VINCENT CATALANO: At an 18 multiple, that sounds a little bit like the rule of 20.
JASON TRENNERT: Yeah, that's a fair-- the rule of 20 was created by my old boss, Jim Maltz and he had found over time, over a long period of time, that if you added up the multiple of the S&P 500 and inflation, that on average, the sum of those two items equal 20, over long periods of time. We have very sophisticated models that look at all sorts of things. Then we have this rule of 20 and I'd have to say that the rule 20 is just as good as some of the very sophisticated econometric models, and they're largely getting at the same thing, which is largely the idea that when you're discounted cash flows by lower interest rates, the net present value is quite a bit higher. That's largely what it's getting to.
VINCENT CATALANO: Jason, welcome to Real Vision.
JASON TRENNERT: Thank you for having me.
VINCENT CATALANO: Tell us a little bit about Strategas, besides the fact of the name, and get into the definition that came from it, Strategas is what?
JASON TRENNERT: Yeah, so Strategas. We're a research firm that focuses on macro-economic research, economics, policy, technical analysis, fixed income strategy, and it's also a broker dealer. In addition to research analysts, we also have sales traders, and institutional salesman. Basically what we do is we write reports on these big picture things. We publish them and then we travel around the country and the world to tell institutional investors what we're thinking.
VINCENT CATALANO: That's fantastic. You are, your role is?
JASON TRENNERT: I'm the chairman of the company and also the chief investment strategist. I mainly focused on the equity markets, but try to also pull everything together.
VINCENT CATALANO: One of the founders?
JASON TRENNERT: One of the founders, that's right. I started in 2006. I had worked at Heiman for about 15 years at a place called ISI Group from '91 to 2006. Then my partners Nick Bohnsack, and Don Rissmiller, they joined me and we started Strategas in 2006.
VINCENT CATALANO: That's fabulous. Want to start off talking about the markets, overall, the equity markets. One of the things that stood out to me and key reason to discuss with you today is earlier in this year on CNBC, one of the hosts there was pressing you and Rich Bernstein. Where's the market going to go? What's the price going to be at? Where are we going to end up? That thing and Rich deferred, demurred. You said, "All right, I'll give you a--", and you gave a number. The number was, I think for the S&P, which was at the time around 2600 or something like that, you said in the neighborhood of like, 3000. In fact, you gave a specific number, 3005.
JASON TRENNERT: Yeah. Oh, wow. That implies a certain expertise I don't have but at least I was bullish, at least that was on the right direction.
VINCENT CATALANO: No, right direction. Yeah, definitely on the amplitude of the low was pretty close to it. Here we are coming to the end of 2019, where do you see the equity markets today? Valuation was tough before and more so now.
JASON TRENNERT: The hard part now is the market is not cheap by any normal standard. I don't also think it's particularly expensive given where interest rates and inflation are. We're using, just to use round numbers, about $175 for S&P 500 operating earnings. If you put an 18 multiple on that, which I think is fair, given where again 10-year Treasury yields and inflation is, it would tell you the market right now is fully valued, but not overvalued.
VINCENT CATALANO: Not Cape like overvalued.
JASON TRENNERT: Not Cape like overvalued. I'm not sure I'm a big fan of Cape, frankly, especially with interest rates this low to begin with. We were talking this morning in our-- we have morning meeting every morning at 7:30 where we all get together and we discuss the market's direction and what's happening. Our view is largely that if we're going to be wrong on the market, it's likely that the market's going to continue to strengthen more than people think that markets rarely stop at fair value. They tend to get overvalued before bull markets end, and even though-- again, it's pretty fully valued right now, with the Fed on hold for most of next year, it's certainly hard to be short, it would be my view.
VINCENT CATALANO: Earning's looking pretty good going into next year, at least the next 12 months. In any event, interest rates being low. That suggests to me that you guys use something along the lines of a discounted cash flow model for value.
JASON TRENNERT: Yeah, we do the earnings on a bottom up basis, really from a sector level so that not bottom up all 500 S&P 500 companies, but we do it sector by sector and we build it up from there and come up with an earnings estimate for the year. Then we use a variety of econometric models to forecast the multiple. Frankly, right now, the models spit out what I would say was almost socially unacceptable numbers of 20 or 21, or 22 times earnings just because you have secularly low interest rates and inflation.
Probably we don't want to bite on that too much because generally speaking, it's hard to get a multiple more than 19 or 20 on a sustainable basis but by the same token, 18, or 19, is perfectly reasonable. Again, we'd rather be a little cautious and be wrong by market moving up the other way as opposed to being too galosh and have the market call the wrong way.
VINCENT CATALANO: At an 18 multiple, that sounds a little bit like the rule of 20.
JASON TRENNERT: Yeah, that's a fair-- the rule of 20 was created by my old boss, Jim Maltz and he had found over time, over a long period of time, that if you added up the multiple of the S&P 500 and inflation, that on average, the sum of those two items equal 20, over long periods of time. We have very sophisticated models that look at all sorts of things. Then we have the rule of 20, and I'd have to say that the rule 20 is just as good as some of the very sophisticated econometric models. They're largely getting at the same thing, which is largely the idea that when you're discounted cash flows by lower interest rates, the net present value is quite a bit higher. That's largely what it's getting to.
VINCENT CATALANO: Now, you referenced the Fed and low interest rates and all, where do you see rates going into the next year, which is a big factor all the way around economically in the financial market?
JASON TRENNERT: Yeah. Well, short rates in my view are going to stay in the current range. The Fed just met last week, second week of December. You're going to between 1.50 and 1.75, the Fed has made it pretty clear, too, they're not going to change until inflation is above 2 and looks like it's going to stay above 2%. Right now, with inflation about 1.50, little more than 1.50, that doesn't seem to be likely anytime soon. I think the Fed is done for next year.
Long rates, on the other hand, though, I think should start to drift higher. Frankly, I think it's a good thing if they're drifting higher because it's a reflection of real GDP growth, as opposed to inflation. It's hard to forecast inflation right now, in my opinion. Our expectation is that a stronger global economy next year will allow interest rates to move higher, and that actually winds up being good for S&P 500 operating earnings because a steeper yield curve tends to be good for financials.
VINCENT CATALANO: That yield curve being more positively sloped is a reflection of an economy, US and worldwide, that's in better shape?
JASON TRENNERT: That's in better shape. Again, you have decent growth with low inflation. It's really a Goldilocks type scenario. I think, again, next year is an election year, too, as if we can't forget, but the Fed probably doesn't want to be too involved, wants to be less involved than it has been over the last few years, probably doesn't want to get the president involved. They don't need to. Again, they're in a position now where inflation is so tamed that I don't think they have to worry too much about inflation getting away from them, running away from them, and they can take their time with the next move.
VINCENT CATALANO: Tell us about the political scene because you guys covered that as well. Dan Clifton.
JASON TRENNERT: Yep. Daniel Clifton.
VINCENT CATALANO: Down there in Washington and what's your firm's perspective on that? Implications economically and implications for the market?
JASON TRENNERT: Yeah, we've been in-- and I was saying before, we've had plenty of bad calls, but one of the good calls we've had was on this idea of populism being something that can last. We were pretty early on in taking Donald Trump seriously as a presidential candidate, pretty early on taking Brexit seriously as a potential outcome. We're still very much of the view that populism is an enduring political theme. One thing I feel strongly about is that whoever next president is, it will be a populist. The question is, is it the right of center populace that's in the presidency now, or is it a left of center populist, like a Bernie Sanders or Elizabeth Warren?
I think the days of-- for the time being, the days of having an establishment candidate are probably pretty unlikely, in my opinion, and I think that it's largely reflective of concerns that everyday people have that are not largely and they have not really been met by the orthodoxy of the bigger parties.
VINCENT CATALANO: That argues against someone like a Joe Biden.
JASON TRENNERT: Like a Joe Biden, in my opinion, he may very well win the nomination but I think if he ran against Donald Trump, he might have a decent chance of beating him but I think Donald Trump would win. Listen, incumbents have a hard time losing anyway. Incumbents particularly have a hard time losing when the economy is as strong as it is now. Now, there's 10 months in--
VINCENT CATALANO: In any number of events.
JASON TRENNERT: 10 months is an eternity, especially these days in a 24-hour news cycle. Our best guess is that the status quo will prevail, which is to say that Donald Trump will be reelected, that the Democrats will keep hold of the house and the Republicans will keep control of the Senate. In our opinion, that's the most likely outcome. By the same token, it's pretty a 50/50 country, and anything could happen but economy, in my opinion, will be the single most important factor in terms of who gets elected next.
VINCENT CATALANO: It'd be interesting to see what the consequences of that would be worldwide.
JASON TRENNERT: Donald Trump being reelected?
VINCENT CATALANO: That's correct. In other words, 2016 wasn't an aberration, it is what is.
JASON TRENNERT: Yeah. My opinion, Brexit, what's happening in Italy, what's happening in a lot of the regional elections in Europe I think give you a pretty strong indication that 2016 wasn't an aberration, that there are a lot of secular pieties on both the left and the right that have been followed by the establishment candidates, by establishment parties, that average people are saying this just doesn't work for us. You could go through whether it's free trade with a country that's not really interested in free trade, like China or open borders or formal Care Act or wars, endless wars and all these sorts of things average people were starting to question and they want something different.
VINCENT CATALANO: Do you think that the, in the US, the Democrats basically with their embrace of let's call it the coastal elites, so to speak, and in particular, Wall Street and Silicon Valley, do you think that that is a dynamic that's there that the democrats are missing?
JASON TRENNERT: That's my opinion. I grew up in-- both my parents were Democrats and I was a Democrat for a while, but it was very different party at that point, it was largely for working men, working women. It was largely anti-communist, if you had a strong religious faith, you didn't feel that you were necessarily excluded. The party has changed a lot now and we could debate those things, but I could say there's a lot of people who have those opinions now that might not feel that at home in the Democratic Party, and I think that's one of the issues.
I think that's part of the why Donald Trump won, he recognized that and recognized that there are certain longing for something. That's why I think Joe Biden would probably have the best chance of beating Donald Trump because I think he has that every man type of feel. I think he would have a better shot at winning than either Sanders or Warren.
VINCENT CATALANO: How do you blend longer term trends and themes with shorter term business cycle related issues? How do you mesh the two together? Because I get a sense that you do that you do look at both. How do you develop that into an investment methodology?
JASON TRENNERT: Yeah. Well, that's a great question. Because it is a constant struggle, and it's mainly because our clients are professional investors so to be frank, the main thing we're trying to get first is the next six to 12 months, just trying to make sure our clients stay employed. Then in turn, keep us employed, because one of the hard parts about the investment business, particularly when it comes to stocks and stocks are the longest duration assets you can get really, maybe aside from real estate. Yet most people who manage stocks are managed at best, or evaluated on a once a year basis. Then some hedge funds are evaluated on a monthly basis.
It's an almost impossible task for the professional investor today, in my opinion, that they again have our trading at very long duration assets and yet, they're held of this very short term standard. We try to give the longer term themes and we publish separate reports on the longer term themes once every quarter, where we try to give people say these are big, long term things to think about whether it might be populism or whether it might be the convergence between the public and private equity markets or very, very long term ideas. We publish those on a quarterly basis to make sure people know what we're thinking about those things but we also publish every day about what's happening every day and what we think is the most likely outcome on a shorter to intermediate timeframe.
VINCENT CATALANO: See, I think that that's one of the great value propositions of Strategas, is the fact that you do reconcile the long term framework, so to speak, with the short term practical elements of it. What you said before about professional investors that they're judged on a shorter term basis, they're in long duration assets, for the most part, judged on a short term basis in many cases. Which is a difficult balancing act to do and the thing I've always been struck by is that Strategas, my sense is that you guys have your ear to that ground better than pretty much anybody.
JASON TRENNERT: Well, that's a very nice thing to say. It's actually, in my opinion, is one of the great compliments you could give our firm. I think if we do that well, it's largely because we-- for better or worse, we travel all the time meaning I'd say for worse because I have to go through TSA or the airport. For better, once you get to wherever you're going-- which I travel 70, 75 days a year and will be in everywhere from-- being everywhere from Des Moines to London to Singapore and balance. My partners travel more than I do if you can believe it, they're a little younger than I am.
The bad thing about that is time away from your family and it's not easy physically. The good thing though is that you meet a lot of different types of investors and not just hedge funds here in New York. You also meet mutual fund managers in Boston and state pension plans and the middle part of the country and then you might deal with a big bank in Europe or big public pension plan in Australia, those types of things. You have a good idea of where people are positioned and how people are thinking and it keeps your mind fresh too, because you're not just talking to each other, which is one of the biggest, let's say one of the biggest risk in the investment businesses, you just spent a lot of time talking to other people that have the same idea as you do, or the same similar backgrounds or similar circumstances.
VINCENT CATALANO: How do you factor that into, or do you not factor that into your estimates of where the financial markets will be? That dynamic of what they're thinking etc.
JASON TRENNERT: Yeah, I wouldn't say it's not, certainly not. There's no mathematical way we do it, but we do meet every day as a firm. We have a morning meeting, as I said, at 7:30 every morning and we share all the time what we're hearing from the road, and the questions that were being asked by investors and that the questions that were being asked by professional investors inform a lot of our written work because again, if you spend a couple of days on the road, let's say in Texas, you'll find that you'll get the same two or three questions in almost every meeting or something that's on people's minds.
That will be the basis for the next report, we say we should look into-- we might not know the answer, well, likely not know the answer. Then we'll do the research and we'll say this is actually what happens. This is how long it takes between the first Fed easing and the next Fed tightening on average, how long does that take? A lot of things along those lines, what happens when the dollar strengthens or when the dollar weakens as it relates to