Forecast: A 'Tech-Stock Tsunami'

ranks of the White House. And on top of that, antitrust regulation is back in the spotlight from mega cap tech companies. Still, the stock market hasn't seemed too bothered, and instead financial markets look to be pricing in reflation once again. But Sarah, the big surprise of the week for our listeners out there is Sarah got yourself a puppy. I did impulsively, I did. I went to get a dog for my parents, and then I ended up buying

one of this of links for myself. Um. So I'm really hoping she doesn't wake up in the middle of this, because she's laying on the floor right next to me. I just pooped her out. Um right before we all walked on. I was starting to run her around the apartment as much as possible, okay, but pooped her out. Could could have a couple of meetings. I didn't know which one you're you're using there, I got you. You know, I've made a lot of impulse purchases in my life,

but never a golden Doodle. That's a big one. That that's a that's a big impulse purchase. I applaud you though, as a co owner of a golden Doodle. I'm very happy for you. In fact, I showed the picture to my kids and they were like the middle one was like, you should have the two dogs bark at each other on the podcast. And I thought that was a great idea.

What do you think? It's a great idea. But I don't know if our guest will be too appreciative of that, or or our producer for a matter of fact, um, but maybe later, Mike. Probably more insightful than the first presidential debate, so I'd be open to it, honestly, very good point and more civil too. All right, sorry, fine, you be the party pooper. No dogs on this podcast sleeping right now? I can't wake her up, alright, alright, fine, that voice you heard, that's our guests first time on

the show. We're very happy to have him. His name is Max Gochman. He is the head of asset Allocation at Pacific Life Fund Advisors over in Newport Beach, California. Max, welcome to the show. Thanks for having me. Excited to be here. We end up having a lot of people from Newport Beach, California on the show. Sir, I think we need to get out there and hold a podcast in person in Newport Beach something. It seems like it's either Newport Beach or New Jersey. Yeah. Almost really basically

the same thing, the same thing. That's right. No board walks in Newport Beach as far as I know, though, that's a good thing. That's a good thing. You selling me on it. Well, Max, let's let's get started here. Um know. As the head of of ASCID Allocation, I feel like it's it's a tricky time, you know. Bond yields are so super low, equity valuations are super high,

at least historically compared to themselves. I guess if you go back and look at those bond yields, they don't look as high as normal how how are you wrapping your head around the valuations in both markets this year? What what do you telling clients? Uh, you know, what's your your basic advice to someone trying to get some kind of real yield in this crazy world? Sure? Um, well it's it's been an interesting time obviously. Uh, just

to just start up by saying the most obvious thing. Uh. The other thing is um For us, we've been a bit more dynamic this year, and we actually started the year fairly neutral. We saw that the market was, you know, price to perfection and didn't see a lot of upset opportunities. We actually, uh, in our year beginning outlooks that there's probably gonna be about a ten percent correction that will be a good tactical time to dip back into equities.

We were very wrong on the magnitude of that correction, of course, but we did have the right idea. So we want up adding risk into the portfolio right around March twenty and that was really predicated on one of those situations that you really hope to experience as an investor, where everyone is going one way into such an extreme

that the contrariuon call suddenly seems very very rational. So when folks are selling treasuries and gold um and just moving into money markets, you know, all else being equal, you would say that's probably a time to take the other side of that. But when you also have a fiscal package that dwarves tarp about to be put through, that you know, really adds a lot of tailor win.

So that's how we got risk on uh late March, and then over the last quarter we really put all our bolts back in the pen um and Sarah, you you're not spoken about that a couple of times, but you know, the market was making new record highs, but the recovery actually started decelerating, and we think that permables may wind up running off the fiscal cliff before the year is out this year. So what do we do now? If you're looking for real yield, I would say dividends

are not a bad way to go. I think more defensive place within that space, like utilities are actually going to give you a decent yield. We think that high yield credit is also remains attractive. Spreads can tightened a bit more. The FED has that massive backstop and high yield is the biggest beneficiary of that. So for investors looking to to find yield in a desert observe, that

would be what we'd say. So if we are seeing deceleration in the economy, at least from that very strong recovery that we had seen coming off the bottoms since March, and at the same time, there is concern over will or will we not get another fiscal package, as you mentioned, we might fall off that fiscal cliff. Why is it that we are seeing this reflation trade resume. I mean, we look at ten year thirty year treasury yields now at the highest since early June. We're seeing small caps,

value cyclical start to outperform. How is it possible that this is happening when so many of those concerns still exist. So that's a really good question. And I think there's two possibilities, right because I never want to say, well,

this is what investors are thinking. Some I'm only one investor, but one is, uh, there's and this is what I would say is most likely, is that there's an understanding that we're going to see much more physical stimulus, that fiscal stimulus is going to have to have, you know, by Newton's storage law. Firm dynamics and equal and opposite reaction.

That's going to be massive treasury issues. So if we're issuing a lot more treasuries, to curve is going to steep on that longer end, and I think that's why yield are going up. The other and related reason is if the FED does go into yield curve control mode, then that I don't know itself, will will be inflation area as well. So how would you envision the yield curve control? Would it be to allow sort of a gradual steepening but not a really sort of sharp move

one way or the others? That is that kind of the safest bet do you think. I think it would be gradual, and certainly the FED would intend for it to be gradual. But one problem with y c C is that it's very open ended and market dependent. So um, you know, let's look at Japan for example, in they announced yield curve control and they actually had to buy a lot less g gbs. Since then, we may get a very different experiment result in the US, and that's

where the curve could move quicker. I think the FED would try to slowly phase it in and be very very clear about that. Powells I think learned the importance of being very predictable as FED chair. So most likely we good allow for a gradual steepening, but still steepening to a level where it's advantageous for for a treasury. So if we have inflation go up at the same time as yields are kept at a low rate, then

you're actually are issuing negative real rate debt. And if you look at CBO forecast and do a little bit of arithmetic, you can actually see that that's what they expect through seven. They're actually expecting that the average real yield of new treasury debt is going to be negative. So you have a real yield of treasuries that's going to be negative. Is this almost the perfect coalescence of a Bolish environment? I mean, okay, you have COVID nineteen

in the picture, still very much with us. But if we get more fiscal stimulus, yield start rising at forces the FED to start doing more asset purchases on the long end to keep them suppressed. All of a sudden, you have plenty of liquidity in the system and you have extremely extremely low yields. Even an environment where we're still coming back from a recession. Yeah, I I would say as we look into we are seeing the potential

for for growth to really come back. In fact, one of the reasons we've more recently tilted into value stocks and away from growth stocks, even as we've again you know, more near term scaled down our our risk to be fully neutral is because we do anticipate that growth full pick up and above trend growth is exactly what value needs and hasn't had in the last fourteen years to accelerate. So so yeah, it's uh, it's could be that perfect storm in that regard Sarah that much. Do you think

a steepening of the curve? You know, like I said at the beginning, a sort of the case for equities is that, yes, valuations are are high, but you know, with bond yields near historically low, especially you know, ten of ten of thirty years space, you know, from that valuation metrics, equities still don't look too frothy. Um, what would that gradual steepening of the yield curve do for valuations?

Is there enough earnings potential next year to keep this rally going or will we see some sort of compression evaluations if that curve steepens and and maybe a rocky road for equities. So I think it depends on where you look within the equity market. When we look at tech, which has obviously been both interestingly momentum and a defensive play this year, we have seen earnings run up so much that those valuations are going to be tricky to justify.

So I think that's where you're gonna have some some issues. I think there's a saturation even if we think of like the work from a home theme. Right, we've all bought fancy microphones and cameras, and we've all added Disney Plus and Hulu and Netflix, but our zoom premium packages.

So there is that saturation that that's there. I don't see that expectation in the earnings revisions, which have only gotten higher and higher, so eventually you know, you're you're going into the shed and taken out a pole vault to get over that bar just to you know, meet expectations. I think that's where it's gonna be a little trickier. Conversely, there's gonna be more downtrodden sectors h and again I'll point to value, where investors have been, you know, largely

ignoring it. And it still remains well well behind growth. In fact, it's still down a year to date, where I think valuations are a lot more reasonable, and at the same time, as is typically the case when the economy is roaring, investors stopped being a higher premium. So I think all that is going to call us into a really good situation for against certain value sectors. Will probably be a lot more tricky for tech. And we haven't even touched on the prospects of you know, tech regulation. Max.

I think you just dropped a hint for us to point out how great your audio is. Because Max was one of those who went out and bought himself a fancy microphone. He has I think a fancier one than both Mike and I, so he was prepared for this.

But Max, you you bring up tech regulation, and I do want to ask you about this because this past week we did here once again from members of Congress and those on Capitol Hill talking about anti trust regulation for these very very large, mega cap tech companies that have just been leaders for so long and have just grown into almost monopolies. And this has been discussed for a while, but it did seem like this report that

was released had a little bit more meat on its bones. However, at the same time, it didn't seem like any of these companies in the stock market seem to care. Sure, we might be seeing a rotation out of tech a bit um over the past five days, Tech is one of the worst performing sectors. Is anything different this time? Is there any reason to really believe that we are going to see politicians policymakers go ahead and actually implement

this policy and make some changes. I believe there is, And I also believe the fact that the market doesn't seem to care is exactly what makes being underweight tech on attractive trade because you kind of want to be a contrarian on on regulatory arbitrage. So the reason why I think it's different this time is because tech regulation

is by partisan the reason for regulating tech are different. So, you know, if we fast forward past November December, whenever we you know, find out the result of the election, and we have a new president in Congress, then if it's a Republican controlled Congress and White House, then they'll focus on perceived anti conservative bias as a reason to really suppress social media companies and alphabet If it is

a more Democrat controlled Congress. Well, I think, you know, really we've been talking about a blue wave a lot, and I think a blue wave is really gonna be at tsunami that drowns detect giants because the antitrust find things that have been found by that panel, which is largely uh, you know, democrat controlled, because it's in the House.

I think they're pretty substantial and there, and and it's gonna be hard to for Amazon, for Apple, for Google to say that their marketplaces really are not infringing on companies. I mean, there's been so much more momentum, and there's also been a much more momentum within the public, within the electorate to say, yeah, we have concerns about privacy. Yeah, we are hearing from small businesses who are getting pressured

by Amazon. There's a lot of developer is who complain about Apple's uh, you know, control of the app store. So all those things created a very different environment than what we saw in uh in years prior, and so regardless of November's outcome, it just doesn't look good for tech. I don't think it's going to be an overnight thing.

I don't think this is something where, you know, end of Q one, we have massive antitrust regulation going through for for tech, but it's going to be a structural theme and eventually investors are going to have to care when those proceedings are really gaining steam. All right, Max, I've been looking thinking about the anti trust issue from a different angle, and I'm not sure if it makes me a contrarian or just a deluded idiot. So so

let me let me know what you think. But you know, if I'm an investor, say in Facebook or Amazon, and Cagar says comes in and says you have to break up these companies, well, how it's done I think is important. You know, if if Facebook were to say spinle and I'm just making up these possible ways they could be broken off, who knows how it could really beat one. But say Facebook spins Instagram off two shareholders, or Amazon spins off Amazon Web services, their cloud business off the shareholders,

or Apple spins off the app store two shareholders. Is that necessarily a barish thing for these stocks in the long run? Um, You know, to those business synergies kind of outweigh the potential benefits share shareholders could get in a breakup. If shareholders end up getting cash or or

stock in one of the units that spun off. Yeah, that's that's a really fair question, actually, and I think the answer lies in the margins that you see tech companies have enjoyed, which are really actually one of the reasons we can justify their valuations to a certain extent, and why we were fine owning them as an overweight earlier in the year before the most recent run ups.

Once you spin off a division, you reduce your margin because you're just gonna have more of the same departments duplicated, right, so there's gonna be a lot of additional hiring that will need to happen. There won't be as much scale and cross selling by definition, right, so Instagram can't cross sell to Facebook, etcetera. First of all, the it's still

be large businesses, right. Instagram on its own is a very large company, um, But without Facebook as its parent, it's going to definitely find a tougher time on expanding and growing and doing so at at a low cost. And similarly, Facebook will lose one of its biggest growth engines because obviously, as although Facebook exects one like talking about this too much, Instagram has really been the reason

why Facebook has done so well. So, so I think long term it'll be interesting to see how these companies, once they're independent, in whatever scenario that ultimately comes through, can really make a go of it themselves. But they are going to be competing with each other, and I don't think that's gonna be a medium term certainly not a near term bullish catalyst. Longer term, we'll we'll have to revaluate pricing power goes down a lot, I guess,

and that's the point of anti rust, increased competition. Um. But speaking of competition, Mike, I I believe that it's that time. Oh boy, it's that time to someone warned Max about our gimmick. Oh he's prepared, aren't you. Oh yeah, I'm ready stand clear of the craziest things we saw in markets this week? All right, Sara, let's start with you. What's the craziest thing you saw in markets this week?

All right? So I will I'm gonna come clean completely admit I had help from our crazy things correspondent this week. But it is a really, really good one. So this is a story in the Financial Times. Just from the headline the start of it, it reads, Vatican used charity funds to bet on Hurts credit derivatives. I love that story. Unbelievable. So essentially I'll just read you, read you a bit

from the story from the FT. The Vatican invested some donations for the poor and needy and derivatives that bet on the credit worthiness of Hurts, the US car rental company that defaulted on its debts earlier this year, according to documents seen by the Ft and it goes on and it says put Frances said credit default swaps quote encouraged the growth of a finance of chance and of gambling on the failure of others, which is unacceptable from the ethical point of view. But the instruments, he said,

we're a ticking time bomb. Meanwhile, you have this going on and Hurt supposedly, um so who are we dealing with the Vatican? Robin Hood not really sure. What's really interesting about that, Sarah, is it gives credence to what Lloyd Blankfin, the former chairman of Golden Sex said when you mentioned they were doing work. So I guess they actually are. That's a good one, truly. I'd love to see the Vaticans pan l though it's you know, they have a pretty they have an Investment Arm of the Vatican.

I'd love to see, uh, see what their pan l is. That's pretty good move going along hurt CDs. I think a lot of a lot of fun managers probably wish they they had found religion on that issue there in hindsight, yeah, in hindsight. Um, we also had one. We had someone tweet that I wanted to make sure I mentioned as well, Mike, also because they've gave me a little props, which of course I have to play up if I have the chance.

So so this comes from I apologize if I'm pronouncing your name wrong, but Karen Verdi at k vora and uh he said. As it relates to Justin Bieber posting that picture of crocsend in croc share storing, he said, definitely to be mentioned in podcast for Crazy Things this week, and then he said, Mike in habit for next time, he's been lagging behind so far. So you hear that you've been lagging behind so far, Mike. I don't know what podcast this guy has been listening to. I don't

know about that one. That is a good thing that we thank him for. That contribution to Justin Bieber. Also one from Ben Emmons, who's been on the show, the strategist at Medley Global Advisors, pointing out the guy, the programmer at City Group who was moonlighting as the head of a q and on conspiracy theory website. And they managed to fire that guy. I was wondering, Sarah, you know in his employment agreement, what exactly they could fire

this guy for. I mean, I guess there's a lot of material there they can work with, so they ended up getting rid of them. It is a little bit surprising. Uh. It makes me think about who who were surrounded up with at work, if anyone's acy theorist. It's kind of dangerous though, you know who there could be a City Group conspiracy theory website up now next you know, they might be playing with fire a bit now Mike is starting his own conspiracy theories. All right, Max, what do

you got for us? Well, I've got a three course meal of madness for you guys. Um, we love that so so first first courses, fish and chips, and uh, I was just I'm kind of amazed with Brexit hinging on. Basically Johnson and McCrone agreeing on letting Frenchmen keep fishing in British waters, So fishing rights are point one percent of the British economy. Yet that is actually what's holding

a brexit right now. And Johnson went so far as to say, if we don't get a deal by middle of next next week or you know, October fifteen, then uh, we're we're walking. So pretty incredible are the fist fresher and certain bodies of water than others. So apparently fish in the British waters are very dominant, and it's actually really important to uh to the French as well as other EU members to keep fishing there without restriction. But aside from those fishermen, I don't think it's really a

reason to plunge both economies into a deeper recession. But you know, the eu is is never never stopped short of arguing over miniscule points. Um So, so next course, after our fish course, we're going to go to steak. And this was just a really great story that that I that I saw. Actually as I was I was like, I wonder what I'm gonna say for you know, craziest thing in the markets, And all of a sudden they get across my terminal salt Bay looking to delay payments

on two point seven billion dollars of debt. So I guess the the Salt Bay experience doesn't translate well into take out. Well, you know, Max, I was actually I was walking by the Salt Bay restaurant the other day in Manhattan and I was thinking, you know, I mean it opened right before this all began, and I was thinking, you know, this can't possibly be going well, I would imagine, apparently not, and it's it's it's their parent company, which I was actually shocked, like, how does Seal Bay have

three billion dollars of debt restructure? So once you once you repass the headline, it's actually they're holding company, but they are a Turkish holding company owning a lot of hospitality and restaurant assets. So m looking looking pretty tough there from the geopolitical and the sector stance. So hopefully, hopefully, I don't know, maybe they'll have Salt Bay go to the investor meetings and you know, but I guess you

can't because of COVID. So so really I don't know how we're gonna dig themselves out of people would watch thought they oversoom that's uh, it'll be interesting see and for my final course, we're gonna go to chicken and this is just that big story on Tyson and the other poultry companies fixing chicken prices from nineteen. The craziest thing about it to me is that actually Pilgrim's Pride was up on on the day and Tyson didn't really move that much. So I don't really know how this

doesn't send stocks down a little bit more. You think that a forthcoming indictment should should have more of an impact, but uh, I guess everyone believes that we'll just keep eating chicken nuggets. Wow, Sarah, this guy is good. That's that's three solid crazy things right there, three solid ones. But Max, I was hoping for some dessert too, so next time, you know, I was gonna leave him wanting more, so I'll keep working on my menu for next time.

That's pretty good, all right. Well, of course I'm going back to the well of the alternative investment space. Sarah. I also have a three three part crazy thing. I don't know what it is, but I guess the in the fall, this time of year, the art auctions really pick up steam. Everyone's back from the Hampton's and wherever they go in California. I guess. I guess it's always summer in California, so maybe it doesn't matter. But first one in art auction news, this is nuts. I did

not realize. Deutsche Bank is apparently one of the world's biggest owners of fine art. They have something like fifty thousand pieces of art in the Deutsche Bank collection. Uh, and they're gonna sell about two d of those going forward. Um, so that's the appetizer. The other one is it all a big art auction at Christie's, but sprinkled in with the art they were selling a full sized t rex skeleton. So someone dug up a Tarannosaurus rex skeleton the whole thing. Um.

And apparently that's very rare. I think the ones you see in museums usually are fakes. You know, they just recreate it full length, full size t rex skeleton. Sarah, you know what time it is. It's prices right, What would you think I knew this was kind of size

t rex skeleton. Oh gosh, I'm gonna I'm gonna go way up there this time, because I do know someone who once dug up a wooly mammoth vertebrae, and I know that went for her good amount, So I would imagine t Rex full skeleton, say fifty million, really good? Bringing it up? What First of all, we're gonna have to talk about your friend who dug up a wooly mammoth another time. Another time we'll say that. Keep the

listeners guessing, because that's a that's the story. I gotta hear. Max, what's your bid for a full size t Rex skelet? I gotta come in a little bit higher than van Sarah. On on that, I would say seventy million, seventy million, both are pretty good bits. I gotta say. If I ever started auction house, you two are going to be my first points of contact. I'm getting you in on every bid I think it was, and I apologize I don't.

I can't remember the exact number because my computer just died on me, but I believe it was thirty two million full size. Yeah, hopefully whoever bought it as listening because the law fer to Sarah. I think next and Max get to get a bidding where Yeah, I'm gonna throw a t Rex skeleton in my apartment with all the all the room that I have currently. All right, but that's not the craziest auction of the week. Someone, Um, there's this art project in London that for some reason,

it's dedicated to promoting bitcoin. Because there's not enough people Sarah out there promoting bitcoin, they needed to get some artists involved. So what they did is they took all of the original code from it was the guy Satashi uh I forgot his last name, Satashi, the guy which by the way, it was not even his real name whatever, whoever,

the guy that originally coded bitcoin. They took that original code and they cut it up into forty pieces and they printed each one out on this big round disc to look like a coin, and they're starting to sell them off one by one. Uh. Included in that disc is a a token they called a non fungible token. So you get a bitcoin token in this, but you know, you can't go trade it like you could any any

other bitcoin token. So I believe what Christie's uh the auction house wanted for this thing was between I think twelve and eighteen thousand. Once again prices right, what are you bidding max for this bitcoin token printed out? I think it's the first three hundreds and some thousand digits of the code. UM I would bid maybe thousand and the low ball, I would I would low ball to my off I would, I would, I would low balld it. It's not a very pleasant looking piece of artwork per se.

T Rex. On the other hand, if I could put a t Rex in my backyard, I'd bet that thing up alright, the rex um So if you said ten thousand was low balling it, I'll go for fifty k. It was something like a hundred and fifty k. So, uh, you know we're completely from both. Yeah. Yeah. In Fiat money, they as the daily Bitcoin website Fiat Money. So what we need to do here is print the bitcoin code on a t Rex and now then we can go

into a hundred million rates. That's that's the plan that Sarah, and that that is why Max is the head of asset allocations. He has the guy knows how to put a portfolio together. He's got the creativity that you need. All right, We I do think we're going to have to leave it there, though, Remember you can always give us a call at our very own Bloomberg Podcast hot line. That number is export six three two four three four

nine zero. If you call us, leave us a message, we may even play it on the show, but Max Skafman, thanks so much for joining us this week. We really appreciate it. This is great. Thanks guys, and I'm gonna I'm gonna name match the winner with the British fish saying that wins the week. I'm gonna I'm gonna give it to you. Thank you. As painful as as it is for me to admit defeat, I gotta I get a hand it to him on that one. Thanks fact

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