The transcript from this week’s, MiB: Jurrien Timmer, Director of Global Macro at Fidelity Investments, is below.
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This is Masters in Business with Barry Ritholtz on Bloomberg Radio
Barry Ritholtz: On the latest Masters in Business podcast. An amazing conversation. I sit down with Jurrien Timmer. He’s the director of Global Macro at Fidelity. They touch about 50 million separate clients. What an amazing conversation. Yian has been started out in fixed income before he became a a market technician. Now, global macro is his beat, which means he covers everything, US overseas equity, bonds, commodities, economic data. I, I thought this conversation was fascinating, and I think you will also what a depth and breadth of knowledge. With no further ado my conversation with Fidelity’s y and Teer. Yuri and Teer, welcome to Bloomberg.
Jurrien Timmer: Thank you very much, Barry.
Barry Ritholtz: I’ve been looking forward to this. I’ve been consuming your stuff for, it feels like forever. I’m a big fan of what you do. But before we get to your work at Fidelity for the past three decades, let’s talk a little bit about your background. You get a bachelor’s in finance from Babson College. What was the original career plan?
Jurrien Timmer: Well, so I was born and raised on the island of Aruba in 1962 when Aruba was still very small and sheltered, and as a Dutch citizen, now, also an American citizen. But you know, generally the kid, the Dutch kids would go to Holland to go to higher education. But I was in love with the American culture. I met many tourists on the beach, you know, and so I wanted to go to the States and do the American thing. And then my father, who was an importer of construction materials, et cetera, he had contacts in Boston. He said, okay, well, you should send your, your kid to Babson because it’s small, it won’t be overwhelmed as a, as an international student. And I’ve always wanted to be an architect. But then in the last year before finishing high school, I’m like, I don’t think I’m good enough to be an architect, so let me do business.
And I figured, you know, there’s always something you can do with a business degree. And so I studied finance with a minor in investments. And then, you know, I graduated with no work permit, right? So I, I was in that place where you need to have obviously a work permit. So back then, I don’t know if it’s still the case, but back then you got one year practical training visa, and then you had to go, you know, get a, get a real, a real visa. And so I took literally the only job that was offered to me in the United States. So I applied to every Dutch company. I figured at least they’ll have maybe some sentimental reasons to hire a Dutch person. I could have worked in Holland, of course, but I wanted to be in the States. So the Dutch bank, A BN, which later became a BN Amro, right, hired me. I went to New York into their corporate banking credit program, in which I had zero interest. But it’s like, you know, this is the job,
Barry Ritholtz: No pun intended, right? But, but you eventually become pretty senior in the fixed income group at A BN.
Jurrien Timmer: Yeah. So I, I was very lucky. And again, you know, it’s sort of, if you take the job that’s offered to you and you make the best of it, you know, you play the hand that’s dealt. And literally within a few months, a BN set up a capital markets group because, you know, we were the, the primary dealer in New York together with LaSalle National Bank in Chicago for the HQ in Amsterdam, which of course was one of the world’s largest banks at the time, and a very large treasury book. And so I was the person who would execute the, the trades for hq. So I became a client of like Solomon Brothers in Smith Varney, and, and you know, the, you know, Goldman Sachs, et cetera. And so I got into the Wall Street game and I learned everything about fixed income. And to this day, I’m, you know, like if, if you’re a either a stock market person or a global macro person, having a foundation of fixed income is so important.
Barry Ritholtz: It’s so true. You say that some of my favorite stock analysts began as bond analysts because they’re concerned about return of capital, not return on capital. And it focuses them very much on staying away from the speculative nonsense and real. I, it it’s been very consistent over the years. Yep. Yeah, I have a list of, of some favorite people in that space. So, so you start out in fixed income. When did technical analysis and becoming a CMT arise in your journey? So,
Jurrien Timmer: So I was at ABN Amro in New York for 10 years. And so I’m, you know, I’m there executing trades, learning about the markets, watching my, the tele eight and the Bloombergs were still, they, they were the quad screens with the amber. Right. And, you know, I just, I’ve always been a visual person. And so I started gravitating towards charts and, you know, charts are kind of the mainstay of what I do even now, 40 years later.
Barry Ritholtz: 40 years later? That’s Crazy
Jurrien Timmer: Yeah. And I, I like to write, I think I get that from my dad, who’s a great writer. And so I always had this kind of urge to put pen to paper and, and to show charts. And so I, I just started writing a newsletter for the, the people in my universe at the time. And, you know, it would be like charts from CQG cut out taped onto a, a type report and then faxed to people. Like that’s what the technology was back then. And so it was all, so that’s how it started. And then I ended up, you know, getting the, the charted market technician, although that may have been during the Fidelity years,
Barry Ritholtz: I think. So, so how did you go from AB=N Amro to Fidelity? When was that?
Jurrien Timmer: So the culture at ABN Amro, not, not to spill any beans, but this was a long time ago, 30 years ago, I didn’t like where it was going. So we, we A BN had a, a bank in Chicago, and they saw what a profit center in New York was. So they wanted to, they wanted me to work for them, become a commission salesman. And I’m like, it’s likes not what I do. And just coincidentally, at that time, fidelity came looking around looking for the most obscure job in the world, a a fixed income technical analyst, right? I mean, talk about a narrow field, right? Right. Very specific. So that was in 1994. Around that time, you know, I was kind of looking around and, and I had two major career highlights within six months of each other because in 94, I was approached by Paul Tudor Jones’s company. Oh, really? And so I had a meeting with Paul in his office downtown New York, with this giant ADE on the screen, and we were looking at the bond chart, 94, the bear market, right.
Barry Ritholtz: And he very famously had called the 87 crash before,
Jurrien Timmer: And he was like, is that, do you think that’s a fourth wave? And we were having that conversation, that was great. And then, you know, I was approached by Fidelity and I ended up going with Fidelity, but the last interview of that process was with Ned Johnson. Oh, really? And so I was, spent,
Barry Ritholtz: The founder,
Jurrien Timmer: I spent an hour with him in his office talking about Parkers, because I was hired to go into the chart room. And at Fidelity, nobody got into the chart room without Ned’s blessing. ,
Barry Ritholtz: Right. Because back then, were they still doing charts by hand? Yep. Amazing.
Jurrien Timmer: And so, so that, so that, anyway, so that’s how the Fidelity career started. And it was, it was interesting because this is now early 95, and of course 94 was that bear market. We had the, the so-called tequila crisis in Mexico. And so the, the new mandate from upstairs in 95 was, we’re not making any duration bets. You just stick to your bottom up. You know, you, you look at credits and like, I’m coming in there as a technician and like, what, what am I supposed to do now? Like, there really is nothing for me to do. And so at that point, I kind of reinvented myself and became multi, multi asset, and I went to the equity side. And anyway, so that was the start of
Barry Ritholtz: The point, when you say multi-asset, I, I think you’re the only person in all of finance with the title director of global macro global means around the world, macro means 30,000 foot view. Yep. Is everything out there in your jurisdiction?
Jurrien Timmer: Pretty much. So I don’t do security selection. I, you know, we have armies of very talented,
Barry Ritholtz: But you do stocks, bonds, alts, crypto, commodities, gold,
Jurrien Timmer: You name it, I do everything, but it’s top down
Barry Ritholtz: As well as economic data. Yes. Interest rates. Yes. Employment, et cetera.
Jurrien Timmer: And, and that’s how I transitioned from being a technical strategist to being more kind of multidisciplinary, because I quickly learned at Fidelity as I was roaming the halls, pitching ideas to, to portfolio managers who generally are fundamentally oriented, right? I’m like, you know, I’m, it’s like I’m speaking a different language, right? So Fidelity’s always had a lot of technical, a analysts and the chart room, but I, I had to like, reinvent myself again and pivot towards at least speaking their language. And like, you know, a chart is a chart, right? It can just be a bar chart of, of the s and p, or it could be of the PE ratio or earnings or monetary policy. So I figured a chart’s a chart, I’m gonna like weave a broader approach to this. And, and that’s where kind of I came up with the title.
Barry Ritholtz: Whenever I see a, a technician and a fundamental analyst having a discussion somewhere along the line, someone says, “Look, I’m a a technical analyst. I’m just telling you what’s going on in the battle between supply and demand. It’s up to you to create a narrative around that. You tell us what’s going on. Fundamentally, I don’t know, but I could tell you who’s winning the buyers or the sellers.”
Jurrien Timmer: The fundamentals tell you kind of the why, maybe the what and the why, and the technicals tell you kind of the when and the how much it, it helps give you conviction. And generally speaking, we use technical analysis like our equity PMs do. Like, they’re obviously gonna have an idea about a company and what their long-term prospects are. But then our technical analysts will, will say, okay, well you’ve rated this stock a one meaning strong buy, but the chart looks like hell. Like you, you should be aware that the what’s in what’s happening is not the same as what should be happening. And maybe it takes time, but it’s like, it’s a, it’s a second opinion, which can be very helpful. And the other way around as well, like a chart looks amazing, but it gets a really poor fundamental ranking. And we also have a quantitative team that does a quant overlay as well.
Barry Ritholtz: We talked about global macro. I’m curious, you’re a Dutch citizen originally born and raised in Aruba, now a citizen of the US for the past 25 years. How does that international upbringing affect how you see the entire world of assets?
Jurrien Timmer: Yeah, it’s, it’s a great question. I, I do think that I am, I’ve been privileged to grow up in a very diverse environment. Like if you look at old high school pitchers, I’m like, maybe one of two white kids in there, right? Everyone else is different shades. But so very, very diverse. And, and, and so I think, and, and also just going to different countries and learning different cultures or being exposed to them, I think it’s helped me, like I view myself sort of as a global citizen. Well,
Barry Ritholtz: You’re a globetrotter. You’re, you’re, you’re in the us you were in California, you’re in New York, Boston, you’re going to where, what’s your next few stops? London.
Jurrien Timmer: I’m flying to London on Saturday. I’ll be in Geneva after that. And then
Barry Ritholtz: We were just in Lake Geneva a year ago. Spectacular.
Jurrien Timmer: And then actually we’re going to Holland because my parents are, they live in the Hague. They’re celebrating their 70th wedding anniversary. Wow, that’s amazing. So they’re, they’re 91 and 97. Wow. So we got three generations of Tim descending on the Hague. That’s incredible. In about, in about a week and a half. And, and I, like, I think what I, I, I feel at home in almost any place, really in the world. And you know, when, when it’s hard to understand what someone says, because the English is not their first language. You, you can kind of like, you, you figure it out because you just kind of used to this, you know, this environment where everyone’s coming from different places and, and like, you know, even now, like I, I run, and this is totally separate topic, but I run a food camp at Burning Man, and it’s a very global camp. We have 90 people. We’re all cook meals that we gift away to the artists there, but we have like 30 Brazilians and we have like French and Swiss and Mexican people and obviously Americans. And, and that like, it’s, it’s easy to do because you’re just used to having all these different cultures in, in the same space.
Barry Ritholtz: I’m kind of fascinated by the new earbuds Apple earbuds; I don’t love the fit of earbuds. They’re not comfortable in my ear. But the new AI enabled instant translation. Yeah. That is Star Trek next level. Yeah. It’s very cool. Futuristic. I, I can see that saying, oh, you want to go to Japan or Korea or China, here you go. Knock yourself out.That, that sort of technological innovation is that turns that into a must have technology. [Yeah. Yep, for sure]. How many languages do you speak?
Jurrien Timmer: I speak, obviously Dutch is my native language. English. I used to be totally fluent in Spanish, but I’ve, I’ve kinda lost that. And then of course there’s the world language called Papiamento, which is what they speak in Aruba, which is essentially kind of a Spanish Portuguese blend. But if you don’t know a word, you can just say it in Dutch or English and it makes, and they’ll, and, and it’s completely acceptable.
Barry Ritholtz: Really fascinating. We were talking about what a globe trotter you are. Let, let’s trot around the world and talk about various asset classes since you began your career with bonds. Let’s, let’s start with bonds. How do you see what’s been going on with treasury yields anticipating not only the 25 basis cut point we had in September, but perhaps a couple more this year and next?
Jurrien Timmer:Yeah, so, so treasury yields such an interesting market right now. We’ve been stuck sort of between four and 5% for a while.
And when we go above four and a half, it’s like nothing good happens. Like the, the old fed model from the Greenspan days comes lurking back and right, it starts to wobble the stock market because the bond yield and the equity yield are about the same right now. And, and so that, that takes you back to the, the eighties and, and, you know, mid nineties and even the seventies and sixties where bonds to stocks were positively correlated instead of negatively correlated. That happened. That, that began, you know, during the great moderation era, late nineties until COVID basically. And so then in 2022, of course the correlation flipped back to positive. It was rising yields that caused the problem in the stock market. And, and so there’s a whole broader conversation about the 60 40, but just dealing with treasuries right now. So as you get close to five, it really starts to freak the stock market out, but also the bond buyers start to emerge. ’cause there’s value, right? I mean, real, real rates are
Barry Ritholtz: Positive. 5% yields over two and a half percent inflation.
Jurrien Timmer: You’re actually making income is back into fixed income, right? But down at four, when you have a gross scare, kind of like, I mean, I wouldn’t say it’s a gross scare, but the jobs Market.
Barry Ritholtz: But there, there’s some nervousness and some la I hate the word uncertainty, but there’s a lack of clarity as to how all these things tariffs yield FOMC plays out.
Jurrien Timmer: So, so at four, generally I would be a better seller than, than a buyer. But this question of, you know, fiscal dominance, you know, clearly the administration wants to grow out of the debt. I think that’s the very overt plan. If you’ve listened to Scott Bessant or even they’re
Barry Ritholtz: Pretty explicit about it.
Jurrien Timmer: And so they’re trying to goose the economy and outrun the debt because everyone knows you can’t really cut the debt very much because too much of the budget is unre is not discretionary. And so that’s the plan. And I think it’s basically, it’s a good plan because what are the alternatives, right?
Barry Ritholtz: Raising taxes and cutting spending, which we know what the odds of that happening.
Jurrien Timmer: Yes. But running kind of that fiscal train means deficit spending, or at least that’s part of it. And that means more supply. And that could mean higher term premium for, for long treasuries. And we saw, we’ve seen that, right? The term premium during the qa, qe financial repression days was like minus one 50, which makes no sense, right? Term, right. A risk premium should always be positive. And now it’s plus 60 plus 70, but historically it’s been plus 150 or even more. And so if, if the term premium mean reverts back to a normal level, positive level because deficit spending and debt levels are rising, you could easily see a five handle on treasuries, huh. And a five handle on treasuries are not gonna sit well with equities like the, the, the equity market can go up, earnings can drive the bus, but the PE gets under pressure because the risk-free asset is now competing with the risky asset and they’re offering the same yield.
Barry Ritholtz: So, so quick question on that. In the 2010s, or at least towards the end of 2010s, we had an inverted yield curve for a while. What’s the impact of that on that term premium or lack thereof?
Jurrien Timmer: Yeah, so we had that very inverted yield curve, obviously it, it shouted recession and it didn’t happen. And I think the reason in hindsight was that the economy is just less interest rates sensitive than it used to be, right? So everyone refied their mortgage in 2020 and 21 at at sub 3%. That’s also why the housing market is frozen, right? But also, if you look at the big banks, right? Why, why is a yield curve inversion typically bad is because banks net interest margins goes upside down, right? They borrow short, lend long, and so banks stop lending and you get a credit crunch and you get a recession. But in this case, the large banks, you know, if you notice your, your deposit rate at the large mega center banks has not really gone up commensurate with the yield on money market funds, right? That’s right. So that deposit rate went up to a half a percent and is now coming back down again. So for a large bank, the yield curve not only was never inverted, it was extremely steep, half a percent funding, right? If you’re, if you’re funding your loans on deposits and you’re paying half a percent on those deposits, and you can land at seven or 8%, you’ll do that all day long.
Barry Ritholtz: And yet at the same time we’ve watched money markets go 5 trillion, 6 trillion, 7 trillion. It’s become so easy with your app to move money from, Hey, I’m going from Chase to Schwab, I’m going from Citi to Fidelity. Yep. Where I’m getting real yield. I wonder how much technology plays a role in people. It used to be a pain in the neck, oh, I’m getting quarter percent in my checking account, but do I really wanna write a check and mail it out and wait for the,
Jurrien Timmer: Yeah, so, so you leave money at the bank for convenience, you know, you got bills to pay, but if you have extra cash, you’re, you’re buying a CD or, or money market fund or buying TD or what have you. And it’s a lot easier than it used to be. And so now you’ve got 7 trillion in money market funds, which a lot of people actually think is money waiting to be invested in the stock market. But I I, I don’t think there’s really a signal there, because I think that money came out of the banks and probably will go back to the banks at some point.
Barry Ritholtz: So some people have said, Hey, as soon as the Fed starts cutting rates, it’ll a make the cost of borrowing cheaper for corporate America as well as cons American households, and B is gonna scare some of that money away and it’s got nowhere to go. But equity fair narrative or kind of a lot of wishful thinking,
Jurrien Timmer: It could be a combination of both. But if you typically look at when money market fund assets swell like it did during the pandemic, it’s money coming out of the stock market seeking a safe haven, and then when the stock market recovers, the money goes back in the stock market. That’s not the pattern this year. The money came out of the banks in part because of like the Silicon Valley right. Debacle a few years ago
Barry Ritholtz: but also 500 basis points of rate hikes in 2022. So money Markets went from zero to five and a half and suddenly attractive
Jurrien Timmer: And deposits went from zero to half. You know, so money markets yielded 10 x the bank deposit. And so some of that may go to the stock market, but I, but it didn’t come from the stock market, let me put it that way.
Barry Ritholtz: So you noted something really interesting. I remember you wrote in 2022, bonds went from being a port in the storm to the storm itself. Yes. So normally we think of money leaving equity and going in the safe harbor of money markets. Were we seeing money exiting bonds and going to money markets? Is that what happened? Was it a duration play from among sort of the typical investors?
Jurrien Timmer: We have not really seen an exodus at all. And I think part of that is just the demographics of, you know, the baby boom solving for income more so than growth. So you look at fund flows into fixed income, they, they’ve remained strong and they were strong at, you know, 1% and they’re strong at 4%. So I think that is more of a structural trend than playing the markets, if you will, right? Like I think the average investor is not looking at, okay, well real rates are now positive, so let me do this, but they’re solving for outcomes. They’re buying solutions based funds, right? Like, like our target date will, will have certain amount of fixed income,
00:22:41 [Speaker Changed] Which has just attracted so much money in 4 0 1 Ks over the past 20 years. It’s, it’s amazing. So let’s talk a little bit about equities. I keep hearing people complain about valuations, but if you stayed out of equities due to elevated valuation, you miss most of this run from the 2013 breakout.
00:23:00 [Speaker Changed] Yes. So, so the market obviously is very bifurcated. We got the max seven, the cap weighted PE is, you know, 23, 24, the equal weighted PE is 18. So there’s a very large gap there. You know, if you look back at the mid to late nineties, which is a kind of an an analogous period to today, right? We had the, the 94 stealth bear market when Greenspan raised rates 300 basis points, then he gave back 75 and we had a huge rally. And it was also the start of the internet boom, you know, the Netscape, IPOI think it was like in 96, 96,
00:23:39 [Speaker Changed] Yep.
00:23:40 [Speaker Changed] So the post 2022 period, very analogous to post 1994, you know, soft landing, ease off the, the brakes markets, markets rip, and then the post 98 long-term capital Yep. That, you know, 22% decline, very robust recovery. And then Greenspan eases three times into that recovery. We’re seeing the same thing. Now we had a 21% tariff tantrum, right? No recession, you know, the kind of administration backed off very, very strong, one of the strongest ever recoveries from a 20% decline other than 1998. And then now Powell’s easing into that. And so, but the point is that that period saw almost nonstop multiple expansion. And that’s what we’ve seen since 2022. And you know, PEs are, they have, they are strong predictors of long-term returns. So if you take a 10 year cape ratio and you regress that against 10 year forward returns, you see a very high, you know, it, it explains the forward returns very well.
00:24:48 But over the near term, a high PE has very little to say about the next year or two. And this is because the market tends to be in a rising trend, momentum begets momentum. And that’s what what we’re in. So it’s, it’s a, you know, it, it’s a tough game to time on the mean reversion of PEs valuation, right? Even though we know that historically it’s between 10 and 30 and it does mean revert. But when the mean revert reversion starts, and from what level is very, very difficult to do, especially during secular trends, which I think we’re very clearly in
00:25:26 [Speaker Changed] So, so many different places to, to go with this. I have a dozen questions, maybe we’ll go a little along the segment and, and delve deeper into equities. I love the concept of a secular bull market as opposed to a cyclical, but I think a lot of people don’t really understand the difference. Give us your definition of what is a secular bull market when this one began, and why?
00:25:50 [Speaker Changed] Yeah, so we have, so we have the market cycle, which is generally driven by the business cycle. So you have a recession and you have the early cycle recovery where things get less bad. And of course the market is always anticipating that, right? The market’s always in price discovery, and this is why at bottoms price will lead earnings, which is why the p always goes up in the first year of a bull market like it always does. And, and it doesn’t make sense on the surface. People are like, oh, this can’t be real. It’s all PE driven, where are the earnings? Well, the market’s just front running the earnings, right? But then there are the, the secular trends, and you know, if you go back a hundred years, you can see them, you can spot them very easily because the market has a kind of central trend line plus 10% nominal plus seven, six and three quarters real. And if you run a regression trend line against the, the total real return of the s and p or some basket of stocks going back 150 years, it’s like perfect. And then you have the pendulum swinging above it and below it. So you have
00:26:55 [Speaker Changed] Very noisy, but still the overall trend is being maintained. Yeah.
00:26:57 [Speaker Changed] But you have these super cycles where you are outperforming the trend line. So the eighties and nineties was one of those. So instead of a 10% return, we got 18% returns for like 18 years. The fifties and sixties after World War ii, right? The, the twenties, that was a truncated one. But from 20 to 29, boy did that thing go. And since oh nine is where I put it, other technicians generally disagree with me. They think it was 2013, right? When you look at the Cape model, you look at deviation from trend, you look at the slope of those early trend lines, for me it’s oh nine, which puts it as 16. And, and of course, and then you have the secular bear markets, right? So the two thousands was one, the 1970s very famous. Of course, 1930s doesn’t mean the market necessarily goes down, but it it’s underperforming that 10% trend line. And generally in real terms, it’s probably going down. And so that’s kind of how I define the secular trend. So
00:27:55 [Speaker Changed] We are in agreement on so much stuff. I’ll, I’m gonna circle back to oh nine and push back a little bit. Okay. But you mentioned that first year you get a PE spike as the market anticipates improving earnings. One of the things that’s kind of fascinating is to see how much of a bull market’s gains are attributable to not improving fundamentals, but multiple expansion from 82 to 2000, what was it? Three quarters of the gains were multiple expansion. How much of that is psychology and how much of that is just people getting on board late in, in, as the market rallies?
00:28:34 [Speaker Changed] It, it’s, it’s both. But yeah, for instance, in 82 the PE was like seven, right? And in 2000 and
00:28:40 [Speaker Changed] What was the yields in 82,
00:28:41 [Speaker Changed] It is double ditches, almost 20%. A lot of competition. And then in 2000, yes, exactly. And in 2000, the PE was 35 using operating earnings. That, that was the forward pe actually the trailing PE was like 45. Wow. So that’s a hell of a pendulum swing. Yeah. And you know, obviously 1982 inflation was very high. They had the malaise of, in the economy bonds were very competitive. Nobody wanted to pay for earnings. The
00:29:10 [Speaker Changed] Death of equities was just a few years earlier on in business week, the
00:29:13 [Speaker Changed] Death, death of equities. Yes, for sure. And then people become more comfortable, and then they go from comfortable to confident, and then it’s like, yeah, I’m gonna pay, I’m gonna pay 20 or 25 times these earnings. And then of course, then you have the growth, the, the growth stocks. So the late nineties obviously were, were, you know, I I used to call ’em the Janice 20. There was a fund that would just owned, I recall the, the most stocks. And so
00:29:36 [Speaker Changed] I remember the Ryan net net funds
00:29:38 [Speaker Changed] Around that. Yes, exactly. And of course, right now it’s the mag seven, formerly known as the, as the fangs. And those are secular growers, right? And there’s a theme, right? It was internet back then, it’s AI now. And people get onto the, onto the bandwagon and it’s like, yeah, you know, I’ll pay 35 times earnings for a company that is in this space and gonna grow their earnings in a secular way, not a cyclical way. And, and so it’s totally plausible and understandable, but at the end it goes too far. And I don’t think we’re, we’re anywhere close to that. But then you start looking for signs of froth. But yeah, but that’s, that’s the pendulum swing.
00:30:17 [Speaker Changed] So, so let’s talk about oh nine and why so many of your technical brethrens dated to 2013, which was when all of the major indices broke out over their prior trading range. So the pushback I hear to oh nine is, well, that’s like dating the 82 to 2000 bull market to the lows in 73, 74, and you’re still, all you’re doing over that period is recovering the sell off. 23rd, what? We were down 56, 50 7% from October oh seven to March oh nine. And then to get back to where you were in oh seven, it took till 2013. Yeah. Yeah. So, so why oh nine as opposed to 13?
00:31:00 [Speaker Changed] It, it’s totally legit argument, but I would say a couple things. One is, this is not an exact science, right? There’s only been two or three or four secular bull markets, right? It’s
00:31:14 [Speaker Changed] Small dataset,
00:31:15 [Speaker Changed] Small dataset. It’s, it’s not a quant model. You have to look at the chart at the slope. So I date this, the secular bull market from the fifties. I date at 49, even though 49 was not the low, right? The middle, the low was
00:31:30 [Speaker Changed] 46, 44, something like
00:31:32 [Speaker Changed] That. But in 49 something changed and, and the slope started to, you know, like the market found itself. And, and, and that trajectory started to really compound at double digits. And you broke out of that big shelf that was really from 29 all the way to 49 seventies. The low was of course in 74, October 74, after 48% bear market, we had some other little cycles, but then in 82 it took off. There was a change in the fundamentals, you know, Volcker broke inflation. And so, and then you look at the ca so then I get verification from the fundamentals. So then, so I look at the charts and yes, I, I see the, the argument, and I agreed it, it’s a good point. But in oh nine, the market just went straight up. After a decade of sideways in 82, the market went straight up after a decade of sideways. I see in 49, same thing, whether the low was in or not. And of course, in real terms, the 82 low was below the 74 low. So
00:32:38 [Speaker Changed] ’cause of inflation, you really felt so, so,
00:32:40 [Speaker Changed] So
00:32:40 [Speaker Changed] Tremendously in the
00:32:41 [Speaker Changed] Seventies. So I, so I wanna get second opinions from the real chart and from the fundamentals. So the cape model, again, where you compare the 10 year PE to the 10 year forward return looks very similar at the oh nine and not similar at the 13 when the market already had a lot of momentum. And then the other thing I look at, again, that 150 year regression trend line of the real s and p
00:33:06 [Speaker Changed] 150 years.
00:33:07 [Speaker Changed] Yeah. And so at the, at secular peaks, the market is about a hundred percent above the trend line. And at secular troughs it’s about 50% below. So that point was in oh nine, it was not in 13. So, so, so I look at, at at, at like the weight of the evidence from a multitude of indicators. And again, it’s, it’s not an exact science, right? I’m not saying I’m right, they’re wrong, but that’s, for me, that’s where I get,
00:33:33 [Speaker Changed] But you’ve been a whole lot more right. Than ro than many other people.
00:33:37 [Speaker Changed] So, well, and, and it, and it’s interesting. So in oh nine, you know, I I was actually running a, a fund back then, a, a kind of a global macro fund, and I was like, the market was so depressed, right? So remember March of oh nine? Sure, of course. And I’m like, you know, I wanna be long, but what if I’m wrong? And I’m like, at this point, if I’m wrong,
00:34:00 [Speaker Changed] So what, you’re already down 50, cut in half. Well,
00:34:02 [Speaker Changed] But at that, at that point, the whole system is gonna collapse. So it’s like why, why not? Why not bet at at that point? And so
00:34:12 [Speaker Changed] Yeah. When is down more than 50% in US markets not a great entry point. Yeah, exactly. I mean that, that’s one thing. But I have to ask you a question about oh oh nine. So I was looking through some of my old notes as I was preparing for this, and I have, I’m curious as to your thoughts on some of the behavioral aspects, including sentiment and bull bear ratios. I wrote something up in October oh nine calling that recovery, the most hated bull market in market history markets went straight up, everybody was miserable. It’s a head fake, it’s a false breakout. This is all gonna be a disaster. And if you listen to those people, you left a ton of money on the table. Yeah. What’s your thought on that extreme sentiment in one direction or the other? And just what it means when everybody hates a particular asset class,
00:35:06 [Speaker Changed] It’s obviously an opportunity because that means that everyone is not on the same side of, of, of, of the boat. Right. And, and actually and what I was,
00:35:13 [Speaker Changed] Or they’re all on the wrong side of
00:35:15 [Speaker Changed] The boat. Yeah. But before I answered the rest of that, I went, I, what I was gonna say earlier was when you run the regression of the oh nine to present s and p, either in real or nominal terms, and you run the same regression from 82 to 2000, from 49 to 68, it’s exactly the same slope. And, and, and so if in oh nine I got bullish and in 13 I’m like, yeah, now we’ve taken out the high. So now we can say this bull market is confirmed. So the 13 for me is not the start, but it’s confirmation. It’s
00:35:49 [Speaker Changed] Confirmation.
00:35:50 [Speaker Changed] But if I had looked at nothing else for the la for the next, you know, 12 years today, I would be within 10% of that slope. Wow. Having materialized. And so again, you’re never gonna do that on, on a secular chart. You wanna have weight of the evidence, but it shows you how powerful that context can be to just look at those different timeframes and see where they are. ’cause it, it’ll keep you on the right side of the market. So
00:36:20 [Speaker Changed] Last question on equities, given the 49 to 66 rally, the 82 to 2000, and then the oh nine forward, how much legs does this secular bull market have? Can can this go another 5, 6, 7 years? And the other related question is how much of a reset does that giant fiscal stimulus of 20 21, 22 build into into markets?
00:36:51 [Speaker Changed] It’s, it’s a great question. And so on the surface of it, we’re 16 years in the last two were 18 years. But again, sample size of two, right? Like you, you can’t go with that. Right? But the Cape model, again, which has been a very good long term model in terms of the 10 year CAGR for the market, suggests that the, so the, the pe the, the growth rate in the PE peaked in 19 for obvious reasons, right? Because it’s a 10 year model. So oh nine rolls off. And then, you know, you have that peak and we’ve been holding steady at around, you know, 14, 15%, 10 year cagr that actually has another peak in about like 20, 26, 7, 8. My guess is that that acceleration will be an AI bubble, or it could be where it’s just like, you know, the AI boom, the mag seven, like all of a sudden everyone’s buying companies with no earnings because they’re promising to be the next killer app, right? And that sort of thing.
00:37:50 [Speaker Changed] The next pets.com.
00:37:51 [Speaker Changed] Yes. And my guess is that if we are heading into a fiscally dominant era, or we’re in it already, so we had 5 trillion of helicopter money in 2020, we now have another $5 trillion fiscal bill. If the next fed post Powell is going to be just more dovish than the economics suggest in order to fund that help fund that debt, then you could see inflation, you know, be structurally higher than 2%, maybe three to four. And if that, and if the 10 year yield at that point goes to a five handle, because the term premium is back, you can easily see a scenario where in a few years can that fed model principle of rising yields bringing down the PE, is gonna be the thing that flattens that secular slope. That doesn’t mean like a two thousands like bear market. It doesn’t have to mean that, but it could just be a flattening instead of running at two x the 10 year rate of change, maybe you’re at half x or something like that. So
00:38:56 [Speaker Changed] Generally speaking, when you see an elevated cape, it’s not a cell signal, it’s really a signal. Lower your future return expectations, things gonna be a little more, a little less easy sledding. Yes,
00:39:07 [Speaker Changed] I think the next 10 years will be less, less robust and the last, but it doesn’t mean they have to be negative at, at all.
00:39:13 [Speaker Changed] You, you mentioned the eighties into the nineties and the post World War II era, it’s kind of fascinated to look at rolling 15 year periods. The, the 15 years following oh nine is the third best 15 year period in history. It’s really amazing. Yep, yep, yep. Coming up we continue our conversation with Yian Timmer, director of global macro at Fidelity, talking about crypto gold commodity alternatives and the state of the economy. I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio.
00:40:00 I am Barry Ritholtz, your listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Ian Teer. He is the director of Global Macro at Fidelity Investments, the giant firm helping to manage over $16 trillion in client assets. So, so let’s talk a little bit about the current environment. You, you look at more than just stocks and bonds, you look at a lot of economic data as well and, and chart that. So how do you think where we are in the current economic cycle, how do you describe our location in the business cycle?
00:40:39 [Speaker Changed] So generally speaking, the economy remains pretty solid. People are employed, their wages are exceeding the inflation rate. At this point, debt levels are not high, at least as a percent of GDP. Right? So the household debt to GDP ratio peaked during the financial crisis in
00:40:59 [Speaker Changed] It’s pretty modest in has it’s,
00:41:00 [Speaker Changed] Yeah, it was a hundred percent of GDP, it’s now 70. So there’s a debt issue on the government’s balance sheet, but, but not in the household or even the corporate balance sheet.
00:41:09 [Speaker Changed] Even the government side isn’t our debt to GDP ratio, like half of Japan, something like that.
00:41:15 [Speaker Changed] So about 120% if it’s just a federal debt, if you add all other debt, it’s about 250, but it’s comparable to other regions. But certainly Japan gets the prize and China as well, just in terms of the growth rate of the debt
00:41:32 [Speaker Changed] China. Oh, okay. Not total, but yeah, no, China’s been growing debt and the Chinese provinces have been growing debt
00:41:37 [Speaker Changed] As well. Yeah. And, and the Chinese numbers of course are, can be a little vague because the, the federal debt in China is not high, but they have the four big policy banks that are essentially providing liquidity. And so you have to add that. And so China and Japan are, are the worst offenders. The US is, is on par with most kind of European and other, other countries. But, so anyway, so, so the, the economy looks pretty good, but you know, one of the things that COVID did was it sort of upended a lot of the things we think about when we look at the, at the economic cycle, at the business cycle. So, you know, of course we know what happened. The economy froze, people got laid off. And then at least in the US the economy came back really fast, faster than in other places.
00:42:26 And the labor wasn’t there, right? Baby boomers had checked out, they left the labor force, of course the borders were closed. And I remember, like, I was, I was doing a lot of flying back to LA at the time because I was hiding in Santa Barbara because the office was closed. And it’s like, like the counter at JetBlue in Boston was like, they just did not have enough people. People were coming back. Like, everyone was like, okay, we’re back. But the, the, they were, there wasn’t, the supply chains weren’t there. And so we had this very tight labor market that of course we would hear about all the time, you know, from the Jolts report, two job openings for every job seeker, that sort of thing. And that has been worked off over the last few years. I think that was the goal of the tightening policy or part of the goal. So when you look at the Jolts report, or you look at the, the U three jobless rate relative to Nru, the non-accelerated rate of employment, everything is in balance. Like it’s right at that zero line. So they supply, which
00:43:25 [Speaker Changed] Is, is that why we’ve kind of been hanging around four, three, yeah. Four, two. So in unemployment,
00:43:30 [Speaker Changed] So no one’s hiring, but not many people are looking for jobs and,
00:43:33 [Speaker Changed] And not a lot of people getting laid off.
00:43:35 [Speaker Changed] No. And so there’s balance, right? The job seekers versus the, the job providers. But you look at that chart over 50 years and you can see that there’s a pendulum swing of that business cycle. So we went from very tight to neutral and you know, like the inclination is to look at that and it’s like, well every other time that’s happened, the next phase is contraction recession. Yeah. And I think that’s what the bond market is saying. That’s I think what, what, where the fed’s coming from now that they did the 25, they’re looking at the, the jobs dated, they’re looking at the revision, right? The jobs report revision,
00:44:10 [Speaker Changed] Big downward revision, almost a
00:44:12 [Speaker Changed] Million jobs, nine, 11,000 jobs. And they’re like, okay, you know, we should, we should build in some, some cushion for that. And so I think that’s generally the vibe. But other than that, you know, we have a whole economics team that looks at the business cycle and we’re not really seeing a lot of red flags other than that yellow flag. If you,
00:44:31 [Speaker Changed] How, how closely does the market cycle track the business cycle? ’cause you know, I’ve heard, heard it said so many times the market is not the economy and vice versa. And the old joke is the stock market is forecast nine of the last four recessions. Yeah. How do you see the, that overlay?
00:44:48 [Speaker Changed] There is of course a connection, right? If you look at GDP growth and inventories, I mean, it’s less about that now than it was decades ago. The impact of monetary policy. But you know, the markets are not the economy. There is a reflection because if the economy grows, earnings are gonna grow and then, you know, the market’s gonna go up because price follows earnings. But there’s a sentiment equation in the stock market that of course you don’t have so much in the, in the economic cycle and, and you have the timing, right? So the market is always gonna anticipate future changes. So you, you
00:45:26 [Speaker Changed] Have a chart showing markets bottom eight months below profits.
00:45:30 [Speaker Changed] Yeah. So you can, that
00:45:31 [Speaker Changed] That’s a huge lead time. Yeah. Eight
00:45:33 [Speaker Changed] Months. So you can be a hundred percent correct about the economic cycle and be a hundred percent wrong about the market latest be because if it’s already been reflected, and if it’s already have has even over earned against that future signal, then you’re buying yesterday’s news. You news you missed it. But yeah, so the market generally at bottoms will bottom two, three quarters before earnings that happened during COVID. And I remembered like it was yesterday because during COVID, you know, the market felt 35% February and March then like late March it bottomed. And I
00:46:07 [Speaker Changed] Think March 25th, I don’t
00:46:09 [Speaker Changed] Remember that. And I think by June it was at new highs and people Right?
00:46:11 [Speaker Changed] 69% for the year. Yeah. From the lows. Yeah. Which
00:46:14 [Speaker Changed] Is amazing. And people, like the economists had a cover saying, this is divorce from reality and everyone. And so it’s my job a to have people not sell in the first place, right. To be, to be the long-term investor. You know, the way I I always describe it is you’re getting a really juicy 10, 11% return by investing in stocks, but the price of admission is you gotta endure some volatility, right? And if you can’t stand the price, then you don’t get the reward.
00:46:42 [Speaker Changed] How do you explain to clients and I I got a million calls, man, this market has become disconnected Yeah. From reality. What’s your explanation to them?
00:46:51 [Speaker Changed] So that, so that what, what happened? It happened after the financial crisis, right? So price bottoms, the market bets on recovery and it could be wrong, right? Price discovery doesn’t mean the market knows everything. Right? And that’s one thing where I sometimes disagree with technicians who say, market’s always right, say, well, the market’s not always right, but the market’s always right in discounting everything that’s knowable, right? So it’s right in that, but it doesn’t mean that that what it’s discounting can’t change, right? And we saw this during the, the tariff tantrum in April. The market was pricing in a left tail that never arrived, right? And now, and then it had to unpr it. So, but so the market looks ahead and the market bottomed in March of oh nine. Earnings didn’t bottom until the third or fourth quarter. Same thing during COVID march, bottomed in March of 2020, earnings recovered third or fourth quarter. And, and so you, you have, so you can’t look at the news and say, how can the market be here when the earnings or like, people are dying. So,
00:47:50 [Speaker Changed] So how did you explain this to clients? I’m curious.
00:47:52 [Speaker Changed] I explained it exactly that way that the price always leads. And you can’t look at it in sort of a linear way. You have to just, you, you have to know that at, at inflection points, the, the, the, the, the price action is gonna make no sense. And this is why people, you know, sell at bottoms and, and buy at tops because they are, they’re trying to understand the narrative. And that narrative is not the one that, that is ruling the, the roost at the time. One,
00:48:21 [Speaker Changed] One of the things that we found was useful was explaining to clients that their life experience isn’t market cap weighted. When you look at what’s driving the big indexes, it was back then it was the fang. Now we call it the magnificent seven. But we did a calculation and found out that if all the airlines, all the hotels, all the local retailers, like just a run of the worst businesses during the pandemic, if they just disappeared tomorrow, it was 6%. Yeah. Of the s and p 500 and you know, or Apple or Microsoft. It’s like, it’s amazing how, how our daily experience is so different from what markets are like.
00:49:01 [Speaker Changed] And we had that during Brexit in 2016. I mean, that was constantly the headlines. What about Brexit? Why is the, the US market ignoring it? Well, because it’s irrelevant because the UK is 3% of s and p revenues. That’s why, you know,
00:49:16 [Speaker Changed] So, so that raises really interesting question about the US versus the rest of the world in terms of economic activities. So the s and p 500 just gets just about half of its revenue from overseas for most of the past 15 years. The US side of consumer spending, business spending, government spending has been very supportive of the domestic side of the s and p 500. Kind of feels like that shifting a little bit. We’re seeing a little slowdown on consumer spending a little slowdown on economic activity here as Europe and Asia seem to be starting to finding their footing after bad 10 years. Can we just pass off the baton without the s and p stumbling? Is that, is that possible?
00:50:04 [Speaker Changed] It’s possible and it’s actually happening right now. And, and this is one of the areas that I’m most excited about right now, is that this US bull market has become a global bull market. You look at EM stocks, Chinese stocks, Europe, Japan. And it’s very exciting because, you know, for many years, right, the US exceptionalism train has been running since 20 14 15 and the rest of the world was always so tempting with its lower valuation. And I, I’ve had conversations, you know, with our asset allocation PMs for years saying look like, yeah, I can, I can buy EO or em at 14 times. They’re cheap. Yeah. Why? Like, and
00:50:44 [Speaker Changed] It’s cheap for a reason
00:50:45 [Speaker Changed] Though cheap for a reason. The market’s very efficient, but for the, but so the catalyst, so you need a catalyst to make the mean reversion in valuation to trigger that. And the catalyst is always gonna be related to earnings. Like if you look at the relative performance, US versus non-US over the past 10 years, it, it’s exactly the same as a relative earnings linee. Like it’s the same thing. So you need something to change in the, on the earning side. And that’s changing. So we have of course a very concentrated market in the US and, and that does pose risks, right? I mean if, if those seven stocks go down, guess what? The s and p is gonna go down. Even if 70% of the stocks in the s and p are going up, if you’re an indexer or you’re buying an ET an SBY, you’re not gonna feel those gains because those top seven stocks are, are taking the index down.
00:51:38 And so it was, so for the last year or so, it was a question of, okay, how do you diversify against concentration risk? Do you go down cap? Do you buy the Russell 2000? But now the answer is easier because now you have a catalyst, a fundamental catalyst that is causing the mean reversion to happen with between US and non-US stocks. And where that’s coming from is that, so I’m a big fan of the discounted cash flow model, the DCF, which looks at not so much earnings, but the payout of earnings. So if you have earnings growth at 10% and 70% of those earnings are being returned to shareholders as dividends or buybacks, the payout is that 70% and the payout ratio is 70%. And for the US it’s always been a very dominating scenario where the payout in the US is very strong because of all the share buybacks we have here. Where, where
00:52:32 [Speaker Changed] Are we today with that? Are we still seeing the same sort of share buybacks? ’cause it seems like we haven’t been hearing a lot of announcements, but that doesn’t mean it’s not happening. We
00:52:40 [Speaker Changed] Don’t hear a lot. But the buybacks are at record highs. There’s 300 billion over the last 12 months and the payout ratio is 75% for the s and p. Wow. But guess what? The payout for efa, which is non-US developed stocks, the payout ratio’s also 75%. It always used to be lower because they don’t do buybacks over there. Right. They do dividends, but now they’re doing more buybacks and the growth rate in the payout itself over the last five years is now higher in EFA than in the us. Wow. So you’re getting equal or superior or at least competitive fundamentals at, at a fraction of devaluation. And that that is a good, that’s a good deal. And so that’s, so finally that, that part is working where the pond that we’re fishing from is now broader. And for me, kind of it’s, it’s a barbell strategy. I don’t want to be short the max seven because they can get bigger. Right. And you don’t want to miss out on that. But rather than going down cap in the us go
00:53:43 [Speaker Changed] Overseas,
00:53:43 [Speaker Changed] Do a barbell of mag seven and non-US stocks, then you can play the dollar with dollar weakening story. You can get equally good fundamentals for a 15 PE instead of a 24 pe. And to me that’s, that’s, that’s a good, that’s a good thing right now. So,
00:53:59 [Speaker Changed] So the last two things I wanna talk to you about in terms of the current environment are inflation and sentiment. And I’m not sure how much of this is related. You know, when we see the Michigan sentiment data, it seems to be so awful and it just doesn’t feel like, is this really worse than the financial crisis worse than COVID, worse than the.com implosion in nine 11 or worse than the 87 crash? If, if you follow the sentiment data, it’s saying yes. Just doesn’t feel that way.
00:54:31 [Speaker Changed] No, it doesn’t. And I think the sentiment data, obviously they’re very bifurcated by political belief. Right. You know, and I, I,
00:54:40 [Speaker Changed] We’ve seen those charts are really useful.
00:54:41 [Speaker Changed] Yeah. And I, I spent time on both coasts and I, you know, I was in at a dinner party in Montecito, California a few weeks ago, and people were like, how, how can everything look so good when we’re like, at the end of the world type of thing, right? And then I’ll be, you know, in some other place and it’ll be the, the total opposite. But I think a lot of the sentiment data are still driven by the inflation data. Like obviously the inflation rate has come down to 2.8%, but
00:55:10 [Speaker Changed] Everything remains more expensive. That,
00:55:12 [Speaker Changed] That, you know, that COV spike, you know, that has not been unwound. And one of, and that’s one of the things I worry about because not, not to make a comparison to the 1970s, which obviously was the great inflation,
00:55:24 [Speaker Changed] Structural and long term,
00:55:25 [Speaker Changed] But during the fifties and sixties, inflation was super low, 2%. Then you, to the second half of the sixties, it started to creep up and then it came back down. But in order to, for the average to be at 2%, if you go to 6%, you then need to go below two, right? For the average to be two. And we haven’t done that. We went from two to nine to 2.8, right? And we’re, we never went below two. And, and if we for some reason get another upswing, and we’re at three and four, like that five year number is now gonna be at four 5%. And I think that’s what’s driving a lot of this. It certainly did during COVID. And it’s things like food, right? So, you know, like the top
00:56:10 [Speaker Changed] Now beef prices are up, egg, egg prices have come back down. Yeah. But beef prices have run
00:56:14 [Speaker Changed] Away. So I, I think a lot of it has to do with that because, you know, people are employed, wages are, are competitive right now. And, you know, unemployment rate’s 4.3%, but I think it’s just that, that cost of living, it just kind of like grinds, right. You know, and it’s been grinding for five years now.
00:56:33 [Speaker Changed] So, so let’s talk about that 2% target. You know, in the 2010s, an era of concerns about deflation and monetary stimulus, 2% seemed like a reasonable number. Is that still a reasonable number now that, and that was an upside target. Yeah. Right. You were at 1% aiming for two. Now we’re at two and a half, three aiming back at two, maybe in an era of fiscal stimulus, two and a half, 3% makes more sense. I mean, I’m not a Yeah, Monet, but I, I don’t know why the whole world changes except for our inflation target.
00:57:08 [Speaker Changed] Yeah. There’s nothing magical about two. Like if you go back 150 years, again, the average inflation rate is like 3%, 2.8. If you look at a distribution of equity PEs and the inflation rate, the sweet spot is sort of one to four, right? So whether you’re at three or two, like for the stock market, doesn’t, doesn’t matter, doesn’t matter. Like 10, 10 to two like that, that
00:57:34 [Speaker Changed] Nine, nine matters
00:57:35 [Speaker Changed] That matters. And, and that distribution is interesting because obviously the higher the inflation rate goes, the lower the pe, which makes perfect sense. Sure. ’cause if inflation goes up, bond yields go up, then the safe asset is, is very competitive with the risky assets. So why take the risk
00:57:52 [Speaker Changed] Plus the cost of capital goes up? Yeah.
00:57:55 [Speaker Changed] If you go to the left hill deflation, there is really no correlation. Nobody likes deflation. So, so from that angle, two and a half is not a problem. Even three is not a problem. I think the Fed worries that if they were to ever admit that, you know, infl inflation expectations could get unanchored, but they went to the a IT thing, right? The average inflation targeting, and actually that actually prevented them from raising rates when they should have back in 2021 and two, they,
00:58:28 [Speaker Changed] They were late to the party to raise and they seemed like they were late to the party to cut as well.
00:58:32 [Speaker Changed] Yeah. So their, their policy was, we need to see the whites in the eyes of inflation before we raise rates. And, and by the time the whites of the eyes were visible, it was like too late. You know, inflation was at five, going to nine. But, so, you know, it, it’s a nuanced thing, but again, 3% is not gonna be the end of the world. It just means bonds have a term premium and stock market is still fine. Maybe the p is like 17 instead of 19. But like, you know, if earnings are doing the heavy lifting, it doesn’t matter. But again, it’s like, what, what will it take for the Fed to actually say that? Or will they ever say it? Or will we just have a post Powell fed that says, you know, instead of neutral being inflation plus a hundred neutral is inflation. And, and, and, and, you know, so there are three instead of, of four or something.
00:59:22 [Speaker Changed] So I see your charts everywhere. Not only are they all over social media, but you do regular chart packs. I I love your monthly chart pack. I’m gonna flip open my laptop and let’s look at some of your favorite charts, and I’ll make these available on YouTube and, and on the website. When, when this posts, let’s start with market cycles and, and what we see going back to around our birth date is just a series of long bull markets followed by shorter shallower bear markets. Tell us about this market cycle chart and what are the different shading means in, in blue and red. What, what’s the significance of that?
01:00:07 [Speaker Changed] Yeah, so, so the shadings are, is the valuation, the five year cape ratio, when
01:00:13 [Speaker Changed] When it starts to get pricey, it turns red. It
01:00:15 [Speaker Changed] Turns red, yeah. And so what the top part of the chart shows are the market cycles. So the green are, you know, the bull markets, of course cyclical bull markets. The red are the bear markets. And you can see as we, as we talked about earlier, they’re really, it’s pretty rare for a 50% drawdown. There’s only been really a couple of them. And so what this shows is that the current bull market, as strange as it, or as unusual as it has felt for many people, actually is pretty garden variety, right? 88% gain over 35 months. So it’s pretty, pretty average. But then when you look at the bottom panel, it shows the relative, the percentage of stocks outperforming the index. And now you see something pretty unusual, something we’ve only seen a few times in history, and that is of course the, the concentration effect of the mag seven.
01:01:06 Then before that the fangs, and it is, the market is as concentrated as it was in the late nineties and the early to mid seventies, which was the original nifty 50. That’s right. Period. And so, you know, for, for an indexer, I guess it, it doesn’t matter for an active manage active investor, it does, but even for an indexer it does because the largest stocks are getting bid up whether they deserve it or not, of course they’re large because they deserve to be generally, but it shows you how narrow the market has been during this cycle. And so it, it’s, it’s just a way of describing kind of where we are. So you got the cyclical on the top and the bottom speaks more to the secular.
01:01:49 [Speaker Changed] Huh, really interesting. So let’s talk about debt dynamics, which shows the change in federal debt versus what.
01:01:58 [Speaker Changed] So what this chart shows, and I, it’s a very simple chart, but it’s, I think it speaks volumes is that, you know, during COVID, we kind of I think entered the fiscally dominant era where debt financing or deficit spending becomes a very major tool, which is definitely different from the financial crisis when we actually had austerity after the financial crisis with the tea party movement. Now we have the opposite. And in the initial years after that fiscal expansion started, the fed was actually doing a lot of the heavy lifting by putting those bonds, or not those bonds, but putting bonds on its balance sheet. So you could see the rise in debt is, is largely accommodated by an expanding balance sheet. Since that time, since 2022, the fed’s gone into quantitative tightening mode where it’s shrinking its balance sheet, but the debt just keeps going up. So the debt is now up about 14 trillion in the last five years, and only about two and a half of that is sort of been absorbed by the Fed. So I put two and two together and it’s like, okay, if that purple line at the top just keeps going up, who’s gonna buy this, right? Is it who’s gonna buy the debt? And will the Fed be forced back into playing a bigger role in kind of mopping up that supply? And that’s the fiscal dominance
01:03:22 [Speaker Changed] Theme. That’s a little bit of modern monetary theory is that the fed can just buy up all the debt and there’s no constraints whatsoever. SOMA stands for what
01:03:30 [Speaker Changed] System? Open market account.
01:03:32 [Speaker Changed] So that’s what the Fed has on its balance sheet. Yeah. So, so that, that went up since the financial crisis and it’s come down since 22.
01:03:39 [Speaker Changed] It’s, it’s the part of the fed’s balance sheet that is sort of the QE part, if you will.
01:03:43 [Speaker Changed] Hmm. So let, let’s talk a little bit about equity supply and demand. What are we looking at this chart back to 1986? Is this simply liquidity driven or what’s going on here?
01:03:55 [Speaker Changed] So I think this is, and it, it, not a lot of people talk about this, but I think this is one of the fundamental drivers of the current secular bull market era. And so you can see on the chart, I started the clock at the bottom in oh nine, which again, I, I believe is the start of the secular bull market. And I look at just the supply and demand of equities just from within the corporate America structure. So not investor flows, but how much, where are there in IPOs and secondary issues? And it’s a couple of trillion, how much was share buybacks and how much was m and a and share buybacks and m and a have something in common in that it’s corporates buying shares of other corporates and those shares get retired, right? So that, that’s the demand for shares. And what you see is the, if you look at the supply demand ratio, like it’s very unbalanced. Like it’s, the demand far exceeds the supply. And to me, this has been one of the important drivers for driving returns in the secular bull market. And there’s no signs that this is, this is letting up. And so when, when, when we think about what inning is the secular bull market in, when is it gonna end? And why? This is one of the things I look at. It’s just, you know, when when you’re retiring far more shares than you are issuing, it’s like, duh, you know, markets are gonna go up. All else being equal.
01:05:19 [Speaker Changed] What what’s so surprising about this is how relatively insignificant the retail flows are. Yes. They’re, it’s, it’s just the opposite of how so many people describe it. Yeah. Coming up we continue our conversation with your Timor director of global macro at Fidelity discussing various asset classes, equities, bonds, commodities alternatives. You are listening to Masters in Business on Bloomberg Radio. I am Barry Ritholtz. You are listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Ian Timmer. He is the director of Global Macro at Fidelity Investments, the giant firm helping to manage over $16 trillion in client assets. Let’s talk about US fundamentals versus EFA fundamentals. So this looks at various market data, buybacks, dividends, et cetera. Tell us what this chart is showing us. Yeah,
01:06:29 [Speaker Changed] So this, we were talking about earlier about there finally being a catalyst for non-US stocks to compete with the u with the MAG seven driven US stock market. And so on the left, I show the earnings line for the s and p, the payout so that the share of earnings re being returned, quote unquote, to shareholders shareholder
01:06:50 [Speaker Changed] Yields
01:06:50 [Speaker Changed] As as dividends and buybacks. And then at the bottom you see the, the payout ratio again, either as dividends in the yellow buybacks in the purple. And you can see the, the payout has risen very nicely, almost a double since, oh, since five years ago. Payout ratio is about 75%. So very bullish fundamentals like you, you know, those fundamentals deserve a high, a high pe right? Because not only is, are the earnings growing, but they’re being returned to shareholders, which of course is worth more than if you’re not getting them back. It’s just the present value of future cash flows. But what’s changed just in the last few years is that for efa, again, which is the MSEI, non-US developed index, you see an even better growth rate in the payout and you see an
01:07:39 [Speaker Changed] More than double.
01:07:40 [Speaker Changed] Yeah. And you see an equally robust payout ratio, again of about 75%. So the rest of the world is really competitive now, despite the fact that this is such a max seven heavy market. And so this is, you know, just a very exciting time because you can actually, you don’t have to make that make or break binary decision. Like you’re either in these big stocks point not, or, or you’re left behind. There are other places to get those returns down.
01:08:07 [Speaker Changed] What what’s so fascinating about this chart is how inverted the ratio of buybacks to dividends is. Yes, very much in the us 45% of shareholder yield is buybacks, 30% are dividends that flips. In Europe, it’s 47% are dividends. Only 27% are buybacks, or I should say efa, not just Europe. Although a lot of it seems to be concentrated in Europe. Yes. How much of that is just driven by tax policy and regulations?
01:08:36 [Speaker Changed] It, I think it’s largely culture. It’s just, you know, and Europe is more of a value market, right? So it’s really like the banks are, are really running the show right now. And so the US it’s more the growthy stocks, so they don’t want to, so, you know, dividends are kind of like a sacred contract, if you will. Like, it takes a lot for dividends to be cut. So I think Europe and Japan has just generally been more of a, of a value driven and the culture has been more, okay, we’re gonna earn so much and you’re gonna get that back as dividends. But especially the Japanese and also the Europeans are, are getting much more with the, the shareholder culture now in terms of unlocking value and, and re and returning those as, as buybacks. So it’s, they’re they’re getting, they’re, they’re starting to play the game.
01:09:23 [Speaker Changed] La last few questions before we get to our favorite questions. You, you have a section in the chart book about the post 60 40 world. I’ve heard people say the old 60 40 is now 50 30 20 or fifty thirty ten five five. Tell us what you think of as the post 60 40 world.
01:09:48 [Speaker Changed] So I, I look at it, i, I call it the sixty twenty twenty. So the 60 40 paradigm worked like a charm, right from the late nineties until the early 2020s and, you know, 60% s and p, 40% Bloomberg ag, so the investment grade bond index, and you got a 9% CAGR against the 9% vol. And like, what’s not to like about that, right? During that time, inflation was like two and a half. So you got a very attractive real return with really moderate volatility. But the whole premise of that paradigm was that the 40 was insurance against the 60. So the 60 of course is always the anchor. That’s where the compounding is. And the 40 would be your port in the storm. I think that’s now changed. So 2022 obviously was a return to the old fed model days where rising yields take, you know, take, take the, the mojo out of the stock market to put it mildly.
01:10:52 The good news is that bonds of course now are a viable asset. They, they generate a positive real yield, but their correlation is now positive against equities instead of negative. So when I think about the post 60 40 world, I’m less worried about the 60, like we can add more international into 60 and, and like we were just discussing, but what do we do about the 40, if the 40 can be the cause of problems rather than the solution to problems, and especially if we end up with a higher term premium, then bonds are not gonna be as, as safe as they used to be. So then I get into kind of, okay, I’m gonna take some share from the bonds. It doesn’t have to be 20. Like again, this is not investment advice, but back at the envelope stuff and you know, maybe some cash strategies are more competitive if we’re not gonna go back to the zero interest rate days, which I don’t think we are. Gold are the proven anti bond over history, right? They don’t produce a cash flow,
01:11:51 [Speaker Changed] 3,700 bucks as we speak,
01:11:53 [Speaker Changed] But when bonds do poorly, gold really shines, no pun intended. And then you gotta throw Bitcoin in there as kind of the, the wannabe exponential gold and then other strategies like alternatives, right? Managed futures, equity, long, short, private credit, you know, all of those kind of alpha rather than beta strategies.
01:12:15 [Speaker Changed] You have, you have tips in there as well.
01:12:17 [Speaker Changed] Yeah, tips, high yield, you know, markets or asset classes that are not negatively correlated, but they’re not positively correlated as well. So when you look at kind of the sharp ratios versus the correlation, not just to the 60, but especially to the 40, right? Because I wanna hedge more against the 40 than the 60.
01:12:38 [Speaker Changed] I was gonna say, this doesn’t look like a yield chase. This looks like a diversifier. Is that the thinking here? Yeah,
01:12:43 [Speaker Changed] Yeah. And actually if you go down one chart, I think, yeah, right there. Oh, look at that. So I want high sharp ratios or high and low correlations, high sortino ratios and, and, and assets that are uncorrelated. And you get into, you get into the BComm commodities, you get into gold, you get, Bitcoin is not quite uncorrelated, but all the alt strategies are uncorrelated. And so to me that is sort of the next 60 40.
01:13:10 [Speaker Changed] Hmm. Really, really fascinating. Last question before we get to our favorites. You look at so many charts each week you identify trends before a lot of people do. What are investors not talking about, but perhaps should be? What topics, assets, geographies, data points. What do you think is getting overlooked? But it’s really worth investors time to pay attention to
01:13:34 [Speaker Changed] One asset class. And we just talked about it. That I think generally is seen as a, as a side show the way Bitcoin used to be. It’s no longer a sideshow for sure is actually gold because for
01:13:48 [Speaker Changed] Even at 3,700 bucks, it’s, well, are people still thinking of it as a sideshow?
01:13:52 [Speaker Changed] I I think institutions do, right? So regular retail investors as, as I call ’em, you know, you can buy GLD or some other gold ETF and like, you know, I own it in my portfolio. And so there, I think there, it’s part of the conversation, but when you think about like large endowments, institutional investors, even mutual funds, like you need a special wrapper in your mutual fund to own physical gold. Like you need to go to the SEC and get approval. And so I, you know, gold has been sort of dormant for so long until recently that is like, yeah, I don’t really want to go through this trouble to buy something that doesn’t have a cashflow, can’t be valued, right? Requires special regulatory approvals and then all of a sudden it starts to run like it is now.
01:14:39 [Speaker Changed] Everybody wants
01:14:40 [Speaker Changed] In. And, and so, so I think that’s the story. So in, in, I ironically, because Bitcoin has, has obviously come well after gold as a kind of a store value, hard money asset in a way. Gold is kind of like where Bitcoin was 10 years ago or five years ago, where okay, bitcoin’s interesting, but I don’t understand it. I don’t feel like spending a hundred hours on this. It’s a bubble, it’s a scam, it’s a pet rock. And, and gold is like, if it keeps going the way it is, and I suspect it will, like the endowments are like, okay, like people are asking me about this. I need to like really like figure out how do we not how do we buy it? You can buy it of course, but it’s, it’s always been a, a dismissed asset, let me put it that way. Among,
01:15:27 [Speaker Changed] I mean that’s what I grew up with. Yeah. It was kind of mocked by the equity people. Yeah. Depends on the length of the chart you look at. You could show a trailing multi-decade period where gold has outperformed the s and p. Yeah, absolutely. So, so if you look at gold as in a secular bull market, I’m not asking for a forecast, but what’s within the range of possible numbers Gold could run to from 3,700 up from the low two thousands and early, what, what are we peaking? Like 2014 and then 2019, something like that. Yeah.
01:16:00 [Speaker Changed] And it was like 260 back in the,
01:16:03 [Speaker Changed] Oh God, I remember in the nineties, financial.
01:16:05 [Speaker Changed] Sure. Yeah. So
01:16:05 [Speaker Changed] When GLD first came out, I wanna say gold was about 4 30, 4 40. I remember talking about it on TV and getting laughed at by
01:16:12 [Speaker Changed] Anchors. Yeah. So I, I once saw a chart that actually Paul Tudor Jones created as really speaking of Paul, where he compared the, the above ground value of gold or the value of above ground gold and compared it to the, the value of M two and, and the
01:16:32 [Speaker Changed] Chart, they kind of track each other.
01:16:33 [Speaker Changed] The chart concluded that when the money supply grows too fast, gold takes market share. So hard money takes market share from soft money from fiat money. And at certain extremes, like in the seventies and other periods of thirties, gold, the value of gold will go all the way up or beyond the value of M two. And so right now M two is about 23 trillion gold plus Bitcoin is, is also about 23 trillion. So in that sense, it’s come a long way to, to take that market share. And now it’s a question of does M two either globally or in the US continue to grow at an above average pace? So the average pace is about 6% nominal, about two, two, 3% real. So I, I do think a lot of the gains are in already, but it will, it will naturally overshoot as these cycles always do. So, so that’s kind of how I would, how I would measure it. So if the money supply goes to 30 trillion gold and Bitcoin could be 35 trillion and, and obviously gold to is, is a large part of that, Bitcoin’s about 2 trillion. And then you convert that to, to a price. But that’s kind of how I think about the valuation side. Hmm.
01:17:49 [Speaker Changed] Really fascinating. Tell us about your mentors who helped shape your career.
01:17:56 [Speaker Changed] Definitely Ned Johnson, because when I came in to Fidelity in 95, I’d been in, you know, in New York for 10 years, didn’t really have mentors. And so he, you know, fidelity has a very strong corporate culture, let’s put it that way. And especially around, you know, the way we approach long-term investments. We’re obviously a long-term investor, but so he, he was like the last person I spoke to before I got hired. And then in those formative years I worked in the chart room and I would spend hours per week with, with Ned. Like he would just come down really? And, and, and we hours per week and we would just pour over charts. Like we have these huge charts on the wall floor to ceiling, you know, like 40 foot wide, like a, a daily chart of the, of whatever the Dao SP
01:18:50 [Speaker Changed] Manually by hand done
01:18:51 [Speaker Changed] By it, it would be computer generated. But then, because we don’t wanna print a whole new 40 foot sheet every week. So you would just, you fill it in by hand and, and you know, just the the oral tradition, the oral history. So he was looking at the chart and then he would say, okay, well, like, and he would go from le right to left and say, okay, you know, then, and we’d end up like, in 1968 and he’s telling me about the glamor stalks and this and that, and I’m like, well this is like gold, right? Like you don’t, you know, literally. And so he would have this encyclopedic memory, but also just the way the information was displayed, semi log skills, the chart room has like museum quality lighting, how you display, how you visualize, you know, data. And so that he instilled that culture, you know, we, we call it kaizen, kind of just gradually improving and having, you know, compounding isn’t just for investing, right? That’s right. It’s just in our day-to-day stuff, you do something consistently, right? It’s gonna make an impact. And when I look back at my 40 years and I’m not going anywhere, but like to me that, that kaizen has, has really played a role in my relationships, in my work. And, and I think a lot of that just came from him.
01:20:10 [Speaker Changed] So, huh, really, really interesting. Let’s talk about books. What are some of your favorites? What are you reading now?
01:20:16 [Speaker Changed] So I, I hate to admit it, but I don’t read a lot of finance books because I’m very interested in having balanced between,
01:20:24 [Speaker Changed] Oh, I don’t want finance books
01:20:26 [Speaker Changed] Between right and left brain.
01:20:27 [Speaker Changed] We’ve all read reminiscence of a stock operator. I’m cu more curious as to what else you’re reading.
01:20:32 [Speaker Changed] Well, I will say that during COVID I read this huge tomb called The History of the Federal Reserve by Alan Meltzer. Oh, sure. Because, you know, I’ve looked at so many charts. You’ve read the reports of like, you know, financial oppression.
01:20:48 [Speaker Changed] It’s like a thousand pages isn’t Ital, it’s a door stop. 01:20:50 [Speaker Changed] But I went like that book, it was like this blow by blow using the Fed Minutes and all these, you know, correspondence to see how the fed handled the fi the financial repression of the forties. And so that was fascinating, although most people would say, well that sounds really boring, a little dry. But, but as, as a, as a consumer of the data just to hit to see, okay, you know, like the wherever was at the Fed would go to the Treasury and the, they were playing games like the treasury would issue bonds below market and then the auction would fill, and then knowing that the Fed would have to mop up the supply, like all of that stuff was just really Oh, really, really fascinating. And you know, and we see the interference in poli with politics and monies, monetary policy today, but it’s nothing new like in the sixties. Both Nixon and Kennedy were equally guilty of, seems
01:21:41 [Speaker Changed] A little more overt. It’s more in public today, more overt. It used to be sort of cloak room sort of stuff. Yeah.
01:21:47 [Speaker Changed] So, so that was one, but the, i, the most interesting recent book I’ve read was, it’s called Rock Me on the Water, and it’s a book about music, TV and movies during the early seventies and how LA was like the epicenter of American culture. So you had like the Laurel Canyon folks, the modern musicians, Tony
01:22:11 [Speaker Changed] Mitchell, David Crosby,
01:22:13 [Speaker Changed] And he had these groundbreaking TV shows, right? Because we were coming out of the straight jacket of the sixties, conformist, like no one dared to make a, a show that that like challenged the, the status quo. And then you had like Mash and you know, Mary Tyler Moore, all the family, all the family, and then the movies like Taxi Driver and, and as a, you know, as a, I I’m, I think I’m kind of Gen X, but on the border of Gen X and baby boom,
01:22:37 [Speaker Changed] Right? I’m in the same like a foot in each camp. Yeah,
01:22:40 [Speaker Changed] Yeah. And so growing up, you know, formative years in the seventies in Aruba, but consuming American pop culture, right? We would sit down every night watching like, you know, wide World of Sports and Mary Tyler Moore and, and all those shows
01:22:53 [Speaker Changed] Rock Me on the Water,
01:22:55 [Speaker Changed] Rock Me on the Water. Oh, that’s, and it, it’s just like, so it, it’s fascinating to read about the things that we lived through as kids, as teenagers, but then like yeah. You know, that was
01:23:06 [Speaker Changed] So amazing. Let’s talk about streaming. What are you watching or listening to right now?
01:23:12 [Speaker Changed] We are binge watching the Bear. So I’m a, I’m an avid cook, you know, like I said, I run a food camp at Burning Man and that’s, that’s, and we, we tend to be late to shows and then we, we just watch like four plow
01:23:26 [Speaker Changed] Through them four seasons. Yeah. The bear is great. Yeah. So we’re, and if you’re a cook all worked in restaurants. Yeah, yeah. It just rings so true. Yeah. Yeah. I gotta ask you a a a crazy question. You’re a cook. What pots do you like? What knives do you like?
01:23:41 [Speaker Changed] I use the all clad. I have, I, I have two places. I have a, a gas stove in Santa Barbara and an induction stove in Boston. You
01:23:51 [Speaker Changed] Know, I came this close to putting an induction stove in my primary residence, but we had just gotten gas and so of course we ran with gas. Yeah. I,
01:24:00 [Speaker Changed] I I will run with gas anytime. Induction is good. It’s very precise. Yes. But it’s safe. I, I like the, the organic kind of tactile dimension of gas, but so all clad and the, the German knives, what’s it called? Gu, I forget. And my go-to knife is a 10 inch chef’s knife. Not the really high one, but the medium one. So the medium one is, is thick enough to like smash on garlic, but not so thick that you don’t feel connected. You don’t have the, the, the road feel of the knife on the cutting board. So,
01:24:40 [Speaker Changed] So I’m jonesing for this shun knife I keep seeing and they’re just exorbitant. Yeah. And we gave someone a gift of the Stanley Tucci healthy, non-sick. I supposedly the old non-stick is not good. Yeah. And she loves it. She’s been, so we debating going out and getting a set for a, like, it’s rare you give someone a gift and they’re like, oh my god, this is amazing. Stanley
01:25:06 [Speaker Changed] Tucci is one of my heroes.
01:25:07 [Speaker Changed] Oh really? Yeah. Have you watched this show in Italy? Yeah, I had a stop. ’cause it just makes me want to eat even after dinner. You want to go, you want to go eat that?
01:25:16 [Speaker Changed] That, that’s my, my guilty pleasure on TikTok is little food clips and I don’t even have to have the sound on. It’s just, you know, because I kind of know what works with recipes, so I don’t need a recipe, but I just need someone to visualize an approach. And so a lot of the things I cook today are from TikTok.
01:25:36 [Speaker Changed] Oh, no kidding. Yeah. Yeah. Oh, that’s amazing. Alright, our final two questions. What sort of advice would you give a recent college grad interested in a career in technical analysis? Fixed income, or just investing generally?
01:25:52 [Speaker Changed] Be open-minded. Be humble. You know, the, the, the true heroes of mine in our business, including Ned Johnson. You know, he, he’s no longer with us, of course. Was that just humility, right? I’ll talk to Will Danoff, who runs 300 billion I love Will. He’s the humblest guy, right? You’ll ever, he’s amazing. You’ll ever meet and there’s no room for, for big egos, like, no matter how important you are, like I, I have no time for that. Right? So stay humble. Don’t figure out, don’t think you’ve, or you’ve, you’ve figured it all out when at, at the age of 25, you know, be learner and be ready to reinvent yourself. I’ve had to do it a number of times at Fidelity, either as planned or as not planned. And you just gotta roll with the punches. And like I said, the first job I had, I, I was like the last job I was interested in, but I took it because it was the only job, you know?
01:26:42 [Speaker Changed] And our final question, what do you know about the world of investing today? You wish you knew 40 years ago or so when you were first getting started
01:26:52 [Speaker Changed] That markets go through cycles and it always comes back. Not always quickly, but you know, every time the market goes down 20 plus percent it’s like the end of the world. And it’s like totally different from every other time. And this is like such a crisis. But then, you know, I’ve now been through like 12 bear markets in my career and it’s like, yeah, whatever. Like nothing shocks me anymore. Of course I’m, I’m maybe in a better place ’cause I’ve, I’ve earned my, my wealth. I’m not still building it, but Right. But it’s just, you know, take, take, take a step back, look at the bigger picture, make sure your portfolio is where it should be in terms of risk and goals. And don’t be your own worst enemy by selling at the bottom. You know, call, call someone like have ’em talk you off the ledge first. You know.
01:27:40 [Speaker Changed] Thank you Yian for being so generous with your time. We have been speaking with Yian Timmer, director of Global Macro at Fidelity Investments. If you enjoy this conversation, well check out any of the 563 we’ve done over the past 11 and a half years. You can find those at Bloomberg, iTunes, Spotify, YouTube, or wherever you get your favorite podcasts. Be sure to check out my new book, how not to invest the ideas, numbers and behavior that destroy wealth and how to avoid them. How not to invest at your favorite bookstore. I’d be remiss if I did not thank the crack team that helps put these conversations together each week. Alexis Noriega and Anna Luke are my producers. Sean Russo is my researcher. Sage Bauman is the head of podcasts. I’m Barry Ritholtz. You are listening to Masters in Business on Bloomberg Radio.
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