Getting Earnings Right with Deutsche Bank's Binky Chadha

Barry speaks with Binky Chadha, Chief US Equity & Global Strategist at Deutsche Bank Securities. They discuss Binky's time with the IMF and his role at Deutsche Bank as an equity strategist. They also discussed making asset allocations and market cycles.

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Episode Transcript

Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news. This is Masters in
Business with Barry Ritholts on Bloomberg Radio.

Speaker 2 (00:16):
I'm Barry Ridholts on the latest Masters in Business podcast.
Another banger, I have Binki Chada. 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's supposed to be.

(00:40):
Started the year twenty twenty five with the seven thousand
target on the S and P five hundred 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

(01:04):
no further ado, my interview of Deutsche Bank Securities Binkie Chada,
Binki Chada, Welcome to Bloomberg.

Speaker 3 (01:14):
Thank you.

Speaker 2 (01:14):
So. I have been looking forward to this conversation for
a long time, primarily because so many people when I
asked them who their mentors are, reference you. So you
have a lot of influence throughout the street.

Speaker 3 (01:29):
That's very guind.

Speaker 2 (01:31):
We'll come back to that a little later. Let's start
with your career. You get a bachelor's in mathematics and
computer science from Dennison and then a PhD in philosophy
focused on economics from Colombia. Is that right?

Speaker 3 (01:45):
A PhD in economics?

Speaker 4 (01:46):
So what was the career plan.

Speaker 3 (01:49):
The career planned was, you know, to get a PhD
in economics and study development economics and alleviate poverty and
help the world. I went to graduates school and graduate school,
you know that out of here exactly, and.

Speaker 2 (02:07):
There's a whole lot of debt, go into go do
some well somewhere.

Speaker 3 (02:11):
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 and.

Speaker 2 (02:29):
First in the first job right out of school. You
were there for a while, seventy seventeen years. So what
were the various positions you had. I saw a division
chief of the Euro Area and Global Markets.

Speaker 3 (02:39):
Yeah, I was doing in chronological orders. So I started
basically in the So the IMAF 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 IMA to Research department under Jacob Frankel

(03:03):
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 IMF suddenly had thirty new member
countries and we all got pulled into working on various
aspects of that. So I worked on Bulgaria pretty much

(03:25):
full time for a year.

Speaker 2 (03:27):
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.

Speaker 3 (03:37):
Yeah, so, you know, I started in the research department,
but I went from there to the Asian Department. And
even while in the Research department, like my participation in Bulgaria,
we always, oh, at least I always, you know, it
was eager to participate in the IMF's bread and butter work,
which is really country work. So I remember going to

(04:00):
Singapore in my very early days. Singapore is, you know,
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 nineteen
seventies we used to talk about the knicks, you know,
So I mean I could talk quite a while about Singapore.

(04:21):
But Singapore started in the early nineteen seventies with a
ten to twelve percent unemployment rate, had low age, export
led growth model. By nineteen seventy nine, unemployment was two percent.
Health had been strong, and because of the peculiarities and

(04:42):
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 two percent unemployment,
you would end up sort of violating the principle what
you were formed because you would need basically lots of
important labor from Malaysia and Indonesia.

Speaker 2 (05:05):
And a wild success story. Though Singapore's economy has done
really well.

Speaker 3 (05:09):
Has so it has because they made a very concerned
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 in the increase in real labor

(05:34):
costs or wages. It's also sort of the retirement plan
of six zero percent in nineteen seventy nine to work
through the system over the next three years, and it
was wildly successful in basically, you know, turning the economy
into sort of a much higher value added growth part.

(05:57):
I mean, finance was some of it, but it was
you know, the focus is more on sort of high
tech manufacturing.

Speaker 2 (06:05):
So today you're overseeing asset allocation primarily for US based
investors for Deutsche Bank. I know you're global.

Speaker 3 (06:13):
Also, yes, that is true my focus, partly because I'm
here and partly because the US is the most important
and biggest driver. I've been our equity strategist in two
different stints over periods, so I actually spent most of
my time basically on US equities.

Speaker 2 (06:31):
I would say, 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.

Speaker 3 (06:47):
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 data day. Certainly not day to day but
week to week, but sort of you know, explains the
direction in which things are going. And I think Singapore

(07:09):
is sort of a good example for I mean, we
started talking about development economics, which was 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?

Speaker 2 (07:24):
Really really interesting, So after seventeen years at the IMF,
what led you to Deutsche Bank in four.

Speaker 3 (07:32):
So the IMF does not historically never really spoke about
exchange rates because the 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

(07:54):
have a dialogue with the markets, there was an opening
basically in FX because a the FX strategists had been
around for quite a while, he had moved on or
retired basically, uh and and so they asked me because
they deutsch Bank at the time. So the strategist that

(08:18):
I'm referring to, his name is Mike Rosenberg. He really
did FX for me top down macro point of view.
Uh and and it's hard to find people like that.
But I was at the i m F. I was
trained as an economist, uh and I had done plenty
of work on FX.

Speaker 2 (08:37):
So, given, given all your background in economics, currency development,
how do you end up eventually as an equity strategist
Because that seems like sure, it's it's adjacent to economic
and economists.

Speaker 3 (08:54):
So so for a few years, uh, a last few
years at the IMF, I 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, I'm tired of reading in the

(09:14):
newspaper on the way to work that another country had
gone under and somebody should be having a dialogue.

Speaker 4 (09:20):
And all the time where it was Fisher.

Speaker 3 (09:23):
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 Asian financial crisis, and
then sort of you could argue that the dominos continued
for the next few years.

Speaker 2 (09:42):
When you reported to Stanley Fisher, was he at IMF
or he had or had he gone else He.

Speaker 3 (09:48):
Was at the IMAF. He was the first deputy Managing director,
which would be the counterpart of being the CEO as
opposed to being the president of the So he ran
the IMF intellectually and otherwise. And it was a small
group of us that you know, basically was a financial
markets dialogue with an open license to go out there

(10:09):
and tell us about any and everything that you think
that matters.

Speaker 2 (10:14):
So how do you transition from head of Foreign Exchange
Research to US chief US Equity Strategy.

Speaker 3 (10:22):
So what I was going to say on that was
simply that 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 want to be
here in the markets. Yeah, the center of liquidity was
really seven am to eight a m. London time, and

(10:45):
and so you either live in London or you know,
you find a US asset class. So I found US equity.

Speaker 2 (10:52):
So yeah, it's purely opposed to covering FX and London
you did actually in stay in the middle of the night.
So so since we're talking about both equity and foreign exchange.
You've said, we have favorable investor positioning, a stable dollar investor,

(11:14):
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.

Speaker 3 (11:28):
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

(11:49):
cycle was just really the housing cycle. That's a very
famous paper with that title. And you know, if you
fast forward from there basically to do 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.

(12:14):
And what is that odds with the traditional cycle is
that when unemployment is low, you're typically at the end
of the cycle and growth tends to be low. But
for the last two to three years, what we've had
is four percent approximately unemployment, but GDP growth, especially underlying
GDP roads running pretty steady at three percent. Showing some

(12:36):
signs of going even higher basically, and what I would
say is historically that is very very rare. It's happened
only six percent of the time if you do things
on a quarterly basis, six percent of the time since
World War Two. And it's no secret when those two

(12:57):
times were one was in the nineteen sixties. I would argue, basically,
that's really the takeoff. That's really the post World War
recovery with a big lag because people didn't know in
the fifties would exactly do because you could only extrapolate
the great you know, the Great Depression and World War Two,
so it took a while. But the sixties is really

(13:18):
the post World War two recovery. And the second time
that happened is more recently, and everybody is reminded of
that now, is the second half of the nineteen nineties.
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, so when you have a

(13:42):
job but growth is strong, risk appetite is going to
be high. I think that's not you know, surprising, and
that's kind of almost exactly where we are.

Speaker 2 (13:53):
So you mentioned the sixties, you mentioned the nineties. I
have to ask you about the twenty twenties, which, on
the one hand, and we'll circle back to housing. 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 after fifteen years of

(14:16):
more or less of monetary driven stimulus, we had the
single biggest fiscal stimulus at least as a percentage of
GDP since World War Two? 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?

Speaker 3 (14:36):
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 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 hiccop this

(14:58):
year 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 so in sort

(15:20):
of a peculiar way, we are blessed in my view,
because of the global financial crisis, which created huge deleveraging
on the household side, and then we had COVID, and
you needed to have your balance sheets right if you
were a company, and you needed to basically get used

(15:41):
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.

Speaker 2 (15:54):
Long before COVID, most of corporate America had refinanced all
the long term debt very favorably. So heading into this,
both households and companies pretty well.

Speaker 3 (16:04):
Situated exactly that I would agree completely, 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

(16:27):
term economic forecast, that's one idea. Basically everybody has a
pickup in growth next year, so.

Speaker 2 (16:35):
Based on either fed cuts or we'll talk about the
policy is just coming up later. 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,

(16:59):
which felt very backward, right the first time we had
ultrao rates and a few generations, and so all the
refinance and helock 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.

Speaker 3 (17:18):
Right, 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're talking six
seven eight percent of GDP is housing. Wow, Today it's
like more like two percent. I apologized the exact.

Speaker 4 (17:36):
Decimal point, but it's a fraction of what it was.

Speaker 3 (17:38):
It's a fraction of what it was, and so it's
I mean, and we were just talking about three percent
GDP growth for the last two two and a half years.
And housing has been in the dol drums for quite
a while.

Speaker 2 (17:53):
We've been underbuilding single family homes since the financial crisis,
so it's not a big contributor there.

Speaker 4 (17:59):
What are we doing fifty eight hundred.

Speaker 3 (18:01):
But what is very peculiar about this cycle is that,
you know, so there is a very important fact when
you think about the three percent or three percent plus
GDP growth numbers, which is you know that it actually
and equities are about cyclicality and cyclical variation. So recessions are
big events, and recoveries are big events. But what I

(18:24):
think 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. They tell you just need
a ruler to what they're earnings are going to be
because I was so predictable in the same vein, two

(18:47):
thirds of US GDP is really stable growth GDP. Now
it's not rip roaring growth, but it's too you know,
two percent growth. What the cycle comes from the cyclical
arts basically, and that's a little bit over twenty percent
of GDP, so it's not really that huge, But all
the cyclicality really comes from there and when it gets going,

(19:10):
it's very powerful. And if you think about what is
the cyclical parts, I can go further. Basically it would
be number one is consumer durables, number two is corporate
cap X, number three is housing, and number four is structures.
And so what is extremely unusual about this recovery from

(19:30):
my point of view, is that stable growth is doing
what it's always doing. There's mostly services. 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 the upside. Like the fifteen percent

(19:52):
I'm saying.

Speaker 2 (19:53):
Does that include all of the tech investments in AI
and data centers that seem to be just full on booming.

Speaker 3 (20:01):
Yeah, So the tech investment wouldn't be in here. I mean,
if you look at CAPAX, if you take out so
AI party, it's on the soft side. But so you
can take, as I always say, you can take a
various 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

(20:23):
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, all.

Speaker 2 (20:44):
Of which seems to be somewhat interest rates sensitive. And
I know you're looking for a few more cuts over
the next year or so. Sure is that what's going
to light the next leg, start the next leg moving higher?

Speaker 3 (20:57):
I mean, I think interest rates are important for how saying.

Speaker 2 (21:01):
And durables right by how should you fill it with
furniture and appliances and a car?

Speaker 3 (21:06):
Sure, 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. Since the nineteen seventies, what corporate America
learned is that you don't spend beyond your means. I
would say most capacs, especially for S and P five

(21:28):
hundred companies, is coming from internally generated cash flow. And
if you look basically at the three uses of cash flow,
you know, dividends, capex, and buybacks, and you take their
total spending relative to their total cash flow. It's been
this side of one hundred percent forever.

Speaker 4 (21:48):
Which sounds sounds pretty.

Speaker 3 (21:51):
Exactly, And so I don't think that the interest rates
going to make plays such a big deal for corporates.
You could even argue you, I mean, for a long
time it was like, if interest rates go up after
the global financial crisis, corporates are going to get killed.
It was the reverse, and their earnings went up.

Speaker 2 (22:06):
Wall Street Journal column, why why are corporate bonds on fire?
Because they seem like such a safe bet.

Speaker 3 (22:13):
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 indicies, you want to be
careful because they're not controlling for the historical credit quality.
I mean, S and P. Five hundred is different because
it's about earnings and your earnings power. But in terms
of credit quality, you know a lot of the indices,

(22:36):
I mean, the current composition is better than it used
to be. Now we're at a certain stage in the cycle,
so we've had to two and a half years basically
of you know, a fully employed labor force and strong growth.
But there's been If you think about those two and
a half years twenty twenty three is you know, everybody's

(22:57):
waiting for a recession and this never change. Use I
call that period the rolling VS. And we're kind of
going through a similar version of the same thing right now.

Speaker 2 (23:06):
Meaning rolling so decreases. Do you think after a recessions
that quickly? So?

Speaker 3 (23:13):
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 twenty twenty two and you
looked at, you know, the forward forecast that was in
the macro consensus, it was growth is here. Growth next
quarter is going to be lower, in two quarters will
be in a recession, and then of course we'll have
a recovery. And so if you look at almost or

(23:37):
so when the recession didn't come, well, 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 I
mean I have this chart. It's a little old now,
but on the same chart as you see the rolling VS.
You look at the actual data when it came in

(24:00):
and there's you know, we're like way above closer to
three percent, and people are forecasting a recession.

Speaker 2 (24:07):
And so those recession forecasts, we heard those in twenty one,
twenty two, twenty three, like if they kept doubling down
and got it.

Speaker 3 (24:16):
Yeah, so it's twenty twenty three and then the early
part of twenty twenty four. So Deutsche Bank was we
to single out our economists year excellent, but they were
some of the earliest on the street of a recession
is going to happen down the road. They didn't give
up the recession call, I believe, till the first quarter
of twenty twenty four. And so from a company point

(24:39):
of view, if you were listening to companies and you know,
analysts ask on learnings calls, why aren't you spending, They're like, no,
there is a recession coming, and the recession is coming.
So all through twenty twenty three, corporate America just waited
for the recession that never came. Early early twenty four
and they began to wait for the we had the election,

(25:03):
everybody got very very optimistic, very very constructive. We got
liberation Day. I think where we are now is those
two years basically of a waiting of created pent up
demand is a shortcut way of saying what I'm trying
to get at. And it's also you know, led to
the approach or strategy if you want to call it that,

(25:26):
that we just need to deal with it and get
on with it. And we're not waiting anymore. And and
so we are where we are, where we're having this
strong growth. But it's really the cycnical bods 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

(25:49):
very modestly. That is the basically the challenge that it
creates for equity strategy or investment.

Speaker 2 (25:54):
Really really really fascinating. Coming up, we continue our conversation
with Pinky Chata, US equity and global strategist and head
of asset Allocation at Deutsche Bank's Securities, talking about his
roles at Deutsche Bank. I'm Barry Ritults. You're listening to
Masters in Business on Bloomberg Radio. I'm Barry Ridults. You're

(26:37):
listening to Masters in Business on Bloomberg Radio. My extra
special guest today is Binki Chada. 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
globetrotter and travels around the world Europe, Asia and elsewhere

(27:01):
advising clients of Deutsche Bank. 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, how has your team, How has the
team's process evolved? What do you think of in terms

(27:24):
of tools and quantitative analysis as well as a broad
global macro overview.

Speaker 4 (27:31):
What drives your decision making.

Speaker 3 (27:34):
Sure, I mean, at the simplest level is to figure out,
you know, where the equity market is going to go.

Speaker 4 (27:40):
That's all I need to do.

Speaker 2 (27:42):
Once you figure that out, your gold.

Speaker 3 (27:45):
We're pretty humble about that pursuit, but I would say
that is the number one objective in pursuit. And what
we do is basically we have developed over time, basically
a whole set of framework. They are not all you know,
I mean, they're meant to be non overlapping frameworks.

Speaker 2 (28:07):
And quantitative or qualitative. Are they all models or is there.

Speaker 3 (28:10):
Some they are quantitative frameworks. You could call some of
them models. So 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 will know

(28:34):
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 divide it up our way.

(28:55):
So there's megacap growth in tech I mean, and that
you know needs to include Visa and master Card because
it's they're not tech companies, but they behave very very
similarly in terms of their revenue streams. So you can
think about it as basically a trend and cycle framework
for each of the groups. And the question that the
trend is, you know, what has basically been prevailing for

(29:18):
quite a while, and then the question is what drives
the cycle in those So if you take megacap growth
in tech. For example, you would have the US dollar
and for some parts you could be looking basically for
you know, very specific things that matter which you're not
going to pick up. So for example, you know, for materials,

(29:42):
because of the way US materials are structured into two parts.
For chemicals, you need basically a chemicals later, which is
not something that most people tend to look at. So
this idiosyncratic, but it's cycle and trend and what drives
basically the cycle it would be, you know, ism manufacturing
US dollar. Ism manufacturing is an interesting one because that's

(30:04):
historically the one thing that explained SMP five hundred earnings
extremely well, and that's kind of like all you needed
to know.

Speaker 2 (30:11):
Still today, does it still happen?

Speaker 3 (30:13):
So basically for the last three years it hasn't been
the case. And why it's simply because of megacap growth
in tech. If you take the s and P five hundred,
you break up its earnings into megacap growth in tech
and everyone else, you'll see that everyone else is still
currently aligned with the ism manufacturing. ISM manufacturing has been

(30:34):
in a funk for three plus years now, and so
we haven't had growth. So I kind of hinted earlier.
You can look at the current you know, sort of
contact in a bearish way. That is, all the growth
is coming from ninety percent of S and P five
hundred earnings growth has come from megacap growth in tech.
Or you could take the view going forward that everybody

(30:56):
else is going to recover. That's the camp that we
are in because.

Speaker 4 (31:01):
That everyone else will be catching up to tech.

Speaker 3 (31:03):
Events exactly unless their earnings are completely aligned with the
ISM manufacturing. In the US, ISM manufacturings basically, and that's
historically the case for the entire indexes and earnings. We've
been in a funk for three plus years. M manufacturing
has been between forty six and fifty, so you know,

(31:24):
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.

Speaker 4 (31:37):
Fifty dividing point above fifty is.

Speaker 3 (31:39):
The dividing point, but I mean I think the fair
or I mean conceptually it's the Intellectually it's meant to
be the dividing point. But this is still slightly positive
growth even below fifty. 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 remember that as we came out,

(32:00):
you know, we had basically massive spending on goods and
that in some way involves manufacturing. And then we had
basically the slowdown and the rotation.

Speaker 2 (32:10):
Reminds me a little bit of what took place in
the run up to Y two K in two thousand.
You had all this tech spending pulled forward and then
it was soft for a year or two.

Speaker 3 (32:20):
Right, right, And it's been followed basically by a whole
set of things. Number two. So on the hangover, I
would say, you know, I don't think a hangover's killed anybody.
So a hangover is holding time basically, and it would
naturally basically, you know, a pass. But then in early

(32:47):
twenty twenty two we got the Russian invasion of Ukraine.
We had one hundred and twenty dollars oil, and if
you look at oil prices today, what we've had is
basically we've gone from one hundred and twenty to in
round number sixty. But it's taken three years to get there,
and what the three years to get there means is
that energy earnings on a year and year basis have

(33:10):
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
sixty four sixty five dollars, and so you know, this

(33:32):
drag should basically stop soon, even though for the third
quarter we're still looking for fifteen percent down so energy
energy in energy earning, so it's just mostly oil prices
and energy vertigo is important basically for various parts of manufacturing.
Then we have basically idiosyncratic issues in autos and Chinese

(33:53):
autos in particular, and of course, last but not least,
we have the tariffs this year, which impacts manufacturer. We're
going to.

Speaker 2 (34:01):
Talk more about tariff shortly. I'm kind of fascinated because
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,

(34:23):
from everybody. How do you navigate and organize all of
these different perspectives, some of which may be in conflict
with others.

Speaker 3 (34:33):
Sure, I wouldn't describe it as conflict. I mean we
are encouraged to have our own different views, a.

Speaker 4 (34:39):
Broad dispersion of views.

Speaker 2 (34:41):
Is that?

Speaker 3 (34:41):
Absolutely so what I was always told by our head
of research, David fogus Landau. You know, so if I
ask you at the end of the year, why did
you get your s and P five hundred, call you
not to tell me.

Speaker 4 (34:57):
That the economist was there?

Speaker 2 (35:00):
Right, that's as a work.

Speaker 3 (35:03):
So you're responsible for everything that goes into your view
and so we discussed 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.

Speaker 2 (35:23):
So let me ask you a question you mentioned im
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.

Speaker 3 (35:38):
So we always start with our economists forecast, and we
always ask the question of does this make sense to us?
Does this make sense to you know, the way of
various you know, economic data are behaving. So I mean,
if you think about the US, so and twenty twenty three,
when everybody's calling for a recession, there was this annoying

(36:00):
fact which if you simply said, okay, I just landed here,
so you know, okay, we're talking about the US potentially
going into a recession. You know, let me start by
looking at GDP and you would find that near seventy
percent of US GDP in real terms comes from personal
consumption spending. Everybody knows that, so why don't we just

(36:23):
draw a chart of it? And because I come from
a relatively volatile asset class, I don't do any growth
rate terms, So I just plot the level. You have
to take logs because of we all though why we
should take logs, And then I draw channels around it.
And if you look at real personal you know, personal

(36:45):
consumption spending in the US for the five years before
the pandemic, we're 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 magic
And so this is twenty one, and the same applies

(37:05):
during twenty two, and the fat is hiking aggressively and
personal spending just continues in the middle of the channel,
and it was almost like there's nothing to see here, right.

Speaker 2 (37:15):
Well, we had three handle on unemployment, wages were actually
rising as fast, almost as as fast as inflation other
than that nine percent peak. Why wouldn't the economy and
market do well? And she says, with perfect times to.

Speaker 3 (37:32):
Fast forward to this morning, where is PC. 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 the headline numbers actually at the
top of the channel and moving along, and you know,
we did have some slowing in the first quarter A
but it was at the risk of going a way

(37:53):
out of the channel and it just sort of moderated,
it went flat and since it got back to the channel.
So it's the same thing and that's why.

Speaker 2 (38:02):
And PC is important because that's a key indicator us GDP.

Speaker 3 (38:07):
Yeah, absolutely, I think.

Speaker 4 (38:08):
That's Jerome Pal's favorite data point.

Speaker 3 (38:11):
Yeah, so he focuses more on the inflation in there.
So I'm talking about really the real volume, or than
the measure that we have, which is in real terms,
I'm just saying, if that's seventy percent of GDP and
that's growing steadily and it's been doing, we're in the
same place that we've been in for ten years, growing
in you know, at what I would describe as a

(38:33):
two and a half percent trend rate, So.

Speaker 2 (38:34):
That that sounds pretty bullish. I'm going to ask you
in a little bit about cautious issues and risks will
circle back to that. But given the relative strength of
the US over the past ten to fifteen years, and
the fact that you've just gotten back from Asia and
Europe before that, how do you look at the rest

(38:54):
of the global economy, what's happening in Asia, what's happening
in Developed X, last Europe and elsewhere.

Speaker 3 (39:02):
Absolutely, So, you know, there's a chart that I'm going
to draw for you, or really two charts, and what
I would say I kind of already described the US chart,
which is, you know, 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. If you

(39:26):
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 were
growing steadily before the pandemic at sort of a two
percent rate. Then we have the pandemic collapse and just
like the US, recovering back basically to the trend line.

(39:46):
But that was in the first quarter of twenty twenty two.
So it is really Russia Ukraine that then basically arrested
that recovery back the trend and basically activity in Europe.
You know, it's essentially gone sideways to fairy slightly up
in the decimal points, I would say, and it's a

(40:07):
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 is slightly different, but I think

(40:29):
the European example is sort of key. And so if
you think about things like fax and the US dollar,
I mean 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

(40:52):
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 a long European equities on the first
Monday of the year. All the credit goes to my colleague,
European equity strategist Max Uliar. That's a great, great call.

(41:14):
It was just the view that everybody was short Europe.
Everybody's going to cover their shorts, or at least some
people are going to 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
going to happen? Now in terms of policies, is going

(41:37):
to happen? So if you look back for the last
few years, you know, as a policy maker, you want
to do something about this, but maybe that shock was
already gone and you're going to start growing anyway. And
so now you have that plus a whole set of
additional you know, incentives to basically to spend infrastructure. Then

(42:01):
there's the defense issue. So I would argue it happens.

Speaker 2 (42:06):
And then is this early days in the resurrection of
European equities or is this a one year one time.

Speaker 3 (42:16):
It depends on whether you believe the growth will happen
and sustain. I'm in that camp, so I would argue
still very early days. And so we are actually from
a positioning point of view, we overweight the US, which
is what we've been talking about, but we'll also overweight
Europe and overweight Europe not because I'm expecting it to
match the US and performance through just.

Speaker 2 (42:37):
Doing so much better than to But.

Speaker 3 (42:40):
I think it's important to keep in mind that so
far we have very little evidence that Europe is actually
growing and if anything, over the last few weeks the
data has kind of disappointed. It doesn't negate what it's
likely to come. And then you look at the Europe
I mean, you know, getting disappointment. We moved up because

(43:05):
Europe might grow and you know it hasn't. But you know,
we have trouble getting below one sixteen. So the market
is you know very much. I would say, you know,
concerned that the growth actually happens. So I'm staying overweight
because there you have to get in before it happens.

(43:25):
And giving the gap basically in the level of activity,
in the level of earnings relative to trend lines, you know,
you could gap up at some point, really, and so
it's not just about tomorrow's earnings numbers. So we started
getting positive growth news out of Europe, well that's off

(43:47):
exactly at that point. It's already half of it. It's
already happened.

Speaker 2 (43:51):
So let's talk a little bit about US economic growth.
We earlier discussed Asia and Europe. You have said we
have resilient corporate earnings with forecasts that are in the
low double digits, robust risk appetite, and major buybacks that

(44:12):
are likely to rise as earnings rise.

Speaker 4 (44:16):
What's not to like about the US market?

Speaker 3 (44:19):
Not too much, I would say, I think that, you know,
going back to what I said earlier twenty twenty three,
we're waiting for the recession twenty twenty four, waiting for
the election. There's a lot basically of demand pentab demand
that for a variety of activities.

Speaker 2 (44:38):
You're talking pre twenty twenty November twenty twenty four, so
the prior year, right.

Speaker 3 (44:44):
But what I'm saying is that while you know, the
backdrop and the contacts 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 twenty eighty three, and so I
would argue after the Liberation Day shocks, so I would

(45:05):
say around the election last year, there was a lot
of buy into a very optimistic take. So we spend
one of our frameworks that we spend a lot of
energy on is our equity positioning framework. 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 having plus minus one, it's

(45:26):
sitting at plus point five. 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 details.

Speaker 2 (45:45):
When we say systematic, it's quantitative, its trend based, it's
earning scrow.

Speaker 3 (45:49):
So I have three in particular in mind so there's
the VALL control, there's the ctias, and then there's risk parody.

Speaker 2 (45:56):
Fund CTA is meaning mostly trend following commodities.

Speaker 3 (46:00):
Exactly, So it's about trend involve UH is a good
summary of each of the three basically, I mean, and
if you look at systematic strategies positioning, you know, 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

(46:21):
is very easy, which is basically VALL. You can use
any measure of VALL that you like, and and and
and it explains basically their positioning. So we had Liberation
Day collapse, we had April to ninth when the cause
of the volatility basically diminished or went down, and so
we had the fastest recovery from a wall shock ever

(46:45):
and and and but there's been very limited buy in,
I would say from discretionary investors who are actually sitting
at neutral discretionary is as opposed to systematic, but discretionary
you want to think about as fundamentals based in.

Speaker 2 (46:58):
Let's take that apart, because that's kind of fascinating because,
on the one hand, there's been a bubble in bubble forecasts.
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
market seems to not care, and it just keeps powering

(47:20):
itself higher. Let's talk about the policy issues you just raised. So,
despite Trump won with some tariffs that were I don't
know about ten percent, and I'm tariff man. It's the
most beautiful word in the dictionary. Despite all of that,
a failure of imagination or on all our parts, April

(47:42):
second shocked everybody with one hundred percent tariffs. I don't
think anybody imagined it, and we had that very rapid
sell off over the next week, then the ninety day
pause and markets took off. But at the end of
the ninety day pause, markets just kind of came going going, yeah,
how do you how do you put this policy into context?

(48:05):
And when you say there's not buying from the discretionary
part of the equity markets, somebody's buying, is it just
systematic or.

Speaker 3 (48:13):
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 just the very
very steady step, huge, huge games and society. So what
we got in September is basically big inflows.

Speaker 2 (48:31):
Right, And I want to say Q three twenty twenty
five was like the seventh best quarter going back to
World War II, some crazy number like that.

Speaker 3 (48:41):
So last month we had the highest inflow into bonds
and equities as a group ever, billion dollars into in
just one month.

Speaker 2 (48:54):
Do you pay attention or care about the seven trillion
dollars in money market funds.

Speaker 3 (48:58):
Or is that you know?

Speaker 2 (49:01):
So?

Speaker 3 (49:01):
I think that's partly a red herring in the sense
that basically it is a reallocation away from bank deposits.
So if you have sum of money market funds and
cash deposits, the line's kind of going up, but it's
going up in line with its trend because cash holdings
are going up. So the two things are just sort

(49:22):
of a wash.

Speaker 2 (49:24):
Because some people 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 in savings account.

Speaker 3 (49:36):
I think it's like very important to keep in mind
that we're having a boom and inflows across all asset
classes really and it's been going on for two years,
if not longer. And you know, as to the question
of why we're having this boom, our take is basically that,
so you have to start historically first, so that we're

(49:57):
talking about, you know, how things check changed relative to history.
So the pattern was that US households would put about
fifty percent of the new savings. So you get a paycheck,
you spend, something is left in the bank account, and
then you allocate basically some of it. But historically about

(50:21):
half of all household savings 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

(50:43):
in the mail or directly deposited in their bank accounts,
their cash holdings went way way up relative to trend.
We then had a period where, because you just over
allocated relative to trend, a period of cash going sideways,
so that all new savings one percent of it was
going into financial assets and into all financial assets is

(51:06):
not just I mean bonds were actually the bigger beneficiary
than equities. Believe it or not. Really people to think
it's equities first, but it's across that so crypto, you know,
commodity funds, you name it a but but it goes
all the way back to the pandemic, and and and

(51:27):
and it's not done yet, is the way I would
put it.

Speaker 2 (51:29):
Well, So you were talking about trade earlier. One of
the comments you made really I found fascinating markets often
price in trade deal hopes early. Are we over discounting
the impact of tariffs or our markets being too optimistic
or how do you contextualize?

Speaker 4 (51:51):
You know, we've been waiting to hear about.

Speaker 2 (51:53):
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. Are are markets not paying
enough attention to tariffs? Or are market saying, hey, President
lost at the Court of Trade, he lost at the

(52:14):
Court of Appeals.

Speaker 4 (52:15):
Maybe he's going to lose it to the Supreme Court.
How are we looking at tariffs?

Speaker 3 (52:18):
So, so, first, you know, a confession, which is basically
after April the second, you know, if you thought through
the impact of the announced tariffs, you were to come
to a very very negative conclusion, right, And that's what
we did, And so we lowered our numbers. We always

(52:40):
built in that there would be what we call a
relent on policies. It's just like trade war one point. Oh,
when the market is up, you know, he would escalate.
When the market was down, he would de escalate.

Speaker 4 (52:51):
People have hold that. I heard a couple of options.

Speaker 2 (52:54):
Traders called that the Trump collar.

Speaker 4 (52:57):
The Trump calls unlike the this is the Trump.

Speaker 2 (53:01):
Collar when markets are high, he's embolden when they're low.
All right, we're going to pause this and.

Speaker 3 (53:06):
Let exactly 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 a and and we have since basically
raised both our earnings numbers and our target your seven

(53:28):
so on. On January first, it was seven thousand, and
today it's again back to seven thousand, and then raised
it in two steps. But your question on you know,
or the tariffs having an impact, what I would say
is that there's sort of different dimensions. So it's kind

(53:49):
of a big question because it impacts everything. So first
is growth. We kind of spoke about that a little bit,
macro growth, and what I would say is that so far,
there's i mean, the logical and intellectual case for slowing
because of very high tariffs or a new tax. You know,
it's impossible to refute, and I'm not refuting it, but

(54:12):
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.
But if you look at macro growth. I also said
that what we're going through is mini version of twenty
twenty three because everybody took a negative view. That negativity

(54:32):
is extremely important part of the positivity in terms of
the price action. But climb a wall away exactly, and
and and you know, our equity is going to 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 are economists. So Matt Lazetti has a

(54:54):
two point eight percent GDP growth number for the third quarter. That's,
you know, the highest numbers I've ever seen from now,
even close before before the data started to disappear. And
and and so you know a number one, no sign
of it in terms of growth if you do and

(55:15):
think about it 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 number
three qualitative reado on earnings, which I would LaDue use
more important than just the numbers, and companies just basically

(55:37):
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 copies, within the realm of you know, our
guidance range. So yes it's negative, but it's not having
such a huge impact. And and and that the impacts

(55:58):
are basically you know, modest and manageable, and there is
a level at which you know you can think about.
So the numbers, what are the numbers? 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

(56:21):
of stuck at ten to eleven percent, and maybe it's
a little bit higher right now, So the market's working
with something like fifteen, so we still have a ways
to basically get there. And the underlying thesis has been
basically that if there's a problem, you will get relents
on exemption. So there's a lot of exemptions and that's

(56:41):
part of the whole thing.

Speaker 1 (56:43):
Really.

Speaker 3 (56:43):
Dimension of course is inflation.

Speaker 2 (56:46):
So let's talk about yeah, yeah, you know it.

Speaker 3 (56:50):
Did it already happen or is it still to come
one simple way. I mean, there's no way to answer
the question with one 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
what you will see is that the norm is for
goods prices to be deflating. We have the post pandemic

(57:12):
ten percent increases a chart of the price level. We
jump up by ten to eleven percent in a relatively
short period of time, and then that's done with and
we start disinflating 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

(57:33):
some impact of the tariffs has already happened. Question is
how much? And I would say relative to the trend line,
core goods prices are probably one one and a quarter
percent higher than they would have been if we had
just continued basically down that trend line. And so how

(57:53):
to basically, you know, handicap that one and a quarter percent.
We have in house from our rates 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
and a half percent. So simple point I would make

(58:14):
is it looks like half of the direct impact already happened,
and if half of it, you know, it wasn't so bad,
how much should we fear the second half?

Speaker 2 (58:25):
Coming up, we continue our conversation with Binkie Chata, chief
US equity and global strategist and head of asset Allocation
at Deutsche Bank's Securities, talking about his roles at Deutsche Bank.

Speaker 4 (58:38):
I'm Barry Ritolts.

Speaker 2 (58:39):
You're listening to Master's of Business on Bloomberg Radio. I'm
very redults. You're listening to Masters in Business on Bloomberg Radio.

(59:02):
My extra special guest today is Binkie Chada. He's chief
US equity and global strategist as well as head of
asset allocation at Deutsche Bank. You're 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,

(59:23):
tariffs are going to be very inflationary. We're seeing a reacceleration.
This isn't a noisy blip, but it's a start of
something worse. We're gonna end up at four to four
and a half five percent 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, because no.

Speaker 3 (59:44):
No, actually, you know I'm not counting on the rate cuts,
and I would argue the rate cuts, you know, much
more of a sideshow, basically real earnings.

Speaker 2 (59:53):
We do. We're so hyper focused on them. At least
the media sure is on 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.

Speaker 3 (01:00:07):
No, I mean the one freeze the housing market. You
need longer hand yields to basically.

Speaker 4 (01:00:11):
Go down, which have not happened.

Speaker 3 (01:00:13):
Yeah, they are pretty much on the low side. I
would argue relative too, So we have a house of
view for the ten year by year end that's closer
to four and a half, so four forty five.

Speaker 2 (01:00:24):
So we what does that mean for mortgage rates? So
we can see a five handle on mortgage rates.

Speaker 3 (01:00:29):
That's a pretty wide so there is room if and
spreads depend on volatility rates. Volatility has been coming down
quite a lot because you know, brokers need to hedge
basically the interest rate risk. Well that's outstanding, so so
I think it's supportive. But I'm not foreseeing any big

(01:00:50):
decline in interest rates.

Speaker 2 (01:00:51):
So maybe another cuts this year, one or two more
next year.

Speaker 3 (01:00:54):
It's also I mean, we don't have the data anymore,
so it's.

Speaker 4 (01:00:57):
Gonna be well, well, there's that it needs data.

Speaker 3 (01:01:02):
But I wouldn't be surprised if the Fed misses one
of those two meetings. In terms of the rape Cottson
pushes it out. I mean this is sort of more
a you know, fine tuning type exercise, either 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,

(01:01:23):
but it was giving you some you know, that kind
of growth. I mean, do we really need lower interest rate?

Speaker 4 (01:01:28):
So let me ask the Jerome pal question.

Speaker 2 (01:01:32):
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, they're a shortage of workers.
Twenty twenty five maybe the first year in history where
US population actually declines. Less immigration, more deportations, a whole

(01:01:53):
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?

Speaker 3 (01:02:05):
Yeah, I think we have a relatively fully employed labor
for us in our baseline view basically sees, you know,
if you ignore the decimals, a little bit abounts here
and they're not really you know, changing very much. So
the question becomes, you know, who's going to produce that
three and four percent GDP? So it was pretty bearish

(01:02:28):
take when we got the revisions basically to the payrolls numbers,
the benchmark provision. But you know, if you're not changing
the GDP numbers and base the level of productivity basically commensurately.

Speaker 2 (01:02:41):
It's not as much of a negative as it looks
at first plus exactly, right, don't I know a lot
of economists who look at growth as productivity plus inflation?
Fair fair assessment.

Speaker 3 (01:02:54):
Yeah, I would say productivity plus employment. Then to get
to the nominal part you would add inflation. And so
I mean, if you think about so we talked a
little bit about, you know, the parallels between today and
the nineteen sixties and the second half of the nineteen nineties.
That's the two periods since World War Two where we

(01:03:16):
had basically productivity growing at three three and a half
percent for sustained period of time. Normally it grows at
one point one point five percent.

Speaker 2 (01:03:26):
What's the old line? I forget who I'm stealing this from?
Productivity gains are seen everywhere except the productivity data.

Speaker 3 (01:03:36):
So that's because you know it's calculated as a residual. Right,
So first you have to estimate GDP. Then you have
the first revision, second vision, third revision. Then you have
to estimate what we were just talking about, which is
the labor input, which is revised then re revised benchmark,
and then what's left over is productivity. But what I

(01:03:57):
would argue is that if you look at a simple
chart of reported productivity in the non foreign business sector,
you know you'll see this growing in a trend channel
of one point four percent, and basically what we've had
over the last couple of years, we went way about the.

Speaker 2 (01:04:15):
Channel basically, and so post pandemic.

Speaker 3 (01:04:19):
That is right, So we got a pandemic jump, then
a slow down back into the channel, and so over
the last two years is what I'm saying. So officially,
you know, yes, the immigration issue, but officially unemployment it's
only been four percent, was even lower, so it was
a tight Historically, a tight labor market has been a

(01:04:40):
necessary condition for getting those productivity booms like we had
in the nineteen sixties and in the second half of
the nineties, and we've had a tight labor market for
several years right now.

Speaker 2 (01:04:51):
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 five hundred,
but you're constantly bringing up the various macro risks investors'
face that sort of full view and not being so

(01:05:19):
just mindlessly bullish is kind of fascinating. So let's talk
about some of the risks that you've been writing about
and discussing. Have to start with froth and AI and
capital spending. How do you respond to chargers that this
market has become frothy A.

Speaker 3 (01:05:40):
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.

Speaker 2 (01:05:56):
So AI bitcoin hit one hundred and twenty five thousand
over the wen.

Speaker 3 (01:06:02):
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,

(01:06:23):
the question I would ask about the retail investor is,
you know, 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. This is I mean,
we don't have a history of retail participation participation in

(01:06:44):
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

(01:07:05):
retail investers. But from a quantitative point of view, I
don't know. I was looking at statistics, So there's conflicting measures.

Speaker 2 (01:07:13):
It's fairly modest, and a lot of it seems to
be four oh one k.

Speaker 3 (01:07:16):
And the whole thing about how you know, the volumes
have taken off and they have skyrocketed and now they
account for four percent tiny exactly. So everything is you know,
consistent and correct. But I now you have to frame
it appropriately. Yeah, and this is a cycle, and we're
talking about now, but basically, and this is you know,

(01:07:37):
me speaking has equities with it's a cyclical asset, okay.
And and and so if the cycle continues the way
that it's been continuing, all of this is going to grow.
But today you're not there yet.

Speaker 2 (01:07:51):
What about market concentration that the magnificent seven or whatever
you want to call the top ten? Is that as big?
Is that real threat? Or is that? You know, this
happens from time to time when a new technology attracts
all this attention.

Speaker 3 (01:08:06):
So I mean, I would put it slightly differently. I
would say the market concentration in megacap growth in tech
reflects the concentration of S and P five hundred earnings
in the megacap growth in what are they?

Speaker 2 (01:08:19):
Something like two trillion in revenue three hundred billion in profits?

Speaker 3 (01:08:22):
Some crazy they're responsible right now for about forty percent
of S and P five hundred earnings, So.

Speaker 4 (01:08:29):
Why shouldn't they be forty percent of the market cap?

Speaker 3 (01:08:33):
Exactly? So they're actually thirty percent of earnings and forty
percent of the market cap.

Speaker 2 (01:08:37):
I apologize, So why are they so overweight?

Speaker 4 (01:08:41):
Is it just future growth expectations?

Speaker 3 (01:08:43):
They're growing faster, so they should definitely have higher multiples. So,
you know, people frame the question as focused on the
megacap growth in tech, you can ask the equivalent question, Actually,
it's a bigger part than sixty percent. Why isn't everybody
else growing? I got into this a little bit earlier.
It's very peculiar recovery where the cyclical parts basically haven't
really kicked in in a big way, but it looks

(01:09:06):
like they're kicking.

Speaker 2 (01:09:07):
In what other sectors are kicking and you we I
know you've written about financials, consumer cyclicals, materials, and then
we could talk about em and small cap and value.
Sure what other sectors have been lagging that you find
particularly interesting?

Speaker 3 (01:09:26):
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
going to 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

(01:09:48):
megacap growth in tech for well known reasons, all the
reasons that you basically mentioned, So you know, if you
phrase it form, you can phrase the question basically from
who's actually going to buy this stuff? This group stands
out and their concerns suggests that they would buy the
cycling goals if they started to believe that the cycle
is going to be fine if you look at it

(01:10:09):
from a fundamental point of view. No, I mean, there
aren't no signs of a huge uptick on the cignical 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 five recession. You know, this brick
shaded period. Equity market falls twenty percent once the recessions

(01:10:31):
you know, starts, but it robustly bottoms around the middle
of the recession and before and recovers while you're still
in this gray shaded area. So if you wait till
payrolls turn negative, you will have missed the entire move
and you will be back to, you know, basically catching

(01:10:52):
that small exactly. So 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.

Speaker 2 (01:11:03):
You've identified a number of risks earlier in the year,
and I'm curious if you still think they are significant.
Protectionist trade policies and immigration policies. Are those still potential
growth pressures or inflation pressures?

Speaker 3 (01:11:20):
I think on the tariffs basically they've proved to be
exactly and so I don't worry about that. I don't
think it closes the issue. I mean, they could still
be negatives that come out of that that we're just
not completely aware of yet. But in that event, you know,
a big part of our thesis for this year has

(01:11:40):
been that if things get bad, you know, at the
end of the day, any administration cares about its approval ratings,
the approved 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. So, you know, we talk

(01:12:02):
about risks, and I am deeply aware of what most
people mean when they talk about risks, but where we
are sitting, I would argue that it is my duty
to simply point out that right now I'm much more
concerned about upside risks than downside.

Speaker 4 (01:12:19):
And melts up potential. A.

Speaker 3 (01:12:23):
Yes, because we don't we stop worrying about going into
a recession, We stop worrying about the politics, and we
stop worrying about the tariffs because companies are dealing.

Speaker 2 (01:12:33):
With it, and suddenly there are blue skies out there.

Speaker 3 (01:12:37):
Exactly.

Speaker 4 (01:12:38):
So last question before I get to my favorite questions.

Speaker 2 (01:12:42):
Okay, what do you think investors are not paying attention
to or not talking about that perhaps they should, could
be a policy, could be an asset class.

Speaker 4 (01:12:51):
What do you think is getting overlooked.

Speaker 3 (01:12:54):
The context that we are in? What I was talking
about basically that a three percent growth with a four
percent unemployment happens only five or six percent of the time,
and it unleashes certain dynamics. And you know, it started
during the previous administration and has continued in this administration.

(01:13:18):
So it's not necessarily about the policies.

Speaker 2 (01:13:21):
So we've got 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, I believe, So yeah, really interesting stuff.
Let's jump to our favorite questions, starting with the question

(01:13:41):
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.

Speaker 3 (01:13:54):
So I started my career at the research department at
the IMF and the most important mentor, I would say
was my boss is a gentleman called Michael Dooley, ex
Federal Reserve, you know, at some of the highest levels,
but was at the IMF then he I was just

(01:14:16):
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.

Speaker 2 (01:14:30):
That's a great, great answer. Let's talk about books. What
are some of your favorites? What are you reading currently?

Speaker 3 (01:14:35):
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 Isabelle Allende's books. I'm currently on a
Long Pedal by the Sea, which is a book about Chile.

Speaker 2 (01:14:53):
Really interesting. What about streaming outside of this show? What
are you watching listening to? What keeps you entertained when
you have a little downtime?

Speaker 3 (01:15:01):
Given my background, I'm definitely big Bollywood fan.

Speaker 2 (01:15:04):
Oh really.

Speaker 3 (01:15:06):
Yeah, I'm very partial to Indian movies.

Speaker 4 (01:15:10):
And give us a title that some of them are.

Speaker 3 (01:15:12):
One that I really liked its own prime. Actually it's
called Tonda t A.

Speaker 2 (01:15:17):
N d A v uh huh.

Speaker 3 (01:15:20):
What's that about it's about politics in political career, and
unfortunately they did not allow the season two to be
the authorities didn't allow season two to in India.

Speaker 4 (01:15:36):
They going off, Yeah, yeah, well, thank goodness, nothing like that.

Speaker 3 (01:15:40):
But you still watch season one?

Speaker 2 (01:15:42):
Yeah, 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.

Speaker 3 (01:15:56):
Yeah, I think that you know, 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 where my abilities are. And my

(01:16:17):
advice would be to go with where your interests are,
the ability will come. I just went through recruiting process
and just hired somebody from our grad program onto my team.

Speaker 4 (01:16:29):
Interesting.

Speaker 2 (01:16:29):
And our final question, what do you know about the
world of economics and investing today? Would have been helpful
when you were starting out back at the IMF in
the nineteen nineties.

Speaker 3 (01:16:41):
To ignore everything except the economy. You all heard this
expression right about presidential elections, it's about the economy stupid,
it's still accurate, and the S and P five hundred
is about earnings period positioning valuation. It all fits in,

(01:17:02):
but the underlying trend is all basically coming from earnings.

Speaker 2 (01:17:06):
Totally, totally fascinating. Thank you, Binkie for being so generous
with your time. We have been speaking with Binkie Chada.
He is the chief US Equity and Global Strategist and
head of asset Allocation at Deutsche Banks Securities. If you
enjoy this conversation well, be sure to check out any
of the five hundred and seventy seven we've done over

(01:17:27):
the past eleven 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.

Speaker 4 (01:17:49):
I would be remiss if I do not.

Speaker 2 (01:17:50):
Thank the track 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 podcasts
at Bloomberg. Sean Russo is my researcher. I'm Barry Rudoltz.
You've been listening to Masters in Business on Bloomberg Radio