Fidelity's Jurrien Timmer Talks AI Powered Bull Market

SPEAKER_1 (0:02)

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Tom Keene (0:07)

We thank Jurrien Timmer in studio right now.

You are the number one reason for anybody in the game to go to LinkedIn. Your publications on LinkedIn are outstanding. How did it happen? How did you decide to take Fidelity wisdom and put it out on LinkedIn?

Jurrien Timmer (0:28)

Good morning.

We have Fidelity compliance to thank for that. So, well, I've been publishing internally for decades for as long as I've been at Fidelity. Every week, I do a stream of consciousness. And it was just sort of first to keep myself honest when I was running a fund. It's like, okay, I want to make sure that what I'm doing is actually what I'm thinking and that you don't have disconfirmation bias. So I would put out just a little thing with some soundbites on Sunday, and that grew and grew. And then during COVID, you know, our higher ups said, look, you know, every person who is client facing at Fidelity needs to have this because everyone is panicking. And then a few years later or a few years ago, I was able to convince compliance that, you know, a publicly acceptable version of the report, it would really be helpful if that can go into LinkedIn or X and LinkedIn still is better suited for that long form content. And so I'm very grateful to them. So I published on Sunday, my media people, Janet who sits in the other room right now, they look at it, it gets approved to send to you and people in the media on a background basis. And then compliance looks at it Monday and out it goes Tuesday morning. And by Carrier Pigeon.

Tom Keene (1:49)

You use the word hope a lot. What is the hope right now that scares you? What is the hope of this bull market? We hope this will happen. What's the hope that Jurrien Timmer fears?

Jurrien Timmer (2:01)

So a year ago, my hope would have been that the AI boom does not turn into a bubble like the internet boom did 26 years ago. And a year later, we can say that, at least I can say that it's not a bubble because P-E ratios have only been falling since then because earnings are exploding so much that market can't even keep up with it. Right now, my hope is that the earning strain continues to chug along because if it doesn't, we run the risk of sort of an echo or aftershock of 2022 when of course we had this big reset in the cost of capital that knocked the stock market down 28% entirely because of interest rate increases. And we're in that same dynamic. Of course, we all know what's happening in the bond market.

And I always remind folks that we all tend to solve for price, right? What's your price prediction? I was like, price is just the residual of earnings and valuation, right? Discounted cash flow model. You figure out earnings, how much are investors going to pay or should they pay? And then you resolve solve for price.

Tom Keene (3:10)

Jurrien Timmer at Fidelity, folks, Gospel, my essay of the year, I'll spend the weekend getting out tidbits of this. Rob Arnott and Cam Harvey at Duke on just what Jurrien Timmer was speaking about from Babson and Fidelity. It's about fundamentals, Alexis, not so much the price dynamic.

Alexis Christophorous (3:27)

And in your note, too, we have to talk about the bond market, of course. And you call it a relentless bond bear market. You would think it would be the most hated asset class, but you have a great chart in here that shows quite a different story. So who's gobbling up the bonds?

Jurrien Timmer (3:41)

So it's a confluence of narratives that has driven bond yields higher.

And investors through ETFs or mutual funds have been buying bonds just as much as they've been buying equities. And I think that's actually a good thing, because if you're looking at retirement down the road and you can buy a 10-year treasury, the supposedly the safest asset on the planet, for a real yield of close to 3 percent, I mean, what's not to like about that? That doesn't mean they can't go higher. Maybe they will. But so the economic buyers have been there. The non-economic buyers, central banks, institutions that are regulated by central banks, commercial banks, for instance, they have not been buying. And so the spread between the growth in the debt, which is 17 trillion just since COVID, it's like a mind boggling number, really has not been offset by any kind of non-economic buying and right now, of course, we're seeing selling. So the question is, who's doing the selling? I think part of it is actually technical and this gets into, I'm sure, a topic that Tom loves is the whole negative convexity hedging in the mortgage-backed securities market that no one is prepaying mortgages because everyone is out the money on their mortgage because yields are rising. So the duration of the Bloomberg MBS index is going up while the duration of the Treasury index is going down.