Another Tech Wreck

of a handful of companies. Well, in recent days, we've got in a firsthand look at just how vulnerable it may be. We discussed the possible causes of this and also the outlook from here, and as always, we will close out the episode with our tradition, the craziest thing I saw in markets this week, Sarah, I trust you saw some crazy things. Trust correctly, And I have to make up for last week. I came a little bit unprepared. Um so this week I came more prepared than last week.

I can say that, Mike, Okay, that that's kind of a low hurdle to clear, So I know, but you you pulled one out at the last minute last week, so I even see that that was a nice save. But anyways, you said, very happy to have our guest back this week. I believe she was on the show once last year and before the world went crazy, uh, and we got her perspective on the velocity of risk and how it is accelerated. Boy um, that thesis was sure proven true in the age of COVID. So happy

to have her back on the show. Her name is Sema Shaw. She is the chief strategist at Principal Global Investors. She joins US from London, where it's a little bit later than it is here in the US. So, Seema, I don't know if you're in your pajamas or what I've I've been in my pajamas since March, so it's it's totally fine if you are. It is my permanent uniform thesis, at least pajamas from the waist down, just in case you have any virtual meetings. No one, No

one will know exactly exactly. It's important that the top of it is looking good. See, I'm gonna dispense. Usually I have about a twelve part question that I start with, but I'm gonna make it simple. Uh, this time what a wild summer. I mean, it was the biggest August gain for the US market. I don't know, Sarah wasn't. It's like the biggest August gain in since the while the whole country was basically more or less lockdown in quarantine.

How would you explain what happened this summer and now that we're seeing sort of the bloom come off the rows, what's happening right now with this little correction in the U S exuity market and tech specifically. I mean, how do you just describe and explain a summer like that? Yeah, it's been absolutely astonishing. I don't think when all of this kicked off, when lockdowns were announced, that anyone would have entered dissipated the kind of summer performance that we've seen.

I think a lot of the strength was down to three factors. One is the release of pent up demand that it clearly accumulated during lockdown. So what we've seen is a lot of easy gains, you know, people trying to return to some semblance of normality and that's propelled markets. And then the other two things is policy. So center banks clearly have you flooded the market with liquidity. It has no else to go, it just goes straight into capital markets. So that that's been key, and of course

fiscal policy has helped with with improving confidence. But within all of this, those three factors have driven one sector. Each one of them has gone into one sector, and that's tech. And when you look at the market recovery, it has been driven simply by take You know, it's such a narrow recovery. And I think all of that incredible exuberance around the big tech sector, which I have to say we have real beliefs in, but it went a little bit too frothy, and that's why you've seen

this pullback over the last few days. I don't necessarily but there's any major fundamentals that have resulted in this jewel back. Seema. I likely spent the entire months of July in August writing about reasons for this unbelievable tech rally that we saw. Some being that many of these companies are beneficiaries of COVID nineteen. Like you mentioned, they

stand to benefit. And the idea is that a lot of these trends have been accelerated by many stay at home orders well In recent weeks and days, there have been many reports about one soft bank buying many call options, and big tech companies also looking at small contract trades seeing tons and tons of options volume from the likes of small retail traders. And I feel like some are questioning if we can actually attribute much of the rally to the fact that these companies stand to benefit UH

and their true earnings potential and their growth power. Is there reason to to question that narrative, if that at all had a play in this unbelievable run up, like like Mike said, the best August since the late eighties, or is there more to it than just the option story? You know, I think you just have to look at some of the charts of these companies performances and you

can see that something weird went on in August. They just you know, they have performed extremely well through till July, and then in August they just took off, you know, the curves almost turned exponential. So I think there has to be something else to play there. Um and the option story I think is key. It probably isn't everything, though, you know, you have to look at some of the smaller orders that went on. They almost dwarf what we've seen the soft bank. So I think the retail investors,

you know, you're the Robin Hood app. I think that's been a huge driver as well. These are companies that people have been watching from home seeing how amazingly the well they've been performing, and have tried to jump on the bandwagon. The problem is is that a lot of these investors and new time investors, this is probably the first time that they've experienced any kind of crisis and

have less ability to try and analyze the fundamentals. So I think this has also been playing out, and it's again one of the reasons why you get this big snap up and then you also get the biggest snap down.

You know. One theory I've I've seen floated for the correction in tech is that people are getting more confident that you know, that we're sort of over the hump of the COVID virus, that the rest of the struggling sectors of the economy, the sort of value stocks, if you will, or the you know, non tech parts of the economy, the cyclical parts that have really been hurt are poised to rebound, and maybe people are getting out of tech and preparing to to get back into you know,

more cyclical and value oriented sectors. I don't know if I buy that, Sema. I mean, is that do you think that could be what's going on? Or was it just you know, this tech rally was bound to hit a wall, This melt up was bound to melt down eventually. You know what which which camper you on for for sort of the cattle to behind us? Yeah, So I think I think this is really interesting because actually I

think there's both of them are true. I think the technicals are kind of momentum that you've seen in the market, the very overcrowding. With all of these positions evaluations together, you've created a story which is very very vulnerable to any kind of pullback, and that pullback can come from either deteriorating sentiment because of geopolitics. But another story is just actually the improving economy and also news of a

potential vaccine. It has been a lot driven by a very strong demand for these technology companies over the summer as since lockdown was announced, and as a result, as soon as you hear news of a vaccine that it encourage people that look, we can maybe return to a more normal way of life. We will no longer need to be so dependent on companies to deliver our food. My husband was saying the other day that actually he's border delivering. He wants to go back to a supermarket.

I mean, I don't share the same sentiment, but I think he speaks for a few people out there, so and I think so as you get that turned to the vaccine, then actually reliance and dependence on technology starts to pull back. And given that all those indicators together, we're building up an environment of vulnerability. It was almost a perfect storm to create that pullback. Maybe if he goes back to the grocery store, he just feels like

his life will be one step closer to normal. I made the supermarkets want us all doing that too, because I know I went into Whole Foods the other day and I had like a list of three items I wanted to get, and I ended up with like eighty five things, uh in the check outlines. So I wonder if there's something, you know, there's something about that impulse purchasing power. I wonder that uh, you know, is being

lost in this whole, this whole online regime. Yeah, the kids sweets are no longer in demand as the kids are walking past and demanding their parents by Yeah, I've got to say I made a Trader Joe's run the other weekend, and I left with many more treating suites than I planned on when I went in there, because they just, you know, they looked good. We're a stuck at home for the most part. I needed something extra. Trader Chose has got to be the market leader and

impulse purchases. They know what they're doing with their store layout. I can tell you that you go in without a shopping list and end up with five things. So I see, m I tell your husband I agree with him. I can relate. He'll be happy someone does. So see. I know, I know it's obviously so difficult to make short term market calls, but I just want to get your view. Yes, we got a an eleven percent correction in the NASDAC in a matter of three days. I mean it was

the fastest correction from a record for the benchmark. Is that enough though, to really wash out the froth is optimistic sentiment and move forwards from here? I mean, you look, and we're still what more than sixty percent off belows from March. I mean that's obviously not a small number. No, I would agree. Look, I think there is still froth in the market, but ultimately, if there's a really strong circular growth story, I don't think that you're going to

see significant drops from here. You know, chances are that you're not going to see the magnitudes of increases certainly that we've seen over the last six months. That's not going to be repeated. But do we expect the market to come tumbling down from here? I'm certainly not a buyer of that idea, and I think, as I said, the reason is is that we may have increased our aliance and we may pull back some of that dependence on technology, but a fundamental core of that is here

to stay. And also in an environment where there is so much uncertainty, we still don't know what's around the corner. You still need companies that have got those really strong balance sheets and positive cash flows, and those make acap tex stocks meet that criteria seem you know. Let's turn our attention to the next big risk, which is on

everyone's mind. It's the US elections in November. You and your colleagues at Principle had an interesting note looking at the elections, and you know, this sort of historical precedent is that it's pretty common for there to be volatility in the market, in the equity market ahead of a US presidential election. You know, I don't know what the percentage of that happening is, but it's it's pretty high

and pretty you know, easily telegraphed and predictable. But that I'll tell you often typically calms down after the election, when investors have a sense of what the next administration's priorities are gonna be, what kind of policies may influence their portfolios. I have to wonder, though, this is a very unique environment leading up to this election. For one thing, all this froth that even after this correction still exists

in the market. Also just the bizarre nature of the the election, where you know, the mail in bouting will be a big you. President Trump is already you know, raising a lot of suspicion at least he alleges as far as the you know, how how reliable the vote can be when it's done over the mail. In many elections, it seems like it's almost a no brainer to buy that pre election dip. I wonder if if you think

that's the case this time. And also given the valuations of the market, is that volatility that dip before the election failed to be potentially a bigger than the normal one this time. Yeah, these are these are really good points that I think all investors are are starting to consider pretty deeply at this stage. Well, as you said,

you know, it is still a pretty frothy market. Valuations is still very stretched, and in that environment you have created almost a perfect scenario where any kind of shifting sentiment can result in a sudden drop. Right, So this is a risk ve losty story that we talked about months ago. The thing is with US elections, typically you do see that volatility, but then the foltility fades and it goes back to fundamentals. So would have been fundamentals

driving the markets over the last six seven months. You know, we spoke about it before. It's down really to center banks, to fiscal policy, but mainly center banks for markets, that's really been key. So, yes, we do anticipate a rise in volatility. Do we think that would be the right

time to buy the dip? Actually, I don't think it's the right time to try and do any kind of trading around the election, because it's so difficult to anticipate and read what's going to happen, especially in scenario where you could potentially see the election result being questioned not just for a week or so, but for even a month or two after. So actually, from our perspective, you're

better off just staying invested. You look away from all the noise, keep your positions, and keep your eyes on the fundamentals because past the election, coming into the things that are going to be driving the market is still gonna be the same stuff, and that's mainly the Federal Reserve. The election is less than two months away. I know, I can't believe it well, and the result or maybe

conclusive results or maybe a year away, Sarah. So we hope, hopefully, we hope, hopefully we're going to be the inauguration day. That's my hope for this country. God help us. If we don't, we'll see what you mentioned the Federal Reserve. And of course we have the next FED meeting coming up next week, so the next really near term risk

probably for the markets. Is there anything that you would expect or maybe you are looking out for that might be unexpected, especially after the release of the policy review and the latest speech from Powell in Jackson Hall. Well, I think there is one thing that Jerome really needs to to discuss, and he needs to give some parameters around this new inflation framework. That's what people want to know. You know, what is too high above two You know, at what point do they feel like, Okay, this is

the time to stop pulling back. How long does it need to be over two percent? Uh? These are the things that I think investors need to get a better hold of. We're also going to be looking out for more information and pretend chill yield, curve control, any kind of explicit forward guidance, although at the stage, you know, having listened to the various FED presidents over the last couple of weeks, I'm not sure we're actually going to

receive much more news. I feel like they are trying to pull back from providing too much information on anything and hoping that actually just the inflation framework itself is

enough to get the market going. And I think it may be in some ways right, because you know, they've gone out of their way to make sure that people know there is no chance of FED rate hikes over the foreseeable future, and of course hopefully we'll get some more details on this sort of new inflation targeting regime that the FED has where they we're looking at that two percent target as as an average rather than sort of a maximum of what they would tolerate for inflation.

See if I don't wonder, though, how big of a deal is that, if we've struggled for so long to hit two pc inflation, is there any reason to believe, in your opinion, that we are in an accelerating inflationary environment and that will really see that average inflation target put into practice at any time in the near future. You know, that's such a good question, you know, I just want to take it out. Two years ago, at

the Global Milk and Conference, Christine the Guard spoke. She wasn't yet the head of the CD, she's still at the i m F, and she was asked on stage, you know, what do you think about raising inflation targets? Do you think that will help countries? And back then she says she saw no sense, said, if you can't reach two percent, what makes you think you can reach three percent? And it made no sense to her to move in that direction. So, and I think there is

a there is a clear argument there right, Why? Why what are they doing which is so special? That means that they're more likely to reach a higher target even now. And I have to say that, given all the structural factors that are underway at the moment, globalization, demographics, technology, it's very difficult to come across another reason why there

should be higher inflation. And in a way, maybe the only opportunity if they start to really embrace fiscal spending even more than what you've already seen this yet, maybe that's the only scenario where you see inflation hitting that

two percent target and even over shooting. You know, there were some big names this past week talking about inflation, Drucon Miller talking about the potential for a ten percent inflation rate, and I know there was a lot of pushback for many investors on this, uh, kind of along the same lines of what you just said, Sema. I mean, we haven't even been able to get to two percent all these deflationary forces over the last couple of years. What makes you think that all of a sudden we're

going to launch into an inflationary upward spiral. Do you see potential for that at all? I mean, do you see the potential for inflation to even get to the point where the feed is actually going to step up and say that they are going to raise rates off of the zero lower bound and say the next five years. I was going to say, what, which lot, which horizon

are you talking about? I mean, the thing is that we look back to global financial crisis since then ten years the father struggle to even hit the two percent level, and they have thrown almost everything that they have and there's still be no no successor So actually what they probably need in order to reach a two percent telegate level is a complete regime change. Now, the inflation framework announcement is good, but it doesn't take you all the

way to a new regime change. So for me, the idea of sending a temper cent inflation result is is out of this world. Look, you have to assume that inflation is fast asleep and it's suddy going to wake up with a bounce. If you think inflation is going to hit over three pc within the next couple of years, I see if I wanted to get back to that idea of velocity of risk, that's what we talked a lot about that the first time you were on the podcast.

I find it to be a fascinating topic and correct me if I bungle my description of of what you mean by But it's, you know, as far as I can tell, it's basically the notion that risks from the economy or from markets are priced in much more quickly now into markets than they had been before. And you know, there's a variety of reasons, technology, the proliferation of social

media being one of them. But boy, you know, as as Sarah points out, in journalism, we do we like to deal with those superlatives, you know, the fastest correction in uh An index ever or the you know, fastest gain whatever. I feel like this year we've just been filled with those type of superlatives on both the downside and the upside for the markets. And I think it kind of proves your point that, you know, markets are moving a lot quicker than maybe they did in the past.

What has the this whole raised a year of COVID and the recession taught you or what have you learned about the velocity of risk from this crazy year that we've had. Well, I spoke to you back in January. It was when coronavirus was starting to spread, but we had no idea about what was in store for us now the velocity of risk. You know, of course when we wrote the paper, we had no idea of course that COVID is on the way, But yes, it worked out exactly to the point that we we had set out.

And as you said, you know, we came into evaluation very very stretched. We had social media being used widely and also enabling the spreading of of news that maybe governments didn't want to share. We have technology very very heavily weighted, and then we had very complex global supply chains which were able to transmit shocks from one part of the world in one sector to a completely different part of the world in a totally different sector. And I think that's why you all such very very sharp

movements down. But at the same time it's bounced right back up again, and we're almost back to where we were at the beginning of the Yet if not even more stretched. You know, if we look at some of our own valuation indicators, if you look at the MSCI Growth Index, you have never ever been more expensive than we are today. The same thing with the SP five it's never been more expensive. So evaluations are still very very stretched, even more than that technology is even even

bigger waiting. I hear people keep using the words during the crisis, it was bread, water and fangs, and I think that just gives a distinction of how important have become. So now we're getting back to the point where any kind of moving sentiment, any kind of large event, is really opening the door to a potentially significant move. No, we don't know what that event is going to be. This time it was COVID. Who knows what it's going

to be next year. But I do think that we've almost learn nothing in terms of policy making because went back to where we were at the beginning of bread, water and things. I love that I've never heard that, but it really does. It feels like everything has happened in warp speed. And I wonder. I know, when you initially we're studying the velocity of risk, you laid out a couple of factors that would exacerbate it going forwards. Is there any one factor that you feel like really

played an outsize role in this year? It's an interesting question. So so I think, I mean, the clear one was just valuations. They were just so stretched that it could have been almost anything that tipped it over. And unfortunately ended up being you know, one of the most significant social and economic crisis in the world that pushed things over the edge. I think more interesting was actually what didn't trigger it. We actually helped insulate the job, and

that was actually the proliferation of technology. You know, when we talked about this, originally we thought like, look, technologies, it's so big that if you have one disappointment from any one of those big companies, it's going to drag everyone down. What we didn't foresee is in an event like this, actually technology becomes so important. But actually that outperforms and it stopped the whole index from completely dropping.

So it worked in the opposite way. But unfortunately, again as I set it, as it go back up again, that vulnerability has only increased. You know, Sea Before we get to the craziest things, we sometimes run the risk of being the typical American UH podcast who's only cares about what's going on in the U. S. Stock market.

So I wanted to touch on a note. UH. You and your colleagues had out about emerging markets in Asia and sort of the legacy of the trade tensions and the sort of anti globalization and nationalization push that we've seen this year. I wonder you know, obviously there's the trade wars created a new set of risks as far as you know positioning in international equities markets, the threat of you know, politics interfering with free markets, that sort

of thing. What us through how you're looking at that risk. Is it something that goes away should Donald Trump be defeated in November or is it something um that perhaps his legacy is that that even if he loses, that type of risk is here to stay, that type of sort of the world being a little less connected at least according to the politicians and the trade policies. Talk to us about how you're thinking about that issue going forward. So from our perspective, the U S. China tensions that

are here to stay. It doesn't matter who comes into the administration. Um, it doesn't matter if you're talking today four years down the line, these tensions are going to be with us for a really long time. So I think as investors, you know, what we need to do is, firstly, you have to at least from the beginning of the you have to have taken away a bit of growth from China's forecast going forward. Now that doesn't necessarily mean it's the end of investing in Emerging Asia or something

investing in China. They still have huge growth potential, is just a little bit lower than what it was before. The things that we do need to look out for, though, is what does the US do with regards to uh to Asian technology companies? How much pressure did they put on them, Because again, just as it is for the U S, technology is also really important for the emerging Asian region as well. It's a new growth step sector. They have got a huge wealth of expertise that has

been driving forward. They've been taking advantage of the fact that there is a growing middle class and they're more people demanding these kind of tech things. So I think that's the first thing we need to look out for. But the second thing, and perhaps this is more important, is is the politics going to start getting in the way of capital markets? And what I mean by that is do they start to intervene, do they start to put pressure on US organizations to pull back from investing

in China? And if that happens, and yes, we would have major concerns, and then we would need to revisit this idea that we have that E. M. MAJA is still a long term strategic allocation that investors should have. As an example, you look at the TikTok saga going on right now, um, but is still ongoing. But I mean China tech and its relationship with the United States, that's right, you know, the the intervention almost it feels

like sometimes it knows no bounds. Um. And Yet one of the areas is we've seen the trade wall moved to a technology war. What we worry about is the new wall going to be moving into capital markets? Um? So are we going to see a lot of firms, pension funds being asked pulled back stop investing in these Chinese assets if that happens, And we just have to question how much strength a lot of these places can have.

We hope that's not going to be the case because at the moment there is so much growth potential in that region. Well, only time we'll tell and as time goes on. In our podcast, Mica, I think you know what time it is? Very very well, it is that time that sounds really genuine. Charlie Pellett tell us what time it is? Damn clear. Of the craziest things we

saw in markets this week all right, Sarah. We haven't gotten many calls to the hotline, so hopefully people are not too shy to call and leave us a voicemail on the hotline and tell us the crazy thing you saw. Um, I did get text from a friend of mine about a crazy thing he saw, So John Miller, this one's for you. He's an avid listener of the show, Sarah.

He listens to us on like double speed, though, which I and then I think whenever I see him and I'm talking at normal speed, I think I sound weird to him. He's like, you, all right, you're feeling okay. It likes us a squeaky, sped up mike. Yeah, yeah, it's weird. I gotta work on talking faster, I guess for when I'm hanging out with him. This is only ten generally market related. In fact, by ten generally I may mean not really at all, but it's so good

I want to share it anyway. It's about an art dealer, and as you know, Sarah, art dealers are my my favorite source of crazy market things. Alternative alternative as that's this guy. Forrest Fen, a millionaire art dealer, hid a treasure chest holding gold nuggets and precious gems in the Rocky Mountains about a decade ago, just for fun, just took what's estimated at two million dollars worth of golden gems, hit it in the Rocky Mountains. And he left not

many clues, some some poem and a map. This is all, by the way, acquitting to a story on MPR dot org. And apparently thousands of people have been out there looking for this forty pound treasure chest. Several people died in fact looking for it. And uh, crazy news is someone actually found it recently. They have not stepped forward to say who they are, but someone buried two million in treasure in the Rocky Mountains. And and the best part is some guy actually found it, using this guy's poem

in a map to go find it again. Not market related, but pretty crazy. It sounds like a Nicolas Cage movie to me, right, National Treasure it is, or that show Outer Banks. My kids are watching Outer Banks, which is a big treasure hunt show. It's pretty it's pretty good. I'll to check it out. And remember, if you do want to give us a call at the podcast hotline, that number is six four six three two four three four nine. Oh and if you tell us something good.

We might even play it on the next episode. Alright, sorry, you're turning, you're in the hot seat. You hyped up your crazy thing. Let's let's hear it. Alright, Well, I figured I would just take a sequel from my last minute last week's entry. Um. So, last week I talked

about measures of implied volatility moving up with stocks. Well, on Tuesday, the day that we saw the nasdack drop, I mean close to five percent, we actually saw the VX and fall alongside it, which is very very rare, clearly something odd going on in the connection, but also just an easy one. I'll bring a double whammy this week. We always kind of look back to Tesla. It's an easy, wonderful crazy things out of But Tuesday down more than the worst day in Tesla's existence. Um so pretty wild,

that is, that is pretty wild. Uh. Tesla is another source of perennial source of crazy things. So we thank them for that. Thank you Ellen Reliable, Thank you Elon Musk short short shorts, and uh whatever else. How about you still lost the same value as Morgan Stanley on Tuesday. Loan, that's my, it's my, it's mind boggling. That's a that's a great way to put it in perspective, Sema like, well done. But have you seen any crazy things in

the past week? So crazier than Tesla? Yes, So again, this is looking back a couple of weeks in fairness, so it's not just this week. But I thought I'm taking a little bit international um and I want to look at reservations, seated diners and restaurants and ask you what you think the year and unit of changes in the UK. So at the end of August this year compared to last year, what was a year and year change?

And just to give you a little bit of a hint, the US number was six down on this time last year. Oh boy, I think for it to be crazy, I'm gonna say they were positive somehow. I don't know how, but that would be the craziest outcome. I would think, aren't you getting paid to eat out? Right? Now? That's right? So is it positive? It is positive. I'm going to tell you the number. It's actually it was up six

and that time last year. Now, it's unbelievable. It really speaks to the the fact that people are willing to put away all of their health considerations just to save ten pounds per person to eat out. So the Chancellor had introduced a scheme called eat out to help out, and each diner on a Monday, Tuesday and Wednesday was getting about up to ten pounds off on each mail

that they that they had out. Um and you know, I can tell you it was a struggle to get any bookings and we tried our hardest to make the most of it. My husband used it five times in one day, five times in one day. He's one of those people adding those seated diners. So he's saving ten pounds and going to gain ten pounds on on the

other end, ten pounds to spend about two that's pretty good. Well, I wonder is part of that because London typically clears out in August and everyone goes to the Mediterranean, and that didn't happen that year. Is added play at all, do you think? Well, actually, interestingly, because it's the only few months where London has really good weather, nobody goes away in July and August we will stay here. So actually usually the restaurant dinings is really high in August.

So it just goes to show the very very significant impact that there's eat out to help out. Scheme had pretty interest. It really is shocking, I mean because I know, at least from my perspective. I mean, this past week they announced that indoor dining can open in New York City soon at capacity, and there are still a lot

of people who are very hesitant um to go. So the fact that in London uh seeded dinners are up from a year prior the value of money right, it's a really innovative introduction because actually what it does it reminds people how much they like to eat out, and actually it reminds them that they it's not as dangerous as maybe they have in their heads. So it was it was a clever move. Well that's a good one, Seema Sarah, we might have to give it. Give Sema

the the gold medal this week. Thank you so so much for joining us this week from London. It was my pleasure. Thanks for having me on What Goes Up. We'll be back next week. Until then, you can find us on the Bloomberg Terminal, website, an app, or wherever

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of Bloomberg podcast is Francesco Levie. Thanks for listening, See you next time.