Omicron Tape Bombs

who stole the Santa Claus Rally. We'll get into it with a Goldman alum who is now the chief investment officer at Kestra Investment Management. But first, vil Donna, I I wanted to thank you for holding down the fort for the last couple of weeks while I was out. I was actually first my wife got COVID and then I got COVID, and um, as you know, I'm not usually on time with things like COVID. You know that the early adopters got it almost two years ago, and

here I'm finally getting it now. You know it's it's it's right on brand for me. Like I'm I'm still listening to Taylor Swift songs, the scooter versions, you know, to give you an idea. Oh my gosh, don't say that you're going to fend a lot of podcast listeners. I'm trying to. I'm trying to recalibrate the jokes to to your generation. But anyway, Danna tell us about this week's guest. I just met her for the first time. I'm I'm excited. What do we know about? What's your

intel on this guest? Well, first, I want to say welcome back, and we really missed you on the podcast. I don't believe. I don't believe that. In fact, I haven't even listened because I assumed you spent the whole time roasting me on on the last two episodes a little bit, so maybe don't really listen to them. But I did miss you. I'm glad to have you back, and I want to thank everybody who helped fill in over the last couple of weeks. But then let's bring

in our guest. Her name is Kara Murphy. She's the chief investment officer of Quesh and S Management. Kara, I spoke with you recently. I had so much fun talking to you, and I want to thank you for joining us on the podcast. Well, thanks for having me, and you guys promised me it would be fun, so it was an easy yet it's supposed to be fun. It's a really high bar. Well care tell us a little bit about Kestra. I don't know a lot about the firms, so just give us sort of the the overview about

Kestra and how you ended up there. It's it's only been a few months you've been there, right, That's right, that's right. So we are a wealth management firm with a number of different UM channels. So there's Kester Financial which has UM advisors all throughout the country, Grove Point. We also work with Art and Trust Company and then Blue Spring, so we have a number of different channels

and ways in which we work with financial advisors. As you said, I joined a number of months ago to build out Kester Investment Management and so my remit is really to build out investment resources, research commentary strategies to be able to assist advisors in managing their client's wealth. So it's been a wonderful opportunity for me to kind of have a blank sheet of paper and build something that we think is going to be really helpful and valuable to advisors, and I want to get into some

of your strategy and how you're thinking about things. But just to start things off with the big events that we had this week, because it was a really, really busy week. Because Mike mentioned, we had these pet winds that really weren't here a couple of days ago, with a new variant, plus a federal reserve that potentially could be withdrawing stimulus at a much faster pace than we had previously thought. So how are you thinking about this

and how are some of these developments impacting your strategy. Yeah, as you said, it's been a very interesting week. You know, you kind of come back from a holiday and hope it will be a little quiet, but it never quite works out that way. UM. But it's not too dissimilar

um to where we were over the summer. UM. So, just as the delta variant was getting going, we were starting to understand that it was much more contagious and we were starting to see rapid um case increases in the US, and that happened just at a time when

the Fed was gearing up to start withdrawing some stimulus. UM. So as those two things unfolded Around the same time, UM delta ended up becoming more of a head one that maybe some had initially thought, and that actually got the FED to hit the pause button a bit and and pushed out expectations for tapering and for FED rate. Kites now roll forward a couple of months more and the kind of steaks on both sides have increased a little bit where we have another kind of unknown variant.

We know that the market hates unknowns, so in the absence of information, people often go to dark places, right, So so the market is sometimes assuming the worst about this new variant at the same time that we're seeing more evidence of inflationary pressures. And and I think we should break down kind of what's driving some of these inflationary pressures. But clearly the stakes have gotten higher for

the FED. And so we've seen a big change in language from Powell and the markets starting to pull forward expect patitions for tapering and FED rate increases. Well. Carry my colleague Cameron Christ has a sort of a jokey line that he puts in columns, and that's uh that you know, everyone got a master's in epidemiology from Google. Your you know, I know as a as a chief investment officer, I'm I'm sure you you've you've got that too. So, um, there is this sort of echo of the frightening nous

of the delta variant with this omicron variant. What have you learned about it? How are you thinking about it specifically? I mean, is it potentially a false alarm? Do you think that that everyone's sort of freaking out about this? I look at this is me speaking as an investor and not an epidemiologist, but there is definitely a chance

that this is a false alarm. And again i'd like, I don't mean to downplay like the very real human impact of this, but when we think about how businesses, individuals, economies have been able to react in previous periods, we've gotten better and better with every that goes by in

this COVID environment. So, assuming that this new variant is not a wholly new kind of type of disease, we have better therapeutics, we have people being more careful in their behavior, we have you know, a large portion of the population vaccinated. So so there are we have a lot more tools today, um to be able to manage through this than we did before. And then put on top of that, we all know how to use our zoom. We've all gotten used to working remotely, we know how

to order things online. So I think the economy and people are in much better position to be able to handle a setback, even if it isn't setback. Yeah, I still mess off the zoom from time to time, but I know I do too. Yeah, we all do. And then karat the other part of this, obviously is the FED. I know before we started taping the podcast, Mike and I have this conversation where I told him I had written this story, saying that this is the most hawkish

j Powell has been in about three years. I got some mails from Bloomberg users terminal users saying, actually, you can't really use that word to describe him. So how much of what's happened this week? How big of a rule does Powell play in the sell off that we saw over the last couple of days, And do you think that the reaction was rational? So I I do think that the market had a bit of an overreaction,

which is not uncommon. Right when you see a big pivot in in a viewpoint with somebody like Powell who is very influential, you can often see the market kind of overreact in the short term. And and remember that we only just recently had renomination of Powell, so his sort of level of authority has been reinforced because of that nomination. So I think his word carries very heavy weight.

He was also very clearly associated with the devish camp within the FED, and so to see him move a little bit more toward that hawk ish end, I think is quite significant. But you know, I might agree with some of those terminal users who reached out were like, I don't know that I'd call him a hawk. He's just a little bit more hawkish than he had been before. Yeah, I think that's fair. And I my guess is he reserves the right to go be going up back to a dove in the in the spring of this summer,

if right. I mean, all we need are a couple of data points in the other direction, and he could very easily move back to the other side. Care One thing I know you you keep an eye on is the credit markets and and credit spreads. Um reading some of the notes you sent over to us with some of your thoughts, and you know pointing out that you know that the credit markets haven't really sort of freaked

out over these developments. I mean, spreads are widening out a little bit, but boy, historically if you zoom out on the chart, you can't even notice it. To me, it's fascinating. I mean you you certainly, I'm sure have clients who are actively engaged in credit markets or at least dipping their toes in it, you know, for people sort of just looking at the stock market, though, there's this tendency you know, for stock investors always seek a

second opinion from someone they think is smarter. In the fixed income mark gets um and that the temptation is look at to look at credit markets and say, well, they're not really freaking out. This is a false alarm, you know. To me, I think about it as I the participants in credit and fixed income tend to be h entirely professional investing class, whereas in the stock market you've got read It and Robin Hood and everything else and and and not entirely driven by you know, the

CFAs of the world. But I'm curious how you are looking at credit markets as sort of the signal for the stock market, you know, the FED. While how's a little bit more hawkish. Now, I feel like, you know, the FED really sort of changed the game with their credit facilities during the pandemic actually being willing to go out and buy corporate credit. Um And I know they didn't really end up buying a whole ton, but sort of the symbolism of it, of of the FED sort

of breaking that glass and breaking that seal. Does that does that at all? Sort of sort of break that signal for credit markets that that we rely on in your opinion, Well, it's so interesting that you mentioned about like stock investors looking to the bond market for confirmation, and like I often think of stock investors versus bond

investors almost like Griffin Door versus s blitz Lytherin. You know, there's this like healthy level of competition between the two, and there's always this like real fealty to wherever it is that you came from. I won't say whether like who's the slitherin house, but but but there is like a fair amount of um of sort of like loyalty saying like if you're a stock investor, no, no no, no, the stock market is the one that's giving the real signals.

But but I think any investor is going to look for more than one single data point to confirm, right, especially in very fast moving markets, you know, Like I think back to the global financial crisis. I was then a stock analyst covering financial companies, and we would use the credit markets a lot because they were often picking up signals, particularly like short term funding markets, that the

equity markets were missing. So so there are times when there's one part of the market that's a little bit closer to this story. I think in this particular instance, like we really aren't. We're not like looking at a lot of stress in general in credit and so I wouldn't say that like credit markets are necessarily closer to the locus of the issue. It's just yet another kind of UM signal to be able to put alongside these

other ones. UM. So in this case, you know, you're gonna look at the full set of data that you can UM and what that's telling us is that there's nobody there who's raising the red flag. Mike, I feel like you'd be in raven Claw or huffle Pop. Those are Harry Potter. Oh oh my god, Okay, you'll probably watch Harry Potter and like twenty years the way you're trending. Yeah, I'll catch up with that eventually. Yeah, yeah, yeah, Karen,

I promise. We talked about your strategy, can you talk a little bit about what you're expecting for I think in one of your no to had said it would be really healthy for the market to turn sideways for a bit, which struck me a little bit because that might sound a little bit disappointing to somebody who was expecting a rally into year end. And so, how are you thinking about the next couple of weeks, what are you expecting? And then looking into two what are you

expecting there as well? Yeah. So, so if we roll back briefly to like two thousand twenty, where we had this massive air pocket in the economy, corporate earnings took a really quick dip down, and then as the market started to recover, you had prices that were covered recovering way before earnings did. Right, So all of the increase in stock prices that we had in two thousand twenty

was really driven by an increase in valuation. And when we roll forward to two thousand twenty two one, then we had a really big rebound in corporate earnings, profits and some compression and valuation and that's a healthy thing, and that's typically what we'll see coming out of a downturn, and so I would expect to see more of the same into two thousan in twenty two. We already have corporate profits that are at or near historic highs. We've

really really strong corporate earnings growth. We think corporate earnings growth will remain strong in two thousand and twenty two, but not as strong. But if we have a market that's just turning sideways for a little bit, it just gives time for those earnings to catch up with the prices that we have right now. Yeah, I just think of it as a correction on the other axis, you know, not on the price axis, but the but the time access And I mean, you know, yes, as far as

valuations go, do you think that that top has been set? Uh? Do you think? Never? Say never? Right? I? I you know, I've I've learned that it's very hard to call like specific turning points UM and and so valuations typically are are a very bad indicator UM from market turns because we can stay expensive for a long time, we can stay cheap for a long time. But what they are good at doing is forecasting forward returns over like a medium term time period. Right now, valuations are high relative

to historical measures. That doesn't mean that the market is going to turn down, but it does mean it should keep a lid on returns over the medium term. And then another one of your notes said, and correct me if I'm wrong. I think it's aid that it's sort of a contrarian call that once inflation turns, we'll see a swift reversal. So I'm wondering if you can lay out the timeframe around that and you're thinking around that

and how it potentially affects markets. Yeah, and so this is I don't know if you guys have had this experience, but like we we order we had some new cabinets in our house and we ordered new polls, right like simply like pretty like basic thing. But we ordered them about like fourteen months ago, and we've reordered them multiple times, right, So they're sitting on side like they were sitting on some ships, you know, off the off the port um.

So we ended up ordering three different sets, not knowing which one was going to arrive when, and in fact we ended up getting two partial orders. So it was good, right, but someday that third order and the rest of the order are going to arrive, and we're gonna have a

bunch of polls that we don't really need. So think about that replicating all over the economy where you have and in fact that there was just an article the other day about store owners that we're starting to order additional amounts of inventory just to be prepared and have stuff on their shelves. So once all of those ships get unloaded, once that inventory gets on trucks and it gets the stores, there are going to be certain types of goods where we end up having more inventory than

what we had originally forecast. And that's the challenge in managing this inventory at a time when like demand and supply are changing so rapidly. So you know, it's you asked about a specific timing, and I think it will depend on the specific good that we're talking about. So, for instance, like lumber was one of those commodities that started to shoot up fairly early in this cycle um and you started to see people who were reaching out and buying lumber ahead of time because they were worried

that the price would keep going up. Well, sure enough, those prices are down like six percent or so from that peak, so that reversal came very very quickly. So ones that went up more rapidly are likely to decline more rapidly. Um and it won't all happen at the same time. It will be kind of sequenced out. We had the exact same experience, you know, stuck in the house. My wife decided it's the perfect time to redecorate, and you know, ordered guiding room chairs. We got a new

front door. I mean, we never got the first thing you wanted, right, It's so frustrating, it's such a nightmare. But Carol, I think I always picture some of our listeners sitting there sort of you know, rolling their fingers on the desk, saying, just tell me what to buy? Have this person tell me what to buy right now?

So can you kind of break it down? It was sort of what's attractive to you both from uh, you know, sort of an allocation standpoint at this point in the cycle, and also you know what you like in each bucket

of allocation. So like one word of warning that I would have is make sure that your overall portfolio allocations are aligned with your risk level and your strategic goal, right, so so you know when you think about the incredible growth and stocks that we've had over the last year or two, it's very likely that folks have portfolios that are out of whack, right, where the equities have just

become a disproportionately large portion of their overall portfolio. And so this is part of just being disciplined, right, And it doesn't matter where you are on the cycle. You should you should be just like looking at that portfolio and confirming, yes, you know, I am comfortable with this level of risk. Make sure you're honest with yourself, right. You don't want to get over your skis and have too much risk. Then the market tirns down and then

you're unhappy. So so that's very important, and that just goes to like the good hygiene habits of being an investor. And then when I think about, you know, our expectation for returns going forward for both stocks and bonds are more muted than what we've seen over the last couple of years, no surprise, UM. And as I said, that's part of you know, earnings catching up with prices. Bond yields are incredibly low. There's only so much lower that

they can go. UM, So it indicates more moderate returns going forward. Within the stock market, we talked about valuation, and this reflects my bias generally is more of a value type investor. UM, but we would have a preference for the types of companies that have, you know, strong growth, characteristic strong balance sheets, have the opportunity to start to return capital or increase their capital return to shareholders. And you can find stocks like that in pretty much any sector.

So it's not necessarily a sector, but UM, but having a higher preference or quality in general, I'm like six game stop Sheba. You know, I got a mixture rebalanced.

That's that's a good mix. It's a really good mix. Actually, she but you it was down earlier this week, even though it had some really high profile around announcements around it, and oh my, oh my goodness, but can you talk about where tech fits in with what you were just saying, because it struck me a little bit by earlier this week we had expected some of the bigger names to maybe hold up really well during the sell off days

that we saw. I remember looking at the Nicety thing in Next I think it was on one saying it was down something like two point seven percent, which really struck me. So how are you thinking about where tech fits in with your strategy and are you expecting some of the names to be a performers going forward. Yeah, Now, tech is a good example where you can find those really go go stocks with super high aggressive evaluations, and then you can also find some more mature companies who

have like very solid earnings growth. So so you you can kind of find good examples of both types of stocks. And so you know in the cellf that you're talking about. So typically when you get later in an economic cycle, the market tends to start to shift towards growth, right because overall growth is harder to come by, so we're going to pay more of a premium for those companies

who actually can deliver repeatable growth. But then contrast that with where we are right now, which is that a lot of those um valuations are quite stretched relative to historic levels. So I think when you have that risk goff environment like we saw earlier this week, the market is punishing those that have the more lofty valuations and the less reliable earnings. So I think what the market is telling us that in a risk off environment, when we're worried, we're going to go back to that safety

rather than looking for growth. One bullet point in your notes, I wanted to discuss a little bit. You say, once inflation turns, we will we will see a swift reversal. Do you mean a reversal in that this recent dip we've had, or reversal in the the oh, I mean reversal in prices so um, and you know, I think that's worth drilling into a little bit more. Right, there's

sort of like two things going on with inflation. There's the supply chain disruptions that we talked about, right, and so the good sitting off of ports and the multiple orders UM. And I think that's where you'll see the really big swift reversal in price increases. And that's very concentrated in durable goods, and it's um concentrated in and UM a lot of types of prices that tend to

be more volatile anyway. The other one that's more concerning, and this is a little bit more I think what Powell is looking at is just like the the you know, core sticky, everyday type of inflation that's more tied to economic growth. And so you know, we've had over the last couple of weeks we've had some really strong indicators of almost a re acceleration of growth into fourth quarter. And the bigger concern is that very broad based growth will find its way into those like sticky kind of

core prices. UM so, so that and that's a part of the um of the economy that moves more slowly, but certainly those durable goods anything affected by the supply chain I think will reverse quite swiftly. So so I keep wondering, well, how how big of an effect can the FED have on inflation until the supply chain stuff is sorted out? But I'm curious, so how how you

kind of look at that core stuff? Would you look at sort of a trimmed uh CPI measure or something like that, Or that's another one where like you have to look at like a ton of different ways of slicing and dicing because you're going to get very different answers. Then you can't rely on you know, your your standard core p PC because you know, you look at it a slightly different way and you get very different numbers.

So we've broken it down by um, you know, core versus headline trimmed, broken it down into like pandemic affected baskets versus non and I think what it's seeing is that there, it's pretty it's pretty easy to track that stuff that has been affected very directly by the supply chain, but it's hard to remove all of that from the core, from like the true core. But what we've seen is that in the specific indicators that we know are impacted by the supply chain, we have seen some of those

start to peek and start to come down. So I mentioned lumber, Auto prices is another one where use car prices have started to retreat a little bit, and we've seen a number of other indicators like that that have started to sort of come on the other side, stuff that's not sitting on a on a ship somewhere right right, Tiden up your straight jackets. It's time for the Craziest Things we saw in markets this week? Well, Theil Donna speaking of core, obviously, the core element of this podcast

is the craziest things we saw in markets this week. Uh, and there's a lot of inflation in that area as well. The crazy things continue to keep rising. What are you got for us this week? Well, first, I have to apologize to everybody because I've been calling it the weirdest thing or which is it crazy? You know, I'm in my bed sleeping during COVID and I'm getting texts. Tell fil Donna, it's the craziest thing. Oh, I shouldn't know better.

I did get a submission from a listener. I have a submission from Alan wax Staff in Minnesota, and he and I were actually exchanging messages via Twitter. He sent me a link to an eBay page that lists Spider Man movie tickets, and at first I think the top one was for seventy dollars, and then as I scrolled through, some of them were going into the tens of thousands. So it turns out I mean, I like Spider Man

and all, but not for dollars. So it turns out that advanced ticket sales for the movie had crashed MC's website last weekend, and then mc CEO Adam Aaron tweeted that the first eighty six thousand purchases of these special reserved tickets for a December sixteen showing or some such they were going to receive a Spider Man n f T. But there was something like a hundred unique kind of tea.

So it was super complicated story. All these tickets. I believe we're getting bit up on eBay because of this and some other auction sites just because of the tweet and all of this that was happening. Wow, that is fascinating. So thank you Allen for for sending that in because Yeah, sometimes I think that guy manages his company to optimize. It's a strategy segments he manages to get in there. That's pretty good. I don't know. I thought I had

a good one, But that's pretty good. How about you care? What's your craziest, ender weirdest thing. So my you know, we we talked about inflation, but we haven't talked about housing. Right, So the housing market has been going crazy, and I'm

here in Austin where it's been especially crazy. But sure enough, outside of Boston, there was a house that had had a serious house fire, so there was almost nothing left of the house, but sure enough it went on Zillo for three thousand dollars as is, and I don't know, I've been tracking it to see if it's actually sold yet. But burned house, that's a hot house. Did they burn it to tear the house into it? N f T Maybe that's the but put him on EVA and yeah,

a millionaires. I sometimes think that the press loves that story. This house that's a piece of junk. So but really it's the lot, right, I mean, you know, I know it's like it might have that lot, might that house was probably worth less with the structure on it. Then you know, well interestingly, so I looked and it's on

Zillo and the estimate was pretty close to three. I'm assuming Zela did not try to flip that one, given their there uh turmoilson, But you know, I like, I like that crazy thing because it's it allows us to talk about a more serious topic, which is this insane housing market. And I think anyone of a certain age who lived through the financial crisis to see house price

gains like this is very worrisome. I mean, do you is there any concern for you of of sort of a subsequent crash and housing prices and you know, is the system hopefully better you know, safeguarded at this time than than what happened last time? Yeah? So, I mean a key difference between today and two thousand seven is leverage. So if you look at mortgage lending standards, they're actually

still fairly tight. And go back to two thousand seven, mortgage lending standards had been loosening for years, and lenders had becoming increasingly creative in offering financing to individuals. And then if you look just in general at consumer balance sheets people have. You know, we have among the highest savings rates that we've ever had. Consumer debt levels are really low, interest rates are really low, so when you

do carry debt, the service payments are very low. So I think that the fundamental health of consumer balance sheets is much much better today than it was. No. Seven. Yeah, that's a great point. All right, I'll stop worrying about that. I've got a long list of things. My job is done. I'll scratch that one off again. Minds from the alternative asset class, uh, the collectibles class. So this is an incredible I I encourage everyone to google the story from

the Washington Post. Really a well reported story. It's about a letter from Catherine the Great, the Russian empress of the of the eighteenth century. She wrote a letter supporting mass immunization against smallpox. Uh. This is way back in you know, the late seventeen eighties. And for one thing, I'm fascinated at at the fact that you know, immunization goes that far back, but this story lays out the

history of of immunization and it's it's even more fascinating. So, prior to vaccination, they did what is called variolation, which instead of creative a vaccine, they would take a piece of the scab from the small pox were I hate to say the word puss, but take some puss for the small pox moon and actually get that into your bloodstream. And that's how you would, uh, that's how you you get the immunity to it. I'm never complaining about a shot again, right, I know, I'm I'm not at all

vaccine skeptical. I gotta say, I think I would have been a little vary relations skeptical. Back to the well, what's nuts is it's not even that far back. So the way this was discovered in the West was a slave in the early part of the seventeen hundreds who introduced it in the US. And he said in Africa they were doing this for hundreds of years. It's fascinating. Really, yeah, that is fascinating. I encourage every and to look up that story. Uh. It gives you a really great uh

look back on that. And the reason she wrote this letter is because there was a lot of peasancy and skepticism um to this, which I kind of sympathize with in this case. Yeah, but anyway to turn it into the craziest thing in prices, right, So this or she wrote sold at auction along with a painting of Catherine the Great from some some famous artists I don't know, but the letter is really the key thing. So time will play prices, right, Karen Villdonna, start with you, vildonna?

What would you pay for this letter from Catherine the Great? Denominated in British pounds? By the way, you gotta you know, you gotta account for the effects. I'm notoriously bad at guessing these things. I'm going to I'm going to overshoot. I'll go with ten million, Okay, I will keep my eye out, I will keep my poker face. Ten million British pounds is that way too high? I will I will say that Vldonna is the type of customers that auction houses dream of. And you'll probably getting some calls

from from from sales reps at uh at various. I usually on a shoot by a huge amount, So I'm really I'm trying really hard. I might have hit my hand a little bit there, but you might forget I said that, what what what's your bid? What's your bid? Well, I think a very important question is are there n f T s that come with us? I don't know my price. You're free to burn the letter and sell it as an n f T probably for what would uh Bildona's talking about? Okay, so I'm going to take

the under. Then, Uh, let's go with five million pounds. You guys are big spenders. I thought it was a lot nine hundred and fifty one British pounds, which bargain, bargain, let's go for it. Yeah, you should. You guys should go go make a bit on that, and then we can hang it up behind all of our zoom calls. There we go. That would be that would be a flex in a zoom call, for sure. If that would be, Oh my gosh, that'd be fun. Yeah, I've got I hang my wife's diploma because my diploma looks like I

don't know something from a comic book. It's not a very distinguished looking tell you a little bit about maybe that color is a little bit about the university I went to. But my wife has a very distinguishing diplomas and luckily no one has zoomed it enough to to realize it's not mine, but it's not your name. But with that said, I think that is all the time we have care. Really great to have you on, uh, really good conversation. I hope we can get you back

some day. Thank you, Thank you. Yeah, I love turning talking about burning houses. Let's do it again. Thank you, Carol. What Goes Up. We'll be back next week. Until then, you can find us on the Bloomberg Terminal website and app or wherever you get your podcast. We love it if you took the time to rate and review the show on Apple Podcasts so more listeners can find us. And you can find us on Twitter, follow me at Reganonymous.

Will do a Hirich is at Bildta Hirich. You can also follow Bloomberg Podcast at podcast and thank you to Charlie Powell to Bloomberg Radio. What Goes Up is produced by Laura Carlson. The head of Bloomberg Podcast is Francesco Levie. Thanks for listening. To see you next time.