WEBVTT - There's No Magic to Fed's 2% Inflation Target 0:00:15.120 --> 0:00:18.439 Welcome to What Goes Up a weekly markets podcast. Umbildana 0:00:18.960 --> 0:00:21.239 a cross asset reporter with Bloomberg. 0:00:20.920 --> 0:00:23.400 And I'm Katie Greifeld, also a cross asset reporter. 0:00:24.200 --> 0:00:27.600 Federal Reserve officials spooked markets recently when they signaled they 0:00:27.640 --> 0:00:30.160 were willing to hike interest rates a few more times 0:00:30.200 --> 0:00:33.480 to get inflation under control. But a new data point 0:00:33.520 --> 0:00:37.320 this week showed inflation decelerating to the slowest pace in 0:00:37.400 --> 0:00:40.479 more than two years. So what does that mean for 0:00:40.520 --> 0:00:43.360 the Fed's hiking path going forward? We're going to get 0:00:43.360 --> 0:00:46.240 into it with the chief investment officer of fixed income 0:00:46.320 --> 0:00:50.959 at the largest asset manager. I'm super excited for that conversation, Katie, 0:00:51.200 --> 0:00:53.479 But first you're filling in for Mike Reagan. 0:00:53.680 --> 0:00:56.680 I am hopefully. We're going to talk about bonds. We're 0:00:56.680 --> 0:00:58.000 going to talk about the FED, We're going to talk 0:00:58.000 --> 0:01:01.400 about inflation. We're also going to talk about exchange traded funds. Yes, 0:01:01.560 --> 0:01:03.680 I love ETF we all do. 0:01:03.320 --> 0:01:04.840 You love ETFs more than I do? 0:01:04.959 --> 0:01:05.319 Actually? 0:01:05.520 --> 0:01:05.959 Probably? 0:01:06.080 --> 0:01:10.479 Yeah? But this is like basically people getting a view 0:01:10.600 --> 0:01:14.720 into mine and your daily conversations at our desks. This 0:01:14.760 --> 0:01:16.640 is literally we sit around and these are the types 0:01:16.640 --> 0:01:18.000 of things we chat about all day long. 0:01:18.240 --> 0:01:20.039 Just to put a visual in hear Vill Doon and 0:01:20.040 --> 0:01:23.120 I sit back to back. We're constantly swinging around and saying, 0:01:23.200 --> 0:01:24.319 holy moly. 0:01:24.080 --> 0:01:25.679 Holy moly, did you see this? 0:01:26.080 --> 0:01:28.840 What yields are doing right now? Have you taken a 0:01:28.880 --> 0:01:32.000 look at the twos ten curve? Even today? This morning 0:01:32.000 --> 0:01:35.240 we were talking about real yields. They are super high 0:01:35.319 --> 0:01:35.920 right now. 0:01:35.760 --> 0:01:36.759 And I said how high? 0:01:37.680 --> 0:01:38.400 So high? 0:01:38.520 --> 0:01:40.040 And you said so high? Lol? 0:01:40.200 --> 0:01:42.080 Yeah. 0:01:42.240 --> 0:01:44.280 You know what else we should chat about? Tell me 0:01:44.480 --> 0:01:48.200 other non market stuff theoretically, So I have a question 0:01:48.240 --> 0:01:52.200 for you. Yeah, Barbie, I'm so Oppenheimer. 0:01:53.160 --> 0:01:56.800 I do love that. How do you pronounce it? Barbenheimer? 0:01:57.120 --> 0:01:59.800 The double feature of people seeing both in the same day, 0:02:00.040 --> 0:02:00.840 think that is, will you. 0:02:00.840 --> 0:02:01.560 Do that with me? 0:02:01.680 --> 0:02:02.320 I would love to. 0:02:02.680 --> 0:02:04.880 You have to say yes, I know, we'll plan it. 0:02:05.360 --> 0:02:07.400 Maybe our guest wants to come with us too, let's 0:02:07.400 --> 0:02:09.920 ask him. We can ask him. I'm so excited to 0:02:09.919 --> 0:02:13.480 have him on. He has so many accolades, Like really, 0:02:13.600 --> 0:02:16.840 we were so thrilled to be having this conversation. It's 0:02:17.040 --> 0:02:21.440 Rick Reader black Rocks, chief investment Officer of Global Fixed Income. 0:02:21.480 --> 0:02:23.480 Thank you so much for joining us. Thanks for having 0:02:23.520 --> 0:02:27.560 me I'm looking forward to Barbie or Oppenheimer for you that. 0:02:27.680 --> 0:02:29.520 I don't know that the question is all going to 0:02:29.520 --> 0:02:32.200 be this hard because that I can't. 0:02:32.880 --> 0:02:35.760 That was actually the softball question. 0:02:36.800 --> 0:02:39.480 Yeah, well, Katie. The reason I was asking is because 0:02:39.560 --> 0:02:40.280 Katie sent me an. 0:02:40.280 --> 0:02:43.440 Article that said people are double booking and so they're 0:02:43.440 --> 0:02:46.280 seeing both on the same day. But the Barbie ticket 0:02:46.400 --> 0:02:48.400 sales have been much I mean. 0:02:48.360 --> 0:02:50.480 They've marketed the heck out of it. It's crazy. 0:02:50.520 --> 0:02:53.440 Oh, I see so many ads every single basically literally 0:02:53.440 --> 0:02:56.400 every single day. Okay, just to start, like I said, 0:02:56.440 --> 0:02:58.520 you have so many accolades. You have the morning Star 0:02:58.560 --> 0:03:02.720 Award for Investing Excellence for Outstanding Portfolio Manager in twenty 0:03:02.760 --> 0:03:06.080 twenty three. Just your fixed income group at black Rock 0:03:06.200 --> 0:03:10.720 manages two point seven trillion with a T. So maybe 0:03:10.760 --> 0:03:13.280 just to start, you can lay out your market views 0:03:13.280 --> 0:03:13.679 for US. 0:03:15.280 --> 0:03:17.440 In my career, I've been doing US for over thirty years. 0:03:17.480 --> 0:03:22.120 I've never seen inflation stay so persistently high. We've lived 0:03:22.120 --> 0:03:26.839 in a world where technology aging population you've had, it's 0:03:26.840 --> 0:03:28.880 been hard to keep prices high. You know, the last 0:03:28.880 --> 0:03:32.200 couple of years post COVID posts, the dynamic around this 0:03:32.240 --> 0:03:35.200 immense fiscal and monetary stimulus that we've had to deal with. 0:03:35.800 --> 0:03:38.960 You know, this increasingly high levels of inflation. Listen, I 0:03:38.960 --> 0:03:40.760 think we're getting on the other side of it. I 0:03:40.760 --> 0:03:43.720 think we've got data on this, this recent CPI report 0:03:43.800 --> 0:03:46.000 that suggests that we're getting on the other side of 0:03:46.040 --> 0:03:48.960 this inflation trend and is throughout one stat that blew 0:03:49.040 --> 0:03:51.240 me away. We actually break it down. You know, the 0:03:51.280 --> 0:03:54.880 Fed is focused on core services X shelter for a 0:03:54.920 --> 0:03:57.880 couple of reasons. Why One, core goods inflations come down, 0:03:58.440 --> 0:04:01.040 but services have been sticky, and it's been sticky because 0:04:01.080 --> 0:04:04.560 wages have been high, but core services has been high 0:04:04.760 --> 0:04:06.760 X shelter And part of why they look at that 0:04:06.880 --> 0:04:09.440 is shelter takes a while for the inflation to come down. 0:04:09.480 --> 0:04:11.560 Rental prices take a while, but they are starting to 0:04:11.720 --> 0:04:15.120 just But anyway, long with my long preamble, core services 0:04:15.240 --> 0:04:18.520 X shelter three month annualized is now down to one 0:04:18.520 --> 0:04:21.880 point seven percent, down from nine and a half percent 0:04:21.880 --> 0:04:24.800 a couple of years ago. We're at one seven So 0:04:25.080 --> 0:04:26.680 and you know, you break down the other numbers, it's 0:04:26.680 --> 0:04:29.080 in core CPI still at four. It's still not at target, 0:04:29.600 --> 0:04:31.880 but gosh, you look at the component parts and you 0:04:31.920 --> 0:04:34.800 look at the trajectory of where we're going. That's a 0:04:34.839 --> 0:04:38.280 really big deal. So so core thesis is listen. I 0:04:38.320 --> 0:04:40.560 think I think we're on the backside of, you know, 0:04:40.640 --> 0:04:43.680 as a Fedkinna hike one more time, you know, maybe 0:04:43.680 --> 0:04:45.160 they try and get two hikes out of it. We're 0:04:45.160 --> 0:04:48.760 on the backside of what has been a bludgeoning of 0:04:48.839 --> 0:04:51.280 the interest rate market, a bludgeoning of people that have 0:04:51.440 --> 0:04:54.960 held rate related products or interest rate sensitive and I 0:04:54.960 --> 0:04:56.560 think that's a really big deal. Not that I think 0:04:56.560 --> 0:04:58.760 they're going to sit there for a while, so rates 0:04:58.760 --> 0:05:02.680 will stay stable for aeriod of time, but I think this, gosh, 0:05:02.720 --> 0:05:04.480 get out of the way because rates are going higher. 0:05:04.520 --> 0:05:06.000 I think we're on the backside of that, which is 0:05:06.000 --> 0:05:08.920 a big deal, whether you're doing debt, equity, private equity, anything. 0:05:09.160 --> 0:05:11.839 Katie, I saw a funny tweet that said it's possible 0:05:11.880 --> 0:05:15.000 services inflation stays high because of Barbie Oppenheimer. 0:05:15.279 --> 0:05:17.760 It could. That's quite a tie in. We'll see if 0:05:17.760 --> 0:05:21.159 the data bears that out. But there's about five different 0:05:21.160 --> 0:05:22.960 things I want to get to there, but I want 0:05:23.000 --> 0:05:27.600 to start with just inflation overall. Because headline CPI fell 0:05:27.720 --> 0:05:30.120 to three percent, which it feels like we haven't seen 0:05:30.160 --> 0:05:31.760 in a while. And the story that ran on the 0:05:31.839 --> 0:05:35.040 terminal immediately after the headline I thought was pretty bold. 0:05:35.080 --> 0:05:39.160 Inflation at three percent flags end of emergency, and Rick, 0:05:39.200 --> 0:05:41.560 you said, we're on the other side of it. Do 0:05:41.600 --> 0:05:44.240 you think that we're out of crisis mode? When it 0:05:44.240 --> 0:05:45.440 comes to inflation. 0:05:45.839 --> 0:05:49.599 Three percent is a very different paradigm than you know 0:05:49.600 --> 0:05:51.800 when you're at four or five six percent. By the way, 0:05:51.839 --> 0:05:55.120 not just quantitatively, but it's also been the case there's 0:05:55.160 --> 0:05:57.520 a lot of academic thought about when you're a well 0:05:57.560 --> 0:06:03.039 above three that your inflationary expectations in people and it's 0:06:03.080 --> 0:06:05.800 hard to get out from under that. When you get 0:06:05.839 --> 0:06:09.640 to three, you're at a place where you're close enough 0:06:09.680 --> 0:06:12.839 to target and it's not that scary data a piece 0:06:12.839 --> 0:06:16.320 of data, and that monetary policy doesn't have to be 0:06:16.440 --> 0:06:19.480 that concerned about it. Listen, I think it's going to 0:06:19.520 --> 0:06:22.719 You'll see inflation continue to come down. I'm much more 0:06:22.760 --> 0:06:25.520 confident that inflation is going to come down that I am. 0:06:25.640 --> 0:06:28.320 Unemployment rate is going to come up. You know, one 0:06:28.320 --> 0:06:31.919 man's opinion. I don't think the FED needs to destroy 0:06:32.440 --> 0:06:35.920 the employment paradigm today. In fact, I think it does 0:06:35.960 --> 0:06:38.880 more harm than good to try and bring that inflation down. 0:06:38.920 --> 0:06:41.400 I think there's a natural migration lower and once you 0:06:41.440 --> 0:06:44.039 reach these levels. To your question, I did a piece 0:06:44.080 --> 0:06:47.440 that I wrote about patients as a virtue, just let patients. 0:06:47.560 --> 0:06:51.039 Just let time and a restrictive interest rate do its work, 0:06:51.080 --> 0:06:53.680 and I think you'll find that it'll approach target over time. 0:06:54.640 --> 0:06:57.560 So over time approaching target, meaning by the end of 0:06:57.600 --> 0:07:00.400 the year or early next year. And then we see 0:07:00.400 --> 0:07:03.120 the very big question now is what does this mean 0:07:03.160 --> 0:07:06.800 for the Fed's future path in terms of you know, 0:07:06.880 --> 0:07:09.680 do we get a hike in July and then a 0:07:09.720 --> 0:07:13.640 pause or another hike after that, what do you foresee? 0:07:14.120 --> 0:07:16.120 Yeah, it's a great question. We're not going to get 0:07:16.120 --> 0:07:19.080 to target. By the way goods inflation we're getting to target, 0:07:19.400 --> 0:07:21.640 but in services we're we're not going to get there. 0:07:21.680 --> 0:07:23.600 We're not going to get there this year. You know, 0:07:23.640 --> 0:07:26.640 could you get there next year? Don't know? But I 0:07:26.680 --> 0:07:29.360 think you can get close, and you know, certainly within 0:07:29.400 --> 0:07:32.200 spitting distance and certainly a place that you feel comfortable with. 0:07:33.080 --> 0:07:35.440 You know, even with today's better data, you have to 0:07:35.440 --> 0:07:37.400 marry yourself to the idea that the Fed's going to 0:07:37.480 --> 0:07:39.560 hike in July. I think it would be a big credibility 0:07:39.640 --> 0:07:42.640 problem if after they paused and the reason why they're 0:07:42.640 --> 0:07:44.680 going to pause, and then everybody and then people in 0:07:44.680 --> 0:07:46.600 the Fed committee have suggested we're going to get two 0:07:46.600 --> 0:07:49.200 more hikes. He did you not go in July if 0:07:49.200 --> 0:07:50.520 that were the case. So I think you have to 0:07:50.560 --> 0:07:53.440 write that in stone that they're going to go in July. 0:07:54.320 --> 0:07:55.800 But I think you've got to listen. I think they're 0:07:55.800 --> 0:07:57.920 going to still try and get another hike done, probably 0:07:58.040 --> 0:08:00.920 you know, November, but I think it's ambiguous now as 0:08:01.000 --> 0:08:02.600 to whether you know, ah, are you going to do 0:08:02.640 --> 0:08:06.000 any more hikes? And quite frankly, the people don't understand 0:08:06.040 --> 0:08:08.280 these rates are restrictive. I think you talked about earlier 0:08:08.320 --> 0:08:11.720 real rates at these levels like these are restrictive levels, 0:08:11.720 --> 0:08:13.800 and if you know, let them marinate through the system, 0:08:13.840 --> 0:08:15.200 you know, you see the impact that has in the 0:08:15.200 --> 0:08:17.840 banking system, You see the impact that has on commercial 0:08:17.880 --> 0:08:19.920 real estate. I think we're going to move to a 0:08:19.960 --> 0:08:22.520 form which I think is right, a form of patients 0:08:22.600 --> 0:08:26.120 versus impatience with how restrictive rates are to try and 0:08:26.160 --> 0:08:27.160 achieve target. 0:08:27.440 --> 0:08:30.280 Well to the idea that we should just let things marinate. 0:08:30.760 --> 0:08:34.040 Here in letting things marinate, should the conversation shift to 0:08:34.120 --> 0:08:37.000 not how many more hikes are left, but how long 0:08:37.040 --> 0:08:39.160 it takes them to cut how long they're on hold 0:08:39.240 --> 0:08:40.439 for Listen. 0:08:40.559 --> 0:08:42.120 I think you know, we went through this period where 0:08:42.160 --> 0:08:45.400 the market was anticipating, particularly around the banking crisis, that 0:08:45.480 --> 0:08:47.080 you're going to have this cliff event, You're going to 0:08:47.120 --> 0:08:49.199 hike and then you're going to have to ease quickly, 0:08:49.240 --> 0:08:51.360 and that when the FED starts easing, when you have 0:08:51.400 --> 0:08:53.679 a crisis, they don't move twenty five base one increments. 0:08:53.720 --> 0:08:58.400 You move quickly. Listen, unless you have some form of crisis, 0:08:59.400 --> 0:09:01.960 which are are hard to anticipate, and I don't see 0:09:02.000 --> 0:09:04.240 one that's out there. You know, you have to assume 0:09:04.280 --> 0:09:06.440 that this Fed stays on hold for at least the 0:09:06.520 --> 0:09:09.080 year and then starts to bring it down. But I 0:09:09.120 --> 0:09:12.160 think they have to bring these rates down. And you know, 0:09:12.520 --> 0:09:14.720 we know the issue around it's not just the deposits 0:09:14.720 --> 0:09:17.640 of the banks. It's a cost of funding those deposits 0:09:17.640 --> 0:09:20.880 are so painful, but it's also people don't talk about 0:09:20.920 --> 0:09:22.679 the debt burden on the country today. When you talk 0:09:22.720 --> 0:09:24.600 about you know, we spend time on the debt ceiling. 0:09:25.080 --> 0:09:27.199 But when you have an economy that's sitting with thirty 0:09:27.240 --> 0:09:30.240 trillion of debt, the longer you keep that rate up, 0:09:30.400 --> 0:09:34.079 the more you impair your fiscal flexibility. And you think 0:09:34.080 --> 0:09:37.360 about debt to GDP, you know what happens is not 0:09:37.400 --> 0:09:40.480 only is your debt service becoming expensive, but you want 0:09:40.480 --> 0:09:43.280 to bring rate down so nominal GDP can can continue 0:09:43.320 --> 0:09:46.560 to be high, so that your debt to GDP is 0:09:46.600 --> 0:09:48.840 not that scary. So I think you got to bring 0:09:48.880 --> 0:09:50.480 these rates down. I don't think you can sit here 0:09:50.520 --> 0:09:53.000 for that long because of the damage it does to 0:09:53.160 --> 0:09:54.959 the economy in multiple forms. 0:09:55.600 --> 0:09:58.080 Is there anything that could happen that would make the 0:09:58.120 --> 0:10:01.120 Fed not hike at the end of July, or as 0:10:01.160 --> 0:10:03.480 you say, is it more credibility issue where they would 0:10:03.480 --> 0:10:03.800 just have. 0:10:03.800 --> 0:10:06.480 To go by the way, not a zero probability, but 0:10:06.480 --> 0:10:09.080 the markets are pricing it as a remote probability. If 0:10:09.080 --> 0:10:11.920 you had some of the bank earnings that were so 0:10:12.160 --> 0:10:15.840 horrible that suggested that gosh, you know, the FED is 0:10:16.400 --> 0:10:19.720 creating its own damage, not just the damage of raising rates, 0:10:19.720 --> 0:10:23.120 but keeping rates too low for too long. Funding you know, 0:10:23.160 --> 0:10:27.720 having banks fund purchase assets at aggressively low yields and 0:10:27.760 --> 0:10:30.640 then all of a sudden shock interest rates higher. Boy, 0:10:30.679 --> 0:10:32.840 it'd be pretty hard if those numbers, those bank earnings 0:10:32.920 --> 0:10:37.959 numbers were dramatically worse than anticipated. You know. Other than that, 0:10:38.000 --> 0:10:40.840 it's hard to see something else that would take them 0:10:40.880 --> 0:10:43.160 off a trajectory that would be you know, I think 0:10:43.200 --> 0:10:45.760 the more likely outcome is you get the July hike in, 0:10:46.440 --> 0:10:50.400 but you do a quote unquote dubbish hike and suggests that, gosh, 0:10:50.440 --> 0:10:53.120 we're nearing the end of what has been a long 0:10:53.160 --> 0:10:55.920 and arduous period to get rates to a very restrictive level. 0:10:56.000 --> 0:10:58.319 So we would go from a hawkish hold to a 0:10:58.360 --> 0:11:01.559 dubbish hike, which would be fun and find out pretty soon. 0:11:01.679 --> 0:11:05.079 But to the idea of it being a credibility issue 0:11:05.120 --> 0:11:08.480 if they didn't go in July, I mean, listening to you, 0:11:08.520 --> 0:11:11.040 it kind of sounds like they've forced their own hand here. 0:11:11.600 --> 0:11:13.360 And by the way, I've throwing one other thing. They're 0:11:13.360 --> 0:11:15.400 also reducing the size of the balance sheet training the 0:11:15.400 --> 0:11:18.320 money supply, and so you know, the policy is not 0:11:18.360 --> 0:11:20.080 just restrictive on the rate. We go back to what 0:11:20.120 --> 0:11:23.400 the most popular with the popular thing to watch is. 0:11:23.440 --> 0:11:26.240 But liquidity is a really big deal Uh huh, it doesn't. 0:11:26.240 --> 0:11:28.839 It doesn't get enough airtime relative to rate. When you 0:11:28.840 --> 0:11:31.440 bring down the money supply, you reduce the balance sheet. 0:11:31.920 --> 0:11:33.680 It has a real impact. I mean, you track the 0:11:33.679 --> 0:11:36.760 stock market over time relative to the growth or shrinkage 0:11:36.760 --> 0:11:41.040 of the money supply. It is very sincere. So listen, 0:11:41.160 --> 0:11:44.160 I think I think this idea of of you know, 0:11:44.200 --> 0:11:46.680 you leave it there, let it marinate, reduce the balance sheet, 0:11:47.000 --> 0:11:49.319 you know, just watch watch the system do what it's 0:11:49.360 --> 0:11:50.640 going to do. On the back side of it. 0:11:58.120 --> 0:11:59.600 I want to go back to what you were saying. 0:12:00.280 --> 0:12:02.520 That policy is restrictive right now. You can see that 0:12:02.720 --> 0:12:05.160 in real rates and just the level of where we 0:12:05.200 --> 0:12:07.880 are right now. So you have to bring rates down 0:12:07.960 --> 0:12:11.160 at some point. But where do you think neutral is 0:12:11.920 --> 0:12:13.040 after what we've been through. 0:12:14.720 --> 0:12:17.040 Wow, it's a great question. That is a great question. 0:12:17.240 --> 0:12:18.760 So that was the softball. 0:12:19.480 --> 0:12:21.319 Yeah, Oh my god, I would say, hopefully the question 0:12:21.360 --> 0:12:25.679 is gonna get easier for that. Yeah. The uh so, 0:12:25.760 --> 0:12:28.160 you know, it's real rates and nominal rates. And so 0:12:28.440 --> 0:12:30.640 let me say, from a real rate perspective, and the 0:12:30.679 --> 0:12:32.520 way you guys started this, some may not you know, 0:12:32.520 --> 0:12:36.240 should real rates be closer to you know, depending on 0:12:36.240 --> 0:12:38.000 where on the curve you think about it closer to 0:12:38.120 --> 0:12:40.800 fifty base points to one hundred bases points. I think 0:12:40.840 --> 0:12:43.480 that is. You know, we're way above that today, particularly 0:12:43.559 --> 0:12:45.520 out you know, we think about where the ten yure 0:12:45.600 --> 0:12:48.520 point is today, and so you know that I think 0:12:48.520 --> 0:12:52.000 can come closer to what is the neutral long term rate. 0:12:52.040 --> 0:12:54.480 And then if you said, and I have I have 0:12:54.559 --> 0:12:57.600 a very non consensus view about this. I think the 0:12:57.679 --> 0:13:01.320 FED should leave the funds rate at somewhere between two 0:13:01.360 --> 0:13:04.680 and three percent for a long period of time. Once 0:13:04.720 --> 0:13:07.680 you get on the other side of inflation, you know, 0:13:07.920 --> 0:13:10.560 why not two percent? Think that? I think the idea 0:13:10.679 --> 0:13:14.520 being that we're going to have because of deglobalization, you're 0:13:14.520 --> 0:13:17.880 going to have because of the demographic you know, shortage 0:13:17.880 --> 0:13:21.120 of labor, you're going to have a higher inflation, structurally 0:13:21.160 --> 0:13:24.160 higher inflation. So should it be two and a half? 0:13:24.320 --> 0:13:26.600 I don't know, should it be two? But I think 0:13:26.640 --> 0:13:28.600 they should leave the funds right there for a long time. 0:13:28.679 --> 0:13:30.600 I think the Fed, no, I know, I've talked about 0:13:30.640 --> 0:13:32.760 it before. If you take the last seventy five meetings 0:13:32.760 --> 0:13:34.880 of the Federal Reserve, sixty five of them, they've kept 0:13:34.960 --> 0:13:38.679 rate successively low or changed it. I just don't think 0:13:38.720 --> 0:13:41.000 you need to spend that much time tweaking it. I 0:13:41.040 --> 0:13:43.439 think they should. They should leave it at a reasonable 0:13:43.520 --> 0:13:46.959 level and that the system recalibrate because the system US 0:13:47.080 --> 0:13:52.079 economy is the most flexible, adaptive, technology oriented economy in 0:13:52.120 --> 0:13:53.480 the world, and it will adapt. 0:13:54.600 --> 0:13:57.800 What about their two percent inflation goal, because I think 0:13:57.840 --> 0:14:00.040 one of the Fed officials this week was asked, like, 0:14:00.600 --> 0:14:04.160 are you willing to sacrifice the economy just to stick 0:14:04.240 --> 0:14:06.800 to that two percent goal? Like the alter of the 0:14:06.880 --> 0:14:11.680 two percent? Is it worth sacrificing the economy just to 0:14:11.720 --> 0:14:13.959 get to that point that you have been telling people 0:14:14.000 --> 0:14:14.439 you would get. 0:14:14.600 --> 0:14:16.079 Is it a false god? 0:14:16.240 --> 0:14:18.400 Is it wow? A Taylor Swift reference. 0:14:18.480 --> 0:14:22.640 Yes, one man's opinion. I think there is. You just 0:14:22.720 --> 0:14:26.040 had massive monetary and physical stimulus. You've got to give 0:14:26.040 --> 0:14:28.240 it a little bit of time. Like this whole idea 0:14:28.400 --> 0:14:31.640 like there's a magic to two doesn't make any sense 0:14:31.680 --> 0:14:34.920 to me that you just had immense stimulus. Let it plan. 0:14:35.000 --> 0:14:37.360 By the way, two percent over the intermediate term, I 0:14:37.440 --> 0:14:40.960 get two percent over any short period of time. It 0:14:41.000 --> 0:14:44.360 doesn't make any sense, particularly defense raise interest rates five 0:14:44.400 --> 0:14:47.080 hunderd base once the unemployment rate is three point six percent. 0:14:48.520 --> 0:14:51.000 How much do you have interest rates? How much would 0:14:51.000 --> 0:14:53.720 you have to move them to get the unemployment rate 0:14:53.800 --> 0:14:56.160 to a level to slow wages and get it to 0:14:56.160 --> 0:14:58.720 a level that you're coming it's not worth it. Why 0:14:58.720 --> 0:15:01.640 would you take why would you take millions of people 0:15:01.680 --> 0:15:04.160 out of work because you need to go from two 0:15:04.240 --> 0:15:07.240 point seven to two? It's like, why do it? And 0:15:07.240 --> 0:15:08.680 I want to talk about this too much, but the 0:15:08.680 --> 0:15:11.000 people that get hurt by the higher levels of inflation 0:15:11.360 --> 0:15:12.880 are the people you're going to take out of work. 0:15:13.720 --> 0:15:16.040 And I think there is you know you think about 0:15:16.080 --> 0:15:19.400 when you raise rates to these levels, you're actually creating 0:15:19.440 --> 0:15:23.160 an income benefit to people. They're wealthier people who are savers, 0:15:23.640 --> 0:15:26.160 and you're hurting the people that just love to borrow. 0:15:26.800 --> 0:15:29.120 And I just don't think that trade off makes any sense. 0:15:29.160 --> 0:15:33.840 You know, this too is some magical, mystical perfection. It 0:15:33.960 --> 0:15:36.160 doesn't make it. It doesn't. It's illogical to me. 0:15:36.640 --> 0:15:39.320 I mean listening to you talk. And you also made 0:15:39.360 --> 0:15:41.040 the point that the FED probably doesn't have to murder 0:15:41.080 --> 0:15:44.440 the labor market here. Just to tie a bow on 0:15:44.520 --> 0:15:49.400 that thought, do you need to get the unemployment rate 0:15:49.560 --> 0:15:52.640 above four percent to get back to two percent or 0:15:52.640 --> 0:15:55.120 can we have this sort of happy balance. 0:15:57.400 --> 0:16:01.240 So I think the system will reach calibrate itself, and 0:16:01.280 --> 0:16:03.520 I think technology. I mean, first of all, we're about 0:16:03.560 --> 0:16:08.200 to go through the most extraordinary productivity growth. I think, 0:16:08.440 --> 0:16:11.440 you know, certainly since the Internet, and maybe even more so, 0:16:12.240 --> 0:16:15.520 we really don't know how many job functions are going 0:16:15.560 --> 0:16:18.080 to be eliminated through AI. We don't know how many 0:16:18.560 --> 0:16:21.960 how much true efficiency is going to be created, and 0:16:22.040 --> 0:16:24.600 so this whole concept of gosh, there's a number that 0:16:24.640 --> 0:16:27.200 we need to get to in payroll. And I'm not 0:16:27.280 --> 0:16:31.120 convinced that wages is that sincere to serve it to 0:16:31.240 --> 0:16:33.720 service inflation. I think it's an indicator and I think 0:16:33.720 --> 0:16:36.160 it can be representative. But you think about it, we 0:16:36.200 --> 0:16:39.160 went for a long period of time where you had 0:16:39.240 --> 0:16:42.480 low levels of inflation. I think it is it is 0:16:42.520 --> 0:16:46.200 an academic exercise, and only that that suggests there's a 0:16:46.280 --> 0:16:50.040 level of employment that creates this level of inflation. You know, 0:16:50.080 --> 0:16:52.560 particularly when you don't know how much efficiency you're going 0:16:52.600 --> 0:16:54.600 to get off of AI, how much technology, how much 0:16:54.600 --> 0:16:57.920 substitution effect that you're going to see play through. I mean, 0:16:57.920 --> 0:17:01.440 the world is changing so quickly, so many ways, But 0:17:01.560 --> 0:17:04.679 I just think those historic calculations and what was a 0:17:04.720 --> 0:17:08.920 simple economy, cyclical goods oriented economy, or do just don't 0:17:08.960 --> 0:17:09.640 hold anymore? 0:17:10.359 --> 0:17:12.960 I want to ask you about that, broadly speaking, and 0:17:13.240 --> 0:17:15.800 about what we've seen so far in twenty twenty three, 0:17:15.880 --> 0:17:19.399 because everything has gone basically not in any way that 0:17:19.440 --> 0:17:23.600 anybody predicted. Like the stuff that's up is stuff that 0:17:23.720 --> 0:17:26.639 nobody thought would be up this year. What is it 0:17:26.720 --> 0:17:30.640 about this year that's been so difficult to make sense of? 0:17:30.920 --> 0:17:34.040 Or is it just the reality of the post pandemic 0:17:34.080 --> 0:17:37.000 world where people are just having a more difficult time 0:17:37.480 --> 0:17:38.960 making some of these forecasts. 0:17:39.440 --> 0:17:41.080 I mean, I'll go back to the first point on AI. 0:17:42.359 --> 0:17:45.200 I mean seven stocks drive in the market. I mean, 0:17:45.200 --> 0:17:47.480 if you take you eliminate those seven stocks of the 0:17:47.480 --> 0:17:49.200 equity market and you look at it and saying, it 0:17:49.280 --> 0:17:51.480 doesn't seem like a market's not up that much, it 0:17:51.480 --> 0:17:54.520 doesn't seem that aberrational. And there by the way, there 0:17:54.520 --> 0:17:56.680 are a lot of equities now they traded three, four 0:17:56.760 --> 0:17:59.480 or five multiple of cash flow that are pretty reasonable. 0:18:00.119 --> 0:18:03.080 So that is, but I think the advent of AI 0:18:03.200 --> 0:18:06.639 coming in and the true explosive opportunity set on that 0:18:07.080 --> 0:18:09.879 has certainly impacted a number of equities on the backside 0:18:09.880 --> 0:18:12.400 of it. I think that has been a surprising dynamic. 0:18:12.480 --> 0:18:16.640 Second being, you know, nobody in this generation has ever 0:18:16.720 --> 0:18:21.399 seen inflation stay as high for as long as it 0:18:21.440 --> 0:18:24.240 had and continue to surprise to the upside. And that 0:18:24.280 --> 0:18:26.800 has been you know, has put the central banks. You know, 0:18:26.840 --> 0:18:30.760 we've had these false starts of inflation, particularly in places 0:18:30.800 --> 0:18:34.000 like the UK, that it feels like it's coming down 0:18:34.040 --> 0:18:36.200 and then all of a sudden it is not, and 0:18:36.200 --> 0:18:38.240 it is not. So I think I think those have 0:18:38.280 --> 0:18:39.920 been the things that have been the most surprising. I 0:18:39.960 --> 0:18:42.000 would say one thing I've learned over the years of investing, 0:18:42.119 --> 0:18:46.040 too is the markets do what hurts the most people, 0:18:46.640 --> 0:18:49.639 and the technicals. So I just give a presentation the 0:18:49.680 --> 0:18:52.000 other day about, you know, some of the things I've 0:18:52.040 --> 0:18:54.520 learned over the years and investing, which I feel like 0:18:54.560 --> 0:18:56.600 I'm still learning more than I did when I first started. 0:18:56.680 --> 0:18:58.119 But you know, one of them is the technicals are 0:18:58.119 --> 0:19:01.800 more important than the fundamentals, and fundamentals win out over 0:19:01.880 --> 0:19:04.480 long periods of time. The technicals went out much more 0:19:04.520 --> 0:19:07.359 so in the short term. And you realize what happened 0:19:07.359 --> 0:19:09.040 at the beginning of this year is people got out 0:19:09.040 --> 0:19:12.399 of equities and had reduced some of it, you know, 0:19:12.400 --> 0:19:14.399 for obviously the pressure that was on it. All of 0:19:14.400 --> 0:19:16.600 a sudden you have this, you know, people need to 0:19:16.600 --> 0:19:18.600