A stellar year for the stock market is coming to a close and money-managers are looking ahead to what 2022 might have in store. But worries persist, including the perennially nagging question of whether the stock market is overvalued and in a bubble. Sébastien Page, head of global multi-asset at T. Rowe Price, talks about his views on that, his team’s current strategy, the need for diversification and his year-ahead outlook.
Hi, and welcome to What Goes Up, a weekly markets podcast umbled on a higher across hasset reporter at Bloomberg, and I'm Katie Greifeld filling in for Mike Reagan. I am also across asset reporter at Bloomberg. I'm also the co anchor of Quick Take Stock. It is a daily market show for Bloomberg Quick Take, and this week on the show, Thanksgiving is around the corner in Wall Street is looking back on the stellar year while also trying to predict what two might bring. Everyone's still contending with lots of things, including hotter than expected inflation, bubble talk, and projections that the portfolio is dead. We're going to get into all of that with our guest, the head of global multi assets at a major investment firm. But first, Katie, I wanted to welcome you to the show. Mike's out this week and that it's actually really perfect because you and I have a lot to talk about. We've been hanging out recently, most notably at some football games. And then just a reminder from me and you, Mike said that we must make a joke on this week's podcast. Listen. I don't have jokes I have nothing but facts. I've learned a lot about football, in particular in the last week. I've heard a lot about Josh Allen. Apparently he's really good. I've learned that in trouble you throw to Digs, He'll get it done. On the Jets, though, Mike White, I mean, next Tom Brady, I don't know. I don't think so for all of our listeners. Katie and I went to the Bills and Jets game this past weekend and we had the best time. And Katie heard a lot of really amazing catchphrases that she was using throughout the game, and I think it worked out. I think so. I mean I was soliciting cool catchphrases I could sprinkle into conversation. Um, the Bills, they had a pretty rough game the weekend before, so they really needed to come out with their hair on fire. With their hair on fire, that's right. They delivered. They delivered two touchdowns. And this is now a sports podcast, by the way, this is everybody who's tuning in for for a commentary on the stock market. You can you can delete now, well we can. We can ask our guests this week about football as well. Possibly, but let's bring in Sebastian Page, who's the head of Global Multi Asset at TRO Price and he's also the author of a new book called Beyond Diversification, which will also discuss on the podcast today. Sebastian, welcome to the show. Thank you, Vildana and Katie. Thank you for having me. Really happy to participate today. Are you a football fan? Yeah, I'm in Baltimore, Maryland, so it's the Ravens for me. Oh go Bills all the way. And I don't have any fun facts about the Ravens. Unfortunately, you'll have to let her know ahead of time next time. But Sebastian, I always hope you could help set things up for us and just give us a little bit more about your role at tro and what your strategy looks like right now. Yeah, thank you. You know my role at THRO I like to say it's the perfect job for me. I absolutely love it. I'm running a large global investment organization, in this case over four hundred and fifty billion in a u M and we oversee over two D and twenty portfolios. And by the way, we have the number one actively managed retirement product in terms of assets under management and performance. The job will Danna involves not only investment oversight, so you know, staying on top of capital markets, consuming vast amounts of research from Bloomberg of course, and so on. But I also run the business, which means setting a strategic vision, making sure it's executed well, importantly, recruiting, developing talent, managing large product development projects. I'm also a member of the firm's management committee, which means I'm representing the division at the firm wide level, and I helped manage the firm. And by the way, at tour Price, we have one point six trillion in assets under management over seven thousand, eight hundred employees in sixteen countries. You know, we have a good brand, but we also have this ethos of keeping our heads down and focusing on investment performance. So for some people and maybe some people in our audience today, sometimes we're like the biggest asset manager they've never heard of. Bottom line is the job is broad. I learned something every day. There are investment challenges and leadership challenges. So if you follow me on LinkedIn, by the way, I realized I'm starting to sound like an influencer. I only have LinkedIn. I don't have Twitter, or anything else. But you'll see that I started was posting on capital markets, of course, but I started posting short articles on psychology and leadership as well because that's a part of my job. So sorry for the LinkedIn plug. I'm just starting to get a few followers and trying. We're trying to ramp up our digital brand as a firm. But yeah, the bottom line is it's a broad job. It's a leadership and an investment job. Sebastian, We've got to get you on Twitter. It's where all the action is. You would fit right in at fin Twitter. But we are in the special time of year where we have about six weeks to go until two and as such, we're starting to see a lot of your head outlooks trickle out, and I'm curious to hear your view on what we're heading into next year, because I mean, just we're still waiting on tenter hooks to see who Biden's FED nominee will be. For example, we know that inflation is at level we haven't seen in decades. Curious how you're taking all these different inputs and seeing how the year head might look Katie. A simple question right now that's on everyone's mind is our stocks in the bubble? And it's really a complicated question. They're both and this is gonna sound unusual, but I can make the statement that at the same time that stocks are both as expensive as they've ever been and as cheap as they've ever been. So how do I get to that statement? If I look at the price earnings ratio on the stock market on the S and P five, it's in the person tile compared to the last thirty years. Maybe it got more expensive around the tech bubble, but pretty much close to as expensive as they've ever been. But if you think stocks are expensive, have you looked at bonds recently? And if you compare the evaluation of stocks that PE ratio, and you can invert it and look at the yield, which makes an easier comparison with bond yields and in particular real rates, the yield you get on bonds after inflation. Then you get to the conclusion that it's it's in the bottom one. So stocks are as cheap as they've ever been. So it's a confusing time for asset allocators. We just had a debate between the bulls and the bears in our asset Allocation Committee. So as we look into the bears are arguing that we've borrowed from the recovery. In other words, valuations are a sign of that. And monetary and fiscal policy have been so extreme that one of our committee members said, look, every inch of recovery will get taken away by the Feds. Need to taper. And on the fiscal side, we're kind of at the end of the day is of sending checks to people. One reason to worry about asset valuations is that it's been liquidity driven. I listened to your podcast. I'm a fan, by the way, I listened to it every weekend. Um. I listened to your Weirdest Things in Market in markets, so you see the speculation there when you hear your comments about the weirdest things in market. Right, you mentioned at one time that someone bought the jpeg and n f T the jpeg of a rock, a dancing rock or rock with red eyes for one point one million. Right. The other one I think you mentioned was the Shiba, a new coin which is a spoof coin on a spoof coin on doche coin. Right, someone had eight thousand dollars in an account and then a year and a half later, that account was worth five point seven billion. So when I talk about liquidity and speculation in markets, you have these micro bubbles, and this is another ration of what makes the bears nervous. So thank you for these examples. I'm using them in some of my presentations. Now. So what are the bulls saying in our committee? Now? They're saying that, look, peak growth doesn't mean low growth. The delta situation ultimately, we hope will be better in six, nine, twelve months. Think about a back to normal world where there's less COVID supply chains maybe slowly, but still normalize services, spending increases, and so on. So the bulls are saying growth is slowed and delayed, but it's not derailed. We're still in their recovery. The number that sticks in my mind, and you hear it a lot in the financial media, is this two trillion dollars sitting in people's checking accounts, right, this concept of pent up demand and companies are flush with hash too. And there's a massive wealth effect at some point from asset price appreciation. And here's something that's not talked about much. Pent up housing single family housing units under construction at its highest level in fifteen years, and this is due to supply shortages. We know also the percentage of houses for sale but not started is at its highest level in history, almost doubled the long term average. So just that pent up housing, our economists here things that it can add seventy five basis points to GDP growth next year as some of these things start to normalize. So the bottom line is that over the next year we will face decline in growth, but still very high growth, declining liquidity, but still very high liquidity, and settle into the mid cycle game. For that game, you need earnings to sustain stocks more than rising valuations, which is what happened this year. Price earnings ratios actually went down on the margin, but earnings has been so strong that stocks have continued to make new highs. You know, it's a massively distorted economy. Ultimately, we're more bearish on bonds than stocks. So where do we settle all of this between the bears and the bulls. Is that we have taken some profits in our portfolios by selling some stocks, but on the margin, we've sold about one percent of our stock stocks exposure. But we're also long growth. We're also a long the economy, so we've added risk back into the portfolio through relative valuation, so to go along the economy long cyclicality. We have shorted treasuries, we have added on the margin to credit, and we're long small cap and value stocks. So we're adding baxiclicality into the portfolio as we're selling some stocks on the margin. That's how we settled the debate, that's how we're thinking about two. So, Sebastian, you actually stole my next question because I wanted to ask you about I saw in one of your recent notes that you guys did recently sell one percent of your equity exposure, so I wanted to ask you about that. And I wanted to ask you to look ahead to next year because my colleagues and I were thinking about what some of the strategists have been coming out with, as Katie mentioned, for their year ahead outlooks, and I wanted to ask you how true it is that a lot will depend on where rates and yields are. And then another one of your comments recently had said that you guys moved some assets into liquid alternatives, and I wanted to ask you what specifically that is. Yeah, let me start with UM the liquid alternatives questions. So as you sell some stocks, maybe you start taking a bit of profit, you pull back a little bit, You stay diversified, you stay invested, but the question becomes where do you put the money? And this relates to the six question as well. About twelve of our core bonds exposure UM has been transferred in our flagship global Allocations strategy to liquid alternatives. Those are strategies that are active management focused, so you need skilled active management to succeed here, and they allow for short positions. They're not linked to the big market trends in either equity returns or interest rates. So that's how we add some diversification into the portfolio. We've also added on the margin two loans as an asset class. Bank loans tend to do okay when rates rise really too long treasuries for example. And we've also added but not too much, but on the margin to credit more broadly, high high yield in particular. So that's how we're positioned from a tactical perspective at the moment, So sepassion. It's been about fourteen minutes that I've been recording. Haven't brought up crypto yet. But I'm going to do that right now, because when you think about a diversified portfolio, obviously the bitcoin is an infleation hedge narrative has reared up again, especially after that really really hot cp I figure that we got for October. How do you think about crypto as an asset class? First of all, just look at the size of crypto, and it's hard to disagree with the idea that it is an asset class. Overall, it's bigger than say, the high yield bond market in the US, So it is a force to be reckoned with in most of our portfolios in our business or clients aren't giving us the mandate to invest in crypto, but we do research in that space because it's going to influence how a lot of companies do business in multiple sectors. We have an army of stock analysts at Tyro Price, and so some of them are following the space. We're looking at it at this point personally, I can say not from an inflation hedge perspective, simply because it's just still such a speculative asset class and it's really driven by technicals sentiment. Sometimes crypto moves and that's why I don't envy being in your business, Katie and Bill Donna, because it's just hard to actually explain. Right, Oh, it's down ten percent, or maybe it's the sweet and it's a little bit mysterious, nebulous. This is a sign that it's still an asset class that moves on sentiment and speculation. I'm just gonna throw a number. I haven't done the map, but let's suppose the volatility of crypto really is speculation trend chasing sentiment. Well, that doesn't make for a really good inflation hedge, unless maybe you think about it from a very, very long term perspective. It's an evolving space. It's an important space for asset allocators to think about. The fact that it's highly volatile is not necessarily an issue. It means that it's more capital efficient, all else being equal. But it's still, for us, not an inflation hedge um as we would think of a traditional inflation hedge. Sorry I'm sounding a bit old school here. Now, this is this is great and I'm really glad. I'm really glad that we brought inflation because Katie wrote the cover of Business Week this week, and it's all about the idea that technically digital. Dohna wasn't on it too, so I was part of it. But her story it was so good. If you haven't seen it, you have to go see it. It's all about how important it is to get the inflation call right for portfolio manager heading into two and so I wanted to ask you where you fall on the transitory or not debate, and then what some potential inflation hedges are, because that was what was part of my article for for Business Speak. It was about, you know, do you buy bitcoin or gold or reads or whatever else? So what might you recommend as an inflation hedge? Yeah, really good question Bill that. In fact, it's kind of become the question right now. Uh. COVID is an absolute disaster, but it's almost taken a back seat to the inflation question. First of all, I'll say, well, you've solved the riddle of how to create inflation in the developed world. It's fiscal policy, not monetary. Right. We've dropped i don't know, four hundred million checks of over a thousand dollars right from the helicopters. So there's too much money demand chasing, too little stuff to buy, especially goods, which creates supply issues. This is not new. Everybody's talking about the mother of all traffic jams at this point. You know, at TiO, we don't have a house view. Sup Portfolio managers across our investment platform actually divided on the question as to whether will face runaway inflation, which Bill Donna. The trick with the transitory question is that everyone has a different definition of transitory, so you sort of need to define transitory first and then express your view. So here I'm gonna say, maybe rephrase the question, are we going to face runaway, out of control inflation that will force the Feds? And you know, from a long term perspective, technology globalization have put downward pressures on prices. And if you go back to say two thousand and you look at the trends in different components of inflation. Uh, look at say, flat screen TVs, computers, all that stuff has gotten really cheaper and cheaper since UM two and before. And so you have you have China made stuff you can buy on Amazon, really cheap stuff, apparel, furnitures, toys. You know, maybe we'll buy less stuff from China. But globalization is sort of unstoppable, right, So maybe in Vietnam and Malaysia and Yea. So those long term trends technology, globalization persists in the background. We don't really think about them right now because we have supply issues and other more pressing concern to address. So from a shorter term perspective, there are reopening effects. We just had a print at six point two headline. You see a big component of it was used cars up about thirty but also inflation is becoming more broad based. You see rents, rents lag real estate. Real estate is up by about expect rents to go up based on the historical relationship when people get to renew their lease um, they will most likely see a price increase. And then there's energy, which is also a puzzle. So gasoline is up fifty percent over the last twelve months, So if you're looking at projecting inflation into next year, it could say, look, it's unlikely that gasoline will be up another fifty percent and news cars probably won't be up another But if you look at shelter, a third of the CPI, you know it was up only three point five cent over the period for that last print of six so it kind of doesn't add up with real estate being up. That is more structural, and of course wage inflation is more structural. So I think overall, I think we're close to pick and peak inflation, but we won't settle back down to pre COVID sub two percent numbers in the foreseeable future. Right now, as we speak, five year break even inflation is trending up. It's at three point two, and that seems reasonable to me. But it's a problem because the FED is you know, you can be flexible. The FED can be flexible targeting two. But there's flexible, and then there's as break events are implying, letting inflation average above three over the next five years, something has to give just to quickly hit Bill down on how do you hedge those risks? We hold short term tips in the portfolio. Interestingly, those are up about seven percent this year compared to minus one for the Barkley Zagg but overall expected returns on short short short term tips are are fairly low where we sit now. We also hold people talk about gold crypto we've just talked about. We also hold a fund of real asset equities. So these are stocks, Katie and Bill Dana, these are stocks, but these are stocks that are inflation sensitive. So think about real estate reads, metals and mining companies, precious metals, energy companies. So what you get with this real asset equity strategies is a levered response to inflation. Right, so if you get an inflation shock, it will go up by five six x and you also get stock exposure in the long run that tends to pay off. And so that's strategies up significantly over the last year as it's done its job of hedging the surprises. Uh in inflation. Now everyone's worried about what the Fed will do. We're all scared of rising rates. I'm gonna end my answer to this really important question on inflation with a riddle for for you, Um, Katie Vildanna, what do egg, yolks, red wine, coffee, and rising rates have in common? You can have them all for breakfast. Well, yeah, we could quibble on wine, but not on this podcast. So so, so the idea is that you don't really if you look at research and you're into health and fitness, you don't really know if these things are good or bad for you. Right, It kind of can go both ways. That's the same thing for a rising rates. We actually did a study and we looked at nine times that the FED pivoted towards higher rates since nineteen seventy nine, and that included the two thirteen paper. And we looked at stock returns twelve months before the pivot and twelve months after the pivot, which gave us eighteen observations. Seventeen of those saw positive stock returns, and the stock returns to were fifteen percent on average. So everyone's you know there, everyone's freaking out about rising rates. But the FED is only comfortable hiking and pivoting in a strong economic environment. The FED doesn't raise rates in a recession, so the initial pivot is usually not as damaging as you might think to risk assets. This is historical evidence. Things could play out differently based on what we just talked about around inflation, but it just gives you some perspective about rising rates. I like that all three of us agree we can have rates for breakfast. Absolutely delicious. Uh, you know, a little bit of cinnamon, But I didn't want to ask. You know, you mentioned that everyone is worried about rising grates. It feels like, you know, on and all of everyone is also worried about um rising long term bond yields. But if you look at the bond market, I feel like that has almost become a pain trade because I'm looking at thirty year treasury yields right now, especially for the past six months or so, it feels like they just can't hold above two per cent. Uh. Same with ten year yields, I mean one point seven five got there for a second, and we went right back down. What's going on in that market? Because I mean, inflation is here and it's hot, but yet long term treasury yields still quite low. It's remarkable, isn't it? What an important question? Ten year yield at one point six in flay and running at six percent, growth running at five six percent, so you talking about nominal growth above ten with the ten year yield at one point six it's a really big unusual spread. And then when you subtract the inflation from the ten year yield, you get an all time low number less than minus one. So what's going on? Many things influence the direction of rates. Probably the most important isn't extremely debbish fed even in the face of everything that's happening with inflation in the recovery. The other thing is that there is a lot of demand from outside the United States for treasuries, And if you're an investor based in Japan, for most of the last twelve months, treasuries were hovering towards on a hedged basis back to your home country, kind of like close to a ten year high. So you actually rates are so low in some countries that this creates demand even for the long end um for treasuries. It keeps rates low when all is said and done, right now, our largest tactical position in our portfolios is to underweight treasuries, and Katie, to your question, underweight the long end. It's starting to look like a coiled spring this valuation. And if you look forward over the next twelve months, it's possible that the direction of rates is higher. If break even inflation, as I mentioned earlier, over five years is three point two, the Fed has to do something even under flexible average inflation targeting to stay around two. So's there's a little bit of an asymmetry, right how much lore can they go from here? And how much higher can they go from here? I'd rather be on the side of pie. So Sebastian, I wanted to ask you one more question before we get into the weirdest thing, and it's about your book called Beyond Diversification. I'm hoping you can set up for us how you're thinking about never certification considering all of the things that we were just talking about, and granted those are, you know, some more short term things, but how should people be thinking about diversification? Why did you feel it's important to write this book? Yeah, thank you for the question. Think about the is the sixty forty portfolio dead? Question? In a sense, that's a question the book addresses. I cover asset allocation for the long run, how you do tactical asset allocation, and how you think about risk, and I revisit how we think about the concept of diversification. So around COVID the book was still in production and the media all of a sudden latched on this question. Is the sixty forty dead? I called McGraw hill and tried to change the title too, is the sixty forty Dead? But unfortunately it was too late, so it would have been a better title than Beyond Diversification. But Bill Donard gives you an idea what the book is about. How do you construct a portfolio given current conditions? I review about two hundred academic articles, but I make it really really user friendly. There's no math, no equations. I also refer to our own experience managing portfolios, and in the third section you get model portfolios too, to give you an idea of, depending on what you're trying to do, what the asset allocation would look like. Stand clear of the craziest things we saw in markets this week. We talked about a lot of weird things on the podcast so far, but we have to get to our weirdest things that we all saw this week. I know Mike usually does this section and sets us up and plays little games, and I'm not as fancy as my kiss, so I think we'll just have to go around and go over the weirdest things that we saw each of us. Sebastian, if you'd like to start, Oh, thank you, I'm glad to start. I've asked my entire strategy team for ideas for this segment, and here's the problem, Uh, Katie, I got too many, and I didn't know which one to choose. So people talked about the size of Avis and the index, the squid coin, which went up millions of percent then crashed zero, how big the fangma's have gotten I heard Rob Arna on your podcast talk about that Amazon collecting thirty five cents of every dollar spent online and so on, So I it is just like which one am I going to choose? I know you always talk about crypt not always, but often talk about crypto some items that are selling at auction, right. I hear Mike sometimes trying to make people guess how much the items are selling for. So those ideas were off the table. I settle on one that I read this week. But I cheated, and I know Mike he's not on the show right now, so maybe we can we can say he cheats sometimes. Um so I he cheats all the time, so you can you can cheat this week too, thank you. So it's something I read this week, but it actually occurred in the eighties, and it's more broadly related to marketing than markets per se. And um, I guess I can make it a game a quiz. So McDonald's, this is going to be a quiz. Back in the eighties, McDonald's had so much success with their quarter pounder that apparently A and W decided to offer a bigger, juicier third pound burger at the same price. The product was a huge flop. It was a bigger what third pounder juicier? It was to compete with the quarter pounder. It was the same price, but it was a huge flop. So my quiz for you is, guess why I know this one? I have the answer, pill Donna, do you have the answer. I don't have the answer. Okay, here's the answer. It's because four is bigger than three. So people heard quarter pounder and said, oh, that has a foreign it that's bigger than three. That that's right. That is that. That is the reason it went down in history as a huge marketing fail because after the fact A w realized that people, a lot of people, too many. I thought that a quarter pounder was bigger than a third pounder. Wow. I'm pitiful at math, but I at least know that this is amazing. I think you win. I mean, Katie and I don't even have to go. You win, Katie. Katie will get to go. But it's the best. You have so many good ones. This is why you need a Twitter so you can tweet about these weird things. I don't have a thick enough skin to get on Twitter. It's a rough it's it's brutal out there. It can be toxic, but you find your nice little niches and people will People are generally nice, Katie, and I will follow you. Yeah, okay, thank you, Katie. What's your weirdest thing? Okay, it's not so much like a crazy thing that I saw, but it is a fun fact. So Sweet Green Salad chain it went public this past week valuation but almost three billion dollars, and Bloomberg had a great story. Drew Singer wrote it. So there's been eleven food and beverage I p o s this year. That is the most since n did not know that there's only one. I mean pretending that Sweet Green hasn't happened. There's only one food or beverage I p O that's treating higher this year. It's a winemaker called duck Corn Portfolio, and the ticker is NAPA, which is adorable. Wow, what a great ticker. I think it's up thirty percent this year, so outperforming the S and P five hundred at this point. Well, I will say, I think the last time I went to Sweet Green, I spent like seventeen dollars for one salad. So inflation, they everywhere they better and they better be making money with with those types of prices. You have to imagine so or they're doing something wrong. It's your turn, though, Oh yes, it's my turn, that's right. So this one is courtesy of Stacy Marie Ishmael, who's the head of crypto for us over here at Bloomberg, and she shared this story from earlier in the week. It's titled Barbados is to become the first sovereign nation with an embassy in the Metaverse. Oh my god, Wow, I mean just wow. The article says Barbados is preparing to legally declare digital real estate sovereign land with the establishment of a metaverse embassy. And I just had this great, you know picture in my head of people going in, you know, in this digital metaverse, lining up at the embassy for their passport whatever needs. I don't even know so that that's gassport in the metaverse, or their countries and borders in the metaverse? Do I have to pay rent in the metaverse? Thinking about the metaverse makes me spiral. I think you and I should just start a business now about, you know, getting everybody settled in the meta worth yea move in service. Yeah, I don't know, Sebastian, what you think about the metaverse. Katy and I have many thoughts. Yeah, it's um, it's puzzling. I think about I think about my kids who just through covid, if just spent so much time on mine Craft and you know, those types of games, And I think about ten years from now, what really all of this will look like. And I don't know. It's it's a it's puzzling exactly where this is going. And the fact that Facebook is leading the charge is is also puzzling. So we'll see, we'll see how it plays out. I don't know. I'm not ready to If I'm going to visit Barbados, I think I'm going to go in person. And I mean, you're not even on Twitter, how are you gonna get into the metal exactly? I'm way behind here, way behind. UM. I think we'll have to leave it at that. Thank you both so much for joining us. Sebastian, thank you for joining the podcast. We're looking forward to having you back on. And Katie, I think I think we just don't call my creaking back ever again for the podcast. I think who's were welcome to be the who is he? I don't know that man. Me neither. I've already forgotten about him. So thank you both so much for joining the show. Thank you, thank you. What Goes Up. We'll be back next week. Until then, you can find us on the bloomboog terminal website and app, or wherever you get your podcasts. We'd love it if you took the time to rate and review the show Apple Podcasts so more listeners can find us. And you can find us on Twitter, follow me at Vildanna Hirich, Katie Greifeld is at k Greifeld, and our guest, Sebastian pagees on Linington. You can find him at Sebastian dash page. You can also follow Bloomer Podcasts at at podcast and thank you to Charlie Pellett of Bloomer Radio. What Goes Up is produced by tofar forheas the head of Bloomer Podcasts. It's Francesca Levi. Thanks for listening and see you next time.