Bloomberg Wall Street Week: Rogers, Keating, Fleming

Bryan Wynhan, a back of America. Will Sarro CEO, Charlie Sharp, Bloomberg wool Street Week with David Weston from Bloomberg Radio. Which way is up? As the Fed talks taper, COVID keeps growing, and the debacle seven thousand miles away consumes Washington. This is Bloomberg Wall Street Week. I'm David Weston. It

was a week marked by uncertainty leading to indecision. Uncertainty over the economy as retail sales felt more than expected, Uncertainty over how quickly the Fed will taper its bond buying after minutes from last month's meeting showed at least some members want to get going before the year is out, and uncertainty over whether a crisis caused by American withdrawal from Afghanistan could make it even more difficult for the

Democrats to get their spending package through the Congress. And the markets this week reflected much of that uncertainty by being somewhat indecisive over the week. The SMP was down a bit, but that was after it was up on Monday, way down on Thursday, and then recovered on Friday. Small caps took a hit, but again not in a straight line, with losses on Tuesday and Thursday partially offset by gains

on Wednesday and Friday. Treasury yields remained stubbornly below one point three, and commodities were the one asset showing real direction, with oil down consistently through the week. To give us an investor's perspective on these indecisive and slightly nervous markets, we welcome tow Katherine Keating. She is CEO of b n Y Melon Wealth MANAGERIC. So give us a sense of what you learned. If anything is through this somewhat

put Tumultuo's week. Yeah, so, I think the word I would used to describe this week David is moderating, moderating. We came off a quarter of just torrid earnings growth, right, earnings growth, and now we're looking at the economic data to try to try to figure out what the future holds. And as you said, we we saw um you know, declines and consumer confidence declines in in retail sales, um declines in the mortgage market, right, modest declines in the

mortgage market, which has been very strong. On the other hand, we see corporate America continue to do well, industrial production up, so you know, things are moderating, and that's normal at this point in the cycle. That's normal at this point in the cycle. You can shut down an economy all at once, but it opens in an uneven pace, and I think that's exactly what we're seeing. And investors are looking through that and looking ahead. Well, that's my question.

What are you hearing from customers? What are they what are they saying? Are they nervous about this? Are they pretty sanguine? They think it's okay. You know. One of the things I think that we have learned through this crisis is how quickly things happen. How quickly a virus spreads around the world, how quickly you can close down the economy, how quickly the market can sit through all

that information. We had a six week bear market and the market completely recovered in six months, so they're learning to sift information very quickly. One of the other pieces of information we sifted this week was the news about the coronavirus and the need for booster shots. Right. The market's way that understanding it is looking forward, and again the market always looks forward a few quarters um and looking forward, we continue to think, uh, the economy is healing.

We're growing at a six percent rate, that's three times what we were growing at before this crisis, and we think there's a lot of support for markets. Wall Street, we talk about investors. Let's be a little more precise about who these investors are. You pointed to a piece on the Blueberg actually this week about Fidelity, which reported that the number of four or one case went up, the number of iras of people with a million dollars

or more in them. Is there a fundamental shift coming in who these investors are that is retail versus institutional And that is exactly the right question, David, because the structure of the markets has changed during our lifetimes. Today, the retail segment of the market that the assets that are governed by individuals, is larger than the institutional institutional segment, and it's growing faster. And there's a reason for that. It's corporate America has fundamentally changed the way we save

for retirement. Our parents generation, they probably had a defined benefit plan, They retired with a pension and annuity for the rest of their lives and their personal savings. Today we save for our retirements ourselves. If we work for a great company, we're lucky to have them contribute as well. But it's defined contribution plans. It's for owen cave plans and our personal savings that make us ready for retirement.

So that's why you see this happening. I think one of the interesting things about that story is it does show the power of investing over the long term. The average age of some of those folks with those the million dollar accounts was fifty eight, So it shows the power of investing over time and markets that do go up over time. So, to put it very bluntly, do we know what we're doing? It sounds nice to take

control of our own retire benefits. At the same time when it was our pension plan, we sort of thought that were professionals doing what they're doing. I'm not sure I'm as good as those pension people are. Does it change the way with the market performs? Yes, it does so um. Yes, that pension plan had professional management, It had a chief financial officer, it had a chief investment

officer doing running in with very clear institutional disciplines. How much do we have to earn, what should our asset allocation be, how much do we have to pay out to our retirees? Very very disciplined, very mathematical. There's nothing that requires us to do that ourselves. There's nothing that requires us. We have to embed that ourselves in what we do. And that's and that's actually quite a mission for us in the wealth management industry. Because consumers are

sevent the economy. We want them to have very solid financial futures, very rewarding retirements, and so we're trying to embed all of those institutional disciplines right into wealth management. I'm not sure how many of us individuals are paying attention to FED, but a lot of the institutional people are. We will next week. We paying attention and Jackson Hole, which is now gonna be virtual. It turns out they're

not going to actually get together in Jackson Hole. What are you looking for to come out of those meetings? So I think we're looking for two things next week. One is, of course Jackson Hole, and we look forward to Chairman Pali's speech on Friday. Will be very interested to see whether he talks about tapering. He may, he may not. He may wait a week and get the jobs report the first week of September. UM, so we

might not message anything very clear about tapering. UM. We also were looking at the the pc inflation dedicator that comes out next Friday, right, the FEDS Preferred measure, you know c p I. The rate of increase at CPI came down, that will probably come down to That's that's an important data point, um. And so we're really looking at those things next week. That's Katherine Keating, CEO of b n y Melon Wealth Management, coming up. Sometimes the

tortoise beats the hair. We talked with long term value investor John Rodgers of Aerial Investments about what their reflation trade means for value stocks and why bigger may not necessarily be That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. The growth versus value debate is a long standing one, with mega cap growth stocks hogging the spotlight in recent years with the star power of names like

Google and Tesla. The five largest components of the SMP five hundred are Apple, Microsoft, Amazon, Facebook, and Alphabet. Here's David Leibovitz of JP Morgan Asset Management. We're getting to a point where the rest of the market needs to participate. It can't be all about five or ten names in the SMP five hundred. Even though growth stocks have largely outperformed value stocks over the past few years, it didn't used to be that way, and value still has a

place in long term investing strategy. These value stocks are still generally cheap and under owned relative to growth stocks. So um, you know, I think there's there's a number of drivers that it can even be more than interest rates and starts of voting value over growth right now. That's Jill carry Hall of Bank of America. Economic conditions

may be ripe for value. Bets on economic recovery bring the prospects of higher treasury yields yet to come which would tend to lift companies sensitive to the economy overall, a trend that began at the end of last year when the reflation trade lifted value stocks as the global economic recovery began to take shape. Here's City Groups, Tobias Lefkovitch. This is a heavy growth market and if you flee bondles are going to edge higher, then growth stocks are

going to take a little bit on the chin. And that's why you probably want to be in more value. Word Terris. When it comes to value investing, no one knows it better or is perhaps more identified with it than John Rogers, co CEO of Area Investments, with some sixteen point eight billion dollars under management last time I counted. And we welcome John now to Wall Street Week. John, thank you so much for being with us. Let me start with the most basic questions here. We talk about

value with his growth a lot. But when you take a look for value stocks, what are the criteria used to say yes, that's in the value bucket? What do you look at? Well, first of all, we look at what we think is the way that we look at value.

To want to have a low price earnings multiple, a low price to EBA dam multiple And at the end of the day, we're looking for new companies that are selling it at least at discount to their intrinsic value, um what we call our our private market value, and we think that's critical to get it more than a discount. So let me understand that intrinsic value, because I've seen

some debate now about how you define value. Some people would talk about price to book and say that actually that number is somewhat outmoded because tech is sort of change the assets you keep on your balance shoot, do you look at things like price to book or price to cash flow? But we do look at price to cash flow for sure. But we also are you know, doing the traditional discount to present, you know, discounting future cash flows into the future to get to what we

would look at our private market value. So that's you know, people learning business school. And though I didn't go to business school, but all of our analysts have and and and they really do believe that, you know, looking at those future cash flows discounting them back, it's how you get to a real true value of a company. So when you get to your bucket, if okay, these are value stacks. How do you discriminate among them and say, yeah, those are the ones that I think are really good

investments for the future. Those maybe value stacks, but I'm not so sure about them. Well, one of the things we always borrow from our you know, our hero Warren Buffett. We want to make sure that the company truly has a real moat around it, so that five to ten years from now, you can bet that company is still going to be a leader in their field and it will be hard for competitors that come and knock them off.

That's really what we are trying so hard to understand is making sure that industry is stable and that company's leadership role is going to be stable in the long run. Of course, we we make mistakes, and so we want to make sure we have a margin the safety in case for wrong. So we want to make sure the companies have a very very strong own sheet that can withstand all types of pressures that happen and that are

inevitable as our economy goes up and down. And then finally, we're trying to look to a management team that we think a shareholder friendly, that cares deeply about their shareholders as well as their customers as well as their employees. So getting to know managements is an important part of our research. Going out and visiting companies, talking to management teams every quarter, understanding understanding their strategy and their plans

to win is an important part of our analysis. John, I think one of the big changes, certainly since maybe two thousand eight, maybe four, but I think it's two thousand eight, has been the role of government, first on the monetary side and the fiscal side, and really being involving themselves in the economy. And so people said the

referee is now joined the game. Has that changed the calculus when it comes to value, when you know that you can have the massive, massive, sort of fiscal and monetary stimulus, well, we think that has certainly made it very difficult over the last you know, twelve or thirteen years. You're right, since the financial crisis. The FED is in, you know, is injected so much liquidity into the market.

They've kept interest rates historically low for historic length of time, and that makes the value of growth stocks, you know, look relatively cheap. You know, the SMP at twenty one times earnings is not overvalued if if interest rates stay this low. But we do think inevitably all the stimulus,

it's got to have an impact on inflation. And as we think about all the new things that are being contemplated now by government to throw even more recent sources at our economy, that ultimately that's going to cause higher inflation, That will cause higher interest rates and be a reason why growth stocks will start to underperform because so much of their earnings power comes out into the future, and if you have higher rates, those future earnings are not

worth as much today. John, those of us in business and financial news like to think that we're providing information and making better helping people make better decisions with investments. But I wonder sometimes we might skew this system a bit. We tend to cover the really big ones. You know, when somebody goes over a trillion dollars in market cap, boy, they get a lot of attention. Some people have balloons

coming down at things. But touch us about large versus small, because I think you have a somewhat different view about this. Well from the very beginning, when when we started Aerial thirty eight years ago, we were heavily influenced by the

place that I used to work. William Blair you know, Mr Blair used to always talk about the fact that smaller companies should be able to grow faster than larger companies, and we still believe that today they can be more nimble, they can be able to take advantages of market opportunities when you're small and nimble. But secondly, smaller companies are less well researched. They were less well researched, uh forty years ago, and they're still less well researched. They're not

as well followed. So you can find some inefficiencies in the small cap sector. And even today, the amount of research in the small cap sector, as you suggest, have gotten less and less and less. People are just not following these sort of neglected companies the way they follow the large growth companies that have been so popular that are the multi trillion dollar companies. So you can do your own homework, do thorough research and find these undiscovered gyms.

We think in that small kept sector today more than ever, and that's why we continue to fish in that same fishing pod. That's John Rodgers, the chairman and co CEO of Aerial Investments. Coming up. Greg Fleming of Rockefeller Capital Management on where high net worth individuals are putting their money in a low return world. That's next on Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week

with David Weston from Bloomberg Radio. Investors of all sorts struggle these days to find yield and places where they can get paid for the risks that they're taking. Greg Fleming is president of Rockefeller Capital Management, managing assets of some billion dollars at least that's the last time I checked. And it's his job to find those opportunities that aren't

quite so obvious, especially for high net worth individuals. Rockefeller grew out of the family office of John D. Rockefeller, the oil magnet, and we welcome Greg now to Wall Street Week. Thank you so much for being with us. Greg is a big shoes, You have the filler with John D. Rockefeller. But give us the sense as you talked to these high that with individuals, what are they looking for and where where are you finding it? That's good to be here, David, is good to see you,

m David. Our clients are primarily high net worth individuals and family and even into the altar high network category, and we work with them through private wealth advisors that deal with the client UH and their investment needs in the near term all the way through to retirement generational planning. So we take a long horizon with our private wealth teams UH, and when we look at the world today, given as you said, you set it up well with a low rate environment. If anything, rates are going to

go higher from here. You have equity markets that have both volatility and they have been on any historical measure, pretty fully priced UH in certain parts of the ecuty markets. So what we cancel our clients on, even that they can handle the irequidity that comes with alterna investments is to put a portion of their assets with besting class alternative managers across the range of different investment strategies and sometimes that even extends to investing rightly in companies that

are doing capital raising rounds on a direct basis. So we think UH, Briana wor all linet work investors, it's important to have a the percentage of their assets in alternative investments for investing class managers who spent a lot of time researching different managers and different strategies, and then our private wealth teams bring those investments to our AP clients. So Greg just educate me on this. When I hear

alternative investments, I think I'm giving up some liquidity. Those tend to be things where I have to commit some money for some period of time, sometimes for a long period of time. Is that and if so, what's the trade off there? Particularly at uncertain times where there's a fair amount of hoolatility, they do tend to be more ill liquid in the investment horizon is often longer, certainly than a publicly available security, whether it's a stock or

a bond. So there's no question that that's what uh you're you're giving up when you when you move into alternate investments. But those investments that are made, whether it's a private equity manature or even a hedge fund, they tend to be made with a longer term investment horizon

mind um. And it allows the investor to access these managers who are investing through the cycle, if you will, David, So, we think it's an important, uh editive part of an investment plan or highnet work multi hignetwork investors who don't have to access the full range of the portfolio on on a real time dear term basis. So so Greg at Bloomberg here. We had an interview this week with the head of the our Norwegian Sovereign Wealth fund, who manages a fair amount of money. I think it's fair

to say believe it's the largest in the world. And what he said was he thought the biggest threat to his portfolio, and that's on the fixed income side and an equi side, is inflation. At this point, do you agree with that and if so, how do you take that into account as you make investments. You know, I think that inflation and he's probably what he's doing is he's saying inflation, which will ultimately lead to higher rates,

is the threat to his investment portfolio. And this is why the FED is working hard to thread this, David. They wanted some near term inflation here for multiple reasons, UH, including trying to avoid the UH deflationary trappic that Japan is legally for so long, and to get some pricing power in the hands of the company. So they wanted and they hung with this, I think UH for for

some time to get some inflation in the system. But if it goes too far and if it becomes something and you know, people forget the inflation is also about X patients and earlier in our lives and careers, there will more inflation. And when there's a sense of inflation, if it starts to get built into the system, then it does tend to uh me be harder to move.

And also, you know, you factor in uh the increase in home price uh home prices and home price sales for distening home over the last year, you've had real inflation in the economy. So he's looking at it and he's worried about the fact that if it gets ahead of the Fed and the Fed has to start raising rates, that's obviously difficult for fixed income investments, but it also tends to revising rate environment is a harder thing on equity markets as well. So that's why he's saying, wait

a minute. If inflation starts to move, and if it gets ahead of the central bankers and interest rates follow, which they will necessarily happen at that point, that could be problematic for both sides. UH good portfolio. That's Gregg Fleming of Rockefeller Capital Management coming up. We ra up the week with special contributor Larry Summers of Harvard. That's next on Wall Street Week on Bloomberg. This is Bloomberg

Wall Street Week with David Weston from Bloomberg Radio. We have a lot to go over this week with our special contributor Larry Summers at Harvard, So Larry, let's get right to it. The biggest story of the week, I think on the headlines every single day was Afghanistan. It's a political, geopolitical, real crisis. I may say, are there any economic ramifications? Do you see? Two comments, David, if this affects the broad perception of the administration, that could

have economic consequences. If you look back to the fall of Saigon, no major economic consequences that followed that, and rather remarkably, uh month and a half afterwards, the president's popularity was up by ten points. Here's what people aren't paying at Engine two. The Taliban is going to find its victory very challenging. Afghanistan was an economy supported largely by foreign aid. That foreign aid, the US spending from

its troop presence. All of that is going to dry up, and that's gonna make governing Afghanistan extremely difficult, and it may a few months from now be a source of leverage for people on the outside with respect to what happens there. They've got big economic challenges ahead much larger than people are recognizing. Larry, having been in Washington, take your first point. Do you think this puts some of President Biden's build back Better plan in jeopardy up on

the hill? I think the linkages between foreign policy and domestic policy tend to be smaller than foreign policy people think. And you know, it will all hinge on what happens over the next couple of weeks. And we've had a tough few days and may well be the next few days we're going to be even uh tougher. But if we are substantially successful with respect to uh the evacuations, and this doesn't dent the president's overall standing, I don't

think the effect is going to be very large. If the president loses ten approval points, all bets are off on his ability to move major legislation. But it's really an indirect effect through what it means for the president's approval, which is the coin of the realm in terms of

presidential power. Lear. Another story in the news throughout the week has been COVID nineteen the delta variant, including now the recommendations about booster shots for people who are already fully vaccinated you were one of the very first that I knew at least the spot this pandemic on the rise. Give us your sense about where we are in COVID

and specifically on booster shots. Something we talked about last week on Wall Street Week, which is, if we give the shots to booster shots, then what do we do for the rest of the world that is not vaccinated at all? Look, I think this is as clear a case as I've ever seen for where we need to shift from a policy of either or to a policy

of both. And UH. It is not remotely tenable for a US president to heed the advice of the who that somehow he shouldn't do what he thinks is necessary for the health of American children and American seniors in order to vaccinate people abroad. That's not how countries operate. It's not how the United States will or should operate.

On the other hand, there is no reason why we can't be launching big initiatives in tandem around both UH, the booster shots at home and about supporting resilience capacity, exporting vaccines and all that goes with UH responding to the pandemic. And so I'd like to see the United States be much more in the lead on the global effort at the same time that we're redoubling our efforts at home. I think that's the only way UH forward.

If we pose this as a choice between American eight year olds and UH kids in developing UH countries and societies that are falling apart, that kind of hardheartedness and hardheadedness will come back to haunt us for a very long time. Larry, Investors in the States clear, we're paying attention to China this week because China seems to be

clamping down on yet another industry almost every day. We started with tech, and then we went on to things like media with reports they're gonna clamp down to that, and now we're talking about cosmetics and liquor manufacturers. It's raising questions in some people's mind. Golden Sex, a lot of said the government. Sex said a lot of their customers are asking, is China investi at this point? Just because Beijing's seems to be almost capricious. Look, every investor

will have to make their make their own judgment. Those who are serene about China remind me of those who are serene about inflation. Bad things keep happening adverse surprises keep happening, and they keep explaining them in terms of specific factors and resisting the idea that there's some kind of emergent general pattern. And I think there is an

emergent general pattern. Uh. Not that China is going back uh to Mao, Uh, not that China is going to entirely renounce the market system, but I think the risks for foreign investors are going up and have to be going up at a time when the greater insertion of the Communist Party into every private enterprise is emerging as a very important priority for the Chinese government. So it's certainly a riskier environment. And I think when you have

a riskier environment, people demand much higher returns. And then there's a question as to whether, given the tensions between our nations, the much higher returns that are necessary to compensate for much greater risks are going to be politically sustainable for a long time in China. So I think uh, anxiety is the right thing. And conclusion, let's go through a rapid round if Summer says here, and we'll do

a little bit differently and three different topics. Let's take a look at better or worse one week at, one month, at six months out. Start with Afghanistan. Do you think one week, one month, six months out, it's gonna be better or worse, worse, worse, worse, worse better, Okay, six months worse, worse, worse, worse better, six months six months out. I think that we're going to have more leverage than we realize. Then people think we're going to have as

the challenge of governing Afghanistan. UH is there for the Taliban and they become dependent for various kinds of economic assistance on the rest of the world. Okay, Afghanistan's number one, number two is COVID once again, one week out, one month out, six month out, better or worse, um about the same, worse better, UH? I think it's UH. I think we're clearly in the midst of an upsurge from delta.

But I think the dynamics around vaccination will change, and I think as more and more people tragically are infected, more and more people will have a period of immunity. So I think we're gonna be further down the road towards a new somewhat unfortunate equilibria where UH COVID is like a second flu, but it is less paralyzing of society six months from now. Okay, one more the economy. Give us your read one week out, one month out,

six months out, better or worse. I think it's going to get more difficult UH combination of UH COVID of COVID, rising UH price pressures UH financial markets that are priced UH for perfection. I don't think it gets much better from here anytime soon. We'll see some further reductions and unemployment, but I think the mood UH is probably gonna get so earlier UH pretty continuously over the next six months. Okay, there you happy. That's what Summers says. Thank you so

much to our special contributor, Larry Summers of Harvard. Finally one more thought baseball as a science or not. Steve Cohen made his name as an immensely successful hedge fund manager, so when he bought the New York Mets, no one thought he did it to lose, something he confirmed at his first news conference as owner. I want to thank my fellow Met fans, the greatest fans in baseball. Your support has been incredible. You want us to win the World Series, and so do I. New York fans have

high expectations and I want to exceed them. I want an exceptional team. I want a team that's built to be great every year. I don't just want to get into the playoffs. I want to win a championship. And for three months this season, it looked like Steve Cohen was going to get his wish, as the Mets led the National League East. But then then they had a bad road trip and dropped out of first, the second, and then the third, falling below five hundred. So Steve

Cohen does what he does best. He applied the math, the medical prowess that made him a billionaire, analyzed his team, and took to Twitter saying, quote, it's hard to understand how professional hitters can be this unproductive. The best teams have a more disciplined approach. The slugging and OPS numbers don't lie. Now, for those of us who don't really follow baseball stats, OPS is a combination of on base

and slugging percentage. Mr. Cohen's rigger in analyzing Smiths brings back memories of Billy being in Moneyball when he brought in a young economist to help remake his Oakland A's after concluding that the only way they had to go was up, and who knows, maybe Mr Cohen is onto something. Hours after he publicly called the Mets out, they came from behind to beat the Giants in an extra innings twelve innings, three precise. That does it for this episode

of Wall Street Week. I'm David Weston, This is Bloomberg. See you next week.