is they're realizing that they might not be able to buy a house. So what they're doing is they're saying, you know what, I'm gonna give up on my deposit and I'm gonna make this apartment for me. I'm gonna paint it, I'm gonna wallpaper it, I'm going to decorate it, I'm gonna pay pictures and you know, nail things in the wall, you know, and and forge over that deposit because they just realized that it's.
It's not going to be a reality for them. They're not gonna be able to get that house that they want.
Yeah, with interest rates where they are, I mean, you know, and there's just no housing stock for sale. So even if I wanted to go into something, there's there's not a lot out there.
I just looked in Skinny Atlas. We had Eric Friedman with us this morning, who lives in arguably the most beautiful town in all of New York State, and there's nothing for sale.
Now.
I mean I looked on really I looked on Zillo to talk to Eric about it, and there was no property to talk to him about, because literally, Paul, nothing's for sale.
Well, were open houses this week and the town I live in there were open houses this weekend and there were lines.
We had to wait because we're renting right now.
We're waiting, and there were lines on the door of these open houses.
So because there's whole few of them, Ye, it's it's true.
All right.
Let's say Apple they want to make more wearable devices to attract customers.
Okay, so here we go. What do we go? This is ay Mark German. Okay, he says wearable devices.
Okay, they want to you know, Apple wants to keep their Apple family. They want to keep people locked in there. So they're talking about a smart ring that could take health tracking features from the Apple Watch and apps, apps on the phone and phone calls and things like that. So the smart ring why people will like it is because sometimes you have the watch and you might not want all the additional things. You know, you might just want to know the health benefits, so you might not
want to watch. So maybe this ring could be something that.
You could use. No, okay, this one about this one Art glasses.
It's something similar to new products from Meta Amazon. They could provide audio so you don't have to do the air pods.
Which they don't say which does Yes, that's my biggest problem with them.
And they use AI cameras they can identify things around the world. So it's taking Apple that step closer to the reality spectacles that you can wear all day.
So that's another thing.
The regular glasses, not the Vision pro but the regular glasses.
Listen Mateo with our newspaper and report today. Thank you so much. This is a Bloomberg Surveillance podcast bringing you the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our global
headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and always I'm Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business App.
Hmm