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What a newslough. It's a perfect day to enjoy. Short thirty minutes, Two short thirty minutes with Abby Joseph Cohen. The office at Columbia Business School is five seventy four Cravis. When the students walk through the door, do they shake? They bow down?
You know, I have so much enjoyed working with the students, but also the faculty members. It's a pleasure to be working with a number of people whose names you would recognize, but also a lot of the up and comers.
Two years into the game, do the underlying theories that you owned and I was weaned on do they still work? De Sharp, does Fama of Chicago the other giants? Do those theories still work in this market?
This is a market clearly that is breaking a lot of rules. The question is do we get back to those rules? And as you know, my own personal rule of a TOM has always been that one must pay attention to things like valuation models based on fundamentals. But that doesn't mean that the market is always an equilibrium.
Damian's dying to get in here.
But let me make one other comment if I may, and that is we swing from one level of disequilibrium to another. So market cycles are typically going from undervaluation through fair value to overvaluation. And the question I think for today is as we swing back down, where do we stop?
Okay, I'm going to rip up the script here right now, and we got again. We've got abby for the entire half hour. Megdan Decaiah l Let's say, wrote a book in Fury out of their financial crisis. Golden Sach caused the financial crisis in case you didn't no on volacy in general equilibrium theory, and he said it's flawed, but it's the best tool we have, is our global vo and equilibrium in finance and an investment. Is it still in place?
It seems to me that it's always something we need to keep in mind. But I think that some of the best calls that get made by strategists, for example, is identifying the situations that keep you off of equilibrium number one, and number two identifying the catalysts that will
do that. So, for example, there have been many people talking about the peculiarity of the US equity market recently with the over concentration in a very small number of names, but The magic, of course, is identifying the catalyst that would move that away and also figuring out what the ultimate target might be. Doesn't mean you get there, but it gives you a sense of direction.
Abbie, you mentioned catalyst, and so that takes me to the concept of factor investing in equities. It's changed so very much. And I'm a big fan of g SAM. You know, Cliff Asness, this g SAM factor in disease, the long short value, the growth. But there's quality, there's low volatility, there's I mean, there's all these different factors that are driving equities. What beta regime are we in now and what beta regime do you think we're going into through the end of this year.
Well, that is a very good question and a highly technical one, but let me answer it in a somewhat different way, and that has to do with the level of concentration that we're seeing in markets and the focus that we have on indexation, both implicit and explicit, seems to me to be driving a lot of the very extraordinarily well developed quantitative models. It's just driving them in
the wrong direction. That doesn't mean they're wrong intermediate to long term, but it doesn't really help on a trading basis. And by the way, we have seen this before. Right years ago, there was something called the nifty fifty Ye no really, and many people listening to us may not remember that, or they may not have read about it, but there were fifty sauce stocks that dominated the markets decades ago, and basically the question was would it continue.
And many of the companies that were included in this, including IBM, if you did the extrapolation, they were going to be twenty to fifty percent of usgdpaid. Obviously, that is not sustainable. And then we have an even more extreme version of that now with a magnificent five, with a mag seven, depending upon which ones you like. And it is driven in large part by the self fulfilling prophecy of people using indexed approaches, particularly market cap indexed approaches.
And you guys have talked about this before, so I'm not going to belabor it to.
Me blaming Larry Fink and black Rot. Now, I'm not a concentration risk in the equity market.
I am focusing on the idea that everyone has been emphasizing relative performance of easy be the index and doing it on a very short term basis. And there are some great companies out there that have been facilitating that for investors who wanted to get it done because it's low cost and so on. And if you are a professional investor, many of them don't want to veer too far from the index because if you're wrong, better to be wrong with lots of companies, right, And.
The thing the behavioral component of that.
Absolutely, and one of the things that intrigues me, of course, are those people who are willing to kind of stick their necks out and say, you know, maybe the consensus will prove to be wrong. The problem this time around, of course, has been that the movement towards five or seven stocks, that level of concentration is really unparalleled.
I want to spend the entire next section on the concentration of the magazine of it. And there's a small shop downtown that put out a blistering essay about six days ago that will did you hire Jim Cavello, You're the one is a ear fault? I was. It's going to be great.
We're going to do that.
In the next section for Global Law Street, I want to talk about courage to be in the market and the word in this room that we get from many strategists as an abby Joseph Cohne word which is solid. And what you say is, if the American economy is solid and business is solid, you have to participate. Talk about the gloom crew that says go to cash.
That is a fascinating question, Tom, And it seems to me that we do have an economy right now that is extremely solid. We have never seen in recent decades as strong a labor market as we have now. Wages are rising at a rate that now exceeds inflation, which is hell helpful, particularly for middle income and lower middle income families that have been having trouble. We have enormously strong profits. Return on equity for the s and P five hundred is at an extremely high level. In fact,
it might be the highest ever. So things are in fact solid. What I worry about always is is that already priced into the market number one and number two, the policies that helped get us to this are they potentially in danger. So this is obviously a big political point in the United States right now. Policies may be changing, and among the things that I worry about, for example, would be a movement towards more significant tariffs, which are inflationary.
It damages not just the economies of our trading partners, but our economy as well. I worry about whether we would step away from some of the good long term policies implemented during the Biden administration to encourage long term investment in public infrastructure, in technology through the CHIPSAC basically making things here, and then of course the investments that are being made in alternative energy. One more point time, if I may, if we're looking at where there's a
shortage of something in this country, it's power. Right with all of the focus on technology, and clearly people are talking about it this morning with the outage. If we're going to be moving towards an even more tech concentrated economy, one that is using AI, cloud services and so on, we need a dependable grid. And one of the things under the legislation, bipartisan legislation that was passed over the last couple of years is a development of more power sources, including alternatives.
Ammy Joseph Cohen, a legend at Globen Sachs, is now a legend at the clou be A Business School. Her classes damian SS are so oversubscribed they're doing classes now a dinosaur barbecue over in a Hudson River. I mean, like push it right out of the school. Here's what everybody wants to know. This arguably is a conversation of twenty twenty four. Somebody really competent James Cavello, Georgetown Tuk
Gulben Sachs has said, we got a problem. We're going opposite of the way it worked at Intel and everywhere else. You have technology that comes in that's cheaper, that drives the dialogue forward. AI seems to be more expensive, polar, opposite of the norm we have lived. Is there substance there to James Cavello's questioning AI?
Yep. I think Jim is a very thoughtful guy who also has access to of information being pulled together by analysts. And what many have been hearing for the past six months in particular, has been that companies that have been investing heavily in AI are saying they're not yet seeing the return. Economists throughout the country are saying they're not really seeing the productivity enhancements yet from AI. Now, it could be that the analyses are looking at data in
a premature stage. Maybe things will improve, but clearly AI has been quite expensive. At this point, there was a race in many industries to take on as much AI investment as possible, and it might take a little while to digest.
Do you believe, I'm thinking of the railroads from eighteen eighty out to nineteen thirty nineteen forty, that you can partition parts of AI where there will be AI failures, but there will be AI successes, and we've already identified them, taking Nvidia as the trophy child time.
Your point is very well made. Clearly, the success thus far has been in those companies providing the infrastructure right, the ones who are providing the basic support for future investment in AI. Where we've not yet seen the full payback and maybe we won't in some companies has to do with the application of AI. We also need to train people, just the way everybody who's been trained in the Microsoft three sixty five products are feeling a little bit of pain today that worked out. Sure it'll be
straightened out. You know, people are not yet fully familiar with many of the AI product and I believe, based upon my background in computer science. I do have an undergraduate degree in computer science. It's ancient at this point talking about dinosaurs Fortram, Yes, for trends, Pascal Pascal and
cobol oh my gosh. But what I have seen over the years is that it takes a while for users to understand the capabilities of what they have, and I think that we're still in that gestation period for AI. What I also think, however, is that many investors in the market, because of this heavy concentration, perhaps became very enthusiastic a little bit too soon, and so we're going to need to see some digestion of that as well.
Abby. I have to ask you something that I know you're an expert about meme stocks, Robin Hood AMC, I mean game stop. I mean, did these names ever come up in your classrooms? I mean are students actually investing in or asking about them?
Students are asking about them, and the response is always one of momentum investing. And what we always do is to encourage students to think about the fundamentals. What's the business plan, what's the business model, what it does matter,
what do the financials look like? And if you can't make a case based on that, it's a only momentum And that to me, you know, in my history in the market, can take you only so far, but more importantly, only for so long, because at some point there's a catalyst that basically makes you stand up and say, emperor has no clothes.
Well, I mean, let's just talk about momentum as a factor, right, I mean, look back windows and all that. I mean, there's a lot of momentum based strategies, but you know, my understanding and I don't know if it works for equity certainly doesn't have facts. It's a volatility damp new you know, so when you used with other factors, it kind of does a little bit and it improves your risk of justiny return, your sharp ratio, as it were. Do you agree with that?
You know, momentum is something that you need to pay attention to. Part of my own fundamental analysis has always been flow of funds, because you need to say, okay, what will corporates be doing with their cash? What will individual investors, what will institutional investors be doing? And so on? And one of the things that distinguishes this period has been that those investors have all kind of coalesced around the same thing because many of them are using the
same benchmarks for performance. And that's one of the big differences this time around.
I'm going back in this insane period and it's someone abby you and I know well Michael Mobison now with a shingle out at Morgan Stanley. That's a firm across the street. Michael has been writing since nineteen ninety five brilliantly for the CFA Institute and others about the new capital allocation we're under and the traditional Graham Dot and hot Coddle capital intensive businesses have given way to an intellectually intensive, innovation intensive work that needs less capital and
provides greater return roic and greater and bigger cash. Do you buy the kool aid?
I buy that to a very large extent, because it also helps explain why the US economy and the US equity market has so dramatically outperformed economies and markets in other parts of the world.
Can we sustain that?
I think that there are very active decisions that have already been taken in other countries to try to catch up with us, and we're not keeping our eye on the ball sufficiently. So, for example, there are industrial policies that are underway in Asia and in Europe to try to catch up with the United States in this regard and I'm not a huge fan of industrial policies because mistakes can be made. But if you can provide a capital incentive for the right sort of investment, that that,
to me makes a great deal of sense. There's one other piece of this time that I think we need to touch on, and that is we are in a new era in which capital is no longer free. Paying for capital. Now, and when there was an environment in which it was free to borrow money, you can make all kinds of interesting decisions. Now you really have to sharpen the pencil in so many areas. And it's not just what companies are doing, and it's not just what
active investors are doing. It's also the use of leverage in many other investment vehicles.
Please visit with these when you stop giving out c's at Columbia Business School, Professor Joseph Cohen with us here on New on this Friday, of our politics, our markets, and the certitude of our technology. William Joel gets it done. Good morning,