The Compound and Friends - The Texas Hedge

Episode Date: April 1, 2022

On episode 40 of The Compound & Friends, Michael Batnick, Adam Parker, and Downtown Josh Brown discuss: smart money buying the dip, the case for small caps, the yield curve inversion, Ned Johnson, private market markdowns, NYC's comeback, Wall Street careers, and much more! Thanks to FTX for sponsoring this episode! Download the FTX App today and use referral code "compound" to earn free crypto on every trade over $10: https://apps.apple.com/us/app/ftx-crypto-exchange/id1095564685 Check out the latest in financial blogger fashion at: https://www.idontshop.com Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/disclosures/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

oh you're at the yeah we'll just get you to slide down a little bit more so mike ovitz can you make it a little louder for me sure in here all right yeah my tail my ear wait hold on this is too far yeah i was about to say i'm also not getting chat one so the studio after scorsese made goodfellas, they wanted him to make Cape Fear. But he's like, I don't do remakes. I was done already. Who said this? Ovitz?

No, Scorsese. They wanted him to make, as part of his deal, they wanted him to make Cape Fear. Did he die at the end? But listen to this. So he wanted to do Schindler's. He wanted to do, so Martin Scorsese owned the rights to Schindler's List. He wanted to make Schindler's List. Steven Spielberg owned the right to Cape Fear.

And Michael Lovitz got them to trade movies. The original Cape Fear. There are some trades that help both teams. So that was a win-win. Yeah, there's some trades that help both teams. I mean, imagine Scorsese making Schindler's List. It would have been even more depressing than it already was. Jewish De Niro.

Like, they did Jewish De Niro in Casino. I suppose it worked in that context. But De Niro walking around a concentration camp, like, it's a little much. I don't think the audience would have appreciated it. Also, Warner Brothers wanted Tom Cruise and or Eddie Murphy to be in Goodfellas. Can you imagine? Tom Cruise and Eddie or Eddie Murphy? What would Eddiefellas. Can you imagine? Tom Cruise and Eddie or Eddie Murphy? What would Eddie Murphy have been?

The Samuel L. Jackson character? He could have been Pesci's character. There was a guy who got shot. That was Samuel L. Jackson. Oh, that was Samuel L. Jackson. He stole the truck and fell asleep in it, so they whacked him. Late for his own funeral. But he had no speaking lines. He had one line.

You're really, you're expert on this topic. I just read the book on the train this morning. I'm going to defer to you on all... What book are you reading? Cinemagraphic.

The Michael Ovitz book. Details. What's it called? Being Michael Ovitz. Good title. Good title. All right, where are we going to close today

most importantly? 32.55. I don't know, what index are we talking about? S&P, what do you got? 4,600-ish, right? going to close today, most importantly? 32.55. I don't know. What index are we talking about? S&P. What do you got? 4,600-ish, right? Call to close.

I didn't look since I got... All right. Put my mic on! You got our earphones loud enough? Can we fix that? Is that for you? All right. And this is not video recording.

Oh, we're on video. Oh, yeah. There's only three cameras around here. I'm a little sweaty. I'm a little sweaty. I'm a little bald. I feel like Jerry Tarkin. I need a towel to chew on in here. No, you'll be all right.

You'll be all right. And we got mints if anybody needs. I've been Purelling. I'm very Purell. Yeah, mints. We got champagne. We got... What is this?

That's the stuff they charge 5x4 now that everyone's heard of. Yeah. They took B-minus champagne with an A-plus price. Exactly. Are we good to go? I'm good. I'm comfortable. What'd you do all day today?

Who were you on the phone with before? I can't tell you. I feel like Matt was a little upset that you didn't spend any time with him. What do you mean? I was in that meeting. Then I was with you guys. Then I called and I came back. I'm just telling you.

All right. Just telling you. He came down from Boston. Let's go. Are these culturally good questions for you to be asking, like every detail? I feel like you're a little micromanaging. All right, thank you. Don't worry about it.

I don't know the work the next. Don't worry about it. Feels a little oppressive, all of a sudden. A little Foxconn. Welcome to The Compound and Friends. All opinions expressed by me, Michael Batnick, and our castmates are solely our own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions.

Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Today's show is sponsored by FTX. FTX was founded in 2019, which is wild. Can't believe it's only been, what year is it, Duncan? It's 20, all right, three years? About. Sam Bankman, freeded the Founder, was on the Forbes list of the richest under 30. I don't even think he's 30. Actually, he can't be 30. It's under 30, right? It's under 30. That wouldn't probably be under 30 years old. This year, we spoke today on the show about valuations with private companies

getting compressed, not FTX. FTX US raised $400 million at an $8 billion valuation. That's only the US subsidiary. FTX International was at a $32 billion valuation. So needless to say, they're doing well. If you are looking to get access to crypto, NFTs, download the FTX US app, enter the promo code COMPOUND to get free crypto on every trade over $10. Look at this guy. Alright. Alright.

Big John, thank you for that. Oh, he's back. John, good to have you. Last week we struggled. John, last week was like when they used to perform Macbeth and the lighting would fall and kill one of the actors. And that's why they call it the Scottish play. All kinds of shit went wrong.

Nicole did your job pretty well though. I gotta be honest with you. Shout out to Nicole. How are you today? I'm good. How are you guys? Doing great. Duncan, how are you? How's life? I'm good. I'm good. I mean I'm offended now. Don't be offended. Hey, I watched like 15 minutes of the Formula One thing on Netflix.

Episode one, season one. I'm into it. Yeah, cool. It didn't hold my attention to watch the whole 45 minutes, though. Okay, well, you got to go back. I know. But it's not bad. I see the appeal.

I see the appeal of it. John, where did you go? Chicago. Oh, yeah, I knew that. How was it? Great. Yeah. I saw some of the team.

Good food. You went to dinner with Jonathan? Yep. Where'd you go? John Banana. He's a foodie. Where did he take you? It's a, I forget the name of it, but it was Pub Food Indian Food Combo.

Pub Food Indian. Yeah. Okay. You don't know what it's called? Royal something. Pub Royal. Pub Royal. That's what it was.

Last time I went to dinner with him in Chicago, he made us eat a bowl of duck hearts. Am I? I'm not making that up, right? You were there? Oh my God. That was awful. Awful. Where were we? Chicago. Yeah. Jonathan. Jonathan's a right? You were there? Oh, my God. That was awful. Awful. Where were we?

Chicago. Yeah. Jonathan's a foodie, but that was a little too far for me. All right. Adam Parker's here, guys. And I've been looking forward to the show since we – when did I ask you to come on? Like a month ago? Two months ago?

Yeah, a couple months ago. I've been fired up for this. So I wrote this – we wrote this really big intro for you. So you're just going to have to bear with us. I want to make sure the audience is aware of your whole oeuvre. Adam is the CEO and founder of Trivariate Research. And you guys are equity research, risk management, macro. Are you doing economics as much or only as it pertains to investing, right?

Yeah, only stock-related. OK. But your lane is pretty wide though. Yeah. I see – like I see all the stuff that you're covering there's a lot there um prior to this let's give people a little bit of a sense of what you were doing prior to trivariate you were number one ranked institutional investor how many times uh several okay semiconductor analyst from 04 to 06 yeah number one yeah okay uh global director of research u.s equity strategist at sanford c Several. Okay. Semiconductor analyst from 04 to 06. Yeah. Number one. Yeah. Okay.

Global director of research, U.S. equity strategist at Sanford C. Bernstein. Right. And at Morgan Stanley, you were chief U.S. equity strategist. Right. So that's when I first became aware of you. Yeah. And I've been on TV with you a bunch. Started doing a lot of TV, yeah.

Okay. What was that like? That's a pretty big job. I traveled 30 weeks a year. That's it? I spoke at 44 conferences around the job. I traveled 30 weeks a year. That's it? I spoke at 44 conferences around the world. I had about nine bosses. I did a lot of diversity and inclusion training, money laundering videos, ESG training, 360 feedback, MD&ED promotion.

And then once in a while, I looked at the stock market. I was going to say things that are more administrative and have nothing to do with markets. Listen, all big firms have positives and negatives. They have bigness disease that I just described, and they have like resources that are incredible. So I saw the world. My first job on Wall Street, I worked for Citi as an intern, like checking those videos that you had to watch,

the click, click, click. I had to audit them to make sure that they were, yeah. So that was fun. Yeah, I had a lot of, I'm making these numbers up, but I think there was like 55,000 employees at the time and there were like 10,000 in legal and compliance and 10,000 in IT. So I felt, you know, 40% of my time was allocated to those buckets. It's good use of your skills. Okay. And you were part of the investment committee at Morgan Stanley. How many people

are, so that's like $2 trillion in assets. At the time, yeah. That's a big responsibility. It might be more now with the E-Trade thing and stuff. But at the time, it was 17,000 advisors. So how many people were on the committee? Seven. And I was kind of the equity – US equity-focused guy.

And fortunately, during the time I was there, I just kept saying I like US equities the most, which more or less was all you need to say. Because you'd always get these bond guys who think they're smarter telling you that that's better. And I would just be like, no. Yeah, bonds are really hard. What's the starting yield? What's the period of time? The duration.

Okay, thanks. Is it going bankrupt? No? Okay. I think I know what the return is. You have a PhD in statistics from BU, so do I. And an MS in biostatistics from UNC Chapel Hill. You went to Shake Shack.

And a BS in statistics from University of Michigan. That's true. You have a UNC-type sweatshirt on. Is that for the Final Four? Definitely didn't go to UNC. Okay. No. They wanted me for basketball, but I wanted to pursue the statistics like you did.

So when you're on that investment committee and you're the equity guy, it's obvious you're the star of the show. Because what are the clients really care most about? Does it matter what GDP is in Q3? Listen, I mistrust economics. And people used to think I was joking when I said this, Josh, but I think you know it's real, which is I think what I'm really good at is knowing what already happened. And I don't even think economists know what already happened. So they'll tell me next year's – last year's GDP, next May or June. And like I just – I don't generally think these frameworks help me invest. I think – so I kind of – my view, yeah, was U.S. equities are the biggest asset class.

My view matters. And I guess I flaunted that. But really the truth is the advisors, they don't really – OK, imagine you go and you talk to the top 50 advisors in every city in the country, which I would do. If you decide and recommend, oh, we like emerging market equities over US, you're asking a guy to say, OK, so you want me to sell my Costco and my Apple and my Google and my – And buy a bank that's controlled by China. And you want me to buy India – I don't even think in practice they can do that until EM beats US by 80 percent a year for three years and then – so it's like the implementability of some of the non-US equity strategies aren't that practical or feasible.

You know how hard it is for a US-based wealth manager sitting at Morgan Stanley to call their clients and say, we're going to be 30 percent US, 20 percent EM because of the CAPE ratio? You know how hard it is to like – Or the Phillips curve is telling – I mean I just – yeah, I don't – Schiller PE looks high. I just – that doesn't work. I think what works has got to be – and I think what you get better at over time, you're really good at this, is taking something that isn't that complicated – that is kind of complicated and making it seem like it's not. I mean you – I know that's your jam and you're good at it on TV. But I'd say like, look, you have to boil it down. I always think of that Mark Twain of like I didn't have time to write a short letter so I wrote you a long one. You have to write the short letter or no, it's not going to resonate it down. I always think of that Mark Twain of like, I didn't have time to write a short letter. So I wrote you a long one. You have to write the short letter or no, it's not going to resonate. So I think that's what you learn when you're talking. And I'm not, I don't, I don't mean

to be disrespectful because if there's 17,000 advisors, like the top few thousand are pretty awesome. I mean, you guys know it's not that easy. You want, you want to know how much money I make and all the money I have and then all the money I spend my expenses. Then after that, you want me to give you all my money. I mean, like that's a hard sale. So some of these guys are awesome at it. But the bottom 50% are not brain surgeon. So you got to keep it simple. If you have a firm, it doesn't have to be Morgan Stanley.

Right. Bank of America, UBS, whatever. Yeah. If you have a firm and there's 15,000 people doing wealth management, it's likely that the top thousand are amazing. Like amazing people. I agree. Because how do you get there if it's not longevity?

If you're not 70 years old, if you're in your 30s or 40s and you're operating at that level, you're really, really good. But then the bottom 14,000, it's like they're interchangeable with any other firm. I think that's right i i i think that um as you know there's so many skills required to be great at it right because you got to be a good asset gatherer to be relevant but you've got to be a pretty good investor and you've also got to be trustworthy and a good person tech it is a lot of things you need to be good at taxes charity so i think the top you know a thousand out of those top 5% are really outstanding. The way it was explained to me is like the ideal producer, quote producer, like wire house advisor at the top of the pyramid,

it's a fraternity president. Like everybody likes the person. They can party. They can be serious. They can be responsible. EQ, IQ, the whole thing. Like all of that. And that's a rare individual. Yeah, I, IQ, the whole thing. Like all of that. And that's a rare individual.

Yeah. I think it's a rare individual. And I think that the key is that you've got to resonate with the – you've got to teach to all students, right? You can't just teach to the best ones in the class. And so – and there's some responsibility and laws and other stuff going around. I honestly enjoyed it because usually what I would do is travel, hit five or six institutional investors in a city, and then hit the top 50 advisors in a room in every city. So you got to know some of them and you would appreciate the challenges that they're going through. But as you guys know, they really want to talk about individual stocks and what names to put in the portfolio and telling them you're bullish on U.S. equities.

Let me stop you. You know what they really want to do? And this is maybe the most hard-hitting question I'm going to ask. You know what they really want to do? And this is like maybe the most hard-hitting question I'm going to ask. How do you not gain 500 pounds? Because you're at steakhouses in every city. I would be the fattest slob.

I mean I would be – because every night is a steakhouse or high-end sushi. So what did you do to do that much travel and not look like you eat for a living? I mean it is hard. I'm complimenting you, by the way. Thank you you thank you i'm a little bit i'm sweating so i feel like i'm the fat guy sweating but i'm genetically engineered to eat but uh i you know to me i i guess um i've always gotten in really early so you know to the restaurants to the office he gets into the restaurant early no he ordered a salad before the blue the The blue-haired people and I. No, I've been like a 5.50 a.m. in the office guy and a lot of coffee and keep the metabolism cranking. And I try to work out every day. So the challenge is really those days you're traveling and you're Beijing on Monday and you're Miami on Wednesday.

And then those are the tough days because you don't know when to work out. You can't cook anything for yourself. You're a mess. And so I tried to keep it under control. But look, the truth is when I left Morgan Stanley, I was like the fattest I ever was. And then I got in shape when I got to the buy side. So, you know, well, you just, you know, you can,

I probably, the thing I need to get better at is sleeping more. Yeah, good luck with that. Yeah. I hear that doesn't get easier as you get older. Yeah, yeah. All right, I wouldn't worry too much about that. So who are your clients now? So we write research, sell data, sell baskets.

Our primary clients are bottom-up stock pickers, hedge funds, big long-onlys, cross-asset. But we also have some clients who are RIAs. We have some that are private equity. We have some corporates themselves. So companies, treasury, CFO, IR, investor, the investor relations that want, you know, our, our kind of bespoke work on their stock. And so it's, it's a broad distribution, but I'd say the bulk of it is bottom-up stock picking hedge fund managers or, you know, what's trivariate. What is the, so the, so the firm is called trivariate research. What does that word mean? The idea was three variables, right?

Quant fundamental and macro. So. So applied to equities. It's a little bit of a – Why not Adam Parker research? Like all kidding aside because you spent – how long were you the chief strategist, equity strategist at Morgan? Seven years. But I don't know. I guess I was kind of – So you built up a name in the industry.

I kind of – it's maybe I'm making a mistake maybe, Josh. I mean it could be. But I think it was just I didn't like the eponymous thing. I kind of thought it seems a little – I mistrust people when you get their business card and they have like three or more titles. So I just didn't want to be like, oh, founder, CEO, and CIO. So I didn't want to do it. I don't know. It just seemed –

I've seen it done multiple ways. So it's not one way is better than the other. I'm just curious. I don't think it's my speed to be too – have know, have my name and initials all over the place. I don't know. Yeah, Ned Davis is kind of a prick like that. I'm with you. I don't know him.

I don't know him, actually. No, I'm just kidding. I don't know him. I don't either. No, Tom Lee is fun, Strat. Like, most people, I think, don't use their name. But some people, I feel like, would be better off if they did. I don't know.

I feel like you have a really good rap. Let's get into it. We're going to start the show today the same way we started last week. Michael doesn't do small talk. That's enough. Last week we started the show talking about the difference between smart money and big money

and retail money. Retail getting bearish. What's so funny? I remember one of my bad moments at Morgan Stanley, you made me smile. This is small talk, but somebody in the crowd raised their hand and said, what is the smart money doing? And I guess I was in a bad mood or I thought I was being funny. And I just looked at him and I said, not what you're doing. And I went to the principal's office. I said smart money because, so we're going to start

with sentiment trader. His name is Jason Gepford. So he tweeted – John, let's throw this chart up. He tweeted, smart money has been buying the debt. In January, commercial hedgers held more than $125 billion of S&P 500 futures net short over the past week. And I think this data is about a week old. Over the past week, they flipped that to a $25 billion net long position. That's quite an about face.

Hold on. Say it a little bit slower for me. It was $125 billion. Let me ask you, who are the commercial hedgers? Of stocks? Yeah. So they're not doing this in options market. It's only kind of in- Futures, it looks like. Okay. So I don't know what commercial hedgers means, but whatever. Needless to say, it's not people that are trading odd lots. Let's put it that way.

Yeah. CFTC data. I like to look at the source there. I'm not 100 percent sure what I'm looking at here. So I – but it looks like one line goes up a lot and one goes down a lot. I guess the question is how do you flip from 125 billion net short S&P futures to 25 net long in one week and not have the kind of rally that we just had. Yeah, I think, look, the flows matter for sure. But I don't think I talk to that many direct people

who trade the futures massively. I think, you know, so I don't have a good feel. Is that concentrated in just a half a dozen firms? That's like prop firms in Chicago. Yeah, swinging around big, you know. Most of the people I talk to are the pot. The pot shops can move around a lot because what happens is they're tasking their PMs or analysts with one alpha dial a quarter, maybe 4% or 5% a year, and they're going to run 1,000 gross in the back room and they can make big returns. So you can see those degrossing.

You talk about on the air like you just get these big moves that have nothing to do with fundamentals or anything because one of these big pods is moving up or down. They're running 30 or 40 billion. That's 400 billion in the balance sheet. So you can see some of that. But I don't know a lot of guys. I don't know if it's like Bridgewater. Some of these guys do it. But yeah, this is outside of my core competency. But the point is, this is a 10-day rolling return chart for the S&P 500. And the only time we had a better 10-day run than the one that we just had was the Corona bounce. But basically 10% in 10 days. I made this chart on Tuesday. It's about as strong a 10-day bounce as we've had.

And why? I'm struggling with this bounce. Tell me what's going on. I mean, so I think explaining it after the fact, I always, and it's probably a mistake I make, but I always try to go to what is like the high-level story. And I think- Is the story good? It's not good. Well, all right. I'll make it good. I mean, look, I'm going to tell you what is like the high level story. And I think – Is the story good? It's not good. Well, all right. I'll make it good. I mean look, I'm going to tell you what I believe and then you

can insult it. But I actually think corporate earnings are growing this year. I think the S&P 500 earnings will be higher in 22 than 21. I think we had a very, very big change to the perception about interest rates starting late last fall. So I start looking at the Fed fund futures when I want – coming every day. I use the type WIF and futures and WP, bond, see what's going on. I always look at FF6, FF12, commodity note, like the perception of rates, right? And that got – we went from like no to seven hikes from last – I think we've gotten way too kind of hawkish personally.

And I think the Fed's not going to be able to execute, you know, what the consensus is without- They can't do seven hikes without blowing up, without blowing up the market. And I think it's an important point. I'm glad, I mean, we're off your exact question. I'll get back to it. But I don't think that the hikes change anything that's causing inflation. Like U.S. companies, if you're a CEO of a big company, you're having trouble hiring U.S. people and with wages.

Is it going to solve the shortage of wheat? Is it going to solve the shortage of oil? No. So none of the things that you're trying to control, which is the Fed's part of the mandate, is inflation. The other is from a public. Raising rates isn't going to change anything. It's not going to suddenly – Supply chain.

No. So it's sort of a weird solution to the problem. But they have to. Couldn't it knock down the housing market and lessen the demand for materials? It could. It could a little bit. It's part of it. To your point, it's a supply driven inflation. What does the Fed have to do with that? I don't think that

the seven hikes is going to happen. And so I guess my point is part of it could be, you've seen like the three year, Fed Fund Futures 36 month, has come down about 50 bps a little bit. So maybe people are realizing, all right, it's really going to be hard to get the 10-year at 4% this cycle or 5%. Like that's going to be rough. Michael and I don't believe it's possible to get above 3% given how much money there is just waiting to buy it. So we agree.

We agree. So I think the answer to your question is, look, if I have earnings that are up this year from last year, and I think likely your base case is still higher than 23 than 22. I think if I'm really being intellectually honest and you say, all right, perception of rates change, growth scare, war, the probability 23 earnings are above 22 is probably lower than it was three months ago. I think that's fair. And the way I think about that is the multiple, it should be lower because there's a distribution of outcomes and willing to pay a certain price for each probabilistically. And that's what the market should be. So yeah, the market should be down from the highs because the risk to earnings is a little

bit higher than it was. But I still think the base case is higher. Can we go back to full year 22 earnings? Yeah. So I think estimates now- 8%. For full year are 8, trending downward, and we're above 10% as recently as January. Yeah. I think the long-term average is the out-year estimates are 14%, the actual 6.5%. So the market knows numbers are coming down. I don't think it matters that they're coming down. I think what matters is they're going to grow year over year.

But I guess given that we had like 29, 17, and 28 for the S&P 500 returns for the last three years, you would think that maybe we could take a pause? It just seems the rally was so furious. Sure. Yeah. I don't disagree with that. But I mean – but again, like if you're rooting your comment at something empirical like this trailing three-year return, a statistically significant breakthrough of subsequent one-year return. No, I know a000 years from now. Earnings growth doesn't linearly help you at all

with calendar year returns either. It doesn't. Think about 18. It doesn't. We did 20% earnings growth mostly because of the tax cut. Right. Right? Stock returns zero.

Look at, like, 2012. We did 20% and negative earnings. I agree. I agree. I'm not saying it's perfect. I'm just saying if people have confidence earnings are higher and there was a growth scare that abated a little, that's an intellectual ex post answer to your question. The short-term answer is probably more where you started with just some flows and positioning, right? And kind of got a little oversold. And I think there are some businesses now, like I think if you look at the small cap universe, something like half the stocks trade below 15 times earnings or – so there's some – I know when I look at it, like I feel like pretty excited about buying a bunch of things in the market.

Like I'm very bullish on energy. I'm buying every dip for the next two or three years. I'm bullish on metals. I think at these prices, like if you have any horizon, you can buy like mid cap biotech in way too years because like the pipeline is the same as it was and the price of sales is a 10-year low and the stocks are down 70 percent. Stocks have been – like stocks have been more than cut in half, but they're still developing the same drugs. Yeah, the innovation – your gamble on innovation is the same. So if you buy a basket of 20 of them, you're going to have the same kind of probability of something safe and effective as you did and you ran it all time. So we were joking around that like what wait why are stocks rallying and i was like oh it's money coming out of the bond market because it has to go to one of two places right if it's not leaving

and going to real estate i bought the two-year in my pa like that's first i've done that in forever because i'm like 2.4 percent two percent i bought a shit out of that i'm like all right you know i you know if you have money lying around doing nothing, you don't need for two years. The worst thing is you take the risk. I just literally, I have a real estate thing coming up where I need cash in about 18 months. I bought the SHY yielding 2.38%. The biggest, I don't care what inflation is two years from now. I don't care.

I need the money. This is more economic than, so this does not explain the short-term stock market. I think it's flows is the short-term answer, but the intellectual reason I exposed, I'm always going to try to go back to some earnings outlook. Look at this chart of Apple. I mean, what in the world? That balance is insanity. It's mechanical. It's insane. So anyway, so Carl Quintanilla tweeted this morning from JP Morgan. This is interesting. The US will not hit a recession in 2022. The $6 trillion in stimulus under Trump

and Biden and more than half of that money is yet to be spent. Instead, it sits in households and government balance sheets. The U.S. is uniquely positioned to weather the inflation storm. So we spoke about that yesterday, that the consumer and the corporations maybe have never been better prepared for a potential downturn. So on the U.S. consumer front, I actually wrote about this this week. You know, I think the consumer is in good shape, right? You know, the things that I would look for would be any signs of 90-day credit card delinquencies rising. They're at all-time lows. Retail sales and confidence still look pretty good. Obviously, the jobs and wages look good. So when you put the cocktail together, it's hard to get a big recession with the consumer in this

good of shape. So I think that point I agree with. And then in terms of the corporates, I've always thought what causes me to get more negative on the stock market would be, I call it hubris and debt, right? Like management arrogance gone awry, too much capital spending. John Chambers, 2007 Cisco CEO, I will build in advance of recovery, right? And then crushed, right? Inventory. Well, we have the opposite problem. We don't have enough chips. The backlogs are there. You can't get a washing machine for your house for a year. Like, so I don't see inventory. Capital spending looks responsible in light of how short we are of everything. But what about inflation hitting consumers and then heading earnings? Right. Okay. So I think the issue from the Huber side, you know,

hiring isn't, you know, it used to be you hire all the Harvard MBAs at the top of the cycle, like Goldman Banking. We're not seeing that kind of hubristic behavior. And we don't have debt meaning like debt that's going to be due at higher rates that's going to impede the interest income, interest expense part of the P&L. So the things that the companies can control I think are in pretty good shape. So it all comes down to wages, logistics, and input costs, like you're mentioning. And I think there's a couple of important points here. Were you going to ask me something? No. All right. I wasn't sure if I was too lathered up.

No, we want more. We want more of you, less of us. What I was going to say is I was with the CEO of a pretty big public industrial company last Friday. And he was making a really good point. He said, I have no wage pressure outside the US. So all my wage price, 75% of my employees are outside the US, 25% are in. All the wage pressures in the US. Yeah. And I thought it was pretty interesting because these companies are moving guys to Mexico subtly. He's like, there's no COVID. Everyone shows up to work. And there's no wage pressure. And in Tennessee or wherever, it's like, I can't get guys to work, right?

So I think looking at the wage pressure from the US, non-US thing is something I'm focused on. Because I think the main thing for investing, like you want to pick stocks right now, which companies can beat gross margins six months from now and which can't? The ones that can't, it's your issue. The rising input costs, they can't pass on to the customers. They run out of the ability to observe. There's a demand problem. So let me jump in real quick. So two points to dovetail on what you're talking about. So passing on costs. Look at Costco. No problem. Holy shit.

All-time high. On the other end of the spectrum... And they have a slightly higher-end consumer than some of the other companies. They also have a locked-in consumer that's already paying them a membership. Slightly wealthier average. What do we make of this? Homebuilders crushed down 27% from the highs. Yeah, I think that's because they act bad when rates rise,

when the perception of rates rise. That's ugly. Yeah, totally. But they also can't even build. The 30-year's up 2% in the last. And then they have an inventory and supply kind of like. It's like the greatest moment ever to deliver new homes for all the demand. They can't.

And they can't afford to. Right. It's almost a Greek tragedy. I don't think – Rose looks like shit. I don't think you want to buy those stocks, but I don't think they're the economic barometer that some people are trying to attach to a negative economic story. The reason they're there is because the 30-year has gone up 2 percent and people know that that's going to eventually hurt affordability. On the flip side, what are we?

Five and a half, six million structures short. They're still north to south. We were talking about Florida being popular, Texas for Californians and you have still an urban to suburban thing. So like the houses aren't in the right place. They're going to be demand for a while and they can't get the product to build them all. So,

and they're being more responsible in some way by not taking the backlog. They know they can't fill. You heard that from Lenar last year. You've heard that from the big company. So I don't, I, I'm not saying I'd buy the stocks now in a three, six month horizon,

but I don't think it means like the world's falling because the stock. Could it mean though, Adam, that there's going to be this shift, leave that, leave that where it is. Put a BBY. Right. Could it mean though, Adam, that there's going to be this shift? Leave that where it is. Put a BBY. Right.

Could it mean though, this looks like the housing stocks. They're not trying to build homes. They're just trying to sell TVs to people who just bought a home. Could it mean that we're about to have this huge shift from dishwashers and flat screens to services spending

and services spending not being as meaningful to the S&P's earnings. Because that's a really big story that people are starting to tell now. I'd say that's definitely possible. And Best Buy is one I used to know very well and I'm not as close to it. But at a time – I was short that thing a few years ago. And the thesis I thought was very interesting was something like a third of their EBITDA was from trying to sell warranties on TVs. Where Amazon had a lower price. And by the way, you don't need to sell warranties on TVs. Yeah. Where Amazon had a lower price.

And by the way, you don't need to warranty your TV. Never. OK. And then 8% of their EBITDA was from the cards you buy as gifts for people that people never used. Yeah. That's a pretty good business. I sell you a card that you never use.

That's 8%. So it kind of feels a little like House of Cards-y. I go to PC Richards. It's just like, name your price. Like, you point to something and be like, I'll give you $300 for that to PC Richards. It's just like, name your price. Like you point to something and be like, I'll give you $300 for that. They'll do it.

So the services thing is interesting though. And I get that. Well, look at like Royal Caribbean is looking a little better. Right. The airlines

are looking a little bit better. But the problem is services related businesses punch way below their weight in S&P earnings. Whereas selling cars and ovens and houses is much bigger. Probably the most absurd part of this thing, or one of the most absurd parts, was used

cars. We all have a story of like, my buddy bought it for 30 grand, used it for four years, and sold it for 37. We know that's going to unwind. It started to, and you started seeing pressure on the last CPI on it. That seems like a certainty. So those are the big dollar things. I think in the industrial sector, like the GICS industrial sector, 40% of the inventory dollars were the Boeing 787 program

at one point. So you can't, the dollars of those kind of big industrial things- Right. Hey, Caterpillar's looking a lot better. Yeah. I mean, they're oil and gas and aero are like two thirds their bid. So it's, I think the tenor of your question though, let's go back to like your question on inflation and input costs and like can the companies absorb it. I feel like there are a bunch of businesses that have pricing power. And so the way that their earnings will collapse will only be if small and medium businesses go out of business and like a true recession, right? I'm just a tiny business, whatever. But like everybody has pricing power over me, right?

UnitedHealth – we were talking about this when I walked in. UnitedHealth with healthcare, they raise it. I use ADP for payroll. I use SMPG. Verizon could probably ask you for five extra dollars. SPGI for data. No problem. I use Salesforce.com to communicate with my customers.

I mean, everybody's raising pricing on me. And unless I go out of business, I'm going to keep paying it. I think Starbucks has raised their coffee prices five times in the last week. Yeah, it's like 17 cents every time. I think their coffee is horrible. Chipotle did two price increases this year so far, I think. It's funny. A homeless guy from Chipotle today asked me for some food and I went in there with a 20 and I actually had the thought of like, is that enough? I gave him a 20 and I walked out. I've been saying 15 is my line in the sand for Chipotle. I won't go above. I don't care. Can you put this chart up, John? Gallup poll inflation. I thought this was interesting.

This is like societal. This is so much bigger than like a financial markets discussion. Right. This is a mindset shift that does not just go back to how it was overnight. You could fix a supply chain tomorrow. It's going to take a while. This is a new regime. So what are the implications? So let me tell the people that aren't seeing this. Inflation as the most important problem facing the US. This is a Gallup poll that goes from October 81 till March.

And the percentage of people mentioning inflation and or cost of living is 17%. It has spent almost the entirety of this 40-year period being below 5%. Nobody gave a shit until now. So this is a very, very big spike. Yeah, I think that's true. What does that look like in June? I think we're going higher. Oh, it's going higher.

Adam, I guess the question is like, when does inflation change people's spending habits? When do we see that? Now, I think we're starting oh, it's going higher. Adam, I guess the question is like when does inflation change people's spending habits? When do we see that? Now. I think we're starting to see it a little bit. Every Wednesday, you can go to government website and look for demand destruction in oil. We really haven't seen gas at miles driven destruction yet. I would have thought with six bucks in LA or whatever that you – but you haven't seen that yet.

Now, seasonally, people start driving more when it gets warmer out, but even seasonally adjusted. So I think you're going to see some demand destruction on that. And maybe that's the bear case for my bullish energy call. But I think on hotels and airlines, I've been flying every week the last three months. And airports, I've never seen more crowd. The hotel prices are, I don't want to exaggerate. I'll just tell you like factually 150 percent higher than 2019, kind of Apple to Apple three years later. Like I'd say if you were paying X a room, then you're sort of two points.

Because they have to pay more to get people to clean it. You can't get people to clean the rooms. They have to pay more for now basically utilities. Like they have to. So they have to pay more for now basically utilities. Like they have to. So they have to charge more. I think the question is the U.S. consumer is – that's where we started there. Like that's the key. If you started seeing cracks in that, I think you've got to lower your expectations of the economy and earnings.

I also could say you could have like an economic recession without the S&P 500 earnings going down. I mean we didn't quite touch on that. But these companies are better than the economy. They do have pricing power. It's not like the S&P is really emblematic of you're a guy worried about inflation, right? But don't people overreact? Like, can the market outperform the economy in a recession? I don't think so. You think so? Yeah, it could. Sure. Oh, but we've only ever seen it overshoot. Yeah, it could. I'm not saying that's the base case. No, it could, but people overreact. Yeah, but I guess to push back to that, I agree.

But to push back to that would – and analysts actually confuse structural with cyclical at the wrong time and their estimates could be too high. So that's why I think all the – most of what I spend my work on is like which businesses have achievable estimates six months from now and which don't. And so we do a bunch of nerdy stuff like regressions between change in sales and change in income and the slope of that line. Is it going to margin? Where are the estimates above or below? And like do they have – you know, like price and power or not? And what are they – you know, so we try to get at that. I think we're going to have new recession signals that we start following in the future based on whatever.

Let's say we have a recession in 23, 24, whatever. I don't know. I think the thing that tells us definitively we're in a recession – Netflix subs. Yeah. I think streaming – so like if definitively we're in a recession. Netflix subs. Yeah. I think streaming. So like if a household has HBO, Netflix, Disney Plus. The average household has five subs.

If all of a sudden like Netflix or Disney shocks us and they go into negative growth one quarter. Right. The only way that would happen is a recession. Peacock is the first thing to go. They can pay. Peacock. Exactly. They'd have to pay me to watch the Olympics.

What about – That's like a nontraditional thing. Cloud computing could have a negative growth quarter. I got a couple things I'm focused on that are like kind of new to this cycle. I'd say backlog and book to bill for industrials and semis. Say more. So, all right. If you're a semiconductor company, every company can't get chips, right? Tell the audience what book to bill is, by the way.

So book to bill is the orders that I have versus what I just shipped out, right? So if I have a billion dollars that I just sold, but I've got 1.1 billion in demand, I get a 1.1 book to bill. People want more than I just shipped, right? And I would say – and then the backlog is, all right, I can't get my product. I need chips to make my car. So hey, Texas Instruments, I want 100 million 12 months from now and I want 100 million 18 months from now. And I put it on your backlog to make sure, hey, I want that. I'm going to keep wanting it. It's on your backlog, right? So these companies, You know I want that.

I'm going to keep wanting it. It's on your backlog, right? So these companies, some of them report their backlog, $3 billion backlog at three years, at two. And so once you get any whiff that that backlog is airing it, I think that's a sell signal for the whole economy. All right. So I just saw this guy at Barclays today, downgrade AMD. And his downgrade was we're worried about these three major end markets, whatever, PC, gaming. And he goes, there's absolutely no indication that there's anything other than like all systems go in these markets. We're just thinking about what happens if like Intel gets more aggressive.

So like the analyst is almost downgrading it in advance of any of that whiff that you're talking about being in existence? I think it's hard to get this. The companies don't give you a real number. AMD obviously is a bit of a duopoly, NVIDIA one half and Intel on the other. But I think generally, if you're talking about TI or ADI or the broader companies, if I look at aggregate, my guess is they're 1.15 booked a bill, then 108, then 106 the last three quarters. We're trending toward production equaling consumption. We're not there yet. I think if you start feeling like I'm getting close and the back – one of the weird things about semis is like – I'm not – I booked a fancy Japanese restaurant.

They took my credit card and they basically said you have a $25 per person cancellation fee. But I can order $200 million worth of chips from ADI, call them to cancel it with no fee. Like, this is insane. It's an absurd business. So, you know, to me, if you get any whiff of cancellation, you're worried. And I'd say on the industrial side, it's probably the same thing where – Wait, so who do you watch for that? Like Taiwan Semi?

Like who's the end of the line? ADI, TI, you know, T txn i guess i should use the tickers yeah okay texas instruments analog devices which bought linear and maxim is a big broad-based company and there's a bunch of smaller ones you know um you can look at um you know avago and there's a bunch of other companies you can look at and just try to get a sense for anything about days of inventory as a proxy for you's happening in terms of production versus consumption. I think looking at the distributors is interesting, Arrow, Avnet, et cetera. Because you get a feel for is demand kind of growth exceeding supply growth.

What are the other new things that you're watching this time? I like that. And then I'd say in the industrial space, you can do some of the same thing too on backlog. I'm definitely focused on loan growth and demand for loans. I know the bank's analysts always do that, but I kind of thought it was nerdy bank stuff earlier. And now I'm like, you know what? It kind of is an important proxy because we need to see demand for loans pick up. If you start seeing that pick up, it's a double-edged sword.

On the one hand, it's good for bank growth. On the other hand, people must want the money and have some project that merits borrowing it. I still think there's too much capacity there. So I have a buddy who bought a building in central Florida. He said, I don't know. I had nine banks call me. He's like, I don't know what they're calling me for. I put down a few million.

I borrowed a few million. They can't wait to put that money to work. Yeah. So there's a lot of capacity there. But if you start seeing that dynamic change – so I think you're right. I totally agree with you, Josh. You got to look at like non-traditional signals because everyone is following the same big stuff. And a lot of the signals that historically everyone follows, they're like from another era.

Yeah. And they just may not be as indicative of the real situation. Like CAPE and Schiller PE and Phillips curves and all kinds of useless – So I want to pivot. You made a call on small caps. Phillips curves and all kinds of useless. So I want to pivot. You made a call on small caps. And I find it interesting the degree to which small caps have underperformed relative to large caps.

And it's not like a three-year thing. You're saying it's a 20-year thing. Look, I just noticed it had been bad for like – usually small caps work in a risk on tape. Now, maybe they underperform because they're worse at passing. They don't have the pricing power and they can't handle the commodities. But in a big uptake, they underperform. What's the discrepancy? I'm looking now.

It's ugly. It was 16% last year, I think, and it's another few percent. You're doing a ratio chart? Yeah. IWM into SPY? Yeah. It's just not pretty. This goes back like 10 years.

Yeah. What's the number? I'll tell you this. We published it a couple weeks ago. My thought was, had you been right here and you'd been underweight, small versus large, like maybe you got to start like truing that up. Now, the biggest criticism or pushback to that is probably the point I made earlier, which is these companies don't have as many non-U.S. employees and they therefore have more wage pressure in the U.S. space. So that's probably the biggest criticism. And I guess also if you think we get higher tax regime, you alluded to that earlier, like these companies tend to have higher statutory rate. Ain't going to be a higher tax

regime. I don't think so. Biden's pretty vulnerable right now. And the midterms are going to be a shit show for the Dems. I wonder what happens when you compare sector to sector because financials, small caps are industrials, healthcare, and financials. They have a lot more banks. So when you look at small cap industrials versus large cap industrials, I wonder if that tells a different story. So in Q4 last year,

I like it when you wonder and I actually have the answer. I hope that keeps happening. In Q4 last year was the first time ever where all 11 gig sectors equal weight underperformed the S&P. So that's the magnitude of how much large cap worked. Yeah.

It was the first time in like 30 years. I mean back in the history of our database. So it's large, small. It's been everywhere. Yeah. And so that was kind of a tough one for the hedge funds because a lot of my clients, like they're purposely trafficking the smaller cap names because they can do the fundamental work and they don't want to just tell their LPs, yeah, I own, you know, Amazon for you. It doesn't look like beta, even though it's maybe Russell beta. It doesn't feel like it's beta. Exactly. And so they're like, you know,

maybe they, I'm not saying, I'm not trying to give my clients an excuse, but like they were fishing at 11% upon not 27. And that's a meaningful difference. And if you're running 50, 60% net, you know, your alpha bogeys, you know, five, 6 is 5%, 6% last year, not 27 S&P or whatever people are benchmarking. All right. So this is you. As we noted at the beginning of the year, size matters. Small caps have had their worst 18-month period of underperformance relative to large caps in the last 20 years. That's through the end of last year, that 18 months?

Yeah. I think, well, COVID – I think we stripped out COVID in the financial crisis, but other than those two, I think it was the worst. All right, so you said, adjusting for historical discounts and current margins, small caps appear more attractively valued than large caps. Small cap margins have recently begun to improve, are still below long-term averages,

whereas large cap margins have softened. Nearly 50% of all small caps trade below 15 times forward PE. That's cheap. And ample single stock, small cap opportunity exists. So I agree with you. But if you're an investor and you're not looking to generate alpha but you just want to put small caps in your portfolio, is there a better thing to do than just own the Russell 2000? What would you tell people? I always think that because you know,

you know, otherwise it's hard for me to get up at five in the morning thinking that all the analysis we do is worthless if it's just you know. So what would you tell people? Where would you tell people to fish if they want to add that to their portfolio? So it really comes down

to, and I'll give you the areas, So it really comes down to – and I'll give you the areas. But it really comes down to sector by sector where I think the relative estimate of achievability is better. So in banks, I actually don't really like the small caps as much. That's like one area we said we like large caps more because they have higher return on tangible. The price of tangible hasn't gone up as much as the balance sheet improvement is merited.

They have other businesses besides pure interest rate play. So that's, it's not across the board, but like, you know, in energy, yeah, I think you can make a ton of money still in the small caps are already up a ton, but they tend to be more statistically significantly associated above and beyond equity market beta to move some of the prices. So, you know, I love small cap energy. I love metals. I think I cannot come up with a scenario where demand growth will meet supply growth in the next two or three years in aluminum or copper or whatever. So the stocks have moved but not that much. Yeah, I think they can go up two to 600 percent more in the next three years or something like that. It's not – they're going to be down – you get a ceasefire announcement, they're going to be down 15 and then you're just buying that every time as opposed to some of these other things.

And then I think if you go across all the sectors, I think I like the smaller and mid-cap biotech and healthcare stuff more than the large cap generally where innovation has just gotten crushed. So I don't want to buy Amgen at 13 times. I'd rather buy a bunch of profitless things on a call option that could work if the drug stays. So I was going to ask you, how do you guys generate – like let's say your call is small caps. So you're coming up with names in each of the sectors that are small cap names that your clients can focus on.

Yeah. So like this week in consumer, we noticed that like the small cap staples, consumer staples look really expensive relative to their profit profile, but a lot of the value, low quality discretionary ones are super cheap. So we're rather long the discretionary than the staples, all else equal, that kind of stuff. So we're always trying to find, you know, where the market seems to have taken either as too high estimates or is paying too much money for the current profile. What do you think about profit margins? Just they don't stop going up. So inflation's rising, but companies are passing them along and then some. So I mean, look, the mega cap, large cap stocks, I don't think saw

any gross margin contraction through COVID, right? I mean, the universe. You've seen some from the top recently were off highs on gross margins. But I focus on gross margins more than stuff down the income statement. Why? For a couple reasons. One is the farther down the income statement, the more the companies can manipulate what's on there. Two is that a lot of the stocks trade more on changes in gross margin, like semis and industrials, than they do on the bottom. So if you're focused on making money, you got to look at that. And three is, I don't think the quality of estimates is as good. It feels a little more arbitrageable. Like everyone has an EPS estimate. The company guides it to some range. Some of the

companies aren't as good about the gross margin. So there isn't a deep, rich history of sell-side consensus estimates for forecasted gross margin. So I think you can like traffic in there and find something that's mispriced a little bit easier. That's interesting. Yeah. And also like it's cleaner. Like I know COGS. Like COGS is labor, materials, or depreciation, right? That's it.

So once you get below that, it gets complex. Is it also true that intangible assets and things that don't appear in a balance sheet or an income statement are more relevant to large caps, whereas small caps, it's a little bit more hardcore. Give me the financials and shut the fuck up about the story. I think that could be part of it. It's a little bit – you get more mispricings, right? Like generally, there's a signal we look at called dispersion of analyst estimates and like if they're super tight those companies usually trade at a premium because there's more certainty about what they're going to earn so like

coca-cola like everyone's like plus or minus one cent right whereas oh that's interesting you go to like the wider the estimates yeah the less likely there will be a premium yeah exactly because you're a little bit uncertain you you pay for certain. Maybe Tesla was a big exception to that, though? There's definitely exceptions over time, but if you bought the top quintile on dispersion and shorted the bottom, you would have made excess return. So I think people want certainty

in this environment. Like, if I go down the line, I mean, what do I think is mispriced? I think there's mispricing in every sector, so that's why I'm, like, pretty, maybe part of my general positivity is it's not like, and I've had this problem in the past

where I don't want to buy anything, like nothing looks awesome to me. But I'm like, I don't know, should I buy some casinos? Maybe, because the Chinese people like to gamble. Yeah, are they going to get more restrictive? Is COVID going to get worse two years from now? I don't think so.

So all of a sudden, I'm looking up the Melco Leaps and maybe there's something interesting. The Melco Leaps. Yeah, I mean, if you want to get dirty sudden I'm looking up the Melco Leaps and maybe there's something interesting. The Melco Leaps. Yeah. I mean if you want to get dirty, let's look at the Melco Leaps. So I'm just saying there's stuff to buy is look around. Like I'm a little bit less into your airlines and cruises combat just because you got – I'm a bull on oil and I just think that's a problem.

And then also I have a little like the Peter Lynch thing of like I get like psychosomatically vomitous thinking about going on a cruise. But like I don't – but like, you know. I'm the same way about going into a casino though. Oh, really? Yeah, I can't. But you don't – have you ever been to Macau? No, never. You got to go.

It's like just to see it. Not now because of COVID, but I'm saying eventually, yeah. Well, after World War III, depending on who won, that's when I'll go anywhere near there. I want to talk about – look. We just got bearish in a hurry there that was a that was a that was a reversal i'm not i'm not i'm not calling for world three um john put up this yield curve chart so on tuesday on tuesday the twos and tens finally inverted right they've been on this collision course it's like rachel and

uh and uh what's his name on friends ross. Ross and Rachel, like when will they? So this was always going to happen, right? But then it finally like it happened really fast. And it's not like a kill switch for the economy or anything stupid like that. But you must have gotten questions about it. Yeah, we do. Got some stagflation questions. Give us your shtick on yield curve inversion stagflation.

What do we need to know from your perspective on this, do you think? Look, I mean, so backing up like the Fed's engineered the soft landing three out of 12 times. Yeah, it's pretty good. So that's one set of data over half a century. I don't even know how relevant that is because some of those they didn't even communicate. There were no dots. There was no expectations. There was no what's in the price.

Greenspan didn't do any of this shit. So it's a little bit different. But I'm saying the facts are 3 out of 12. I do think the banks are in a way better position in balance sheet-wise and days of liquidity and the like. So I think there's some offsetting things. And I think one of the challenges we have with this is like – one of my many learning lessons I've had on Wall Street, I was at an Intel analyst day. A thousand people back in the day, San Francisco, Moscone Center. I get in the line.

I'm an analyst. I raise my hand. I ask the CFO a question. And he goes, Adam, I was about gross margins. Adam, it's a 19-variable question. I'll happily help you with one of them. And then he starts laughing, and everyone's laughing. And I think some of it is that.

There's like 19 variables. Like, what's the starting interest rate for the 10-year? Like, twos and tens are a parity, but they're not 17 versus 17. They're 2 versus 2. There's always a million consumers in great shape, but there's a war. Even if the record is what it is, though. 312 is not great.

I don't think that you can prove that this causes... I agree. It's always different, and there's always too many variables to point to any one. But I don't think it's a good sign. What I did is I told you I bought some two years in the PA. And if I were a wealth manager looking at the distribution of alcohol, I would rather own the two-year. Than the 10-year. For 10 basis points more. For sure. I think it's insane. So will that be enough demand that ultimately the two-year comes in? Or is the 10-year going to back up

more? That's the equation. But for me, if you have guys with excess cash, like why wouldn't they buy the two-year at this price and just wait if they don't need it? Like it seems pretty good to me. So that's new. I certainly didn't have that thought in the last cycle. Why can't the Fed just buy three-month to two-year and sell everything that's a later duration? If they want to change the size of their balance sheet, start with whatever the longest duration stuff you have is. And doesn't that steepen us or

at least counterbalance the flat yield curve? Yeah. I mean, if the economy's strong, I mean, ultimately the 10-year should back up a little bit more, I guess, if the economy remains OK. One of the things I learned at Morgan Stanley is that the interest rate guys always talk about supply and demand dynamics and then they're always wrong, right? So think about like QE1, QE2, QE3, twist. Oh, the 10-year yield is going to back up because there's all the supply coming on. Every time when there's a risk of trade, it goes lower. So like I don't – if we're nervous, I don't know how the 10-year backs up a ton. So I think it's – my answer to the steepening is going to be people buy the two-year.

I think. Isn't it also true that steepening is going to be people buy the two-year. I think. Isn't it also true that – If I'm doing it, other people – Whatever is intuitive doesn't necessarily happen. Yeah. And I always think about – I don't know what you were doing during like 11 years ago when – 2011. Yeah, when the treasury was cut by S&P from AAA.

It was like a US CDS chart was being plotted, yeah. Yeah, and the response was a huge rally in treasuries. Yeah. So like when you see something like that happen, you just say to yourself, stocks are hard enough. I'm not going to do it. Kind of. Look, I shorted the yen six times in my life, my PA,

because I would like get lost in this whole country. It makes no sense. And I shorted it every time I lost money. And then when that Fukushima thing happened, I literally, which is a terrible, I'm a bad person. I'm like, oh, at least I'm going to make some money. And then I lost money anyway, because then all the money came in. So even during the nuclear thing, I lost money. So I called my advisor, and I was literally like, you're over-serving the drunk guy at the bar. Stop letting me short the yen in the PA. Cut it out. So yeah, I think it's easier to find the dislocations in the US stocks for me. And that's obviously where I spend all my time. But if I get

to the tenor of your question, like, I don't think it's great for the small cap banks. Okay, so that's one of the reasons on a relative basis. You need steepening, right? You need something to borrow and lend and capitalize on the differential. And if they're the same, I don't see that. I don't think that's good. So I think that's, to me, like an underweight. Of course, I'm not sure it's that bad for Morgan Stanley or Goldman or JP Morgan if there's activity in their other business lines or whatever, I mean, on a relative basis. So I kind of like that pair trade. Hey, Adam, this is a dumb question, but you're talking a lot about fundamentals. Like, how long do we have to wait for prices and fundamentals to converge? Look, that's a great question. And you can be fundamentally right and bankrupt right

for sure. I think 50 percent plus the money is run passively, right? And then probably another big chunk is run in pods. So like the active kind of day-to-day stuff that you control can sometimes be 10, 15 percent. So you can get dislocated for a decent time for sure. But I – The biggest hedge funds that exist now are not trading on fundamentals.

Systematic. Yeah. They're systematic, they're quants, they're not- Price and liquidity. And they're systematic on prices and signals. They're not nostalgic about things that- I know Morgan Stanley reported this

and it could be dated, but at one point, 30% of the whole equity business was two to five day holding period, right? So, you know, so obviously that's only price and liquidity signals. So is that an advantage for people who are doing work? I hope so. Most of our quantitative models that predict subsequent return to stock are 18 months forward.

So I think the answer to your question is that's where the signal decays, but it still has some value in that. So I think it's over 18 months. So if people want the answer, like what happened this week, I guess your initial chart is 100% right. It's got to be some flow thing. So if we're talking about – It's got to in that. So I think it's over 18 months. So if people want the answer, like what happened this week, I guess your initial chart's 100% right. It's got to be some flow thing. So if we're talking about- Yeah, it's got to be that. If we're talking about economics and companies' fundamentals growing, their earnings,

but we're simultaneously, for the first time in a while, having liquidity drained from the market by the Fed, pulling back, what's going to win? Is that like the immovable force? No, I mean, I don't think the balance sheet- Getting that sentiment, like what sentiment plays as big a role as those two things. Yeah. Fundamentals, there's the monetary situation, and then how do people react to it? How anticipatory has this been already, right? Because some of it is in the- Yeah. Some of it's in the price. I never say it's all in the price, but look, what I did, I'm going to

go to work I did, right? We did some work looking at the Fed publishers, their balance sheet every Wednesday. So you can get the week-over-week change in the Fed balance sheet compared to the week-over-week change in the S&P. Overall, sector level is statistically significant, yes. So when the Fed was expanding the balance sheet, it was statistically significantly associated with a higher equity market. Like that was a factual thing and we published it and you could see it actually impacted the financials and tech the most when it was happening. The interesting thing is when the balance sheet hasn't really come down. So you can't like really statistically significantly observe the inverse yet. You just have to surmise that it acts the same. We've grown it at a less rapid rate, but we haven't-

You can't say it's in the price. We haven't even- Right. We haven't seen like massive week over week declines in the Fed balance sheet. And then I could tell you, hey, empirically, here's your answer because like I don't know. It stands to reason that it won't be great because it was statistically significantly associated on the upside. But there are a lot of like one-way streets in equity markets where it doesn't necessarily work the exact way in reverse as it did in the up market. I think the market is going to be harder going forward than it was over the past few years. I agree with that, but I think that's a consensus too, right? Yeah, for sure. I want to ask you so that like your – I don't know if call cheapens it, but your perspective on the market this year is like we can power through this as long as everyone's expectations are a little bit lesser.

Less upside in stock prices, less upside in earnings growth, but enough to keep us afloat till the next thing. If I were talking to people who day-to-day wanted like, where's your S&P target, which thankfully I'm not, I would go – what I would say is I think there's a 2.5% net buyback plus dividend. There's 1.5%, 2% boosting to S&P earnings by adding companies in and taking companies out. Like you're taking 6% of the companies that are – That much? It's big. Equivalent to the are- That much? It's big. Equivalent to the buyback and dividend? It's just switching out stocks?

Yes. Do you know that? It's pretty big. And then there's 4% or so organic growth, something like that. So let's say it's a 7% to 8% total return algorithm. And so the multiple's at 20, 21 times forward, depending on your forward earnings. Maybe you're at 21, I'm at 20, whatever. And the long-term average is 17 times forward. That's since 1978. So we don't have a ton of history when rates were high. But that was OK.

So is 20 fair versus 17? Maybe because less capital intensity, 45% of companies don't even have inventory as part of their business model. The banks are in superior position. Maybe. So I don't know if the value and the bonds are worth – like nobody – I would not buy a bond and hold it for a very long duration, five, ten, seven years. So I'd rather own the S&P for five years than bonds, right? So I still – I don't like that. Like there's no other alternative thing.

But like – It really isn't. Seven, eight percent total return algorithm isn't terrible and I think that's a base case. Now that we're down – when you get down ten, I don't want to say it's definitely going to be seven to eight percent up from the down 10 in the next six months but there really isn't an alternative if you own your home and you're not speculating in other real estate it's not like you go to private equity to pay a discount gutter cats what are you talking about right but there's so many but there's things that there's things like i i'm always thinking about like yeah i'm i'm going to buy some natural resources

directly i love energy i love commis like maybe I should buy metals. What about, you know, everything's elevated legal cases. I'll buy those. Like you can, there's all kinds of cases. Yeah. Whatever. There's all kinds of stuff you can buy. That's interesting. Uncorrelated. There's tons of cool stuff. So like I'm, I'm, I'm, but, but the bulk of money, like, I don't know what the numbers are for like so much. I can go into that. Right. But like, even if I have the 2 trillion back in the day, I'm already saying, I think only 800 was a million was even a billion was even like qualified, right? So you can't buy all this stuff.

So when you go down the list, like, yeah, I don't know if there's a huge alternative and I think you could get flows in here. As people look around, they say, all right, so it's a 7% total return. Adam is crazy. It's a 5% total return algorithm. Where do I get five? It's not that bad. If I had to say one thing, though, to stock market investors who are asset allocating and they're doing stocks and bonds, one thing that will always be true, and they should always remember, the money has to go somewhere.

Yeah. And we never make less money in this country. Yeah. That's a really powerful- It's powerful. It's powerful. It doesn't stop the stock market from temporarily getting cut in half. No, for sure.

Hey, let me ask you- But eventually, it getting cut in half. No, for sure. But eventually, it has to go somewhere. Yeah, I agree with that. And so maybe now, like I've heard more and more in the last two months, people ask about non-U.S. equities. Right? And so, you know, I'm not a fan of that. It might go there temporarily. It never stays there. I'm not a fan of that. What we've been doing,

we've done a couple of these projects for clients. We do a lot of bespoke stuff. I just say, here's the U.S. stocks that are the most correlated to that market. Why don't you just buy those? And if you want Europe, like basically what you're saying is you don't want tech and you want more utilities, energy, and banks. Like I can do that for you. Like you don't need to buy SockGen or whatever. You can just buy Citigin Wells or whatever.

So you can mirror that. Chinese equities, we did a big note last fall, August, when the market was getting killed there. Basically, our conclusion was, why ever buy a bat, Jay? Why would you buy Alibaba and Baidu and Tencent and JD.com? You can buy US semis, US utilities, get the same return and have no Chinese risk. And US stuff doesn't go down when China... So I proxy it. I don't want to own it directly. And as I told you, most advisors won't listen to you anyway. What have the conversations been with clients over the last 12 to 18 months as a lot of these high beta, high growth, R-complex names have gotten blown to kablooey? What's your take? So one of the things that we do a lot of, I think we signed like 25 non-disclosure agreements with hedge funds.

One long only the rest are hedge funds. Not to brag. No, it's like two a month. It's not that many, but that's what I do, like outsource chief risk officer kind of stuff, right? And they send us their portfolio and then we kind of give our view of the risk that they have maybe, you know,

we try to say stuff that's not in Barrow or Axioma or Moody's Semi Fund Services, like the obvious things. Is that what you really do? Yeah, we spend a lot of time doing that and it's great. And so you get a window and the answer to your question is a lot of guys had texas hedges on where they were sort of long texas texas hedge like i'm long a compounder and then i'm short something like i call it a melting ice cube but really it's just it's a factor bet that's like

minus one times what i'm long so they're like they're they're long it's a double yeah it's a double down texas hedge means give an example i example. I'm short. Long Shopify, short IBM. Long the Knicks, short Charlotte, who they're playing tonight. And Knicks are the underdog. Your example is right. Like you're long some hyper-growth stock that's kind of negatively correlated to rising rates. And you're short something that's positively correlated to rising rates. And then when rates rise, you lose on both sides of the book.

So we spend a lot of time looking at – do you have the same – It's not a hedge. Yeah. It's a Texas hedge means it's like a big strong – yeah, I guess. But so it's kind of a – I think that was pretty prevalent because what worked the best in 2020, right? The profitless Goldman software basket and biotech and like ARK and crypto and like speculation and SPACs, right? The profitless Goldman software basket and biotech and like ARK and crypto and like speculation and specs, right? So starting like February of 21, we got that all peaked out, right? And so that stuff was probably way overvalued to start out with. And I think people

got over-indexed to it for a lot of last year. Are you seeing buyers step in or what are you advising clients? I think what we're saying is if you want to buy hyper growth profitless stuff, I'm like long biotech short profitless software. Try to get rid of that arc factor if you want to call it that, but get exposure to the innovation without having net exposure. She's not there as big as she is in – Yeah, yeah. And it's just like – this is interesting. 15% of biotech companies ever generate positive chemo-free cash flow. So when you hear this lazy like, well, the terminal value is affected by rising rates.

Like, not for biotech because I'm not going to make any money anyway. So they get bought at premiums with the drug safe and effective before they have revenue. So I'd rather take a shot at that than bill.com, 24 times full of sales. Biotechs were the original TAM stories. It's like, how many people have sickle cell anemia? Okay, that's how we're valuing this company because they haven't sold shit. So the answer to your question is like, do they want net exposure to that? Not really to the sort of hypergrowth problem factor.

So they're trying to do clean tech, biotech over software. So not advice. Find some pair trade in there. But long Moderna, short Zoom. Is that like an example? I mean, Zoom. Is that a South Shore hedge? Yeah.

Zoom, I think, you know, we pitched this stuff as short ideas for a while, and I think that basket makes sense. We think they're just like kind of over-earning work from home, no moat. Like if you're a Microsoft Karitsu guy, like what does Zoom bring to the party? You use Teams. Yeah. Yeah, you use Microsoft for everything. LinkedIn, Teams. We're doing all Google Meets now.

By the way, thank you. So I didn't know this. Now when I put a – Can I open this in front of the mic? Crack it. Go ahead. Go ahead. Here, I'll disguise it.

When I send a calendar – That's a Pellegrino. When I send a calendar invite, I just turn the video on. I don't attach a Zoom's invite. I just hit Google. Boom. A lot of clients do this thing with me where they send the Zoom link, but then they don't turn the camera on.

It's like a Heisman for me. I don't get that. Oh, I'll be out of the meeting if they do that shit with me. That's a weird move. It happens all the time. We'll do like a 30 person, 30 clients around and like only the one guy's on and everyone else is like mute, mute. I don't know if they're in their PJs.

That's the two-way mirror. Yeah. That's like a two-way mirror interrogation. Who does that? With a cop on the other side of it. 87% of institutional investors do that. Somebody said that to me the other day. Oh, I'm just in my sweatpants. It's like, well-way mirror interrogation. Who does that? With a cuffs on the other side of it. 87% of institutional ambassadors do that. Somebody said that to me the other day. Oh, I'm just in my sweatpants.

It's like, well, I'm bald. So what? Turn your fucking camera on. Are you? I didn't know you're bald. Oh, fully. Fun fact about Michael. Nike hat's doing a good job of covering it.

I want to ask both of you guys. I think Ned Johnson is like a giant. Yeah. And he just died this week. And there wasn't really a lot of attention paid to this, probably because he wasn't running Fidelity. But 91 years old, he basically took his father's company and made it what it is today. Not to take anything away from his daughter, Abigail Johnson. But Ned Johnson III did like a really big thing in our industry.

This is New York Times. And they actually have quotes from Bogle about Ned and his obituary. I guess they got them a while ago. Mr. Johnson, widely known as Ned, led FMR, Fidelity's parent company, drove it to prominence in the 1960s. Jerry Tsai. Heavily promoted, aggressively managed go-go stock funds. In 1974, the company helped popularize the fledgling money market business by allowing customers to write checks against his money fund. They had like a whole bunch of stuff that didn't work, but their big innovations were a really big deal. Didn't work, but their big innovations were a really big deal.

At his death, Fidelity had more than 500 mutual funds, $11.8 trillion under administration. The company's still half owned by the Johnson family. How about the operating income? And half by its other employees. They never had to go out and raise money, no IPO. Yeah, why would you go public if you don't have to? Listen to these numbers. $24 billion revenue, operating income of $8 billion.

What would that be worth in the stock market today? Would it be as big as Schwab? Yeah, $30 billion. What's up with Schwab? Is it $40 billion? I think bigger. $8 billion in operating income. $8 billion in operating income.

I think you pay kind of 10. I got it. 10? Yeah, maybe 10 times income. I mean, I don't know what the taxes are. In this economy, Adam? Adam, in this economy? This would be a bigger company. No, Yeah, maybe 10 times income. I mean, I don't know what the taxes are. In this economy, Adam? Adam, in this economy? This would be a big company.

No, I'm saying 20 times earnings. You're going to pay less than 20 times earnings for that though, right? But yeah, it's a real company. Growing as fast or faster than Goldman Sachs or – Yeah, they have a lot of good businesses and they do a good job across the wealth spectrum. Back on your growth question though, like you asked – I just answered like the hyper growth kind of biotech, pair trade clean tech over software. But I think most clients are trying to figure out who really has pricing power, right?

It turns out when I got to Morgan Stanley in the fall of 2010, it was the same theme about pricing power. I interviewed all the analysts. Josh will love this. And magically, all the ones they said had pricing power, they were overweight rated. And all the ones they said didn't have pricing power, they were equal or underweight weighted. So you're like, all right, this is garbage in, garbage out. I need another way of doing this, right? But I think people are trying to really figure out which kind of growth stocks have positive

free cash flow and margin expansion. Shopify? Really? I think it's mixed. That particularly, I think people are more mixed on. But I think it's more, I won't own the 80% margin, decelerating revenue, negative free cash flow, 20 times sales stuff right now. That just doesn't feel like it's going to find its footing. Yeah, sure, if I get a directionally

dovish comment from Powell, they're all going to rip 8% one day. But that's not what we're talking about. We're talking about the kind of structural. So I think it's more around back to that gross margin, positive free cash flow theme. And there are some out there. I've had some questions picking around those kind of stocks and asking for screens and asking a couple of guys that we put together short baskets for that are really like which ones have decelerating revenue and negative free cash flow. So the 23 estimates are below 2022 for revenue. They're still above 10 times sales. Their beta is one and a half or higher. And I'm going to short 25 of those guys, 20 bips each, get a 500-bip short on, and I'll buy some pricing power margin expanders against it and try to grow. Are the private markets more important than ever?

Wait, hold on. Before we go there, two things. One, how much did you say Fidelity's revenue was? 24. Because Schwab's is 18. much did you say Fidelity's revenue was? 24. Because Schwab's is 18. Yeah. What's Schwab's market cap? So let's see.

60? I don't think it's... How big is it? Oh, shit. Well, it's just after they merged. 160, so... Hundreds. Oh, because they bought TD.

But before we move off Ned Johnson, so he... I don't know if this is Times Times or the Journal, he offered retail customers the ability to conduct transactions by toll-free telephone. He pioneered walk-in investor centers and he revived and then popularized funds focused on specific industry sectors like healthcare. This was new to me. I'm sure you guys both know this. In 2004, Abigail Johnson sought to vote her father out of his position over disagreements with some business decisions. The plan fizzled after he learned of it and issued enough stock to dilute his children's ownership. That's like a succession.

Yeah. Do you remember that? I think it was less cinematic than that. I vaguely remember that this was a thing that happened. Try Barrett really likes Fidelity and we find them. We're happy Fidelity customers. No, nothing bad. Wait, last thing, last thing.

So you spoke about like if they were public. So in an interview a decade earlier, a reporter asked Ned Johnson what Fidelity might offer its stock to the public, and he said, well, I'm dead and buried. Okay. I don't blame him. I mean, listen, think about like you're a public company and you're raising money, and then you have analysts like a 35-year-old version of me or Josh Brown calling you, asking you all kinds of questions like, do you want to do that or do you want to stay private? Which one sounds better to you? I wouldn't go public if I didn't need the money. Outsiders may be given important roles. Family members need to be prominent to provide stability and, quote, an ongoing philosophy or culture of doing things a certain way. It's impossible on Wall Street especially to have like all these different masters and keep whatever culture you had private. It doesn't mean it's necessarily negative.

It's just not going to be the same. There's a lot of – I think there's a lot of truth to that. For sure. Especially if it's a family business. All right, well, shout out to Fidelity. And I just thought this guy's life was incredible, just what he was able to take from the prior generation and build. When I started as a semiconductor analyst,

I was at a Fairchild Semiconductor in Portland, Maine. And there's 20 guys up there. And CEO said, thanks for coming up here. We're going to miss earnings. And everyone ran to the cell phone to call Fidelity. It was like, let them know what's going on. I mean, it was the epicenter of the buy side. It was the most important.

And it's the epicenter of retail, biggest 401k market in the world. We were going to talk really quickly about private markets. I wanted to ask you because this is probably a backwater for somebody that's covering the public equity markets up until let's say five years ago. Now you have companies in the private market that are bigger than most of the companies in the Russell. now you have companies in the private market that are bigger than most of the companies in the Russell. When they come public, they're so big that they actually make a dent in market cap of other stocks. How much attention are you paying to that world? I bet you half your clients are, if they're not crossover funds, they're considering becoming crossover funds. Do you think about private the same way you think about public?

What's your take on all that? Yeah, I mean for sure a lot of the large clients, I wouldn't say they have – the word crossover fund, I would say there's a smaller meaning. They don't necessarily cross-pollinate the private and public in the same fund, but they definitely have both separate private funds. They have analysts covering private companies. They definitely have a private fund and a public fund at the same umbrella. Right. The crossover themselves, I think there's less of that.

But probably growing. Maybe the firm crosses over. The firm does. Yes. Well said. And also they didn't have analysts analyzing the private companies that are competing with public ones. I think so. I'd also say, and maybe this is like an old man thing to say, but like it's statistically significant that the people covering the private ones are younger.

You know, like they're just kind of, you know, tearing apart. I bet that's true. Yeah, I see that, you know. You know, like they're just kind of, you know, tearing apart. I bet that's true. Yeah, I see that, you know. But, you know, I think it's because a lot of the hedge fund guys who got really wealthy and successful, you know, 2000 to 2010, like their traditional model changed, OK? You really can't make any money unless you do one of three things, right? You either got to run huge gross, run super concentrated, or you got to take like big factor bets or risks and be right.

If you don't do that, you can't make money. So these guys realized, all right, my days of 40 long, 60 shorts, 120 by 80, 40% now, I can't make any money. I'm like, these machines are killing me. So they already got rich, and they started bolting on private businesses. And then that really worked for a while because you got into all the stuff that's killed it. You give a company $10 million, and then they go public six months later for 18 billion. It's like, why don't we just do this?

Yeah, all these guys got a second wave of wealth by – and like you were pointing out with rates before, it was a one-way street on rates. And private was really just a levered long call when rates were falling. What's the research scene like though? when rates were falling. What's the research scene like, though? Where do hedge funds get their research on unicorns and shit that they want to be aware of? They might be in on the IPO. They might come in on the last funding round.

Titchbrook. I think it varies. I think some guys- Because you could build that. But I say in the tech space, though, a lot of these guys really, really follow the technologies. And they know what's up and coming, whether it's software or semis. And they're really immersed in it.

And they talk to the guys on the private side. And they look at all the – one of the things that I don't do a good job of, and maybe you guys follow up. But if you look at Google and Apple, these companies are constantly buying little companies here and there. You don't notice it's $200 million there and $100 million there. You would only notice if one of your buddies sold this company for $200 million. But short of that, that doesn't even register on the P&L. It happens all the time. So go to Bloomberg and type in Google Equity CACs, the corporate actions. Click on M&A, and there's like 87 things in there that are all like $200 million. So these guys are animals looking at what is that? What's the technology? What are

they buying? What's it competing with? How competing with? That's a full-time job. And I don't do that because it's like, you know. So I think a lot of guys in tech and obviously in healthcare are all over that space. So what the story is, SoftBank made 195 private company investments last year.

There was a big write-down for Instacart, which is one of the biggest unicorns that exists. And is this – this is a SoftBank-driven thing or not necessarily? No, the company did that, which is interesting. This wasn't like Fidelity or T. Rowe. It's Instacart. So they said, we announced to our team that we will be aligning new equity awards for existing employees and new hires to an updated company valuation that reflects current market conditions.

No employee is going to go work there if they know that they're getting options or whatever that's 40% overvalued. So investors valued at $39 billion already last March. And this is everybody. It's Fidelity, D1, Sequoia, T. Rowe, Andreessen. And the company saying, actually, we're going to value ourselves less. For what? Just for stock incentives?

Well, I guess for like for employership. But we spoke about this a couple of weeks ago that I think T. Rowe and Fidelity both did write them down. One was like 5 percent. It was 18 percent. But it's like, yo, DoorDash is down 70 percent. Yeah. percent, it was 18 percent. But it's like, yo, DoorDash is down 70 percent. Yeah. You know, I think holistically on the private side, like I guess I do view it as like it was a levered long call on the public market. And so I think if rates are going to rise,

it is going to challenge the return profile of that space a little bit more. And I think the valuations of the private companies aren't going to be as attractive. What if that's better, though, for the investor in the end? It's an adjustment on whatever shit they just invested in now. But the next hundred deals they see are going to be more realistically priced, potentially. Maybe. I mean, all these SPACs are so unfilled. There's so many of them.

We'll see. But that's the thing. There's too much supply. In 2020, 2021. There's excess capacity in every part of it. I don't know. You've invested in private equity stuff in your personal life, right? Yeah.

It's such an un-user-friendly experience. It's getting better all the time. So I invested in a big one in 14 and 15, big for my relative worth. And it's like-

What was it, Uber? A company or a fund? A fund. A private equity fund. And I'm saying the fund is- And so the fund, I don't know, he got like two or three things that went public. And one of my buddies who told me to get in there was like, oh, this guy's been awesome. I'm like, fund and so the fund he got like two or three things that went public

and one of my buddies who told me to get in there was like oh this guy's been awesome I'm like alright maybe so how much money are we up I can't even figure it out because he distributed 17 grand to my thing meantime the S&P from 14 or whatever has been a monster so is it up 100%

I don't even know you won't know until all of the capital is returned. But I know that what – right, which isn't imminent. And I know that like the few things he spun off to me through the thing, like I don't know. It like went into my chain. I don't know where it is. Like my wife spent it. So like I don't – the friendliness of the experience isn't awesome.

I like a statement that's like here's what you're up. We're getting there. We're getting there. That's what I think the industry needs. Everyone on Wall Street is working on this problem. With real marks. Yeah, with real marks. There's a lot of companies coming in to do that.

No, I know. There's a lot of technology. And I think that's going to make the experience better. But I just think the returns benefited from a levered long call. And I think, like you said, it's going to be a little harder. I think it's going to be a little harder there too.

There's excess capacity. A lot of businesses got overvalued. There's a lot of competition. Oh, I think the illiquidity premium worked because you couldn't even sell that stuff. And in 16, you might've been bearish. Oh no, it's Donald Trump and Brexit. My point is the marks made you believe you were making more money than you were. And now you're going to see the downside of it at this cycle. So like I don't – I was being – I was kidding a little on that. But I'm just saying like I don't – I don't know if I would like make fresh allocations to that with the blindness that I did in 2014 and 15 when I did like my – yeah, I was working at Morgan Stanley. All my wealth was tied up in like equities and Morgan Stanley style or whatever. And I was like I had two smart friends who were doing – OK, great.

Here's some money. Now I'm like, wait a second. Like, yeah, they did fine. Maybe as well. It ain't going to be non-correlate. If it used to be, which we don't fine. Maybe as well. It ain't going to be non-correlated. If it used to be, which we don't even think it really was, it ain't going to be this time. I think it's going to be highly correlated to growth equities. Totally.

Exactly. I still think there's too much money chasing too few companies in private markets. There's so much excess capacity in every part of our industry. Speaking of, I wanted to ask you about what do you think about, you're a New York City resident live Upper East Side. We're going to put your address in the show notes. So we're commuters, Michael and I. We're bridge and tunnel

now. I used to live here when I was cool and thin. What do you make of NYC's comeback? Because from the commuter standpoint, all of the surveys are super negative about whether or not they're ever going to come back for good, more than one day a week.

Like Newsday just ran a poll and it was something like 29% have any interest in coming in at all. This is people who normally commute into the city. It doesn't appear that way when you walk around. So what, like, what's really going on from your perspective? Yeah. Listen, the reason I, you know, live in the city and work in the city, so I didn't have to commute. And when I went marketing Connecticut on Tuesday, it took me like two hours and 30 minutes to get to Westport. So, you know, I don't,

I don't like commuting, but I, what I've noticed is that the big companies are realizing they can't get culture unless they can't get culture unless they can hire the new MBA classes and the new kids out of college and get them in front of people who are a little grizzled and learn from them. So they're going to want people in the office more. They just have the same wage and kind of employment problem everyone else has. So it's a little bit harder to make demands right now. But I think when things reach equilibrium, they're going to make people come to the office more because they just can't teach them culture

and have them do stuff. We had Nick Colas on last week and he was saying like the knowledge on Wall Street is an oral tradition. Yeah. It's like passed down from like people

meeting with older people. Listen, like when I was an associate, a junior guy, like, you know, what was awesome was like watching my boss like talk to a CEO

on the phone about earnings. Right. Right, like just seeing, you know, or like just seeing you know or like watching um you know senior pms like ask questions and so like you know now like that's an advantage like i'm talking to like guys who run big hedge funds and guys who run big pms and like i got a couple guys in their 20s who work for me and they sit next to me and like they're

like this is awesome like i i'm never going going to get this if I'm not physically sitting with you. You can't get this from reading blog posts or listening to podcasts. You cannot. So I think that that, that, that's not just like an old cool, you know, I walk up to the work uphill every day. You know, I think it's more like they want to get the culture. And then I think guys who run hedge funds are kind of sick of it now. They're like, look, I pay for everything. There's 50 employees like come to work and sure. Like I'm not going to come in Fridays and in the summer I'll be in the Hamptons.. Like, come to work. And sure, like, I'm not going to come on Fridays in the summer. I'll be in the Hamptons. But, like, you know, I think guys who are the analysts who are in their 20s and 30s, they want to live in the city.

It's more fun. You've seen that with residential apartment pricing. All right, so wait a minute. So I think the issue is, like, once they start, like, getting kids and want to, like, move out, what's going to happen? I was going to say, those people, you don't have a problem getting people in their 20s. You see my office. I have people here. They're in their 20s.

They live in apartments. They don't want to sit there all day. They'd rather be here. The office is nicer than their apartment. It's bigger. So 40% of employees who reside in Manhattan still say they're thinking of leaving. 48% if you live in the outer boroughs outside of Manhattan. This is last week, this poll.

It's not great. Public safety is the number one issue only 40% of employees have returned to their offices in person full time 43% of people cite public safety only 27% cite exposure to COVID

so it's not even the f***ing pandemic anymore it's that we have Gotham City with no Batman and I don't think employers can do anything about that. I think, look, I'm so over-indexed to the financial industry and performance. To me, when markets up

27 last year, why would you make anyone come in? But this year, guys are down eight, and they're like, hey, we want to see you. Nobody's making money. We want to see you. I want to get you in the office and let's like really dive through it. So like, you know, maybe the big long-winded firm is a little slower because it's not their money and they don't care.

But like if you're running a hedge fund, it's a $2 billion hedge fund and you're worried about like the viability of your business and you got like 15 employees. Like, sorry, you're working Monday to Friday in the office in New York, period. So I don't know. We'll see what happens. I mean definitely the residential market is back. Like you can't get three months free rent anymore in that market. It's only in the commercial side. So I think the young kids want to – I think it depends on the corporates.

The bigger companies start mandating it. I can tell you that it really varies. How's the Upper East Side? How's Campagnola on a Monday night? The restaurants are packed. Everyone's there. The restaurants are packed. You can't get reservations anywhere on the Thursday, Friday, Saturday. What's your go-to Italian Upper East Side? El's Campagnola on a Monday night? The restaurants are packed. Everyone's there. The restaurants are packed. You can't get reservations anywhere on the Thursday, Friday, Saturday.

What's your go-to Italian Upper East Side? Elio's? Say Elio's. No, forever, I've always liked Scalinatella. Love Scalinatella. But the challenge has been they have low ceiling, no ventilation, no windows, no takeout. You don't like going down into a basement next to Bloomingdale's? I love the place.

Then my mom, who's like 80, yeah, they're the best COVID. They do COVID well. She was like, Sonnerstown, the food's downstairs mom, who's like 80. Yeah, they're the best COVID. They do COVID well. She was like, Sonnerstown, the food's downstairs and the bathroom's upstairs. That was her jam. But I've always loved it there. I've had so many great dinners with management teams and the Pulse. For a place with brick walls and no atmosphere and zero cogs on their interior, I'll pay like 80 bucks for a Dover Soul.

I don't know why. Cafe Antonucci? Oh, yeah. I like that place with the cheese and the thing. Can I get you to buy on that? I haven't been there in a while. I'd say generally it's busy in the city. I think the traffic is up. I think your point, though, holistically, it really varies. I spend a lot of time in Florida seeing a lot of investors in Florida. It's crowded. Investors

are in the office. There's no COVID in Palm Beach, in Miami. Nobody cares about COVID. They're just using that as a cover. I think in Boston, a lot of guys live in the suburbs. They don't want to take the 30-minute train to COVID. They're just using that as a cover. I think in Boston, it's the same. A lot of guys live in the suburbs. They don't want to take the 30-minute train to downtown. They're like, oh, we're coming in Tuesdays through Thursdays.

I think culturally, if you run a firm, that's going to be hard to keep for five years. So we'll see. I think the younger guys in their 20s and 30s need to be in the office to understand and learn what's going on. And I don't think you pick it up all from being off camera, on mute, on Zoom while you're balding in your pajamas or whatever everyone what's going on. And I don't think you pick it up all from, you know, being off camera on mute on zoom while you're in your, you're balding in your pajamas or whatever.

I want to, this is the last thing I want to ask you and then we'll get into favorites. Yeah. What, what would you, your look, you've had an amazing career on wall street and it's not obviously, just getting started.

You're in your second career, just getting started. What's more important for someone's career trajectory. Do you think the school they went to or the first job they got on wall street? Like what's more important for someone's career trajectory do you think the school they went to or the first job they got on wall street like what's the school is definitely not it i mean i'm totally the frank bruno like where you went does not who you'll be like yeah but doesn't that open the right doors for you or does that not matter as much i wasn't in i wasn't in that like you know you know elitist club. I went to public school from Boston.

I went to University of Michigan. I wanted to go – But Michigan on Wall Street is a big deal. Now, it wasn't in 1987. I'm 52 years old. I'm going to be 53 in May. It wasn't. I was the only kid from my high school that went to Michigan.

And I went because I like sports. And so I have friends who tease me about Michigan. I'm like, all right. So name a school. It's top 25, like undergrad business, medicine, law, engineering, football, and basketball. Go ahead. Oh, Michigan. Maybe it's like that.

I mean, the list gets small. Go blue! Yeah. So I'm one of those Michigan assholes. But so I want my kids. I raise them in the city. I want a campus. And so-

We talked about Delray before. Yeah. The Michigan assholes fully took over Delray around Christmas because it was the – they played in the bowl. I was there. It was the best eight minutes of my life was pregame in the parking lot. I had the best buzz going. My whole hotel was filled with Michigan people. And 10 seconds after kickoff, I was like, we are going to get killed.

I've never – my high to low reversal at the Orange Bowl was one of the highest. I was secretly happy for that. All right. So let's say you wanted to pursue a research career. So it's not, to ask you a question, it's not where you went, right? I mean, look, if you have a good personality and you work hard, it's effort and enthusiasm, right? Like I could tell you right now, I'm purposely, I'm hiring. I have a strong anti-Ivy bias, okay? I want someone who's hungry. If they have any millennial stuff going on, I interview the guy who said I want to surf at 3 o'clock every day.

I'm like, you're out. It's not for me. The good thing about Zoom is you just hit the leave button at that point. I'm like, I want someone who wants to work hard, likes people, and it's hard to screen for that. It's PhDs.

Poor, hungry, determined. Yeah. For me, I never felt like – I thought a PhD for me was 99% perseverance, 1% intelligence, right? So for me, I'm like a grinder. So I didn't have like the – No, that was – what's his name? That was Ace Greenberg at Bayer.

Poor, hungry, determined. That's the only PhD he wants to talk to. Yeah. Bernstein, when I interviewed there, Sandy Bernstein, he died in February of 99, right when I started interviewing. But it was an old, crazy place, right? They would play chess with people and like he was screening for like desperation, right? Like that's what he wanted.

Like are you – so like that culturally like kind of infused in a little bit of like – so I think one of the – I only hire at billiards halls. I'm looking for like craftiness, desperation, a little mix. I agree with that. I'll tell you a funny story. I had this woman and Morgan Stanley only recruited like Yale and Harvard and Wharton and Chicago, right? And then like once in a while, they'd slum down to Michigan, right? Only if you went to Ross and got a 4.0.

So I had this woman. She worked for me. I loved her. and then like once in a while they'd slum down to Michigan only if you went to Ross and go to 4.0 so I had this woman she worked for me I loved her she went to Yale Fulbright Scholar spoke fluent Mandarin but she was coquette I mean she was incredible and she wanted to leave and I'm like what do you mean you want to leave you're staying with me for the rest of your career like I love you

where do you leave Morgan Stanley to go so she the story I'll make it fast. But basically I was very disappointed. I didn't understand why she was leaving. I tried everything I could do to keep her. And she basically was like, yeah, I don't want to do this. It's like beneath my dignity.

I think that was the answer. So when I talked to the HR person who replaced her, I'm like, here's what I want. I want someone who's broken. I want them to not have gone to a good school. That was me. That's why Josh hired me. I want someone who went to not a good school. And I don't want to list the schools off, but they weren't the schools that

But smart as shit. Queens College. Chip on the shoulder. So I said, preferably athlete or accomplished musician who had bad grades their first two years, had some injury, then did a little bit better, so there's some aptitude there. But they present themselves as like a 3-0 from Michigan State who is like a track

person. What does this HR person say? So this person's like taking notes. They don't get it. And two days later, they come back with a woman who had a 3-7 from Columbia who played field hockey. I'm like, I think that you missed it. That's called an outstanding person. Like what's wrong with you?

Like that person is not broken. They're all hockey. Yeah, like she like – yeah. I met like someone who got like a 2-0 from like Rutgers because they were like playing football. You've got your shit together. Yeah, and she was 3-7 from Columbia. All right. So they don't get it, but my jam

is like a hungry kid. Are you hiring now? Yeah. You know who my audience is, right? It's like guys in their 20s, 30s. All right, here's who I want. Looking to kill it. I need a salesperson who's physically based in New York who wants to sell research

to the people I listed off. They want to sell research to hedge fund guys and it's business development. They'll have a percentage of profit sharing. So the firm makes money. You know what you want? You want like a fund wholesaler who's done selling funds, but is knowledgeable and knows. Wants to read research five minutes, seven minutes a week, and then wants to call people and distribute it and sign up new clients that we don't have, we have a huge, yeah.

Guys, if you're interested in that, here's Adam's cell phone number. Not my cell phone, but Adam at trivariantresearch.com. All right, dude, that's great. And let's get into favorites and we'll let everybody get out of here for the night. Cause I can't believe it. This has been fun. Thanks for having me. This has been awesome. And we really appreciate like all of the insight that you shared with us. This is the part of the show where we ask you what you're watching or reading or what books or anything that's non-financial, let's say, but that you think the audience would benefit from checking out. Yeah. So I'm not like a TV guy.

So I'm glad you didn't ask me like what. Name your favorite episode of Severance. I'll tell you the book that I'm reading right now. It's Marie Yovanovitch. It's called Lessons from the Edge. She's the former US ambassador to Ukraine who got – Yeah, it didn't go well for her. Kind of screwed by Trump.

Yeah. And I'm like 80, 90 pages into it. I just started reading it. This is it. Is she in fact a Biden operative? What's going on with her? It's a very interesting book, an incredibly interesting – I just – I mean I knew it. But I'm like diving into it.

I'm trying to not – as you can imagine, like I over-index to reading like earnings reports and earnings calls and like Wall Street research and writing. So eight or nine hours a day. Like I'm doing that if I'm not talking to clients on the phone. So like between 5 50 AM and like 9 PM, like, ah, that's what I do. Like I either,

what makes you pick up a book? What's the thing that you're looking for when you want a distraction from wall street? No, I don't read, I never read fiction, but it's always just something I can learn. Right.

And that I actually bought this book cause I thought I kind of wanted to give her some money. I just felt like, you know, so like, so like you know um those hearings were crazy yeah they were telling her her life was at risk she had to get out of there crazy so far i've only got to the beginning of her story you know mogadishu and other places she was at but but uh you know generally stuff i can learn i mean um i read uh the sackler book empire of pain recently i just finished that and um oh that's Oxy, Oxy. Yeah, the Oxy stuff.

Very crazy, interesting. Like everything, like the grandparents started out with something interesting and then the grandkids ruined it. Sort of like Barney's The Clothing Store,

you know, whatever that always happens like the grandkids. Yeah, third generation. Double nepotism is usually a short signal. You were asking for signals. Michael, what's your favorite?

What book am I reading? You gave us a podcast this week. Yeah, all i can't find this book um it's about commodities it doesn't matter good night moon what the hell is all right whatever anyway um i i you know i'm like i'm like i would like i one of the things i'd like to do more of like can i do the new year's resolutions i'm like oh i'm gonna read more books i'm reading one book a month that's what i'm doing i like 12 a year. It's about my pace. Can I tell you something?

My father-in-law retired five years ago. All he does is read books. You will have plenty of time to do that. Yeah. I don't know if I'm going to retire. Like, listen, I love doing this business. We're ramping. It's going well.

Oh, no. He's like 78. I'm not retiring. Me either. I think I want to do this for like the next 25, 30 years. I just – what I learned and like this is a good example. Don't you always want to be talking to people in their 30s and 40s? They're not in their 20s where you don't want to talk to them, and they're not sold. They don't understand technology and stuff that's going on.

Why wouldn't I want to analyze markets, talk to smart people? That's actually a really good point. When are people the most interesting in life to talk to? Probably 35. When they're 37. Is that what you are? Yeah. You're a couple years past. What do you got for us? You're a short. in life to talk to? Probably 35. More than 37. Yeah. Is that what you are? Yeah. Yeah, he just turned 37.

You're a couple years past. What do you got for us? You're a short. I'm initiating a new short position on your personality at 37. David Rubenstein was on with Patrick O'Shaughnessy. Amazing podcast.

And we were talking earlier about- I love his Bloomberg show, by the way. It's great. It's great. We were talking about private valuations. Brad Gerstner joined the Chamath, Jason Kalkanis crew. That was very good.

Ruben Stodd's show, I leave my TV, one of the TVs I have, I leave on mute on Bloomberg all day long. At night, you look up and he's on. He's an incredibly interesting interviewer. He's normal smart. He's super f***ing smart for a normal person. His backstory is awesome, right? I forget what it was. He's a billionaire.

He's a mailman. He's like a normal dude. Yeah, I've heard him speak it was. But he's a billionaire. That was a mailman. He went to R&R. He's like a normal dude. Yeah, I've heard him speak a few times. He's really entertaining. Him and the two co-founders of Carlyle, which by the way, they were at a hotel called Carlyle, and that's why they named the fund. They had a meeting in the lobby. I think that's how they- I like those kind of stories.

Tribarret's not that cool. I looked this up. Him and the two founders still own a third of Carlyle, which is now a public company worth like $11, $12 billion. Yeah, he's got a couple billion. I know he does. He's a big document preservation guy. So he has this whole thing he tells at all the – when he's talking to people like, hey, honey. His wife says, what did you do?

He says, oh, honey, I bought the Magna Carta today. That's his rap. He's like a document preservation guy. It's good stuff. I'm sure I would like that. I just don't really do podcasts because I don't – like there's no part of my day where I like – What do you listen to when you're in the gym?

Earnings call? You know, I usually like just – yeah, like not even listening to anything. I'm just like trying to like – One of those. Yeah, I'm usually like trying to like get through the Insanity video without barfing or get the 45 minutes on the phone. I thought you were going to say Cardi B. I don't know what you're talking about. No, no, wait.

I got a Ford Mustang convertible and I listen to ACDC. I'm not one of those guys. You're not a TV guy, but I'll give you the must not miss show of this year is Severance. Severance? And I know Michael was on this before I was. Are you co-writing for Severance or are you giving stock advice? No. How good is that show?

Honestly. What is the show? I don't even know what it is. It's so fucked up. Ben Stiller directs it. It's on Apple TV. Okay. And the premise is these are people who go to a job where they want their mind erased in between when they're home and when they're at work.

Oh, I think I saw an advertisement for that. They get a chip implanted into their brain that separates their lives and they call it the innie and the outie. When they're at work, Oh, I think I saw an advertisement for that. They get a chip implanted into their brain that separates their lives and they call it the innie and the outie. When they're at work, they're their innie self. They have no idea what their real life is.

And when they're at home, they don't know what they did all day at work. And there are specific reasons why people want to be there. Like one of them, their wife dies. It's super dark.

And they can't work. So that's like $5 of the recent Apple appreciation you showed me on the chart. Severance is worth like a 20 billion cash. Listen to this cast. John Turturro. There it is. Christopher Walken.

Adam Scott. Adam Scott. It is Patricia Arquette. This is one of the best TV shows I've ever seen. Are you up to date? Yeah, I'm waiting for tomorrow. How sick was the reveal? What season is this?

Is it the first season? Okay. There could only be one season. The last reveal? Yeah, there could only be one season. Oh, no. This reminds me of Lost where- They better not. They better not. is this? Is it the first season? Okay. There could only be one. The last reveal? Yeah. There could only be one season. Oh no. This reminds me of Lost where

They better not. They better not. You're waiting though every week. Like I have to see what happens. I'm out for At least 10 seasons. I'm out for season two.

Wait are you in on Severance? Yeah. No it's like the best show I've ever done. Are you caught up? Yeah. How many episodes have you been in?

Seven. Yeah. Yeah. So I'll wait I'll wait till the whole season's over and then I can watch it all in like two or three days and I don't have to deal

with the tension you feel is it 10 or is it 8 but I wish it never ended it's based on a novel it's based on a Japanese novel so it can't extend into infinity if it does I'm so out yeah they could extend to anything if there's enough money John you watching this or no

you all in wow I guess you know it's the only guy in the room in his 50s i've now proven myself i'm i'm telling you your next flight to florida wherever you want to go just like download a few episodes you'll love it um all right we're gonna wrap it up there i have one thing that nicole asked me to announce which is a free sticker giveaway to three tiktok followers new followers no listen listen we're on TikTok now. I'm sorry.

It's at the Compound News. We burned down. Yeah. What? We're finally on TikTok. And we have followers. Yeah, yeah, yeah. People are into this shit.

Duncan is dancing on our TikTok. Yeah. Just, all right, listen to me. Follow us on the Compound News is our handle on TikTok. These are nice hats. We're going to select three TikTok followers at random who mention us saying hashtag sticker giveaway. They have one week to enter

and we're going to send them a special gift. Nicole's going to get in touch and we're going to put something physical, not an NFT. We're actually going to send you something that exists. What do you got? I was just making sure you don't forget the review too. We got to read the review. Oh, do the review. Oh yeah. Yeah, yeah. Do the review and then we're don't forget the review too. We got to read the review.

Oh, do the review. Oh, yeah. Do the review and then we're going to get out of here. I can't read our reviews. They're savage. The reviews, they're so good. Do people compliment you guys? Kill me. Kill Michael. For the most part, they're really good. I mean, Michael does get a disproportionate share. Wait, what?

Hang on. We delete all the bad reviews. I don't want to analyze at Trivera whether it's statistically significant that he gets worse? Oh, it is. It is statistically significant. I would put a statistical – I can go to like a T-stat on that if you want. I think it's a bullying situation though. They feel like they could just say whatever because he's the younger one of the two of us. So I think that's why he gets it worse.

What's the review? Let's hear it, Duncan. Okay. Let's hear it. All right. So Giddyup525 – It's like mean tweets. Yeah.

So Giddyup525 wrote in, five mean tweets. So Giddy Up 525 wrote in five-star review. Wait, is that their real name? I think so. Okay. And so I like the subject of this one is 53 and no longer afraid, which is like an infomercial or something. Compound team, I love your show. You've taught me that the market will go up and it will go down.

Just don't freak out. Stay the course. You guys have mastered the ability to communicate the market world to me and those like me. You're like the work friends I wish I had. Keep up the great work. Wow. Beautiful. So what are we sending this person?

Well, we don't know who they are. If anyone listening to this, if you hear us read this, you have to email us. We appreciate that. All right. Listen, Adam Parker, where do you want people to follow you? We're going to go to, first of all, what's the URL that we're going to send people to so they can possibly subscribe to what you do? Yeah, so we sell our content.

So if people are interested and can afford it, they can email me at adam at trivariatresearch.com. T-R-I-V-A-R-I-A. So it's a direct email and they got to be like, look, I run an asset management firm or I'm an RIA. We don't sell our product to individual investors. Of course. So it's got to be a real institution. But yeah, or they can go to our website too.

Are you active on social? Are you doing anything like publicly or are you just keeping a low profile? I don't. I don't. Smart. Just LinkedIn and that. Yeah, I don't do tweeting or TikTok or any of that stuff. But you're killing it on CNBC lately.

You're popping up everywhere. I've been going a little bit more often. You know, I learn a lot. And I think sometimes what not to do and sometimes what to do. But, you know, you got to observe. You got to get out of the house and be with people, as we're saying. So thanks for having me. It was just fun. I learned a lot i want to hang out with you guys awesome guest and we'll definitely have you back what are you doing on tuesday next week no i'm just kidding we'll give you a little bit we'll

give you a little bit of time produce some more research all right we would love to have you back adam parker ladies and gentlemen thank you so much good job all right for those of you who are unaware if you'd like to watch clips from today's show, check out The Compound on YouTube. It's youtube.com slash thecompoundrwm. Thank you so much, Adam Parker. Good job, Duncan. Good job, John.

Thanks, Michael, Nicole. We'll see you guys next week. All right. Good job, man. That was fun. That was amazing. That was great. That was great. Good job. That was fun. That was amazing. That was great. That was great.

Dude, that was awesome.