Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jailey. We bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot com,
Speaker 1: and of course on the Bloomberg Terminal. John gets out
Speaker 1: front of the toughest thing, which is a get beyond
Speaker 1: what's going to happen the first week August or Jobs
Speaker 1: Day on Friday. Somebody who's expert at that is Howard
Speaker 1: Ward trying to get out beyond the next quarter with
Speaker 1: Gabelly Funds, and certainly I can say legendary in growthiness, Howard.
Speaker 1: Let's look at the debris right now, twelve months trailing.
Speaker 1: A sophisticate like Howard Ward knows that's t MT and
Speaker 1: the answer is the twelve month trailing numbers are a
Speaker 1: ginormous bullmarket up or So, how do you get out
Speaker 1: to your measurement of growthiness, Howard in two thousand twenty
Speaker 1: three out two years? Well, Tom uh first of all,
Speaker 1: let me just say that the stimulus combined with the
Speaker 1: vaccination to the extent that it's been used and unfortunately
Speaker 1: hasn't been used enough yet have really combined to give
Speaker 1: us a very strong recovery. The GDP growth this year
Speaker 1: could be seven or eight percent. We haven't seen growth
Speaker 1: of that magnitude since nineteen fifty one when Harry Truman
Speaker 1: was president. Earnings expectations UH, which were high two months
Speaker 1: ago when I was last on your show, people were
Speaker 1: expecting earnings of about a D eighty two dollars on
Speaker 1: the SMP this year. That numbers now about a hundred
Speaker 1: nine three dollars, and based on the numbers that were
Speaker 1: reported for Q one and Q two, I think that
Speaker 1: number is still too low. It's probably too of at
Speaker 1: least ten percent um, which means that the three uh
Speaker 1: excuse me, the expectation right now is too low. That's
Speaker 1: it around around two d and twelve dollars. So we
Speaker 1: have continually UH several years of continued good, good earnings
Speaker 1: growth ahead of us, I believe. And so it is this.
Speaker 1: You know, in real estate they say location, location, location,
Speaker 1: and with stocks, I would say earnings, earnings and earnings,
Speaker 1: and the earnings outlook is rarely brighter. How this is
Speaker 1: so important? And John brought it up the idea of
Speaker 1: the NASAC out performing. You provided worldwide leadership on rationalizing
Speaker 1: these nast deck stocks out further state the case now
Speaker 1: for owning those glorified revenue builders out two years, five years,
Speaker 1: ten years. So so tom Um, what's happened since I
Speaker 1: was on two months ago is inflation expectations, while while
Speaker 1: they're higher than we would like because of the delta
Speaker 1: variant being introduced to the extent it has uh, interest
Speaker 1: rates have gone down, but at the same time, as
Speaker 1: I just mentioned, earning estimates have gone up. And when
Speaker 1: you look at the economic growth as strong as it
Speaker 1: is this year seven or eight percent GDP, it's probably
Speaker 1: more like four percent next year. We're already in an
Speaker 1: economy that has seen PEAT growth on a quarter to
Speaker 1: quarter basis and will be is beginning to slow. Slowing
Speaker 1: growth is generally a good environment for growth stocks, and
Speaker 1: when you get beyond next year, we're probably going back
Speaker 1: to GDP growth that has a handle on it of
Speaker 1: about two simply constrained by the limits of the increase
Speaker 1: in the labor supply and productivity growth. So slow growth,
Speaker 1: whether it's slowing or slow, these are good environments for
Speaker 1: growth stocks. So the present value of those future earnings
Speaker 1: remains hot. There's a question also about whether they're a
Speaker 1: mono left right. We always talk about the fang stocks
Speaker 1: as one entity, and yet we've seen a lot of
Speaker 1: divergence within the recent earnings and the outlooks. For example,
Speaker 1: the likes of Alphabet Whogl's parent companies seeing ad revenue
Speaker 1: really picking up, whereas the likes of Amazon seeing a
Speaker 1: lower sales estimate. How much do you expect this bifurcation
Speaker 1: to continue of the halves and the have nots within
Speaker 1: the growth world. Well, you know, it's a little bit
Speaker 1: tricky right now when we look at the numbers, because
Speaker 1: you have uh companies like Amazon that are growing free
Speaker 1: cash flow like few other companies. In fact, the fang
Speaker 1: stocks in general are among the greatest free cash flow
Speaker 1: generators of all and the market in the last two
Speaker 1: months in particular, as rates have moderated, has been rewarding
Speaker 1: free cash flow more than anything else. In the first quarter,
Speaker 1: it was really rewarding earnings estimate revisions, positive revisions. Last year,
Speaker 1: it was sales growth. Right now it's free cash flow growth.
Speaker 1: And so so many of these growth stocks, and all
Speaker 1: of the fang stocks, including Netflix, although they were free
Speaker 1: cash flow last year, probably not this year, but they
Speaker 1: will get on a permanent or trajectory of free cash
Speaker 1: flow growth next year. Uh. These are wonderful places to go.
Speaker 1: And in the case of Amazon in particular, bear in
Speaker 1: mind the company is up against monster comparisons. And Amazon
Speaker 1: has become Amazon because of Jeff bezos willingness to sacrifice
Speaker 1: short term profit for long term geed. He's become the
Speaker 1: richest person in the world following following that strategy. And
Speaker 1: in the case of Amazon, they have investment cycles. They
Speaker 1: keep investing to give the consumer a better experience, and
Speaker 1: that has been a successful formula and it is continuing
Speaker 1: to show the way for Amazon's future growth. They remain
Speaker 1: the leader in e commerce, they remain the leader in
Speaker 1: web services, and they have a rapidly growing digital ad
Speaker 1: business which puts them up there in the you know,
Speaker 1: as number three behind Google and Facebook. So so free
Speaker 1: cash flow growth right now is the primary mantra. And
Speaker 1: I think really all the Thanks Dots and so many
Speaker 1: other these software and even semiconductor type companies are generating this,
Speaker 1: and this is what really gets us excited. I gotta say,
Speaker 1: tom as I hear Howard talk, I think about the
Speaker 1: case for growth, the case for buying stocks look expensive
Speaker 1: for people who say are in too intall cash who
Speaker 1: might not have been in this. You know, that's been
Speaker 1: the howard Ward mantra for years and goes to Mario
Speaker 1: Gabelly and Howard Wards saying that growth is the new value.
Speaker 1: What's the value trap right now? Howard Ward outter that
Speaker 1: two thousand three, what's the trap? You see? Well, you know,
Speaker 1: you know, I think that the market got very excited
Speaker 1: about the potential for cyclical earnings growth UM. And I'm
Speaker 1: not saying that that that has gone away. Uh, it's
Speaker 1: simply that. And so you had stocks like Caterpillar, for example,
Speaker 1: which should be an obvious beneficiary of the pending infrastructure
Speaker 1: package UM and also benefiting from the reopening trade and
Speaker 1: and booming housing markets and construction. But yet the market
Speaker 1: had discounted that. And in fact, it's a good point
Speaker 1: to mention that, as we saw with this most recent
Speaker 1: batch of earnings, UH, whether it's Amazon or some of
Speaker 1: the others, the market has discounted efficant earnings growth. But
Speaker 1: my my perspective is it's still not where it should be.
Speaker 1: The earnings expectations are still too low for the market overall.
Speaker 1: But when you look at some of the cyclical names,
Speaker 1: particularly now with COVID striking us again, some of that
Speaker 1: cyclical fervor is going to going to come down, and
Speaker 1: some of that reopening trade in hospitality might be put
Speaker 1: on hold. And so I'd be very careful with a
Speaker 1: number of those stocks, whether they're transportation or or or
Speaker 1: or hotel restaurants. I think you have to be very
Speaker 1: careful there, because well, I don't think we're going back
Speaker 1: to a base case of any kind of a countrywide lockdown.
Speaker 1: Lockdown on a regional basis, on a state by state basis,
Speaker 1: that's not so certain. And this is a problem, and
Speaker 1: the risk has risen because of the failure of more
Speaker 1: people to vaccinate. And I have to say that the
Speaker 1: TV personalities and politicians that have discouraged the vaccine and
Speaker 1: are continuing to discourage max mask wearing are doing a
Speaker 1: real disservice to this country and it's costing us illness
Speaker 1: and lives, and those people need to be held accountable.
Speaker 1: How would Ward of Cabelly Funds, Howard, thank you, sir
Speaker 1: as always gonna catch up a number of summers ago.
Speaker 1: My book of the summer was Elizabeth Economy of President
Speaker 1: gy and she called it the Third Revolution. It was
Speaker 1: cover to cover, read every word. Someone expert on the
Speaker 1: granularity of Liz economies China is Leland Miller with China
Speaker 1: Beije book. He is definitive on the cadence and the
Speaker 1: pulse of domestic China. Leland Miller, what's it looked like
Speaker 1: right now? How does domestic China react to what they
Speaker 1: see from Beijing. Well, you've got a lot of factors
Speaker 1: that are pushing things in both directions. You've obviously got
Speaker 1: these nasty crackdowns and tech and the education sector that's
Speaker 1: hitting the stock market, which is looking sort of nasty.
Speaker 1: You've got spread of delta variant, which is which is
Speaker 1: creating uncertainty for the future. At the same time, you know,
Speaker 1: some of the numbers that we're looking at are not
Speaker 1: as bad as everyone sperit. Yet a recent are Our
Speaker 1: cut and that made people think, well, well, China must
Speaker 1: be doing really poorly if they're looking to stimulate the economy. Well,
Speaker 1: I think manufacturing is doing okay. Services actually doing a
Speaker 1: little bit better. So so we're not as negative on
Speaker 1: on the actual underlying economy, even though you have these
Speaker 1: awful headlines just coming from every direction. Okay, great, what
Speaker 1: do you do if you're advising Tim Cook of Apple?
Speaker 1: What is the Leland Miller perspective for big American companies
Speaker 1: who have this this codependency almost with Beijing. Well, you know,
Speaker 1: Apple is almost unique in that it figured out a
Speaker 1: bunch of years ago that it needed to have a
Speaker 1: contingency plan. But its needs and its production China is
Speaker 1: so big that it can't really just move things. So
Speaker 1: I think what Apple is doing is what they can
Speaker 1: in terms of trying to create other markets where they
Speaker 1: can where they can produce too, so they don't have
Speaker 1: so much of an emphasis and reliance on China. But
Speaker 1: they produce so much you can't just move everything to
Speaker 1: India or to Vietnam or somewhere else in Southeast Asia.
Speaker 1: So so they're doing the best they can. But but
Speaker 1: if you're not Apple, and you know, you should be
Speaker 1: way down the road in terms of contingency planning just
Speaker 1: so you don't have over reliance on on China for
Speaker 1: the market, for the production, just because of all the
Speaker 1: different things are going on, from the virus to trade wars,
Speaker 1: to geopolitical tensions. Okay, so we've been talking about the
Speaker 1: fundamentals and the potential slowing down of the economy. The
Speaker 1: data seeming to confirm that that we got out overnight.
Speaker 1: The question is how much does this matter and how
Speaker 1: much is the focus squarely on the regulatory regime. The
Speaker 1: fact that there does seem to be a shift by
Speaker 1: President jin Ping, there's definitely a shift. The question is
Speaker 1: is this step one of twelve steps where they keep
Speaker 1: ramping up crackdowns between now and the Party Congress, which
Speaker 1: is a little over year year from now, or is
Speaker 1: this uh their attempt to try to fix problems during
Speaker 1: what is basically a little bit of hiatus from disaster disasters.
Speaker 1: Headlines they recovered from COVID faster than others. Uh, there's
Speaker 1: a little bit of a global recovery going on right now.
Speaker 1: So so to some extent, this may be Beijing seeing
Speaker 1: a window to try to do some of these things
Speaker 1: that they pushed off for a long time. It's more
Speaker 1: likely that this is the first of many steps. Uh.
Speaker 1: So then I think you're gonna have to to watch
Speaker 1: not just the regulatory crackdown because that affects stocks, but
Speaker 1: but whether this spills over into pessimism on the economy
Speaker 1: at large. Right now, we're not seeing that yet, but
Speaker 1: that's something to watch for the second half of the year.
Speaker 1: What are potential regulatory measures that you expect the PBOC
Speaker 1: to consider, they expect j Pink potentially signal and upcoming speeches.
Speaker 1: I think the most important thing over the next year
Speaker 1: will be signaling a continued pull away from a reliance
Speaker 1: on the United States or the West. Uh. You know,
Speaker 1: the law of the headlines the past couple of years
Speaker 1: have been how the US is threatening to kick China
Speaker 1: off its stock markets and and and decoupling through you know,
Speaker 1: chip chips and other aspects of the technological relationship. What's
Speaker 1: Jumping really has to signal from a political standpoint is
Speaker 1: that China can go its own way. Now that's not
Speaker 1: completely true, and in some things like chips, it's not
Speaker 1: true at all, But that's the signal that he has
Speaker 1: to be sending. Uh, China can do its own way
Speaker 1: as they enter a very politically sensitive year next year, Leland,
Speaker 1: I'm trying to understand what's happening on the ground in
Speaker 1: the country at the moment, and I'm not getting a
Speaker 1: ton of information Nanjing and the spread of the downta
Speaker 1: variant supposedly from the airport there and the restrictions with
Speaker 1: standing to see what are you seeing on the ground,
Speaker 1: what are you hearing? But we actually attract us now,
Speaker 1: so we have a China beged book COVID tracker, and
Speaker 1: what we do is we asked our corporate networks whether
Speaker 1: they're seeing a spike amongst their workforce, either in a
Speaker 1: particular city or nationally. Uh. We saw the spike in
Speaker 1: Guangdong two weeks before it was announced, affecting the ports
Speaker 1: and the shutdowns. Uh, you know, and we saw something
Speaker 1: a couple of weeks ago showing that that that the
Speaker 1: that there looked like there was a bit of an
Speaker 1: outbreak going on. It's hard to know what is a
Speaker 1: mildly serious outbreak and something bigger because Beijing is is
Speaker 1: vary suppressing information on it. It's not good news, so
Speaker 1: they don't like to report it. They're also cracked down.
Speaker 1: They see six cases and they shut things down. So
Speaker 1: really it's it's watching the spikes and our COVID tracker
Speaker 1: to see to see what is what is just sort
Speaker 1: of the role of this thing. So the EBB and
Speaker 1: flow and what looks like it could be a serious
Speaker 1: spike that's gonna affect economic activity. That's the question I
Speaker 1: have Leland the restrictions you're starting to see introduced on
Speaker 1: the ground and cities light managing. Is this a threat
Speaker 1: to economic growth in China for the coming months. Absolutely.
Speaker 1: I mean, we all know how how incredibly contagious the
Speaker 1: delta variant is, and that's what China's dealing with right now.
Speaker 1: They have a vaccine, but it's not really a vaccine.
Speaker 1: It doesn't it doesn't show anywhere near the protection that
Speaker 1: all these other UH vaccines being used United States and
Speaker 1: elsewhere are are. You are are are boasting. So there
Speaker 1: is a real worry about this, and so what you're
Speaker 1: gonna see from China is a continued, very aggressive shutdown
Speaker 1: response every time they see a small outbreak. What does
Speaker 1: that do? If rows off commerce, it throws off the economy,
Speaker 1: and if you see it in enough places, it's gonna
Speaker 1: affect macro economic activity. So we haven't seen that yet,
Speaker 1: but what we're seeing right now with these mini spikes
Speaker 1: is something to watch going into September, because this is
Speaker 1: this is this is something new, This is something new. Yeah,
Speaker 1: especially given the efficacy rights of the particular vaccine that
Speaker 1: was distributed that compared to say, fine some of Madonna
Speaker 1: in much of the West, lean and grant to catch
Speaker 1: up running poll and tell pink lea mill of that,
Speaker 1: Shanna Basbook CEO. Let us return John to May seven
Speaker 1: of two thousand twenty one. The survey was what a
Speaker 1: millionaire this or that? Nine hundred thousand oops, and it
Speaker 1: came in a little lower. Stephen Stanley, like all of us,
Speaker 1: sobered up that day with Amber's pier Pont chief Economists
Speaker 1: and joins us right now, Stephen Stanley, why is this
Speaker 1: time around different than the joy of May seven, two
Speaker 1: thousand twenty one? Right? Well, I think that was the
Speaker 1: day that we realized just how severe the supply side
Speaker 1: constraints were on the labor market. And as an economist,
Speaker 1: you know, I've been trained, the FED economists have been
Speaker 1: trained for decades that when you look at the peril numbers,
Speaker 1: when you look at the unemployment rate, what you're really
Speaker 1: trying to get at is the strength of demand in
Speaker 1: the labor market. And we knew that demand was very strong.
Speaker 1: In the spring. We had seen a big peril number
Speaker 1: uh the month before, and what we've learned in the
Speaker 1: intervening months is that demand is indeed very strong, but
Speaker 1: there there have been some pretty severe supply side constraints.
Speaker 1: People are not flocking back into the labor force in
Speaker 1: the numbers that we had hoped, you know, for the
Speaker 1: reasons that everyone suggested, health concerns, childcare issues, and the
Speaker 1: supplemental unemploment benefits, and the latter two of those should
Speaker 1: be starting to ease now. Um. Obviously remote schooling should
Speaker 1: be less of an issue in the summer than it
Speaker 1: was during the school year, and the supplemental unemployment but
Speaker 1: if it's have expired about half the states, so um,
Speaker 1: I think that's one story that we're likely to see
Speaker 1: in July. The other one, with regard to payrolls is
Speaker 1: is just a seasonal quirk, which is, you know, the
Speaker 1: the education the seasonality around education workers is pretty extreme
Speaker 1: and obviously they're being um, you know, they're they're not
Speaker 1: on the payroll in the summer, and so to the
Speaker 1: extent that schools weren't operating full bore, you would have
Speaker 1: a smaller number of education related layoffs in July, and
Speaker 1: therefore the seasonal in justused number in July for the
Speaker 1: education workers is likely to be up very sharply, Stephen.
Speaker 1: You're anticipating the supply side of this economy to respond
Speaker 1: from September on woods. If it doesn't, can you see
Speaker 1: wage pressures persisting, this inflation re pressure persisting in a
Speaker 1: way that could reshape the conversation of the Fed. Absolutely,
Speaker 1: I think that's the that may be the problem for
Speaker 1: the FED. As long as demand is as strong as
Speaker 1: it has been, then you know, it's it's a pay
Speaker 1: me now, pay me later thing. Either we're going to
Speaker 1: get a very strong recovery and economic activity as the
Speaker 1: supply side normalizes, if it normalizes quickly, or if it doesn't,
Speaker 1: we're going to continue to see these bottle now x
Speaker 1: that have helped to generate wage and price pressures. So um,
Speaker 1: neither of those scenarios is really entirely uh consistent with
Speaker 1: the sort of monetary policy that the FED is running.
Speaker 1: There is, of course, very little they can do about
Speaker 1: the supply side of the economy, Stephen, except let demand
Speaker 1: writ for long enough that the supply side eventually responds.
Speaker 1: But if the participation rate doesn't recover, that surely changes
Speaker 1: the path of things for the Federal Reserve. At what
Speaker 1: point do you think that's conversation could gain a little
Speaker 1: bit more traction. Is that a year end conversation or
Speaker 1: a new year conversation? Well, I mean they've they've been
Speaker 1: pointing September right, school starts again, the unemployment benefits expiring
Speaker 1: the other states. Um, so you know, let's see what
Speaker 1: happens in September and the months forward. I think things
Speaker 1: may pick up even before September. But if they don't
Speaker 1: and we're still talking about these same issues in October, November,
Speaker 1: and then yeah, I think that definitely needs to have
Speaker 1: a pretty tough conversation around that. Stephen. You keep mentioning
Speaker 1: the enhancement employment benefits rolling off in September, and there
Speaker 1: have been a number of states that have already ended
Speaker 1: them in large measure, and some studies have shown that
Speaker 1: they haven't really added that many more jobs in other states,
Speaker 1: that they aren't necessarily on the forefront. The early data
Speaker 1: does it should suggest that perhaps there's more a slack
Speaker 1: of the economy, or less slack in the economy than
Speaker 1: people think. You know, I think it may be early
Speaker 1: to tell. Obviously, this July peril number will be the
Speaker 1: first one where we'll get a gauge on that um
Speaker 1: on a you know, in terms of the really big
Speaker 1: national data UM we've seen, we've definitely seen some impact
Speaker 1: on the claims numbers, so we know that fewer people
Speaker 1: are collecting benefits in those states. Um. You know, the
Speaker 1: presumption is you think they you know, a lot of
Speaker 1: them would want to go out and uh and get
Speaker 1: a job. So and there's certainly plenty of opening. So UM,
Speaker 1: we'll see what happens. I think you don't have to
Speaker 1: give it a month or two before we have a
Speaker 1: better sense of exactly what's going on. The inflationary pressures meanwhile,
Speaker 1: that we are seeing in wages. We've been talking about
Speaker 1: Goldman Sacks raising their entry level salaries this morning, Others
Speaker 1: doing the same credit squeeze coming out and saying that
Speaker 1: they were going to also. Hey, initial associates have a
Speaker 1: hundred thousand dollars a year. Question, is this just isolated
Speaker 1: to the white collar jobs, to the more hiring paying professions,
Speaker 1: or you seeing it consistently and evenly throughout all careers. No.
Speaker 1: I mean, I think most of the headlines over the
Speaker 1: last few months have been more on the lower end
Speaker 1: of the spectrum. You know, the Walmarts of the world
Speaker 1: and the fast food restaurants and and you know a
Speaker 1: lot of cross really across the restaurant industry having to
Speaker 1: raise wages to get people in the door. Um. So
Speaker 1: I don't think that it's that it's just white collar
Speaker 1: or blue collar or service sector. I think it's it's
Speaker 1: kind of across the board. And I think part of
Speaker 1: what's going on, I think this is directly applicable maybe
Speaker 1: to the to the Wall Street headlines is after the pandemic,
Speaker 1: people are kind of reexamining the whole work life balance issue,
Speaker 1: and it may be that people are inclined to either
Speaker 1: work a little less or if they're gonna work really hard,
Speaker 1: they want to get compensated more, um, you know, more
Speaker 1: for it. So, um, let's see how that all plays out.
Speaker 1: I mean, as the dust settles and we get back
Speaker 1: to normal. Um, it may take a couple of years
Speaker 1: before we have a good handle on that, but you
Speaker 1: know that that is something that you could see as
Speaker 1: a as a big factor for the economy moving forward.
Speaker 1: Steven Stanley, it's real sophisticated Monday question. Which is the
Speaker 1: horse and which is the cart? If there's an inflation
Speaker 1: adjusted wage which is negative. Does that lead to wage
Speaker 1: increases or is there some other mystery thing that leads
Speaker 1: us out to a wage breakout? Well, I think that's so.
Speaker 1: There are two things, really um that should be driving
Speaker 1: that wage picture. One is the inflation story, and in
Speaker 1: particular inflation expectations, and that's I think why the FED
Speaker 1: is so focused on that. So if inflation just bulges
Speaker 1: up once and people don't expect it to last, then
Speaker 1: they're not necessarily gonna storm into the boss's office and say, hey,
Speaker 1: I need a race to make up for this five
Speaker 1: percent inflation we're going to see forever. The second thing
Speaker 1: is the leverage that workers have in the labor market.
Speaker 1: And right now, the labor market, despite the level of
Speaker 1: the unemployment rate, I would argue, the labor market is
Speaker 1: as tight, if not tighter, than any we've seen in decades.
Speaker 1: And so, yeah, workers have a lot of leverage in
Speaker 1: that sort of an environment, and you know, we'll see
Speaker 1: if that persists, and if it does, I think workers
Speaker 1: are going to continue to to be able to demand
Speaker 1: higher wages and and then you do run that risk
Speaker 1: of of kind of you know, one step in front
Speaker 1: of the other, and you get wages going up, and
Speaker 1: then inflation and then back the wages, and um, you know,
Speaker 1: you end up eventually if if you don't arrest that
Speaker 1: you end up back in the Stephen just quickly here,
Speaker 1: this is as tight as it ever has been. And
Speaker 1: you think that that can persist, You think if it's
Speaker 1: wrong here, That's what I'm hearing. And I'm just wondering
Speaker 1: when you think they will actually break down to your
Speaker 1: point of view of the world and what kind of
Speaker 1: liftoff you're expecting here. I do think the FED is
Speaker 1: looking at it incorrectly. I think they're looking at it
Speaker 1: the way that I indicated at the outset, which is
Speaker 1: the way that we've always looked at it, which is
Speaker 1: you focus whatever you're looking at in terms of the
Speaker 1: level of the unemployment rate. The pace of job growth
Speaker 1: is only an indicator of of labor demand. I do
Speaker 1: think they're coming around if you look at you know,
Speaker 1: three or four meetings ago, all Power was talking about was, oh,
Speaker 1: the unemploant rates too high, and even the stated unemployment
Speaker 1: rate understates the health of the labor market. Um. And
Speaker 1: with each successive meeting he started to talk a little
Speaker 1: bit more acknowledging that labor demand is very strong. I
Speaker 1: think they get it. Um. I think that they're just
Speaker 1: coming around slowly to that point. So as you mentioned before, UM,
Speaker 1: it seems like it's it's probably, you know, end of
Speaker 1: the summer, as some of these special factors should be
Speaker 1: starting to fade, that they're really going to be able
Speaker 1: to focus on what's actually going on. What's your lift off,
Speaker 1: coach Stapen, I I still think it's next year. I
Speaker 1: think yeah, I have my first rate hike is June,
Speaker 1: so middle of the year. Wow, Stamens Donley, we should
Speaker 1: have stied that, shouldn't we. Economys Stephen, thank you. We
Speaker 1: get smarter with Lisa Hornby, with Schroder's head of US
Speaker 1: multisector fixed income and very sophisticated at the entire depth
Speaker 1: of the yield market. Lisa, I want to channel Ted
Speaker 1: Lasso this morning. That's what we're doing here. And the
Speaker 1: basic idea is the belief in yield higher? Do you
Speaker 1: believe and yield higher? What's the path to get us
Speaker 1: to higher yields where we can frame an intelligent belief? Yeah? Well,
Speaker 1: first of all, I think it depends on whether we're
Speaker 1: talking about nominal or real yields. But just to start
Speaker 1: with nominal, we do think that yields belong higher. I mean, basically,
Speaker 1: any sort of fundamental economic model that you could run
Speaker 1: today suggests that based on the longer term level of growth,
Speaker 1: and I don't mean the next quarter or so, which
Speaker 1: is still quite elevated thanks to the COVID recovery. But
Speaker 1: if any longer term basis, ten year, yields probably do
Speaker 1: belong at a higher level. And that's compounded by the
Speaker 1: fact that, uh, the FED will eventually be starting to
Speaker 1: taper its purchases. I think what we've seen recently is
Speaker 1: that one, there's a tremendous amount of liquidity in the
Speaker 1: system and it's chasing yields lower. Uh. And to the
Speaker 1: fact that, uh, you know, the market has essentially taken
Speaker 1: the terminal rate all the way down to around one
Speaker 1: and a half percent. So the market kind of has
Speaker 1: this view right now that if the FED start hiking
Speaker 1: in the next let's say year and a half or so,
Speaker 1: they will not be able to get many rate hikes
Speaker 1: actually done UM. And that means the terminal rate will
Speaker 1: be one and a half percent UM, and so that
Speaker 1: the level of tenure yields, and my view is is
Speaker 1: artificially depressed by that view, and I think that that
Speaker 1: will start to correct itself, in part because I actually
Speaker 1: think that the Fed wants to take a slightly easier
Speaker 1: path to all of this and might delay the rate
Speaker 1: hiking cycle more than the market currently believes, which means
Speaker 1: the terminal rate actually belongs higher and nominal yields actually
Speaker 1: belong higher. They said just quickly on this for debate.
Speaker 1: There's more debate to this, and I think some people
Speaker 1: might imagine outside of the market, looking again, you think
Speaker 1: tapering is actually bearish for treasuries because some people have
Speaker 1: taken the other side of that. Um, well, it's it's
Speaker 1: hard to say right now, right because we've had we
Speaker 1: had the sell off, and now we've had the rally. Um,
Speaker 1: So where does that actually leave us. I don't think
Speaker 1: taper is actually the big story, because I think the
Speaker 1: Fed is going to try to focus it on. Look,
Speaker 1: the size of the balance sheet is going to remain
Speaker 1: extraordinarily large, So the incremental flow they'll take down ten
Speaker 1: billion per month perhaps, um it'll take them maybe close
Speaker 1: to a year to actually taper. But the real question
Speaker 1: is what happens after that, and last time they waited
Speaker 1: a year to actually start hiking rates after they finished
Speaker 1: they finished the tapering cycle um. But also last time around,
Speaker 1: they started hiking rates and then they also started reducing
Speaker 1: their balance sheet actively. So I think they're going to
Speaker 1: try and sequence this in a much more extended way,
Speaker 1: and that's probably, in our view, going to result in
Speaker 1: a higher inflation backdrop than the market has become accustomed
Speaker 1: to over the last decade. We're not talking about pernicious,
Speaker 1: you know, four or five six percent inflation um, but
Speaker 1: we think the inflation regime for the next let's say
Speaker 1: several years is probably closer to two and a half
Speaker 1: percent versus the one and a half percent regime we
Speaker 1: had been in previously. So well, Lisa, we're focusing a
Speaker 1: lot on the ten year yield, and some people might say, really,
Speaker 1: that's the one metric and markets, and yet this underpins
Speaker 1: people's call when it comes to stocks, when it comes
Speaker 1: to currencies, literally with everything, and increasingly this is one
Speaker 1: of the most important factors to keep an eye on.
Speaker 1: And we keep talking about the demand side, the idea
Speaker 1: of the FEDS buying and how much they are buying,
Speaker 1: how much they might remove accommodation, And yet the supply
Speaker 1: side is also important. We came into the year talking
Speaker 1: about fiscal stimulus that was way above where we are
Speaker 1: seeing it come in. Now, how much does that play
Speaker 1: a factor in this The idea that supply of treasuries
Speaker 1: being sold into the market probably will decrease a little
Speaker 1: bit more than people had expect or at least not
Speaker 1: go as high as people expected. Does this lead naturally
Speaker 1: to perhaps a lower yield than might have others wise
Speaker 1: naturally been the case. Yeah? Absolutely, But I do think
Speaker 1: some of that perhaps has been discounted. Right. So, when
Speaker 1: we started the year we were talking about an infrastructure
Speaker 1: package of two three four trillion dollars, rates were significantly higher. UM.
Speaker 1: So that has to some degree been been marginalized. You know,
Speaker 1: we're now we're talking about a five and fifty billion
Speaker 1: dollar package. Honestly, who knows where this is going to
Speaker 1: end up. I mean that the conversation changes week to week. Um.
Speaker 1: But at this point I think that the market's expectations
Speaker 1: for another large fiscal plan have been dampened to some degree.
Speaker 1: So if we got something significantly larger, I think that
Speaker 1: would need to be discounted into the into rates markets.
Speaker 1: This quote from a Lim and just to jump in
Speaker 1: least off I can. The extent to which try series
Speaker 1: will be driven by the fundamentals is as much of
Speaker 1: an unknown as the actual dates for itself at this stage.
Speaker 1: That's the problem, isn't it. It's fair That's absolutely right,
Speaker 1: and that's that's why that fundamental divergence that I mentioned
Speaker 1: to you, when you look at a model of where
Speaker 1: tenure should be and where they are today, it's probably
Speaker 1: as wide of the gap as it has been. However,
Speaker 1: in our view, when you look at that over kind
Speaker 1: of a long term, more structural way, those do tend
Speaker 1: to converge. Now that doesn't mean intends go right to
Speaker 1: the fair value model, but that does mean that we
Speaker 1: probably see ten year old start to drift higher in
Speaker 1: the next couple of months rather than in our view
Speaker 1: lower from here. Lisa always enjoy catching obvious send not
Speaker 1: best of the team one, Yeah, Lisa Hombi that strout
Speaker 1: as head of US multisector fixed income. This is the
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