The transcript from this week’s MiB, Binky Chadha, Chief US Equity & Global Strategist at Deutsche Bank Securities, is below.
You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.
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This is a Master’s in Business with Barry Ritholtz on Bloomberg Radio.
Barry Ritholtz: I’m Barry Ritholtz on the latest Masters in Business podcast. Another banger. I have Binky Chadda. He’s Chief US strategist for Deutsche Bank Securities. Fascinating career and approach to looking at markets. He’s an economist, but essentially operates as a market strategist. He’s been fairly constructive where he is supposed to be started the year 2025 with the 7,000 target on the s and p 500. Brings in a lot of different factors that makes his work so interesting at Deutsche Bank Securities. Not just economics, but FX equities, global perspective focused on US equities. I thought this conversation was absolutely fascinating, and I think you will also, with no further ado, my interview of Deutsche Bank Securities. Binky Chadha.
Binky Chadha. Welcome to Bloomberg.
Binky Chadha: Thank you.
Barry Ritholtz: So I have been looking forward to this conversation for a long time, primarily because so many people, when I ask them who their mentors are, reference you. So you have a lot of influence throughout the street.
Binky Chadha: That’s very kind.
Barry Ritholtz: We’ll, we’ll come back to that a little later. Let, let’s start with your career. You get a bachelor’s in mathematics and computer science from Denison and then a PhD in philosophy focused on economics from Columbia, is that right?
Binky Chadha: A PhD in economics from Columbia.
Barry Ritholtz: So what was the career plan?
Binky Chadha: The career plan was, you know, to get a PhD in economics and study development economics and alleviate poverty and help the world. I went to graduate school and graduate school, you know, circumstances kind of rings that outta you.
Barry Ritholtz: And here’s a whole lot of debt. Go, go into, go do some well, somewhere.
Binky Chadha: Well, I mean, I think that development economics is sort of builds on, is not necessarily core. You know, core is micro and macro. And I ended up basically studying macro and then went to basically work at the International Monetary Fund in Washington DC
Barry Ritholtz: First, first job right outta school. You were there for a while. 17 years
Binky Chadha: 17 years, yeah.
Barry Ritholtz: So what were the various positions you had? I, I saw a division chief of the Euro area and global markets.
Binky Chadha: I’ll do it in chronological order. Sure. So I started basically in the, so the IMF has a grad program, just like any investment bank. It’s called the Economist Program. And my second assignment was in research, and I stayed in research for the next few years. It was the heyday of the IMFs to research department under Jacob Frankl and then Michael Musa. And we had all the world’s leading researchers visiting the IMF. And then the Iron Curtain came down and the, I MFS suddenly had 30 new member countries and we all got pulled into working on various aspects of that. So I worked on Bulgaria pretty much full-time for, for a year.
Barry Ritholtz: So you were at IMF for almost two decades. How did that experience shape your view about the economy and markets both domestically and internationally? Yeah,
Binky Chadha: I, so I, you know, I started in the research department, but I went from there to the Asian department and, and even while in the research department, like my participation in Bulgaria, we always, oh, at least I always, you know, a a was eager to participate in the IMFs bread and butter work, which is really country work. So I remember going to Singapore in my very early days. Singapore is, you know, a a obviously a small country, but because it’s a small country has issues, especially from a development strategy point of view that are sort of key. You remember in the 1970s we used to talk about the Knicks. You know, so, I mean, I could talk for quite a while about Singapore, but Singapore started, i I, in the early 1970s with a 10, 12% unemployment rate, had low wage export led growth model. By 1979, unemployment was 2%. Wow. Both had been strong. And because of the peculiarities and the politics of Singapore, it’s ethnic Chinese that moved out of Malaysia to have an independent country. When you want to grow rapidly, but you only have 2% unemployment, you would end up sort of violating the principle of what you were formed because you would need basically lots of imported labor from Malaysia and Indonesia. And
Barry Ritholtz: A wild success story, though Singapore’s economy has done really well, hasn’t it? So,
Binky Chadha: So, so it, it, it it has because they made a very concerted push at the time to move basically towards higher value added activities. And the first paper I ever wrote on a country was really Singapore, and it’s about Singapore’s high wage policy. They announced an increase in real labor costs or wages. It’s also sort of the retirement plan of six 0% in 1979. Two work through the system over the next three years. And, and it was wildly successful in basically, you know, turning the economy into sort of a much higher value added growth part. I mean, the finance was some of it, but it was, you know, it it, the focus was more on sort of high tech manufacturing too.
Barry Ritholtz: So, so today you’re overseeing asset allocation primarily for US based investors for Deutsche Bank. I know you’re global also.
Binky Chadha: Yes, that is true. My focus, and partly because I’m here and partly because the US is the, the biggest, most important and biggest driver. I’ve been our equity strategist in two different stints over periods. So I, I actually spent most of my time basically on US equities, I would say.
Barry Ritholtz: So how do the lessons from Singapore and Bulgaria or just global perspectives via the IMF, how does that translate into making better asset allocation decisions for US investors?
Binky Chadha: I think those experiences are basically, you know, things that sort of inform you about the bigger picture and forces that are ongoing that, you know, one may not sort of see day to day, certainly not day to day, but week to week, but sort of, you know, explains the direction in, in which things are going. And, and I think Singapore is sort of a good example for, I mean, we started talking about development economics, which was, but but, but it’s about growth economics and development economics and sort of like, you know, does policy really have a rule a role, or should we just let the free markets keep going? Hmm.
Barry Ritholtz: Really, really interesting. So after 17 years at the IMF, what led you to Deutsche Bank in oh four?
Binky Chadha: So the IMF does not historically never really spoke about exchange rates because it’s a market sensitive variable. That was the thinking at the time. But that didn’t mean that the IMF didn’t spend a lot of energy working on fx. We had an internal group that, you know, some people in the market knew, and basically because we used to have a dialogue with the markets, I I, there was an opening basically in FX because a, a a, the FX strategist who had been around for quite a while, he, he, he, he had moved on or retired basically. And, and so they asked me, ’cause they, he dets bank at the time. So the, the strategist that I’m referring to, his name is Mike Rosenberg. He really did FX for me top down macro point of view. And, and it is hard to find people like that. But I was at the IMFI was trained as an economist and I had done plenty of work on fx. So,
Barry Ritholtz: So given given all your background in economics, currency development, how do you end up eventually as an equity strategist for Deutche Bank? Because that seems like Sure. It’s, it’s adjacent to economic and economists. Yeah,
Binky Chadha: So, so for a few years, I, I I, last few years at the IMFI was actually part of a small group that was responsible for developing and maintaining basically a dialogue with the markets. I used to report to Stanley Fisher who said he was, oh, okay. He was tired of reading in the newspaper on the way to work that another country had gone under and somebody should be having a dialogue. And the
Barry Ritholtz: Market at the time, it was fisher,
Binky Chadha: It was Stanley Fisher. He was the first deputy managing director of the IMF in the late nineties, which is, so this is soon after the a Asian financial crisis, a a and then sort of, you could argue that the Dominoes continued for the next few years.
Barry Ritholtz: When, when you reported to Stanley Fisher, was he at IMF or he had, or had he gone elsewhere? He,
Binky Chadha: He was at the IMF. He was the first deputy managing director, which would be the counterpart of being the CEO as opposed to being the president of the imm. Got it. So he ran the IMF intellectually and otherwise, and it, it, it was a small group of us that, you know, basically was a financial markets a dialogue with an open license to go out there and tell us about any and everything that you think that matters. You know,
Barry Ritholtz: So, so how do you transition from head of Foreign Exchange research to us Chief US Equity strategist?
Binky Chadha: Yeah, so what I, what I was gonna say on that was simply that a, you know, I came to do FX strategy and research, but I really wanted to do things more sort of close to the markets. And there was a simple practical issue, which is if you wanna be near the markets Yeah. The center of liquidity was really 7:00 AM to 8:00 AM London time. And, and, and so you either live in London or, you know, you find a US asset class. So I found US equity, so Gotcha. Purely
00:10:53 [Speaker Changed] As opposed, opposed to covering FX in London. You did equity in the states
00:10:56 [Speaker Changed] Yeah. In the middle of the night.
00:10:59 [Speaker Changed] So, so since we’re talking about both equity and foreign exchange, you’ve said we have favorable investor positioning, a stable dollar investor, animal spirits and robust buyback activity, lots of m and a activity going on, and high business confidence. That sounds like a fairly bullish set of factors.
00:11:28 [Speaker Changed] It, it, it is a very bullish set of factors. What I would point out is that, you know, equities historically are really about the business cycle, and that’s why people wrote pieces that are well known on Wall Street there from some time ago that, you know, getting at what drives the cycle. And once upon a time, the US business cycle was just really the housing cycle. There’s a very famous paper with that title I, I and, and, and, and you know, if you fast forward from there, basically to, to today we have a very, very, very peculiar cycle is the way I would put it. We’ve had for the last two, almost three years now, essentially full employment in the labor market. And what is at odds with the traditional cycle is that when unemployment is low, you are typically at the end of the cycle and growth tends to be low.
00:12:24 But for the last two to three years, what we’ve had is 4% approximately unemployment. But GDP growth, especially underlying GDP growth rank pretty steady at 3% showing some signs of going even higher basically. And what I would say is historically that is very, very rare. It’s happened only 6% of the time if you do it things on a quarterly basis, 6% of the time since World War ii. Wow. So, and, and, and it’s no secret when those two times were one was in the 1960s where I would argue basically that’s really the takeoff, that that’s really the post world war recovery with a big lag because people didn’t know in the fifties what exactly to, because you could only extrapolate the great, you know, the, the Great Depression and World War ii. So it took a while I, but the sixties is really the post World War II recovery. And the second time that happened is more recently and, and in, and, and everybody is reminded of that now is the second half of the 1990s. But it goes without saying that both of those periods, like the current period have been very good basically for equity markets. If, when unemployment, when, so when you have a job, but growth is strong risk, appetite is going to be high. I think that’s not, you know, surprising. And, and, and that’s kind of almost exactly where we are.
00:13:53 [Speaker Changed] So you mentioned the sixties, you mentioned the nineties. I have to ask you about the 2020s, which on the one hand, and we’ll circle back to housing. I’m, I’m fascinated by that, but this feels like a little bit of a, to use your word, peculiar cycle because during the pandemic we had the biggest a after 15 years of more or less of monetary driven stimulus, we had the single biggest fiscal stimulus, at least as a percentage of gdp. DP Sure. Since World War ii, are we seeing that boom, that boom let, I don’t know what to call it, on a bit of a lag? Or has it hit the economy and is beginning to fade a,
00:14:35 [Speaker Changed] A a a from what I look at my reading would be that this has been going on for a while. It’s been going on basically through a variety of policies and, and, and, and so I don’t think it’s really coming from the policies. I might even go far enough to say that it’s happening despite the policies because we had a massive hiccup this year. I I and, and it has to do, so, you know, one of the things about a cycle and how vulnerable or strong it is has to do with basically, you know, household and corporate balance sheets. Right. And a a so in, in, in, in sort of a, a, a peculiar way, we are blessed in my view, because of the global financial crisis, which created huge de-leveraging. Right. On the, on the household side, we, and then we had COVID and you needed to have your balance sheets, right? If you were a a, a company and you needed to basically get used to dealing with new shocks. And arguably we got another one today. So, but what I would argue this resilience is partly a blessing of the two large shocks that we already had. And,
00:15:54 [Speaker Changed] And long before COVID, most of corporate America had refinanced all their long-term debt very favorably. So heading into this, both households and companies pretty well situated
00:16:05 [Speaker Changed] E exactly. That that EII would agree completely. And, and they remain. So I would say right now, outside of a few pockets, you don’t really see any signs of excess. So there’s every reason to believe that it continues. And if you start, you know, by looking just at like, sort of near term economic forecast as one idea, basically everybody has a pickup in growth next year. So
00:16:35 [Speaker Changed] Based on either fed cuts or, we’ll, we’ll talk about policy issues coming up, up later. Sure. What I wanted to ask you about, you mentioned housing is such a key factor in cycles. Is it a leading factor or is it a benefit of a positive business cycle? Because a lot of people kind of grew up in the two thousands, which felt very backwards. Backward. Sure. Right. The first time we had ultra low rates and a few generations. And so all the refinance and heloc, home equity loan withdrawals, all that stuff felt like it was, the real estate was driving the economy as opposed to the economy benefiting real estate. Right.
00:17:18 [Speaker Changed] So what I would point out is that the housing market today is a much smaller part of the US economy than it used to be. So if you go back to the seventies, you know, we are talking six, seven, 8% of GDP is housing. Wow. Today it’s like more like 2%. I apologize that, I don’t know the exact decimal point, but it’s
00:17:37 [Speaker Changed] A fraction of what
00:17:38 [Speaker Changed] It was. It’s a, it’s a, it’s, it’s a fraction of what it was. And, and so it’s, I I mean, and we were just talking about 3% GDP growth for the last two, two and a half years. And housing’s been in the doldrums for quite a while. I
00:17:53 [Speaker Changed] Would say we, we’ve been under building single family homes since the financial crisis. Yeah. So it’s not a big contributor there. What are we doing? 7 50, 800. But,
00:18:01 [Speaker Changed] But what is very peculiar about this cycle is that, you know, so there’s is a very important fact when you think about the 3% or 3% plus GDP growth numbers, which is, you know, that it actually, and, and, and equities are about cyclicality and cyclical variation. So recessions are big events and recoveries are big events. But what I think is, is, is easily missed is that two thirds of the US economy is actually stable growth economy. It’s like the old days of consumer staples earnings where every company analyst in the room would get mad when I would say, you don’t need an analyst to tell you, you just need a ruler as to what their earnings are gonna be. ’cause I was so predictable. And in the same vein, two thirds of us, GDP is really stable growth. GDP, now it’s not rip roaring growth, but it’s two, you know, 2% growth.
00:18:56 What I I I, the cycle comes from the cyclical parts basically. And that’s a little bit over 20% of GDP. So it’s not really that huge in, but all the cyclicality really comes from there. And when it gets going, it’s very powerful. And, and if you think about what is the cyclical parts, I can go further, basically it would be number one is consumer durables, it, it, number two is corporate CapEx, number three is housing, and number four is structures. And so what is extremely unusual about this recovery from my point of view is that stable growth’s doing what it’s always doing, it is mostly services. It, it, it’s really that, you know, if you look at the cyclical part of us, GDP, yes it’s growing, but it’s at the bottom of the channel basically. So it actually has a lot of room to move up, up to the upside, like 10, 15%. I’m saying,
00:19:53 [Speaker Changed] Does that include all of the tech investments and AI and data centers that seem to be just full on booming?
00:20:01 [Speaker Changed] Yeah. So, so the tech investment wouldn’t be in here. I mean, if you look at CapEx, if you take out soft, the AI party, it’s, it’s on the soft side. But, so you can take, as I always say, you can take, you know, a bearish view on that, which is it’s all coming from this one part, or you can take a bullish part that the other part’s going to start to happen. So, and here what I would get say is that it’s hard to put your finger on exactly what the issue is, but there’s a lot of overlaps in the different aspects of what’s going on. So I just gave you the list of the four parts that are not doing great. I, I, I, I, I, I, I
00:20:44 [Speaker Changed] All of which seems to be somewhat interest rate sensitive, and I know you’re looking for a few more cuts over the next year or so. Sure. Could is that what’s gonna light the next leg start the next leg moving higher? I
00:20:58 [Speaker Changed] Mean, I think interest rates are important for housing
00:21:00 [Speaker Changed] And durables, right? You buy a house, you fill it with furniture and appliances and a car.
00:21:06 [Speaker Changed] Sure. I I, but what I would say is I don’t think that interest rates are absolutely the key because CapEx, we were just talking about that a little bit earlier about corporate balance sheets. I I since the 1970s, what corporate America learned is that you don’t spend beyond your means. I would say most CapEx, especially for s and p 500 companies is coming from internally generated cash flow, right? And, and if you look basically at the three uses of cash flow, you know, dividends, CapEx, and buybacks and, and, and you take their total spending relative to their total cash flow, it’s been this side of a hundred percent forever.
00:21:48 [Speaker Changed] Which sounds, sounds pretty reasonable,
00:21:49 [Speaker Changed] Right? EEEE. Exactly. And so I don’t think that the interest rates gonna make, plays such a big deal for corporates. You could even argue, I mean for a long time it was like, if interest rates go up after the global financial crisis, corporates are gonna get killed. It was the reverse and their earnings went up
00:22:06 [Speaker Changed] Just the street column. Why, why are corporate bonds on fire? Because they seem like such a safe bet.
00:22:13 [Speaker Changed] I I, that is exactly right. And there’s been, you know, market mechanisms that have in many cases actually improved the credit quality. So when we look at indices, you want to be careful because they’re not controlling for the historical credit quality. I mean, s and p 500 is different because it’s about earnings and you know, earnings power. But in terms of credit quality, you know, a lot of the indices, I mean the, the, the, the current composition is better than it used to be. Now we are at a certain stage in the cycle. So we’ve had two, two and a half years basically of, you know, a a fully employed labor force and strong growth. But there’s been, if you think about those two and a half years, 2023 is, you know, everybody’s waiting for a recession, right?
00:22:59 [Speaker Changed] And this, that never came, this
00:23:00 [Speaker Changed] News, I call that period the rolling vs. And we are kind of going through a similar version of the same thing right now, meaning
00:23:07 [Speaker Changed] Rolling decreases. So if you sectoral recessions that quickly,
00:23:12 [Speaker Changed] So, so actually what I mean, I call it, when I say the rolling vs. What I mean is that basically if you look back to late 2022 and you looked at, you know, the, the forward forecast that was in the macro consensus, it was growth is here, growth next quarter is gonna be lower in two quarters will be in a recession. And then of course we’ll have a recovery. And, and, and so if you’re looking, they were almost right. A so when the recession didn’t come, what the macro consensus did is simply rolled it forward. They said, no, we are right just wrong on timing. And then when that didn’t happen, we went and rolled it forward. And, and I mean I have this chart, it’s a little old now, but I I I on the same chart as you see the rolling vs. You look at the actual data when it came in and there is, you know, we are like way above closer to 3% than people are forecasting a recession. I, I I and, and so, and
00:24:08 [Speaker Changed] Those, those recession forecasts, we heard those in 21, 22, 23, like it, it, they kept doubling down and got it wrong.
00:24:16 [Speaker Changed] Yeah. So it’s 2023 and then the early part of 2024. So Des bank was, and and I don’t mean to single out our economists here, but who are excellent, but they, they were some of the earliest on the street of a recession is gonna happen down the road. They didn’t give up their recession call, I believe till the first quarter of 2024. And, and, and so from a company point of view, if you were listening to companies and, and you know, analysts ask on earnings calls, why aren’t you spending, they’re like, no, there is a recession coming and the recession is coming. So all through 2023, corporate America just waited for the recession that that
00:24:54 [Speaker Changed] Never came really quite
00:24:55 [Speaker Changed] Fasting comes early 24 and they began to wait for the election. A a we had the election, everybody got very, very optimistic, very, very constructive. We got liberation day. I think where we are now is those two years basically of waiting of created pent up demand is a shortcut way of saying what I’m trying to get at. And, and has also, you know, led to the approach or strategy, if you want to call it that, that we just need to deal with it and get on with it. And we’re not waiting anymore. I, I and, and, and so we are where we are where we’re having this strong growth, but it’s really the cyclical parts of the us, you know, are either erratic and noisy or at the bottom of the channel. So not exactly depressed and falling out of the channel or going into recession, but growing very modestly, huh. That is the basically the challenge that it creates for equity strategy or investment. Really,
00:25:54 [Speaker Changed] Really, really fascinating. Coming up, we continue our conversation with Binky Chadda chief US Equity and Global strategist and head of asset allocation at Deutsche Bank Securities, talking about his roles at Deutsche Bank. I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio.
00:26:36 I am Barry Ritholtz. You are listening to Masters in Business on Bloomberg Radio. My extra special guest today is Binky Chadda. He’s chief US Equity and global strategist as well as head of asset allocation at Deutsche Bank. Although he’s here in the US and has a lot of US clients, he is also a, a globe trotter and travels around the world, Europe, Asia, and elsewhere advising clients of Deutsche Bank. So, so before we get into what’s going on today in more detail, I want to talk a little bit about your role at Deutsche Bank. You’ve led US equity and global strategy for a couple of decades now. Yeah. How has your team, how has the team’s process evolved? What do you think of in terms of tools and quantitative analysis as well as a broad global macro overview? What, what drives your decision making? Sure,
00:27:34 [Speaker Changed] I mean, at the simplest level, it’s to figure out, you know, where the equity market is going to go.
00:27:40 [Speaker Changed] That’s all I need to do. Once you figure that out, you’re, you’re golden.
00:27:45 [Speaker Changed] It, it, it, we are pretty humble about that pursuit, but I would say that is the number one objective and pursuit. And what we do is basically we have developed over time basically a whole set of frameworks. They’re not all, you know, a a a I mean they’re meant to be non-overlapping frameworks and
00:28:07 [Speaker Changed] Quantitative or, or qualitative. Are they all models or is there some i i
00:28:11 [Speaker Changed] They’re quantitative frameworks you could call some of them models. I is. So the, i I would say the most important thing for equities, and again, my very humble opinion is what’s happening with earnings. And so you need to have a good framework basically for earnings. If you could get earnings, right? I mean, and you need to do that well in advance of the actual delivery. You know, you, you, you will know what the markets are going to do basically. So what we did, and we revisit, revise, revamp, redo, throw out, whatever you want to call it. But at the moment, basically what we have is we take a whole group of stocks and sectors, we divided up our way. So there’s mega cap growth in tech. I mean, and that, you know, needs to include Visa and MasterCard because it’s, they’re not tech companies, but they behave very, very similarly in terms of their revenue streams.
00:29:06 So you can think about it as basically a trend and cycle framework for each of the groups. And the question, the, the, the trend is, you know, what has basically been prevailing for quite a while. And then the question is what drives the cycle in those? So if we take mega cap growth in tech, for example, you would have the US dollar and, and, and for some parts you could be looking basically for, you know, a a a a very specific things that matter, which you’re not going to pick up. So for example, you know, for materials, I I, because of the way US materials is structured into two parts, a, a a for chemicals, you need basically a chemicals deflator, which is not something that most people tend to look at. So there’s idiosyncratic, but it’s cycle and trend in what drives basically the cycle. It would be, you know, ISM manufacturing the US dollar ISM manufacturing is an interesting one because that’s historically the one thing that explained s and p 500 earnings extremely well. And that’s kind of like all you needed to know still
00:30:12 [Speaker Changed] Today. Does it still have that
00:30:13 [Speaker Changed] Correlation still? It’s basically for the last three years it hasn’t been the case and, and, and why? It’s simply because of mega cap growth in tech. If you take the s and p 500, you break up its earnings into mega cap growth in tech and everyone else, you’ll see that everyone else is still currently aligned with the ISM manufacturing. ISM manufacturing’s been in a funk for three plus years now. And, and so we haven’t had growth. So I kind of hinted earlier, you can look at the current, you know, sort of context in a bearish way that is all the growth is coming from 90% of s and p 500 earnings growth has come from mega cap growth in tech. I I, or you could take the view going forward that everybody else is going to recover. That’s the camp that we are in because
00:31:01 [Speaker Changed] That everyone else will be catching up to tech events
00:31:03 [Speaker Changed] E Exactly. Unless EEE their earnings are completely aligned with the ISM manufacturing in the US ISM manufacturing’s basically. And, and that’s historically the case for the entire index is earnings. We’ve been in a funk for three plus years. We’ve been, ISM manufacturing’s been between 46 and 50. So, you know, it it, it’s something that we’ve never seen historically. So if you ask why are we sitting here? Well, first thing to note is that if you know things were bad, then we should have been going down. We shouldn’t be sitting in mildly contractionary. But 50
00:31:37 [Speaker Changed] Is the dividing point above 50
00:31:39 [Speaker Changed] 50 is the dividing point. But I mean, I think the fair, or I mean conceptually it’s the, an intellectually it’s meant to be the dividing point, but this is still slightly positive growth. Even below 50. To get to negative growth, you have to go quite a bit lower. And I would argue in the first instance, it was basically just the hangover from the pandemic. So you remember that as we came out, you know, we had basically massive spending on goods and that in some way involves manufacturing a, a and, and, and then we had basically the slowdown and the rotation
00:32:10 [Speaker Changed] Reminds me a little bit of what took place in the run up to Y 2K in 2000 you had all this tech spending pulled forward and then it was soft for a year or two,
00:32:20 [Speaker Changed] Right? Right. A, a a and, and it’s been followed basically by a whole set of things, number two on, so on the hangover, I would say, you know, I don’t think a hangover has killed anybody. So a hangover is holding time basically. And it would naturally basically, you know, a a a pass. But then in early 2022 we got the Russian invasion of Ukraine. We had $120 oil. And if you look at oil prices today, what we’ve had is basically we’ve gone from 120 to, in round numbers 60, but it’s taken three years to get there. And, and, and what the three years to get there means is that energy earnings have been on year in year basis have been negative basically, or contracting for three years now. The good news is that we are much closer now to basically what I would think of as fair value for oil prices. That’s actually a little bit higher. It’s not a tradable difference right now, but fair value is probably 64 or $65. And, and, and, and so, you know, this drag should basically stop soon, even though for the third quarter we are still looking for 15% down. So energy in energy, in energy earnings. So it is just mostly oil prices and energy vertical is important basically for various parts of manufacturing. Then we have basically idiosyncratic issues in autos and Chinese autos. And of course last but not least, we have the tariffs this year, which impacts manufacturing
00:34:00 [Speaker Changed] More. We’re gonna talk more about tariffs shortly. I’m kind of fascinated ’cause I’m hearing in your laying out where we are today, a lot of different voices and at a shop like Deutsche Bank Securities, you have to have so many different perspectives, opinions from different quarters, from the economists, from the FX traders, from everybody. How do you navigate and organize all of these different perspectives, some of which may be in conflict with others?
00:34:32 [Speaker Changed] Sure. IIII wouldn’t describe it as conflict. I mean, we are encouraged to have our own different views or a, a
00:34:39 [Speaker Changed] Broad dispersion of views. Is that a
00:34:41 [Speaker Changed] Fa better? Absolutely. So what I was always told by I, our head of research, David Foggers, Landau a a, you know, so if, if I ask you at the end of the year, why did you get your s and p 500 call wrong? You’re not to tell me that, you know,
00:34:58 [Speaker Changed] The economist was bearish, right? That doesn’t work.
00:35:03 [Speaker Changed] So you are responsible for everything that goes into your view. And, and so we discuss in debate. So as far as the research aspect of it is concerned in terms of the strategists across all asset classes and economists, we have a regular meeting. We just had one this morning actually.
00:35:22 [Speaker Changed] So let me ask you a question. You mentioned ISM what leading indicators do you put the most amount of weight on and what indicators do you think aren’t all that important for forecasting the economic and or market cycle?
00:35:38 [Speaker Changed] So we always start with our economist forecast and we always ask the question of does this make sense to us? Does this make sense to, you know, the way various a, a a, you know, economic data are behaving? So I mean if you think about the us so in 2023 when everybody’s calling for a recession, there was this annoying fact, which was if you simply said, okay, I just landed here. So you know, okay, we are talking about the US potentially going into a recession, you know, let me start by looking at GDP and you would find that near 70% of us, GDP in real terms comes from personal consumption spending. Everybody knows that. So why don’t we just draw a chart of it and, and, and because I come from a a, a relatively volatile asset class, I don’t do in growth rate terms, so just plot the level you gotta take logs because of, we all know why we should take logs.
00:36:38 And then I draw channels around it. And if you look at real personal cons, you know, personal consumption spending in the US for the five years before the pandemic, we are in this tight channel growing steadily at two and a half percent a year, pandemic collapse, recovery of PCE back magically into exactly the same channel magically. And so this is 21 and and the same applies during 22. And the Fed is hiking aggressively, right? And personal spending just continues in the middle of the chow. And, and it was almost like there’s nothing to see here,
00:37:15 [Speaker Changed] Right? Well we had three, three handle on unemployment, wages were actually rising as fast, almost as, as fast as inflation. Other than that 9% peak, why wouldn’t the economy and market do well?
00:37:29 [Speaker Changed] And, and, and to just, he
00:37:30 [Speaker Changed] Says with perfect hindsight,
00:37:32 [Speaker Changed] To fast forward to this morning, where is PCE? It’s right in the middle of the channel. I would say if you, you know, there’s a couple of different variations of looking at it and in the headline numbers actually at the top of the channel and moving along and, and you know, we did have some slowing in the first quarter a a but it was at the risk of going way outta the channel and it just sort of moderated and went flat and, and, and since it got back to the channel. So it’s the same thing. And that’s why I’m saying and
00:38:02 [Speaker Changed] PC is important ’cause that’s a key indicator of the Fed looks
00:38:05 [Speaker Changed] At it’s percent of the US GDP. Yeah, right. Absolutely. I
00:38:08 [Speaker Changed] Think that’s Jerome Powell’s favorite data point. Yeah,
00:38:11 [Speaker Changed] I I, so he focuses more on the inflation in there. So I’m talking about really the real volume or that measure that we have, which is in, in, in real terms, I’m just saying, I I i, if that’s 70% of gdp DP and that’s growing steadily and it’s been doing, so we, we in the same place that we’ve been in for 10 years, growing in, you know, at what I would describe as a 2.5% trend rate. So, so
00:38:34 [Speaker Changed] That, that, that sounds pretty bullish. I’m gonna ask you in a little bit about cautious issues and risks. We’ll circle back to that. Sure, sure. But given the relative strength of the US over the past 10 to 15 years and the fact that you’ve just gotten back from Asia and Europe before that, how do you look at the rest of the global economy? What’s happening in Asia, what’s happening in developed ex-US Europe and and elsewhere?
00:39:02 [Speaker Changed] Absolutely. I, so, you know, there’s a chart that I’m going to draw for you or really two charts and, and, and what I would say, I kind of already described the US chart, which is, you know, a, a a, a steady trend channel growth of two and a half percent before the pandemic steady, you know, two and a half percent growth since then. I, I I, if you look at the rest of the world, the trend rates are different. So if you use Europe as an example, but the same applies basically to various other regions. We were growing steadily before the pandemic at sort of a 2% rate, then we had the pandemic collapse and just like the US recovering back basically to the trend line. But that was in the first quarter of 2022. So it is really Russia, Ukraine that then basically arrested that recovery back the trend and, and, and basically activity in Europe, you know, it’s essentially gone sideways to very slightly up in the decimal points I would say.
00:40:05 And, and, and so there’s a very large gap basically relative to trend. And so what I would argue is that, you know, there was nothing exceptional happening in the US in absolute terms. It was really in relative terms because the rest of the world wasn’t really growing. And I’m using Europe as an example, you know, China, Japan’s slightly different, but it, it, it, I I think the European example is sort of key. And, and, and so if you think about things like FX and the US dollar, I mean we, US dollar typically does long multi-year cycles. We were sitting at the top of the band for three years. So I think about it as a multi-year trade or trend, basically waiting for a catalyst and waiting for the catalyst is just, you know, is the rest of the world going to start to grow? And in the case of Europe, you know what we had basically, so we went long European equities on the first Monday of the year, all the credit goes to my colleague, European equity strategist, max. That’s
00:41:11 [Speaker Changed] A great great
00:41:12 [Speaker Changed] Call. I, I i i, it was just the view that everybody was short Europe, everybody’s going to cover their shorts or at least some people are gonna cover their shorts going into the election, given the platforms which they began to do. And after they covered their shorts, it became a question of, you know, from a fundamental point of view, you know, is this gonna happen now in terms of policies is gonna happen? So if you look back for the last few years, you know, as a policymaker you want to do something about this, but maybe that shock was already gone and, and you’re gonna start growing anyway. And, and, and so now you have that plus a a, a whole set of additional, you know, incentives to basically to spend infrastructure. Then there’s the defense issue. So I would argue it happens.
00:42:06 [Speaker Changed] And, and is this early days in in the resurrection of European equities or is this a one year, one time? So
00:42:16 [Speaker Changed] It, it depends on whether you believe the growth will happen and sustain. I’m in that camp, so I I I would argue it’s still very early days. And so we are actually, from a positioning point of view, we are overweight the us which is what we’ve been talking about, but we’re also overweight Europe and overweight Europe, not because I’m expecting it to match the US in performance through year end,
00:42:37 [Speaker Changed] Just doing so much better than it used to.
00:42:40 [Speaker Changed] But, but, but I think it’s important to keep in mind that so far we have very little evidence that Europe is actually growing and, and if anything over the last few weeks, the data has kind of disappointed. It doesn’t negate what is likely to come. And, and then you look at the Europe, I mean, you know, getting disappointment. We, we, we moved up because Europe might grow and, and, and you know, it hasn’t, but you know, we have trouble getting below one 16. So the market is, you know, very much I would say, you know, concerned that the growth actually happens. So I’m, I’m staying overweight because there, it, it, you have to get in before it happens. And given the gap basically in the level of activity, in the level of earnings relative to trend lines, you know, you, you, you, you could gap up at some point really. And, and so it’s not just about tomorrow’s earnings numbers. So we start getting positive growth news outta Europe.
00:43:45 [Speaker Changed] All bets are off at that point.
00:43:46 [Speaker Changed] EEE, exactly. At that point it’s already half of it’s already happened, so. Wow.
00:43:51 [Speaker Changed] So let’s talk a little bit about US economic growth. We, we earlier discussed Asia and Europe, you have said we have resilient corporate earnings with, with forecasts that are in the low double digits, robust risk appetite and major buybacks that are likely to rise as earnings rise. What’s not to like about the US market?
00:44:19 [Speaker Changed] Not too much, I would say. I think that, you know, going back to what I said earlier, 2023 we’re waiting for the recession, 2024 waiting for the election. There’s a lot basically of demand pen hub demand that in for a variety of activities.
00:44:38 [Speaker Changed] Ance you, you’re talking pre 2020, November, 2024. So the prior year,
00:44:43 [Speaker Changed] Right. But, but what I’m saying is that the, while you know the backdrop and the context has been very good. It’s been very strong. It hasn’t really been, there hasn’t really been buy into it because there’s been something massive to worry about, like a recession in 2023, right? A a and, and so I would argue after the liberation day shock, so I would say around the election last year, there was a lot of buy-in to a very optimistic take. So we spent, one of our frameworks that we spend a lot of energy on is our equity positioning framework. And, and if you look at where we are today, and that’s what I’m saying, there’s limited buy-in is my positioning measure. It’s a Z score measure. So typically between plus minus one, it’s sitting at plus 0.5. But what I would point out, so market’s clearly overweight, that entire overweight characterization is coming from the positioning of systematic strategies who are not following or thinking about fundamentals. If you think about the design,
00:45:45 [Speaker Changed] When we say systematic, it’s quantitative, it’s trend based, it’s earnings growth based.
00:45:49 [Speaker Changed] So EEI have three in particular in mind. So there’s vol control, there’s the CTAs and then there’s risk parity funds,
00:45:57 [Speaker Changed] CTAs meaning mostly trend following commodities, things like that. E
00:46:00 [Speaker Changed] Exactly. So it’s about trend and vol. A a is a good summary of each of the three, basically. I mean, and if you look at systematic strategies, positioning, you know, it it, it’s hard to come up with an intuitive, simple measure of what is the trend and that, that, that’s what a lot of that exercise is about. But the other part is very easy, which is basically vol. You can use any measure of vol that you like. Hmm. And, and and, and it explains basically their positioning. So we had liberation day collapse, a a we had April the ninth when the cause of the volatility basically diminished or went down. And so we had the fastest recovery from a wall shock ever. And, and, and, but there’s been very limited buy-in, I would say, from discretionary investors who are actually sitting at neutral discretionary as opposed to systematic, but discretionary. You want to think about as fundamentals based investors. Let,
00:46:58 [Speaker Changed] Let’s take that apart ’cause that’s kind of fascinating. ’cause on the one hand there’s been a bubble in bubble forecast. That’s an old joke. We’ve heard that, you know, for decades. But really it seems like everybody is saying, oh, there’s an AI bubble, there’s a market concentration bubble, and the the market seems to not care and it just keeps powering itself higher. Let, let’s talk about the policy issues you just raised. So despite Trump won with some tariffs that were, I don’t know, about 10%, and I’m tariff, man, it’s the most beautiful word in the dictionary. Despite all of that, a a failure of imagination are all on all our parts. April 2nd, shocked everybody with a hundred percent tariffs. I I don’t think anybody imagined it. And we had that very rapid sell off over the next week, then the 90 day pause and markets took off. But at the end of the 90 day pause, markets just kind of kept going. Kept
00:48:00 [Speaker Changed] Going. Yeah. How,
00:48:01 [Speaker Changed] How do you, how do you put this policy into context? And when you say there’s not buy-in from the discretionary part of the equity markets, somebody’s buying, is it just systematic or it’s,
00:48:13 [Speaker Changed] So it’s systematic strategies. And I would say, you know, we are sitting here in the first week of October, so if you think about September and, and, and just the very, very steady steep climb,
00:48:24 [Speaker Changed] Huge gains in time.
00:48:25 [Speaker Changed] So, so what we got in September is basically big inflows.
00:48:30 [Speaker Changed] We right. And I wanna say Q3 2025 was like the seventh best quarter going back to World War ii, some crazy number like that.
00:48:40 [Speaker Changed] I I I, so last month we had the highest inflow into bonds and equities as a group ever since $2 billion into just one month. Do
00:48:54 [Speaker Changed] Do you pay attention or care about the $7 trillion in money market funds? Or is that, you know, I, i
00:49:00 [Speaker Changed] A, so I think that’s partly a red herring in the sense that basically it is a reallocation away from bank deposits. So if you take a sum of money market funds and ca and cash deposits, the line’s kind of going up, but it’s going up in line with it’s trend because cash holdings are going up. So the two things are just sort of a
00:49:23 [Speaker Changed] Wash. ’cause some people are, have been claiming that is the next source of fuel for equities. I’m in your camp. I think that money mostly came from low yielding bonds or checking and savings accounts. Yeah, not, I,
00:49:36 [Speaker Changed] I think it’s like very important to keep in mind that we’re having a boom in inflows across all asset classes, really. And it’s been going on for two years, if not longer. And, and, and you know, as to the question of why we are having this boom, our take is basically that. So you have to start historically first. So if we’re talking about, you know, how things changed relative to history, so a a a, the, the pattern was that US households would put about 50% of the new savings. So you get a paycheck, you spend some is left in the bank account and then you allocate basically some of it. But historically, about half of all household savings, it, it would stay in cash. Half would basically go into financial assets. And so if you think about the cash holdings of households, it’s very, very steady, clear trend line, what the pandemic did, partly because people spent less, partly because they were getting checks in the mail or directly deposited in their bank accounts, the, their cash holdings went way, way up relative to trend.
00:50:51 We then had a period where, because you just over-allocated relative to trend a, a a a period of cash going sideways so that all new savings, a hundred percent of it was going into financial assets and into all financial assets is not just, I mean bonds were actually the bigger beneficiary than equities, believe it or not really. Most people think it’s equities first, but it’s a across that, so crypto, you know, commodity funds, you name it a a, but, but, but it goes all the way back to the pandemic and, and, and, and, and it’s not done yet, is the way I would put it.
00:51:29 [Speaker Changed] Wow. So, so you were talking about trade earlier. One of the comments you made really, I found fascinating markets often price and trade deal hopes early. Are, are we over discounting the impact of tariffs or are markets being too optimistic or how, how do you contextualize, you know, we’ve been waiting to hear about all these tariff deals we really haven’t heard of. I think we have one with the UK that’s kind of kind of IT and Japan, right?
00:52:02 [Speaker Changed] Are
00:52:03 [Speaker Changed] Are, are markets not paying enough attention to tariffs or are markets saying, Hey, president lost at the court of trade, he lost at the court of appeals, maybe he’s gonna lose it, the Supreme Court. How, how are we looking at tariffs?
00:52:18 [Speaker Changed] So, so the, the a a a, so first, you know, a a a a confession, which is basically after April the second, you know, if you thought through the impact of the announced tariffs, you are gonna come to a very, very negative conclusion, right? And that’s what we did. And so we lowered our numbers. We always built in that there would be what we call a relent on policies. It’s just like trade war 1.0 when the market is up, you know, he would escalate when the market was down, he would deescalate. People
00:52:51 [Speaker Changed] Have have called that I, I heard a couple of options. Traders call that the Trump collar.
00:52:57 [Speaker Changed] The Trump collar.
00:52:58 [Speaker Changed] So unlike the Powell put, this is the Trump collar right at when markets are high, he’s embolden when they’re low. Alright, we’re gonna pause this and let the dust settle.
00:53:07 [Speaker Changed] Exactly. Exactly. A a a that’s kind of, you know, where we were. And, and so the call was that we would go a lot higher, but a lot less than we had originally thought basically. And, and we have since basically raised both our earnings numbers and our target. I started
00:53:26 [Speaker Changed] What’s your s and p 500 to 7,000.
00:53:28 [Speaker Changed] So on, on January 1st it was 7,000 and today it’s again, back to 7,019, lower
00:53:33 [Speaker Changed] It you, it goes the tariffs and
00:53:34 [Speaker Changed] Then raised it again and then raised it in two steps. But your question on, you know, a, are the tariffs having an impact? What I would say is that there’s sort of different dimensions. So this is kind of a big question because it impacts everything. So first is growth. We kind of spoke about that a little bit, macro growth and, and, and what I would say is that so far there is, I mean the, the, the, the logical and intellectual case for a slowing because of very high tariffs or a new tax, right? You know, it is impossible to refute. And I’m not refuting it, but I’m just saying there’s like no evidence of that because what other things are basically dominating? So I talked about the consumers are doing what they’ve always been doing, et cetera, a, a, a, but if you look at macro growth, I also said that what we are going through is a mini version of 2023 because everybody took a negative view that negativity is extremely important part of the positivity in terms of the price action because markets
00:54:37 [Speaker Changed] Climb a wall of
00:54:38 [Speaker Changed] Worry. Right? Exactly. And, and, and, and, and you know, our equity’s gonna go down if somebody raises their GDP growth numbers or their earnings numbers. So it’s so that negativity is a positive force for now i, our economists, so Matt ti has 2.8% GDP growth number for the third quarter. That’s, you know, the highest numbers I’ve ever seen from him.
00:55:01 [Speaker Changed] Atlanta, GDP now is even higher now it’s close
00:55:03 [Speaker Changed] To four. Yeah. Before the data started to disappear, a, a, a and, and, and so, you know, a, a number one, no sign of it in terms of growth, if you do and think about in terms of earnings. So there should have been a big impact in the second quarter earnings growth in the second quarter actually picked up from where it was in the first quarter. So even the sign is wrong, it’s going in the other direction. A a number three qualitative read on earnings, which I would argue is more important than just the numbers and companies just basically saying that yes, this is a negative shock. Yes, it’s a big deal, but it’s, you know, it’s not way out of basically the realm of, in many cases, even for machinery companies within the realm of, you know, our guidance range. So yes, it’s negative, but it’s not having such a huge impact.
00:55:56 Huh? And, and, and that the impacts are basically, you know, modest and manageable. I is a level at which, you know, you can think about, so we, we, the numbers, what are the numbers? I I, so the effective tariff rate defined as basically tariff revenue on the treasury’s website divided by the value of imported goods, it was kind of stuck at 10, 11% and maybe it’s a little bit higher right now. So the market’s working with something like 15. So we still have a ways to basically get there. I i, and the underlying thesis has been basically that if there’s a problem, you will get relent on exemptions. So there’s a lot of exemptions. And, and, and that’s part of the whole thing, huh? Really? The other dimension of course is inflation. I would, so let’s talk about that. Yeah, yeah. I, I, I, you know, did it already happen or is it still to come one simple way, I mean, is there’s no way to answer the question with a hundred percent certainty, but what I would say is that if I take a look at core goods prices or core CPI, if you want, and, and what you’ll see is that the norm is for goods prices to be deflating.
00:57:10 And we have the post pandemic, 10% increases the chart of the price level, right? We jump up by 10, 11% in a relatively short period of time. And then that’s done with, and we start dis inflating at the same historical trend rate is a very modest, mild deflation. And what we’ve had over the last three months is a clear increase up. So some impact of the tariffs has already happened. Question is how much, and, and, and I would say relative to the trend line, core goods prices are probably one, one and a quarter percent higher than they would’ve been if we had just continued basically down that trend line. And, and, and so how to basically, you know, handicapped that one, one and a quarter percent we have in-house from our rate strategist, a bottom up measure basically of the direct impact of tariffs. So you go SIC code by SIC code, you add it up and then you calculate and they calculate two, two point a half percent. So simple point I would make is it looks like half of it, the direct impact already happened. And if half of it, you know, it, it wasn’t so bad, the how much should we fear the second half
00:58:24 [Speaker Changed] Coming up, we continue our conversation with Binky Chadda, chief US Equity and Global Strategist and head of asset allocation at Deutsche Bank Securities talking about his roles at Deutsche Bank. I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio.
00:58:58 I am Barry Ritholtz. You are listening to Masters in Business on Bloomberg Radio. My extra special guest today is Binky Chadda. He’s Chief US Equity and Global Strategist, as well as Head of Asset Allocation at Deutsche Bank. You are very constructive about additional federal reserve rate cuts this year and next year, and the people who are a little bearish on that are saying, Hey, tariffs are gonna be very inflationary. We we’re seeing a re-acceleration. This isn’t a noisy blip, but it’s a start of something worse. We’re gonna end up at four, four and a half, 5% inflation, which would put the Fed on hold. Walk us through your thinking on how many more rate cuts this year and next year. It sounds like you’ve already given the game away ’cause
00:59:44 [Speaker Changed] No, no, actually, actually, you know, I, I’m not counting on rate cuts and I would argue the rate cuts are, you know, much more of a sideshow basically really for earnings. We do have,
00:59:54 [Speaker Changed] We’re so hyperfocused on them, at least the media sure is on it. It’s, you know, everybody is, if we get these rate cuts, it’ll unfreeze the housing market, it’ll do all these great things.
01:00:07 [Speaker Changed] No, I mean, for the, to unfreeze the housing market, you need longer end yields to basically go down,
01:00:11 [Speaker Changed] Which have not happened yet. Yeah,
01:00:13 [Speaker Changed] There, there are pretty much on the low side I would argue relative to, so we have a house view for the 10 year by year end that’s closer to four and a half, so 4 45. So
01:00:24 [Speaker Changed] We, what does that mean for mortgage rates? Are we gonna see a five handle on mortgage rates?
01:00:29 [Speaker Changed] So that’s a pretty wide, so there is room if and, and spreads depend on volatility rates. Volatility’s been coming down quite a lot because, you know, the a a a brokers need to hedge basically the interest rate risk while it’s outstanding. So, so I think it’s supportive, but, but, but I I I, I’m not foreseeing any big decline in interest rates.
01:00:51 [Speaker Changed] So maybe another cut this year, one or two more next year. Yeah,
01:00:54 [Speaker Changed] It’s also, I mean, we don’t have the data anymore, so it’s gonna become,
01:00:58 [Speaker Changed] Well, there’s that
01:01:00 [Speaker Changed] A a a who
01:01:01 [Speaker Changed] Needs
01:01:01 [Speaker Changed] Data, but, but, but I wouldn’t be surprised if the Fed misses one of those two meetings in terms of the rate cuts and pushes it out. I mean, this is sort of more a, you know, fine tuning type exercise, I would argue. I mean, if the Atlanta Fed GDP is right, and it’s been pretty right for several years, obviously not to all the decimals, but it was giving you some, you know, with that kind of growth. I mean, do we really need lower interest rates?
01:01:28 [Speaker Changed] So let me ask the Jerome Powell question. We’re seeing the labor market sort of soften, even though we’re fairly close to, to, you know, as low as unemployment gets. At the same time, there, there are shortage of workers 2025 may be the first year in history where US population actually declines. Declines, yeah. Less immigration, more deportations, a whole lot of other policy issues that are affecting that. How do you think about the labor market here and what does that mean for corporate earnings? What does it mean for interest rate policy? Yeah, I
01:02:05 [Speaker Changed] I I, I think we have a relatively fully employed labor force and, and, and our baseline view basically sees, you know, if you ignore the decimals, a little bit of bounce here and there not really, you know, changing very much. So the question becomes, you know, who’s gonna produce that three and 4% GDP? So it, it, it was pretty bearish take when we got the revisions basically to the payroll’s numbers, the benchmark revision. But, you know, if you’re not changing the GDP numbers and you just doesn’t matter, raise the level of productivity basically. Right. Commensurate
01:02:41 [Speaker Changed] It’s not a, it’s not as much of a negative as it looks at first blush
01:02:44 [Speaker Changed] E Exactly right.
01:02:46 [Speaker Changed] Don’t I, I know a lot of economists who look at growth as productivity plus inflation. Fair, fair assessment.
01:02:53 [Speaker Changed] Yeah, I would say productivity plus employment. Then to get to the nominal part, you would add inflation and, and, and so a a I mean, if you think about, so we talked a little bit about, you know, the, the parallels between today and the 1960s and the, the second half of the 1990s, that’s the two periods since World War ii where we had basically productivity growing at three, 3.5% it for a sustained period of time. Normally it grows at 1.4, 1.5%. What,
01:03:26 [Speaker Changed] What’s the old line? I, I forget who I’m stealing this from. Productivity gains are seen everywhere except the productivity data.
01:03:35 [Speaker Changed] So that’s because, you know, it, it, it’s calculated as a residual, right? So first you have to estimate GDP, then you have the first revision, second revision, third revision, A, a, a, then you have to estimate what we were just talking about, which is the labor input, which is revised and then revised right. And benchmark. And then what’s left over is productivity. But what I would argue is that if you look at a simple chart of reported productivity in the non-farm business sector, you know, you’ll see this a a a a growing in a trend channel of 1.4%. And, and, and basically what we’ve had over the last couple years is we went way above the channel basically. And, and so
01:04:17 [Speaker Changed] Post pandemic, post
01:04:18 [Speaker Changed] It, it, it, that is right. So we got a pandemic jump, then a slowdown back into the channel and, and, and so over the last two years is what I’m saying. So officially, you know, yes, the, the, the immigration issue, but officially unemployment’s only been 4% was even lower. So it was a tight, historically a tight labor market has been a necessary condition for getting those productivity booms like we had in the 1960s and, and, and in the second half of the nineties. And we’ve had a tight labor market for several years right now. Huh.
01:04:51 [Speaker Changed] Very, very interesting. One of the things I’m so fascinated about your work is that you’re not just, you know, a one-way bull. You start the year as one of the most bullish forecasts for the s and p 500, but you’re constantly bringing up the various macro risks. Investors face that sort of full view and, and not being so, so just mindlessly bullish is kind of fascinating. So, so let’s talk about some of the risks that, that Sure. You’ve been writing about and discussing. Have to start with froth and AI and, and capital spending. Sure. How do you respond to charges that this market has become frothy?
01:05:40 [Speaker Changed] A a what I would say is basically that, you know, we do see signs basically of rampant speculation, but I would say so far it’s only in basically relatively well-defined pockets.
01:05:56 [Speaker Changed] So AI, Bitcoin hit 125,000 over the weekend. So
01:06:00 [Speaker Changed] IIAA on ai, I would say it’s, you know, what some companies and some deals are doing, you could put in that bucket, but I mean, the stocks are not necessarily doing that. And so I would argue that we are still sort of in the early stages, I would say there’s a lot of focus on the retail investor. Now, the question I would ask about the retail investor is, you know, I I I, when you look at measures of retail participation or retail activity, you know, it’s easy to sort of exaggerate relative to their own history. I mean, we don’t have a history of retail particip participation in US equity since the nineties. So it’s been more episodic, basically. And so there is a tendency to put it in that light that this is an episode, but I mean, we were talking about Asia earlier, it’s a long history of retail involvement in all markets. And so one of the things that is getting attention is the presence of retail investors, but from a quantitative point of view, I dunno, I was looking at statistics. So there’s conflicting measures and
01:07:13 [Speaker Changed] It’s fairly modest and a lot of it seems to be 401k and Ira
01:07:16 [Speaker Changed] Invested I this whole thing about how, you know, the volumes have taken off and they’ve skyrocketed, and now they account for 4% of
01:07:23 [Speaker Changed] Tiny
01:07:24 [Speaker Changed] Exactly. So everything is, you know, consistent and correct, but I I would now this is, you
01:07:30 [Speaker Changed] Have to frame it appropriately.
01:07:32 [Speaker Changed] Yeah. And, and, and this is a cycle and we’re talking about now, but basically, and this is, you know, me speaking as equities, we, it’s a cyclical asset. Okay. And, and, and so if the cycle continues the way that it has been continuing, all of this is going to grow. But today we are not there yet.
01:07:51 [Speaker Changed] What about market concentration, the, the magnificent seven or whatever you wanna call the top 10? Sure. Is that as big a, is that really a thread, or is that, you know, this happens from time to time when a new technology attracts all this attention and capital.
01:08:06 [Speaker Changed] So I mean, and I I I would put it slightly differently. I would say the market concentration in mega cap growth in tech reflects the concentration of s and p 500 earnings in the mega cap growth and tax.
01:08:18 [Speaker Changed] What are they? Something like 2 trillion in revenue, 300 billion in profits, some, some crazy number.
01:08:23 [Speaker Changed] Yeah. They, they, they’re responsible right now for about 40% of s and p 500 earnings. So
01:08:29 [Speaker Changed] Why shouldn’t they be 40% of the market cap? E,
01:08:32 [Speaker Changed] EE, E. Exactly. So they, they’re actually 30% of earnings and 40% of the market cap. I apologize. Oh, so
01:08:39 [Speaker Changed] Why, why are they so overweight? Is it just future growth expectations?
01:08:43 [Speaker Changed] They, they’re, they’re, they’re, they’re growing faster, so they should definitely have higher multiples there. So, so, so, you know, people frame the question as focused on the mega cap growth in tech. You can ask the equivalent question. Actually, it’s a bigger part than 60%. Why isn’t everybody else growing? I got into this a little bit earlier. It’s a, it’s a very peculiar recovery where the cyclical parts basically haven’t really kicked in in a big way, but it looks like they’re kicking in
01:09:08 [Speaker Changed] What other sectors are kicking in you? We, I know you’ve written about financials, consumer cyclicals materials, and then we could talk about em and, and small cap and value. Sure. What other sectors have been lagging that you find particularly interesting?
01:09:25 [Speaker Changed] So right now, you know, we have what I call simple cyclical tilt to our positioning, because I talked about discretionary investors sitting at neutral. Why are they sitting at neutral? Because they’re concerned about the cycle. What are they gonna buy if they get off and start participating in a bigger way? I would argue they will buy the cyclicals because that’s their concern. They’re unlikely to buy mega cap growth in tech for well known reasons. All the reasons that you basically mentioned. So, you know, if you phrase it from, you can phrase the question basically from who’s actually gonna buy this stuff? I would argue this group stands out and, and, and, and their concern suggests that they would buy the cyclicals if they started to believe that the cycle is gonna be fine. If you look at it from a fundamental point of view, no, I mean, there aren’t no signs of a huge uptick on the signal side, but if you wait for those signs, equity market will price it far before, I mean, one of the lessons that I take away is you have to think about the s and p 500 in a recession.
01:10:26 You have this brick shaded period, equity market falls 20% once the recessions, you know, starts it, it, but it robustly bottoms around the middle of the recession. Right, right.
01:10:37 [Speaker Changed] Long
01:10:38 [Speaker Changed] Before and, and recovers while you are still in this gray shaded area. So if you wait till payrolls turn negative, you’ll have missed the entire move and you will be back to, you know, basically that V again, catching that small EE Exactly. So a, a equities turn up when there’s a positive probability that you’re going to basically have a recovery because you’ve been in a recession for so long, you,
01:11:03 [Speaker Changed] You’ve identified a number of risks earlier in the year. And I’m curious if, if you still think they are significant protectionist trade policies and immigration policies are, are those still potential growth pressures or, or inflation pressures?
01:11:19 [Speaker Changed] I, I, I, I, I think on the tariffs, basically they’ve proved to be a modest E-E-E-E-E. Exactly. And, and, and so I don’t worry about that. I don’t think it closes the issue. I mean, there could still be negatives that come outta that, that we are just not completely aware of yet. But in that event, you know, a big part of our thesis for this year has been that I, I I, if things get bad, you know, at the end of the day, any administration cares about its approval ratings, the approval ratings about the economy. So they will relent and especially if it’s caused by one of the policies. So that’s been a big part of our thesis for staying constructive through the year. A a A I. So, you know, we talk about risks, and I am deeply aware of what most people mean when they talk about risks. But where we are sitting A-A-A-I-I, I would argue that it, it, it is my duty to simply point out that right now I’m much more concerned about upside risks than downside. Risks
01:12:20 [Speaker Changed] Melts up a potential A, a
01:12:22 [Speaker Changed] A a. Yes. Because we don’t, we stop worrying about going into a recession, we stop worrying about the politics and, and, and, and, and we stop worrying about the tariffs because companies are dealing with it.
01:12:34 [Speaker Changed] And suddenly there are blue skies out there.
01:12:36 [Speaker Changed] EEEE. Exactly. So,
01:12:39 [Speaker Changed] So, so last question before I get to my favorite questions. Okay. What do you think investors are not paying attention to? We’re not talking about that perhaps they should, could be a policy, could be an asset class. What do you think is getting overlooked?
01:12:54 [Speaker Changed] The, the context that we are in, what I was talking about, basically that a 3% GDP growth with a 4% unemployment happens only five or 6% of the time. And, and it unleashes certain dynamics. And, and, and, you know, it started with during the previous administration, it has continued in this administration, so it’s not necessarily about the policies. So
01:13:21 [Speaker Changed] We found a lot of noise and a lot of headlines and a lot of news coverage. Is that obscuring what is fundamentally underneath everything, a robust economy and a healthy market?
01:13:33 [Speaker Changed] I believe so, yeah.
01:13:34 [Speaker Changed] Huh. Really, really interesting stuff. Let, let’s jump to our favorite questions, starting with the question that brought me to you, which is, who are your mentors who helped shape your career? So many people, so many guests of this show have mentioned you who helped shape your career
01:13:53 [Speaker Changed] Well, so I started my career at the research department at the IMF and most important mentor, I would say was my boss is a gentleman called Michael Dooley, ex Federal Reserve, you know, a at some of the highest levels, but was at the IMF. Then he, I, I was just out of graduate school. He taught me basically how to think critically, how to stand on my own feet, and most importantly, how to communicate things or the essence of things in a very simple way. Hmm. He
01:14:30 [Speaker Changed] That’s great. Great answer. Let’s talk about books. What are some of your favorites? What are you reading currently?
01:14:35 [Speaker Changed] So I’m definitely a fiction reader. It gives me a good break from where I live and what I do. I’m currently reading Isabel aide’s books. I’m currently on a Long Pedal by the Sea, which is a book about Chile.
01:14:52 [Speaker Changed] Hmm. Really interesting. What about streaming outside of this show? What are you watching? Listening to? What, what keeps you entertained when you have a little downtime? Oh, given
01:15:01 [Speaker Changed] My background, I’m definitely big Bollywood fan. Oh,
01:15:04 [Speaker Changed] Really?
01:15:06 [Speaker Changed] Yeah. I’m very partial to Indian movies. And, and
01:15:10 [Speaker Changed] Give us a title that some of ’em are, listen, might
01:15:12 [Speaker Changed] Enjoy the one that I really liked, it’s Own Prime, actually. It’s called Tav, T-A-N-D-A-V.
01:15:20 [Speaker Changed] What’s that about?
01:15:21 [Speaker Changed] It’s about politics. Oh, really? And political career. And unfortunately they did not allow the, the season two to be, the authorities didn’t allow season two to in India.
01:15:36 [Speaker Changed] They stopped it from going on in India. They stopped.
01:15:38 [Speaker Changed] Wow. Yeah. Yeah.
01:15:39 [Speaker Changed] Well, thank goodness, nothing like that would ever happened
01:15:41 [Speaker Changed] Here. But you still watch season one. Yeah.
01:15:43 [Speaker Changed] All right. Our final two questions. What sort of advice would you give a recent college grad interest in a career in either economic policy analysis, asset allocation, or just investing?
01:15:56 [Speaker Changed] Yeah, I think that, you know, a, a working on Wall Street or in finance, I mean, there’s a lot of different things you can do. And I think for young people starting out, the biggest challenge is to figure out where, you know, how do I match basically what I’m most interested in and what, where my abilities are. And, and my advice would be to go with where you are interests are, the ability will come. I just went through recruiting process and just hired somebody from our grad program on onto my team. Yeah.
01:16:29 [Speaker Changed] Interesting. And our final question, what do you know about the world of economics and investing today would’ve been helpful when you were starting out back at the IMF in, in the 1990s
01:16:41 [Speaker Changed] To ignore everything except the economy. You, you all heard this expression, right? About presidential elections. It’s about the economy. Stupid. Right?
01:16:51 [Speaker Changed] Still
01:16:51 [Speaker Changed] Accurate. And, and s the s and p 500 is about earnings, period, positioning, valuation that all kinds of fits in and, and the but, but the underlying trend is all basically coming from earnings. You know?
01:17:06 [Speaker Changed] Totally, totally fascinating. Thank you Binky for being so generous with your time. We have been speaking with Binky Chadda. He is the Chief US Equity and Global Strategist and head of asset allocation at Deutsche Bank Securities. If you enjoy this conversation, well be sure to check out any of the 577 we’ve done over the past 11 years. You can find those at iTunes, Spotify, Bloomberg, YouTube, or wherever you get your favorite podcasts. Be sure and check out my new book, how not to invest the ideas, numbers, and behaviors that destroy wealth and how to avoid them, how not to invest at your favorite bookseller. I would be remiss if I did not thank the correct team that helps put these conversations together each week. Alexis Noriega is my video producer, Anna Luke is my producer. Sage Bauman is the head of podcast at Bloomberg. Sean Russo is my researcher. I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.
~~~
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