This week, U.S. economic growth came in lower than expected, some high-profile companies posted disappointing earnings results and central banks worldwide took steps toward withdrawing pandemic-era stimulus. Yet stocks are broaching new records and October shaped up to be the best month of the year. To Wall Street veteran Doug Ramsey, Leuthold Group chief investment officer and co-manager of the Leuthold Core Fund, it looks like the market melt-up has just begun.
Hello, and welcome to What Goes Up, a weekly markets podcast. My name is Mike Reagan, I'm a senior editor at Bloomberg, and I'm vil Donna hick Cross ASID report at Bloomberg. And this week on the show, Well, the good news is the SMP five hundred is trading near record highs again. But the bad news, well, there's some clouds gathering on the horizon. US economic growth came in lower than expected at two percent for the third quarter, and the inflation fueling supply chain bottlenecks don't seem to be easing any time soon. Meanwhile, the Federal Reserve appears poised to finally announce plants to taper its asset purchases next week. So it's this rally on borrow time. We'll get into it with a veteran fund manager. But well, donta first, I need to issue I don't know if you would call it a correction or retraction to last week's podcast. Remember we were talking about how our friend Sarah has cooled seats in her car down in Florida. Yeah, of course, I remember. It's like the coolest thing I've never heard of. Such a thing I thought, is the coolest thing in the world. Anyway. I'm at my kids field hockey game the other night and a friend who's an avid listener of the show, shout out to John Midler comes up and he says, I can't believe you've never heard of cold seats. I've got to pick up truck that's eleven years old. It's got cold seats in them. And I'm like, what right, And then it gets worse, and then my wife goes, you, dummy, Our cheap Cherokee has cooled seats in them. I had no idea. What apologies to listeners, just the first ever retraction. Can I say that that makes you supremely fancy? As fancy as Sarah. That's pretty fancy. Yeah, I'm not quite as fancy as Sarah. You took a big step towards it. Well. I know that our guest comes from a really cold area of the country, so I don't know if he has cool cooling seats. We'll find out. But I want to bring in Doug Ramsey. He's the chief investment officer and co manager of the looth Oled Core Fund. Doug, Welcome to the show. Thanks so much, it's great to be on you know as a longtime fund manager, and is especially in our space, which is tactical asset management. It's been a hot seat here for a while, and I don't know when it was ever cool. That's a that's a really good transition, you know. We we tend to do well during more difficult markets. Uh, so it was a cool seat for about twenty five days in March of but then back off to the races and uh, yeah, the seat feels pretty hot from the perspective of I guess those who who own US equities. But we're faring pretty well within our tactical peer group, which is I mean that pier group has been under pressure, as you might imagine, for a long period here with you know what, what you could almost argue is now a twelve and a half year bull market rather than a one and a half year bull market, depending on how you score things at home, you know, talk as you put out, talk about a hot stock market again. Uh, we're talking before the show, and you use the word that I think always raises eyebrows, Uh, melt up. You think we're we're kind of been a melt up right now. Um, And obviously that makes you wonder if a meltdown is in the cards too. But but explain how why you're thinking that and sort of what what are the what's the evidence of a melt top in most cases, and why do you think we're having one now? Well, it's just got that feel to it. It's sort of the the time of the year here where seasonality turns positive. Uh. And you know, despite this, uh, this resurrection of the Nasdaq stocks, I mean, this thing is is still very broad. I mean, we wrote, you know, throughout the summer and early fall about just some you know, anomalies that we were seeing in terms of the market breadth data. You know, we're still seeing some of those. But it's really hard to argue that the market has narrowed when you've got New York Stock Exchange breadth at a new all time high as recently as Tuesday October, when you had the value line arithmetic composite, which is an equal weighted index of about stocks that made an all time high on the same day after having been rangebound for a lot of months. So it is very broad. And then it's just its ability to just shrug off this looming tapering, which we would construe as tightening. As we did in h and then uh, you know, the likelihood that we're going to see elevated inflation numbers well into two. I mean we've moved from the transitory narrative. You know, the definition of transitory has been warped. Uh. And and now we're almost beyond that to where it's accepted that we're going to have elevated inflation for a while. And now, um, and remember a lot of times the market narrative morphs to fit the price action. Well, now, because the market has been so strong coming off of early October lows, the new narrative is well yet inflation is going to be elevated, but it's gonna lift earnings and will not impact PE multiples. So it's been interesting to watch that narrative on inflation evolved over the last six or seven months. So do if we can take a really big step back. I noticed in a recent note of yours you had said, Um, there's plenty of fundamental misgivings about this market, but the shorter term work still cautions against hedging two aggressively. And so I'm wondering what you mean by that, and if that's a really good way to characterize what's going on right now, meaning people are worried, but that they're staying invested. Well. Part of our concern in the shorter term, I mean in terms of, you know, trying to to hedge against this market. As you know, as I mentioned earlier, this this move is very broad. Again, You've got so many bellweathers breaking out two new highs. The Dow Transports, which were lagging for much of the year, are on the verge of breaking out to a new all time high. I mentioned this measure of stocks equal weighted at a new high, New York Stock Exchange breath at a new high. It's just it would be very rare for the market to put in a major top. I mean, regardless of how expensive it might be, and regardless of how the FED may be moving into the less accombinative mode. Just history shows that generally there is some sort of narrowing that happens before you reach a definitive top in the market. And that's why while we're we're cautious in terms certainly in terms of evaluations and what the FED is likely to do now here over the next several months, the market probably deserves the benefit of the doubt because of its very strong internal momentum. You know, Doug, I want to get unpack a little bit. Uh, that notion of inflation and valuations. You know, as you put out historically, you always think of higher inflation really depressing stock stock market multiples. UM. I always think back of that rule of twenty I think it was Peter Lynch who who came up with that, where you know, the market wide p plus the rate of inflation should equal about twenty two to be a fairly valued market. Well, well here we've got peas way about twenty on a forward and trailing basis, inflation like we've never seen before. Um. Is it inevitable to to sort of see that valuation uh come back down? Or is this is there a case to be made at this time? Is different? You know, the regular listeners of the show will sort of think I'm a broken record on this. But I keep thinking of of all the cash that's just sitting around. How the savings, the consumer savings rate blew out during the pandemic. Uh, corporations cash levels are really high. UH, money market funds are are really high. Back balance sheets are really high. Is there just enough kind of dry powder on the side sidelines to to sort of break that historical relationship between inflation in multi suppolser is that something you wouldn't mess with? Uh So I think about it more in just terms of this this excess liquidity, I mean, keeping them the money supply growth rate, and let's set QE aside right for the moment. But you know, we are still growing mto money supply in this country at I mean, now that's down from a peak. I think we peaked post collapse at earlier this year. It's fallen in half, but it's stayed around that level for the last three or four months. I have no idea why the money supply still needs to be growing that rapidly, with with fiscal outlays growing much more slowly than they were during the height of the emergency assistance. But but there we are. And so part of me looks at this looming tapering and says, well, that's that's it. An incremental that's a that's an important change at the margin, you know, taking Huey purchases from a hundred and twenty billion dollars a month down to zero next summer, which is what's sort of being a trial balloons out there among the various FED talking heads. I mean, I'll believe that when I see it, quite frankly. But we're still growing the money supply. There's still excess liquidity available to flow into financial assets. So that obviously we have the FED meeting coming up really soon and a lot of people are expecting them to announce that they will start taping. So how do you invest around that? And I know a lot of investors are pulling forward their expectations for when the FED might start hiking interest rates to maybe the earlier parts of next year, even I was reading in some Bloomark stories. So how do you invest around that? What do you tell clients? Well, the first step I think is to acknowledge that, uh, timing this thing is extraordinarily difficult. I mean, we look at a raft of technical and sentiment and monetary data. Uh, but the fact is that in a market with this kind of momentum, uh, not a lot of that work is all that timely. And of course valuations get a bad rap as a poor timing tool, and I get that, but they are a very good risk management tool. So to start with, we have a lower equity allocation in our tactical funds then we would if valuations were average or even even on the high end of their fair values. Though, I mean, even with the dramatically improved fundamental picture, and even with estimates for next year which are still trending higher, we are still on a lot of measures. UH for the S and P five hundred pretty close to numbers that were last seen in late early two thousand, near the tech bubble peak. What's different and what makes it so much more difficult I think for go anywhere managers, so to speak, is that the rest of the market is so much more expensive than it ever got during the tech bubble. I mean, the one thing about the tech bubble was that, uh, during the last couple innings of that move into the early two thousand, a lot of stuff was left in the dust. So you could find a lot of good industrial and financial and what they were, classically value sectors that were really left in the dust, mid caps, small caps that just had very middle of the range pees. As long as you were willing to stay away from where the action was in those last couple of needs, you came through that downturn just fine. Whereas uh, I mean, just because of this monetary tsunami, we have everything now mid caps, small caps, and really almost across the span of sectors, we have valuations well above anything that we saw in the late nineties, and at the two thousand top so um, there's not not a lot of alternative if you'd want to be more defensive. So that's why our equity reality asian is more moderate than it otherwise would be with this kind of strong uh technical market action. So I wanted to ask you, with us coming into the year end, how true it is that active managers are potentially going to be facing some pressures to chase performance given how well the market's done so far this year, and what does that mean overall for the market. It's interesting, Bill Donna, because I can certainly see there are some strange developments uh going on that would suggest some degree of narrowing. But when when you see an index as broad as the value line breaking out to a new high, you know that's that's really a signal that we're not quite there yet in terms of the market narrowing. So uh, I don't know. I mean, well, what's been interesting here this year is it's been sort of a rotational market in terms of groups at you know, had a tremendous surge beginning around election time, stalling out a year ago, uh, stalling out in the spring, and then working sideways for several months. So that would be the small caps. The Russell two thousand is still below the high that it made back in in mid March, which was right around when yields unentertain your treasury peaked out. I don't think that's probably um, I mean, that's probably not a coincidence. H And as I mentioned, you know, the transports have been lagging for several months, and all of a sudden, just a tremendous surge in in October, so things have broadened out. But yeah, I think and again maybe I'm biased a little bit by the space in which we compete. UM. I certainly think that, you know, the tactical fund space that tends to take a more cautious view on things, especial stually in expensive markets. I just feel like, you know, the bigger fear, UM is the fear of missing out radin and the fear of losing significant money. Despite evaluations being almost as elevated as they were at the tech bubble peak, there's still steems to be more fear over missing out than there is over losing serious money. That's that's just sort of my sense, and I'm glad you brought up the comparisons to the tech bubble, Doug. I think the last time we spoke a few years ago, pre pandemic obviously, UH we talked about used to do a thing basically saying okay, comparing the rally since the financial crisis to the dot com rallying saying okay, where are we in the dot com bubble calendar? Our our boss, Chris neg loved that. That's all you get, you put together to sort of track that. So where are we now to the the pandemic kind of blow up? That that comparison, uh, you know that tool that that when you look at the market or is it still valid? You know, I remember early on in the conversation, you say, you consider this a twelve year bull market, you know, the last year's bear market being sort of not counting. Um, can you can you still kind of make the the parallel to the dot com market given everything that's happened. We've introduced some some new valuation techniques since uh I first did that work several years ago, basically looking at, okay, if this were the late nineties. Where are we based on you know, forward pe and normalize pe and price to sales and things of that nature. Uh, you know, one that we've favored in the last couple of years, and it's been helpful with this unusually rapid earnings rebound is the concept of looking at price to any trailing peak and earnings. And of course we're back at a new peak now through second quarter numbers, which is pretty remarkable. Uh. But the difference between the current rebound and let's say the two thousand peak is that margins are so much higher. The SMP five operating margin in the second quarter was at twelve all time record, took out the previous record of eleven point three, which I believe was in the third quarter. If the current forward estimates for the third quarter are correct, we're gonna go to twelve and a half. I mean, the margins that we were printing back in late and early two thousand were between seven and seven and a half percent. We are just an entirely different zip code when it comes to profitability. Now. The issue is that was bound to happen when you dumped five trillion dollars of incremental federal spending above and beyond what likely would have been spent if there had been no pandemic interruption. And of course, UH you monetized about that. You monetize four point three out of that five trillion incremental, so the operating leverage was just enormous. The issue now is you spent that five trillion over a period of eighteen months, and now as you're seeing the new uh Biden Economic Build, Build Better Plan being whittled down, you're talking about eighty two trillion over ten years, so two hundred billion dollars a year after you dumped five trillion on the thing in eighteen months. So that's why I am just you know, when I look at estimates for two, it's just very hard for me to join in the fray and to throw a number out there, because I just I don't have a good idea on what impact this fiscal cliff and it will be a cliff on a rate of change basis is going to have on SMP five journeys. UM just very poor visibility there stand clear of the craziest things we saw in markets this week. I think that lack of visibility is the theme of at least this part of the year, especially with all the supply chain issues and everything else. Um and no one really knowing how long transitory is is gonna last. But the one thing we do have some visibility into is the craziest things we've seen in markets this week. Um, I'm gonna start with you. What's the craziest thing you saw this week? Oh my gosh, you're catching me off guard. You had no idea and I had a few more minutes, yeah to prepare. Um. Well, as you know, Katie Rifle and I have been covering what's been going on with the crypto market so extensively, and the launches of the future spiitcoin, e TF and and all of that, and there's so much happening in the crypto market that's really interesting. I think this week she but you knew, I don't know if you were keeping track of what was going on there, that that was one of the craziest things. However, it's been really extensively talked about already. So my craziest thing is this Bloomberg story about how Chinese authorities are asking the founder of Ever Ever Grand Ever Grande. I'm still not sure how to pronounce it. The founder to use his personal well to help alleviate some of these uh, the some of the crisis that the company is seeing, which is just crazy. They're asking him to use his own money. To me, it's it's a it's a really crazy story. Probably only happened in China. Yeah, I'm not sure how that would go over overwhelluh in the US. If I don't know, you never know. I don't know, Doug. How about you? You You seen anything crazy this week? Uh? I did? Bill Donna alluded to it, and uh, you know when something I can't even pronounce nor had never heard of, uh can take an account a coin base? Uh? Billful from an eight thousand dollar total investment up to five point six billion? I think is the latest I've read. Yeah. Uh and Bill Donna, you had the name, can you? Uh? Oh very good? I saw that story. But I mean what gets me is I hadn't heard of that until last night. Uh. Not big on at least the you know, secondary and tertiary cryptos. I mean this is a spoof of a spoof, right, it's a spoof on doage coin. But just I mean, think about the wealth amassed relative to and I was trying to brush up on the two thousand eight short of the Housing Market by John Paulson. I think that personally netted him four billion. It was the greatest trade of all time. Um, you know it was. The whole theme was made into a movie, The Big Short. But uh, think of all that had to gone go right and the intricate structuring of that trade that paid off. And now you've got someone that just puts a little bit of money out of his or her checking account into a spoof and and out does the greatest trade of all time in a matter of was it since last summer? I can't even remember? But uh, And the fact so the weirdest thing is not that itself, but the fact that it didn't even qualify as the weirdest thing that Bill Donna saw all week. That's weird. That's that's her too, immersed. Bill Donna's got her eye on a lot of weird things. I saw that story and it was fascinating to Mike, do you know what this means? Me? And you have to start a derivative of a derivative of a derivative. We have to do the third iteration. Oh right, like a golden doodle coin. Yeah, a golden doodle point would kill it. Is a golden doodle here, a golden doodle coin would just kill it all all the Golden doodle owners out there, Well, this is a rare stars are all lined because because Siba knew if I am pronouncing a correct is also by my craziest thing of the week. But I'm gonna add the prices right element to it. Okay, can either of you tell me what the year today percentage gain of this coin is seven million or something? Doug, what's your what's your guess? I'm gonna say three, three millions something like that per cent So I had to. I did this math like three times because it's it's not the easiest math to do. The start of the year might do this coin still is way in the fractions of a penny per coin. Start of the year it was dollar sign zero decimal ten zeros. See the last time I checked its dollar sign zero decimal four zero sixty. That gets you a ninety one million percent year to date gain and achieve it. You know, does it make you think like, what are we doing with our lives? It does? And then just you know, I'm sort of a market historian, just all the good stories you would hear about, like anecdotal sentiment tip offs. I mean one being Joe Kennedy supposedly sold his stocks in ninete because the shoe sharing boy gave him a stock tips. I mean, that is so weak by today's standards. I mean, we were, we were far beyond that a year ago, and here we are still powering higher. And that's uh, you know, that's what I talked about. Even you know, some of these sentiment tools, I mean a lot of our sentiment work has been through the roof now for months on end. But you know, the Hueshine Boy tips haven't been helpful in terms of negotiating an exit to this market. So sometimes I joke, you know, evaluation has deservedly a bad rap for how inept it is at helping you time the market. But I think sentiment gives gets an undeservedly good rap because it's also not that helpful, uh, when you're in a manic environment like this. I mean, quite frankly, most of our sentiment work, our sentiment composite registered its froth Eyist readings back in mid February, and here we are probably sixteen seventeen percent higher than we were in mid February, so even the sentiment stuff, it's not all that helpful. Oh, I think that's all the time we have for this week. Really appreciate you joining the show, and uh hope, I hope we can do it again some day, Well to do it again What Goes Up. We'll be back next week and so then you can find us on the Bloomberg Terminal website and app or wherever you get your podcasts. We love it if you took the time to rate and review the show on Apple podcast so more listeners can find us. And you can find us on Twitter follow me at Reaganonymous. Well, Donna Hirich is at Vildonta Hirich. You can also follow Bloomberg Podcasts at podcasts and thank you to Charlie Paletta, Bloomberg Radio, and the voice of the New York City Subway System. What Goes Up is produced by Tofur Foreheads. The head of Bloomberg Podcasts is Francesco Levy. Thanks for listening, See you next time.