1 00:00:05,120 --> 00:00:09,200 Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 2 00:00:09,240 --> 00:00:13,200 Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jailey. We bring you 3 00:00:13,320 --> 00:00:18,600 Speaker 1: insight from the best and economics, finance, investment, and international relations. 4 00:00:18,960 --> 00:00:23,840 Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot com, 5 00:00:23,920 --> 00:00:30,760 Speaker 1: and of course on the Bloomberg Terminal. John gets out 6 00:00:30,800 --> 00:00:32,800 Speaker 1: front of the toughest thing, which is a get beyond 7 00:00:32,880 --> 00:00:35,240 Speaker 1: what's going to happen the first week August or Jobs 8 00:00:35,280 --> 00:00:38,760 Speaker 1: Day on Friday. Somebody who's expert at that is Howard 9 00:00:38,800 --> 00:00:42,640 Speaker 1: Ward trying to get out beyond the next quarter with 10 00:00:42,800 --> 00:00:47,000 Speaker 1: Gabelly Funds, and certainly I can say legendary in growthiness, Howard. 11 00:00:47,080 --> 00:00:49,839 Speaker 1: Let's look at the debris right now, twelve months trailing. 12 00:00:50,200 --> 00:00:53,600 Speaker 1: A sophisticate like Howard Ward knows that's t MT and 13 00:00:53,640 --> 00:00:56,400 Speaker 1: the answer is the twelve month trailing numbers are a 14 00:00:56,480 --> 00:01:01,440 Speaker 1: ginormous bullmarket up or So, how do you get out 15 00:01:01,480 --> 00:01:05,920 Speaker 1: to your measurement of growthiness, Howard in two thousand twenty 16 00:01:06,000 --> 00:01:10,200 Speaker 1: three out two years? Well, Tom uh first of all, 17 00:01:10,319 --> 00:01:14,399 Speaker 1: let me just say that the stimulus combined with the 18 00:01:14,480 --> 00:01:17,399 Speaker 1: vaccination to the extent that it's been used and unfortunately 19 00:01:17,400 --> 00:01:21,640 Speaker 1: hasn't been used enough yet have really combined to give 20 00:01:21,760 --> 00:01:25,759 Speaker 1: us a very strong recovery. The GDP growth this year 21 00:01:26,240 --> 00:01:29,319 Speaker 1: could be seven or eight percent. We haven't seen growth 22 00:01:29,360 --> 00:01:32,679 Speaker 1: of that magnitude since nineteen fifty one when Harry Truman 23 00:01:32,760 --> 00:01:38,559 Speaker 1: was president. Earnings expectations UH, which were high two months 24 00:01:38,600 --> 00:01:41,880 Speaker 1: ago when I was last on your show, people were 25 00:01:41,920 --> 00:01:44,880 Speaker 1: expecting earnings of about a D eighty two dollars on 26 00:01:44,920 --> 00:01:47,840 Speaker 1: the SMP this year. That numbers now about a hundred 27 00:01:47,920 --> 00:01:50,960 Speaker 1: nine three dollars, and based on the numbers that were 28 00:01:51,000 --> 00:01:53,040 Speaker 1: reported for Q one and Q two, I think that 29 00:01:53,160 --> 00:01:56,480 Speaker 1: number is still too low. It's probably too of at 30 00:01:56,520 --> 00:02:02,760 Speaker 1: least ten percent um, which means that the three uh 31 00:02:02,760 --> 00:02:07,600 Speaker 1: excuse me, the expectation right now is too low. That's 32 00:02:07,600 --> 00:02:11,840 Speaker 1: it around around two d and twelve dollars. So we 33 00:02:11,960 --> 00:02:16,920 Speaker 1: have continually UH several years of continued good, good earnings 34 00:02:16,919 --> 00:02:20,880 Speaker 1: growth ahead of us, I believe. And so it is this. 35 00:02:21,120 --> 00:02:24,040 Speaker 1: You know, in real estate they say location, location, location, 36 00:02:24,480 --> 00:02:26,680 Speaker 1: and with stocks, I would say earnings, earnings and earnings, 37 00:02:26,680 --> 00:02:29,560 Speaker 1: and the earnings outlook is rarely brighter. How this is 38 00:02:29,560 --> 00:02:31,680 Speaker 1: so important? And John brought it up the idea of 39 00:02:31,680 --> 00:02:36,799 Speaker 1: the NASAC out performing. You provided worldwide leadership on rationalizing 40 00:02:36,840 --> 00:02:41,120 Speaker 1: these nast deck stocks out further state the case now 41 00:02:41,200 --> 00:02:46,480 Speaker 1: for owning those glorified revenue builders out two years, five years, 42 00:02:46,760 --> 00:02:51,440 Speaker 1: ten years. So so tom Um, what's happened since I 43 00:02:51,480 --> 00:02:54,920 Speaker 1: was on two months ago is inflation expectations, while while 44 00:02:54,919 --> 00:02:58,680 Speaker 1: they're higher than we would like because of the delta 45 00:02:58,760 --> 00:03:02,440 Speaker 1: variant being introduced to the extent it has uh, interest 46 00:03:02,480 --> 00:03:05,160 Speaker 1: rates have gone down, but at the same time, as 47 00:03:05,160 --> 00:03:08,840 Speaker 1: I just mentioned, earning estimates have gone up. And when 48 00:03:08,919 --> 00:03:10,800 Speaker 1: you look at the economic growth as strong as it 49 00:03:10,880 --> 00:03:13,920 Speaker 1: is this year seven or eight percent GDP, it's probably 50 00:03:13,960 --> 00:03:16,720 Speaker 1: more like four percent next year. We're already in an 51 00:03:16,760 --> 00:03:19,200 Speaker 1: economy that has seen PEAT growth on a quarter to 52 00:03:19,280 --> 00:03:23,040 Speaker 1: quarter basis and will be is beginning to slow. Slowing 53 00:03:23,080 --> 00:03:27,280 Speaker 1: growth is generally a good environment for growth stocks, and 54 00:03:27,320 --> 00:03:30,520 Speaker 1: when you get beyond next year, we're probably going back 55 00:03:30,560 --> 00:03:32,840 Speaker 1: to GDP growth that has a handle on it of 56 00:03:32,880 --> 00:03:37,600 Speaker 1: about two simply constrained by the limits of the increase 57 00:03:37,640 --> 00:03:42,000 Speaker 1: in the labor supply and productivity growth. So slow growth, 58 00:03:42,320 --> 00:03:45,040 Speaker 1: whether it's slowing or slow, these are good environments for 59 00:03:45,080 --> 00:03:48,280 Speaker 1: growth stocks. So the present value of those future earnings 60 00:03:48,280 --> 00:03:50,600 Speaker 1: remains hot. There's a question also about whether they're a 61 00:03:50,600 --> 00:03:53,480 Speaker 1: mono left right. We always talk about the fang stocks 62 00:03:53,480 --> 00:03:55,680 Speaker 1: as one entity, and yet we've seen a lot of 63 00:03:55,680 --> 00:03:58,680 Speaker 1: divergence within the recent earnings and the outlooks. For example, 64 00:03:58,720 --> 00:04:02,000 Speaker 1: the likes of Alphabet Whogl's parent companies seeing ad revenue 65 00:04:02,000 --> 00:04:05,040 Speaker 1: really picking up, whereas the likes of Amazon seeing a 66 00:04:05,080 --> 00:04:08,320 Speaker 1: lower sales estimate. How much do you expect this bifurcation 67 00:04:08,360 --> 00:04:10,760 Speaker 1: to continue of the halves and the have nots within 68 00:04:10,800 --> 00:04:13,400 Speaker 1: the growth world. Well, you know, it's a little bit 69 00:04:13,440 --> 00:04:15,520 Speaker 1: tricky right now when we look at the numbers, because 70 00:04:15,560 --> 00:04:21,640 Speaker 1: you have uh companies like Amazon that are growing free 71 00:04:21,640 --> 00:04:24,080 Speaker 1: cash flow like few other companies. In fact, the fang 72 00:04:24,120 --> 00:04:27,760 Speaker 1: stocks in general are among the greatest free cash flow 73 00:04:27,800 --> 00:04:31,520 Speaker 1: generators of all and the market in the last two 74 00:04:31,520 --> 00:04:35,520 Speaker 1: months in particular, as rates have moderated, has been rewarding 75 00:04:35,600 --> 00:04:38,400 Speaker 1: free cash flow more than anything else. In the first quarter, 76 00:04:38,400 --> 00:04:42,920 Speaker 1: it was really rewarding earnings estimate revisions, positive revisions. Last year, 77 00:04:42,920 --> 00:04:45,680 Speaker 1: it was sales growth. Right now it's free cash flow growth. 78 00:04:45,920 --> 00:04:48,680 Speaker 1: And so so many of these growth stocks, and all 79 00:04:48,720 --> 00:04:51,600 Speaker 1: of the fang stocks, including Netflix, although they were free 80 00:04:51,600 --> 00:04:53,880 Speaker 1: cash flow last year, probably not this year, but they 81 00:04:53,880 --> 00:04:56,479 Speaker 1: will get on a permanent or trajectory of free cash 82 00:04:56,520 --> 00:05:01,279 Speaker 1: flow growth next year. Uh. These are wonderful places to go. 83 00:05:01,360 --> 00:05:03,919 Speaker 1: And in the case of Amazon in particular, bear in 84 00:05:03,920 --> 00:05:07,880 Speaker 1: mind the company is up against monster comparisons. And Amazon 85 00:05:08,040 --> 00:05:12,280 Speaker 1: has become Amazon because of Jeff bezos willingness to sacrifice 86 00:05:12,320 --> 00:05:15,200 Speaker 1: short term profit for long term geed. He's become the 87 00:05:15,279 --> 00:05:19,440 Speaker 1: richest person in the world following following that strategy. And 88 00:05:19,560 --> 00:05:21,599 Speaker 1: in the case of Amazon, they have investment cycles. They 89 00:05:21,680 --> 00:05:24,839 Speaker 1: keep investing to give the consumer a better experience, and 90 00:05:24,880 --> 00:05:28,200 Speaker 1: that has been a successful formula and it is continuing 91 00:05:28,240 --> 00:05:31,680 Speaker 1: to show the way for Amazon's future growth. They remain 92 00:05:31,720 --> 00:05:33,960 Speaker 1: the leader in e commerce, they remain the leader in 93 00:05:34,000 --> 00:05:36,960 Speaker 1: web services, and they have a rapidly growing digital ad 94 00:05:37,000 --> 00:05:38,840 Speaker 1: business which puts them up there in the you know, 95 00:05:39,320 --> 00:05:43,320 Speaker 1: as number three behind Google and Facebook. So so free 96 00:05:43,320 --> 00:05:46,160 Speaker 1: cash flow growth right now is the primary mantra. And 97 00:05:46,200 --> 00:05:48,080 Speaker 1: I think really all the Thanks Dots and so many 98 00:05:48,080 --> 00:05:52,400 Speaker 1: other these software and even semiconductor type companies are generating this, 99 00:05:52,720 --> 00:05:55,240 Speaker 1: and this is what really gets us excited. I gotta say, 100 00:05:55,279 --> 00:05:57,479 Speaker 1: tom as I hear Howard talk, I think about the 101 00:05:57,600 --> 00:06:00,720 Speaker 1: case for growth, the case for buying stocks look expensive 102 00:06:00,760 --> 00:06:03,640 Speaker 1: for people who say are in too intall cash who 103 00:06:03,880 --> 00:06:06,240 Speaker 1: might not have been in this. You know, that's been 104 00:06:06,279 --> 00:06:08,560 Speaker 1: the howard Ward mantra for years and goes to Mario 105 00:06:08,600 --> 00:06:13,040 Speaker 1: Gabelly and Howard Wards saying that growth is the new value. 106 00:06:13,320 --> 00:06:16,320 Speaker 1: What's the value trap right now? Howard Ward outter that 107 00:06:16,400 --> 00:06:20,760 Speaker 1: two thousand three, what's the trap? You see? Well, you know, 108 00:06:21,440 --> 00:06:24,400 Speaker 1: you know, I think that the market got very excited 109 00:06:24,560 --> 00:06:28,440 Speaker 1: about the potential for cyclical earnings growth UM. And I'm 110 00:06:28,480 --> 00:06:31,960 Speaker 1: not saying that that that has gone away. Uh, it's 111 00:06:32,000 --> 00:06:35,560 Speaker 1: simply that. And so you had stocks like Caterpillar, for example, 112 00:06:35,800 --> 00:06:39,840 Speaker 1: which should be an obvious beneficiary of the pending infrastructure 113 00:06:40,240 --> 00:06:44,440 Speaker 1: package UM and also benefiting from the reopening trade and 114 00:06:44,640 --> 00:06:49,159 Speaker 1: and booming housing markets and construction. But yet the market 115 00:06:49,160 --> 00:06:51,120 Speaker 1: had discounted that. And in fact, it's a good point 116 00:06:51,160 --> 00:06:53,760 Speaker 1: to mention that, as we saw with this most recent 117 00:06:54,000 --> 00:06:57,599 Speaker 1: batch of earnings, UH, whether it's Amazon or some of 118 00:06:57,640 --> 00:07:01,400 Speaker 1: the others, the market has discounted efficant earnings growth. But 119 00:07:01,480 --> 00:07:05,600 Speaker 1: my my perspective is it's still not where it should be. 120 00:07:05,640 --> 00:07:09,280 Speaker 1: The earnings expectations are still too low for the market overall. 121 00:07:09,880 --> 00:07:11,800 Speaker 1: But when you look at some of the cyclical names, 122 00:07:11,800 --> 00:07:15,080 Speaker 1: particularly now with COVID striking us again, some of that 123 00:07:15,160 --> 00:07:18,320 Speaker 1: cyclical fervor is going to going to come down, and 124 00:07:18,360 --> 00:07:22,160 Speaker 1: some of that reopening trade in hospitality might be put 125 00:07:22,200 --> 00:07:24,120 Speaker 1: on hold. And so I'd be very careful with a 126 00:07:24,160 --> 00:07:28,600 Speaker 1: number of those stocks, whether they're transportation or or or 127 00:07:28,760 --> 00:07:30,960 Speaker 1: or hotel restaurants. I think you have to be very 128 00:07:30,960 --> 00:07:33,960 Speaker 1: careful there, because well, I don't think we're going back 129 00:07:34,000 --> 00:07:36,640 Speaker 1: to a base case of any kind of a countrywide lockdown. 130 00:07:36,800 --> 00:07:40,400 Speaker 1: Lockdown on a regional basis, on a state by state basis, 131 00:07:41,160 --> 00:07:44,320 Speaker 1: that's not so certain. And this is a problem, and 132 00:07:44,320 --> 00:07:48,120 Speaker 1: the risk has risen because of the failure of more 133 00:07:48,120 --> 00:07:50,520 Speaker 1: people to vaccinate. And I have to say that the 134 00:07:50,600 --> 00:07:55,000 Speaker 1: TV personalities and politicians that have discouraged the vaccine and 135 00:07:55,040 --> 00:07:58,360 Speaker 1: are continuing to discourage max mask wearing are doing a 136 00:07:58,360 --> 00:08:02,280 Speaker 1: real disservice to this country and it's costing us illness 137 00:08:02,360 --> 00:08:04,600 Speaker 1: and lives, and those people need to be held accountable. 138 00:08:04,720 --> 00:08:07,200 Speaker 1: How would Ward of Cabelly Funds, Howard, thank you, sir 139 00:08:07,440 --> 00:08:15,720 Speaker 1: as always gonna catch up a number of summers ago. 140 00:08:16,000 --> 00:08:19,440 Speaker 1: My book of the summer was Elizabeth Economy of President 141 00:08:19,480 --> 00:08:22,560 Speaker 1: gy and she called it the Third Revolution. It was 142 00:08:22,600 --> 00:08:25,960 Speaker 1: cover to cover, read every word. Someone expert on the 143 00:08:25,960 --> 00:08:30,440 Speaker 1: granularity of Liz economies China is Leland Miller with China 144 00:08:30,520 --> 00:08:33,520 Speaker 1: Beije book. He is definitive on the cadence and the 145 00:08:33,559 --> 00:08:36,880 Speaker 1: pulse of domestic China. Leland Miller, what's it looked like 146 00:08:37,080 --> 00:08:39,959 Speaker 1: right now? How does domestic China react to what they 147 00:08:39,960 --> 00:08:44,240 Speaker 1: see from Beijing. Well, you've got a lot of factors 148 00:08:44,240 --> 00:08:46,760 Speaker 1: that are pushing things in both directions. You've obviously got 149 00:08:46,800 --> 00:08:50,320 Speaker 1: these nasty crackdowns and tech and the education sector that's 150 00:08:50,360 --> 00:08:52,760 Speaker 1: hitting the stock market, which is looking sort of nasty. 151 00:08:53,320 --> 00:08:55,840 Speaker 1: You've got spread of delta variant, which is which is 152 00:08:55,840 --> 00:08:58,560 Speaker 1: creating uncertainty for the future. At the same time, you know, 153 00:08:58,679 --> 00:09:00,440 Speaker 1: some of the numbers that we're looking at are not 154 00:09:00,520 --> 00:09:04,080 Speaker 1: as bad as everyone sperit. Yet a recent are Our 155 00:09:04,160 --> 00:09:06,480 Speaker 1: cut and that made people think, well, well, China must 156 00:09:06,480 --> 00:09:09,200 Speaker 1: be doing really poorly if they're looking to stimulate the economy. Well, 157 00:09:09,400 --> 00:09:12,559 Speaker 1: I think manufacturing is doing okay. Services actually doing a 158 00:09:12,559 --> 00:09:15,439 Speaker 1: little bit better. So so we're not as negative on 159 00:09:15,440 --> 00:09:18,040 Speaker 1: on the actual underlying economy, even though you have these 160 00:09:18,080 --> 00:09:21,800 Speaker 1: awful headlines just coming from every direction. Okay, great, what 161 00:09:21,880 --> 00:09:24,559 Speaker 1: do you do if you're advising Tim Cook of Apple? 162 00:09:24,640 --> 00:09:29,160 Speaker 1: What is the Leland Miller perspective for big American companies 163 00:09:29,360 --> 00:09:35,280 Speaker 1: who have this this codependency almost with Beijing. Well, you know, 164 00:09:36,080 --> 00:09:39,880 Speaker 1: Apple is almost unique in that it figured out a 165 00:09:39,920 --> 00:09:41,800 Speaker 1: bunch of years ago that it needed to have a 166 00:09:41,840 --> 00:09:45,040 Speaker 1: contingency plan. But its needs and its production China is 167 00:09:45,040 --> 00:09:48,319 Speaker 1: so big that it can't really just move things. So 168 00:09:48,640 --> 00:09:50,880 Speaker 1: I think what Apple is doing is what they can 169 00:09:50,920 --> 00:09:53,680 Speaker 1: in terms of trying to create other markets where they 170 00:09:53,679 --> 00:09:55,920 Speaker 1: can where they can produce too, so they don't have 171 00:09:55,960 --> 00:09:58,560 Speaker 1: so much of an emphasis and reliance on China. But 172 00:09:58,640 --> 00:10:01,640 Speaker 1: they produce so much you can't just move everything to 173 00:10:01,720 --> 00:10:05,000 Speaker 1: India or to Vietnam or somewhere else in Southeast Asia. 174 00:10:05,280 --> 00:10:07,040 Speaker 1: So so they're doing the best they can. But but 175 00:10:07,080 --> 00:10:09,600 Speaker 1: if you're not Apple, and you know, you should be 176 00:10:09,880 --> 00:10:12,480 Speaker 1: way down the road in terms of contingency planning just 177 00:10:12,600 --> 00:10:16,160 Speaker 1: so you don't have over reliance on on China for 178 00:10:16,040 --> 00:10:18,880 Speaker 1: the market, for the production, just because of all the 179 00:10:18,880 --> 00:10:21,160 Speaker 1: different things are going on, from the virus to trade wars, 180 00:10:21,160 --> 00:10:23,760 Speaker 1: to geopolitical tensions. Okay, so we've been talking about the 181 00:10:23,760 --> 00:10:27,079 Speaker 1: fundamentals and the potential slowing down of the economy. The 182 00:10:27,120 --> 00:10:29,800 Speaker 1: data seeming to confirm that that we got out overnight. 183 00:10:29,840 --> 00:10:32,120 Speaker 1: The question is how much does this matter and how 184 00:10:32,200 --> 00:10:34,760 Speaker 1: much is the focus squarely on the regulatory regime. The 185 00:10:34,800 --> 00:10:37,199 Speaker 1: fact that there does seem to be a shift by 186 00:10:37,200 --> 00:10:41,600 Speaker 1: President jin Ping, there's definitely a shift. The question is 187 00:10:41,600 --> 00:10:44,960 Speaker 1: is this step one of twelve steps where they keep 188 00:10:45,080 --> 00:10:48,400 Speaker 1: ramping up crackdowns between now and the Party Congress, which 189 00:10:48,400 --> 00:10:50,800 Speaker 1: is a little over year year from now, or is 190 00:10:50,840 --> 00:10:54,199 Speaker 1: this uh their attempt to try to fix problems during 191 00:10:54,280 --> 00:10:57,920 Speaker 1: what is basically a little bit of hiatus from disaster disasters. 192 00:10:57,920 --> 00:11:01,440 Speaker 1: Headlines they recovered from COVID faster than others. Uh, there's 193 00:11:01,440 --> 00:11:03,719 Speaker 1: a little bit of a global recovery going on right now. 194 00:11:03,800 --> 00:11:07,840 Speaker 1: So so to some extent, this may be Beijing seeing 195 00:11:07,880 --> 00:11:09,679 Speaker 1: a window to try to do some of these things 196 00:11:09,720 --> 00:11:12,200 Speaker 1: that they pushed off for a long time. It's more 197 00:11:12,320 --> 00:11:15,080 Speaker 1: likely that this is the first of many steps. Uh. 198 00:11:15,360 --> 00:11:17,400 Speaker 1: So then I think you're gonna have to to watch 199 00:11:18,360 --> 00:11:20,760 Speaker 1: not just the regulatory crackdown because that affects stocks, but 200 00:11:20,760 --> 00:11:24,559 Speaker 1: but whether this spills over into pessimism on the economy 201 00:11:24,600 --> 00:11:27,200 Speaker 1: at large. Right now, we're not seeing that yet, but 202 00:11:27,280 --> 00:11:29,000 Speaker 1: that's something to watch for the second half of the year. 203 00:11:29,040 --> 00:11:31,760 Speaker 1: What are potential regulatory measures that you expect the PBOC 204 00:11:31,920 --> 00:11:35,760 Speaker 1: to consider, they expect j Pink potentially signal and upcoming speeches. 205 00:11:37,040 --> 00:11:38,880 Speaker 1: I think the most important thing over the next year 206 00:11:38,920 --> 00:11:43,400 Speaker 1: will be signaling a continued pull away from a reliance 207 00:11:43,800 --> 00:11:46,280 Speaker 1: on the United States or the West. Uh. You know, 208 00:11:46,320 --> 00:11:48,240 Speaker 1: the law of the headlines the past couple of years 209 00:11:48,280 --> 00:11:51,000 Speaker 1: have been how the US is threatening to kick China 210 00:11:51,040 --> 00:11:55,080 Speaker 1: off its stock markets and and and decoupling through you know, 211 00:11:55,200 --> 00:11:59,360 Speaker 1: chip chips and other aspects of the technological relationship. What's 212 00:11:59,440 --> 00:12:02,480 Speaker 1: Jumping really has to signal from a political standpoint is 213 00:12:02,520 --> 00:12:04,920 Speaker 1: that China can go its own way. Now that's not 214 00:12:05,040 --> 00:12:07,480 Speaker 1: completely true, and in some things like chips, it's not 215 00:12:07,520 --> 00:12:09,800 Speaker 1: true at all, But that's the signal that he has 216 00:12:09,840 --> 00:12:12,400 Speaker 1: to be sending. Uh, China can do its own way 217 00:12:12,480 --> 00:12:15,520 Speaker 1: as they enter a very politically sensitive year next year, Leland, 218 00:12:15,559 --> 00:12:17,400 Speaker 1: I'm trying to understand what's happening on the ground in 219 00:12:17,400 --> 00:12:19,120 Speaker 1: the country at the moment, and I'm not getting a 220 00:12:19,160 --> 00:12:23,240 Speaker 1: ton of information Nanjing and the spread of the downta 221 00:12:23,320 --> 00:12:26,360 Speaker 1: variant supposedly from the airport there and the restrictions with 222 00:12:26,400 --> 00:12:27,880 Speaker 1: standing to see what are you seeing on the ground, 223 00:12:27,880 --> 00:12:30,680 Speaker 1: what are you hearing? But we actually attract us now, 224 00:12:30,760 --> 00:12:32,920 Speaker 1: so we have a China beged book COVID tracker, and 225 00:12:32,960 --> 00:12:35,000 Speaker 1: what we do is we asked our corporate networks whether 226 00:12:35,040 --> 00:12:37,720 Speaker 1: they're seeing a spike amongst their workforce, either in a 227 00:12:37,720 --> 00:12:41,079 Speaker 1: particular city or nationally. Uh. We saw the spike in 228 00:12:41,160 --> 00:12:44,840 Speaker 1: Guangdong two weeks before it was announced, affecting the ports 229 00:12:44,840 --> 00:12:47,120 Speaker 1: and the shutdowns. Uh, you know, and we saw something 230 00:12:47,160 --> 00:12:49,440 Speaker 1: a couple of weeks ago showing that that that the 231 00:12:49,280 --> 00:12:50,520 Speaker 1: that there looked like there was a bit of an 232 00:12:50,559 --> 00:12:54,440 Speaker 1: outbreak going on. It's hard to know what is a 233 00:12:54,520 --> 00:13:00,160 Speaker 1: mildly serious outbreak and something bigger because Beijing is is 234 00:13:00,240 --> 00:13:03,040 Speaker 1: vary suppressing information on it. It's not good news, so 235 00:13:03,280 --> 00:13:05,600 Speaker 1: they don't like to report it. They're also cracked down. 236 00:13:05,600 --> 00:13:07,880 Speaker 1: They see six cases and they shut things down. So 237 00:13:08,240 --> 00:13:10,720 Speaker 1: really it's it's watching the spikes and our COVID tracker 238 00:13:10,800 --> 00:13:13,520 Speaker 1: to see to see what is what is just sort 239 00:13:13,520 --> 00:13:16,280 Speaker 1: of the role of this thing. So the EBB and 240 00:13:16,320 --> 00:13:18,320 Speaker 1: flow and what looks like it could be a serious 241 00:13:18,360 --> 00:13:21,280 Speaker 1: spike that's gonna affect economic activity. That's the question I 242 00:13:21,280 --> 00:13:23,640 Speaker 1: have Leland the restrictions you're starting to see introduced on 243 00:13:23,679 --> 00:13:26,560 Speaker 1: the ground and cities light managing. Is this a threat 244 00:13:26,840 --> 00:13:30,600 Speaker 1: to economic growth in China for the coming months. Absolutely. 245 00:13:30,640 --> 00:13:33,280 Speaker 1: I mean, we all know how how incredibly contagious the 246 00:13:33,320 --> 00:13:36,200 Speaker 1: delta variant is, and that's what China's dealing with right now. 247 00:13:36,960 --> 00:13:39,160 Speaker 1: They have a vaccine, but it's not really a vaccine. 248 00:13:39,280 --> 00:13:41,839 Speaker 1: It doesn't it doesn't show anywhere near the protection that 249 00:13:41,960 --> 00:13:45,640 Speaker 1: all these other UH vaccines being used United States and 250 00:13:45,679 --> 00:13:49,800 Speaker 1: elsewhere are are. You are are are boasting. So there 251 00:13:49,880 --> 00:13:51,920 Speaker 1: is a real worry about this, and so what you're 252 00:13:51,960 --> 00:13:55,920 Speaker 1: gonna see from China is a continued, very aggressive shutdown 253 00:13:56,200 --> 00:13:59,400 Speaker 1: response every time they see a small outbreak. What does 254 00:13:59,440 --> 00:14:01,880 Speaker 1: that do? If rows off commerce, it throws off the economy, 255 00:14:01,960 --> 00:14:03,640 Speaker 1: and if you see it in enough places, it's gonna 256 00:14:03,760 --> 00:14:07,880 Speaker 1: affect macro economic activity. So we haven't seen that yet, 257 00:14:07,920 --> 00:14:09,880 Speaker 1: but what we're seeing right now with these mini spikes 258 00:14:09,960 --> 00:14:12,400 Speaker 1: is something to watch going into September, because this is 259 00:14:12,520 --> 00:14:15,000 Speaker 1: this is this is something new, This is something new. Yeah, 260 00:14:15,080 --> 00:14:17,760 Speaker 1: especially given the efficacy rights of the particular vaccine that 261 00:14:17,800 --> 00:14:20,000 Speaker 1: was distributed that compared to say, fine some of Madonna 262 00:14:20,320 --> 00:14:21,760 Speaker 1: in much of the West, lean and grant to catch 263 00:14:21,840 --> 00:14:23,440 Speaker 1: up running poll and tell pink lea mill of that, 264 00:14:23,480 --> 00:14:34,280 Speaker 1: Shanna Basbook CEO. Let us return John to May seven 265 00:14:34,840 --> 00:14:38,720 Speaker 1: of two thousand twenty one. The survey was what a 266 00:14:38,840 --> 00:14:42,200 Speaker 1: millionaire this or that? Nine hundred thousand oops, and it 267 00:14:42,320 --> 00:14:45,760 Speaker 1: came in a little lower. Stephen Stanley, like all of us, 268 00:14:45,800 --> 00:14:48,960 Speaker 1: sobered up that day with Amber's pier Pont chief Economists 269 00:14:48,960 --> 00:14:52,560 Speaker 1: and joins us right now, Stephen Stanley, why is this 270 00:14:52,640 --> 00:14:56,440 Speaker 1: time around different than the joy of May seven, two 271 00:14:56,480 --> 00:15:00,120 Speaker 1: thousand twenty one? Right? Well, I think that was the 272 00:15:00,200 --> 00:15:03,400 Speaker 1: day that we realized just how severe the supply side 273 00:15:03,400 --> 00:15:06,239 Speaker 1: constraints were on the labor market. And as an economist, 274 00:15:06,680 --> 00:15:08,960 Speaker 1: you know, I've been trained, the FED economists have been 275 00:15:08,960 --> 00:15:12,360 Speaker 1: trained for decades that when you look at the peril numbers, 276 00:15:12,360 --> 00:15:14,160 Speaker 1: when you look at the unemployment rate, what you're really 277 00:15:14,160 --> 00:15:16,840 Speaker 1: trying to get at is the strength of demand in 278 00:15:16,880 --> 00:15:20,280 Speaker 1: the labor market. And we knew that demand was very strong. 279 00:15:20,360 --> 00:15:22,640 Speaker 1: In the spring. We had seen a big peril number 280 00:15:23,120 --> 00:15:26,120 Speaker 1: uh the month before, and what we've learned in the 281 00:15:26,160 --> 00:15:29,200 Speaker 1: intervening months is that demand is indeed very strong, but 282 00:15:29,280 --> 00:15:33,320 Speaker 1: there there have been some pretty severe supply side constraints. 283 00:15:33,360 --> 00:15:36,280 Speaker 1: People are not flocking back into the labor force in 284 00:15:36,320 --> 00:15:38,960 Speaker 1: the numbers that we had hoped, you know, for the 285 00:15:38,960 --> 00:15:43,120 Speaker 1: reasons that everyone suggested, health concerns, childcare issues, and the 286 00:15:43,160 --> 00:15:47,120 Speaker 1: supplemental unemploment benefits, and the latter two of those should 287 00:15:47,160 --> 00:15:50,360 Speaker 1: be starting to ease now. Um. Obviously remote schooling should 288 00:15:50,360 --> 00:15:51,920 Speaker 1: be less of an issue in the summer than it 289 00:15:52,000 --> 00:15:55,080 Speaker 1: was during the school year, and the supplemental unemployment but 290 00:15:55,120 --> 00:15:58,000 Speaker 1: if it's have expired about half the states, so um, 291 00:15:58,040 --> 00:16:00,560 Speaker 1: I think that's one story that we're likely to see 292 00:16:00,560 --> 00:16:03,760 Speaker 1: in July. The other one, with regard to payrolls is 293 00:16:03,760 --> 00:16:06,360 Speaker 1: is just a seasonal quirk, which is, you know, the 294 00:16:06,360 --> 00:16:10,360 Speaker 1: the education the seasonality around education workers is pretty extreme 295 00:16:10,400 --> 00:16:13,560 Speaker 1: and obviously they're being um, you know, they're they're not 296 00:16:13,680 --> 00:16:16,880 Speaker 1: on the payroll in the summer, and so to the 297 00:16:16,920 --> 00:16:19,720 Speaker 1: extent that schools weren't operating full bore, you would have 298 00:16:19,720 --> 00:16:23,120 Speaker 1: a smaller number of education related layoffs in July, and 299 00:16:23,160 --> 00:16:25,760 Speaker 1: therefore the seasonal in justused number in July for the 300 00:16:25,880 --> 00:16:29,400 Speaker 1: education workers is likely to be up very sharply, Stephen. 301 00:16:29,440 --> 00:16:32,080 Speaker 1: You're anticipating the supply side of this economy to respond 302 00:16:32,160 --> 00:16:35,120 Speaker 1: from September on woods. If it doesn't, can you see 303 00:16:35,120 --> 00:16:38,880 Speaker 1: wage pressures persisting, this inflation re pressure persisting in a 304 00:16:38,880 --> 00:16:42,800 Speaker 1: way that could reshape the conversation of the Fed. Absolutely, 305 00:16:42,880 --> 00:16:44,760 Speaker 1: I think that's the that may be the problem for 306 00:16:44,800 --> 00:16:47,000 Speaker 1: the FED. As long as demand is as strong as 307 00:16:47,000 --> 00:16:49,720 Speaker 1: it has been, then you know, it's it's a pay 308 00:16:49,760 --> 00:16:51,400 Speaker 1: me now, pay me later thing. Either we're going to 309 00:16:51,440 --> 00:16:54,480 Speaker 1: get a very strong recovery and economic activity as the 310 00:16:54,480 --> 00:16:58,320 Speaker 1: supply side normalizes, if it normalizes quickly, or if it doesn't, 311 00:16:58,320 --> 00:17:00,160 Speaker 1: we're going to continue to see these bottle now x 312 00:17:00,200 --> 00:17:03,400 Speaker 1: that have helped to generate wage and price pressures. So um, 313 00:17:03,520 --> 00:17:08,399 Speaker 1: neither of those scenarios is really entirely uh consistent with 314 00:17:08,520 --> 00:17:10,679 Speaker 1: the sort of monetary policy that the FED is running. 315 00:17:10,800 --> 00:17:12,600 Speaker 1: There is, of course, very little they can do about 316 00:17:12,600 --> 00:17:15,520 Speaker 1: the supply side of the economy, Stephen, except let demand 317 00:17:15,560 --> 00:17:18,400 Speaker 1: writ for long enough that the supply side eventually responds. 318 00:17:18,600 --> 00:17:22,520 Speaker 1: But if the participation rate doesn't recover, that surely changes 319 00:17:22,720 --> 00:17:24,800 Speaker 1: the path of things for the Federal Reserve. At what 320 00:17:24,880 --> 00:17:27,240 Speaker 1: point do you think that's conversation could gain a little 321 00:17:27,280 --> 00:17:29,679 Speaker 1: bit more traction. Is that a year end conversation or 322 00:17:29,680 --> 00:17:33,000 Speaker 1: a new year conversation? Well, I mean they've they've been 323 00:17:33,080 --> 00:17:37,320 Speaker 1: pointing September right, school starts again, the unemployment benefits expiring 324 00:17:37,359 --> 00:17:40,359 Speaker 1: the other states. Um, so you know, let's see what 325 00:17:40,400 --> 00:17:43,040 Speaker 1: happens in September and the months forward. I think things 326 00:17:43,080 --> 00:17:46,080 Speaker 1: may pick up even before September. But if they don't 327 00:17:46,240 --> 00:17:50,320 Speaker 1: and we're still talking about these same issues in October, November, 328 00:17:50,320 --> 00:17:52,000 Speaker 1: and then yeah, I think that definitely needs to have 329 00:17:52,040 --> 00:17:55,919 Speaker 1: a pretty tough conversation around that. Stephen. You keep mentioning 330 00:17:55,960 --> 00:17:58,800 Speaker 1: the enhancement employment benefits rolling off in September, and there 331 00:17:58,800 --> 00:18:00,640 Speaker 1: have been a number of states that have already ended 332 00:18:01,000 --> 00:18:03,840 Speaker 1: them in large measure, and some studies have shown that 333 00:18:03,880 --> 00:18:07,159 Speaker 1: they haven't really added that many more jobs in other states, 334 00:18:07,160 --> 00:18:10,320 Speaker 1: that they aren't necessarily on the forefront. The early data 335 00:18:10,400 --> 00:18:12,960 Speaker 1: does it should suggest that perhaps there's more a slack 336 00:18:13,000 --> 00:18:15,560 Speaker 1: of the economy, or less slack in the economy than 337 00:18:15,600 --> 00:18:18,800 Speaker 1: people think. You know, I think it may be early 338 00:18:18,840 --> 00:18:21,800 Speaker 1: to tell. Obviously, this July peril number will be the 339 00:18:21,840 --> 00:18:24,120 Speaker 1: first one where we'll get a gauge on that um 340 00:18:24,240 --> 00:18:27,240 Speaker 1: on a you know, in terms of the really big 341 00:18:27,359 --> 00:18:31,640 Speaker 1: national data UM we've seen, we've definitely seen some impact 342 00:18:31,680 --> 00:18:33,720 Speaker 1: on the claims numbers, so we know that fewer people 343 00:18:33,760 --> 00:18:36,639 Speaker 1: are collecting benefits in those states. Um. You know, the 344 00:18:36,680 --> 00:18:38,760 Speaker 1: presumption is you think they you know, a lot of 345 00:18:38,760 --> 00:18:41,000 Speaker 1: them would want to go out and uh and get 346 00:18:41,000 --> 00:18:44,120 Speaker 1: a job. So and there's certainly plenty of opening. So UM, 347 00:18:44,160 --> 00:18:45,760 Speaker 1: we'll see what happens. I think you don't have to 348 00:18:45,760 --> 00:18:47,080 Speaker 1: give it a month or two before we have a 349 00:18:47,119 --> 00:18:50,320 Speaker 1: better sense of exactly what's going on. The inflationary pressures meanwhile, 350 00:18:50,359 --> 00:18:52,920 Speaker 1: that we are seeing in wages. We've been talking about 351 00:18:52,920 --> 00:18:56,800 Speaker 1: Goldman Sacks raising their entry level salaries this morning, Others 352 00:18:56,880 --> 00:18:59,000 Speaker 1: doing the same credit squeeze coming out and saying that 353 00:18:59,000 --> 00:19:01,639 Speaker 1: they were going to also. Hey, initial associates have a 354 00:19:01,760 --> 00:19:05,560 Speaker 1: hundred thousand dollars a year. Question, is this just isolated 355 00:19:05,600 --> 00:19:09,040 Speaker 1: to the white collar jobs, to the more hiring paying professions, 356 00:19:09,320 --> 00:19:13,560 Speaker 1: or you seeing it consistently and evenly throughout all careers. No. 357 00:19:13,680 --> 00:19:15,960 Speaker 1: I mean, I think most of the headlines over the 358 00:19:16,040 --> 00:19:18,000 Speaker 1: last few months have been more on the lower end 359 00:19:18,000 --> 00:19:20,399 Speaker 1: of the spectrum. You know, the Walmarts of the world 360 00:19:20,400 --> 00:19:22,840 Speaker 1: and the fast food restaurants and and you know a 361 00:19:22,840 --> 00:19:26,679 Speaker 1: lot of cross really across the restaurant industry having to 362 00:19:26,800 --> 00:19:30,399 Speaker 1: raise wages to get people in the door. Um. So 363 00:19:30,560 --> 00:19:33,520 Speaker 1: I don't think that it's that it's just white collar 364 00:19:33,680 --> 00:19:36,640 Speaker 1: or blue collar or service sector. I think it's it's 365 00:19:36,680 --> 00:19:38,639 Speaker 1: kind of across the board. And I think part of 366 00:19:38,720 --> 00:19:41,320 Speaker 1: what's going on, I think this is directly applicable maybe 367 00:19:41,359 --> 00:19:45,520 Speaker 1: to the to the Wall Street headlines is after the pandemic, 368 00:19:45,520 --> 00:19:48,480 Speaker 1: people are kind of reexamining the whole work life balance issue, 369 00:19:48,560 --> 00:19:51,560 Speaker 1: and it may be that people are inclined to either 370 00:19:51,760 --> 00:19:54,280 Speaker 1: work a little less or if they're gonna work really hard, 371 00:19:54,320 --> 00:19:57,640 Speaker 1: they want to get compensated more, um, you know, more 372 00:19:57,720 --> 00:20:01,000 Speaker 1: for it. So, um, let's see how that all plays out. 373 00:20:01,040 --> 00:20:02,960 Speaker 1: I mean, as the dust settles and we get back 374 00:20:02,960 --> 00:20:05,240 Speaker 1: to normal. Um, it may take a couple of years 375 00:20:05,240 --> 00:20:07,159 Speaker 1: before we have a good handle on that, but you 376 00:20:07,160 --> 00:20:09,000 Speaker 1: know that that is something that you could see as 377 00:20:09,080 --> 00:20:11,159 Speaker 1: a as a big factor for the economy moving forward. 378 00:20:11,320 --> 00:20:14,760 Speaker 1: Steven Stanley, it's real sophisticated Monday question. Which is the 379 00:20:14,800 --> 00:20:18,640 Speaker 1: horse and which is the cart? If there's an inflation 380 00:20:18,960 --> 00:20:23,760 Speaker 1: adjusted wage which is negative. Does that lead to wage 381 00:20:23,800 --> 00:20:27,760 Speaker 1: increases or is there some other mystery thing that leads 382 00:20:27,880 --> 00:20:33,639 Speaker 1: us out to a wage breakout? Well, I think that's so. 383 00:20:33,720 --> 00:20:36,520 Speaker 1: There are two things, really um that should be driving 384 00:20:36,520 --> 00:20:40,399 Speaker 1: that wage picture. One is the inflation story, and in 385 00:20:40,440 --> 00:20:43,600 Speaker 1: particular inflation expectations, and that's I think why the FED 386 00:20:44,000 --> 00:20:46,960 Speaker 1: is so focused on that. So if inflation just bulges 387 00:20:47,080 --> 00:20:50,439 Speaker 1: up once and people don't expect it to last, then 388 00:20:50,480 --> 00:20:54,120 Speaker 1: they're not necessarily gonna storm into the boss's office and say, hey, 389 00:20:54,160 --> 00:20:56,359 Speaker 1: I need a race to make up for this five 390 00:20:56,359 --> 00:20:59,000 Speaker 1: percent inflation we're going to see forever. The second thing 391 00:20:59,080 --> 00:21:01,560 Speaker 1: is the leverage that workers have in the labor market. 392 00:21:01,640 --> 00:21:04,280 Speaker 1: And right now, the labor market, despite the level of 393 00:21:04,280 --> 00:21:06,320 Speaker 1: the unemployment rate, I would argue, the labor market is 394 00:21:06,359 --> 00:21:09,879 Speaker 1: as tight, if not tighter, than any we've seen in decades. 395 00:21:10,080 --> 00:21:12,399 Speaker 1: And so, yeah, workers have a lot of leverage in 396 00:21:12,440 --> 00:21:15,240 Speaker 1: that sort of an environment, and you know, we'll see 397 00:21:15,240 --> 00:21:18,040 Speaker 1: if that persists, and if it does, I think workers 398 00:21:18,080 --> 00:21:21,360 Speaker 1: are going to continue to to be able to demand 399 00:21:21,480 --> 00:21:24,400 Speaker 1: higher wages and and then you do run that risk 400 00:21:24,480 --> 00:21:26,760 Speaker 1: of of kind of you know, one step in front 401 00:21:26,800 --> 00:21:29,159 Speaker 1: of the other, and you get wages going up, and 402 00:21:29,200 --> 00:21:32,560 Speaker 1: then inflation and then back the wages, and um, you know, 403 00:21:33,320 --> 00:21:35,560 Speaker 1: you end up eventually if if you don't arrest that 404 00:21:35,600 --> 00:21:38,120 Speaker 1: you end up back in the Stephen just quickly here, 405 00:21:38,400 --> 00:21:40,840 Speaker 1: this is as tight as it ever has been. And 406 00:21:40,920 --> 00:21:43,880 Speaker 1: you think that that can persist, You think if it's 407 00:21:43,880 --> 00:21:45,880 Speaker 1: wrong here, That's what I'm hearing. And I'm just wondering 408 00:21:46,160 --> 00:21:49,160 Speaker 1: when you think they will actually break down to your 409 00:21:49,160 --> 00:21:51,159 Speaker 1: point of view of the world and what kind of 410 00:21:51,160 --> 00:21:54,439 Speaker 1: liftoff you're expecting here. I do think the FED is 411 00:21:54,480 --> 00:21:56,960 Speaker 1: looking at it incorrectly. I think they're looking at it 412 00:21:57,000 --> 00:21:59,200 Speaker 1: the way that I indicated at the outset, which is 413 00:21:59,240 --> 00:22:01,159 Speaker 1: the way that we've always looked at it, which is 414 00:22:01,480 --> 00:22:04,200 Speaker 1: you focus whatever you're looking at in terms of the 415 00:22:04,280 --> 00:22:06,480 Speaker 1: level of the unemployment rate. The pace of job growth 416 00:22:06,560 --> 00:22:09,840 Speaker 1: is only an indicator of of labor demand. I do 417 00:22:09,920 --> 00:22:12,199 Speaker 1: think they're coming around if you look at you know, 418 00:22:12,440 --> 00:22:15,760 Speaker 1: three or four meetings ago, all Power was talking about was, oh, 419 00:22:15,800 --> 00:22:19,119 Speaker 1: the unemploant rates too high, and even the stated unemployment 420 00:22:19,200 --> 00:22:22,680 Speaker 1: rate understates the health of the labor market. Um. And 421 00:22:22,800 --> 00:22:25,440 Speaker 1: with each successive meeting he started to talk a little 422 00:22:25,480 --> 00:22:28,560 Speaker 1: bit more acknowledging that labor demand is very strong. I 423 00:22:28,600 --> 00:22:31,080 Speaker 1: think they get it. Um. I think that they're just 424 00:22:31,200 --> 00:22:35,480 Speaker 1: coming around slowly to that point. So as you mentioned before, UM, 425 00:22:35,560 --> 00:22:38,080 Speaker 1: it seems like it's it's probably, you know, end of 426 00:22:38,119 --> 00:22:40,560 Speaker 1: the summer, as some of these special factors should be 427 00:22:40,640 --> 00:22:43,320 Speaker 1: starting to fade, that they're really going to be able 428 00:22:43,359 --> 00:22:46,480 Speaker 1: to focus on what's actually going on. What's your lift off, 429 00:22:46,520 --> 00:22:51,119 Speaker 1: coach Stapen, I I still think it's next year. I 430 00:22:51,480 --> 00:22:55,840 Speaker 1: think yeah, I have my first rate hike is June, 431 00:22:55,920 --> 00:22:59,680 Speaker 1: so middle of the year. Wow, Stamens Donley, we should 432 00:22:59,680 --> 00:23:12,000 Speaker 1: have stied that, shouldn't we. Economys Stephen, thank you. We 433 00:23:12,080 --> 00:23:14,680 Speaker 1: get smarter with Lisa Hornby, with Schroder's head of US 434 00:23:14,800 --> 00:23:19,080 Speaker 1: multisector fixed income and very sophisticated at the entire depth 435 00:23:19,480 --> 00:23:22,040 Speaker 1: of the yield market. Lisa, I want to channel Ted 436 00:23:22,119 --> 00:23:25,040 Speaker 1: Lasso this morning. That's what we're doing here. And the 437 00:23:25,080 --> 00:23:28,119 Speaker 1: basic idea is the belief in yield higher? Do you 438 00:23:28,200 --> 00:23:32,159 Speaker 1: believe and yield higher? What's the path to get us 439 00:23:32,200 --> 00:23:36,960 Speaker 1: to higher yields where we can frame an intelligent belief? Yeah? Well, 440 00:23:37,640 --> 00:23:39,120 Speaker 1: first of all, I think it depends on whether we're 441 00:23:39,119 --> 00:23:41,960 Speaker 1: talking about nominal or real yields. But just to start 442 00:23:41,960 --> 00:23:45,000 Speaker 1: with nominal, we do think that yields belong higher. I mean, basically, 443 00:23:45,040 --> 00:23:48,640 Speaker 1: any sort of fundamental economic model that you could run 444 00:23:48,640 --> 00:23:52,200 Speaker 1: today suggests that based on the longer term level of growth, 445 00:23:52,200 --> 00:23:54,280 Speaker 1: and I don't mean the next quarter or so, which 446 00:23:54,320 --> 00:23:57,840 Speaker 1: is still quite elevated thanks to the COVID recovery. But 447 00:23:57,880 --> 00:24:01,080 Speaker 1: if any longer term basis, ten year, yields probably do 448 00:24:01,200 --> 00:24:04,040 Speaker 1: belong at a higher level. And that's compounded by the 449 00:24:04,040 --> 00:24:07,919 Speaker 1: fact that, uh, the FED will eventually be starting to 450 00:24:07,960 --> 00:24:11,320 Speaker 1: taper its purchases. I think what we've seen recently is 451 00:24:11,359 --> 00:24:13,520 Speaker 1: that one, there's a tremendous amount of liquidity in the 452 00:24:13,520 --> 00:24:17,120 Speaker 1: system and it's chasing yields lower. Uh. And to the 453 00:24:17,160 --> 00:24:21,280 Speaker 1: fact that, uh, you know, the market has essentially taken 454 00:24:21,280 --> 00:24:23,600 Speaker 1: the terminal rate all the way down to around one 455 00:24:23,600 --> 00:24:26,040 Speaker 1: and a half percent. So the market kind of has 456 00:24:26,080 --> 00:24:28,200 Speaker 1: this view right now that if the FED start hiking 457 00:24:28,240 --> 00:24:30,640 Speaker 1: in the next let's say year and a half or so, 458 00:24:30,920 --> 00:24:33,000 Speaker 1: they will not be able to get many rate hikes 459 00:24:33,040 --> 00:24:36,040 Speaker 1: actually done UM. And that means the terminal rate will 460 00:24:36,080 --> 00:24:38,399 Speaker 1: be one and a half percent UM, and so that 461 00:24:38,640 --> 00:24:40,520 Speaker 1: the level of tenure yields, and my view is is 462 00:24:40,640 --> 00:24:43,840 Speaker 1: artificially depressed by that view, and I think that that 463 00:24:43,880 --> 00:24:46,919 Speaker 1: will start to correct itself, in part because I actually 464 00:24:46,920 --> 00:24:49,320 Speaker 1: think that the Fed wants to take a slightly easier 465 00:24:49,400 --> 00:24:52,359 Speaker 1: path to all of this and might delay the rate 466 00:24:52,440 --> 00:24:55,160 Speaker 1: hiking cycle more than the market currently believes, which means 467 00:24:55,200 --> 00:24:58,040 Speaker 1: the terminal rate actually belongs higher and nominal yields actually 468 00:24:58,080 --> 00:25:00,560 Speaker 1: belong higher. They said just quickly on this for debate. 469 00:25:00,640 --> 00:25:02,480 Speaker 1: There's more debate to this, and I think some people 470 00:25:02,560 --> 00:25:04,760 Speaker 1: might imagine outside of the market, looking again, you think 471 00:25:04,800 --> 00:25:07,879 Speaker 1: tapering is actually bearish for treasuries because some people have 472 00:25:07,960 --> 00:25:11,959 Speaker 1: taken the other side of that. Um, well, it's it's 473 00:25:12,000 --> 00:25:14,320 Speaker 1: hard to say right now, right because we've had we 474 00:25:14,400 --> 00:25:16,640 Speaker 1: had the sell off, and now we've had the rally. Um, 475 00:25:16,680 --> 00:25:18,760 Speaker 1: So where does that actually leave us. I don't think 476 00:25:18,760 --> 00:25:21,520 Speaker 1: taper is actually the big story, because I think the 477 00:25:21,520 --> 00:25:23,560 Speaker 1: Fed is going to try to focus it on. Look, 478 00:25:23,640 --> 00:25:26,080 Speaker 1: the size of the balance sheet is going to remain 479 00:25:26,119 --> 00:25:30,400 Speaker 1: extraordinarily large, So the incremental flow they'll take down ten 480 00:25:30,480 --> 00:25:34,639 Speaker 1: billion per month perhaps, um it'll take them maybe close 481 00:25:34,680 --> 00:25:37,439 Speaker 1: to a year to actually taper. But the real question 482 00:25:37,520 --> 00:25:40,480 Speaker 1: is what happens after that, and last time they waited 483 00:25:40,520 --> 00:25:43,400 Speaker 1: a year to actually start hiking rates after they finished 484 00:25:43,520 --> 00:25:48,359 Speaker 1: they finished the tapering cycle um. But also last time around, 485 00:25:48,520 --> 00:25:51,440 Speaker 1: they started hiking rates and then they also started reducing 486 00:25:51,480 --> 00:25:54,080 Speaker 1: their balance sheet actively. So I think they're going to 487 00:25:54,119 --> 00:25:57,719 Speaker 1: try and sequence this in a much more extended way, 488 00:25:58,000 --> 00:26:01,280 Speaker 1: and that's probably, in our view, going to result in 489 00:26:01,320 --> 00:26:04,480 Speaker 1: a higher inflation backdrop than the market has become accustomed 490 00:26:04,520 --> 00:26:07,800 Speaker 1: to over the last decade. We're not talking about pernicious, 491 00:26:07,800 --> 00:26:11,000 Speaker 1: you know, four or five six percent inflation um, but 492 00:26:11,080 --> 00:26:13,480 Speaker 1: we think the inflation regime for the next let's say 493 00:26:13,560 --> 00:26:15,640 Speaker 1: several years is probably closer to two and a half 494 00:26:15,680 --> 00:26:18,240 Speaker 1: percent versus the one and a half percent regime we 495 00:26:18,240 --> 00:26:21,919 Speaker 1: had been in previously. So well, Lisa, we're focusing a 496 00:26:21,920 --> 00:26:24,720 Speaker 1: lot on the ten year yield, and some people might say, really, 497 00:26:24,760 --> 00:26:27,359 Speaker 1: that's the one metric and markets, and yet this underpins 498 00:26:27,359 --> 00:26:29,760 Speaker 1: people's call when it comes to stocks, when it comes 499 00:26:29,760 --> 00:26:33,400 Speaker 1: to currencies, literally with everything, and increasingly this is one 500 00:26:33,440 --> 00:26:35,879 Speaker 1: of the most important factors to keep an eye on. 501 00:26:35,920 --> 00:26:38,600 Speaker 1: And we keep talking about the demand side, the idea 502 00:26:38,600 --> 00:26:40,680 Speaker 1: of the FEDS buying and how much they are buying, 503 00:26:40,680 --> 00:26:43,399 Speaker 1: how much they might remove accommodation, And yet the supply 504 00:26:43,520 --> 00:26:45,879 Speaker 1: side is also important. We came into the year talking 505 00:26:45,920 --> 00:26:49,240 Speaker 1: about fiscal stimulus that was way above where we are 506 00:26:49,240 --> 00:26:51,600 Speaker 1: seeing it come in. Now, how much does that play 507 00:26:51,640 --> 00:26:55,240 Speaker 1: a factor in this The idea that supply of treasuries 508 00:26:55,280 --> 00:26:58,800 Speaker 1: being sold into the market probably will decrease a little 509 00:26:58,800 --> 00:27:00,919 Speaker 1: bit more than people had expect or at least not 510 00:27:01,040 --> 00:27:04,280 Speaker 1: go as high as people expected. Does this lead naturally 511 00:27:04,320 --> 00:27:07,480 Speaker 1: to perhaps a lower yield than might have others wise 512 00:27:07,560 --> 00:27:11,160 Speaker 1: naturally been the case. Yeah? Absolutely, But I do think 513 00:27:11,200 --> 00:27:13,720 Speaker 1: some of that perhaps has been discounted. Right. So, when 514 00:27:13,720 --> 00:27:16,360 Speaker 1: we started the year we were talking about an infrastructure 515 00:27:16,359 --> 00:27:20,880 Speaker 1: package of two three four trillion dollars, rates were significantly higher. UM. 516 00:27:21,119 --> 00:27:24,639 Speaker 1: So that has to some degree been been marginalized. You know, 517 00:27:24,640 --> 00:27:26,919 Speaker 1: we're now we're talking about a five and fifty billion 518 00:27:26,960 --> 00:27:29,879 Speaker 1: dollar package. Honestly, who knows where this is going to 519 00:27:30,040 --> 00:27:34,040 Speaker 1: end up. I mean that the conversation changes week to week. Um. 520 00:27:34,119 --> 00:27:36,800 Speaker 1: But at this point I think that the market's expectations 521 00:27:37,280 --> 00:27:41,439 Speaker 1: for another large fiscal plan have been dampened to some degree. 522 00:27:41,600 --> 00:27:44,159 Speaker 1: So if we got something significantly larger, I think that 523 00:27:44,200 --> 00:27:47,240 Speaker 1: would need to be discounted into the into rates markets. 524 00:27:47,800 --> 00:27:49,720 Speaker 1: This quote from a Lim and just to jump in 525 00:27:49,800 --> 00:27:52,320 Speaker 1: least off I can. The extent to which try series 526 00:27:52,320 --> 00:27:54,960 Speaker 1: will be driven by the fundamentals is as much of 527 00:27:54,960 --> 00:27:57,959 Speaker 1: an unknown as the actual dates for itself at this stage. 528 00:27:58,280 --> 00:28:01,439 Speaker 1: That's the problem, isn't it. It's fair That's absolutely right, 529 00:28:01,480 --> 00:28:04,760 Speaker 1: and that's that's why that fundamental divergence that I mentioned 530 00:28:04,760 --> 00:28:06,200 Speaker 1: to you, when you look at a model of where 531 00:28:06,280 --> 00:28:08,760 Speaker 1: tenure should be and where they are today, it's probably 532 00:28:08,800 --> 00:28:11,280 Speaker 1: as wide of the gap as it has been. However, 533 00:28:11,320 --> 00:28:12,920 Speaker 1: in our view, when you look at that over kind 534 00:28:12,920 --> 00:28:16,880 Speaker 1: of a long term, more structural way, those do tend 535 00:28:16,920 --> 00:28:19,879 Speaker 1: to converge. Now that doesn't mean intends go right to 536 00:28:19,920 --> 00:28:22,240 Speaker 1: the fair value model, but that does mean that we 537 00:28:22,359 --> 00:28:25,000 Speaker 1: probably see ten year old start to drift higher in 538 00:28:25,040 --> 00:28:27,080 Speaker 1: the next couple of months rather than in our view 539 00:28:27,200 --> 00:28:30,080 Speaker 1: lower from here. Lisa always enjoy catching obvious send not 540 00:28:30,160 --> 00:28:31,960 Speaker 1: best of the team one, Yeah, Lisa Hombi that strout 541 00:28:32,000 --> 00:28:35,040 Speaker 1: as head of US multisector fixed income. This is the 542 00:28:35,040 --> 00:28:39,719 Speaker 1: Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays 543 00:28:39,760 --> 00:28:43,200 Speaker 1: from seven to ten am Eastern on Bloomberg Radio and 544 00:28:43,320 --> 00:28:47,560 Speaker 1: on Bloomberg Television each day from six to nine am 545 00:28:47,640 --> 00:28:51,400 Speaker 1: for insight from the best in economics, finance, investment, and 546 00:28:51,520 --> 00:28:58,040 Speaker 1: international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, 547 00:28:58,200 --> 00:29:01,800 Speaker 1: Bloomberg dot com, and of course, on the terminal. I'm 548 00:29:01,840 --> 00:29:04,400 Speaker 1: Tom keene In. This is Bloomer