Webcast transcript
Willy Walker: Thank you Susan, and good morning everyone it's a pleasure to have Kate Moore joining me again on the Walker Webcast to talk about the markets and where she and BlackRock see things going from here.
Last June, immediately after the killing of George Floyd I asked Walker & Dunlop Board Member and Founder and CEO of Management Leadership for Tomorrow, John Rice to join me on the Walker Webcast and during that discussion John said, “The time for words is over and the time for action is now.” And over the past 10 months a good deal of action has happened across corporate America and across the country. And the guilty verdict given to Derek Chauvin by the jury in Minneapolis yesterday was our justice system working and thank goodness it worked. But as many commentators rightly said yesterday, we still have a long way to go. At Walker & Dunlop we've taken concrete steps over the past 10 months to be a more diverse and better company. While we've been focused on issues of diversity, for decades, we decided to hire a Chief Diversity Officer and give that role the human capital, and focus it deserves. We established ambitious five-year diversity and inclusion goals for women and minorities at Walker & Dunlop and establish those goals to not only promote women and minorities into leadership positions, but to pay them more. And we tied those goals to our executive team short- and long-term compensation, which is outlined in our 2020 proxy that was filed with the SEC. We were one of the first 25 corporations in America to sign up for the Management Leadership for Tomorrow Black Equity at Work Certification which includes an audit of where we stand today and the establishment of goals to achieve tomorrow. We have established a Commercial Real Estate Diversity Task Force working with some of the largest owner operators of commercial real estate in the United States, including Greystar, Kayne Anderson, and KKR. And we have continued to do the things we always did before, be a great place to work, which includes an environment that is accepting of diverse backgrounds, genders, races, sexual orientations, religions, etc. Continue recruiting talented women and minorities and ensuring that they get the training and opportunities to build valuable careers at Walker & Dunlop; and continue to outperform the competition showing the diversity and inclusion isn't only the right thing to do, it's the valuable thing to do.
A couple quick comments on the markets, the 10-year stabilizing around 1.60% has been extremely helpful to the commercial real estate financing markets. The dramatic rise in 10-year treasury during Q1 had many borrowers on the sidelines and the current stability is allowing many borrowers to transact once again. Fannie and Freddie who carried over a significant amount of business from 2020 into 2021 and then pulled back from the market significantly in February and March have finally cut their pricing and appear to be reentering the market; that is a very welcome sign for owners of multifamily properties. CAP rates continue to compress in multi and industrial which has many buyers scratching their heads. I had lunch with a client in Salt Lake City last week who couldn't understand how a class B multifamily property in Albuquerque, New Mexico had recently traded for a 3.9 CAP rate. And I reminded him that multifamily has now held up through the great financial crisis and COVID pandemic; it is a cash flowing asset that at a 3.9 CAP rate that acquisition will still have positive leverage and in today's yield starved world buying that property is a great way to deploy capital, and then I also reminded him that there is a ton of capital out there today.
Final note before I begin my discussion with Kate to understand where the broader markets are headed. The replays on the Walker Webcast are starting to gain fantastic momentum and after this discussion with Kate today, we will have had over 750,000 views of the Walker Webcast either live or on YouTube replay. Over 80,000 people have watched the replay of the Walker Webcast with Brendan Wallace of Fifth Wall and Casey Berman of Camber Creek. And at our current replay rate, we will be over 1 million views very soon. I’m truly honored to have such amazing guests, such as Kate join me every week and we will continue to produce the Walker webcast for as long as thousands of people tune in each week.
Next week we have Jim Loehr, world renowned sports psychologist and author of 17 books, including Leading with Character to discuss just that: competition, mental toughness, and leading with character. The following week I’m thrilled to have Will Ahmed Founder and CEO of unicorn health and technology company, Whoop join me to discuss sleep, strain, recovery, and how Whoop data is being used by people, including Hideki Matsuyama during the final round of the Masters, to live better and healthier lives. And then we'll have Deb Cafaro one of the most successful and inspirational CEOs in America talk about how she has built Ventas into a commercial real estate and seniors housing powerhouse; great lineup and it all starts now with Kate.
Quick intro on Kate and then we'll get into it. Kate Moore is Managing Director at BlackRock and a member of the Global Allocation Investment team and Head of Thematic Strategy. Her investment mandate includes identifying opportunities to exploit structural change, policy evolution, and dislocations across global industries, she is a member of the Human Capital Committee. Prior to joining BlackRock Kate was the Chief Investment Strategist for the private bank at JP Morgan and a member of the Global Investment Committee. Before JP Morgan, she was Senior Global Equity Strategist at BofA, Merrill Lynch- Global Research and Emerging Market Strategist at Moore Capital Management, and a member of the Global Strategy team at Morgan Stanley Investment Management. She holds a BA in Political and Social thought from the University of Virginia where my father also happened to have gone to college. Where Kate also serves on the Board of Managers of the Alumni Association and she holds an MA and Political Economy from the University of Chicago where my guest last week, Peter Linneman has his PhD from.
So, Kate, let's make a little news this morning, your job is to identify opportunities to exploit structural change and policy evolutions. We've had a lot of structural change in policy evolutions in the US over the past couple months, what did we miss or what can we exploit from your perspective at BlackRock?
Kate Moore: Yeah, thanks Willy, I’m super glad to be back on. A little intimidated by the lineup that you have over coming weeks, though, and I will say number one, I want to learn more about performance and number two I’m super focused on my sleep and how that sort of interplays with my athletics, so I’ll be tuning in.
Willy Walker: Where’s your Whoop? Get a Whoop.
Kate Moore: I wear an Oura ring which might be controversial, but we can talk more about that.
Willy Walker: All good.
Kate Moore: Okay, so what's happened in terms of sort of bids, big structural changes over the last let's call it 15 months. There's some things that we all talk about that kind of bringing forward demand when it comes to consumers; how they're purchasing, how they're interacting with products, how they're interacting with brands, you know that's pretty straightforward kind of know that's been going on. But there's a lot of other things that I think have been somewhat recognized by the market, but are actually really enduring trends that you know I want to get ahead of and I’m aggressively invested in. One of them is around software security and particularly security systems that protect against a cyber threats, zero trust software in particular. You know we've learned, and BlackRock had you know all 16,000 of our employees at one point working remotely, I’m still working remotely, that is incredibly important to have the right software and systems in place to protect critical data, whether it's client data or proprietary data, systems, and models. And most companies have to continue to spend on this, in fact, despite spending on it in 2020 we've actually heard from many of the Chief Technology Officers and Chief Investment Officers in their surveys of where they're putting capital to work over the course of this year and next that technology and cyber software is like their number one area of spend. So that I think is an important durable trend, as we think about the future of the workforce, as we understand the threats that could potentially come when people are not in their home office location and also the threats that we've experienced to governments and non-government organizations. So, I think that's a really interesting theme.
Willy Walker: If I can before you move on to the next one. On that, clearly a big issue Fed Chairman Powell mentioned it as his biggest concern when he did the 60 minutes interview two weeks ago. My question to you is: how much additional spend do you expect there? In other words, I get the fact that everyone needs to protect themselves but companies like BlackRock and Walker & Dunlop we're already spending Do you think that there's an additional outlay, or is it just that you want to invest in the best because that's going to be something that's going to be needed forever?
Kate Moore: Yeah, I think there's going to be an additional outlay. I mean one of the problems, but I would say the opportunities for many of these software security companies is that the threats continue to evolve; they become more sophisticated, they're coming from different sources, there are additional vulnerabilities that get exposed through day-to-day work. I actually expect the spin to accelerate, we're talking about kind of mid-teens, double digits spending for most of the companies relative to kind of 8-9-10% spend in this space that we saw in the years pre-COVID. As I said this is a combination from like picking up on all of the global stress and all of the global threats, whether it's to governments, non-government organizations, or private enterprise; as well as the recognition that all of our systems just got a lot more complicated. So, this is a place of durable spend like I think and we're going to see more and more companies enter the space. The big enterprise companies acquiring smaller private companies to sort of bolster their offering as well as I mean we've seen a couple of really innovative super interesting companies in the private space that will come public over the next year.
Willy Walker: Great.
Kate Moore: The second thing, Willy, I was going to mention was around climate. We all talk a lot about renewables, and you know the Biden Administrations’ increased focus on clean energy; and you know another big component let's say of the tax plan that the Biden Administration has put out is to increase subsidies for clean energy and zero carbon companies and reduce the subsidies for traditional fossil fuel. So that we all know about, but what I think is going to be really interesting is there are so many interesting companies across the entire renewables supply chain. These are companies in the battery space, in the chip space, that play directly into electric vehicles. The raw materials that go into all of these components, super interesting and then increasingly interesting technological breakthroughs in terms of breaking down traditional plastics or coming up with alternatives to traditional plastics, things that biodegrade in landfills and water. I think we are at like not even the first inning of this theme in terms of investing. It's not just about the policy push that's happening in the U.S., this is something that we're seeing in Europe, in China, in most major economies around the world there's a huge amount of private funding for all of these companies and technologies. And there are many more ways to play then say like an ED company on its own, or rather think about the whole supply chain and think about everything from consumer-packaged goods to the materials that go into our houses.
Willy Walker: Yeah, I would remind people who may have listened to the conversation that I actually mentioned at the outset with Brendan Wallace of Fifth Wall about a month ago, where Brendan basically said, you know, their proptech fund has had incredible returns, as it relates to you know, prop tech -- property technology -- is really taking off over the past couple of years. And he said, “Look, we've had amazing returns in our most recent fund, but wait until we… raise our envirotech fund.” Because he said, “If we think we've done well in proptech, envirotech is going to just run past proptech.”
Kate Moore: That makes a ton of sense. I’ll be watching that.
Willy Walker: Yeah. So, Kate, the Dow is up 41% over the last 12 months from 23,000 to 34,200. I watched…one of the things, both the good and the bad of having someone like you, who is so wildly watched, particularly on CNBC and Bloomberg, is that I get to go back and look at things you said at various times and bring you back to it and say, “If you'd only known.” But in September, before Q3 earnings came out, you were saying, you know, you like the markets, but you were saying let's wait and see what happens in Q3. And at that time the Dow was still below 27,000. You were a little cautionary. What's really changed between then September / October, when I saw that interview of you where you said, “Let's see what Q3 comes in at,” and now? Clearly, we've had the vaccine rollout, which has had a huge impact. But anything else, from a fundamental standpoint that has changed dramatically since you were somewhat cautious back then to where you are today?
Kate Moore: Okay well, Willy, thanks for holding my feet to the fire and making me answer to my previous comments. No, but in all seriousness, there were a couple things that were on my mind at that point in kind of late summer / early fall of 2020. The first was we just had this phenomenal run in the markets, you know, post the market’s lows. And so, it always feels like you need a little period of consolidation. And then there were three things additionally happening. Number one, COVID cases were spiking and we're seeing states and localities locked down again. We were going into what we knew was a very challenging U.S. election. And we also were not really certain at that point how sustainable earnings were going to be in a period where, like, revenue growth was pretty limited. So, what we saw and one of the reasons why I became more constructive over the course of the fourth quarter, as companies were importing third quarter earnings, was this incredible ability to generate earnings, even in a tough economic environment. Revenue growth may have been anemic, in some cases negative, but companies cut costs and streamlined their businesses, and they were really delivering on the bottom line. So, despite the political- and the virus-related challenges, I became more constructive as companies started to report.
What’s changed? Well number one, markets have run a lot further. You mentioned the Dow. I tend to focus on the S&P, which is up 52% over the last 12 months. I’m very thankful to say my fund has captured that upside and then some. But you know, we are now at a place where we’re having this, you know, vaccine and economic restart. We have more political stability, with a clear policy program, no longer an election season. And we've a very healthy consumer and accommodative policy, and you combine all that together and that's a wonderful kind of growth backdrop. That said, I think some risk assets are already pricing in that backdrop. So, it's not that I’m overly cautious, but I expect that the market is going to have to digest some big news over the course of the next couple months, maybe even quarters; which is, you know, how companies deal with inflation; how much gets passed onto consumers; whether or not the proposed changes in the corporate tax policy are going to be a significant hit to earnings; or, if we get a watered down policy as we kind of move forward. And then, kind of finally, once we get through this sugar high, this massive pop in terms of earnings growth because the comps are so low in the first and second quarter, which companies and where we're going to see sustained earnings growth in a post-pandemic, more trend growth world.
Willy Walker: So, you mentioned the election. Any surprise on your part, that there was a lot of talk that if Biden won, Democrats come in; government gets big; taxes go up; markets will sell off. There was a narrative that was being played around the election time. Clearly, we haven't seen that. Are you surprised at how the markets have continued to move forward, even with that as the political backdrop today?
Kate Moore: No. Markets crave clarity. You know, they want certainty. And I think, regardless of whether or not you agree with all of Biden’s policy proposals or his priorities, he's super clear about what they are and goes to great lengths at explaining each detail of his policy. You know, a marked difference between Biden and Trump is that after announcing a huge stimulus, you know, his team gets on the road to sell that stimulus even after it's already been passed to voters and to individuals. Not because they have an eye on the next election, but because they want more popular support and understanding for future programs. And so, I think that communication has been really key. And one of the reasons why the market, frankly, has not been as worried. I would also note that quite a lot of the stimulus that is being proposed is really growth generative, whether it's around green energy or infrastructure, or very importantly, support for lower income households. I mean, I think this is a very big one. We're looking to get a big announcement from the Biden administration at the early part of next week, and I expect that we're going to hear continued support, post-COVID support, for segments of our economy and our households that have been left behind. Not just over the last couple years, but over a longer period of time. That's quite supportive of growth, and I think the market likes that.
Willy Walker: So, you and I both remember the dotcom build up and then bust. And the stocks like Globe Street and others that had these silly valuations that no one could really understand, but it was a momentum play and people wanted to dive in and take their risk, if you will. And it's hard to see things like Dogecoin and GameStop do what they're doing and not sort of get a little concerned that the market’s doing some things that just don't make any sense. What should investors keep in mind as you see something like Dogecoin have a $50 billion valuation, that’s being created as a literally a hoax and GameStop which, you know, you’d sit there and listen to really insightful people like yourself who said, “This isn't going to end well.” And I think everybody who's invested said this thing is not going to end well. But at the same time, GameStop, as of yesterday, was still trading at 158 bucks a share and had an $11 billion market cap, which, if you'd asked me to bet on the GameStop would still be at that level today I would have lost a lot of money, because I wouldn't think it would still be there. How do we make sense of this sort of what I call silliness in the market?
Kate Moore: Yeah. First of all, let me say, Willy, a whole bunch of that stuff that happened during the dotcom bust, you know, I thought there was something wrong with me. I was like, I don't understand this company; it doesn't make any sense. What are they doing? You know, they're not really generating any cash flow. And then I thought, Maybe I’m just dumb and I’m asking the wrong questions. Maybe I’m looking at, you know, sort of the wrong framework. I feel quite thankful that I was depending on rationality at that moment. And you know, I would say the same now. Does it frustrate me that GameStop is up 10 times where it started this year, despite some of the best names in software of being down, after beating and raising guidance? Yeah, it's a little frustrating. At the same time, it doesn't make me want to jump in and sort of participate in these companies or in these investments that I can't value; you know, that either are structurally impaired or don't have a defined supply/demand, or sort of structure to them. Does that mean I’ll miss out on some gains, perhaps speculative gains? Of course. But there's plenty of other places to make money. And so, I just note these things. You know, 20 something years after I started my career, I feel much more confident saying, you know, that doesn't seem to make sense to me. It might actually not make sense.
Willy Walker: So, on that, and talking specifically to things that either make sense or don't make sense, does Bitcoin makes sense to you? My father passed along a thing this morning from JP Morgan, your former firm, saying that if Bitcoin doesn't get over $60,000 a coin in a very short term, it's going to collapse because it's just a momentum trade. And I sit there, and I read that, and I say, that doesn't make any sense. And then I say, actually, it does make sense, because all it is, is a momentum trade right now. There's no value there. What's BlackRock’s take on Bitcoin, and what's your personal take on Bitcoin? And I know I’ve asked you to put on two hats and I’m certain that BlackRock does not want to hear you being just being “personal Kate,” but how do you view Bitcoin?
Kate Moore: Yeah, so it's a great question. First of all, I think it's pretty difficult to put any sort of price target on an asset like Bitcoin. Like, unlike other crypto’s, as we all know, Bitcoin has a finite supply; and therefore, you know, in theory, has much better support than some of the other crypto assets. And you know, I think we have to ask ourselves whether or not crypto in general is a substitute for currency. Now, it's not a threat to fee OTT currency for most use cases. It's not for payments or means of exchange. You know, we think that fee OTT is superior. I mean, it's already digital, it's instant, it's convenient, accessible in a million different places. And not necessarily…I wouldn't say Bitcoin or crypto doesn’t have a utility of a regular currency. You know, and monetary policy is kind of beginning to erode fee OTT’s edge. We know that and sort of diluted. And crypto can be a hedge. But you know, there's a big institutional structure supporting fee OTT currency and I don't think we're going to be replacing all of our fee OTT currency with crypto. That said, you know, in my fund Global Allocation, we have started to add Bitcoin in particular, and this is out publicly so I’m happy to say this on the webcast, as part of our overall currency basket. On thinking about diversifying our non-equity, fixed income privates or liquid assets. And it's not so much that we think that Bitcoin is going to outperform everything else, but we have noted that it has not always the highest correlation to some of the other assets we own, and we think it provides diversification benefit within our currency basket. So, as much as we would own a little bit of gold, I wonder if, and this is my own personal speculation, Bitcoin is going to replace gold in terms of a currency hedge, longer term, simply because it can be easier to hold for many people. It has the advantage of a fixed supply and being entirely digital means that no one has to take physical delivery. So, you know it think has a place in portfolios. But I put it in that kind of Currency and Alternatives bucket, as a diversifier, as opposed to, you know, the largest single bet. I’m sure I could have been really rich, if I had thought of it otherwise at another point in my career, but I didn't.
Willy Walker: So, you talked about the fee OTT currency, and you also watch politics, and you also watch China very closely. Is Bitcoin too big today for the U.S. Government to stop it? To the degree that if China comes out with a digital currency that could really present a threat to the dollar, being the fee OTT currency, don't you think the U.S. Treasury steps in to try and stop that transition?
Kate Moore: Well, it's a good question. And I’m going to tell you we have some experts on crypto at BlackRock that are better at this than me. But China is already in this space. They see the value of digital currency. And they like to control the digital currency. I mean, I think that PBOC and Chinese government policymakers understand something critical. This is here to stay. You know, blockchain based currencies are here to stay, and it's better for the institutions to be involved early and to have a say in how they are used, than perhaps to let it sort of run wild. I think we're going to see much more widespread, and you know, embracing of digital currencies and of cryptocurrencies by central banks as long as they have a role, or a responsibility in some way, for monitoring and regulating them. But I think there's going to be an underlying demand for Bitcoin, for a non-government controlled, or central bank-controlled currency. But I would just note that, as I said before, if I can't define the kind of a soft supply demand, if I don't understand entirely how to value an asset, you know, it may not be a core part of our portfolio. I’ll tell you, Willy, something funny. You know I’m a big skier, and throughout the course of the ski season I got asked by a lot of folks on the mountain who knew that I was in finance, you know, Kate, should I be buying Bitcoin right now? My first question is, how does it diversify the rest of your portfolio?
Willy Walker: Yeah.
Kate Moore: And you know, for a bunch of these folks, they're like, well, you know, what do you mean? I don't really have anything else. I’ve got cash to sit on. And I said, well talk to me when you have a diversified portfolio and you're looking to add a hedge.
Willy Walker: So final thing on Crypto for a moment, which is just that to that question. Is there a point where, as you talked about institutions...? So, I wanted to buy Bitcoin back when it was $19,000 a coin, I called up my guy at JP Morgan and say, “Let's go buy some Bitcoin,” and about three weeks later when it moved up to $28 or $29,000 per coin, I call him up and say, “Hey, isn't it great that we went and bought Bitcoin?” and he said, “Oh, you didn't get the memo I sent you? At JP Morgan we can't trade in in Bitcoin so I couldn't buy for you. I sent you back a lengthy memo on how you could actually go do it on your own, but I can't do it at JP Morgan.” Is there a tipping point, on sort of adoption, where a JP Morgan or other big financial services firm say, “We're now in it,” where then that risk of it sort of being peeled back by the government says, “It's now too big to fail. It is now moving forward.” I mean, can you watch that and be as precise as that? Or is it just more that it's going to evolve into the economy and it's here to stay?
Kate Moore: Yeah, I mean think about this Willy, how the rhetoric around Bitcoin has evolved over the last couple years to what the heck is this? This makes no sense, I don't understand! To this is interesting, we should be paying closer attention to... Hmm! I’m watching how this moves and that it is a diversifier to other assets to oh my gosh, we have to get there! The problem is that a lot of institutions have been kind of late to the party and because it has been difficult to understand, it requires a specific type of arcane knowledge, you know, to really unpack. A lot of institutions haven't put it on their platform or there has been hesitancy of the regulators to allow different funds to own it, for example. So it feels a little bit like once we broaden out the invest-ability of it through either private banks or through traditional funds, you know, additional avenues for individual investors to easily transact in the space that we could see an additional leg of support.
Willy Walker: So, you talked for a moment about in Q1 seeing Game Stop move up while some of the technology companies you’ve invested in who came out with great earnings have gone down, and you've continued to be bullish on technology, even though a lot of money has moved to the reopening trade. Talk about right now, from a positioning standpoint and sort of an outlook for the next year or two, as the economy reopens and so many people have gone to the reopening trade where you think people ought to be mindful, as it relates to a long term “this is what's going to give you the best returns”.
Kate Moore: Yeah, look, Willy, I’ll be honest, there were parts of the first quarter where we saw this rip-roaring move in value and in more cyclical parts of the market that I was like having slightly sleepless nights where I was feeling a little anxious. Not because I wasn't a believer in the economic restart, because I certainly am and very, very encouraged by consumer balance sheets and also, as I was mentioning before, kind of like how companies have handled things. So, there's a lot of reasons to be optimistic and where you could see some of the more cyclical companies perform. But I sort of like yeah, I get some of the technology stock is trading at high multiples and, of course, as we were moving higher in rates, there was a readjustment in terms of valuations. But these are fundamentally extremely strong companies that are throwing off free cash flow, and I’m not talking about the unprofitable tech, I’m talking about the profitable tech and the profitable companies with technology platforms across all sectors that were frankly getting thrown out as people scrambled to restructure their portfolios to reallocate towards cynical and value traits.
I don't think we are completely done with that rotation trade yet simply because we are on the cusp of even stronger economic data. We know that PMI is both the services and goods are at all-time or kind of cycle highs at this point. Sure, they can go a little bit higher but we're also going to get stronger inflationary prints, on the retail side it's going to look very strong. I would expect continued strength across all areas of consumer spending creating durable goods and housing and that's going to make people get even more constructive around cyclicals.
I pay really close attention to something called earnings revision ratios. These are the number of upgrades relative to downgrades for stocks and you aggravate it into industries and sectors. And the earnings revision ratios, number of upgrades relative downgrades, for cyclical sectors are literally the highest they've ever been. I mean, there was a pop, of course, after the 2018 tax cuts that adjustment was made, but this is just off the charts incredible! People see a lot of pent-up demand and a lot of room for spending in some of the more cyclical industries, and by, this I’m talking about you know, energy and banks, materials, industrials, and these were sectors that most of the market was underweight as they stayed firmly anchored to the secular growers throughout the course of 2020 in that difficult economic period.
So, my expectation is that we're going to get strong data that's going to continue to push people to rotate into some of these cyclical sectors. But you and I are going to be having a different conversation in six months, which is not that these companies do poorly, because I think the economic trajectory is going to be solid, but rather that the kinds of gains that they're experiencing now are going to be unlikely be replicated, and people are going to focus a lot more unsustainable and durable cash flows which will favor some of the tech trades.
Willy Walker: So, on the reopening in consumer spending, specifically. So, you just talked about a couple of cyclicals, but go into the retail sector, the hospitality sector, where I mean, last week with Peter Linneman on, Peter and I talked about the fact that deposits and checking accounts and savings accounts in the banking system in America has had on average about $3 trillion of deposits and checking account dollars and that's up to $9.1 trillion today. So, there's $6 trillion of what I would call “excess deposit” sitting in American’s back pockets and they're going to go spend it somewhere. So where are they going to go spend it?
Kate Moore: Yeah, I mean there's a lot. So, there's so much to unpack with the consumer, I’m sure we could have spent a whole hour here but there’s a couple things I sort of want to point out. We look at the aggregate savings numbers. The aggregate money on the sidelines. You know that's going to be disproportionately skewed towards the upper-income cohorts. I like to think about the top two quintiles, top kind of 40%. There have been a lot of people that because they are primarily employed in service industries or are lower income workers who have not been saving as much. Now, of course, the fiscal stimulus that we've had over the course the last six months has been incredibly supportive for these groups, but I think that fiscal stimulus and support for lower-income families and workers is going to be incredibly important, even after we get past the COVID support, specifically. The Biden Administration, I mentioned this a moment ago, has made clear that they have this policy priority to continue to support low-income workers and families and, as I mentioned in the early part of next week, we may see an announcement around the American family plan, which is going to be specifically targeted towards that. So, not only do we have this sort of top 40% who are kind of flush with cash, who have a huge amount of pent-up spending on goods and services, that they want to do once they are vaccinated and the economy reopens and restarts, but you also have a lower income cohort that is going to have continued government support, and I think you're going to get the consumer firing on these two really strong engines, which means that both luxury goods and services are going to be well supported, as well as you know, retailers. Whether it's the dollar stores, or auto parts stores, etc., that may be better geared towards the lower-income consumer will also see stronger earnings.
So, I think you can tell Willy, I’m pretty bullish on the consumer from here and we've been looking at a lot of opportunities, both in the public and private space across the sector.
Willy Walker: So, you think that that, if you will, trade will last longer than the cyclical trade? So you're saying cyclical trade has sort of a six month tail on it, if you will, and not that they're going to fall off a cliff in six months, but they're not going to hold up comparatively whereas on the retail trade you think that that last well into 2022?
Kate Moore: That's right. The incremental gains for the cyclical trade, I think, are going to be significantly less six months from now. With the consumer side, I feel very confident in over the medium term. And, as I said, it's not just the high-end consumer, it's also the low-end consumer, and the beneficiaries there. I mean we're talking about consistent spend on both technology and services, on goods and experiences, and you know, there are going to be companies that win and that that lose. I’m not suggesting just by the entire consumer sector and don't pay attention to fundamentals, but I think the breadth of opportunities for the consumer is some of the greatest I’ve experienced in my career.
Willy Walker: So, you are asked on CNBC a couple weeks ago, what you would pair today, and you, you said, “Oh that's a tough one,” and what you said, though, was that you would pair some of the retail stocks that are already trading at 100% reopening. And so, my question to you is, do you think we're not going to get back to 100% reopening?
Kate Moore: No, I just think that some of these retail stocks are imagining that we go to 100% of the same consumer activity we had in 2019. So, by this, I mean the mall-based retailers. You know, if your primary business model is mall-based retail, and we've seen an acceleration towards online spending and people are discovering new brands, they're doing more price discovery on their phones and on their computers, it's really hard to say that unless you have a unique value proposition that also offers a service, that a mall-based retail outlet is going to be that attractive. So, some of these things, everyone's kind of went back and said, “What did okay in 2019 before it was beat up?” and they just bought this basket of stocks, without asking themselves has that business model been disrupted permanently over the course of the last 13-14 months? And the answer for some of those companies is yes! That is permanently been disrupted. Now some of those companies have modified their business models and are more agile, but it's a handful, not the whole group.
Willy Walker: So, on that, you know, the big have gotten bigger. I’m shocked at, for instance, Chipotle and how Chipotle has traded. And the play there is not only has Chipotle done well, but there's a play that a lot of their competition of the local sandwich shop, has gone out of business during the pandemic, and therefore they're just going to continue to gobble up more and more client base and more and more wallet share if you will, and that seems to make a lot of sense. A lot of the big box retailers similarly Target has done, really, really well, a number of those. Is there a sector that hasn't started that consolidation, but you're thinking is it's going to happen over the next 6 to 12 months, where we haven't really seen it come back because during the pandemic was so changed but we're going to see kind of consolidation in certain brands or certain styles?
Kate Moore: Yeah, actually Willy, that's such a great question and the answer is the place I’m looking for that type of change to happen, that consolidation that hasn't quite happened yet, is in business services. So, you know, most people have been playing into, as I mentioned the restart trade in retail or and travel and leisure, but we're all going to be going back to offices, even if it's not 100% of the time, and business services, whether it's around industrial facilities or food service, etc. You know, there are a couple of big players but they together, and the top three only make about 50% of the North American market share, and yet they have better supply chains, and better cleaning protocols, and you know, ability to scale that I think has been under-recognized by the market. So I would expect smaller companies that have been doing insourced facility services, sports arenas if they were doing insource facility services, and schools, especially higher education, will look to some of these bigger services, these bigger companies and say, “Wow they've got it all figured out. This will actually take a whole load of stress off of me if I outsource this and, by the way, it'll be cheaper.”
Willy Walker: So, you mentioned supply chains, and we've seen a lot of supply chain disruptions. We've seen the chip industry not be able to keep up with production, in the automobile industry. We've seen a tanker go sideways in the Suez Canal. Any of that supply chain concern you from an inflation standpoint? And let's segue sort of a little bit into inflation and then into rates for a moment.
So, on the inflationary side, we're going to see some marks here, Kate, that show us on a on a quarter-to-quarter basis. Since we're going Q2 to Q2, we're going to see a huge step up in all the inputs, as it relates to Q2 2020 to Q2 2021. Should we read through those? Or should those really be of concern to us when we see some of these prints?
Kate Moore: Let me just answer the chip thing, first of all, because I follow this reasonably closely. We think a bunch of the chip supply chain bottlenecks will ease by the end of the second half of this year, and I think, companies are going to have to adjust their strategy around chips to not get to the same problem again in the future, which might mean a little inventory stocking. So, we might actually see extended periods of high demand for chips as people try and buffer against supply chain shocks and the future, so this I’m watching very closely.
Willy Walker: Do you think any of that comes back to the U.S. so that we're not so reliant on foreign manufacturers of chips?
Kate Moore: It would be great! It takes some time, and you know, globalization allowed many different countries and regions to specialize in different parts of the supply chain. As people look to onshore their supply chains; it's going to require a significant amount of investment. It doesn't happen in a couple quarters; it happens in a couple years. And you know that's true for China, it's true for the U.S., it's certainly true for Europe. So, I think we'll see some of that but, you know, my timeline is a lot longer than the average bear.
Willy Walker: So, on that, you don't see the pandemic causing a fundamental shift to supply chains in America?
Kate Moore: It depends on the supply chain Willy. I say this because there have been a lot of surveys and a lot of discussions with the CFO’s about their plans to invest differently domestically and it may take a while to rebuild a supply chain, or to bring it completely onshore. What we've instead heard them say, as much as I was talking about when it comes to chips and silicon in general, is they may look to stockpile in the near turn before they can find a viable production capacity that's closer to their end market. It's going to be really in fits and starts and it's a significant amount of investment that may or may not make sense longer term. Certain supply chains I would expect to look to produce closer to their end consumer, but that doesn't mean, for example, all production capacity leaves China or the rest of emerging Asia because there's huge consumer demand there too. This is all my way of saying I think it's going to be very nuanced and I think there's a gap between the rhetoric we're going to change our supply chains and the practice understanding that it takes many years and a lot of investment and there has to be approved case for it.
Willy Walker: So, on that, inflation and inflationary pressure coming from either supply chains or just the cost of goods going up. Are you in the camp that says we really won't see a lot of consumer inflationary pressure just because goods and services, we still have excess capacity there, we’ll continue to see asset inflation and asset price appreciation but that's not what the Fed’s looking at to cause them to move on rates. Or do you say no we're going to see consumer inflation and then the Fed’s going to move?
Kate Moore: So, first thing I will say, there's a bunch of incoming data that suggests that the reopening sensitive components of inflation are rebounding faster than we originally had in our forecast. So, instead of thinking about inflation popping in the second half of this year, which was kind of the baseline forecast, we're now saying the middle part of this year we're likely to see much higher inflation prints. That said, there are two questions around this. Will inflation be transitory? So, by the time you and I are talking this time next year and we say 2% is kind of average, it's not such a big deal. And the second question is, how does monetary policy respond if we're talking about a one-time significant rise in inflation that reverts back to something closer to the long-term average level that they're comfortable with. You know, on the latter on this view around how monetary policy responds, I often differ to my fixed income colleagues on this one. Although, I do have my own conversations with the Fed. But it seems quite clear that the tone from central bankers particularly from Fed speakers will likely evolve over the coming quarters as inflation picks up a little bit, we will see some adjustments in terms of monetary policy. But this kind of question about whether or not inflation really ends up hitting the consumer wallet, I think it's up in the air. There are two ways companies can deal with it, they can take higher input costs and pass it on if they have that pricing power. We know there's a little bit of a lag so short margin hit while that happens. Or they can make productivity and efficiency enhancing investments to mitigate the impacts of higher inflation going forward. If the more sustained inflation is coming in terms of wages, I expect to see companies make more investments in technology that allows them to work with a more streamlined labor force. That's like a really polite way of saying they're going to slow down their hiring in order to not pay for additional expensive workers. And so, I think there's a lot of questions about how different companies and different industries handle this. My gut feeling is that we're not going to be stressing about inflation in a couple quarters from now, that we're seeing this one time pick up, that we're going to see many consumers see slightly higher prices in some of their goods but nothing that is kind of derailing to growth or spending.
Willy Walker: So, if you think about that in the context of rates and the 10-year being at 158, 160 today; what's your thought as it relates to where the 10-year would be by the end of 2021?
Kate Moore: I find forecasting a 10-year quite challenging.
Willy Walker: As do I, and I’m in that market every single day and I’m smart enough not to give anyone my real precise number on what I think it's going to be. But you're a lot smarter than I am and you're also a lot more willing to put yourself out there. So, where's the 10-year going to be?
Kate Moore: Willy, I feel like you might be throwing me under the bus right now, saying “I never do this, but Kate you go ahead and give me a number.”
Willy Walker: Exactly. It's so important in the commercial real estate space, obviously on sort of where the 10-year goes and then also where the Fed’s fund rate goes for floating rate debt. We have clients every single day saying do I fix, do I float, are rates going to run on me so I want to fix it in today, or is the short end of the curve going to stay low because the Fed is in this easy money policy for sort of forever and therefore, it doesn't really matter what I do today because I can go borrow on floating rates and short term rates are going to stay low for a long period of time. So, just in that framework if you had a commercial real estate property to go finance today would you go floating rate and stay on the short end of the curve or would you go and lock in long term fixed rate financing because you think rates are going to really run?
Kate Moore: It’s a quite binary outcome you’re giving me.
Willy Walker: It's a question that every one of our clients has every single day, and so that question of fixed versus float and where do rates go from here is something that is super important and obviously plays into the broader markets as well. Thoughts.
Kate Moore: So, my answer is and I’m going to just put myself out there by giving a forecast. I think the 10-year is going to trend to 2% by year end. The exact path of the move from 156 to 2, I can't give you. That said, I think given the strength of the economy, you know better inflation as in no disinflation and a stronger growth outlook is going to lead us to kind of a 2% on the 10-year. I think there's going to be a lot of demand at kind of a 175 and a 2% level so that's why the path is going to be difficult to forecast. But if I were in the place right now to think about financing be floating rate or be fixed, I would choose fixed. I think the path of rates should be higher over the course of the next 18 months, even after we get past the 2% on the 10-year and I would expect for less accommodation from the Fed, from global central banks, as we get past the COVID shock.
Willy Walker: So, a little bit behind all that is global capital flows and where money is going and whether people are buying into the U.S. equity market, into the U.S. debt market or going outside. BlackRock is quite bullish on emerging markets right now and overweight on China. Can you talk a little bit about what you're seeing outside the four walls of the U.S.?
Kate Moore: So, the view on China has many different parts to it. Well, let me first talk about the portfolio perspective where Chinese equities and Chinese bonds, so Chinese government bonds, parts of the Chinese debt market, I know we have some hiccups there right now, offer really important diversifying benefits to a global portfolio. On the equity side, and I can't remember if we talked about this last time we spoke, but you have a pool of companies that are very domestically oriented, unlike the U.S., where you have like 40% of your sales outside of the U.S. and some parts the market CAP is even bigger. I’ve seen cased in Europe where you have a hugely diversified revenue sources. Most of the big Chinese companies are 100% percent in China. So, you're dealing with Chinese consumers, Chinese policy, Chinese sort of like overall investment trends. The interplay between the real estate market and risk assets that is totally unique from what's happening in the rest of the world and I think that makes it really interesting diversifier for portfolios.
You also get companies with business models that look completely different than U.S. or European counterparts. I get kind of restricted on naming names, but there's a few consumer platforms in China that when I was first introduced to them, say like five or six years ago, I literally would sit in these company meetings in Shanghai or Beijing and think I don't get it, you're growing phenomenally but, the way that a consumer interfaces with your product and with your platform doesn't make a ton of sense to me. That was my fault, because I wasn't putting my brain in the body of a Chinese consumer and now, I get it and it's super interesting. There's interesting innovation and collective buying and sort of shopping clubs and things that I never had thought once or even twice about in the U.S. that are incredibly powerful in a place like China. So, I can buy into these business models that look really different, that adhere to a different type of consumer that interacts with their phone and their platforms totally differently than we see here in the U.S., so I love that diverse fire. And then from a rates perspective, I would say, we still see an attractive yield across a bunch of Chinese fixed income.
So, as I mentioned some hiccups in Chinese credit today, at this moment, but in terms of Chinese government bonds and then broader in terms of dollar base Chinese credit, we think it offers nice yield pickup. Especially for those of us that are global investors.
Willy Walker: And what about the re-emergence of Europe? I noticed yesterday that the “footsie” (Financial Times and Stock Exchange) still isn’t even back to where it was pre-pandemic. Think about the U.S. markets being up, you said the S&P 52, I said the Dow's up 47 or whatever it is. The “footsie” isn’t even back to where it was a year ago, I think it was at 7,500 pre-pandemic, it went down to 5,000 and it's now at 7,000. What's your take on the reopening trade in Europe?
Kate Moore: Willy, I hate to be admitting this in such a public forum, but you know count me as a euro skeptic and not like a skeptic of the euro the currency. But if it's not once a year, it's once every 18 months the whole market comes together and says, now is the time to rotate into Europe. When in a time like now we see a significant cyclical upswing and many of the companies in Europe have huge operating leverage. That's another way of saying they're fixed cost basis is so high, they can't do that well unless there was a cyclical upturn. You know everyone gets all bulled up but there are a couple things that I think are really important, especially with investing in European equities. Number one, the market composition of Europe looks nothing like the U.S., or even China. The amount of technology, the amount of innovation is meaningfully less and I’m blaming a lot of that on the Labor laws in Europe which make it more challenging to have dynamic companies that rise and fall, hire new people and then get rid of them when things don't work out. And also, because the market is dominated by more resources and banks versus technology and consumer. So, it's a harder market for me to just buy and so I tend to be more skeptical.
I would also note that there are some outstanding European companies that should be bought as, take idiosyncratic risk, bet on those specific companies. But a lot of those companies that I like also have high gear into the U.S. and China, to places where I have greater confidence in the growth story in say 2022. So sometimes when I’m buying Europe. I’m really buying the globe. I’m buying best in class companies that are globally diversified. So, I guess I would say I wouldn't be putting a whole bunch of money into the index at this point. You don't get a lot of great companies. You're better off stock picking and picking those stocks that have gear into the U.S. and China.
Willy Walker: So fair to say, if you will, all eyes should be headed West and not East in looking for investments, because I don't think many people are looking South to Latin America right now. And what you basically said, is a pretty big blanket on Europe, and so really, the opportunity is in Asia and the U.S. for the foreseeable future. Is that a fair summary of what you just said?
Kate Moore: Yeah, that's how I like to think about bar-belling my portfolio is chunky positions in the U.S., chunky positions in China, business models that are very different than each other and then being a real stock picker and the rest of the regions, particularly in Europe. There are some great companies in Latin America that we like as well, but they're very specific and I wouldn't buy the broad index there which is very geared and in some cases to resources and banks.
Willy Walker: So last time you and I talked, I asked you what do you read and how do you stay up with all the amount of information that you bring in? And you said that you read, what I learned this week by our mutual friend Kiril Sokoloff of 13D Research. I’m curious about data and how BlackRock is using technology to make you smarter and smarter? I read this morning about a firm Two Sigma that is raising a real estate fund that is going to be using data analytics purely to figure out what commercial properties to buy and what commercial properties to sell, if you will, and just basically using data to make their investment decisions. How much has your life changed as an investor, given the technology investments that BlackRock has made over the past decade?
Kate Moore: Can I just say that I’m blown away by the technology investments and the data scientists at BlackRock. I think back to earlier in my career where If I had access to some of this data instead of combing through faxes, by the way faxes, in case anyone forgot about those. For information and data sets, you know I would be able to make decisions so much more quickly, and I think that's a really amazing resource we have now at BlackRock. Everyone's using data in a million different ways, but I like to think that we are unparalleled. I’ll give you an example, working on a sort of pool of companies in the environmental kind of climate space. I was trying to figure out what their clients or their customers are really saying about them. So, I put this query into our data scientists who then web scraped all of the comments, either in private chat rooms, or whatever it was and it really helped to aggregate how views and some of these companies were evolving. It wasn't just what I was hearing from sell side analysts and their interpretation of management meetings or earnings, but actually from people who are using the products. And it's just phenomenal and really helps to give me a much more well-rounded view of an investment or an opportunity. I think data is going to become more integral to all of our processes. I’m more of a macro person and I’m taking in data in slightly different ways than others. But our fundamental analyst that cover just single stocks are incorporating data differently than they ever did before, and if you don't innovate, if you don't incorporate new data, you become obsolete.
Willy Walker: You talking about the fax makes me smile because I got phished yesterday by somebody saying you have a fax that you need to pick up and if you press here, you can pick it up, and I said I haven't looked at a fax in 10 years. This phisher is clearly like maybe it's someone who's 65 years old who thinks that faxes are still flying around in this world, but I thought it was hysterical that they asked me to click to pick up my fax.
Kate Moore: I remember when I was an analyst, being one of the first people in, and you go to the fax machine in our little group area and sorting through the research reports and dropping them on everyone's different desks, I mean wow, different.
Willy Walker: So, to close out Kate everything looks really rosy. We've got a lot of stimulus out there, we've got relatively low rates, we've got a stock market that's hitting all-time highs but everyone's saying there's so much more juice to come because of the reopening and people getting back to the things that we've talked about. What's the thing that you're watching that says, “that's going to be my canary in the coal mine if I keep my eye on that”? And obviously, very few people saw that the subprime mortgage industry was going to bring down the economy right. A couple hedge funds made the right play on that and so it's hard to figure out what that one thing to really watch is. But as you look at sort of what's happening politically, economically, socially around the globe, what's the thing that you're kind of tracking that says if that starts to move in the wrong way I might get a little more pessimistic about things?
Kate Moore: Well, I think it depends on the time horizon Willy, but I have to say, in the near term, very sharp adjustment in rates again would make me nervous. If we were to see the same kind of move we saw in the first quarter, like a mini tapery-tantrummy, although I kind of hate that analogy because 2013 with such a different time, that would make me a little bit nervous. The thing I’m watching also really closely forces the tax proposal and we know kind of an aggregate of all of those taxes were implemented, it would be a 7% hit the S&P tax earnings. But really disproportionately felt by multinational corporations who are paying much lower effective tax rates than the headline rate at this point. And I think that kind of adjustment in trying to think about how companies deal with that would be a bit of an obstacle. So, I’m watching those two things very closely. You know I have to tell you I’m a little bit less concerned around the U.S., China risk. I think we're going to be in a tense relationship between U.S. and China for some time, but it will be a low, low level of stress, long tense relationship as opposed to like periodic bouts of disagreement or decoupling.
Willy, I realized I didn't answer your question about what I’m reading and it's not just about investment research, but I’m a giant sci-fi fan, and I decided to reread the Dune series. So, it's not investment research but I love reading science fiction and understanding the structure of the world in which the science fiction writer is occupied. In this case, it has to do with environment and interplay between politics and power and religion and I love it, so I want to put that in there.
Willy Walker: Final question, what will be the date when you sit across the table from Larry Fink and have a face-to-face meeting with him?
Kate Moore: Probably not till September. I would say, it could be sooner, because I was in the New York office for a few days last week, but our summer's here in Jackson Hole are kind of magical so I’m going to try and milk it.
Willy Walker: See I wasn't going to tell anyone you were in Jackson Hole with that backdrop on it, but you just gave it away so I’ll let that let that be the last point on this.
Kate, always great to see you. Thanks for all your insight and have a great time in Jackson.
To everyone who joined us today, thanks for joining us again and we'll see you next week with Jim Loehr to talk about character and leadership. Thanks everyone, have a great day. Thanks Kate.
Kate Moore: Thanks.
