Odd Lots - How All Financial Markets Turned Into The Same Big Trade

Episode Date: September 28, 2020

These days it seems like all financial markets are the same big trade. A gold chart looks like a Tesla chart, which looks like an Ethereum chart, which looks like a chart of a basket of cloud computing stocks. So why is this? And what could cause that to change? On this episode, we speak with Jared Woodard, the head of the Research Investment Committee at Bank of America, who recently published a report on exactly this. As Woodard explains it, the question starts with low growth and inequality, and the premium that investors will pay for certain types of securities in such an environment. He walked us through how that might change, and what investors can do in the meantime to discover under-appreciated values in the market.See omnystudio.com/listener for privacy information.

The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gurra. Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Rafini. We'll bring you the latest headlines, in-depth analysis, and big interviews. All the stories that hit home on your days off.

And I'm Lisa Mateo. Watch and listen to Bloomberg this weekend for thoughtful, enlightening conversations about business, lifestyle, people, and culture. On Saturday mornings, we put the past week's events into context, examining what happened in the markets and the world. That on Sundays we speak with journalists, columnists, and key political figures to prepare you for the week ahead. Join us as soon as you wake up and bring us with you wherever your weekend plans take you. Watch us on Bloomberg Television.

Listen on Bloomberg Radio, stream the show live on the Bloomberg business app, or listen to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg Television, radio. and wherever you get your podcasts. And welcome to another episode of the Oddlots podcast. I'm Joe Wisenthall.

And I'm Tracy All the Way. Tracy, I liked one of your tweets this morning. Which one? No, I mean, they're all good. I like all your tweets. But I liked your chart comparing the share price of Tesla with the price of the cryptocurrency Ethereum and how closely they've tracked each other this year.

Yeah. You know, I have a history of finding spurious correlations between cryptocurrency and other assets. The most famous one being Bitcoin and Avocados, but I have to say the Tesla versus Ethereum chart, I'm not sure it's actually that spurious a correlation. I think there's something there. Yeah, I mean, I do too. And I was exactly going to say, I think the infamous Bitcoin versus the price of popcorn versus the price of avocados one, that one was probably spurious. But I actually think that when you look at something like Tesla and Ethereum, it's not as spurious as that one was or maybe people think. And in fact, there are like a lot of charts that all kind of look like that these days, even though they seem to be in very different asset classes and with different fundamental theoretical drivers.

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

And I think this gets to some of the frustration in the market currently, which is that the same things keep increasing in value, notably the tech stocks, and lots of people think that that shouldn't be happening, that that's irrational, that at some point the price movement should become self-limiting, i.e., the stocks themselves should become too expensive, and yet they just never seem to. People just keep buying and buying and buying and pushing up the valuation. Yeah, and I think the other weird thing is, is that, like, you know, you look at say like tech stocks flying to the moon, and it's like, this is what people are. would call like risk on, right? So people's like, this usually is associated with, you know,

and you see valuations go up and you see stocks go up. One typically associates that with boom times. But the weird thing is also the simultaneous rally in assets that one doesn't associate with boom times. So gold obviously has had an incredible year. It's come off the boil a little bit lately. Treasuries have had an incredible year, although they're sort of like backed out because rates are at long and treasuries are zero. So you have this simultaneous boom, not just in risky assets with different fundamental drivers, but also weird like boom in safe haven assets and risk assets at the same time. And I think that's the part that really sort of throws people a loop like gold and Tesla both looking the same. It's strange. Yeah, it's strange. Although I have a feeling that a lot of people

would point out the role of central banks in this and the flooding of liquidity and the idea that money has to work its way into some sort of asset, whether it's a traditional safe haven or something like a tech stock. And of course, some people are calling tech stocks safe havens now, which is kind of crazy compared to 10 years ago. But anyway, yes, it's a big theme in the market. And I'm looking forward to this discussion. Great. So we are going to be talking about how everything has just become one big trade. Our guest this week is really brilliant guy. I've loved reading his stuff for a long time. Jared Wooder. He is the head of the Research Investment Committee at Bank of America, and he recently wrote a note exactly on this, the all one trade in this of the market.

So, Jared, thanks so much for joining us. Yeah, I'm really glad to be with both of you. Thanks so much for having me. So it's not just our illusion, right? I mean, it really does seem like everything is kind of the same right now. Is there, A, is that true? Is there an easy way to sort of demonstrate it quantitatively that it is all? the same right now. It's not just sort of us playing tricks with terminal charts.

Look, I do the same tricky charts in Excel. So I think you can choose your software and make some pretty bold claims. But I think there is some underlying truth to it. And there is a simple explanation. This is a world in which two big features that have been with us for some time, namely really scarce sources of growth, especially sources of profit growth. combined with the world of ample liquidity, as you mentioned. And when earnings growth is scarce, but there's lots of liquidity sloshing around, then investors will kind of do two things we know from the last 10 to 20 years. The first thing they'll do is they'll bid up the price of those assets that can produce

some cash flows and profits in a world where those are incredibly scarce. They'll bid those up to very expensive levels, as you mentioned with tech and there's lots of other examples. The other thing that they'll do is they'll buy things that basically, function like call options in a way, even though they're not derivatives, that, you know, assets that maybe don't do anything right now, but might do something really big in the future. Cryptocurrencies might be a good example of that, you know, esoteric commodities linked to new products, new sources of energy, you know, futuristic technology, any kinds of asset that might really explode in value in some future scenario in the world, even if it's not giving you a

cash flow today, you know, may become worth quite a lot. And so we're worth buying to today, when liquidity is ample and there's really no alternatives in conventional investment assets. So fixed income, for example, you have treasury yields at record lows, corporate bond yields incredibly low. There's relatively scarce places to generate those kinds of returns. And so what we find are investors forming portfolios that are kind of a barbell of the tech and maybe healthcare, maybe consumer discretionary stocks that can still grow their earnings in a reliable

way, scarce as they are. So we'll bid up those on the one side of the portfolio. And then the other side is kind of your liquidity trade, slightly more speculative part where you buy something that might generate some outsized return someday as long as it's not too expensive to own today. And the underlying dynamic here is one in which there's actually reasonable economic rationale, I think. I mean, just as corporate profit growth is scarce, we know public. economic growth is scarce. And so you're starting to see, I think, the kind of inequality on Wall Street that we've seen on Main Street for a very long time. Everyone knows about, you know, all those eye-popping, you know, statistics about the relative, you know, size of income and

wealth controlled by, you know, vast numbers of people on the world relative to the handful of very wealthy folks who control quite a lot more. And so if you think about that, I mean, one of my favorite statistics on this measure is Orrin Cass's cost. of Thriving Index. So if you go back to I think 1980 and 1985, you know, the average worker making, you know, median salary, it might take them, I think it was something like 20, maybe 25 weeks out of the year to earn enough money to pay for the big fixed costs that you have to have for sort of a comfortable, you know, middle class life, a house, a car, education, healthcare, housing. So you fast forward to today, and I think it takes like 53 weeks out of a

52-week year to pay for those same fixed costs. So the bottom line is, even if people can kind of get by, they certainly can't thrive. They certainly can't spend on things they like to spend because their income, so much of their income is consumed by the necessities. And whatever your politics are around that, I think the bottom line is that for a country like the United States in which consumption is 60 to 70 percent of GDP, we can't ever expect to have breakout economic growth in an economy in which most people simply don't have enough income to spend on discretionary, you know, disposable kind of items. Well, that's,

that's a familiar story. What I think less familiar, perhaps, is, is the inequality that you're seeing that manifest on Wall Street, where you can look at the broad measures of corporate profitability across the United States, the national income product account NIPA measure is a popular one, where if you look at that measure across all of corporate America, even including small, meaning of businesses, profits haven't actually really grown in dollar terms since about 2014. I mean, if you, you know, obviously excluding the pandemic and the collapse in profits then. But if you go back to the start of 2020 before profits really took a nosedive, you know, corporate profits had flatlined for many years. Contrast that with the S&P 500, large cap, the really

big winners, where profit growth has been continuing to explode, you know, upside led primarily by the six or seven big tech and sort of consumer stocks that we can all think about. Well, that kind of inequality on Wall Street, where just a handful of firms are able to generate the lion's share, both of profits and of market returns, is, I think, exactly the kind of dynamic you've seen across the real economy. That's what drives people into these crowded trades. The intuition that we all have is, this is incredibly extreme. This can't continue forever.

This won't end well, et cetera. the problem is that if you bet it against that trend, you've gotten burned, I think, for quite a long time. And so the next question that we always get asked is, what would cause a reversal or what would cause a change? Yeah, I think that's the big question. And we're definitely going to return to that topic. But just before we do, one thing I was wondering is, given this backdrop of slow economic growth and abundance of liquidity, how much does price? of financial assets actually play into all of this. And I know it sounds weird, but one thing I often think about is if you can't make money through cash flow of companies because there's

sluggish economic growth, then one way to actually make money is through asset price. Asset prices going up. So it's kind of flows following flows, right? You're trying to target the thing where a lot of money is flowing into on the hopes that that's going to force the price up, and that's basically another way of monetizing. Is that something that you observe as well in the current environment? Well, we definitely see, you know, periods of speculative flows kind of and price bubbles, which is maybe the natural outcome of this kind of environment. A lot of work done this year, I think, for example, on flows among individual investors, especially younger and more tech-savvy investors trading in different ways, trading to different

kinds of assets. Not sure how much those move the needle in overall dollar terms relative to the size of the market, but whether it's in the options market or in just cash equities, you've certainly seen some of those big speculative flows. I know that if you look at a very simple measure, something like the price of the S&P 500 relative to its 200-day moving average. In recent weeks, just that simple ratio, I think, reached the highest level since 2009, as we had this incredible rally fueled by the sense from at least some investors that,

you know, markets are only going to go up for quite a while. And when that gets reinforced by that ample liquidity, by obviously incredible fiscal support this year, it's a great recipe for some speculative upside bubbles that then get popped and, and assets redistributed, perhaps in the steadier hands, kind of like the classic old story. What doesn't change are the economic fundamentals and the scarcity of that underlying growth. I'm Francine Lacquhar, an award-winning journalist,

and I've got a new podcast, leaders with Francine Lacqua from Bloomberg podcasts. I've interviewed everyone from heads of state to fashion icons about the news of the moment. But I've always been curious, who are these people as leaders? I don't think there's one. right way to be a leader. Make decisions. A poor decision is always better than no decision.

Listen to new episodes every other Monday. Follow leaders with Francine Lacroix wherever you get your podcasts. I really like the way you sort of characterized earlier the sort of some of these speculative assets, like a lot of popular tech stocks, is sort of being like a call option on some future outcome. And so you see incredible valuations for, say, cloud computing stock. How much, or say Tesla, which maybe one day will have an autonomous electric vehicle on Mars or something like that, and somehow they'll make a ton of money on that. I'm curious, like, one of the things is this out of idea, the flooding of liquidity, the collapse in real interest rates, real interest rates are actually negative. How much that's really the part of the story? Because if you talk to cloud investors, they're like, oh, yeah, all these businesses are going to the cloud.

If you talk to auto investors, like all these business, all these cars or whatever, like people have their individual stuff. stories. But how much is it as simply that when real interest rates are negative, people can afford to wait because they're not really losing any money in the short term by waiting for those profits that they expect to come rolling in in the year 24? Look, I think it's certainly true that each individual industry has its own idiosyncratic drivers. But what gets people to invest and what motivates those flows, I think absolutely is the broader macro story. Just the overall value versus growth debate, I think captures this really well. You know, we published recently, you know, on the fact that value versus growth over the past

10 years has just, you know, endured its worst period of returns in history. Worst in the dot-com bubble. Yeah, that was a great chart, you guys public. Thank you. The bottom line is that is that when growth is scarce, you know, growth stocks outperform, it's just really simple. But, you know, we tried to get a little bit deeper. If you look at the, just to sort of explain that ratio, value.

versus growth. We found that you could you could explain about 80% of the variance with with just three variables. It was interest rates, inflation, you know, expectations, inflation compensation, and the business cycle proxied by purchasing manager indexes. So those are three really common variables. Everybody looks at and they account for about 80% of the variance. What that tells us is that for value to recover the losses this year relative to growth stocks, you'd have to see the 10-year Treasury yield rise from, I think, like, 0.6% today to 1.8%. You'd have to see five-year forward inflation, you know, expectations rise to 2.5% and keep PMI's very stable and expansion territory. So that's a really big recipe, you know, a really big bill to fill. And one reason

why we think growth stocks can continue. So it's absolutely, I think, a function of, you know, very low expectations out into the future for growth and for inflation and driving a lot of those flows. You saw some great evidence of this, by the way, very recently when the Fed shifted its inflation, you know, framework and the chair basically made it very clear that we're going to allow inflation to overshoot for some amount of time. On those days and the sessions in market thereafter, there was, I think, a pretty clear rotation out of some of those tech and other kind of growth names into things like financials and energy, precisely because I think investors realize that in terms of these longer dated, you know, discounting cash flows back to the present, at some point

in the business cycle, if we do get to meaningful wage growth in particular, again, you know, the Fed might really will be more tolerant. It's really remarkable. If you look at a chart, for example, of wages and just the Fed funds rate, however, the past three or four cycles, the Fed has always hiked interest rates just when, you know, the lowest income parts of the labor market really start to enjoy, you know, some of that juicy upside. And then they cut it off and you get a recession, you know, shortly thereafter. It's always happened in the past.

What a coincidence. Yeah, right. And so, you know, that's always happened in the past. It's always, it's always bad news for growth. You know, although I'm not quite the sort of perennial optimist, like some folks are about the Fed, you know, it does seem that if the Fed is able to make and meet this commitment, that if we do get in the next business cycle, you know, we start to see. wages rise really meaningfully. If the Fed does sit on its hands and say, look, we're going to let

this continue. It actually could mean at that future date, who knows how long it takes to get there. It could mean some more meaningful upside, I think, for the economy and for inflation. Investors are going to price that in. It doesn't mean a radical permanent shift now, but it does mean that I think that the distribution of returns can tilt a little bit more in favor of value, you know, in that sort of right-hand-tail future state of the world. Yeah, it could actually be different this time, or at least the Fed's framework is different. So you already touched on this a little bit, but when it comes to something like the tech stocks or, you know, the typical things that people like to say are in bubble territory, what will be the thing that sparks the big reversal? You just mentioned inflation and the return of some wage growth potentially and maybe the Fed being more patient than it used to be when it comes.

comes to that. But is there anything else that you see that could sort of spark that big repositioning? Well, there's one sort of markets-related catalyst that could happen anytime. And then there's a policy-related catalyst that I think we could look for as well. The markets one is, I mean, I wonder whether this sort of value underperformance, for example, or just the kind of returns we've seen lately cause investors to look at their accounting again and think twice about the way that they're interpreting, understanding corporate actions and businesses. If you think about a conventional value index, you know, a price to book sort of a ratio,

well, what goes into that book value? It's assets minus liabilities, but the assets that typically are included are mostly just tangible assets. We saw one estimate from a third party claiming that in S&P 500 companies, intangible assets actually account for 84% of their total assets. Now, I think that note is a little bit high. It just sounds high to me. But even if you think it's only, you know, 50 or 60, I mean, it's a huge amount of work that's not being accounted for in a lot of conventional models, things like patents, the output of R&D, the training that goes into a workforce, customer loyalty, brand value, whatever that's worth. I mean, these things aren't worth zero dollars. It should be included. And if you do include them, there's some academic research and some independent work that our team has done, suggesting that if you you include intangible assets in the formula for companies book value, you can improve the returns to a value strategy by, you know, more than three percentage points a year versus a

conventional benchmark. And that's a pretty meaningful, you know, meaningful result. If you throw in a couple other tricks, things like a quality filter, a small cap value bias rather than a large cap, you can boost returns by another two to three percentage points. Altogether, some pretty meaningful outperformance. And I wouldn't be surprised to see investors start to rethink their models of how companies are built and what they look like in the future in a way that could shift some flows in the meaningful direction toward companies that we don't typically think of as value stocks. We think about the winners and losers in this market. We mentioned tech a lot and maybe it would include health care and some consumer discretionary as the big

growth sectors. I think that's been true historically. And by the same token, our work shows that value indexes traditionally have been really overweighted into financials and interest. But if you start to include intangible assets as actually credible, you know, meaningful parts of what makes a company worthwhile, then financials energy don't get quite the big overweights that they, that they would today. And you can actually as a value investor go into some sectors that people don't typically think of, things like, you know, health care, even a little bit of tech, even some others. So I think that could happen. That could cause a meaningful shift within the market. It obviously doesn't affect the broader economy, you know, in a first order way. But I think the more important shift to look out for, something we've worked on a lot this year, is what happens in public policy over the next several quarters, next several years. Because we know that if fiscal policy, if monetary policy does what it does, we talked about that already, that's not going to move the needle independently. It just kind of affects what happens really in some far off distant land of a really hot economy. me. And if fiscal policy, we've argued, only remains limited to providing, you know, sort of life support when it's absolutely necessary, the kind of work that we've seen this year, look, this is the

biggest and fastest fiscal expansion in U.S. history outside of World War II. It's been incredibly powerful, incredibly important. But all it does is get us back to where we sort of started the year, if that's the most we can achieve. We're not going to break out of this world of sort of secular stagnation and scarce growth. to see a level shift kind of elevation to a new tier of growth and productivity requires new investment, especially, I think, industrial policy. This has worked really well in the past in the United States, in South Korea, in Japan, and Germany. I mean, basically any modern economy that you look at over the past 100 years hasn't gotten to where it is today,

any modern industrialized economy without some cooperation between the public and private sector when it comes to incentivizing research, boosting productivity and key industries, protecting nascent industries for a little while from competition until they can stand on their own two feet, and sometimes even government as a ready buyer. All that to say, things are changing, I think, not just in Washington, D.C., but around the world, as countries realize that competition globally is going to require a little bit more than a kind of a laissez-faire hands-off attitude. And so if governments continue the path that I think they've started this year, I mean, we tracked

15 to 20 different bills in Congress just this year, many with broad bipartisan support designed to incentivize research and development and CAPEX in direction of new technologies. And if companies, you know, get those benefits, get those incentives and governments really push in that area, I think you can actually see a big boost to productivity. That's exactly what happened in the U.S. during the Cold War. So that's the scenario, I think, a combination of supporting consumption, but also incentivizing, you know, productivity that could get us to a new growth scenario and actually cause a really profound shift in the kinds of portfolios that'll work well.

So if I'm hearing you correctly, then the best thing for the financial industry or finance stocks and the oil industry would be a huge Biden and Democratic sweep and a massive fiscal stimulus. And so probably the two industries that we most associate with antagonism, perhaps, towards tax and spend and Democrats and liberals would actually theoretically benefit the most from such an outcome. I can't. I can't. I can't go all the way with you, Joe. I know. I know. I know. You can't say that. I know, I know. But you can nod. I know no one can see your face because we're just doing it on audio.

But you could just sort of nod that that's kind of a potential implication. Well, whoever, I mean, whoever, whatever political colds. and gets it done, I don't think matters all that much. Right. And we could handicap which, you know, who's more likely under which scenarios. But I can't agree with the bottom line, which is that if you do see a big surge into new forms of investment that can boost productivity, then, yeah, that's the most bullish scenario for the most highly cyclical, you know, inflation sensitive parts of the market, which are financials

and materials and industrials and energy. I would just note that historically you've seen this kind of investment. and sort of productivity booms happen under, you know, administrations of both parties. I don't think anyone has a lock on this. But that is definitely the most plausible scenario that we can see for a shift to a higher level of growth from where we are today. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report delivered right to your podcast feed.

Bloomberg News Now is a short five-minute audio report on the day's top stories. Episodes are published throughout the day with the latest information and data to keep you informed. Yes, there are other products like this from a variety of news organizations, but they usually rerun their radio newscasts throughout the day. That's not what we do. We create customized episodes that can only be heard on Bloomberg News Now. And we don't wait an hour to publish breaking news. When news breaks, we'll have an episode up in your podcast.

podcast feed within minutes. So you're always getting the latest stories and developments. Get the reporting and the context from Bloomberg's 3,000 journalists and analysts. We're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. So I know we're talking about big changes in the environment that could spark that long-awaited rotation from growth to value. But is there anything in the meantime that you think investors,

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

Yeah, absolutely. within an equity, the equity part of a portfolio, there absolutely are some tweaks that investors can make. You know, bargain hunters or folks with a value bias sort of psychologically can, I think can and should add intangible assets to their calculation. Even if you don't think that every dollar of goodwill on a company's balance sheet is a rock solid asset the way that a, you know, a manufacturing plant might be, it's also not worth nothing. And right now, again, a lot of conventional measures treat those intangibles as worth literally nothing or as simply as expenses. Like R&D, for example, only shows up as an expense unless a company gets acquired and then the R&D can be, you know, capitalized as goodwill. But bottom line is there's a lot of value strategies today and value indexes and so on that simply haven't, you know, they were based on the economies of decades ago and before that on beloved Graham and Dodd sort of, you know, snippets from. their books and, you know, that's all great.

The economy has changed, and I think our investment, you know, approaches can change with it. So investors absolutely should include intangibles. And I think, you know, as I mentioned, history suggests that that can really improve returns. The other two things I hinted at before, but I think are really worth implementing is to add a quality filter. My colleagues in research have done some great work on this too, suggesting that in point of fact, as economies change, sometimes there are dead industries or dead business. businesses that have to be completely rethought or generally

rethought or just if they aren't investable. You know, a horse and buggy manufacturer at a certain point had a great price to book ratio, but it never quite came back. And I think there may be some lines of business in companies today that might, you know, be facing a similar fate. Adding, you know, filters for the quality of a company's earnings and the quality of their business historically has added about a percentage point a year, I think, to returns.

And the small versus large debate is really interesting, too. small cap value stocks have always performed better than large cap value stocks. There's data going back to the 1920s for U.S. equities. And that's always been true. And even in this period where value overall has performed so terribly versus growth in a really a historical, unusual way over the past decade, even over this period, that bias in favor of small cap value has actually continued to work well. So I think that's still worth preserving. That's another sort of two percentage points a year or so about performance. And those are things that investors can do today. That's within the equity sleeve. For fixed income people, I think the world is even more difficult. You know,

there's a lot of discussion since we sort of floated our end of 6040 thesis last year. It's been a kind of a perennial topic. And the bottom line is there's no great answer in a world of very low yields for fixed income folks. But I think the only solution that makes any sense at all is to allocate a little bit away from from treasuries that pay you nothing and in fact obviously float that you're faced with negative real interest rates on those assets and to shift into different kinds of risk. I mean, whether it's credit risk or something more equity like in terms of preferreds or convertibles or, you know, there's there are places still to get some credible yield today. And if you agree with our outlook that, you know, we're not on the cusp of a second

dip of, you know, into a deep procession or something even worse, then this point. point of the business cycle looks like a moment in which a little bit of extra credit risk or even some equity like risk certainly seems preferable for an investor with an income target to hit than to simply cross your fingers in government bonds and hope that it all works out. Those are things that investors can and should do today. And I think that the economic environment is pressuring people more than ever to start to rethink how they construct those portfolios. So the bottom line is, although we could get this shift of major policies,

shift. There are things that investors can do. There is an alternative between the sort of like hardcore ram and dod book value side on one side. Andy put it all on Tesla and Ethereum. On the other hand, like we don't have to choose. Like maybe like, okay, a policy shift would be preferable and that's great. But in the meantime, there are sort of options in the middle. Absolutely right. That's right. I want to go back to something you said about the Fed and its inclination to somehow it always seems to raise rates just as the lower end of the income spectrum was starting to see wage growth. And maybe that's just some accident. Maybe it's a conspiracy or whatever, maybe something in between.

But I'm curious whether we basically live in a society where the elites or the very wealthy people. don't really prefer growth. We're this sort of like the growth famine, the growth scarcity that we have right now is better for people who are very rich because their wealth and their standard of living is more tied to asset valuations than it is from, say, GDP going from 3% in a year to 4% in a year. This is a tough question and it's a really sensitive question. And I'll give you two answers.

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

I don't know that I believe that. But there is a great old essay called the political aspects of the full employment by a fairly famous economist, Michelle Koleski, who's kind of a rival to Keynes and a lot of people think sort of came up with some of the same ideas around the same time and doesn't get nearly so much credit. And he argues in that essay that in fact, you know, the reason that there's often, you know, what we call it, standing army reserve of unemployed folks has much more to do with the desire for owners of capital and those of businesses to keep labor, you know, sort of well disciplined so that they can generate good returns and so on. And it is politically

radical. I'm not necessarily endorsing the sort of the view, but I think you can certainly see a trend, at least in the United States, in recent decades, between decreasing, you know, power of labor negotiations, increasing power of owners of capital, and decline in things like capacity utilization rates of manufacturing, decline in demand, decline in inflation, as more and more capital gets concentrated in relatively fewer and fewer hands. The bottom line is that folks who have a lot of cash don't tend to spend it quite as much. They tend to save it. People who don't have that much capital, when they get a little bit extra, they will spend it.

And so you don't have to be a political radical to think that getting a little bit more capital into the hands of people who will circulate it in the economy is a pretty great way to boost demand in a time when demand is scarce. The other answer to this, and this is a little bit more sunny side, you know, kind of things will all work out in the end view, at least via the market, is something I mentioned before. The fact that we're seeing increasingly more inequality in Wall Street to mirror that kind of inequality on Main Street, meaning that as returns get more scarce and profits get more scarce, even if Joe, you're right that maybe owners of capital are content to just squeeze things forever as much as possible. no matter what, I think what you're seeing these days, and you see it in kind of valuations in tech and growth and so on, is increasing pain for owners of capital, whether it's someone buying a treasury note, you know, holding their nose and getting 60 basis points of yield,

or someone buying an expensive tech stock, holding their own and hoping, holding the nose and just taking whatever future cash flows might eventually come their way, increasingly, owners of capital feeling the pressure and the pain and are starting to start. to think that's why I think politically, as I mentioned before, you're seeing some really broad bipartisan support this year. It's an election year. It's incredibly hostile political environment. And yet somehow, for example, the Senate was able to pass a bill a few months ago, authorizing $25 billion for semiconductor manufacturing in the United States, bipartisan co-sponsors passed easily, and they're working on more things in that direction.

That doesn't fit the narrative of sort of owners of capital, you know, fighting new policy measures no matter what it takes. And I think without getting into it too much, some of the movements you've seen in political coalitions in the United States on the left and the right have started to incorporate more discussion about whether it's universal basic income, job guarantees, modern monetary theory, on the left, on the right, you know, nonprofits talking about whether maybe we do need a better deal for working families and maybe labor unions are part of that. I mean, things that were unthinkable, I think politically, in both parties 10 years ago are suddenly very thinkable today because increasingly the bottom line I think is that

many owners of capital including regular investors are starting to realize they're actually in the same boat with many workers and if they don't find a new sort of negotiated settlement of the sort that we had across the western world after World War II in many countries if we don't find a new settlement then things are going to go badly not just for working people but increasingly for you know, people trying to invest as well. Jared, thank you so much for joining us. This is sort of, you know, we had a conversation recently with Paul McCulley and touched on some of these things, but this felt like a really nice sort of part two to that in terms of

really diving into some of the portfolio implications of policy and, you know, the sort of long-running inequality. Thank you so much for joining it. My pleasure. Good to connect with both of you. Thanks, Jared. That was really good. So I guess the lesson, Tracy, is that inequality is why Tesla and Ethereum trade exactly the same.

It's kind of funny how every investment discussion nowadays ends up touching on marks, right? Like, I don't know. It just seems inevitable nowadays. And, you know, I'm joking slightly. But I will say, I agree with Jared that there does seem to be a growing recognition of the need for some sort of policy. shift, even at places like the Federal Reserve, we did see the Fed put out a working paper, I think it was last month or something, talking about how the growth of big corporations had increased inequality and basically caused sluggish growth and all of that. And there is this ongoing conversation about monopsony, this idea of monopoly power in the labor

market. So it feels like there is this recognition, but change is slow. Change is super slow. But, you know, I think, look, it's like you look at the market and you have this, everything is the sameness about the different asset classes. So it's like, okay, we have to look bigger. It almost forces zooming out. Like if energy and financials are the same trade, if Tesla and Ethereum are the same trade, if gold is the same trade, if gold is the same, if Snowflake, the popular cloud computing IPO that just came out. if all of it is the same, we essentially as market observers, commentators, have no choice

to zoom out and talk about the sort of like broader political and economic conditions that created the same thing. Yeah, I think that's right. You can't really focus on micro, you're forced to talk about the macro. Yeah. Yeah. You know, the other thing I was thinking was we should do a deeper dive on intangibles at some point. Yes.

I think we actually have one scheduled because I think in a future episode we're going to be talking to Michael Mobison, who we've had on before, but he just came out a pretty great sort of white paper on valuing intangible. So I think people who are interested in that should stay tuned. But can I just say something about that? And I meant to joke about it with Jared. But do you think it's kind of cheating? It's like value investing doesn't work. So let's find a way to explain how Peloton and Tesla are actually value stock. Like, it's kind of cheating. Yeah. I mean, I think there's a lot of fudging that you can do around intangibles. And I think Jared touched on this. But it's, I mean, the accounting for intangibles is kind of insane. So it's really easy to make the numbers look a lot bigger than they are. So just saying that everyone should factor in intangibles along with traditional price to book ratios,

it's kind of much easier said than done. If you're looking at intangibles, you actually have to do a deep. dive into how those intangibles are being portrayed on a company's balance sheet. And again, this sort of, sorry, now I'm going to go on a rant, but this gets to one of the things that I've been saying about the sluggish growth environment, which is that if you're a company and you can't grow through traditional ways, like just growing your cash flow and your business, then one of the easy ways to grow is to buy a bunch of other companies and do adbacks and, you know, add intangible assets from your acquisition.

which makes you appear to be growing faster than you actually are. And I think we've seen some examples of that in the current economic cycle as well. Yeah, absolutely. And, you know, I think that's sort of like, yeah, like these PE roll-ups and other sort of, it's like you can sort of grow two ways. You can grow by creating a really red hot software company that everyone, every other company has to use. Or you can essentially do it by financial engineering and credit, which turns, which turns meager cash flows into big cash flows. Yeah, exactly. And so just saying, oh, look at the intangibles.

Sure, that makes a lot of sense. But on the other hand, it's not a sort of bulletproof way of investing either. I swear I read an interview with some value manager a couple years ago. I think it was like at Barron's and they're like, this value manager made a bunch of money. How did he do it in a time when value wasn't good? And his basic answer really was like, oh, I basically came up. up with a framework where Netflix is a value stuff. Yeah, so I invested in Amazon and Apple as a value play.

Yeah. All right. Well, Laura Buffett bought Apple, so if he did it. All right. Clearly, we could talk about this for a while, but we are going to come back to it in a future episode, which will be good. Looking forward to it. Shall we leave it there?

Yeah. All right. This has been another episode of the Odd Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway. And I'm Joe Wisenthall. You could follow me on Twitter at the stalwart. And you should follow our producer on Twitter, Laura Carlson.

She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today. And check out all of our podcasts under the handle at podcast. Thanks for listening. This is Tom Keane, inviting you to join us for the Bloomberg Surveillance Podcast. It's about making you smarter every business day. I'm Paul Sweeney. We bring you complete coverage of the U.S. market open.

We cover stocks, bonds, commodities, even crypto, all the information you need to excel. And I'm Alexis Christophress. Bloomberg Surveillance also brings you the analysis behind the headlines. We do that through conversations with the smartest names in economics, finance, investment, and international relations. We do all this live each and every weekday that bring you the best analysis in our daily podcast. Search for Bloomberg Surveillance on Apple, Spotify, YouTube, or anywhere else you listen. On the East Coast, listen at lunch.

And on the West Coast, listen as soon as you wake up. That's the Bloomberg Surveillance Podcast with Tom Keen, Paul Sweeney, and me, Alexis Christophorus. Subscribe today, wherever you get your podcasts. Bloomberg Surveillance, essential listening each and every business day.