Richard Bernstein on Quantitative Analysis

down guy with a strong quantity of background. If you're at all interested in thinking about asset allocation top down analysis, how to think about the world of investing, not as a stock picker, but as a broad macro perspective, none better than Rich Bernstein. I found this conversation to be fascinating, and I think you will also, with no further ado. RBA's Richard Bernstein. Let's start talking a little bit about

your career. You get a BA in economics from Hamilton's College, you get an NBA from NYU, You go to a few firms before you end up at Merrill Lynch in nineteen eighty eight, not too long after the crash. Correct tell us a little bit what mother Merrill was like in the late eighties. So Merrill was a fantastic place

to work. I had, as you pointed out, early in my career, I had bounced around a bunch of investment banks, and what I learned through time was it was important when I interviewed to interview the investment bank as it was for them to interview me. Each investment bank had a different corporate culture, and it was clear that some of them I liked and someone I didn't. And Merrill was just a fantastic corporate culture. It was Wall Street.

So I don't want to make it sound like we were all best buddies or anything, but it was a very collegial, a very success oriented culture. It was a great place to work. So what was your first job? That did you start as an analyst? So truth be told, Um, I actually lied about my age to get my first job, because because back then you could ask people how old they were, and I was twenty nine, and I knew that if I told people I was twenty nine, they

would think it was a kid. So I told him I was thirty, you know, the twenty nine ninety nine thing. So by the time I actually had the op, that's very fun. Yeah. And so by the time I got there, I was thirty. But to be honest, I mean, what is a twenty nine year old. No, but by the time you're thirty, you've got it all figured out exactly. That's what I figured. So, um, so I was hired to be, uh, the quantitative analyst. Um. This was in

the late eighties. Quantitative analysis was really starting to gain momentum, and everybody thought they needed a quant of one form or another. And I'm not sure Merril knew what a quant did back then, but they knew it was a slot that got voted on an institutional investor and they wanted an analyst to fill the slot. And I was probably the cheapest. And that's how I go empty seats at the table, all right, exactly. I don't know if we're gonna win, but let's at least get nominated. Exactly.

So you know, I figured I was there. But what was interesting and I think, you know, for anybody who's listening, who's who is starting as a young person in this industry, I think what I did learn was I took some of my experiences from business school in the business school case studies and there were a lot of very established senior analysts in Merrill, and the question was, how was I going to make an impact? Right, Who's going to

listen to the twenty nine thirty year old guy. When you've got guys that are, you know, fifty fifty five sixty men and women that are fifty fifty five sixty, have multiple cycles, tons of experience, some of the best in the industry, why would they listen to me? And so I quickly figured out I couldn't do what everybody else was doing. I had to find something different, and

I had to find a niche. And in the eighty nine nine recession, value managers did very, very poorly, and I just figured if I could help those value managers, it would solve a problem and it would create a need for my work. And that's how I started. All Right, so obvious question, it's nineteen ninety technology is about to explode. How do you help a value manager? Short of saying go by growth? Yes, Like, what do you do? Yeah?

So in what we did was we figured out the economic rational, the macroeconomic influences about why growth and value work at any point in time. And so even if value managers weren't going to outperform. They could explain to their investors what was going on and why value was out of favor, and they could point to our work as an independent source, not their own marketing people defending

their work. And so in the nineties, you know, the middle part of the nineties was kind of value orient did but you're right Berry, as we got to the late part of the nineties, nobody cared about value. That whole irrational exuberance era from ninety six, from the speech to two thousand that could be the best for you run in market history. It was crazy. It was It

was really crazy. And I think you know, the way you can tell whenies are expensive is by the investment banking activity, because nobody sells a company when it's cheap. Everybody wants to sell a company when they get a good valuation. And so the investment banking activity started to explode. It was like mushrooming, like crazy um and people couldn't get enough. And that was that was a pretty good

warning signed as to what we were adding for. So you start as the head of quant a department of one, how do you go from that to chief investment strategist? What is that career path like? So it was, it was.

It wasn't a straight line, I can assure you. Um, I went from being the quantitative analyst to being the manager of quantitative analysis, to being the quantitative strategists, to being the chief US strategist, to being the chief quantitative strategists, and and you know, each step along the way, same office,

same department, like they just changed the business card. Now. No, I actually fortunately I got I got more responsibility, bigger staff, and eventually a bigger office, yes, and everything that comes along with that. But but it took a while. That's a twenty year career, right, I mean, And as I said, Merril was a good place. If you worked hard and you did well, you were definitely rewarded at a place

like Meryl. So you're there for twenty years, from nineteen eighty eight to two thousand and nine, and you say, you know, I think now is the time to go hang my own shingle. Given this whole financial crisis we've just been through. What was that experience like launching a firm right into the teeth of that mess. Yeah, so you know, two thousand and nine, what had happened was I was very burnt out. I mean, being a cell side strategist is a very, very difficult job. You're on

the road a lot. I was on the road forty fifty sixty percent at the time, depending on what time of year was or something like that, all around the world. And you know, I actually remember when this kind of hit me. I was in Taiwan for like the you know, twentieth time or whatever it was, and a lot of my colleagues were going out and they said, do you want to come out with those like no, I'm just gonna watch TV. And then I'm watching TV and I realized,

I'm one of the greatest cities of the world. I'm in Taipei, and all I want to do is watch TV. There's something wrong with my life. And that's when it kind of hit that I need to do something else. And so the question was what was I going to do? And um, I just figured, man, let's see if this stuff I've been telling everybody to do for all these years, let's see if it actually works. And I figured, let's

let's start a firm. Now why why? Then? Well, I really thought, and I think some of my associates thought that two thousand and nine, was was a major market loan. We were going to enter one of the biggest bull markets of our careers, and we simply thought, if you're going to start a firm, now's the time. Now's the times. Absolutely, And how often in the US is down fifty six percent in equities not a good entry? Even twenty nine, Yeah, thirty two kind of you felt the pain, but still

anytimes was equities a cut in half? Not a bit entry? No, And people were were not only figuratively but literally under their desk in the fetal position. And when we started our firm, what was very interesting and really kind of confirmed what we were talking about was that people would refuse to invest with us because we were too bullish. Now, keep in mind, I know you and David Rosenberg as

the twin bears of the absolutely Right. Rosie, who's been on the show a couple of times and now runs Rosenberg Research, was the chief economist, you were the chief strategist, and in the mid two thousands, right, arguably a little early, but not that early. You guys were like uber bears, and you were wrong, wrong, and then wildly right. Ye. So um, it's funny to hear someone say that Rich Bartensting guy way too bullish. Yeah, it was. It was shocking.

I mean it was something I didn't expect. But people literally would not invest with us because we were too bullish. They wanted to hear a Bearer's story post tooth thousand and nine. They wanted to be cautious. And our marketing materials. If you go back and look at all our marketing materials from twenty nine, ten, eleven, twelve, you'll see little things about what we call fire extinguishers that we were

put in the portfolio. Things you could pull off the wall in case there was an emergency to put out the fire in the portfolio. And that was a that was a key part of our marketing back then. So were you when you launched the firm? Obviously it was macro focused. Also, how quantitative was it in twenty nine and ten? You're still bringing the same tools, the same philosophy along with correct So what we did the way our firm works is that we are very much active managers.

We don't know anything about coke versus PEPSI. That that that's you know, I don't want to lead anybody astray. Who's listening your top down macro nut bottom ups completely completely. We do no individual stock selection. When we form portfolios of individual stocks. We're always forming baskets of stocks. Think of it as that we're forming our own ETFs, so to speak. That's that's what we're doing. Um And so what we do is we combine line a process driven

macro assessment with quantitative portfolio formation. So we want to know what the risk is we're taking. You know, it's always good to say like, oh, you should go do this from a macro perspective. The question then is can you actually do it? And meaning can you express that investment thesis in a portfolio in a portfolio without taking ridiculous amounts of risk? And so what we do is we balance out those macro views with the risk assessment,

the quantitative assessment to form a realistic portfolio. And how has that been working out? Knock on wood, We've been doing okay. I think well. Twenty twenty two clearly was a macro investors paradise at least if you got it right. It's no fun when you're the macro tourist in the wrong place, but you're bringing a certain discipline and quantitative analysis. Tell us a little bit about and we'll talk in

depth more about your process. But it's late twenty one, SMP up twenty eight percent from the previous low, from the COVID low. In twenty twenty, I think the SMP gained sixty eight percent to finish the year, So up eighteen or nineteen percent for the year. You see those spectacular numbers. What does that do to your macro perspective heading into twenty twenty oh end? Inflation is ticked up through two percent in March and has begun to really

move higher in twenty one. Right, So what people forget is going into the into the pandemic, the US economy was actually starting to slow and slow pretty dramatically. Nobody remembers that anymore because the pandemic, but that was starting to happen, and so we you'l curve inverted. The curve inverted was some definite expectations of a recession. Profits were profits were slowing very dramatically. Employment growth was negative year on year. I mean, there were all these things were

starting to happen. So we were calming down the risk in our portfolios, becoming more and more defensive. Obviously, when the pandemic hit, we did very well, not that we saw the pandemic coming, but we saw the economy slowing, and so we ended up doing very well, a little bit of luck, I will readily admit on that one. Um. Then coming out of the pandemic, we were very defensively positioned and we weren't sure what was going to happen.

There's no playbook for a pandemic. You can't go back and say, like, what, how does the macroeconomy respond after a pandemic? There's no cycle. Nineteen eighteen wasn't a big hell no, no zero guidance. So so so we we just decided as a group, we said, look, if we're going to be wrong, what's going to benefit the most from that environment. What's one hundred and eighty degrees away from where we are positioned right now, Let's own some

of that in case we're completely wrong. One hundred eighty degrees away from what we were owning was energy to the right, and which had a fabulous fantast last year. I mean it was it was surprising given that oil was negative on that year, Yeah, which always shocks people. Yeah, it was it was you know, if you think about twenty one to twenty two, twenty one, well, at one point actually had a negative was priced with a negative

sign in front of it. I don't understand anything could be priced with a negative sign, but sure enough it did. And you know, some of the major oil companies had you know, eight and ten percent dividend yields and things like that. So we just figured, Okay, if we're gonna be wrong, let's not take a lot of risks. This seems like a good opportunity that's played out very well

over the last couple of years. But I think, um, you know, for us, twenty twenty one in general, was towards the end of the year got very hard, right. We had a big speculative burst in the marketplace. Um, you know, every it was all about tech innovation, disruption, cryptocurrencies. It couldn't be sexier, you know, that type of thing. And so that's not us. We're not momentum investors at all,

and so we lagged there. But then twenty twenty two, when the momentum faded as the FED was tightening and monetary conditions changed and profits began to slow, we did very well. So the question I have about that environment, you have all these conflicting crosscurrents happening. At the same time,

employment is strong but rates of going up. Margins are falling, but lots of companies seem to be able to pass along input costs to their end consumers, and the consumers had plenty of stimulus money in their wallets they continue to spend. As a macro strategist, how do you look at all these seemingly canceling sign waves to get to the signal amongst the noise. To paraphrase, absolutely your book.

So I think I think the first thing that one has to do in the current environment is understand that the central bankers in the nineteen seventies were not stupid, right. They were faced with varying pressures. They were they were vased with some of the conflicting data that you you're talking about, Barry, and obviously lots of politics involved as well. And I think the thing we all have to remember

is that fighting is not easy. There's this kind of notion that, Okay, the FED is raised rates, the worst is behind us, it's all over. Well, it'll be fine, we can go right back to where we were. History says that's not quite the way it works. And so I think in the current environment. You have to kind of understand that we're reliving the past to some extent,

and I'm not sure it's an evolution. I'm not sure we're any smarter than we were in the seventies that the same pressures and the same conflicts and all that kind of data are still there. So I think that, you know, our story has been that the FED will be tighter for longer than people think that it's this this tightening cycle is not going to end quickly and right now. I think the biggest thorn, which you point out, Berry, is the labor market. That is a huge thorn in

the FED side. You know, I think if we had said this to going into this, the Federal Reserve would raise interest rates four d seventy five basis points. What would happen to the demand for labor? We would all say it would fall over. Well, the demand for laborer has actually gotten marginally stronger. I mean, it's crazy to think that way, but that's kind of what's going on. So that is a big thorn in the side of

the FED. And I think that if you think about what it means to weaken the labor market and what that means from the political side. You can then start understanding the cross currents that are facing the FED right now, really interesting, Let's talk a little bit about that model

kind of similar to what you did at Meryl. Tell us about who you work with, who your clients are, right, So, our clients are financial advisors and institutions, as you point out, and the methodology that we use is very similar to what we originally constructed at Meryl. I mean, the original research was like the early nineteen nineties. We're now on sort of, you know, the fifth or six or seventh

generation of that original research. But you know, our goal, my goal always was as a researcher was to try and understand what the macro influences were on the stock market. You know, most people try to look at individual stocks and they try to figure out why company A is outperforming company B, and they forget about the macro influences. And so my job has always been to try and figure out what in the macro environment is causing things

to happen. And my attitude has always been if you can understand that and you can identify what the macro causes are, you can generally take advantage at in the marketplace. So you describe your firm's quantitative approach as really having three drivers, profits, liquidity, and sentiment. So let's talk about all three. Obviously profits very important to company valuation, growth, metrics, growth, all those sort of fun things. So I don't know how much detail we have to deal into profits. Let's

talk a little bit about liquidity and sentiment. What do you look at when you're looking at liquidity, So liquidity, Barry, we look at at liquidity can do in roughly forty or forty five different countries around the world. Obviously get more detail in the United States than you would in an emerging market, but we still look at about forty or forty five different countries. Liquidity is really necessary for

people to take risk. And so what you want you want to look at corporate profits because you want fundamentals to be improving, of course, but then you want to have liquidity so that people can take advantage of that of those improving fundamentals. And so what do we look at to gauge liquidity? What we look at central bank policies.

Of course, we look at slopes of yeld curves. We look at banks willingness to lend, because you remember central banks at least in true capitalist economies, moving not so much in a command economy. Even in a true capitalist economy, the central bank can only set the table, and they can't force banks to lend or stop lending. You know, we all hear about the lags of monetary policy. That's

one of the reasons why there are legs. So the FED could lower interest rates, it doesn't guarantee the banks are going to be willing to land at the moment they lower interest rates, or they can raise interest rates. It doesn't mean that banks are going to stop lending the second they raise interest rates. So we look at how banks erecting and bank the willingness of banks to

lend as well. So I have a vivid recollection. Back in the days when I was on a trading desk, M three would come out, money supply would come I don't even know if we report M three any it's two now, right, So they went to a I think it's M one, M two, M three, M three was the narrowest, the broadest, the broadest, the broadest, right, I didn't remember. But nobody talks about money supply anymore in

those terms. But that theoretically was liquidity, That would find its way into stock markets, do we When you talk about liquidity, how do you think about the dollar and the availability of sure free capital sure, so you know it's it's it's kind of interesting even relative to the last cycle where you know, money growth M two growth. Getting back to your question, before M two growth got up to about twenty seven twenty eight percent, which was

the highest in his story that we can find. Put it put the United States on par with Peru at the time, just to put it in proper perspective, and given that during the pandemic, not a lot of business was going on, so you had tons of liquidity going into the economy and really no place for it to go. So that means it's going to go to savings. If it's going to savings, where's it going to end up.

It's going to end up in the stock market. And I think that was one of the reasons why we saw the bull market um developed much more quickly than people thoughts through the pandemic. Post pandemic, YEA makes a lot of sense. And last is sentiment. So so there's always a challenge looking at sentiment because it's so noisy, except that extremes. How do you use sentiment in your

your spot on on that? And we tend to fade some of the more accepted sentiment indicators, the kind of short term you know, put call ratios, things like that, because call odd lots was a big deal years ago. I mean all these things, just m three odd lots

is like a great so. And the reason why is because exactly what you point out is that they're so volatile, and as an investor is opposed to a short term trader, it's questionable as to whether you get a consistent signal, so you can actually take an investment position in that. So we tend to look at sentiment a little more structurally by looking at at various measures that try to figure out how people are truly allocating their assets, not

trading their assets, but literally allocating their assets. The other thing we do bury is we group valuation as a sentiment indicator. So we do a lot of valuation work. And some people say, well, why do you consider a sentiment Well, you can't have an overvalued market that people hate, and you can't have an undervalued market to people. So valuation will reflect sentiment, and so we include valuation in

our sentiment work. So effectively, if you think about profits, liquidity, sentiment, and valuation, what we're looking for places where profitability and fundamentals are improving, there's liquidity to take advantage of it, and nobody cares, right, that's a pretty good combination. Or vice versa. Fundamentals are deteriorating, liquidity is drawing up and everybody loves it. That would be a warning sign. Huh, that's really that's really intriguing. Which raises the question which

is the harder environment to stand out from? I don't even want to ask which is more challenging, Which is it harder to draw a distinction in where rates are low, capitalist free in the market is screaming higher, or where inflation is up. Rates are going higher and people are a little bit of cautious, right, so you know, let's let's talk about it from an investment point of view,

in a marketing point of view for a second. From an investment point of view, the extremes are always very intriguing, right, And I think our firm is relatively indifferent whether it's we should be really bullish or really bearish, but they're they're both kind of a very interesting periods From a

marketing point of view. However, remember you you pointed out on the CEO and the CIO right, The EO within me doesn't like these extremes because the extremes are when a firm like ours looks really stupid and people think you know nothing. So it's a very difficult period for us to market, for us to have exactly right, and so that's when we rely more heavily on our investor relations people, on our marketing people all that because it's very important to be very transparent as to what you're

thinking and what you're doing. We don't expect everybody to agree with us all the time, but we want them to know what our thinking of is so that there's not a surprise. There's nothing like you know, they just don't know what they're doing. So tell us a little bit about the sweetest services our MBA offers. How do you work with advisors who say, hey, you know, I have good financial planning with my clients, but I don't want to run the portfolios. What can rich Bernstein do

for me exactly? Well, one of the one of the greatest things that we can do for financial advisor right now is free up their time line. There is an immense amount of pressure on financial advisors. Rightly or wrongly, I'm not passing judgment, but but there's a lot of pressure on financial advisors to grow assets, and so that makes it more difficult for them to manage portfolios like they used to. You know, it used to be that the financial advisor was also a portfolio manager. That's becoming

very difficult. The role that we play for a lot of financial advisors is that kind of portfolio manager, almost an outsourced CIO, if you will. I was about to say that, yes, and so we can we can play that role. Obviously there's going to be all kinds of specialists that are going to be in that portfolio as well, but we're kind of we played the role very often is kind of a core of a basic portfolio. So there's a phrase in your literature that kind of cracked

me up. Pactive management. Yes, what is that? Who came up with? It? Is a trademarked What is pactive? To me? It's passive active. Yeah, it is trademarked. It is trademarks. So don't get any bright ideas dot com to give that exactly. But pactive is for the active management of passive investments. You know, if you go back to you know, Jack Bogel and the whole idea, and I always to my career, I had tremendous respect for Jack, both as a businessman as an investor. And Jack's whole thing was

that you want to be a passive investor. Okay, we could argue whether that's right or wrong. But what Jack would never do, and what no true passive investor does is they never tell you what index to buy and when. And people can say, well, I should just hold an index fund for the long term. Well what's your definition

of the long term? Because there are times where if you make the wrong decision, and if you're in the wrong index at the wrong time, it can take you five, ten, fifteen in one case that we found seventeen years to break even. Is that, you know, isn't that an important decision?

So pactive investing is all about, yeah, look, maybe you want to be passive, but being passive is an active decision in and of itself, and that you have to decide what index to buy and when we think we're pretty good at that at the pactive side of investing. And I get the sense that you're an investor, not a trader, especially given you your recent research note earlier this year. Don't speculate on speculation, tell us, tell us

what that means. So it's it's really our view right now, Barry, that the market is in another speculative phase, that the rally so far this year has largely been in the speculative stocks of technology and worse the company was the better. Yeah, and I think of the Goldman basket of profitless stocks exact is one of the market lead right. And now you know, somebody could say, well, that's a that's a fundamentally based rotation, maybe from value to growth or or

to more economically sensitive companies. I get that, except for one thing. Cryptocurrencies are rough thirty to fifty percent. Yeah, where we are like twenty three twenty four on bitcoin, Yeah, from sixteen. That's a big move, it is. And now I may offend a lot of your listeners, but I

don't believe there is anything fundamental about cryptocurrencies. So when cryptocurrencies erupted so much at the same time that we're seeing tech and innovation and disruption and profitless stocks and meme stocks and everything go up at the same time, that says to me, this is a speculative environment. This

is not fundamentally driven. And I think what that is really relating to as people's hopes that inflation is going to subside very quickly, the FED will go back to a period of cheap and abundant liquidity, which is a cornerstone of speculative investment. Right. Unfortunately, transitory is taking a lot longer than expect it correct. Right, So, given that since you brought up the FED, how significant is the path of rate hikes, how high they go, how long

they stay that way relative to consensus expectations. Yeah, well, you know, I love Barry that everybody has like a terminal rate. They know exactly what it's going to be and when it's exactly I mean, like, I love the decision. I mean I wish I were that smart. I'm really not that smart, you know, But I think that what we're going to find is that that terminal rate will be higher, and it'll be farther around the future than people think right now. It's it's just very hard to

kill inflation in an economy. This is not. This inflation in our economy right now is not because of supply chain disruptions. That was an early story but that was the early story in the seventies too. We just didn't call them supply chain disruptions. We called them oil embargoes. But they were supply chain disruptions. So let me push

back on that. Okay, sure we have the oil embargo, and oil is the lifeblood of the economy, but dear lord, everybody is stuck at home for a year, right, You can't get paper towels, forget bleach or you know, lysol or anything like that. Semiconductors are shut. There's a shortage of homes, there's a shortage of people workers, there's a shortage of containers for container ships about even to move goods.

You know, when everybody stuck at home, we go from a service economy to a goods economy, and you can't ramp up goods when demand sturges twenty now, so you would expect some of this to legitimately be pandemic lockdown related. Absolutely the first year. What happens in the second year. So what happened in the seventies even was that it moved from oil and from the embargoes into the general

economy and then into wages. So a prominent economist recently about a year ago said to me that we don't have a wage and price spiral because wages aren't keeping up with prices. And my answer was, Okay, we don't have a wage and price spurrol. Maybe we have a price and wage spiral. I'm not sure which comes first, the chicken or the egg, the wager the price, and does it make any difference? And so I think that now we're in that wage portion where wages are starting

to catch up. I mean, I'm sure you saw today one of the airlines came out with a new agreement with their pilots for like seven big increase, seven and a half percent increase per year for the next four years. But to be fair, they had been cutting, freezing pilot wages absolutely. In fact, my big complaint about wages as a driver of inflation. Hey, where were you for the past thirty years, where at least the bottom half of

the wage pool was inflation? Absolutely, minimum wage legs everything from productivity to corporate profits to c suite to inflation. The minimum wage, if it kept up with anything, would be fourteen sixteen box something like that. Yeah, So so suddenly wages finally start to catch up. Oh my goodness, this is the end of the world, says the FED. We have to stop this. Yeah right. So so, first of all, let me you know a little known fact

about Rich Bernstein. I'm a two time union member. Not only have I had my entire career on Wall Street, but I'm a two time union member. Once worked for the International Chemical Workers Union and suing one I was. I was a maintenance in a pharmaceutical plant, right and and I also worked for the United Auto Workers. When I was on the adjunct faculty at NYU, we were represented by, of all things, the United Auto Workers. Of a two time union member, I believe me. I'm not

anti union. I'm not anything like that, I understand. I've always thought that unions were the comparable to like CEOs have lawyers and agents, and whose sports people have agents. For everyday folks, it is called the union, right, well, at least they used to. Unions are still. Even though people talk about the rise of Amazon this and yeah, union membership is a fraction of what year it's very

love ye, it's very long. Now it is creeping up because as we have a very tight labor market, power is starting to revert back to the workers in some respect. And I'm not. I'm not Carl Marks don almost understand the point here. I sent my entire career on Wall Street. But these are just some of the realities that are going on now in a tight labor market. Analysts of the world unite Street. I love that. But so let's let's stick with labor a little bit because it's kind

of interesting. Was having this conversation with David Kotok of Cumberland and he points out, you have the highest level of disability people leaving the workforcesibility over the past twenty years. Then you have all these people, you know, a million plus dying of COVID and another depending on which study you believe, ten fifteen twenty million people with long COVID immigration.

And as much as people blame Trump, it started before him and continued after legal immigration has continues to trend downwards. If we want there too, if we want to get um, if we want to get wages sort of under control in a way that works out, don't we need to bring a whole bunch more workers and absolute labor force. Absolutely? Why haven't. Now I'm going to ask you a policy question which is outside of your expertise. No, no, but why aren't we bringing in more skilled labor from outside

of the country. I think we actually have to. I think there's been part of the story of the US economy for decades and decades and decades, and I think we have to. But Barry, you bring up a very important point. When I talk about about the labor markets and the tightness of labor markets, people always want like one reason why it has happened. It's really a perfect storm of about four or five or six different things all coming together at the same time, and there's no

one reason. But the end result is that we do him. I would argue, the tightest labor market in our lifetimes. Isn't that always the case? Though people want Jacques one simple here's why everything is terrible. It's always so much more complicated, it's so much more nuanced, and that makes people unhappy when the answer to what appears to be a simple question is well, it's really complicated and here are the forty seven factors that but that's just reality.

That is that is reality. But I think that makes the fed's job very very difficult right now, because, as I said before, if you think about that, the FED is trying to curtail demand for labor. If they're trying to ease up the labor market. Politically, that's not very palatable. So let's talk a little bit about the challenges of being a top down macro investor in a very conflicted environment.

How dependent are you on what the FED says? What Jerome Powell questions get asked him at a conference, the random ways people seem to misinterpret it in the morning and then reverse it in the afternoon. How crazy is it operating like this? So, Barry, being a macro investor, one of the things that's important for us is that we are not event driven. We are certainly a macro firm. But as you point out, everybody wants to know, like what's the FED doing, what's happening today? That's not us,

And we are very very process driven. So very often I get calls from people that say, like, you know, what do you think of the FED? And my answer is I don't know, you know, And that's not satisfying yourself in DC right, right, you're supposed to have like a very sophisticated answer. And but for us, the problem is, and I think if you look at macro hedge funds and the lack of success of macro hedge funds. The

reason why is because everything has become an event. Everything is a hair on fire event these days, and it's hard to figure out what is true investment information and what is pure noise. And so what we've been arguing and what I argued through my entire career has been the way to sift out the true investment information is to stick to a hardcore process. No matter what happens, come hell or high water, do not deviate from that process.

And as we were talking about before, for us, it's profits, liquidity, sentiment evaluation. We never deviate from that. So, yes, we know what's going on, we know what the Fed's doing, we know what everything, and we're aware of that. But we stick to our process and we stick to our models and to our indicators to keep the hardcore process and not just flail around every five seconds. So, since we're talking about the FED and not giving a hot take,

let's take a longer term look at inflation. Where are we in the inflation cycle? Is it safe to say inflation peaked six or eight months ago already? Well, the answer I'm going to give you kind of the economist answer, On the one hand, yes, we have probably peaked in terms of the near term inflation. But on the other hand, and I think what's much more important for investors. I

think secular inflation has changed. I don't think we are going back to the period that we saw for the past, you know, thirty years or so, where we could always count on secular disinflation. I think that now the story is secular inflation. Now what does that mean right all of a sudden, you know, does that mean at six

eight percent? What does that mean? Well, most forecasts of secular inflation right now range between two and three percent, which makes a lot of sense because long term inflation in the United States is roughly two and a half. So you can see how the forecaster are there. So that means as an investor, you have to kind of take an over UNDERBD. Is it going to be less than two The lower end of that range were higher than three. Above the higher end of the range. Right

now the markets are making a huge bit. It's going to be sub two. In other words, going back to the period of cheap and abundant liquidity. Our story is three percent or more. That's it. We think that meaningfully changes the way people have to manage. So let's let's stay with that because that's so interesting. So, the key forces that were drivers of deflation in the eighties, nineties, two thousand, in the post Vulcar era was we had globalization,

so manufacturing went to wherever it was cheapest. We had software and automation and technology that made everything more productive. And then and then lastly, productivity across the board finally started showing up in the statistics after it famously was everywhere except in the data. Um, have any of those things really changed materially or have we just wrung out all of the deflationary forces from globalization, automation and productivity

that we can see in our lifetimes. So so Barry, I would argue that the number one factor that caused secular disinflation was globalization. That I would I would suggest it started with NAFTA in the early nineties. And what it did was it it consistently opened markets around the world, and what that meant was that we were consistently increasing

competition around the world. Right, Inflation, for all the fancy ways people think about it, I think it's very easy to think of inflation as when demands greater than supply. We know, prices go up when demands greater than supply for an extended period of time, we call that inflation. And what globalization did was it it increased the supply of suppliers. In other words, it increased competition. So the that's the old commodity trader joke. The cure for high

prices is high prices exactly. And so what happened was as you had more and more and more suppliers, greater and greater and greater competition, you had downward pressure m prices. Well, it looks like globalizations now starting to contract. This is not going to happen in five minutes or five months. It's five, ten, fifteen, twenty years. As was NAFTA a thirty year story or globalization a thirty year story, we're

now going back in the other way. Now, Look, it could be that we're all going to sit around a campfire and sing Kumbaya around the world, or like the old coke commercial where we're on a hill, you know, holding hands and teaching the world to sin. Exactly that that could happen. I'm skeptical that that's really going to say. So I'm glad you brought that up because I've heard this the end of globalization story, and it smells like a lot of a lot of political noise. All right,

we'll build a semiconductor plant in Arizona asutely. But the massive shift in global economy where manufacturing is done here and all these other countries are coming online, whether it was first was Japan, and was South Korea, now it's Vietnam and Turkey and Mexico and go around the world. Are we really going to meaningfully reverse that? Is globalization gonna shrink beyond low single digits? I don't think right

now we can see how that could happen. But again, I'm talking about, you know, a ten twenty thirty year phenomenon here. I think if we had said thirty years ago that globalization was going to cause the environment that we ended up with, people would have said you were nuts. Right in the in the early nineteen nineties, you know, Ross Perot was the one who was anti the great sucking sound, which which which turned out to be to some extent correct. But what he didn't allow for were

the benefits of the society, what globalization might do. Well, you you lost the you know, hosiery and furniture manufacturing and replaced it with software and quantitative an out correct exactly right. And and so our argument at our firm is that we're going to see a slow progression back in the other direction, what we keep calling a shift from cute wiener dogs in the metal to real productive assets.

That's not going to happen in two weeks, but we think that's going to happen over three years, five years, ten years, fifteen years. So so given where we are in the in the broad world, it seems like the stock market in twenty twenty three is hanging on every economic report, every CPI release, every non farm payrolls, every FOMC meaning like even when we get the FOMC notes, they're they're always a month old, and yet people wait

with bated breath. Yes, tell us what they were thinking a month ago, like like that really is going to move markets, but it certainly causes some volatility. Is there too much focus on these big macro events today? I'm not sure there's too much focus, but I think the minutia and the decimal point focus is not very healthy. You know, I think if you if you think about the the CPI report, that's you know the February CPI report that comes out in March. I think the consensus

is for something like point four for March. If you look at Bloomberg, I think that's the that's the consensus. And you know, which would be under a five handle annualized it which is not bad? Which is not it. But if it comes in at point five instead of point four, we know the markets are going down. If it comes into point three instead of point four, we know the markets are going up. Now, well, we in this phase where bad news is good news, because does

point three mean that the FED is done? And if the market rallies, hey hey, not so fast. It seems like every time the market rallies in anticipation of the FED ending their tightening regime, the FED says, slow your roll. Yeah, I think that's I think we're definitely in that kind of an environment. But the point that I was just trying to make was the descal point precision, which is so spurious if you think about it. The point three means everything's okay, and point five means it's the end

of the free world as we know it. That's very silly. And getting to your question, you know, what does this mean or people looking at this too too closely. I would say yes, I think that people should be taking a more longer term holistic view, which is kind of what we try to do with our firm. All right, So, given all the focus on the FED and last year we were talking about the end of Tina for a long time, you know, you yield getting no yield in bonds.

Now I think the what is it, six months, nine months, you're about five percent. You're really seeing some decent yield. How do you look at the world of bonds when, for the first time in a decade or longer, you're actually getting paid to lend Uncle Sam some money. Yeah, So, Barry, two things relative to that question. Number one is one has to remember that that's what the FETE is trying

to do by raising short term interest rates. They are trying to disintermediate the economy, get liquidity out of the economy, slow the economy, and of course you're going to put it in short term instruments. That's the whole point of monetary policy. And so people are saying, oh, short term rates are competitive again, Yeah, no kidding, that's what the FETE is Watch that happened, right, That's what they're trying

to do. Second thing is is that I think that if we're right and the secular inflation backdrop is changing, I think fixed income money management will change dramatically over the next five, ten, fifteen, twenty years. It's been meaning become a whole lot more attractive. It'll be a lot more difficult. Oh really, because look over the in our careers, it's been pretty easy to be a fixed income money manager. You could have been the worst fixed income money manager

and secular disinflation bailed you out. You could have been completely wrong, but you still made money for your client. Just just ride the wave from when Volker took rates to a million percent and it's been a forty year bullmarket wasn't eighty one to twenty one. Yeah, that's a good run. That is now. If we're right and the inflation backdrop is changing, it means that money management or fixing come money management doesn't have the wind that they're

back anymore. It means you're gonna have to be more tactical. You're gonna have to constantly change duration depending on what's going on with interest rate. You're gonna have to chang quality depending on what's going on with company fundamentals and earnings and things like that and fixing. Company managers have never had to be that nimble. You know, if you look at the data, they say, oh, well, we're active managers, but maybe they change duration from ninety two percent of

benchmark to ninety four percent of benchmark duration. Right, that's hardly being an active planager. A lot of active bond managers because there's so many more types of bonds than stocks, just don't own the worst half and your way ahead of everybody ahead. So let's let's talk about duration. If you shorten up your duration last year, you did okay, I'm getting into great in bonds, but you didn't do as bad as as the benchmark. They get into as poorly as the benchmark. So here we are, It's first

quarter of twenty twenty three. Where should our duration be set? With an inverted yield curve and a FED that keeps telling us, hey, guys, higher for longer, right, So Barry, we are bar build right now on the curve. We have very short term because the FED is raising rates, and as you pointed out before, you can get reasonable returns and the short reasonable yield at the short end

of the curve. But then we've also begun to extend duration because in every cycle the fed goes too far and the long end of the curve starts to starts to rally. I'm not going to tell you we're smart enough to pick that to the day, but we're at the point in the cycle where we think it pays to start extending duration because they are going to make

a mistake at some point. So when you say longer term, do you mean five to seven, you mean ten to twenty, where so we have nothing in the middle of the curve. The belly of the curve, we're very short term, let's say under two years, and then we're a ten years plus. Okay,

that's that's kind of how we're positioning. What's the ten year yielding when the six month is about four and a half five tenure right now is about three ninety four, Yeah, something like that, all right, So you're actually it's it always feels so weird to say, listen, I'll give you four percent if you tie your money for either six months or a decade, right, And that's just the nature of an inverted curve. And but the way we think

about it is not so much for the yield. We think it's total return investors, and maybe we're going to get that yield, But will we get you know, five or ten percent capital apprecation on top of that, that would be that makes for a pretty good total return. So let's talk a little bit about the current environment. I've been told the sixty forty portfolio is dead. Is that true? Or are we no longer looking at a balanced portfolio as a viable investment thesis, or have higher

rates resurrected sixty forty back from the dead. So, Barry, I think both the sixty and the forty, if you're just buying indicase, probably not a good idea over the next five to ten years. It's probably not a good deal. However, if you're actively managing within the sixty and you're actively managing within the forty, I think what you buy will

have a meaningful difference on performance. So I don't think the sixty forty is dead, but I do think the traditional passive sixty forty is going to have a very tough time. So let's stick with that. We have rates approach five percent from the FED, very different than where we were just two years ago, when we were at zero.

How does that impact your tactical allocation decisions if inflations continues moderating and rates stay high, what sectors look attractive to Yeah, so, Barry, you know, it's it's kind of funny. I think I mentioned this before. We're not really very bearish, but we're we don't like three sectors. We don't like US tech, we don't like US consumer discretionary, and we don't like US communications. We think those are the three

very speculative bubbles. And by the way, they dominate the US market even with their bear market, those three sectors is still about forty five of the US If you remove those three sectors that we think are very speculative, everything else is basically fair game. It's almost every other sector in the United States, and the menu of global opportunities is big two. Because the United States is very unique in that we are dominated by those three sectors.

Most other developed markets are not. So let's talk about that. Because the rest of the world has lagged the US markets for ten to fifteen years, it's the it could be the longest period of outperformance I think in market history. So when you look around the world, since you're active, not passive, what parts of the world do you look at? Are you looking at em or developed x US? And again, since you're not passive, what particular specific countries you find appeal.

So um, first, it's it's important to start this part of the conversation by saying that in twenty twenty two, seventy percent seven zero seventy percent of non US markets outperformed the United States in twenty twenty two, even even in US dollar terms. So the fact that most people aren't aware of that shows that investors have become a little geographically myopic. And and why did the country bias is absolutely huge, huge and but why did that happen?

It happened because what I said before, most other markets aren't domin needed by those three sectors that were dominated by the United States Tech, consumer, discretionary, and communications. So you actually had in twenty twenty two was a global sector event, not a country event. And one of the things that we try to do is we look at size and style and industries and sectors not only in

the United States but around the world. But most investors think of global investing is what country do I invest in? Not as they were a global sector event or global style event going on, and I think twenty twenty two was very much a global sector event. So let's talk about a specific sector. Since the financial crisis and only eight o nine since you launched rich Bernstein Associates, finance really hasn't been much to write home about. Right. It's

been a giant laggard. When does the financial sector start to see a little love from investors? Right? So there's a confounding issue with the financial sector, namely the financial crisis and the increased regulation that which kind of threw them off for a loop and really constrain their business activity. I mean, one of the reasons that today the financial sector is so healthy is because of all that regulation.

But you had to give up all the growth that maybe we're going to get from all the leverage and everything else. But to be fair, not blowing up and destroying the world economy. That's a fair trade. You're healthy and you're still around, but you're only growing at five percent instead of ten percent. Seems like a reasonable trade

off exactly. So let's let's just remove that from the discussion. Historically, if you take out that period, you'll find that the yel curve is a pretty good representation of when you want to buy financials and when you don't, and when you have a steeper Yeel curve, it says that net lending margins are going to be higher, deposits are cheaper than lending. What you're getting on the loans, the interest rate you're getting on the loans, and so your profitability

goes up. And when the curve inverts, not only is it a signal of a recession, but the inverted curve itself starts shutting down the economy. Because the deposit rate is higher than the lending rate, nobody wants to lend. And so what we've got right now is an inverted Yeel curve. Historically not a great time to overweight financial stocks. It's too early till we have a steep garve. Correctly,

we've seen some of the utilities and defensives underperformed. Yes, Also now some people have argued, hey, that's suggesting the worst of the economic slowdown is behind us. How do you look at these different sectors as a foretelling of what might happen in the next quarter or two. Right, So, we talked about early on about the importance of corporate profits and the profits cycle and what we tend to do in our firm is look a little bit more

and profit cycles as opposed to economic cycles. In the United States, we could argue, whether we're going to an economic recession, we are definitely falling into a profit's recession, despite twenty twenty two having profits hold up shockingly well, considermendously that was going on tremendously well. But now those hard comparisons, everything are coming home to roosts, increasing labor costs,

everything that we've been a base exactly. And so when you're going to a profit's recession, and what tends to work defensive type sector is because there's kind of this ridiculously obvious statement that we're going to make, but people forget it. The cycle, by definition, is determined by cyclicals. And so when you're in a cyclical when you're in a cyclical downturn, you don't want to hold cyclical stocks.

When you're in a cyclical upturn, you do. And and so we're in a position right now we think we're entering a profit recession, which would be a cyclical downturn. You want to be very careful about the cyclicals that you hold. So the profit recession in a cyclical downturn. Everybody's been focused on the landing. Is it a soft landing, is it a hard landing? Towards than Slock of Apollo has been talking about a no landing um at Thanksgiving.

The question is, hey, we can have a recession or not, right, So how do you look at that? Or you less concerned with the economic recession and more focused on the earning side. Well, we are more focused on the earnings. But to the point about about the landing, I think we're circling the airport. I don't think we're landing yet. And I don't think it's right to say there won't be a landing, because I don't think the fit can

effectively fight inflation without some kind of landing. Whether it's hard or soft, to some extent in artwork, it doesn't matter. You're gonna have the same defensive strategy for a landing. It's just a question whether it's a single, a double, a triple, a homer, or grand slam as to how successful it's going to be. But you're not really going to change We're not going to change our portfolios depending on the type of landing. Really interesting, I got a

curveball question for you. You have two books which we haven't talked about, Style Investing Unique Inside into Equity Management. The second one I love the title, Navigate the Noise, Investing in the New Age of Hype and media, media and Hype. You donate the profits from both of those books to charity. Tell us where those profits go and

what motivated that decision. So I don't want to make it sound like they've been hugely profitable millions millions of exactly so, but with out as a realization, the profits have long gone. They're very small now because the books have been around for a long time. But originally they went to Doctors Without Borders. Oh that's nice. Yeah, that was the that was the chests really interesting. What led

you to choose that particular chance. Well, if you think the first book was written in two thousand, I think it was in nineteen ninety nine, Doctors Without Borders won the Nobel Priests product. That's right, and so I, um, they've always I've always had a place on my heart for that organization because one of my when I was a kid, my childhood doctor took a month off to go ten to earthquake victims in Nicaragua. Wow. And I thought that was so cool, right, not golf on Wednesday,

Not golf on Wednesday. He actually went to help people, and so that just stayed with me, and so my wife and I have consistently donated to that charity. So before we get to our favorite questions, I have a couple of other things I have to throw at you. First.

You could be barish but still have a ten percent return target for the SMP five hundred every year discuss you could be bears but have a ten percent Well, you know, it's kind of funny when obviously at Merrill people wh would always ask me from my expected returns and everything on the markets, and I would always say eight to ten percent because that's what the market did over the long term, but in any one year it

never actually did eight to ten percent. So I used to just throw that out and people would be satisfied, I think, despite your reputation as a perma bear. Yeah, yeah, yeah, perma bear, eight to ten percent always, I always said eight to ten percent. And because the odds are look, the market goes up about two thirds to three quarters of the time historically, so you know, you really don't want to be a perma bear. That doesn't really pay.

But but you know, I think we don't have to realize the probability of a hitting eight to ten percent in one year is probably pretty low. This is one of my favorite questions. When the firm wide cell side indicator turns positive, it's preferable to leave the firm and start your own shop. Then go on the call and tell everybody about the cell side indicator. Tell us about that. By the way, I have great research. I was gonna say that's a good one. I'd like to know worry,

but but no, I mean it. The sell side indicator to which you refer really is a gauge of Wall Street bullish embarrash. And what it's always shown is that when Wall Street doesn't like equities, it's a great time to buy equities. And you know, I describe it as people being under their desk in the fetal position. In two thousand and nine, I really thought we had hid an ultimate under your desk in the fetal position, and there was probably a good time to start a firm

generational load, to say the least. And finally, our last question, and this will be the big reveal on Wall Street, a midlife crisis doesn't have to involve a ferrarian hair plugs, A mini cooper, a leather, rubber and metal man bracelet will do just fine. Does that Does that sound remotely familiar? I'm not quite sure about all of that. Sevita Subramanian's farewell speech to you when you left the firms and

thanks to her Frankel first scaring that up. But a midlife prisis doesn't always have to involve a ferrarian hair plugs. Sounds like a good approach to life. Yeah, that was not me, as you can tell with people on the radio can't see me. But I am as bald as could be. And this has kind of been your look for a long time. It has been. It has not like that's why you look timeless. Like the first time I met you, I don't think you look very different

than you do today. Um well, thank you for saying that. I think I probably do look a little different, right because I'm twenty years older or whatever. But um, yeah, you know, I mean I kind of go through My attitude is being um, just go with the flow. That's a good attitude. When when markets do what they do, that means you're not finding the tape, You're not finding the fed You're letting Price tell you, Hey, here's what's happening. Yeah, exactly.

So I got some of those questions from ten lessons learned over twenty years. That was Savida's farewell speech at your exit. A few weeks ago, we had Neil dutta On who worked under David Rosenberg. You and Rosie were like, you know, the fearsome tusome. What was it like the two of you working with the reputation you guys had constantly on the All Star team, constantly described as bears, but you were fairly constructive and useful to your clients.

It wasn't like you would just sell everything. What was it like working with Rosie back then? Well, I think we had a blast. I mean we were traveling all over the world together. It was it was fantastic. But I think, you know, our bearish views, especially when markets get very heady. It's a testament to Merrill that they allowed us to say what we really thought we were going to say and not trying to muzzle us to do better, to do more business. I think that was

really testament to them. And I can't tell you how much both Rosie and I appreciated that. Really interesting. All right, so let's jump to our f questions that we ask all our guests, starting with tell us, what kept you entertained during lockdown? What were you streaming? What was I streaming? Well? What are you streaming now? When am I streaming? Now? Right now? I'm streaming Fauda, the Netflix Oh my God

series about the Palestinians and Israelis. It's I have to say, we have a rule in my house we will not start that after nine o'clock because it's so gripping. You just won't go to sleep. You won't go to sleep right in heartoun it is fantastic. I mean we my wife and I are just about the finished series season two, but fantastic. The acting, everything is just wonderful and heart wrenching and you never figured thrilling, frightening. It's just like, oh my god, it's just you can't look away. No,

it's amazing. Let's talk about mentors. Who was helped guide your career over the years. Ah, that's a that's an interesting question. Well, first and foremost, I would have to point to Chuck Klowd. Chuck was the chief investment strategist who at Merrill who fired me at Merrill, and he gave me two good lines of advice, which I once asked, Chuck if you remember he said this, and he did not. But line one was I went to him like my first day at Merrill, and I said, what do you

think I should do? And he said, I don't really care, just don't make a fool of yourself. That was number one. And number two, the best line anybody's ever said to me is make sure you're a star and not a Roman candle. Fantastic line. Fantastic line. And I have lived my entire career thinking there's a big difference between being a star and being a Roman candle. Really interesting. Let's talk about books. What are some of your favorites and what are you reading right now? What am I read?

I don't even know the title of the book I'm reading right now. I hate to say that, but it's I always love spy espionage, Cold War spy espionage, and I'm reading one right now, which is a true story about one of the heads of the KGB that they turned and became an informant for him. I six, huh, that's really interesting. So last two questions, what sort of advice would you give to a recent college grad who

was interested in a career in finance or asset manage. Oh. I actually speak to a lot of college grads and the one thing I always tell them is keep a very open mind about what you want to do. When you're graduating college. You really don't understand what the financial sector is all about. You don't understand what Wall Street's all about as much as you might think you do. And don't put on blinders and say this is what

I'm going to do. Wall Street changes so dramatically. You don't want to be caught saying this is what I'm going to do and then whatever you want it to do becomes obsolete. Be very flexible. As I said before, go with the flow. There's many different things in finance that people never consider. And our final question, what do you know about the world of investing today? You wish you knew forty years so years ago when you were first starting out. Oh, just the experience of living through cycles.

I mean, you know you can't you can't back in time. There's no way to replace this, but living through cycles, remembering, keeping notes, living history, I think is very very important if you're going to be a true investor. If you're going to be a market observer or anything like that is living history. Realize you're living history and don't forget it. Really interesting. Thanks rich for being so generous with your time. We have been speaking with rich Bernstein, CEO and CIO

of Richard Bernstein Associates. If you enjoy this conversation, well, I'll be sure and check out the previous four hundred and sixty seven we've done over the past eight or nine years. You can find those at iTunes, Spotify, YouTube, wherever you find your favorite podcasts. Check out my daily

reading list at Ridhaltz dot com. Follow me on Twitter at Ridholtz, follow all of the Bloomberg podcasts at podcast I would be remiss if I did not thank the crack team that helps put these conversations together each week. My audio engineers were Justin Milner and Robert bragg Atico. Val Bron is our project manager. John Russo is my head of research. Paris Wold is my producer. I'm Barry Ratults. You've been listening to Masters in Business on Bloomberg Radio