Dan Lefkovitz (0:01)

At Jackson, we've created a digital retirement planning experience with you in mind. Visit Jackson.com to explore our easy to understand resources and user friendly tools that are designed to enable financial professionals and clients to plan a path to financial freedom. Jackson is short for Jackson Financial, Inc. Jackson National Life Insurance Company, Lansing, Michigan and Jackson National Life Insurance Company of New York, Purchase, New York. Please stay tuned for important disclosure information at the conclusion of this episode. Hi and welcome to the Longview. I'm Dan Lefkovitz, strategist for Morningstar Indexes. In this episode, we'll share some of our Favorite clips from 2024 Interviews with portfolio managers, economists and investment thinkers. It's the companion to Christine Benz's best of episode, featuring highlights from conversations with financial planners, advisors and retirement researchers. First, in a rare conversation with primecat Management, my colleague Jeff Pat asked Joel Fried about the Magnificent Seven, the cohort of mega caps that has been leading the US Equity market. Absolutely. As you might imagine, Jeff, we've had many conversations about the Magnificent Seven. You know, so much of the performance over the last few years has been concentrated in the Magnificent Seven, and so not owning them has been a real handicap to performance. But if you think about the magnificent seven today, they comprise 28% of the value of the S&P 500. We've never seen that kind of concentration before. We're talking about seven stocks with a combined market value of greater than $10 trillion and revenues approaching $2 trillion. At some point, the law of large numbers kicks in. We think the market assumes that this group of companies will grow revenues at a compound annual rate of at least 10% over the next five years. This would imply the seven stocks increasing revenue by about a trillion dollars in five years. That's an extremely high bar in our opinion. To maintain their current multiples, this would require the market value of the Magnificent Seven increases by more than $5 trillion in five years. Could it happen? Sure. Is it likely? We don't think so. When companies are this large and this profitable, it inevitably invites competition, especially in technology based industries. And in our experience, creative destruction is undefeated. I'll give you an example that has always stuck with me. It was fairly early in my career. In the early 90s, Walmart was the dominant retailer. It offered the lowest prices and the broadest selection of goods. It had massive scale advantages. It parlayed its strength in discount stores into warehouse stores and grocery stores. It was a classic example of a virtuous cycle. Every growth fund owned the stock. The consensus growth projections of Wall Street Analysts, if realized, would have resulted in Walmart owning the majority of retail sales in this country. And it was really difficult to imagine how Walmart could be dethroned. Then out of the blue came the Internet and then came Amazon. Let me be clear, the Magnificent Seven are excellent companies with wide moats, wonderful prospects and fortress like balance sheets. But in our view, they're priced accordingly. As you observe, we continue to own positions in several of these stocks, but our dramatic underweighting reflects our caution. On a similar note, Christine Benz and I spoke with J.B. taylor of Wasatch Global Investors about the underperformance of small cap stocks in the US equity market. Well, sure, I mean the last 10 years you've had this unbelievable run in the big cap stocks, but specifically the mega cap stocks. And you know, everyone's talking about the Magnificent Seven. So Apple, Microsoft, Google, Meta, Amazon, Nvidia, Tesla, and you know, certainly these are phenomenal companies and all the momentum in the market has gravitated towards these companies and for good reason. They're great companies with, you know, great competitive moats. And if you look back over the last 10 years, the combination of cloud computing, a smartphone in every hand, and now the advent of AI, there's a lot of reasons that these companies have been able to grow to enormous scale and then enjoy the benefits of that scale. But if you look at the history of large cap versus small cap, there does tend to be cycles. And if you go back over the last hundred years, the average performance period of large beating small or small beating large is about 10 years on average. And so the longest period of large cap outperformance was 14 years. And that was that period leading right up into the Internet bubble and burst, which was followed by 10 years of small cap outperformance. And now we've had, you know, we're in year 13 of large cap outperformance. So from that standpoint, just from a timing, small cap certainly seem interesting and that we've run a long time now with the large cap companies doing quite well. The other thing that's interesting about large cap versus small cap right now is that from a relative valuation standpoint, small caps are extremely attractive. We haven't seen small caps broadly this cheap versus large caps at any point in the last 25 years. And again it's going back to right before the dot com bust. The small cap index is trading at about 13 times earnings today and the large cap index in total is trading at about 20 times earnings. But if you take that magnificent seven, they're trading more like 40 times earnings. So a huge valuation discount. And then the other interesting thing about this large versus small phenomenon is that you've got about 30% of the S&P 500 and Russell 1000 is in these seven stocks. And that's an enormous concentration. And historically, if you go back, the top 10 names of the Russell 1000 in any given year are not a great place to invest going forward over the next five years. The success that gets companies to the top of that index, it's hard to repeat, but the exception has been the last five years you've had momentum carry year to year in the top weights of the Russell 1000. So again, this idea of a lot of momentum crowding into the top of these stocks. And the last time that you had kind of this crowding and that momentum carrying in the top 10 stocks of the big indexes was again going back to that run up, up to the dot com bubble and burst, which the period after that was just a phenomenal time to be investing in small cap stocks. The last point I'd make is if you think about what is expected of these companies, you know, at Wasatch we're looking in the small cap space. We're looking for companies that can double in size over the next five years and then companies that have the headroom and the management team and the execution ability to double again in the subsequent five years. So say a 4x increase in size in terms of revenues and earnings over the next four years. And if you're expecting that type of hurdle from the Magnificent Seven, it's pretty fascinating. Those companies are worth $12 trillion in total today. And they would have to grow to something like 48 trillion, which is more than every company in the S&P 500 combined today. And the revenues would have to grow to something like 20% of US GDP. So the expectations placed on those seven companies are huge. Trading at 40 times earnings and who knows if they'll grow that fast. That seems like a really tall task. But, but the one thing to think about is there's 12 trillion invested in just those seven companies. The entire small cap index that we hunt through is valued about $2.5 trillion. So you have two companies, Apple and Microsoft, both at 3 trillion in market value, that are larger than our entire small cap universe. And it doesn't take a lot of reallocation from big cap down the cap spectrum to drive performance when that momentum finally turns. And it's not that those companies need to do poorly. They just need, you know, to maybe not outperform for a little period. And at that point it'll be pretty dramatic. It will be like, you know, filling a bathtub with a swimming pool. It'll fill up really fast. We spoke with Jody Johnson of Capital Group and asked her about areas of global equity markets that she has been avoiding. Consumer staples used to be, I covered some of them as an analyst back in the 90s. Used to be an area of very consistent growth and I think over time that really has changed a bit. I think back I used to cover companies like Procter and Gamble and Colgate for example and emerging markets was an area of huge growth and huge potential for them, for example. That really was a tailwind to their unit growth. That's changed. That has been less the case in the last several years. I think also many of the consumer staples companies have struggled with inflation and pricing and particularly in food and beverage areas. There have been a number of concerns around things like health and many of those stocks have derated over time. So there have been relatively few consistent winners in that area and they've been less defensive in down markets as well. So I think that just the character of some of those staples has changed in the consumer discretionary. Again, we're there, but in very selective ways. Obviously retailing has been totally changed over the last decade or two. E Commerce and we have had at times very large representation in Amazon, in the fund and other beneficiaries of E Commerce, but probably less in traditional brick and mortar retailing. So we've tried to be very thoughtful and long term about the secular changes going on in those industries. We still have investments in some of the leaders there. Like a Home Depot has been a very long term holding for us over many years. But I think those sectors have changed to the point where we need to be much more discriminating in our selection there. And when we've wanted something more defensive, we've probably looked a little bit more toward areas like healthcare or even certain parts of technology. Has sort of been the new defense where, you know, food and beverage might have been that in prior cycles. Sticking with skepticism, our colleague Brian Armour of Morningstar's Passive Strategies research team made some observations about the popularity of exchange traded funds employing covered call strategies. Yeah, I don't know how the the hot trend in the market flipped from meme stocks to covered calls. It's a little bit of whiplash for investors, but it's been astonishing trend in terms of assets and product development. It seems like a covered call is being slapped on every Single strategy. From single stocks to Bitcoin to S&P 500, JP Morgan Equity Premium Income ETF. JPI is the poster child right now and it's over $30 billion in assets and we actually cover this ETF. It's sensible approach, low risk strategy. But most covered call strategies are highly tax inefficient. In the same way we were talking about bond ETFs earlier. The premium received from covered calls is not considered a capital gain. So that's something that will be distributed as income that investors will have to pay taxes on and then reinvest if they're not using the income for personal uses. And there's a huge opportunity cost for covered call ETFs. So Eugene Fama's like doctoral thesis remains true today where the distribution of market returns have fat tails. So that means there are more extreme gains and losses than expected from a normal distribution of returns. And so we always talk about downside risk and how that can set investors back. But the same is true of missing out on the best months or years for an investment. And so it doesn't make sense to give up the good fat tail and keep exposure to the bad one for cover call strategies. Because what you're doing is you're selling upside and sort of like cashing in that expected volatility and taking the income instead of and capping upside. And so a prime example would be Global X Nasdaq 100 Cover Call ETF, which is QYLD. It launched in December 2013. And you know, it's, it's basically like QQQ except with a covered call attached. And it's trailed QQQ by an annualized 10 percentage points since its launch in 2013. So QQQ over that whole time is up 450%, QYLD is up 100%. So it's a substantial opportunity cost that you're giving up with covered calls. Popular asset classes within fixed income were a focus of our conversation with Sonali Peer, who manages credit portfolios for pimco. We asked about how the rise of leveraged loans and private credit were impacting the high yield bond market. Yeah, there's absolutely been significant growth in both the bank loan market and the private credit market today. All three markets are similar size, yet the growth trajectories have been quite different. So the bank loan market's doubled over the last 10 years. The private credit market has doubled over just the last four years. You know, it's kind of helped high yield actually improve in quality because over the Last decade we talked about those rising stars, but there's also been limited net supply more recently as the debt stacks had been termed out. And so there wasn't really a need to refinance while rates have been at call it peak. In contrast, the loan market has deteriorated in quality as it became a primary capital source for LBO financing. With this constant pre payability at par, meaning sponsors found it quite attractive to be able to have that option to prepay at par. Where typically in the high yield market there would be a structure where it'd be a non call three years and then at that first call date it'd be par plus half the coupon you'd have to pay. So both time prohibitive and cost prohibitive. Adding to it, the CLO growth has been so tremendous that it's led to significant growth in the loan market of loan only structures, asset light businesses, covenant light growth. And so you know, you have to be quite selective within that asset class. As we look at private credit, some of its growth has been due to providing a partnership with a small number of holders as lenders that are looking for control, but also can provide issuers with some insights through portfolio companies. So altogether all three are about 4.5 trillion and converging to some extent. And this is having an impact on spreads, structural protections and defaults. So let me explain and highlight a few examples. The growth of the private credit market, we see that all over the headlines and they've taken significant share of LBO activity. This has partially been responsible for improving that credit quality we talked about in high yield as some of these issuers that are lower rated single B or triple C and are no longer in the high yield benchmark because they've been refinanced in private credit. The growth in private credit has also led to large multibillion dollar deals where there is also sometimes a public and private piece to that transaction. These prepayments address near term maturities and have also led to negative net supply in public markets. This has been a very supportive technical to secondary prices given credit fundamentals have also been stable. Today there are many times where PIMCO is providing a price based on whether it's a public or a private deal and showing kind of a dual track option to issuers. You know, the private credit importantly has provided really a lifeline for some of these B3 triple C type credits that would have otherwise had to default or led to maybe a distressed exchange in the high yield or bank loan markets, essentially doing their dirty laundry for them in fourth quarter 23 alone, we saw approximately 20 billion of public transactions refinanced that were near term maturities with low rating profiles. You know, again, going back to kind of solving for what either would have been difficult for the loan market to digest given, you know, CLOs have to mark to market in excess of 7.5% triple Cs and they own about 70% of that loan market. So it's been quite interesting how private credit has kind of become a solution and allowed all of credit to perform perhaps better than some expected from a default perspective. And today, you know, I would say the open question is how the secondary market will evolve as private credit continues to pursue large multibillion transactions and when this is tested in a financial downturn. Speaking of economic downturns, we chatted with Neil Shearing of Capital Economics about how the US economy has defied forecasts and avoided recession. Christine asked Neil whether this period has been especially difficult to forecast. Yes, I think that's fair to some extent. I mean, I've been doing this for 25 years or so and I think one point I would make is that there's a tendency in every period to say the outlook is unusually uncertain. If we go back to 2008, for example, we were debating whether capitalism had a future in the teeth of the global financial crisis and the collapse of Lehman's. So I think there's always been an element of uncertainty. Then there's the future of the Eurozone, Would the Eurozone break up and Greece leave? And since then we've had the us, China fracturing and the end of globalization. So there's always uncertainty. I think what marks this cycle out as being different, if indeed it is even a cycle, is two things. And I think this is what's led economists down the wrong path where they've been thinking about their forecasts. The first is that normally manufacturing and services tend to move in the same direction through the cycle. Manufacturing tends to be more cyclical than services, but they tend to move in the same direction through the cycle. Yet this time it's been different because we had this surge in manufacturing demand or demand for manufactured goods during the pandemic when we were all locked down and we're having to furnish our home offices and so on, and buy flat screen TVs and iPads with our stimulus checks. And the service sector was locked down. And then the service sector reopened and demand for manufacturing goods fell and demand for services picked up. And what that meant was that when we looked at the usual kind of recession indicators for example, ISM manufacturing new order balance has been a pretty reliable indicator of recession in the U.S. actually, this time around, it wasn't a good indicator of recession because there was a manufacturing recession without there being an accompanying services recession. Actually service sector strengthened. So the difference between manufacturing and services in this cycle has been a key reason why I think it's been difficult to forecast. And then the second point is that the supply side has played a much greater role in this cycle. So normally what tends to happen is the way economists think of the supply is it's essentially flat. There are no kind of supply changes to a meaningful extent through the cycle. Supply just is what it is. There's a certain number of workers and a certain level of productivity, and that gives you your supply potential. Whereas in this cycle, because we essentially shut down the economy, we ended up with an enormous amount of dislocation on the supply side of economies. Workers leaving jobs, some sectors diminishing, shutting down, other sectors growing, people moving location, big surges in goods demand and then services demand. So that creates enormous problems on supply sides of economies. And then that's taken some time to kind of work through. And I think we're getting to that point now where it is working through. What that's meant is that we've been able to have a fall in inflation without there being necessarily a big contraction in demand. So normally the Larry Summers thesis is you need a contraction in demand to get on top of inflation once it gets to the rates that it got to in 2022. But it's impossible to get inflation down this time because of the response on the supply side. Sticking with the theme of flawed consensus view on the economy and rate cuts, our colleague Amy Arnott brought it up with Sebastian Page of T. Rowe Price, who appeared on the podcast with Omar Aguilar. From Charles Schwab, I like that question. You know, those projections are usually wrong. You can go back in time, look at what the projections were at any point in time, and see how wrong they were consistently. So, no, it's not that surprising to pick up where Omar ended, you know, at the end of 2023 for the last three months, if you took the month over month CPI, we were running at 2% inflation. So to your earlier question, at that time, we had six, seven rate cuts priced in. So my one answer to your earlier question is inflation economists got it wrong. Because then January, February, March, you take those three months, you take the headline print month over month, and we were running at 4.5%. So I think commodity markets, the commodities, the housing, the services, they all surprised a bit. On the upside, as Omar said, it's the stickiness of inflation that was a big part of that. Ms. I'll say another thing about getting economic forecasts wrong. It's been difficult because of the pandemic. The stimulus has distorted all the models. And I think in general as an industry we often look at year over year changes. But if you're coming down from unprecedented stimulus, 20 trillion by some estimates, the year over year changes aren't going to look good. But I think a lot of economists just missed the fact that the economy, while it was decelerating fast, it was still pretty good. So I've been telling my team to not just look at rates of changes in this environment, but also look at levels and from a really big picture perspective. I think we all underestimated the economy's resistance to hikes. Now, if I travel back in time before the Fed started hiking in early 22 and I say imagine that the Fed's about to hike by 550 basis points and you're going to have a war in Ukraine and you're going to have a banking crisis, what do you think is going to happen? I don't think any economist or investor this is not to pick on economists whatsoever would have predicted that by now we'd still be pretty low at 4.3% unemployment. So the response, those long and variable acts, the resistance of the economy to those hikes has surprised pretty much everybody. At Jackson, we've created a digital retirement planning experience with you in mind. Visit Jackson.com to explore our easy to understand resources and user friendly tools that are designed to enable financial professionals and clients to plan a path to financial freedom. Jackson is short for Jackson Financial, Inc. Jackson National Life Insurance Co. Lansing, Michigan and Jackson National Life Insurance Co. Of New York Purchase, New York. We spoke with Northern Trust economist Carl Tannenbaum about inflation and also the US national debt as a long term risk factor. What is it Hemingway said about going bankrupt? First it happens slowly and then all at once. We had a surplus for the last time in our country in the year 2000 and those who are of a certain age will remember that the worry that Alan Greenspan had that we might end up retiring all of the national debt and then it would be very hard for the Fed to conduct monetary policy. Well, he needn't have worried because shortly afterwards we've had kind of a back and forth between tax cuts and spending increases here. So far this century we've had four administrations Two Democratic, two Republicans. We've had mixed Congresses for most of that history. And so the notion that one side or the other is fully responsible for where we are. But the Committee for a Responsible Federal Budget, I highly recommend their stuff. It's non partial and they really call out some of the perversions. I think one of the points of mistake is so many programs are advertised as paying for themselves and the evidence is that they never do spending or tax cuts. And so we've gotten to the point now where our debt is 100% of our GDP and could be twice that level by the middle of this century. Now, the good news is that financing it by and large has not been a problem other than the higher cost. The bad news is that one never knows when a tipping point is reached where international investors will say that they've not only had enough of our Treasuries, but they have had enough of the political dysfunction that periodically comes up and asks the question of whether the debt will be repaid. And I should note that our current debt ceiling accord will expire shortly after the beginning of next year. So whoever is seated in whatever seats in January is going to have to go back through that process that we've seen altogether too often where the world is watching whether the United States and our currency are still worth investing into the same degree. So maybe not tomorrow, maybe not soon, but sometime in the rest of our lives, I think we're going to get to a very uncomfortable point. And so when I go to Washington, I urge policymakers to try and stay as far away from that brink as we possibly can. Christine and I interviewed David Harrow of Harris Associates and Rajeev Jain of GQG in a live taping of the Longview as part of the Morningstar Investment Conference in Chicago. Here's David Harrow on deficits. And the US Dollar term rates are going materially down anytime soon under the current fiscal situation. I was overhearing your last speaker. There's just no way a country that's growing at 1 to 2%, that has a 7% deficit to GDP, that you could see sustainably. Long term rates, there might be cuts in short term rates. Of course there might. But, but I think if anything, if anything, this does not bode well for the US Dollar, the fiscal situation we have in our country. And honestly, I don't know how it's going to get resolved. I hear Jamie Dimon talking about it, Ken Griffin talk. You just hear some of these voices in the wilderness. This is a really bad situation. And when you Start seeing lower appetite for some of these treasury auctions. Maybe the roosters will come home. But I think the biggest impact will be on this whole U.S. fiscal and monetary policy. Both will be on a weaker dollar going forward. We're going to have stubbornly high inflation because you have this extremely aggressive fiscal policy. The Fed will not be able to cut rates the way they want to and the rest of the world is not going to have this inflation problem as bad as the US and in fact a lot of the countries in Europe, Germany, I mean they're fighting over whether it's 2 or 3% deficit, the GDP we're 6, 7, 7.5%. So I don't know. I think the biggest impact of this whole fiscal monetary policy, I'm combining them both are I don't see how the dollar strength could continue. I really don't. Here's Rajiv Jain responding to Christine's question about why U.S. investors should still allocate to equity markets outside the U.S. as you know this has been an age old question and usually happens after 10 years underperformance of non US look, our view is that at the end of the day corporate earnings will drive returns and if you leave us these cycles that happen from time to time in different markets market so you actually get a reasonably diverse book of investments you can have outside the US and over the very long run the return patterns are remarkably similar. So if you're sitting for 2000, 2010, you actually didn't really make any money in US and then US did very well. If you're sitting in 90 to 2000 you didn't well in a lot of non US so I think these cycles come and go. But that's the whole point of diversification is not everything should up and down together on investment opportunities outside the U.S. we spoke with Carl vine who invests in Asian equities for M and G in London. He highlighted Japanese small caps. Yeah, I really love small caps and I think Japanese small caps in particular are just the most fascinating little pocket of, of the global equity market. I know on your own podcast in the past you've had people, guests talking about how globally small caps are just super attractively priced. I think in Japan what's amazing, it's, it's big. You know, there's a lot of small cap companies and a lot of them have got coverage of zero. And so you know, in the large caps we have to do really clever things like you know, find out when the consensus is using the wrong logic. For Honda's earnings and you know, in the small caps you have to be no more clever than being the only one looking. And that's refreshing. I typically know what's really important part of our process is to understand why is something mispriced. And oftentimes in the small cap universe in Japan it's mispriced because no one's looking. So we find globally relevant companies. So a lot of them are domestic, but a lot of them are global as well. You know, they'll have 20, 30% of the sales that address global customers that are growing, they're normally underpriced. And companies that are well run with relevant products, you know, they're not just the low price to book cigar butts, but we've got growing companies trading on super low valuations that are also, you know, still facing the upside opportunity set of, you know, more westernized strategies in terms of commercial and business approaches. You just see some crazy valuations in small caps. And it's not purely just in that kind of domestically focused area. It's in companies that are well run, that have got globally competitive products, typically in niche areas. But you know, you get companies that have been growing for decades just grinding out sustainable growth. So I think it's a fantastic part of the equity market in Japan where you really find some just crazy pricing anomalies. Christine and I spoke with Justin Levrentz, emerging markets equity manager for Invesco, and asked him about biotechnology investments in his portfolio. Well, I think biotechnology alongside we talked about the energy transition. India is one of the big themes of the next decade. There has been enormous amounts of progress over the last 20 or 30 years in science in terms of new modalities. We all know of course mRNA because we all had those injections during the COVID period. There are things like antibody drug conjugates which are much more targeted and better form of chemotherapy and are going to be prospectively $100 billion industry there obviously Car T which has gotten a lot of press because of FDA approvals. There's gene and cell therapy. So a lot of things that have been developed in science over the last 20 or 30 years are now in advanced stages of the clinic and it's going to be a really promising area for global investors. So where do emerging markets fit in this perspective? I would say in kind of two dimensions. The first is much of the innovation that's happening in biotechnology around the world is actually in biotech and not in big pharma. You've obviously seen in the last six months a big Amount of business development and mergers and acquisitions associated with big pharma that have patent cliffs going and buying biotech. But there's been a sort of fragmentation of the industry where now discovery, development, manufacturing is increasingly being kind of decoupled, particularly for biotech that doesn't want to compound clinical risk with the risk of actually doing manufacturing and some of the even in the development phases. And so where emerging markets fit is in China and Korea there are huge opportunities associated with the CDMO CMO space. So the development and manufacturing scale to be able to work with biotech and actually increasingly big pharma that wants to dual source for security in biologics. The second area is actually very China specific, which is a large part of the talent pool around the world. In the life sciences, if you go to the big life science schools, you see this at Stanford or Johns Hopkins or MIT is actually Chinese. And you have seen a wave of the last five years of Chinese scientists and clinicians who've sort of hit a glass ceiling in the west, whether it's in Boston or South San Francisco or Switzerland, moving back to China and building really innovative biotech companies. And so much of the sort of M and A wave in the last six months has been associated with big pharma companies like GSK or AstraZeneca, Merck going to China and in licensing clinical assets of China biotech companies. So there'll be big opportunities in the manufacturing and development side and then there'll be significant but much more idiosyncratic opportunities associated with China biotech which is increasingly going global. On the topic of growth themes and disruption, we spoke with Ankur Crawford of Fred Alger about artificial intelligence and its investment implications. Yeah, I think there's many different winners. I was actually explaining to my kids, you know, I, I often use them like to see if I can explain it in a way that is understandable. And I was explaining that like there's dominoes, right? So we have this, you know, if you line up our dominoes, there's so many different implications of AI and the cost of compute declining. And the idea that we're going to start using, you know, all of these chips to be more productive. It changes our data centers, it changes what we need in our grid, you know, and what companies you may want to invest in in the industrial space. I think it changes certain business models to a point where there might be wide swaths of the market you don't want to necessarily invest in. And there's two papers that I would, that we wrote over the last year, actually we wrote them about a year ago, one called Empowering Intelligence that talks about the need for electricity from data centers and how that's growing. We think it's growing from 2% of the US market to about 10% by 2030. The second one I feel like is a really seminal paper on what happens when the cost to create declines and the implications for entire subsectors like software and what the risks are as gen AI starts writing. When software writes software, what happens to a software company that reside on code is that good or bad for margins? And our conclusion is that over time that the margin structure for software businesses will for the most part be under pressure. So the implications are very, very broad of having this kind of revolution. I think even in terms of our portfolio construction, as I think out over the next decade, it changes the valuation parameters that we're going to really lean on. And an example I love to use is Macy's. Macy's traded from a 16 to 20 multiple pre Amazon. And as Amazon started to make way into their markets and the market started to realize, you know, that, you know, this business is under structural decline or secular decline, the multiple has slowly come into four to six multiple. And it took a decade for that to happen as people started to really understand that the terminal value of this business isn't going to, you know, go up. It's actually on a downward bias. And I think some of that starts to happen again where, you know, businesses that can't be AI'd end up getting significantly higher multiples than you might think. And businesses that are going to see margin pressure because of AI and you know, at multiples lower than you might think. And I would also argue that a lot of investors today, you know, have kind of made their careers owning, you know, software. And you know, I structurally believe that software is going to have to prove itself in this new world. So what does that do to the multiples? So the ramifications across the market I feel like are going to be very significant. Whether that's in like the cyclical industrials or you know, the AI based industrials. You've seen companies like Vertiv, which is cooling for data centers. And I mean the stock has I think trip tripled over the last year and a half to two years or even some of the utilities like Constellation Energy, which is a nuclear utility. So again, I think the valuation parameters that we've used historically, I think we need to rethink all of them. AI was also a focus of our conversation with Jeremy Grantham. Investor and market historian AI is serious. It will change everything. And therefore it's not surprising the market took it seriously. The bigger the new idea, the bigger the new invention. The more the market becomes overpriced, the more it attracts euphoria. It's not accidental, really. Great things happen in the Internet phase. 98, 99, but they overdo it. They overdid it with the canals, apparently in England. They overdid it magnificently all over Europe, particularly the uk, but also the US with railroads. They were spectacular bubbles. Now the canals were huge. The railroads were even much more profound, changed everything. They were serious, but that didn't stop them attracting too much capital. Charlatans putting eight different railroad lines between Manchester and Liverpool, or planning them and raising capital for them when one or two was clearly enough. And the result was a bubble that broke for canals and railroads, and then somewhat the same with automobiles and radio and so on in 1929. Electrification of everything and development of mass markets for a lot of them. And then the Internet. The Internet was serious. We all use the Internet. We can't live without our iPhones. And yet it was overdone. Everyone knows that Amazon went up multiple times in 99. I forget how many times, but several times. It was the star of 99, which was a great year to be a star. And then in the break it went down 92%. Very few people realize that Amazon, huge success went down 92% and then it rose from the wreckage, as did a handful of them, and inherited the earth. But how many? What fraction of those stars of 99 survived? I think 80% of the Internet stocks just ceased to exist. Some were bought for scrap iron price. Basically they ceased and a handful of super leaders emerged. So the fact that it's a real idea doesn't say that there won't be a crash. It's quite the reverse. The more important the idea, the more guaranteed almost it is historically, that it will attract too much short term attention, then there will be a crash and then the railroads will change the world. Internet will change the world. AI will change the world. But it would be classic for it to be overdone. That's what the history book is shouting at us. Our final clip is from a conversation Jeff Patak had with Dan Ibison of Pimco, where he relays the firm's views on asset allocation, the relative merits of stocks, bonds and cash. Yeah, well, again, when you talk about some of these longer term valuation metrics, just thinking about cyclically adjusted PE ratios or other longer term valuation Metrics, it's important to note that they can stay out of whack for a long time. They don't necessarily have to be revert very, very quickly. As a starting point for an investor, particularly an investor like me, that's been a little bit negatively influenced by all the volatility, especially the 22 experience. It's fine now to look at fixed income not only as a defensive play or a way to improve diversity in a portfolio, it really can be a return generator in absolute and relative terms. You're at a point now where if history were to repeat itself, We've done a lot of analysis here that at the current starting point for high quality global bond yields versus starting equity valuations, there's a chance that the returns over the next five or ten years will be very, very similar with less volatility or less uncertainty in fixed income. There's even a decent part of the distribution where high quality bonds outperform equities over that same period. Now, no guarantees. And the US market in particular, as we know, has been driven by a lot of large tech stocks. There's a lot of innovation, there's a lot of positive scenarios around artificial intelligence and the ability of that sector to drive significant growth. So when we're looking at forecast returns over a one or two year period, much harder to do. A lot of momentum in US equity markets, a lot of momentum in global equity markets. So a decent amount of uncertainty there. But long term, it does look like whatever your neutral point was in terms of allocation between cash, fixed income and equities, again taking advantage of a global opportunity set. And again that's acknowledging that there's a lot of short term uncertainty, but it's better to have valuation tailwinds than headwinds. If we were having this conversation a few years ago when yields in the US government bond market were 1, 1.5% and they were negative half a percent over in Europe, a very, very different discussion. We've come a long way in some sense. The pain that we've all gone through in 22 and portions of 23 and even this first quarter, that was all a prerequisite to get back to a better valuation setup for fixed income. From here, that wraps it up for this best of investing episode. We hope you enjoyed it. On behalf of the whole team at the Longview, wishing you and yours happy holidays and a healthy and prosperous 2025. This recording is for informational purposes only and should not be considered considered investment advice. Opinions expressed are as of the date of recording and are subject to change without notice. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. And its affiliates, which together we refer to as Morningstar. Morningstar is not affiliated with guests or their business affiliates. Unless otherwise stated, Morningstar does not guarantee the accuracy or the completeness of the data presented herein. 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