00:00:00 Speaker A
And of course, still with me is Simeon Hyman. Um Simeon, um I want to talk a little bit about a theme that we were talking about earlier in the show because I think it's something that you're anxious to talk about or that you're excited to talk about. And that's what we're seeing in the bond market and sort of the bigger theme of deficit concerns, the effect it's having on yields, etc. Um we were talking with Eric Winograd at the top of the show about this. Um and you both agree that we are potentially looking at a steepening yield curve. Now, a lot of people hear the words steepening yield curve and their eyes might glaze over, especially people who are primarily equity market investors. Why do you think it's happening and why is it important economically and and for other assets?
00:01:19 Simeon Hyman
We can make a list of a dozen reasons why the yield curve may be steepening, and you only have to believe in just a couple of them for it to likely happen. As an example, you could dismiss everything except a little stickiness and inflation, and you'd find yourself to say a 5% 10-year easily because the long-term real yield on the 10-year Treasury is about 2.5% above inflation. We're at 2.5 now, that makes five, and if just a little bit of tariffs takes us to 5%, then you could have north of 5% on the 10 years. So it's tough to argue against it in the absence of a real recession. You know, the implications, they're in a couple of dimensions. Certainly on the bond side, it tells you, man, you should be careful about your long-term bond exposure. We have an ETF, IGHG, it just hedges the interest rate risk out of investment grade treasuries. But it also can prompt you to think about getting yield and income from places that don't have anything to do with interest rates. And one part of that in the equity market that we've been focused on is infrastructure. But infrastructure in a very specific way, when people think of infrastructure, they often think about companies that build it, that pave roads, that build bridges. Here we're not talking about that. With our ETF TOLZ, the ticker is tolls, that's for a reason because it's the toll takers, the companies that own it, and that's super inflation-resistant stuff with a three and change yield on it. So those are the opportunities that I think are important. It tells you to be careful about long duration exposure in your bonds, but it tells you to focus on yields and growing yields in the equity market.
00:04:25 Speaker A
Something else I want to ask you about related to all of this is, I can't tell you how many strategists we've spoken to recently say everything else being equal, corporate profits are still okay. And so that gives them some solace in this tariff environment, etc. But then, if we start to see yields go up even more, what effect does that have on profitability, you know, borrowing costs go up, you know, you see sort of cascading effect potentially. Is that something that we should be watching?
00:05:13 Simeon Hyman
So let's talk about the good stuff first, and then talk about whether it's under attack, if you will. It's absolutely true, as Phil just told us, cash flow is cranking out of the S&P 500, particularly driven by the MAG 7. Return on assets and profit margins are double what they were two years ago. Also, very importantly, leverage in the S&P 500 is at all-time lows. So therefore, a little bit of a tick up in the cost of debt might not be that big a deal. But 100%, the risk is can a little bit of a whiff of a little bit of extra inflation and a little bit of lower growth, even from just a little bit of tariffs, can nick those margins, and they have been the underlying fundamental drivers. So it makes some sense in our view to look a little bit beyond the MAG 7 for some companies that may have some sustainable ability to keep those margins. You know, we've talked for years about dividend growth stocks, particularly we think don't overlook mid caps. People worry about concentration in the MAG 7. Okay, well, maybe I'll equal weight the S&P or something. Well, why not just go to mid caps? The number one slice of the equity markets for four decades in a row, and there are dividend growers there. Our ETF REGL, the S&P 400 dividend aristocrats. So those are some of the ideas that we have in terms of thinking about that rising rate environment.
00:07:52 Speaker A
And then we've we've gotten everybody's views on AI today, but we haven't had a chance to ask you your views, you know, ahead of Nvidia and that big push back into the Magnificent 7 and the broader AI trade. How are you thinking about it?
00:08:13 Simeon Hyman
I do like this broadening of the AI trade to include some new disruptors, which we talked about this morning, because it has been, from my perspective, being kind of the old guy and remembering what happened in the 90s when it was disruptors. There was a book called The Innovator's Dilemma that said that when there is a new technology, incumbent companies can't take advantage of it because it destroys their existing cash cows and they don't know what to do. It's been very different this time around. The youngest companies at the top of the heap are companies that are 20 and 30 years old already. But I kind of like that there are a few disruptors showing up in the new issuance market because I do think that gives a little bit of a broader flavor to the AI initiative. It it is it is a revolution and it's going to be an important part of the market.
