WEBVTT - Surveillance: The Bull Case With Armstrong 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.240 --> 0:00:13.080 with Jonathan Ferrell and Lisa Brownwitz Jay Ley. We bring 0:00:13.119 --> 0:00:17.159 you insight from the best and economics, finance, investment, and 0:00:17.280 --> 0:00:23.280 international relations. Find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg 0:00:23.360 --> 0:00:30.280 dot com, and of course on the Bloomberg Termament. All 0:00:30.320 --> 0:00:31.840 of those things that we're supposed to be the story 0:00:31.880 --> 0:00:34.360 this year, we're not. The question is do those actual 0:00:34.560 --> 0:00:36.960 rotations start to take hold in the your head. Let's 0:00:36.960 --> 0:00:40.159 stop that conversation now with Patrick Comstrong, chief investment officer 0:00:40.479 --> 0:00:42.839 at bloo REMI well, Patrick, got to catch up with you, sir. 0:00:43.360 --> 0:00:45.239 The things that are set to come under pressure into 0:00:45.320 --> 0:00:49.760 twenty two Patriot. What pockets to this market are you avoiding? Um? 0:00:49.800 --> 0:00:52.000 I think it's not going to be here where you 0:00:52.000 --> 0:00:53.800 want to try to get rich. I think for the 0:00:53.840 --> 0:00:56.440 last three years we've had massive liquidity in the system. 0:00:56.440 --> 0:00:59.520 We've had central banks buying bonds, trillions of bonds, and 0:00:59.640 --> 0:01:03.040 it's going to be an environment where liquidity is slowly 0:01:03.080 --> 0:01:06.640 taken out of the system. And I think the meme stocks, 0:01:06.680 --> 0:01:10.160 the high growth no earning stocks, those types of story stocks, 0:01:10.200 --> 0:01:12.960 they They've come under pressus in November, and I think 0:01:13.000 --> 0:01:15.280 that's going to continue. I think if you're making an 0:01:15.319 --> 0:01:19.759 investment for two you want to have a valuation thesis. 0:01:19.800 --> 0:01:23.039 At least you have to understand that this company is generating, casual, 0:01:23.160 --> 0:01:26.399 generating earnings. And it's not ruling out all tech companies. 0:01:26.800 --> 0:01:28.880 But I think the companies that are at the most 0:01:28.920 --> 0:01:32.080 extreme multiples that they're going to be category killers. But 0:01:32.160 --> 0:01:34.880 that's five years out. I think those are going to 0:01:34.880 --> 0:01:38.240 come under pressure as liquidity gets removed from the system. 0:01:38.640 --> 0:01:40.640 But what about the other tech companies that some may 0:01:40.640 --> 0:01:43.680 put in the kind of quality basket Patrick, the likes 0:01:43.720 --> 0:01:46.240 of Apple, which is approaching three trillion dollars in valuation, 0:01:46.319 --> 0:01:50.160 that are consistently strong earnings growers to bet against the 0:01:50.240 --> 0:01:52.040 U S. And I know you're underweight the US. Are 0:01:52.040 --> 0:01:54.840 you also saying that you expect some of those large 0:01:54.840 --> 0:01:58.520 heavyweights to start lagging. Where I've got my U S 0:01:58.560 --> 0:02:01.360 exposure is those large heavy wait, so I'm very comfortable 0:02:01.400 --> 0:02:03.680 with Apple. We actually sold Apple earlier in the year 0:02:03.680 --> 0:02:06.320 in February, which has looked like good timing. We did 0:02:06.320 --> 0:02:08.359 it just before their earnings, but we bought it again 0:02:08.400 --> 0:02:10.520 about a month ago, So I'm back into Apple. I 0:02:10.560 --> 0:02:15.000 own Meta, I own alphabet Um, so my US exposures 0:02:15.080 --> 0:02:17.920 underweight versus the MSCI worldwide. But I'm taking it with 0:02:18.000 --> 0:02:20.640 the big cap tech companies because just the cash flow 0:02:20.680 --> 0:02:24.639 is enormous. Their multiples aren't cheap, but totally defendable or 0:02:24.680 --> 0:02:27.520 thirty times multiple or thirty times earnings for the kind 0:02:27.520 --> 0:02:30.959 of growth and profit margin they generate, I totally can justify, 0:02:31.080 --> 0:02:33.519 so I feel comfortable to own them. But there's many 0:02:33.560 --> 0:02:37.160 industries where like for like um stocks just trade at 0:02:37.240 --> 0:02:41.280 thirty premium if they're listed in the United States versus 0:02:41.320 --> 0:02:43.519 if they're listed in Japan or if they are listed 0:02:43.520 --> 0:02:46.120 in Europe. So the other more traditional sectors that aren't 0:02:46.120 --> 0:02:49.720 tech orientated is where I'm overweight to other countries. Yeah, 0:02:49.760 --> 0:02:52.320 I was just gonna ask. I mean, I'm sure you're 0:02:52.360 --> 0:02:56.280 not betting against the United States, but really on other 0:02:56.320 --> 0:03:00.440 countries where you see undervalued assets, where is that? Well, 0:03:01.280 --> 0:03:03.040 I've been talking about it for a year and the 0:03:03.080 --> 0:03:05.720 companies have performed incredibly well. And I think every time 0:03:05.720 --> 0:03:07.679 I've been on your show for the last fifteen months 0:03:07.760 --> 0:03:10.400 or so, I talked about Muller Mares capeg Lloyd, and 0:03:10.639 --> 0:03:13.320 I don't get my head around they're trading at four 0:03:13.360 --> 0:03:16.280 times earnings. How negative do things have to get for 0:03:16.320 --> 0:03:19.519 shipping rates to really make it be a four times 0:03:19.560 --> 0:03:22.040 earnings on Muller Mares. So it's probably up sixty percent 0:03:22.160 --> 0:03:24.480 this year, but earnings are growing as fast as the 0:03:24.520 --> 0:03:27.400 share price is growing, and it's just incredibly cheap our 0:03:27.440 --> 0:03:30.360 Salur mattel Um. I do think infrastructure spend is going 0:03:30.400 --> 0:03:32.600 to happen in the United States. I think Europe school 0:03:32.760 --> 0:03:35.640 to get around to infrastructure spend. Japan's doing it as well. 0:03:35.960 --> 0:03:38.600 I think steel is very cheap. Company like this is 0:03:38.600 --> 0:03:41.400 trading at six times earnings. So there's companies that are 0:03:41.400 --> 0:03:45.240 domiciled in Europe, their global companies benefiting from the global recovery, 0:03:45.480 --> 0:03:48.640 but they're just trading at very low multiples and they 0:03:48.680 --> 0:03:51.600 actually have very high earnings growth potential in my opinion, Patrick, 0:03:51.720 --> 0:03:54.000 of those companies, the Likes and Modern Masque, some of 0:03:54.040 --> 0:03:55.920 the minors, some of the energy players would have seen 0:03:56.080 --> 0:03:59.240 huge amount for their goods and the underlying product or 0:03:59.280 --> 0:04:03.120 services a great gain in price. Have you seen the 0:04:03.240 --> 0:04:06.720 corresponding discipline when it comes to building out capacity, Patrick, 0:04:06.760 --> 0:04:08.400 because that's been the worry of what's happening in the 0:04:08.400 --> 0:04:11.360 shipping industry in a previous few decades, what's happened in 0:04:11.400 --> 0:04:13.520 mining and energy in the previous few decades as well. 0:04:13.640 --> 0:04:16.080 Is that what's different this time around, Patrick, into twenty two, 0:04:16.279 --> 0:04:18.679 that they haven't made those big coals, those big investments 0:04:18.720 --> 0:04:21.080 into capacity that could haunt them in years to count. 0:04:21.560 --> 0:04:24.560 They haven't. They're producing tons of cash flow, so it's 0:04:24.560 --> 0:04:26.920 always a risk when the CEO has got so much 0:04:26.960 --> 0:04:29.440 cash doesn't know what to do with it, expanding investing 0:04:29.600 --> 0:04:32.920 assuming that these profits and the freight rates will stay 0:04:32.920 --> 0:04:35.920 where they are. None of the CEOs are talking like that. 0:04:35.920 --> 0:04:38.400 There's another who brie about this is going to last forever. 0:04:38.520 --> 0:04:42.440 They know this is a cyclical windfall that they're really monetizing. 0:04:42.720 --> 0:04:44.800 I think it will probably lead to some consolidation in 0:04:44.839 --> 0:04:48.120 the industry, which may streamline capacity. It will give more 0:04:48.160 --> 0:04:51.640 pricing power, and I think those kind of expenditures make sense. 0:04:51.680 --> 0:04:54.839 You can preserve your profit margins with that. I don't 0:04:54.839 --> 0:04:57.640 think a big, massive build out is what any CEO 0:04:57.800 --> 0:05:01.240 is talking about of new shipping U So they're being built, 0:05:01.400 --> 0:05:04.760 but these take years of lead time as well. Patrick, 0:05:04.800 --> 0:05:06.560 I noticed as well. You say you want to own 0:05:06.839 --> 0:05:11.479 volatility in the year ahead, Why and how specifically well 0:05:12.000 --> 0:05:15.400 queie what it does, It's unclear. No one knows unequivocally 0:05:15.440 --> 0:05:17.800 what QUEI does for the economy. It probably gives it 0:05:17.839 --> 0:05:20.799 a boost to give some confidence when times are very scary. 0:05:20.880 --> 0:05:24.800 QUEI basically brings out some animal spirits and provoke some investment. 0:05:24.880 --> 0:05:28.760 But what it does is it suppresses volatility, and as 0:05:28.839 --> 0:05:32.880 QUEI gets removed, the market forces will just be allowed 0:05:32.960 --> 0:05:36.400 to react to scary things that happen when something happens. 0:05:36.400 --> 0:05:38.240 In the past, used to get a sell off, it 0:05:38.240 --> 0:05:41.240 would be a buying opportunity. Over the last few years, 0:05:41.279 --> 0:05:44.800 buying opportunities last in the spans of days rather than months. 0:05:44.839 --> 0:05:47.000 So I do think there'll be some sell offs that 0:05:47.080 --> 0:05:49.080 maybe will last a few months, where you get an 0:05:49.400 --> 0:05:52.520 official correction and some things then get too cheap and 0:05:52.560 --> 0:05:55.320 that provokes some buyers, but there won't be the wall 0:05:55.480 --> 0:05:58.400 wall of money chasing every single sell off. And I 0:05:58.440 --> 0:06:02.280 think when you can have dips, that's the definition of volatility, 0:06:02.279 --> 0:06:04.559 and I don't think those will be suppressed as much 0:06:04.920 --> 0:06:07.760 as QUI gets removed in the first quarter of next year. 0:06:07.839 --> 0:06:09.240 Patrick I just want to build on what you think 0:06:09.240 --> 0:06:12.160 will spark the disruption. What we saw in the previous psycho. 0:06:12.920 --> 0:06:15.960 What we saw was ultimately no real disruption until real 0:06:16.040 --> 0:06:18.920 rates got through positive one percent, and so we actually 0:06:18.920 --> 0:06:21.080 started to see some balance sheet reduction and not just 0:06:21.120 --> 0:06:23.920 the unwind of KWEI and NETT purchases. Patrick, you send 0:06:23.920 --> 0:06:25.600 that could happen this time around before we get to 0:06:25.640 --> 0:06:28.520 those kind of points. Well, they're bound to be before 0:06:28.520 --> 0:06:30.920 we get to this kind of point. But the thing 0:06:31.000 --> 0:06:33.359 that's kept me in equities it's there's three pillars, and 0:06:33.400 --> 0:06:36.520 thank god I look at them because I worry about 0:06:36.600 --> 0:06:39.240 valuations and the S and P five hundreds at three 0:06:39.440 --> 0:06:41.839 point five times sales, it's never been higher than it 0:06:41.920 --> 0:06:45.760 is today. But massive liquidity, negative real yields and earning 0:06:45.760 --> 0:06:47.920 his growth. While those pillars remain in place, I think 0:06:47.920 --> 0:06:50.840 equities do move higher. Um. I don't think we need 0:06:50.880 --> 0:06:53.120 real yields at one percent to provoke a correction. But 0:06:53.120 --> 0:06:55.120 if we get down to less than half a percent 0:06:55.200 --> 0:06:58.680 negative real yields, where the outlook for treasuries is moving higher, 0:06:59.120 --> 0:07:01.640 I think that will prove some multiple contractions, and I 0:07:01.680 --> 0:07:04.960 do think it will be the highest growth companies. Um 0:07:04.960 --> 0:07:07.640 with the most extreme multiples that are impacted the most 0:07:07.720 --> 0:07:09.960 out companies that are trading at thirty times earning is 0:07:10.080 --> 0:07:13.000 very expensive. But you can see how those big tech, 0:07:13.440 --> 0:07:15.960 big cap tech companies grow their way into those multiples. 0:07:15.960 --> 0:07:18.520 So offsetting a multiple contraction with the earnlish growth and 0:07:18.560 --> 0:07:20.480 Patria before you run, just let me squeeze this one. 0:07:20.480 --> 0:07:22.200 And you brought up a p moder mask A company 0:07:22.280 --> 0:07:24.600 used to follow really closely when I was doing some 0:07:24.640 --> 0:07:27.200 work out of London. Of course, that company out of Denmark, 0:07:27.360 --> 0:07:29.000 Guy Johnson and I used to talk about this all 0:07:29.000 --> 0:07:30.760 the time. I'm not a big fan of stock splits, 0:07:30.800 --> 0:07:33.040 but of all the names, Patrick, in Europe, does that 0:07:33.120 --> 0:07:37.560 company need one? Give? What is credit out right? Now? Um? Yeah, 0:07:37.680 --> 0:07:40.720 it's precludes retail investing. Europe isn't as much of a 0:07:40.800 --> 0:07:43.680 retail investor market anyway as in America, so I don't 0:07:43.720 --> 0:07:47.440 know if it would incrementally create demand, but yes, definitely 0:07:47.480 --> 0:07:51.360 that must open up the shareholder or the potential shareholder base. Patrick, 0:07:51.400 --> 0:07:53.680 Thank you sir. Going to catch up, Patrick Hampstrong there, 0:07:53.720 --> 0:08:02.440 Fleur remake. Let's bring a doctor Amadota now the city 0:08:02.440 --> 0:08:05.840 of Scola. The Johns Hopkins censor for house security doctor. 0:08:05.960 --> 0:08:07.720 Let's stop right here, and I think this is so 0:08:07.720 --> 0:08:10.600 so important. Have we just taken a big step towards 0:08:11.000 --> 0:08:13.720 normalizing how we treat this virus, towards getting that to 0:08:13.800 --> 0:08:18.000 normal I do think that the CDC revised guidance, which 0:08:18.080 --> 0:08:20.320 was based on science, based on what we've learned about 0:08:20.360 --> 0:08:23.440 this virus, does give us some sense of normalcy, because 0:08:23.440 --> 0:08:26.080 what you're seeing is that this is a less disruptive 0:08:26.080 --> 0:08:28.600 event to get COVID nineteen when it's mild, when the 0:08:28.640 --> 0:08:32.160 symptoms have abated, and we're making that isolation period something 0:08:32.160 --> 0:08:35.480 that people can more easily cope with within their lives, 0:08:35.559 --> 0:08:37.480 and we're doing in a safe manner. It's important to 0:08:37.480 --> 0:08:40.200 remember that this one size fits all ten days that 0:08:40.200 --> 0:08:42.439 have been in place for so long didn't really apply 0:08:42.480 --> 0:08:46.400 to everybody because many people were becoming not contagious earlier 0:08:46.440 --> 0:08:48.240 in that time period. So I think this is more 0:08:48.240 --> 0:08:51.080 precision guided. I think it's going to be something that 0:08:51.120 --> 0:08:53.679 people are finding will find much easier to cope with 0:08:54.120 --> 0:08:56.360 when they do get these mild breakthrough infections that are 0:08:56.360 --> 0:09:00.240 going to become ubiquitous. Well. Dr ADAGEA obviously to even 0:09:00.320 --> 0:09:03.000 understand that you have a positive case and need to isolate, 0:09:03.040 --> 0:09:04.880 you need to have a test, and in some cases 0:09:04.920 --> 0:09:06.760 you need to have a test to stop isolation and 0:09:06.800 --> 0:09:09.960 return to your office, for example. Yet testing just doesn't 0:09:09.960 --> 0:09:14.040 seem to be easily accessible. How does that problem get solved. 0:09:15.400 --> 0:09:18.160 This is going to take a full concerted effort by 0:09:18.160 --> 0:09:20.839 the federal government to incentivize companies to make tests, to 0:09:20.880 --> 0:09:22.800 make it easier to get these tests on the market. 0:09:22.840 --> 0:09:24.880 We know we only have a handful that it passed 0:09:24.920 --> 0:09:28.960 through an ownerous FDA regulation process, and I think we 0:09:29.040 --> 0:09:31.760 have to make these cheaper because twenty five for two 0:09:31.760 --> 0:09:34.680 tests out of most people's reach. And this is all 0:09:34.679 --> 0:09:37.320 a result of the fact that tests have always been undervalued, 0:09:37.360 --> 0:09:40.120 that we really never had a robust home testing program 0:09:40.120 --> 0:09:42.680 in place during the Trump administration. It started during the 0:09:42.679 --> 0:09:45.880 Biden administration, but it's been very stulted and flawed and 0:09:46.400 --> 0:09:49.560 not really optimized. So this is going to be the 0:09:49.640 --> 0:09:51.760 key part of how we move through this pandemic, as 0:09:51.800 --> 0:09:54.480 we normalize this, As people want to be able to 0:09:54.559 --> 0:09:57.440 navigate a life with COVID nineteen as as being an 0:09:57.440 --> 0:09:59.520 ever present issue that they have to deal with, they 0:09:59.520 --> 0:10:01.760 need these us and I think we can't wait until 0:10:01.960 --> 0:10:04.720 the fower government solves this problem over time. It has 0:10:04.760 --> 0:10:06.880 to be done now. And I think that this is 0:10:06.920 --> 0:10:09.440 something that Europe has done very well, but in the 0:10:09.520 --> 0:10:12.000 U S has just not been something that prioritize because 0:10:12.000 --> 0:10:14.520 everybody assumed more people will be vaccinated than that just 0:10:14.559 --> 0:10:17.160 didn't happen, and we're still stuck in this limbo. Have 0:10:17.280 --> 0:10:20.240 we learned now that we can't vaccinate our way out 0:10:20.240 --> 0:10:22.400 of this, that you need more more than one weapon 0:10:22.440 --> 0:10:25.040 in this war is? Or are we just still putting 0:10:25.040 --> 0:10:28.679 too much epsis on that. In particular, the vaccines are 0:10:28.720 --> 0:10:30.679 the best tool that we have by far because they 0:10:30.679 --> 0:10:33.800 remove the ability of the virus to cause serious disease, hospitalization, 0:10:33.800 --> 0:10:36.000 and death. So that has to be the key component 0:10:36.000 --> 0:10:38.800 of our response. But not everybody is going to get vaccinated, 0:10:38.840 --> 0:10:42.000 as we've seen, and tests are one way, especially with 0:10:42.040 --> 0:10:44.960 a contagious variant like omicron that can get around vaccine 0:10:45.000 --> 0:10:47.760 and duce protection and cost. Mild infections. Tests are going 0:10:47.840 --> 0:10:51.120 to be almost equally important because people need to know 0:10:51.200 --> 0:10:54.800 their status. Many organizations want don't want to have any 0:10:54.840 --> 0:10:58.280 tolerance of cases in their inside their workplace, for example, 0:10:58.360 --> 0:11:00.800 or at their event so this is something that needs 0:11:00.840 --> 0:11:02.679 to be done in order for the country to kind 0:11:02.720 --> 0:11:05.360 of move forward. Even if all of these cases are mild, 0:11:05.520 --> 0:11:08.559 there's still not a risk tolerance to have these mild cases, 0:11:08.800 --> 0:11:11.960 and you still have hospitals that are under stress from 0:11:12.080 --> 0:11:15.480 Delta patients and now some omicron patients. That's going to 0:11:15.600 --> 0:11:18.280 be the key thing. So until we get to that point, 0:11:18.480 --> 0:11:21.640 this is treated completely like another respiratory virus. Tests are 0:11:21.640 --> 0:11:24.079 going to be something that people want to do very frequently, 0:11:24.480 --> 0:11:28.160 and it's and it's it's still a major mess. How 0:11:28.200 --> 0:11:31.559 soon do we get their amish because, um, you mentioned 0:11:31.600 --> 0:11:34.560 that you expect this to become these breakthrough mild cases 0:11:34.559 --> 0:11:39.360 have become ubiquitous, meaning pretty much everyone is gonna get it, 0:11:39.520 --> 0:11:41.880 and it seems like, you know, with one point four 0:11:41.920 --> 0:11:46.040 million new cases yesterday, that's gonna be fairly soon. We're 0:11:46.080 --> 0:11:49.320 not fighting the Spanish flu anymore, even though we still 0:11:49.360 --> 0:11:53.600 get the Spanish flu and it's one of the biggest killers. Um, 0:11:53.640 --> 0:11:55.840 it's just so common. Is that what this is going 0:11:55.920 --> 0:11:59.160 to become. Yes, this is going to go the way 0:11:59.160 --> 0:12:03.079 of the other four ronaviruses that cause about our common colds. 0:12:03.080 --> 0:12:05.680 So this is going to be something that everybody gets 0:12:05.840 --> 0:12:08.200 it probably will probably get it multiple times. But it's 0:12:08.200 --> 0:12:10.400 going to be a tame reversion because our immune systems 0:12:10.400 --> 0:12:12.600 are going to be trained to respond through vaccines and 0:12:12.600 --> 0:12:16.280 prior infections. We're gonna have tools like anti virals, monoclone, 0:12:16.360 --> 0:12:19.120 land of bodies, and rapid tests so people can know 0:12:19.440 --> 0:12:21.480 what their status is and they don't infect other people. 0:12:21.480 --> 0:12:24.680 So yes, we probably will get away from these these 0:12:24.679 --> 0:12:27.199 public health record with these public health regulations and more 0:12:27.280 --> 0:12:30.520 towards an individual based way of of dealing with this. 0:12:30.800 --> 0:12:33.280 The problem is we still have hospitals in the United 0:12:33.320 --> 0:12:35.600 States and around the world where there are still issues 0:12:35.640 --> 0:12:39.000 with the capacity. And that's the key pivot point for me, 0:12:39.360 --> 0:12:42.240 is when we remove the ability of COVID nineteen to 0:12:42.320 --> 0:12:45.200 cause hospital capacity concerns, and that is the case in 0:12:45.240 --> 0:12:47.680 many parts of the country, but there are still areas 0:12:47.920 --> 0:12:50.679 in the country, specific regions with low vaccination rates where 0:12:50.679 --> 0:12:54.240 they're still at risk for too many people with conditions 0:12:54.280 --> 0:12:56.640 that put them in the need for hospitalization that are 0:12:56.720 --> 0:12:59.840 unvaccinated that can crush the hospital. That's the point where 0:12:59.840 --> 0:13:01.840 we kind of move fully to endemicities when we're not 0:13:01.880 --> 0:13:06.240 seeing hospitals report over bet capacity I see you from 0:13:06.280 --> 0:13:09.480 multiple days for example, because so when do we get there? 0:13:09.520 --> 0:13:11.080 I mean we have we had that in the past 0:13:11.160 --> 0:13:14.599 with flu seasons that were really bad. Um, some hospitals 0:13:14.640 --> 0:13:18.240 get overcrowded. Do we do we end up next Christmas 0:13:18.280 --> 0:13:21.200 in a situation um the likes of which we would 0:13:21.240 --> 0:13:23.959 have seen in bad flu seasons ten years ago to 0:13:24.000 --> 0:13:28.200 twenty years ago. Hopefully that will be the case. Right now, 0:13:28.240 --> 0:13:30.920 it's it's still worse than influenza seasons, even the worst 0:13:30.920 --> 0:13:33.480 of our influenza seasons in many parts of the country. 0:13:33.920 --> 0:13:37.160 That has to be what what what? What changes? So 0:13:37.360 --> 0:13:40.360 probably by the end by next winter a year from now, 0:13:40.520 --> 0:13:42.240 we should be at that phase in the United States 0:13:42.280 --> 0:13:44.559 and many of the developed countries uh that that this 0:13:44.720 --> 0:13:47.079 becomes handled more like influenza. But I still think it's 0:13:47.080 --> 0:13:49.360 going to have a bigger burthen influenza for some time 0:13:49.600 --> 0:13:51.840 because of the attack. Great how many people get infected, 0:13:51.960 --> 0:13:53.880 And it seems on a pound for pound basis to 0:13:53.920 --> 0:13:57.680 be worse than seasonal influenza when it comes to mortality. 0:13:57.880 --> 0:14:01.160 But that will all adapt over time, and obviously new 0:14:01.240 --> 0:14:03.559 variants can come and change that prediction might be faster 0:14:03.720 --> 0:14:06.360 or slower but I think we're still looking at next 0:14:06.520 --> 0:14:09.560 flu season, in the next fluid respiratory virus season, being 0:14:09.880 --> 0:14:12.640 probably closer to our baseline, but still probably a little 0:14:12.640 --> 0:14:16.559 bit more intense than usual, but hopefully manageable. Amish, thank 0:14:16.600 --> 0:14:18.160 you for all that you do. I know you're busy 0:14:18.160 --> 0:14:20.440 on it a Christmas weekend as well. We appreciate it's 0:14:20.480 --> 0:14:22.400 for everything you've done and for us this year as well. 0:14:22.720 --> 0:14:24.560 We'll catch up soon, thought to Amish it down to 0:14:24.600 --> 0:14:33.240 the Matt you said that that CDC decision for some 0:14:33.280 --> 0:14:35.360 paper at least including you, and for me to some 0:14:35.440 --> 0:14:41.400 degree a bullish co Yeah. Absolutely. Because of the problems 0:14:41.480 --> 0:14:44.800 businesses that have had with employees being out for a 0:14:44.840 --> 0:14:48.160 full ten days at least ten days after testing positive, 0:14:48.360 --> 0:14:51.080 they've had to shut down services. Some companies have had 0:14:51.120 --> 0:14:55.560 to shut down production, some companies have shut down retail outlets. 0:14:55.800 --> 0:14:58.040 If they can reduce that to five days, and the 0:14:58.040 --> 0:15:00.440 CDC now says that you can as long as you're 0:15:00.480 --> 0:15:04.240 asymptomatic um. That obviously opens up a chance for them 0:15:04.280 --> 0:15:07.440 to do more business and raise revenue profit as well, 0:15:07.600 --> 0:15:09.880 and maybe to some extent, makes it easier to forecast 0:15:09.880 --> 0:15:12.240 this economy into twenty two. Let's do that right now 0:15:12.240 --> 0:15:15.320 with John Riding, the Chief Economic Advisor, a bree Capital 0:15:15.360 --> 0:15:17.000 and a good friend of this program for a long 0:15:17.000 --> 0:15:19.920 long time. John, It's good to see you buddy. As always, 0:15:20.000 --> 0:15:21.720 let's start with a call for next year, John, what 0:15:21.720 --> 0:15:25.520 are you focused on? Well? I think the main focus 0:15:25.600 --> 0:15:27.920 is the inflation story. And this was a story that 0:15:28.360 --> 0:15:31.160 as early as April of last year, we warned that 0:15:31.720 --> 0:15:34.360 we were going to have an inflation event, not a 0:15:34.400 --> 0:15:39.320 disinflation or deflation event, because it would negatively it been 0:15:39.320 --> 0:15:43.680 the the virus and the government mesh lockdown measures would 0:15:44.440 --> 0:15:47.440 negatively hit the supply side. Now the supply chains have 0:15:47.520 --> 0:15:52.280 been hit harder, more prolonged than I think that we imagine. 0:15:52.760 --> 0:15:55.160 And on the other side, we're going to get massive 0:15:55.160 --> 0:15:59.120 demand stimulus that was monetary financed, and we've certainly had 0:15:59.160 --> 0:16:03.080 that and UH As a result, the combination has been 0:16:03.120 --> 0:16:08.480 a far more elevated inflation rate than anyone expected. Almost 0:16:08.520 --> 0:16:11.680 seven percent, may well be seven percent when the December 0:16:11.760 --> 0:16:14.600 data come in. And so the question is how much 0:16:14.600 --> 0:16:18.040 does that inflation rate moderate and what is the policy response, 0:16:18.080 --> 0:16:21.000 because I just don't believe that that inflation is going 0:16:21.080 --> 0:16:24.840 to wind itself down to two percent without little action 0:16:25.840 --> 0:16:29.120 from the FED. I think inflation expectations are getting embedded. 0:16:29.600 --> 0:16:32.560 Your previous guests talking about all those pressures on the 0:16:32.600 --> 0:16:38.240 airline industry was just an example of the cost pressures 0:16:38.280 --> 0:16:41.600 that companies are able to pass along in this environment. 0:16:41.600 --> 0:16:43.880 So I think the inflation story is the first. I 0:16:43.880 --> 0:16:45.520 think the inflation rate is going to be close to 0:16:45.560 --> 0:16:48.400 four and the Fed is going to end up taking 0:16:48.800 --> 0:16:52.920 more steps, as its signaled at the last meeting with 0:16:53.080 --> 0:16:57.480 its dot plot, than people have been expecting. A couple 0:16:57.520 --> 0:17:00.200 of things that John, then the scale of deceleration on 0:17:00.280 --> 0:17:02.760 headline inflation. You're looking for seven potential to close out 0:17:02.760 --> 0:17:05.119 of the year into next year, and the policy response 0:17:05.160 --> 0:17:07.840 that would shake that move lower. John, let's build on that. 0:17:08.240 --> 0:17:10.760 The expectation now for many people is three hikes next year. 0:17:11.240 --> 0:17:15.000 Does that do anything? John? Does that achieve anything? Well? 0:17:15.040 --> 0:17:18.159 I think it starts off as a signal, and I 0:17:18.160 --> 0:17:20.520 think the key thing was for the FED to recognize 0:17:20.560 --> 0:17:22.520 the problem. I don't think the FED fully recognized the 0:17:22.560 --> 0:17:26.720 problem at Chair Powell's last press conference, but I think 0:17:26.760 --> 0:17:30.200 it went some way to recognizing the problem by getting 0:17:30.280 --> 0:17:33.600 rid of the transitor language, putting again three hikes that 0:17:33.800 --> 0:17:38.880 were supported by thirteen members of the committee as opposed 0:17:38.920 --> 0:17:42.399 to the one hike that was at the in the 0:17:42.520 --> 0:17:46.480 last dot plot back in September, which was basically a 0:17:46.520 --> 0:17:49.440 split decision with as many people looking for one hikers 0:17:49.640 --> 0:17:51.639 looking for no move at all. So it is an 0:17:51.680 --> 0:17:54.240 important signal, and I think the really good thing would 0:17:54.240 --> 0:17:57.800 be if that move came in March. The asset wind 0:17:57.800 --> 0:18:01.520 down at the asset purchases ends mid March. The next 0:18:01.520 --> 0:18:04.320 decision day, I think is March sixte So if the 0:18:04.359 --> 0:18:07.880 FED were to raise rates on March sixteenth, it would 0:18:07.960 --> 0:18:10.399 be a signal. And then the next signal will be 0:18:10.840 --> 0:18:13.400 start letting the balance sheet run off and perhaps do 0:18:13.440 --> 0:18:16.200 that as soon as June of next year. Will that 0:18:16.240 --> 0:18:19.760 be enough? Probably not, But it is important that we 0:18:20.119 --> 0:18:23.480 the FED recognizes the problem and starts to take steps. 0:18:23.560 --> 0:18:28.200 And then that makes companies begin to think should price increases, 0:18:28.240 --> 0:18:31.879 which I fear is becoming the case, uh not be 0:18:32.080 --> 0:18:36.600 part of our process for making profits because we're in 0:18:36.640 --> 0:18:39.800 an environment right now. We we've got cost pressures, but 0:18:40.560 --> 0:18:43.399 companies are raising prices by even more than the costs 0:18:43.440 --> 0:18:45.840 are going to go, perhaps using the cover of costs 0:18:45.880 --> 0:18:50.119 and widening profit margins, and that's relatively unusual, necessarily different 0:18:50.160 --> 0:18:52.920 from the profit from the inflation environment that we had 0:18:52.920 --> 0:18:55.760 in the nine seventies. So I think those signals are 0:18:55.880 --> 0:19:00.560 very important to start reframing the decision making Pross. But no, 0:19:01.119 --> 0:19:03.080 by itself, I think there's going to be more rate 0:19:03.160 --> 0:19:08.600 hikes into three more I think, you know, being signaled 0:19:08.640 --> 0:19:11.840 by the dot plot um. But on the other side, 0:19:12.080 --> 0:19:14.720 the economy is still going to be rolling along because 0:19:14.720 --> 0:19:17.080 there's so many supply constraints, so higher rates are not 0:19:17.160 --> 0:19:19.680 going to hurt the economy. We've got so much access 0:19:19.720 --> 0:19:22.920 demand in the system. Taking some demand out isn't going 0:19:22.960 --> 0:19:26.119 to slow growth. It isn't going to create any slack 0:19:26.160 --> 0:19:28.920 in the labor market. There's just simply plenty of jobs 0:19:29.000 --> 0:19:32.560 out there, and all of this COVID protocols are making 0:19:32.600 --> 0:19:36.399 it harder and harder to fulfill those positions. So is 0:19:36.400 --> 0:19:38.560 what you're saying, essentially, John, that the FED is likely 0:19:38.560 --> 0:19:40.800 going to have to move more aggressively, but it's not 0:19:40.840 --> 0:19:44.640 going to amount to a policy mistake of some kind. Um. 0:19:44.920 --> 0:19:47.240 The policy mistake has been made, and the policy mistate 0:19:47.359 --> 0:19:51.080 was keeping the emergency measures in place for too long. 0:19:51.400 --> 0:19:54.520 There was no need to have continued purchasing at a 0:19:54.600 --> 0:19:58.119 hundred and twenty billion dollars a month almost through to 0:19:58.200 --> 0:20:01.399 the end of this year. They they only started that 0:20:01.480 --> 0:20:05.360 to wind down adjustment in November. So that was one 0:20:05.400 --> 0:20:08.520 policy and state there was the Fed could have signaled 0:20:09.080 --> 0:20:12.560 that inflation wasn't going to be transford. They weren't going 0:20:12.600 --> 0:20:17.760 to let it be anything other than transitory by by 0:20:17.840 --> 0:20:21.480 recognizing the problem. But I think there was some mischaracterization 0:20:21.520 --> 0:20:23.800 the inflation from a lot of focus on really a 0:20:23.840 --> 0:20:26.840 lot of focus on a handful of items, even as 0:20:26.880 --> 0:20:29.639 all the data showed that it was broadening out and 0:20:29.680 --> 0:20:32.880 the inflation precius of broadened out. And you can't talk 0:20:32.920 --> 0:20:36.280 down this inflation problem. You know, a credible FED has 0:20:36.320 --> 0:20:40.159 to talk against the inflation problem, take action against the 0:20:40.160 --> 0:20:43.200