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Speaker 1: Let's get to our guest, James Abante, managing director and

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Speaker 1: chief investment officer at Center Asset Management. So James. In

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Speaker 1: our stocks wrap, we reminded listeners at the last CPI report,

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Speaker 1: which was soft ushered in a five and a half

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Speaker 1: percent rally in the SNP five and then JP Morgan

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Speaker 1: came out and said that it could see a ten

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Speaker 1: percent rally in the best case scenario. I assume you'll scoff,

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Speaker 1: but I always love hearing you scoff. Was the smart

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Speaker 1: move loading up today? Well, I don't know. I mean,

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Speaker 1: the forecast for CPI a year over year is supposed

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Speaker 1: to come in at seven point. It's clearly that we're

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Speaker 1: on the descent in terms of inflation. The real question, however,

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Speaker 1: is the stickiness and whether or not we're ever going

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Speaker 1: to return to the nirvana of the two percent inflation

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Speaker 1: that the Fed has kind of, you know, felt that

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Speaker 1: is it's target. I don't think that's where we're going.

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Speaker 1: I think we're going to be a bit sticky. I

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Speaker 1: see inflation falling, but let's not forget even in the

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Speaker 1: nineteen seventies, after we had kind of peak inflation of

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Speaker 1: twelve in seventy three seventy four. You know, in the

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Speaker 1: whole whip inflation. Now under President Ford, you know, inflation

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Speaker 1: did fault around five percent and seventy six seven percent

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Speaker 1: in ninety seven. The real question is whether or not,

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Speaker 1: you know, we're able to replace this um inflationary environment

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Speaker 1: or stagflationary environment with some kind of new evident locomotive

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Speaker 1: of recovery or strength. And that's really the key issue.

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Speaker 1: We're stuck in an environment where, you know, unless there's

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Speaker 1: a change in the productivity and inflation landscape quickly, um,

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Speaker 1: you know, the business cycle and the market cycle is

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Speaker 1: going to be you know, sideways at best. But James

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Speaker 1: used you do with stag inflation. And we have a

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Speaker 1: healthy jobs market, So why did you use that term?

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Speaker 1: Are you seeing something that others are not? Well, we

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Speaker 1: have a good jobs market. But when you look at

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Speaker 1: you know, the real issue and the only way to

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Speaker 1: pull out of this continuing kind of down trend that

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Speaker 1: we're in, to get a genuine soft landing is to

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Speaker 1: increase the supply of essentials you know, energy, agricultural products,

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Speaker 1: you know, some kind of innovation that changes the productivity

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Speaker 1: an inflation landscape quickly. I mean, all that seems to

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Speaker 1: be very unlikely, you know, as the investment cycle for

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Speaker 1: these types of investments is multi year. Again, there's no

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Speaker 1: real evident locomotive of recovery or strength. So I continue

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Speaker 1: to think that we're in this prolonged stagflation light environment

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Speaker 1: and that has implications in terms of the market and

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Speaker 1: the overall economy as well as FED policy. There are

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Speaker 1: some interesting changes. Older people are are not coming back

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Speaker 1: into the workforce, so for some reason that a labor

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Speaker 1: participation is is still too low or lower than expected. Uh.

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Speaker 1: And I'm just wonder whether or not you you have

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Speaker 1: some ideas about why the productivity being low that you

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Speaker 1: mentioned is the case. You know, it's uh. I don't

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Speaker 1: want to be a facetious but I mean, you know,

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Speaker 1: maybe we can open up some more marijuana dispensaries and

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Speaker 1: you know, have some more commercials about online gambling to

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Speaker 1: cure this, or maybe a new application from TikTok. I mean,

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Speaker 1: the reality is something is wrong or broken in the workplace,

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Speaker 1: and even when we talk about on shoring these things,

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Speaker 1: they're not coming back to the United States. Even Apple

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Speaker 1: is moving its major production capacity from China to India,

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Speaker 1: not to the United States. So you know, something still

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Speaker 1: seems to be fundamentally broken when nearly a hundred million

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Speaker 1: Americans who should be in the workforce or not. Yeah,

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Speaker 1: this is a perplexing problematically, which is also being found

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Speaker 1: in parts of Europe too. But I want to get

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Speaker 1: a sense here of how that plays into your investment

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Speaker 1: narrative and what you're looking at now, James, Given you

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Speaker 1: know we are almost I think it's a sort of

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Speaker 1: inflection point. Yeah, I think you're absolutely right. Rish. I

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Speaker 1: think if we look at where we are right now,

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Speaker 1: you know, we're an environment where you know, most make

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Speaker 1: a cap technology and communications stocks remain overvalued. I think

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Speaker 1: there's a potential to repeat the late nineties seventies from

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Speaker 1: a market perspective. Now, that's not all bad. I mean,

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Speaker 1: remember small caps did very well in those years on

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Speaker 1: a relative basis. It's kind of the nifty fifty imploded.

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Speaker 1: And even large cap fund managers who tilted their portfolio

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Speaker 1: waitings to be more equal weighted rather than market capitalization weighted.

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Speaker 1: How a factor element that was a tailwind to help

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Speaker 1: them outperform. And I think lastly, if you think about

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Speaker 1: emerging markets, they're gonna be very dependent on the US dollar,

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Speaker 1: which you know, everybody seems to want to you know,

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Speaker 1: sell until they realize they have to buy another worst

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Speaker 1: off countries currency at this point in time. So from

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Speaker 1: that perspective, I think we're in an environment where the

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Speaker 1: major industry, the S and P five hundred, continue to struggle,

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Speaker 1: but I think you're gonna start to see opportunities in

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Speaker 1: mid sized companies, smaller cap companies in the industrial space,

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Speaker 1: and continue to like those areas that can be beneficiaries

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Speaker 1: of kind of a idiosyncratic or stock specific type of risk.

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Speaker 1: In your answer to our first question that you talked

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Speaker 1: about how you thought inflation would be sticky and it

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Speaker 1: may come down a little, but that it will stay high,

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Speaker 1: and that seems to suggest that the Fed will have

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Speaker 1: to stay aggressive, and in fact, Jerome Powell has talked

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Speaker 1: about that about staying higher for longer. Do you think

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Speaker 1: that that means recession then and they have to choose

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Speaker 1: between the two. And if we do get recession, then

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Speaker 1: the the lineup of companies you just talked about may

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Speaker 1: not do so well. It's fair because I think that

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Speaker 1: the normal recession is that we're gonna, you know, have

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Speaker 1: a thirty percent declient and earnings. And I'm of the

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Speaker 1: belief now when you look at where we are, that

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Speaker 1: the recession that we're in or you know, entering is

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Speaker 1: very much akin to you know, what happened with the

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Speaker 1: paper wealth loss that followed the dot com bust in

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Speaker 1: two thousand one, two thousand and two. Um. You know,

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Speaker 1: from that perspective, you know, we're interest you know, a

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Speaker 1: relatively mild and comparatively short duration type of recession due

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Speaker 1: to the fact that the heavy capital spending in the

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Speaker 1: inventory spending that predated the two thousand eight recession is

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Speaker 1: not evident today. That's what people are looking at right now.

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Speaker 1: In essence, what I mean by that there's a lot

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Speaker 1: of capital investment over the last ten years was an

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Speaker 1: intangible assets and the associated wealth just simply has evaporated.

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Speaker 1: And we've seen to at FTX and other things. But

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Speaker 1: that doesn't seem to have the same overhang right in

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Speaker 1: except in the terms of wealth effect. Um. But it

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Speaker 1: won't be as disinflationary as most people expect because of

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Speaker 1: the lack of fixed equipment overhang. So I think the

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Speaker 1: FED is going to end up where the one year

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Speaker 1: note is, which is basically around four and three quarters

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Speaker 1: percent and it's probably gonna stay there. So the expectation

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Speaker 1: that the FED is going to rapidly somehow pivot from

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Speaker 1: tightening policy to lowering interest rates in two thousand and

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Speaker 1: twenty three, I think is where the consensus gets it wrong. James,

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Speaker 1: it was interested you said in the first part of

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Speaker 1: your answer that about this. Is it because that or

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Speaker 1: that you know, cheap money was used perhaps you know,

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Speaker 1: and not used to as much investment as it should

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Speaker 1: mean that that's why it's led to this situation that

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Speaker 1: we're in. And I think one thing which highlights that

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Speaker 1: was this is sheer number of share buybacks we've had

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Speaker 1: in recent years. Oh, that's absolutely right. I mean, that's

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Speaker 1: where we've had, you know, this proportion of capital being

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Speaker 1: spent on share repurchases, a lot of that just to

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Speaker 1: you know, enrich the C suite at the expense of

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Speaker 1: shareholders rather than in R and D UM equipment purchases

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Speaker 1: and things on those lines. In fact, you know, if

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Speaker 1: you look at even just the proportionality of capital spending

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Speaker 1: across the S and P, the amount that went into

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Speaker 1: quote unquote intangibles, which is R and D developed UM

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Speaker 1: you know, outweighed the amount that was in fixed hard assets.

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Speaker 1: I think the difference between now and like the dot

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Speaker 1: com bubble is technically you know, go ahead, No, that's it.

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Speaker 1: We don't have time, James. Unfortunately, thank you. James Abati

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Speaker 1: with us from Center Asset Management. This is Bloomberg