Joe Terranova is a series regular on CNBC's Fast Money and the Chief Market Strategist for Virtus Investment Partners, a $25 billion Hartford-based asset management firm. In his current role, Mr. Terranova is involved with Virtus' investment oversight function and represents Virtus as a client-facing thought leader, providing insight into the domestic and global investing landscape. Prior to joining Virtus, he spent 18 years at MBF Clearing Corp., where he was the director of trading and managed more than 300 traders.
Liz Young is Director of Market Strategy for BNY Mellon Investment Management. In this role, she works directly with the firm's Chief Economist to formulate and deliver economic and market views to external audiences. She focuses on educating investors on current macroeconomic themes and their effects on capital markets. Liz is a CNBC Contributor and is frequently quoted in the Wall Street Journal, Financial Times, Washington Post and other industry publications.
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SPEAKERS
Joe Terranova
Chief Market Strategist
Virtus Investment Partners
Liz Young
Director of Market Strategy
BNY Mellon Investment Management
EPISODE TRANSCRIPT
John Darsie: (00:07)
Hello, everyone and welcome back to SALT Talks. My name is John Darcy. I'm the managing director of SALT, which is a global Thought Leadership Forum and networking platform at the intersection of finance, technology, and public policy. SALT Talks are a digital interview series with leading investors, creators, and thinkers and our goal on these SALT Talks is the same as our goal at our SALT Conferences, which is to provide a window into the mind of subject matter experts, as well as provide a platform for what we think are big ideas that are shaping the future.
John Darsie: (00:39)
We're very excited today to welcome two great market strategists to SALT Talks to talk you through where we are today in financial markets. Our two guests today are Joe Terranova and Liz Young and I'll read you a little bit about their bios before I turn it over to our host, Mr. Anthony Scaramucci for the interview. Joe Terranova is the chief market strategist at Virtus Investment Partners, a position he was elevated to in 2009, after having started with the firm as chief alternative strategist.
John Darsie: (01:07)
In his current role Mr. Terranova is involved with Virtus' investment oversight function, represents Virtus as a client facing thought leader providing insight into the domestic and global investing landscape. Mr. Terranova developed the Terranova US Quality Momentum Index, which launched and began publicly pricing in August, of 2020. Prior to joining Virtus, Terranova spent 18 years at MBF Clearing Corp, rising to the position of director of trading.
John Darsie: (01:34)
He's perhaps best known for his risk management skills, honed while overseeing MBF's proprietary trading operations during some of the most calamitous times for US markets, including the first Gulf War, the 1998 Asian crisis, 9/11, the collapse of Amaranth Advisors. He wasn't around for when Anthony traded through the Great Depression though. So he's a little bit younger than our host today.
John Darsie: (01:57)
During those times, there was never a loss at MBF due to market anomalies. Since 2008, you might know Mr. Terranova as being a CNBC ensemble member, appearing regularly on the Halftime Report, Squawk Box, contributing financial content throughout the CNBC media and digital platforms. Liz Young is the director of market strategy for BNY Mellon Investment Management.
John Darsie: (02:20)
In this role, she works directly with the firm's chief economist to formulate and deliver economic and market views to external audiences. Liz is a CNBC contributor and is frequently quoted in the Wall Street Journal, Financial Times, Washington Post and other industry publications. Prior to joining BNY Mellon in 2015, Liz was a portfolio analyst at Robert W. Baird, responsible for manager due diligence for the firm's recommended manager programs and discretionary model platform.
John Darsie: (02:48)
Prior to that, she served as a research analyst at BMO Global Asset Management. Liz earned her Bachelor of Business Administration in finance and marketing from the University of Wisconsin Milwaukee, as well as an MBA from Marquette University. So she's Wisconsin through and through. She holds a CFA designation and as a member of the CFA Institute and the CFA Society of New York.
John Darsie: (03:10)
So she's pretty smart, but we already knew that and hosting today's talk is Anthony Scaramucci, the founder and managing partner of SkyBridge Capital, a global alternative investment firm. Anthony does not have a CFA designation. He's also the chairman of SALT Talks. So we'll give him credit for that, but with that, we'll turn it over to Anthony for the interview.
Anthony Scaramucci: (03:29)
He's really riding hard, Joe. So just so just so you know, you and I know each other a long time, Joe. It was a little hard to trade the depression. It wasn't that hard. It was a little hard, because there was a lot of momentum back in the day, but when John Darcy needs the Botox, just remember, Joe, I have it all in my garage. So he's not getting any Botox as he starts to age, but Liz, it's great to have you on. Joe, great to have you on. I want to start with you Liz, if it's okay.
Anthony Scaramucci: (03:56)
The broad equity indexes have exploded upward. They're melting upward, at least that's my impression from watching the two of you on CNBC and looking at our portfolios. Have things gone too far, Liz? What's your opinion?
Liz Young: (04:12)
Well, depends if you want to talk about it broadly or in little pockets. There are certainly little pockets that are speculative, and Joe can cover the momentum piece of that much better, but those little pockets certainly are speculative and there are pieces that I would look at and say, "I don't know that this is the right entry point." But broadly speaking, the market I don't think has gotten ahead of itself.
Liz Young: (04:33)
If you just come back to fundamentals, which seems like a foreign language to us after all this policy support, but come back to the fundamentals, the earnings in 2021 are expected to be above the earnings in 2019. So if we're looking forward, and we've got this interest rate environment and this liquidity environment, I don't think we're far ahead of ourselves. Now, the interesting part is that what usually happens is you see this big run up in equity markets as we're starting to recover.
Liz Young: (05:00)
But then once the recovery is really underway, and it's getting to be squared away, then you see a pause in equity markets. So markets don't move at the same time as economies, they don't move at the same time as economic data they never have, they never will. So it's going to seem strange that we see a pause in markets later on when we feel like the economy is finally back on its two feet.
Anthony Scaramucci: (05:22)
Joe, I'm an old fashioned guy and I'm looking at money production by the United States and I'm a little worried. So let's just go over that. 23.6% more dollars are in circulation over the last six months. If the $1.9 billion stimulus goes into effect, that number will be 40%. So we will have 40% more dollars in circulation in a 12 month period of time, more so than the last 244 years. I'm worried Joe. Should I be worried or not a big deal?
Joe Terranova: (05:57)
What would you like them to do? Not have a response, which is what happened in the Great Depression? See the Great Depression, everyone thinks it's caused by the dramatic equity declines, but it was the absence of a response. They took the monetary base, Anthony from October, of 1929, to October, of 1930 and they contracted it by 7%.
Joe Terranova: (06:14)
Democrats and Republicans were actually unified, but we had this tax, Smoot-Hawley Tariff that contracted exports and imports with Europe, our largest trading partner, by 60 something percent at the time. So the Federal Reserve is doing exactly what they're supposed to be doing, but we're going to look back, we're going to look back on the period from 2010 to 2030.
Joe Terranova: (06:37)
We're going to realize at some point, it's going to be written about in history books, financial history books, that this was an investment Renaissance. It is an investment Renaissance, because we have recreated the American economy where we value the algorithm, the artificial intelligence and the software program, more than we value what we used to value which was the machinery, the automobile or the airplane.
Joe Terranova: (07:05)
In addition to that, we have a supply to demand imbalance as it relates to investable assets. It is the most dramatic imbalance in modern economic times. We've declined the supply of publicly traded companies over the last 15 years. We tried to introduce different types of asset classes, whether it be commodities, which disappointed in terms of price performance and depth and liquidity, but yet demand continues to rise.
Joe Terranova: (07:38)
Global investors continue to grow their numbers, Millennials are going to be such an incredibly important economic engine for us as a generation as we move forward, and Gen Z behind them. So collectively, Anthony, you've got these secular tailwinds that are in place, that are driving markets higher and the Federal Reserve is doing exactly what they're supposed to be doing.
Joe Terranova: (08:01)
In a hyper deflationary environment, you're supposed to nourish risk assets by providing liquidity and I think that their policy has been the right one.
Anthony Scaramucci: (08:12)
So, Liz, Joe's making a lot of good points, but I'm looking at economic data that suggests that the Federal Reserve's policies, and I agree with Joe and I accept that they don't really have much of a choice. I'd love to see some more fiscal legs to this economic store, like infrastructure and job training and things like that but the potential outcome, the side effect of these policies is that assets, and let's say one to 3% of the population owns the assets are going up.
Anthony Scaramucci: (08:43)
So that means all of our assets are going up. Good for the people that own the assets, but Joe's mentioned that we're in a deflationary environment. So wages don't seem to be going on for middle and lower income people. So there's a chasm widening. Are you concerned about that, Liz, or am I wrong about that? Push back on me,. Tell me what I'm wrong about so we-
Liz Young: (09:06)
You're inviting an argument. I'm excited.
Anthony Scaramucci: (09:11)
The point I'm making is Joe's right. It's an effective policy response and it's good for the markets, it's good for the businesses, but is it hurting middle and lower income people? Not not on purpose, but is it one of the deleterious side effects of it?
Liz Young: (09:29)
I don't know that Federal Reserve policy is necessarily hurting lower and middle income people, but what is hurting them is the way that the labor market is set up right now. So here's where I agree with Joe and then a little bit where I disagree with Joe. I agree that the Fed didn't have a choice. The Fed certainly didn't have a choice last March and it was a huge benefit, what they did and how quickly they did it. I think all of us learned a really painful lesson in 2008 and 2009. We didn't act fast enough, we didn't act big enough and we underestimated the downside.
Liz Young: (10:00)
So this time everybody, Fed, government, private companies, everybody said, "We're not going to do that again." So they had to do that in spring of last year to prevent a complete financial market meltdown, and that was absolutely the right thing to do. Now, we're in a place though, where the Fed is focusing a lot on the labor market and I think that's actually a good thing.
Liz Young: (10:21)
It may force them to keep policy where it is, but the issue with the spread between wealth and the gap that keeps growing is that the jobs that were lost were, unfortunately, on that lower end of the wealth curve and a lot of those jobs that were last are not going to be where we left them. So when we reopen the economy, there's going to be people that were supposed to be temporarily unemployed, that turn into permanently unemployed persons.
Liz Young: (10:47)
That is going to affect that part of the labor market much more. Where the question lies is, whose responsibility is that? Is that a fiscal responsibility to create new jobs in that particular part of the economy? Is it a fiscal responsibility to create new jobs that have never been had before in our economy, and put people to work there, but then there's the skill mismatch that is actually one of the things that I'm worried about over the next, call it two to three years, that you've got unemployed people and a labor market that never got back to the size that was before, and a bunch of open positions but there's not a good match between the skill set that the unemployed people have and the open positions need.
Liz Young: (11:27)
So then you just kind of stay stuck in this spot and then you have to decide, is it the government's responsibility to train and educate those people? Or is it private company's responsibility to train and educate those people and meet somewhere in the middle? I don't know what the right answer to that is. I don't think it's the Federal Reserve's responsibility.
Anthony Scaramucci: (11:50)
We'll agree that it's not the Federal Reserve's responsibility and I think Joe's making the point is they have a blunt instrument, they're using the instrument and if you go to the book, Firefighting, which was a great book written in 2018 by Geithner, Bernanke, and Paulson. They all say in that book that their policy response in 2008 into 2009 wasn't big enough and Jerome Powell took that to heart. So I'm giving them credit for all of that.
Anthony Scaramucci: (12:14)
I'm just worried about these deleterious, potential side effects, but let me just flip it to chill for a second because Joe, you're great at this. I remember this from your book about momentum and I remember this from your book about when things sometimes go parabolic. Are we in a technology 2000 style potential boom, and then correction, like in March, of 2000 or are we getting just started in the technology rush here? What's your opinion?
Joe Terranova: (12:49)
So there is no comparison, based on the evidence between the experience of 2000 and where we are today. If you go back-
Anthony Scaramucci: (13:00)
John Darcy wasn't born in 2000. Just explain to Darcy what happened in 2000 [crosstalk 00:13:05]-
Joe Terranova: (13:05)
If you go back to 2000, first of all, you had two conditions in place that I think were important in quickly advancing what what became a very negative environment. First of all, technology was highly indebted as a sector back in 2000. In addition to that, you had competition for the equity investor, if they wanted to move away from allocations towards a lot of these technology companies. Rates were significantly higher than where they are today.
Joe Terranova: (13:43)
You don't have that in place now. Technology, Anthony, and I always use this interesting example but I want you to think about Microsoft in 1999. Microsoft in 1999 was a $60 stock. One year later, Microsoft was a $20 stock. Guess what? Microsoft didn't get back above $40 until 2013. Took them 13 years. So what happened was, and this kind of speaks towards what what Liz was addressing and I think where your your question is going, Anthony, with whose responsibility is it to stimulate the labor market?
Joe Terranova: (14:28)
So technology from 2000 to 2010, they spent that decade repairing themselves. It was kind of like, I often use the analogy of a hurricane. If you think about a hurricane coming through your neighborhood, if your house is the house that gets knocked down, you rebuild your house, and it's going to be rebuilt hurricane proof. Well, technology did that. If the hurricane comes through and your neighbor's house gets knocked down, you don't rebuild your house because your neighbor's house got knocked down.
Joe Terranova: (14:58)
So technology recreated itself, positioned itself exactly where it was able to, in terms of prevalence and market share in the economy from 2000 to 2020, really take strong hold. I think that deflationary impact is the reason why we've had a case shaped recovery since the great financial crisis and fiscal policy makers whose responsibility, Anthony, it is to address that. They haven't done a good job in doing.
Joe Terranova: (15:30)
We talk about an infrastructure bill. We need an infrastructure bill that distributes technology throughout the country.
Anthony Scaramucci: (15:38)
Next week is infrastructure week, Joe. Just letting you know that. It's going to be infrastructure week, next week.
Joe Terranova: (15:44)
We need that-
Anthony Scaramucci: (15:44)
I'm not kidding by the way. The White House just announced that. I know you guys think I'm joking.
Joe Terranova: (15:50)
Well, hopefully it includes companies like Cisco and technology is a big part of that, but understand that since the great financial crisis, you had people that lost a particular income threshold, and never were able to attain it again, or maybe lost their jobs and their ability to invest and to Liz's point, they were never retrained. They were never provided with the skills that are currently needed in what now is an intangible asset economy.
Joe Terranova: (16:18)
They didn't have those skills. If you and I, you grew up in the 70s, right, Anthony? What's your tendency? What's your bias back to your childhood? You worry about inflation? You worry about the Russians, and you worry about high oil prices. Well, you had policymakers, fiscal policymakers, who had that mindset.
Joe Terranova: (16:39)
They didn't understand how they needed to re-educate the society towards having those intangible skills that are needed in the workplace. I think that's been one of the greatest challenges as to why you've had this case shape recovery since the great financial crisis.
Anthony Scaramucci: (16:56)
Also the specter of deflation, because you have excess factory output, you've on boarded billions of people into western style capitalism. So those policymakers that were guarding against the last war, inflation, weren't anticipating the deflationary aspects of the globalization of our society. So, Liz, everybody manages and thinks about risk differently. How do you think about it and what are the pockets of risk right now that you would be worried about?
Liz Young: (17:29)
So, if you talk about clients, they define risk as losing money. Full stop. They don't ever want to lose money. They don't ever want to see anything below zero.
Anthony Scaramucci: (17:39)
Everybody is a long term investor, Liz, until they have short term losses. We've long-
Liz Young: (17:43)
Exactly, exactly, exactly. We learn that painfully every single year. What I think risk actually is, is the blind spots that you weren't prepared for or you didn't prepare your portfolio for. It doesn't mean that you take risk exposure off the table, and you're suddenly protected against all risk. In an environment like this, that's just not the case. What you have to protect against is the biggest risk to you as an investor.
Liz Young: (18:10)
So let's say, for example, I'm 80 years old, and I'm not earning an income anymore. My biggest risk is to maintain my purchasing power, the biggest risk is inflation. So then I develop a portfolio that protects me against inflation, and you have to focus on it like that. It's a sniper bullet. It's not a shotgun blast.
Liz Young: (18:28)
One of the things that I think is hiding in the corners of risk that we talk about under the surface, but I don't know that people are really giving it enough attention is the idea that inflation will eventually come back to life and it should. It would be a healthy thing for inflation to come back to life. There's a reason the Fed has a 2% target, because 2% means that there's healthy demand in the economy.
Liz Young: (18:52)
So I would welcome a 2% inflation reading. Eventually, it'll happen. What I think might occur in the middle part of this year is as everybody comes back online, and there's this flurry of activity and that savings rate in the US goes from 14% down closer to the average, which is 5%, you have a lot of demand that floods back into the system, and the supply chains might not be able to keep up with it.
Liz Young: (19:17)
So you might see these little transient spikes in inflation and they're numbers that we haven't seen in a really, really long time and I think it could spook people and I think it could particularly spook the yield curve. I would expect the Fed to control the yield curve a little bit but not entirely. So I think the yield curve piece and the yield curve volatility is a risk out there that I want investors to be ready for, not necessarily to do much about right now but just be ready for mentally.
Anthony Scaramucci: (19:45)
All right, and I hear you. Joseph, Bitcoin, cannabis, SPEX recent Reddit activity, GameStop et cetera. There's a lot of excitement out there, Joe. Let me ask you. Is this born from Federal Reserve policy? Do we have more of these squalls in the future?
Joe Terranova: (20:09)
This is part of the investment Renaissance. This is the absence of supply for new investable assets. You need more investable assets as you continue to have rising demand. You have 80 to 85 million millennials. Let's talk about this for one second. A couple of years back, you and I would walk into a room and Liz would walk into a room. The difference between you and I walking into the room and Liz walking into the room is that Liz is probably the youngest person in the room.
Joe Terranova: (20:46)
You and I, okay, like everyone else in the room is aging quickly. Now, we both know you and I are aging gracefully, but we're aging quickly.
Anthony Scaramucci: (20:56)
Joe, Joe, you're worse than Darcy, man. I was doing great [crosstalk 00:21:01]-
John Darsie: (21:01)
He's aging but it's not that graceful, Joe. That's where you got it wrong.
Anthony Scaramucci: (21:05)
It's unbelievable. You're worse than Darcy. I just got my hair dyed, by the way and you're just unbelievable. You probably do need my colors at this point, just so you know. Liz is looking at that carrot top saying, "Yeah, Terranova does need a little bit of help," and there's some-
Liz Young: (21:23)
We all age.
Anthony Scaramucci: (21:24)
And there's some great colors up here on the North Shore, just so you know. Go ahead Joe, after you just insulted me. I do run the SALT Conference. I know Darcy tries to say that he's doing it, but you're hurting my feelings, Joseph. Go ahead.
Joe Terranova: (21:39)
let's take the SALT Conference.
Anthony Scaramucci: (21:41)
Unbelievable.
Joe Terranova: (21:42)
Look around the SALT Conference. What do you say to yourself in 2017 at that SALT Conference about the financial services industry? We're getting older. We need to introduce a younger generation to the financial services industry.
Anthony Scaramucci: (21:55)
I wasn't saying that to Joe Biden, when he was at the SALT Conference. I said, "Joe, you look great to me, Joe. You look young." That's what I was saying to the vice president at that moment.
Joe Terranova: (22:07)
You need to have a transition to a younger generation to take hold in the financial services industry. Now, a couple years back, because of what happened with 9/11, the experience of the great financial crisis, they rightfully did not trust Wall Street. They didn't want to engage in that conversation. Then you introduce Bitcoin and Bitcoin, a number of years back, became the way that you could actually engage in this conversation.
Joe Terranova: (22:37)
Now we're seeing an acceleration in their excitement, towards not only Bitcoin, but SPEX and cannabis, and what we're seeing with this Reddit revolution. If you are like myself, you are in that older generation of the financial services community that have been doing this for 30 years, here's your opportunity.
Joe Terranova: (23:02)
Here's your opportunity to speak with Millennials and Gen Z, about financial literacy, about long term investing, about portfolio and constructing, using multi asset allocation. This is a tremendous opportunity and Anthony, the last point I'll make on this is, I will tell you that we have characterized the Millennial generation totally incorrectly.
Joe Terranova: (23:30)
The Millennial generation will be the generation that provides this country the greatest opportunity to finally achieve organic economic growth. In 2010, the most common age in the United States was the age of 49. The second most common age was the age of 50. In 2019, the most common age in the United States was the age 29 and the second most common age was 30.
Joe Terranova: (23:52)
The top 10 ages were all below the age of 34. 11 years, forward in 2030, all you're going to see is that generation just slowly begin to age into their prime income generating years. This Millennial generation is so important. Behind them Gen Z, who are so financially literate and technologically savvy, they will also be contributing and I just think collectively, this is a moment where as I said, this investment Renaissance is taking hold, and we have to realize it and embrace it.
Anthony Scaramucci: (24:27)
So despite the fact that you're making me feel old, Joe, you're very bullish. So Liz, does he have it right or where do you think he has it wrong? Where does he have it right and wrong, in your opinion?
Liz Young: (24:39)
Well, first of all, you're both wrong because we all age at the same speed. So I'm getting older at the same pace that you're all getting older and I was not 29 in 2019. Anyway, I think he's right that we need to create more investable assets.
Liz Young: (25:00)
I think I would add on top of that, we need to, as an industry stay relevant to the next generation. How do we stay relevant? They care about different stuff than the baby boomer generation cared about. They care more about ESG, they care more about companies being socially conscious and that's not just to invest in them, that's to work at them.
Liz Young: (25:22)
So that gap that I talked about before between the skill set, and the unemployment rate is that in order to narrow that as we move forward, you also need companies to stay relevant to the workforce. So there's this huge movement towards clean energy, there's obviously the huge movement in social issues. I think that that only grows, and we as an industry need to embrace that.
Liz Young: (25:44)
Now, as far as, is the craze ... I think your original question was, all these new assets, is it kind of a craze? Is it maybe indicative somewhere of a bubble? Joe used a hurricane analogy, so I'm going to use a tornado analogy, because I'm from Wisconsin. We didn't have hurricanes there.
Liz Young: (26:02)
When you have a tornado watch, it means that the conditions are present for a tornado to form. When you have a tornado warning, it means that one's been spotted and here's what I would say about bubbles. Right now, I think we could be on bubble watch. The conditions are present for one to form, but it's not a warning. We haven't spotted one and the thing about bubbles is you don't know that there was one until after it popped.
Liz Young: (26:26)
So I don't think that there is one necessarily in those spaces at large. Now, will some of those spaces go through a boom and bust? Sure. Will there be survival of the fittest? Sure. Will every SPEX survive? No, but that's how this works and they're in the price discovery phase. They're in the discovery phase now and I think it does drive a lot of enthusiasm from younger investors, because it's interesting.
Liz Young: (26:52)
It's not the same stuff that their parents invested in, and they can understand it better, because it's the generation that they're growing up in. So I welcome it. I think it's great. I just think people need to make sure that they realize it doesn't always go up. Not everything is always going to be positive.
Joe Terranova: (27:07)
Anthony, if I could real quick, I love that. That is just a perfect assessment of the environment, but I also want to introduce one element that is so critically important, and it's happened within the last week. Elon Musk has finally introduced for investors, the needed correlation for Bitcoin. What was missing for Bitcoin in the last couple of years was a correlation.
Joe Terranova: (27:32)
Now by Elan Musk, using Tesla as the way to introduce that correlation, he has now provided for every investor that they have to have an understanding of Bitcoin. I'll tell you why. Liz, if you own an S&P fund, guess what? You now own Bitcoin, and that's the correlation that has been introduced this week that's so powerful.
Joe Terranova: (27:57)
Yesterday, Bitcoin was down 7%. I'm watching my screen and I'm saying, okay, Tesla is going to go down today, because Bitcoin's down 7%. Before we came on, I saw that Bitcoin was 7% higher. I don't know where Tesla is right now, but I'll tell you what, it's not lower right now. That correlation was what was missing and it's so powerful that it was finally introduced.
Anthony Scaramucci: (28:20)
So where's where's Bitcoin going to go, Joe?
Joe Terranova: (28:24)
I have no clue. I'll leave that up to you. I don't have a Bitcoin fund. I'm just looking to an invest in a good Bitcoin fund. Do you know one?
Anthony Scaramucci: (28:32)
I do. Yes. I know one. Go ahead, John.
John Darsie: (28:38)
Liz-
Anthony Scaramucci: (28:38)
And he's dying to get in here. Go ahead, John. Go ahead.
John Darsie: (28:41)
Of course, we had-
Anthony Scaramucci: (28:42)
Try to outsmart everybody. Go ahead.
John Darsie: (28:44)
I want to stay on Bitcoin for a second and hear Liz's opinion. So Liz, obviously you work at BNY Mellon. You are not part of the decision for BNY Mellon to enter the Bitcoin custody space, which we saw recently that BNY Mellon is going to allow some custody of Bitcoin, but what's your view intellectually on Bitcoin? You don't have to give a price target to it, but do you think it has staying power or do you think this is some sort of fad?
Liz Young: (29:13)
I think crypto in general has staying power. Absolutely. I would call it an asset class, though, not something that is going to take over the dollar. I think originally the fear and all the hype around it was, okay, Bitcoin is going to take over the world and the US dollar goes away. Fiat currency in general goes away. I don't think that's the case, and I actually just recently did a podcast with Mike Novogratz, and we talked about Bitcoins that I could try to help my listeners understand it better and maybe even help myself understand it better.
Liz Young: (29:41)
One of the things that I think we figure out over time is that the dollar is already sort of going digital. How often do you really carry cash and you have to go out of your way to even get cash these days. Once the dollar goes completely digital, that's a digital currency.
Liz Young: (29:59)
So if we just put it in the basket of digital currencies in general, I do think currency goes digital, broadly across the globe. Now, Bitcoin is something that I think continues to go through a lot of boom and bust cycles and that's why I would call it an asset class. Where I get a little bit nervous as when people start calling it a store of value, because that makes investors think that it's the same as gold, or it's the same as the dollar and it's not.
Liz Young: (30:25)
It does not carry the same volatility profile, it's going to have a lot bouncier of a pattern, and it's going to make people get really scared sometimes. So I would be careful with calling it a store of value and that's the only reason you hold it. As far as institutions getting involved in it, BNY Mellon included in that, one of the points that Mike Novogratz made and I would agree with this is that once you saw insurance companies get involved and once you saw big institutions get involved, you had to get to critical mass, which was about three.
Liz Young: (30:56)
Then once there were three big ones that were involved, everybody else felt more comfortable. It's almost like it legitimatized the asset class, and I think we're just going to continue to see more and more institutions get on board, but I also think investors need to remember that an individual investor profile and risk profile and appetite for risk is much, much different than an institution.
Liz Young: (31:16)
Institutions have almost endless time horizons, and they can invest in stuff that booms and busts for a very long time and they can stomach it a lot easier than an individual can.
John Darsie: (31:27)
It's a great point, Liz and we were having a conversation around Bitcoin. You talked about insurance companies, and as Mike might have told you on your podcast, and he told us when he came on SALT Talks is that the public disclosures that we've seen in terms of insurance companies and institutions that have invested in Bitcoin is only about 10 to 15%, he thinks of the actual universe of institutions that have already invested in Bitcoin, but haven't disclosed it yet.
John Darsie: (31:50)
So it's almost getting to the point where people talk about the biggest risks of Bitcoin being regulation, and the idea that the US or other countries will ban Bitcoin, but if you have large insurance companies, you have big corporations like Tesla that are driving the market, you have endowments, pensions and other institutions that are heavily invested in the asset class, I would find it very difficult for the US government to create a systemic risk that would come along with potentially banning Bitcoin at this stage of its evolution.
John Darsie: (32:20)
Staying on the idea of speculative assets. So we've touched on this a little bit, Joe, but I want to dig into it further. Asset light businesses, so businesses who don't own underlying real estate or restaurants or accommodations. You have Airbnb, you have Uber, you have DoorDash. Companies that are asset light, that are performing extremely well. We had Jeff Ubben on SALT Talks recently. He's the founder and former CIO of ValueAct, talking about how he thinks that asset heavy businesses are extremely undervalued and that the value factor he thinks is going to come back into play.
John Darsie: (32:56)
He doesn't know when, but he thinks it's going to come back into play at some point. Do you agree with that? Not necessarily that tech stocks are going to crash, but that the value orientation is going to come back into the market, or you think, the horse is out of the barn and now it's time for investing in the new era of technology and distributed workforces, and all that type of stuff.
Joe Terranova: (33:16)
John, growth is 40% of the S&P and it's warranted, given the contribution from technology companies and the intangible asset economy that's represented in the United States. That being said, you have seen opportunities and value when people talk about the narrowing of the performance gap between growth and value at the end of 2020. Well, that gap was close to about 40% wide in the favor of growth at one point. It narrowed towards the end of the year to where it was only about 32% wide.
Joe Terranova: (33:54)
The opportunity really comes in two ways when I think about value. The two ways to think about it are, if you could introduce the word quality, and apply it to value, you can study, what are the fundamentals, what's the strength of a balance sheet for a company that's viewed as value? If you could identify that as qualitative, strength of a balance sheet, then there's an opportunity for the equity side of that value company.
Joe Terranova: (34:26)
But if you can't, the real opportunity, and the opportunity in Q2 of 2020, was on the debt side and historically, that's really where investors find the strongest performance is realizing that the debt market at a time where there's stress and strain on a particular industry that we identify as "value," that's where the real opportunity will be found and you saw that in Q2.
Joe Terranova: (34:57)
A high yield market provided some very favorable conditions for a lot of these value companies and it's similar, John to what you experienced in the wake of the great financial crisis. Think about the financial sector and how many would suggest coming out of the great financial crisis that owning the equity of financial institutions was a historic opportunity. Well, in certain circumstances, rather, reflecting back, they were correct that you were able to be rewarded with strength and performance, but in the subsequent four to five years after the great financial crisis, the out-performance was in the debt of financial institutions, not in the equity.
Joe Terranova: (35:39)
I think investors kind of forget that sometimes, but that's the two ways that I think you think about it. Looking at measuring the equity component, but utilizing and applying the quality factor to it and then understanding if you can't find that quality, I'm going to be in the debt market, particularly the high yield looking for the performance opportunity.
John Darsie: (36:02)
Liz, how are you looking at that push and pull between growth and value?
Liz Young: (36:07)
If I had a nickel for every time I got asked about growth and value, I could have retired in 2020. So the push and pull, first of all, you have to define them and I don't think we can define them the same way that we defined them 10 years ago. The reason that some of the value sectors started to show strength back in November and December is not because they were cheaper than growth sectors. It wasn't because people were going out and saying, "Oh, look at the PE of these value sectors. That's so much more attractive. Let me buy that because it's cheaper."
Liz Young: (36:38)
It's because there happens to be a pretty strong overlap between cyclical sectors and value sectors and back in November, as you remember, we had an election and then we had good vaccine news every single Monday for about four Monday's following it. People decided there's going to be this huge cyclical recovery, it's going to be global. So what benefits from that? It's things like small caps, it's even cyclical regions, like emerging markets, and Europe and then it's the cyclical sectors, which happened to be a lot of the value of sectors.
Liz Young: (37:08)
Now, one of the interesting things about growth is that I actually think there's parts of the growth universe that act more like value of your. So when you look at even just the big tech names, they're actually more correlated to a rise in the 10 year yield than they ever used to be and theoretically, that's not what should happen. You should see a rise in long term rates and pressure on growth stocks, but what's happening lately is that people are equating big tech with just blue chip related to the economy, going to participate in a recovery type names, and they feel safe about it.
Liz Young: (37:43)
So I don't think we can split the universe up like that anymore. I think you have to look forward and say, "What's going to participate in an economic expansion," and you can't take growth out of that equation. We need technology and to my point earlier, again, about the labor force, I feel like I keep going back to this, but I didn't know it was going to be my theme today. It is.
Liz Young: (38:04)
To go back to that point, when we do get back to prior levels of GDP, we're going to do it with a smaller labor force. So we need that smaller labor force to be more productive in order to create the new growth that Joe talked about earlier. How do you be more productive without telling people they need to work harder and longer? You need technology to make them more efficient. So no matter what, we still need technology, we're still going to need growth stocks and I would also throw healthcare into that spot, too. I think healthcare is going to be a huge driver and that's also a growth area, especially in small caps.
John Darsie: (38:38)
It's a fascinating point that sort of Apple, Google, Microsoft, those have become the new value stocks. They see part of the rotation with people looking to de risk from chip stocks or the other hat, cloud computing or data AI type companies. Joe, so we mentioned in the opening that you launched a US quality momentum index. Tell us about that. Talk a little bit about the momentum factor, and why that has been so successful, whether you think it's driving some of the big moves we've seen in the market and just tell us more about that product and why you decided to launch it last year.
Joe Terranova: (39:16)
Well, I have a obvious fundamental belief that we have an absence of supply for investable assets. In my attempt to introduce the index methodology, what I was trying to accomplish was to provide a modern day approach to thinking about the markets in a way that was properly incorporating what was so important to me over the last 30 years in my observation of where we would find success in investing. So there has been a lack of respect in my view, towards the word momentum.
Joe Terranova: (39:59)
Momentum, unfortunately, has been communicated to be something that equates with high or hyper volatility. I think the way in which we need to really look at momentum in this modern market is to understand it's where you find confidence in your observing the prior 12 or 24 or 36 months. The technical formation tells you some story and that story, I want to be one that is one of confidence.
Joe Terranova: (40:36)
I often use the analogy of an athlete, right, John? If you've got a basketball player, who he or she in the first quarter, takes five shots, and they miss all five shots, well, they're not playing with confidence. Second quarter, if she steps out and hits a deep three, well, that player is now playing with confidence and they want the ball.
Joe Terranova: (41:00)
I think the same thing needs to be said in investing and that's what momentum really is. Understanding technical confidence, but I wanted more than that and I wanted to introduce the quality factor, which is the study of a balance sheet. I think a balance sheet is so incredibly important. A balance sheet is similar to understanding how healthy an individual's heart might be.
Joe Terranova: (41:26)
So we look at return on equity, debt to equity, annualized sales growth over the prior 36 months, and so far year to date, it's interesting, weak balance sheets are actually outperforming strong balance sheets, but that's fine. That's not what my investment philosophy is. My investment philosophy is, where do I find technical confidence in a formation that I define as momentum and I combine that where I find fundamental strength of a balance sheet quality, I bring those together and John, I really believe we've introduced a strategy that will be viewed as a core equity strategy, and a modern day strategy that investors could utilize over the coming decades.
Joe Terranova: (42:11)
It's equally weighted, which removes the idiosyncratic single stock event risk. It avoids concentration and it's rebalanced, and reconstituted quarterly and it only holds 125 names. It basically calls the losers of a lot of the index that have, in the case of the S&P 500, 500 large cap names. We only want the true winners so we've got 125 equally weighted in the index.
John Darsie: (42:45)
Well, it sounds like a fantastic product. Last question before we let you guys go, Liz and it's back to public policy. So you study labor markets and policy a great deal. We joked in the opening that the Biden administration is now taking a stab at infrastructure week after I think the Trump administration was about O-7 in actually doing anything related to infrastructure week, but what would you like to see from the US government from the fiscal side of things?
John Darsie: (43:13)
We talked about Fed stimulus before? What specific things would you like to see from the Biden administration if we're going to create a healthier recovery and a healthier labor market?
Liz Young: (43:24)
So first and foremost, I'd like to see the government move faster than they did on the last package. We started talking about that package happening last July, and we didn't get it until December. So I think speed is the first and foremost thing that we need to have. Secondly, I do think infrastructure is hugely important to create that new growth that we've talked about throughout this entire thing, and that package likely comes maybe a little bit later in spring.
Liz Young: (43:50)
Anthony might disagree with me on that, but that package does need to be had. I think in the medium term though, or in the near term, we need a package that is targeted enough so that we don't misuse the funds and that we don't have to dig out of too big of a hole later, but we still need stimulus and we still need to support that bottom part of the K in the K shaped recovery.
Liz Young: (44:13)
So that's what I would like to see from the government. I realized that it's really difficult to target that, and it's difficult to make something as effective and keep the guardrails on as much as we can, but I do think that the right approach is to focus on getting this vaccine distributed, getting us as close as possible to herd immunity. I think that the estimate is that we're to 75% immunity by August. So keeping us on that track needs to be first priority and then we move on to infrastructure.
John Darsie: (44:42)
I saw your CNBC colleague, Jim Cramer gave a great pitch recently on his show about the need to invest in us manufacturing. In regard to the tech sector, we import most of our chips and our semiconductors from Taiwan and from South Korea and I think there's a lot of things the Biden administration could do to invest to accelerate the growth in our domestic technology sector. Thank you so much, Liz and Joe for joining us here on SALT Talks.
John Darsie: (45:10)
We hope to have you back soon and hopefully what you're saying about herd immunity, Liz, is right, because we're hoping to have our next SALT Conference actually in New York in September. We haven't publicly announced that, but that's our goal is to do something in our hometown before we hopefully go back to Vegas, but we hope to have both of you there in September in a safe manner.
Joe Terranova: (45:30)
I will be there. I don't know if I'll I'll have the vaccine by then, unlike Anthony. I know he qualified for the vaccine. I didn't qualify.
John Darsie: (45:37)
Exactly. He was in the first round, Joe-
Anthony Scaramucci: (45:39)
Liz, that was another age shot at me. Did you see that?
Liz Young: (45:43)
It was, it was. If Joe doesn't have the vaccine by then, I definitely won't have it.
Anthony Scaramucci: (45:47)
The thing about Joe is ... When we get off this SALT Talk, I'm calling his agent and I'm going to complain about Joe. I had Joe on specifically so he could team up with me against Darcy. I knew you were going to be just fine, Liz, because you're Midwestern. You have all that charm and grace and niceness to you unlike these New Yorkers and southerners. So at any event, it was a brilliant conversation. Thank you so much for [crosstalk 00:46:14]. Hopefully we can have you guys back, maybe do a mid-year review if you guys would like to do that with us. Terrific for us. Thank you, again.
Joe Terranova: (46:22)
Absolutely. Thank you, Anthony.
John Darsie: (46:24)
Thank you everyone for tuning into today's SALT Talk with Joe Terranova of Virtus and Liz young of BNY Mellon. Just a reminder, if you missed any of this episode or any of our previous episodes, you can access our entire archive of SALT Talks as well as sign up for all future talks at salt.org\talks.
John Darsie: (46:42)
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John Darsie: (47:05)
We're also on LinkedIn, Facebook and Instagram as well, and being more active there too. On behalf of the entire SALT team, this is John Darcy signing off for today from SALT Talks. We hope to see you back here soon.