How All Financial Markets Turned Into The Same Big Trade

closely they've tracked each other this year. Yeah. You know, I have a history of finding spurious correlations between cryptocurrency and other assets, the most famous one being bitcoin and avocados. But I have to say, the Tesla versus Ethereum chart, I'm not sure it's actually that spurious a correlation. I think there's something there. Yeah, I mean I do too, And I was exactly gonna say, I think the uh, the infamous bitcoin price of bitcoin versus the price of

avocado's one, that one was probably spurious. But I actually think that when you look at something like Tesla and ethereum, it's not as spurious as as that one was, or maybe people think. And in fact, there are like a lot of charts that all kind of look like that these days, even though they seem to be in very different asset classes and with different fundamental theoretical drivers. Yeah.

I think you tweeted one recently as well, which was wasn't it lumber versus uh, crypto of some sort versus tesla as well, and it was all moving in the same direction. Yeah, there's a good bunch. So it's a gold and tesla and lumber and cryptocurrencies and just like a bunch of other stuff. Basically, all these charts sort of look the same these days. It's very strange, and a lot of people have been saying this, but it feels like everything is sort of all one trade right now. Yeah.

And I think this gets to some of the frustration in the market currently, which is that the same things keep increasing in value, notably the TEX stocks, and lots of people think that that shouldn't be happening, that that's irrational, that at some point the price movement should become self limiting, i e. The stocks themselves should become too expensive, and yet they just never seem to People just keep buying and buying and buying and pushing up the valuation. Yeah.

And I think the other weird thing is is that like you know, you look at say like tech stocks flying to the moon, and it's like, this is what people would call like risk on right, So people are like, this usually is associated with you know, when you see valuations go up and you see stocks go up, one typically associates that with boom times. But the weird thing is also the simultaneous rarely and assets that one doesn't

associate with boom times. So gold obviously has had an incredible year, it's come off the boil a little bit lately. Treasuries have had an incredible year, although they're sort of like backed down because rates are at long end treasuries or zero. So you have this simultaneous boom not just in risky assets with different fundamental drivers, but also weird like booming safe haven assets and risk assets at the

same time. And I think that's the part that really sort of throws people a look like gold and Tesla

both looking the same. It's strange. Yeah, it's strange. Although I have a feeling that a lot of people would point out the role of central banks in this and the flooding of liquidity and the idea that money has to work its way into some sort of asset, whether it's the traditional safe haven or something like a tech stalk, And of course some people are calling tech stalks safe havens now, which is kind of crazy, um compared to ten years ago. But anyway, Um, Yes, it's a big

theme in the market and I'm looking forward to this discussion. Great, So we are going to be talking about how everything has just become one big trade. Our guest this week is really brilliant guy. I've loved reading this stuff for a long time, Jared Woodard. He is the head of the Research Investment Committee at Bank of America, and he recently wrote a note exactly on this the all one trade and nous of the market. So, Jared, thanks so much for joining us. Yeah, I'm really glad to be

with both of you. Thanks so much for having me. So it's not just our illusion, right, I mean, it really does seem like everything is kind of the same right now? Is there a Is that true? Is there an easy way to sort of demonstrated quantitatively that it is all the same right now? It's not just sort of us playing tricks with terminal charge. Look, I do

the same tricky charts and excel. So I think you can choose your software and uh and and and make some pretty bold claims, but I think there is some underlying truth to it, and there is a simple explanation. UM, this is a world in which to two big features that have been with us for some time, name really really scarce sources of growth, especially sources of profit growth UM. Combine with the world of ample liquidity as you mentioned, and when quinnings growth is scarce but there's lots of

liquidity slashing around. The investors will, you know, kind of do two things we know from the last ten to twenty years. You know. The first thing they'll do is they'll build up the price of those assets that can produce you know, some cash flows and profits in the world with where those are incredibly scarce. UM, they'll build those up to the very expensive levels as you mentioned

with tech, and there's lots of other examples. The other thing that they'll do is they'll buy things that basically function like call options in a way, even though they're not derivatives that you know, the assets that maybe don't do anything right now but might do something really big in the future. UM. Cryptocurrencies might be a good example of that, you know, esoteric commodities linked to new products, new sources of energy UM, you know, futuristic technology, UM.

Any kind of asset that that might really explode in value is some future scenario the world, even if it's not giving you a cash flow today, you know, may become worth quite a lot, and so we're worth buying today point liquidity example. And you know there's really no alternatives in in conventional UM investment, uh, you know assets. So so you know, fixed income for example, you have treasury yields at record lows, UM, corporate bond yields incredibly low.

There's relatively scarce places to generate those kinds of returns. And so what we find our investors forming portfolios that are kind of a barbell of the tech and maybe health care, maybe consumative discretionary stocks that can still grow their earnings in a reliable way, UM scarce as they are a little bit up those on the one side

of the portfolio. And then the other side is kind of your your liquidity trade UH slightly more speculative part where you you know, buy something that might generate some outside return someday as long as it's not too expensive

to own today. And you know that at the underlying dynamic here is one in which there's an actually reasonable econom rationale I think, I mean, just as as as corporate profit growth is scarce, we know economic growth is scarce, and so you're starting to see I think the kind of inequality on Wall Street that that we've seen on

Main Street for a very long time. Everyone knows about, you know, all those eye popping you know, uh statistics about the relative you know, size of income and wealth controlled by you know, vast numbers of people on the world relative to the handful of very wealthy folks who control quite a lot more. And so um, if you think about that, I mean, one of my favorite statistics on this measure is or in casts cost of thriving

in deck. So he if you go back to I think you know, the average worker making you know, median salary um, it might take them. I think it was something like twenty maybe twenty five weeks out of the year um to to earn enough money to pay for the big fixed costs that you have to have for sort of a comfortable you know, middle class life, a house, to car, education, healthcare, housing. So you fast forward to today and I think it takes like fifty three weeks out of a fifty two week year to pay for

those same fixed costs. So the bottom line is, even if people can kind of get by, they certainly can't thrive. They certainly can't spend on things they like to spend because they there their income, so much of their income

is consumed by the necessities. And and whatever your your politics are around that, I think the bottom line is that for a country like the United States and which consumption is GDP, we can't ever expect to have a breakout economic growth in an economy in which most people simply don't have enough income to spend on discretionary you know, disposable kind of items. Well, that's that's a familiar story. Which I think less familiar, perhaps is is the inequality

that you're seeing that manifest on Wall Street. Where you can look at the broad measures of corporate profitability across the United States, the National Income Product Account and Input measure is a popular one where if you look at that measure across all of corporate America, even including small medium businesses, profits haven't actually really grown in dollar terms

since about two thousand and fourteen. I mean, if you found you know, obviously excluding the pandemic and the and the collapse and profits then, But if you go back to the start of before profits really took a nose dive,

corporate profits at flatline for for many years. Contrast that with the SMP five hundred large cap, the really big winners, where profit growth has been continuing to explode, you know, upside lead primarily by the six or seven big tech and and sort of consumer stocks that we can all think about. Well, that kind of inequality on on Wall Street, where just a handful of firms were able to generate the lion's share both of profits and of of market returns um is I think exactly the kind of damic

you've seen across the real economy. That's what drives people into these crowded trades. The intuition that we all have is this is incredibly extreme. You know, this can't continue forever, This won't end well, et cetera. The problem is that if you bet against that trend, you've you've gotten burned, I think, for for quite quite a long time. And so the next question that we always get asked is

what would cause reversal, what would cause it change? Yeah, I think that's the big question, and we're definitely going to return to that topic, But just before we do, one thing I was wondering is, given this backdrop of slow economic growth and abundance of liquidity, how much does price of financial assets actually play into all of this?

And I know it sounds weird, but one thing I often think about is if you can't make money through UM cash flow of companies because there's sluggish economic growth, then one way to actually make money is through asset price. Asset prices going up, So it's kind of flows following flows, right, You're trying to target the thing where a lot of money is flowing into on the hopes that that's going to force the price up. And that's basically another way

of monetizing. Is that something that you observe as well in the current UM and vironament, Well, we definitely see, you know, periods of speculative flows kind of and price bubbles UM, which is maybe the natural outcome of this kind of environment. UM. A lot of work done this year, I think, for example, on flows among individual investors, especially you know, younger and more tech savvy UM investors trading

in different ways, trading different kinds of assets. I'm not sure how much those moves the needle and in overall dollar terms relative to the size of the market. But um, whether it's in the options market or in or in uh, you know, just cash equities. UM. You've certainly seen some of those big speculative flows. And I know that if you look at a very simple measure, something like the the price of the SMP five relative to its it's

two moving average. In recent weeks, that just that simple ratio I think reached the highest level since since two

thousand and nine. UM, as we had this incredible rally fueled by the sense from at least some investor there's that you know, markets are only gonna go up for quite a while and UM, and when that gets reinforced by that ample liquidity by um obviously incredible fiscal support this year, it's a great recipe for speculative upside bubbles that the then get popped and UM, you know, assets be distributed, perhaps in the steady your hands kind of

the classic old story. What doesn't change are the economic fundamentals and the scarcity of that underlying growth. I'm gonna I really like the way you sort of characterized earlier the sort of some of these speculative assets, like a lot of popular tech stocks is sort of being like

a call option on some future outcome. And so you see incredible valuations per se cloud computing stocks how much or say Tesla, which maybe one day we'll have an autonomous electric vehicle on Mars or something like that, and somehow they'll make a ton of money on that. I'm curious, Like, one of the things is this art of idea of the blooding of liquidity, the collapse and real interest rates.

Real interest rates are extreally negative? How much? That's really the part of the story, because if you talk to cloud investors are like, oh, yeah, all these businesses are going to the cloud. Uh. If you talk to auto investors like all these business all these cars or whatever. Like.

People have their individual stories, but how much is it is simply that when real interest rates are negative, people can afford to wait because they're not really losing any money in the short term by waiting for those profits that they expect to come rolling into the Ye. Look, I think I think it's it's It's certainly true that each individual industry has its own idios and credit drivers. But what gets people to invest and what motivates those flows,

I think absolutely is is the broader macro story. Yeah, just to the overall value versus growth debate, I think captures is really well. UM. You know, we we published recently, you know on the fact that value versus growth over the past ten years is just you know, UM endured its worst period of returns in history, worse than the dot com bubble. Yeah, that was a great chart, you guys, public.

Thank you. The bottom line is that is that when when growth is scarce, uh, you know, growth stocks outperform. It's it's really simple, but you know, we tried to get a little bit deeper. If you look at the just to to sort of explain the that ratio value versus growth. We found that you could you could explain about eight percent of the variance with with just three variables.

It was interest rates, inflation, you know, expectations inflation, compensation and in the business cycle proxy by purchasing manager indexes. So those are three really common varables everybody looks at and they can help for a value percent of the variants. What that tells us is that for value to UM recover the losses this year relative to growth stocks, you'd have to see the ten year treasury yield rise from I think like six six percent today to one point

eight percent. You have to see five year forward inflation, you know, expectations rise to two and a half percent and keep p M I is very stable and expansion territory. So that's a really big recipe. Uh, you know, a really big bill to to fill and uh and one reason why we think growth stocks can continue. Um. So it's absolutely I think a function of you know, very low expectations out into the future for growth and for

inflation and driving a lot of those flows. You saw some great evidence of this, by the way, very recently when the FED shifted it's it's inflation framework and in the chair, it basically made it very clear that we're gonna allow inflation to overshoot for some amount of time.

On those days and and the sessions and market thereafter, there was I think that you know, pretty clear rotation out of some of those tech and other kind of growth names into things like financials and energy, precisely because I think investors realized that in terms of these longer dated you know, discounting cash flows back to the present at some point in the business cycle, if we do get to meaningful wage growth in particular, again, you know,

the FED might really will be more tolerant. It's really remarkable if you look at a chart, for example, of wages and and just the FED funds rate. However, the past three or four cycles, that has always hiked interest rates just when you know, the lowest income parts of the labor market really start to enjoy, you know, some of that juicy upside, and then they cut it off and you get a recession. You know shortly thereafter. It's

always happened in the past. What a coincidence? Yeah, right, And so you know that's always happened in the past. It's always it's always bad news for growth. You know. Although I'm I'm I'm not quite the sort of perennial optimists like some folks are about the FED. You know, it does seem that if the FED is able to make and meet this commitment, that if we do get in the next business cycle, you know, we start to

see wages rise really meaningfully. If the FED does sit on its hands and say, look, when I let this continue, um, it actually could mean at that future date, who knows how long it takes to get there, and it could mean some more meaningful upside. I think for the economy and for inflation, investors are going to price that in.

It doesn't mean a radical, permanent shift now, but it does mean that I think that the distribution of returns can tilt a little bit more in favor of value, you know, in that sort of right hand tail future state of the world. Yeah, it could actually be different this time, or at least the FED spramework is different.

So you already touched on this a little bit. But when it comes to something like the text stocks or you know, the typical things that people like to say are in bubble territory, what will be the thing that sparks the big reversal You just mentioned inflation and the return of some wage growth potentially and maybe the FED being more patient than it used to be. Um when it comes to that, But is there anything else that

you see that could sort of spark that big repositioning. Well, there's there's one sort of markets related catalyst that could happen anytime, and then there's a policy related catalysts that

that I think we could look for as well. The markets one is I mean, you know, I wonder whether this sort of value under performance, for example, or or just the kind of returns we've seen lately cause investors to to look at their accounting again and think twice about the way that they are interpreting understanding corporate actions and businesses. If you think about a conventional value in the actual price to book sort of a ratio, But what goes into that book value, it's it's it's assets,

my salabilities. But the assets that typically are included are are mostly just tangible assets. Um. We saw one estimate from a third party uh claiming that in SMP five companies, intangible assets actually account for eighty four percent of their other total assets. Now, I think that knows a little

bit high. It just sounds high to me. But but even if you think it's only you know, fifty or sixty, I mean it's a it's a huge amount of work that's not being accounted for in a lot of convention in all models, things like patterns, the output of R and D, the training that goes into a workforce, customer loyalty, brand value, whatever that's worth. I mean, these things aren't worth zero dollars. It should be included. And if you

if you do include them. There's some academic research and some independent work that our team has done suggesting that if you include intangible assets and the formula for companies book value, you can improve the returns to a value strategy by you know, more than three percentage points a year versus a conventional benchmark. And that's a pretty meaningful,

uh you know, meaningful result. If you throw in a couple other tricks, things like a quality filter, a small cap value byas rather than large cap, you can boost returns by another two to three percentage points. Altogether some

pretty meaningful performance. And I wouldn't be surprised to see investors start to rethink their models of how companies are built and what they what they look like in the future in a way that could shift some flows in the meaningful direction towards companies that we don't typically think of as you know, as you stocked. We think about the winners and losers in this market. We've mentioned tach a lot, and and maybe it would include healthcare and

some consumer discretionary as the big growth sectors. I think that's been true historically and the same by the same token, our work shows that value index is traditionally have been really overweighted into in financials, um and energy. But if you start to include intangible assets is actually credible, you know,

meaningful parts of what makes a company worthwhile. Then financials energy don't get quite the big overweights that they that they would today, and you can actually as a value investor go into some sectors that people don't typically think of, things like you know, healthcare, even a little bit of tech, even some others. So um, I think that could happen. That could me causing the equal shift within the market. It obviously doesn't affect the broader economy, you know, in

the first order way. But I think the more important shift to look out for something we've worked on a lot this year. It is what happens in public policy over the next several quarters, next several years. Because we know that if fiscal if monetary policy does what it does. We talked about that already, that's not going to move the needle independently. It just kind of affects what happens really in some far off distant land of of a

really hot economy. UM, and a fiscal policy, I we've argued, only remains limited to providing you know, sort of life support, and it's absolutely necessary. The kind of work that we've seen this year. Look, this is the biggest and fastest fiscal expension in US history outside of World War Two. It's been incredibly powerful, incredibly important. But all it does is get us back to where we sort of started

the year. If that's the most we can achieve, we're not going to break out of this world of sort of secular stagnation and scarce, scarce growth. To see a level shift, kind of elevation to a new tier of of growth and productivity requires new investment, especially I think industrial policy. Um this has worked really well in the past in the United States, in South Korea, in Japan

and German. I mean basically, any modern economy that you look at the past hundred years hasn't gotten to where it is today, any modern industrialized economy without some cooperation between the public and private sector when it comes to incentivizing research, boosting productivity, and key industries, protecting nascent industries for a little while from competition until they can stand on their own two feet, and and and sometimes even

government as a ready buyer. All that to say, things are changing, I think not just in Washington, d C. But around uh out around the world as countries realize that you know, competition globally is going to require a little bit more than a kind of a las fair

hands off attitude. And so if if governments continue the path that I think they've started this year, I mean, we tracked fifteen to twenty different bills in Congress just this year, many with broad by partisan support designed to incentivize research and development and capex um in in the direction of new technologies. And if companies, uh, you know, get those benefits, get those incentives, and governments really push in that area, I think you can actually see a

big boost productivity. That's exactly what happened in the US during the Cold War. So that's the scenario. I think, a combination of of supporting consumption but also incentivizing you know, productivity that could get us to a new growth scenario and actually cause a really profound shift in the kinds

of portfolios that will work well. So, if I'm hearing you correctly, then the best thing for the financial industry or finance stocks and the oil industry would be a huge Biden and Democratic sweep and a massive fiscal stimulus. And so probably the two industries that we most associate with antagonism, perhaps towards uh, tax and spend, and Democrats and liberals would actually theoretically benefit the most from the UH such an out. I can't, I can't, I can't

go all the way with you. I know, I know you can't say that. I know, I know, but you cannot. I know. No one can see your face because we're just doing it on audio. But you could just sort of nod that that's kind of a potential implication. Well, whoever, I mean, who whoever, whatever political coalition gets it done. I don't think matters all that much, and we could handicap which you know, who's more likely under which scenarios,

But I I can't agree with. The bottom language is that if you do see a big surge into new forms of investment UM that that can boost productivity, then yeah, that's the most bullish scenario for the most highly cyclical you know, inflation and sensitive parts of the market, which are financials and materials and industrials and energy. UM. I would just note that historically you've seen this kind of investment and and and sort of productivity booms happen under

administrations of both parties. I don't think anyone has a uh, you know, a lock on this. But um, but that is that that is definitely the most plausible scenario that we can see for a shift to a higher level of growth from where we are today. Um. So, I know we're talking about big changes in the environment that could spark that long awaited rotation from growth to value.

But is there anything in the meantime that you think investors could do to sort of tweak their models or too, I don't know, re appraise the way they're actually looking at value stocks. So, for instance, you talked a lot about intangibles. Is that something investors should be adding to price to book value in order to compensate for the modern economy or is there anything else that people can do now rather than just waiting for the economic environment

to change significantly? Yeah? Absolutely, Um. Within an equity the equity part of a portfolio, there absolutely are some tweaks that that investors can make, you know, bargain hunters or folks with the value you know, bios sort of psychologically can I think it can and should add intangible assets to their calculation. And if you don't think that every dollar of goodwill on a company's balance sheet is a rock solid asset, the way that you know a manufacturing

plant might be, it's also not worth nothing. And right now, you know, again, a lot of conventional measures treat those intangibles as worth literally nothing or or as or as simply as expenses. Like R and D for example, doesn't only shows up as an expense unless a company gets acquired, and then the R and D can be you know,

capitalized as good will. But the bottom line is there's a lot of value strategies today and value indexes and so on that that simply haven't you know, they were based on the economies of decades ago and before that on beloved Graham and Dott sort of you know, snippets from their books, and you know, that's all great. The economy has changed, and I think our investment you know,

approaches can change with it. So we investors absolutely should include intangibles, and I think, you know, as I mentioned, history suggests that can really improve returns. The other two things that I hinted at before but I think are worth really worth implementing, is to add a quality filter.

My colleagues in research have have done some great work on this too, suggesting that in point of fact, as economy has changed, sometimes there are dead industries or dead businesses that that have to be completely rethought or since they are an investable. You know, a horse and buggy manufacturer a certain point had a great price to book ratio,

but you know, never quite came back. And I think there may be some lines of business in companies today that that might you know, be facing a similar fate. Adding you know, filters for the quality of a company's earnings and and and the quality of their business historically has added about a percentage point a year. I think two returns and and the and the small versus large debate is really interesting too. Small cap value stocks have

always performed better than large cap valu stocks. There's data going back to the nineteen twenties for US equities and that's always been true. And even in this period where value overall has performed so terribly versus growth and really a historical unusual way over the past decade, even over this period that that bias in favor of small cap value has actually continued to work well. So I think

that's still worth preserving that. That's another sort of two percentage points a year or so about performance, and those are things that investors can do today. That's within the equities leave for fixed income people, I think the world is even more difficult. You know, there's a lot of discussions since we sort of floated our end of sixty four D thesis last year, it's been a kind of a perennial topic, and the bottom line is there's no great answer in the world of very low yields for

for you know, fixed income folks. But I think the only solution that makes any sense at all is to allocate a little bit away from from treasuries that pay you nothing in fact, obviously float fit your face with negative real interest rates on those assets, and to shift into different kinds of risk. I mean, whether it's credit risk or something more equity like in terms of prefers or convertibles or you know reads. There's there's there are

places still to get some incredible yield today. And if you agree with with our outlook that you know, we're not on the cusp of a set and dip you into a d procession or something even worse than. This point of the business cycle looks like a moment in which a little bit of extra credit risk or or even some equity like risk certainly seems preferable. For an investor with an income target to hit, then you know, to simply cross your fingers in government bonds and hope

that it all works out. Those are things that investors can and should do today, and I think that the economic government um is pressuring people more than ever to start to rethink how they construct orse portfolios. So the bottom line is, although we could get the shift, a major policy shift, there are things that investors can do.

There is an alternative between the sort of like hardcore Gram and dudd book value side on one side, and he put it all on Tesla and ethereum on the on the other hand, Like we don't have to choose, like maybe like okay, a policy shift would be preferable, and that's great, but in the meantime, uh, there are sort of option is in the middle, absolutely right, that's right. I want to go back to something you said about

the FED and it's inclination too. Somehow, it always seems to raise rates just as the lower end of the income spectrum is starting to see wage growth. And maybe that's just some accident, maybe it's a conspiracy or whatever, maybe something in between. But I'm curious whether we basically live in a society where the elite or the very wealthy people don't really prefer growth, where this sort of

like the growth famine. The growth scarcity that we have right now is better for people who are very rich because their wealth and their standard of living is more tied to asset valuations than it is from say GDP going from three percent in a year to four percent in a year. It's a this is a tough question, and it's a really sensitive question. And I'll give you I'll give you two answers. And I'm not sure, honestly, I'll give you two answers. I'm not sure which one

I believe in totally. The first answer is the more politically radical one, which is that is to say that that that yes, actually, you know, holders of capital would just rather see you know, profits um and and we'll go down the ship with with the ship, you know, until there's last drop of profit has been squeezed, no matter what the cost or what the harm is to the raw society. I don't know that I believe that.

But there's a great old essay called The Political Aspects of Full Employment by fairly famous economist michaelle Klatsky, who's kind of a rival to to Keynes, and a lot of people think sort of came up with some of the same ideas around the same time, and doesn't get

nearly so much credit. And he argues in that essay that in fact, you know, the reason that there's often you know, what we call standing army reserve of of of unemployed folks has much more to do with the desire for owners of capital and owers in businesses to keep labor you know, sort of well disciplined so that they can generate good returns and and and so on.

And it is politically radical. I'm not I'm not necessarily endorsing the sort of the view, but I think you can certainly see a trend, at least in the United States in recent decades between decreasing you know, power of labor negotiations, increasing power of owners of capital um and decline, and things like capacity realization rates of manufacturing decline and demand decline and inflation. As you know, more and more

capital gets concentrated and relatively fewer and fewer hands. The bottom line is that folks who have a lot of of cash don't tend to spend it quite as much. They tend to save it. People who don't have that much capital. When they get a little bit extra, they'll

they'll they will spend it. And and so you don't have to be a political radical to think that getting a little bit more capital into the hands of people who you know, circulated in the economy is is a pretty great way to boost demand in a time when demand is scarce. The other the other answer to this, and this is a little bit more sunny side, you know, kind of things will work out in the end of view,

at least by via the market. Is is something I mentioned before the fact that we're seeing increasingly more inequality in Wall Street to mirror that kind of inequality on Main Street, meaning that as returns get more scarce and

profits get more scarce. Even if Joe, you're right that maybe owners of capital or content to just squeeze things forever as as much as possible, no matter what I think you're seeing these days, and you see it in kind of valuations and tech and growth and so on, is um increasing pain for owners of capital, whether it's uh, someone buying a treasury note, you know, holding their nose and getting six sixty basis points of yield, or someone

buying an expensive tech stock, holding their own and hoping, holding the nose and just taking whatever future cash flows might eventually come their way. Increasingly owners of capital of feeling the pressure and the pain and are starting to think. That's why. I think politically, as I mentioned before, you're

seeing some really broad by partisan support this year. In this it's it's an election year, it's incredibly hostile political environment, and yet somehow, for example, the Senate was able to pass a bill a few months ago authorizing billion dollars for billion dollars for semiconduction manufacturing in the United States by partisan co sponsors, passed easily, and they're they're working

on more things in that direction. That doesn't fit the narrative of sorrowners of capital, you know, fighting new policy

measures no matter what it takes. And I think, without getting into it too much, the some of the movements you've seen in political coalitions the United States on the left and the right have started to incorporate more discussion about whether it's universal basic income, job guarantees, modern monetary theory on the left on on on the right, you know, um, nonprofits talking about whether maybe we do need a better deal for working families and maybe labor unions are part

of that. I mean, things that were unthinkable I think politically in both parties ten years ago are suddenly very thinkable today because increasingly, the bottom line, I think is that many owners of capital, including regular investors, are starting to realize they're actually in the same boat with many workers. And if they don't find a new sort of negotiated settlement of the sport that we had across the Western

world after World War two, um in many countries. UM, if we don't find a new settlement, then things are gonna go badly, not just for working people, but increasingly for you know, people trying to invest as well. Jared, Uh,

thank you so much for joining us. This is sort of you know, we had a conversation recently with Paul McCauley and touched on some of these things, but this felt like a really nice sort of part two to that in terms of really diving into some of the portfolio implications of policy and you know, the sort of long running inequality. Thank you so much for joining it. My pleasure. Good to connect with both of you. Thanks Jared,

that was really good. So I guess the lesson Tracy is that inequality is why Tesla and ethereum trade exactly the same. It's kind of funny how every investment discussion nowadays ends up touching on on marks, right, Like, I don't know, it just seems inevitable nowadays, but and you know, I'm joking slightly, but I will say I agree with Jared that there does seem to be a growing recognition of the need for some sort of policy shift, even

at places like the Federal Reserve. We did see the Fed put out a working paper I think it was last month or something talking about how the growth of big corporations had increased inequality and basically caused sluggish growth and all of that. And there is this ongoing conversation about monopsyy, this idea of monopoly power in the labor market. So it feels like there is this recognition, but change

is slow. Change is super slow. But you know, I think, look, it's like the you look at the market and you have this everything is the same nos above these different asset classes, so it's like, okay, we have to look bigger. It almost forces zooming out. Like if energy and financials are the same trade, if Tesla and the Theorum are

the same trade. If gold is the same trade as UH Snowflake, the popular cloud computing ip o that just came out, If all of it is the same essentially as market observers, commentators have no choice that to zoom out and talk about this sort of like broader political and economic conditions that created the same Yeah. I think that's right. You can't really focus on micro you're forced to talk about the macro. Yeah, you know. The other thing I was thinking was we should do a deeper

I've on intangibles at some point. Yes, I think we actually have one scheduled because I think in a future episode we're gonna be talking to Michael Mobrison, who we've had on before. But he just came out with a pretty great sort of white paper on valuing intangible So I think people who are interesting interested in that. I should stay tuned. But can I just say something about that? And I meant to joke about it with Jared, But

do you think it's kind of cheating? It's like value investing doesn't work, so let's find a way to explain how Peloton and Tesla are actually Like it's kind of cheating. Yeah, I mean I think there's a lot of fudging that you can do around intangibles, and I think Jared touched on this, but it's I mean, the accounting for intangibles is kind of insane, so it's really easy to to make the numbers look a lot bigger than they are.

So just saying that everyone should factor in intangibles along with traditional price to book ratios, it's kind of much easier said than And if you're looking at intangibles, you actually have to do a deep dive into how those

intangibles are being portrayed on a company's balance sheet. And again this sort of sorry, now I'm going to go on a rant, but this gets to one of the things that I've been saying about the sluggish growth environment, which is that if you if you're a company and you can't grow through traditional ways like just growing your cash flow and your business, then one of the easy ways to grow is to buy a bunch of other companies and do add backs and you know, add intangible

assets from your acquisitions, which makes you appear to be growing faster than you actually are. And I think we've seen some examples of that in the current economic cycle as well. Yeah, absolutely, And you know, I think that's sort of like, um, you know, like these pe roll ups and other sort of It's like you can sort

of grow two ways. You can grow by creating a really red hot software company that everyone every other company has to use, or you can essentially do it by financial engineer and credit which turned which turned my meager cash flows into big cash flows. Yeah exactly, And so just saying oh, look at the intangibles, sure, that makes a lot of sense. But on the other hand, it's not a sort of bulletproof way of investing on m I swear I read an interview with some value manager

a couple of years ago. I think it was like a barren and they're like, this value manager made a bunch of money. How did he do it at time when value wasn't good? And it's basic answer really was like, oh, I basically came up with a framework where Netflix is a value stock. Yeah, so I invested in Amazon and

Apple as a value play. Yeah alright, Well Laura Buffett bought Apple, so if he did it all right, clearly we could talk about this for a while, but we are going to come back to it in a future episode, which will be good looking forward to. Shall we leave it there. Yeah, alright, this has been another episode of

the All Thoughts Podcast. I'm Tracy the Way. You can follow me on Twitter at Jucy All the Way, and I'm Joe Wisn't Thal You could have follow me on Twitter at Stalwart and you should follow our producer on Twitter, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levi at Francesco Today, and check out all of our podcasts under the handle AD Podcast. Thanks for listening.