WEBVTT - Surveillance: Earnings Optimism With Ward 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.240 --> 0:00:13.200 with Jonathan Ferrell and Lisa Brownwitz Jailey. We bring you 0:00:13.320 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.960 --> 0:00:23.840 Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot com, 0:00:23.920 --> 0:00:30.760 and of course on the Bloomberg Terminal. John gets out 0:00:30.800 --> 0:00:32.800 front of the toughest thing, which is a get beyond 0:00:32.880 --> 0:00:35.240 what's going to happen the first week August or Jobs 0:00:35.280 --> 0:00:38.760 Day on Friday. Somebody who's expert at that is Howard 0:00:38.800 --> 0:00:42.640 Ward trying to get out beyond the next quarter with 0:00:42.800 --> 0:00:47.000 Gabelly Funds, and certainly I can say legendary in growthiness, Howard. 0:00:47.080 --> 0:00:49.839 Let's look at the debris right now, twelve months trailing. 0:00:50.200 --> 0:00:53.600 A sophisticate like Howard Ward knows that's t MT and 0:00:53.640 --> 0:00:56.400 the answer is the twelve month trailing numbers are a 0:00:56.480 --> 0:01:01.440 ginormous bullmarket up or So, how do you get out 0:01:01.480 --> 0:01:05.920 to your measurement of growthiness, Howard in two thousand twenty 0:01:06.000 --> 0:01:10.200 three out two years? Well, Tom uh first of all, 0:01:10.319 --> 0:01:14.399 let me just say that the stimulus combined with the 0:01:14.480 --> 0:01:17.399 vaccination to the extent that it's been used and unfortunately 0:01:17.400 --> 0:01:21.640 hasn't been used enough yet have really combined to give 0:01:21.760 --> 0:01:25.759 us a very strong recovery. The GDP growth this year 0:01:26.240 --> 0:01:29.319 could be seven or eight percent. We haven't seen growth 0:01:29.360 --> 0:01:32.679 of that magnitude since nineteen fifty one when Harry Truman 0:01:32.760 --> 0:01:38.559 was president. Earnings expectations UH, which were high two months 0:01:38.600 --> 0:01:41.880 ago when I was last on your show, people were 0:01:41.920 --> 0:01:44.880 expecting earnings of about a D eighty two dollars on 0:01:44.920 --> 0:01:47.840 the SMP this year. That numbers now about a hundred 0:01:47.920 --> 0:01:50.960 nine three dollars, and based on the numbers that were 0:01:51.000 --> 0:01:53.040 reported for Q one and Q two, I think that 0:01:53.160 --> 0:01:56.480 number is still too low. It's probably too of at 0:01:56.520 --> 0:02:02.760 least ten percent um, which means that the three uh 0:02:02.760 --> 0:02:07.600 excuse me, the expectation right now is too low. That's 0:02:07.600 --> 0:02:11.840 it around around two d and twelve dollars. So we 0:02:11.960 --> 0:02:16.920 have continually UH several years of continued good, good earnings 0:02:16.919 --> 0:02:20.880 growth ahead of us, I believe. And so it is this. 0:02:21.120 --> 0:02:24.040 You know, in real estate they say location, location, location, 0:02:24.480 --> 0:02:26.680 and with stocks, I would say earnings, earnings and earnings, 0:02:26.680 --> 0:02:29.560 and the earnings outlook is rarely brighter. How this is 0:02:29.560 --> 0:02:31.680 so important? And John brought it up the idea of 0:02:31.680 --> 0:02:36.799 the NASAC out performing. You provided worldwide leadership on rationalizing 0:02:36.840 --> 0:02:41.120 these nast deck stocks out further state the case now 0:02:41.200 --> 0:02:46.480 for owning those glorified revenue builders out two years, five years, 0:02:46.760 --> 0:02:51.440 ten years. So so tom Um, what's happened since I 0:02:51.480 --> 0:02:54.920 was on two months ago is inflation expectations, while while 0:02:54.919 --> 0:02:58.680 they're higher than we would like because of the delta 0:02:58.760 --> 0:03:02.440 variant being introduced to the extent it has uh, interest 0:03:02.480 --> 0:03:05.160 rates have gone down, but at the same time, as 0:03:05.160 --> 0:03:08.840 I just mentioned, earning estimates have gone up. And when 0:03:08.919 --> 0:03:10.800 you look at the economic growth as strong as it 0:03:10.880 --> 0:03:13.920 is this year seven or eight percent GDP, it's probably 0:03:13.960 --> 0:03:16.720 more like four percent next year. We're already in an 0:03:16.760 --> 0:03:19.200 economy that has seen PEAT growth on a quarter to 0:03:19.280 --> 0:03:23.040 quarter basis and will be is beginning to slow. Slowing 0:03:23.080 --> 0:03:27.280 growth is generally a good environment for growth stocks, and 0:03:27.320 --> 0:03:30.520 when you get beyond next year, we're probably going back 0:03:30.560 --> 0:03:32.840 to GDP growth that has a handle on it of 0:03:32.880 --> 0:03:37.600 about two simply constrained by the limits of the increase 0:03:37.640 --> 0:03:42.000 in the labor supply and productivity growth. So slow growth, 0:03:42.320 --> 0:03:45.040 whether it's slowing or slow, these are good environments for 0:03:45.080 --> 0:03:48.280 growth stocks. So the present value of those future earnings 0:03:48.280 --> 0:03:50.600 remains hot. There's a question also about whether they're a 0:03:50.600 --> 0:03:53.480 mono left right. We always talk about the fang stocks 0:03:53.480 --> 0:03:55.680 as one entity, and yet we've seen a lot of 0:03:55.680 --> 0:03:58.680 divergence within the recent earnings and the outlooks. For example, 0:03:58.720 --> 0:04:02.000 the likes of Alphabet Whogl's parent companies seeing ad revenue 0:04:02.000 --> 0:04:05.040 really picking up, whereas the likes of Amazon seeing a 0:04:05.080 --> 0:04:08.320 lower sales estimate. How much do you expect this bifurcation 0:04:08.360 --> 0:04:10.760 to continue of the halves and the have nots within 0:04:10.800 --> 0:04:13.400 the growth world. Well, you know, it's a little bit 0:04:13.440 --> 0:04:15.520 tricky right now when we look at the numbers, because 0:04:15.560 --> 0:04:21.640 you have uh companies like Amazon that are growing free 0:04:21.640 --> 0:04:24.080 cash flow like few other companies. In fact, the fang 0:04:24.120 --> 0:04:27.760 stocks in general are among the greatest free cash flow 0:04:27.800 --> 0:04:31.520 generators of all and the market in the last two 0:04:31.520 --> 0:04:35.520 months in particular, as rates have moderated, has been rewarding 0:04:35.600 --> 0:04:38.400 free cash flow more than anything else. In the first quarter, 0:04:38.400 --> 0:04:42.920 it was really rewarding earnings estimate revisions, positive revisions. Last year, 0:04:42.920 --> 0:04:45.680 it was sales growth. Right now it's free cash flow growth. 0:04:45.920 --> 0:04:48.680 And so so many of these growth stocks, and all 0:04:48.720 --> 0:04:51.600 of the fang stocks, including Netflix, although they were free 0:04:51.600 --> 0:04:53.880 cash flow last year, probably not this year, but they 0:04:53.880 --> 0:04:56.479 will get on a permanent or trajectory of free cash 0:04:56.520 --> 0:05:01.279 flow growth next year. Uh. These are wonderful places to go. 0:05:01.360 --> 0:05:03.919 And in the case of Amazon in particular, bear in 0:05:03.920 --> 0:05:07.880 mind the company is up against monster comparisons. And Amazon 0:05:08.040 --> 0:05:12.280 has become Amazon because of Jeff bezos willingness to sacrifice 0:05:12.320 --> 0:05:15.200 short term profit for long term geed. He's become the 0:05:15.279 --> 0:05:19.440 richest person in the world following following that strategy. And 0:05:19.560 --> 0:05:21.599 in the case of Amazon, they have investment cycles. They 0:05:21.680 --> 0:05:24.839 keep investing to give the consumer a better experience, and 0:05:24.880 --> 0:05:28.200 that has been a successful formula and it is continuing 0:05:28.240 --> 0:05:31.680 to show the way for Amazon's future growth. They remain 0:05:31.720 --> 0:05:33.960 the leader in e commerce, they remain the leader in 0:05:34.000 --> 0:05:36.960 web services, and they have a rapidly growing digital ad 0:05:37.000 --> 0:05:38.840 business which puts them up there in the you know, 0:05:39.320 --> 0:05:43.320 as number three behind Google and Facebook. So so free 0:05:43.320 --> 0:05:46.160 cash flow growth right now is the primary mantra. And 0:05:46.200 --> 0:05:48.080 I think really all the Thanks Dots and so many 0:05:48.080 --> 0:05:52.400 other these software and even semiconductor type companies are generating this, 0:05:52.720 --> 0:05:55.240 and this is what really gets us excited. I gotta say, 0:05:55.279 --> 0:05:57.479 tom as I hear Howard talk, I think about the 0:05:57.600 --> 0:06:00.720 case for growth, the case for buying stocks look expensive 0:06:00.760 --> 0:06:03.640 for people who say are in too intall cash who 0:06:03.880 --> 0:06:06.240 might not have been in this. You know, that's been 0:06:06.279 --> 0:06:08.560 the howard Ward mantra for years and goes to Mario 0:06:08.600 --> 0:06:13.040 Gabelly and Howard Wards saying that growth is the new value. 0:06:13.320 --> 0:06:16.320 What's the value trap right now? Howard Ward outter that 0:06:16.400 --> 0:06:20.760 two thousand three, what's the trap? You see? Well, you know, 0:06:21.440 --> 0:06:24.400 you know, I think that the market got very excited 0:06:24.560 --> 0:06:28.440 about the potential for cyclical earnings growth UM. And I'm 0:06:28.480 --> 0:06:31.960 not saying that that that has gone away. Uh, it's 0:06:32.000 --> 0:06:35.560 simply that. And so you had stocks like Caterpillar, for example, 0:06:35.800 --> 0:06:39.840 which should be an obvious beneficiary of the pending infrastructure 0:06:40.240 --> 0:06:44.440 package UM and also benefiting from the reopening trade and 0:06:44.640 --> 0:06:49.159 and booming housing markets and construction. But yet the market 0:06:49.160 --> 0:06:51.120 had discounted that. And in fact, it's a good point 0:06:51.160 --> 0:06:53.760 to mention that, as we saw with this most recent 0:06:54.000 --> 0:06:57.599 batch of earnings, UH, whether it's Amazon or some of 0:06:57.640 --> 0:07:01.400 the others, the market has discounted efficant earnings growth. But 0:07:01.480 --> 0:07:05.600 my my perspective is it's still not where it should be. 0:07:05.640 --> 0:07:09.280 The earnings expectations are still too low for the market overall. 0:07:09.880 --> 0:07:11.800 But when you look at some of the cyclical names, 0:07:11.800 --> 0:07:15.080 particularly now with COVID striking us again, some of that 0:07:15.160 --> 0:07:18.320 cyclical fervor is going to going to come down, and 0:07:18.360 --> 0:07:22.160 some of that reopening trade in hospitality might be put 0:07:22.200 --> 0:07:24.120 on hold. And so I'd be very careful with a 0:07:24.160 --> 0:07:28.600 number of those stocks, whether they're transportation or or or 0:07:28.760 --> 0:07:30.960 or hotel restaurants. I think you have to be very 0:07:30.960 --> 0:07:33.960 careful there, because well, I don't think we're going back 0:07:34.000 --> 0:07:36.640 to a base case of any kind of a countrywide lockdown. 0:07:36.800 --> 0:07:40.400 Lockdown on a regional basis, on a state by state basis, 0:07:41.160 --> 0:07:44.320 that's not so certain. And this is a problem, and 0:07:44.320 --> 0:07:48.120 the risk has risen because of the failure of more 0:07:48.120 --> 0:07:50.520 people to vaccinate. And I have to say that the 0:07:50.600 --> 0:07:55.000 TV personalities and politicians that have discouraged the vaccine and 0:07:55.040 --> 0:07:58.360 are continuing to discourage max mask wearing are doing a 0:07:58.360 --> 0:08:02.280 real disservice to this country and it's costing us illness 0:08:02.360 --> 0:08:04.600 and lives, and those people need to be held accountable. 0:08:04.720 --> 0:08:07.200 How would Ward of Cabelly Funds, Howard, thank you, sir 0:08:07.440 --> 0:08:15.720 as always gonna catch up a number of summers ago. 0:08:16.000 --> 0:08:19.440 My book of the summer was Elizabeth Economy of President 0:08:19.480 --> 0:08:22.560 gy and she called it the Third Revolution. It was 0:08:22.600 --> 0:08:25.960 cover to cover, read every word. Someone expert on the 0:08:25.960 --> 0:08:30.440 granularity of Liz economies China is Leland Miller with China 0:08:30.520 --> 0:08:33.520 Beije book. He is definitive on the cadence and the 0:08:33.559 --> 0:08:36.880 pulse of domestic China. Leland Miller, what's it looked like 0:08:37.080 --> 0:08:39.959 right now? How does domestic China react to what they 0:08:39.960 --> 0:08:44.240 see from Beijing. Well, you've got a lot of factors 0:08:44.240 --> 0:08:46.760 that are pushing things in both directions. You've obviously got 0:08:46.800 --> 0:08:50.320 these nasty crackdowns and tech and the education sector that's 0:08:50.360 --> 0:08:52.760 hitting the stock market, which is looking sort of nasty. 0:08:53.320 --> 0:08:55.840 You've got spread of delta variant, which is which is 0:08:55.840 --> 0:08:58.560 creating uncertainty for the future. At the same time, you know, 0:08:58.679 --> 0:09:00.440 some of the numbers that we're looking at are not 0:09:00.520 --> 0:09:04.080 as bad as everyone sperit. Yet a recent are Our 0:09:04.160 --> 0:09:06.480 cut and that made people think, well, well, China must 0:09:06.480 --> 0:09:09.200 be doing really poorly if they're looking to stimulate the economy. Well, 0:09:09.400 --> 0:09:12.559 I think manufacturing is doing okay. Services actually doing a 0:09:12.559 --> 0:09:15.439 little bit better. So so we're not as negative on 0:09:15.440 --> 0:09:18.040 on the actual underlying economy, even though you have these 0:09:18.080 --> 0:09:21.800 awful headlines just coming from every direction. Okay, great, what 0:09:21.880 --> 0:09:24.559 do you do if you're advising Tim Cook of Apple? 0:09:24.640 --> 0:09:29.160 What is the Leland Miller perspective for big American companies 0:09:29.360 --> 0:09:35.280 who have this this codependency almost with Beijing. Well, you know, 0:09:36.080 --> 0:09:39.880 Apple is almost unique in that it figured out a 0:09:39.920 --> 0:09:41.800 bunch of years ago that it needed to have a 0:09:41.840 --> 0:09:45.040 contingency plan. But its needs and its production China is 0:09:45.040 --> 0:09:48.319 so big that it can't really just move things. So 0:09:48.640 --> 0:09:50.880 I think what Apple is doing is what they can 0:09:50.920 --> 0:09:53.680 in terms of trying to create other markets where they 0:09:53.679 --> 0:09:55.920 can where they can produce too, so they don't have 0:09:55.960 --> 0:09:58.560 so much of an emphasis and reliance on China. But 0:09:58.640 --> 0:10:01.640 they produce so much you can't just move everything to 0:10:01.720 --> 0:10:05.000 India or to Vietnam or somewhere else in Southeast Asia. 0:10:05.280 --> 0:10:07.040 So so they're doing the best they can. But but 0:10:07.080 --> 0:10:09.600 if you're not Apple, and you know, you should be 0:10:09.880 --> 0:10:12.480 way down the road in terms of contingency planning just 0:10:12.600 --> 0:10:16.160 so you don't have over reliance on on China for 0:10:16.040 --> 0:10:18.880 the market, for the production, just because of all the 0:10:18.880 --> 0:10:21.160 different things are going on, from the virus to trade wars, 0:10:21.160 --> 0:10:23.760 to geopolitical tensions. Okay, so we've been talking about the 0:10:23.760 --> 0:10:27.079 fundamentals and the potential slowing down of the economy. The 0:10:27.120 --> 0:10:29.800 data seeming to confirm that that we got out overnight. 0:10:29.840 --> 0:10:32.120 The question is how much does this matter and how 0:10:32.200 --> 0:10:34.760 much is the focus squarely on the regulatory regime. The 0:10:34.800 --> 0:10:37.199 fact that there does seem to be a shift by 0:10:37.200 --> 0:10:41.600 President jin Ping, there's definitely a shift. The question is 0:10:41.600 --> 0:10:44.960 is this step one of twelve steps where they keep 0:10:45.080 --> 0:10:48.400 ramping up crackdowns between now and the Party Congress, which 0:10:48.400 --> 0:10:50.800 is a little over year year from now, or is 0:10:50.840 --> 0:10:54.199 this uh their attempt to try to fix problems during 0:10:54.280 --> 0:10:57.920 what is basically a little bit of hiatus from disaster disasters. 0:10:57.920 --> 0:11:01.440 Headlines they recovered from COVID faster than others. Uh, there's 0:11:01.440 --> 0:11:03.719 a little bit of a global recovery going on right now. 0:11:03.800 --> 0:11:07.840 So so to some extent, this may be Beijing seeing 0:11:07.880 --> 0:11:09.679 a window to try to do some of these things 0:11:09.720 --> 0:11:12.200 that they pushed off for a long time. It's more 0:11:12.320 --> 0:11:15.080 likely that this is the first of many steps. Uh. 0:11:15.360 --> 0:11:17.400 So then I think you're gonna have to to watch 0:11:18.360 --> 0:11:20.760 not just the regulatory crackdown because that affects stocks, but 0:11:20.760 --> 0:11:24.559 but whether this spills over into pessimism on the economy 0:11:24.600 --> 0:11:27.200 at large. Right now, we're not seeing that yet, but 0:11:27.280 --> 0:11:29.000 that's something to watch for the second half of the year. 0:11:29.040 --> 0:11:31.760 What are potential regulatory measures that you expect the PBOC 0:11:31.920 --> 0:11:35.760 to consider, they expect j Pink potentially signal and upcoming speeches. 0:11:37.040 --> 0:11:38.880 I think the most important thing over the next year 0:11:38.920 --> 0:11:43.400 will be signaling a continued pull away from a reliance 0:11:43.800 --> 0:11:46.280 on the United States or the West. Uh. You know, 0:11:46.320 --> 0:11:48.240 the law of the headlines the past couple of years 0:11:48.280 --> 0:11:51.000 have been how the US is threatening to kick China 0:11:51.040 --> 0:11:55.080 off its stock markets and and and decoupling through you know, 0:11:55.200 --> 0:11:59.360 chip chips and other aspects of the technological relationship. What's 0:11:59.440 --> 0:12:02.480 Jumping really has to signal from a political standpoint is 0:12:02.520 --> 0:12:04.920 that China can go its own way. Now that's not 0:12:05.040 --> 0:12:07.480 completely true, and in some things like chips, it's not 0:12:07.520 --> 0:12:09.800 true at all, But that's the signal that he has 0:12:09.840 --> 0:12:12.400 to be sending. Uh, China can do its own way 0:12:12.480 --> 0:12:15.520 as they enter a very politically sensitive year next year, Leland, 0:12:15.559 --> 0:12:17.400 I'm trying to understand what's happening on the ground in 0:12:17.400 --> 0:12:19.120 the country at the moment, and I'm not getting a 0:12:19.160 --> 0:12:23.240 ton of information Nanjing and the spread of the downta 0:12:23.320 --> 0:12:26.360 variant supposedly from the airport there and the restrictions with 0:12:26.400 --> 0:12:27.880 standing to see what are you seeing on the ground, 0:12:27.880 --> 0:12:30.680 what are you hearing? But we actually attract us now, 0:12:30.760 --> 0:12:32.920 so we have a China beged book COVID tracker, and 0:12:32.960 --> 0:12:35.000 what we do is we asked our corporate networks whether 0:12:35.040 --> 0:12:37.720 they're seeing a spike amongst their workforce, either in a 0:12:37.720 --> 0:12:41.079 particular city or nationally. Uh. We saw the spike in 0:12:41.160 --> 0:12:44.840 Guangdong two weeks before it was announced, affecting the ports 0:12:44.840 --> 0:12:47.120 and the shutdowns. Uh, you know, and we saw something 0:12:47.160 --> 0:12:49.440 a couple of weeks ago showing that that that the 0:12:49.280 --> 0:12:50.520 that there looked like there was a bit of an 0:12:50.559 --> 0:12:54.440 outbreak going on. It's hard to know what is a 0:12:54.520 --> 0:13:00.160 mildly serious outbreak and something bigger because Beijing is is 0:13:00.240 --> 0:13:03.040 vary suppressing information on it. It's not good news, so 0:13:03.280 --> 0:13:05.600 they don't like to report it. They're also cracked down. 0:13:05.600 --> 0:13:07.880 They see six cases and they shut things down. So 0:13:08.240 --> 0:13:10.720 really it's it's watching the spikes and our COVID tracker 0:13:10.800 --> 0:13:13.520 to see to see what is what is just sort 0:13:13.520 --> 0:13:16.280 of the role of this thing. So the EBB and 0:13:16.320 --> 0:13:18.320 flow and what looks like it could be a serious 0:13:18.360 --> 0:13:21.280 spike that's gonna affect economic activity. That's the question I 0:13:21.280 --> 0:13:23.640 have Leland the restrictions you're starting to see introduced on 0:13:23.679 --> 0:13:26.560 the ground and cities light managing. Is this a threat 0:13:26.840 --> 0:13:30.600 to economic growth in China for the coming months. Absolutely. 0:13:30.640 --> 0:13:33.280 I mean, we all know how how incredibly contagious the 0:13:33.320 --> 0:13:36.200 delta variant is, and that's what China's dealing with right now. 0:13:36.960 --> 0:13:39.160 They have a vaccine, but it's not really a vaccine. 0:13:39.280 --> 0:13:41.839 It doesn't it doesn't show anywhere near the protection that 0:13:41.960 --> 0:13:45.640 all these other UH vaccines being used United States and 0:13:45.679 --> 0:13:49.800 elsewhere are are. You are are are boasting. So there 0:13:49.880 --> 0:13:51.920 is a real worry about this, and so what you're 0:13:51.960 --> 0:13:55.920 gonna see from China is a continued, very aggressive shutdown 0:13:56.200 --> 0:13:59.400 response every time they see a small outbreak. What does 0:13:59.440 --> 0:14:01.880 that do? If rows off commerce, it throws off the economy, 0:14:01.960 --> 0:14:03.640 and if you see it in enough places, it's gonna 0:14:03.760 --> 0:14:07.880 affect macro economic activity. So we haven't seen that yet, 0:14:07.920 --> 0:14:09.880 but what we're seeing right now with these mini spikes 0:14:09.960 --> 0:14:12.400 is something to watch going into September, because this is 0:14:12.520 --> 0:14:15.000 this is this is something new, This is something new. Yeah, 0:14:15.080 --> 0:14:17.760 especially given the efficacy rights of the particular vaccine that 0:14:17.800 --> 0:14:20.000 was distributed that compared to say, fine some of Madonna 0:14:20.320 --> 0:14:21.760 in much of the West, lean and grant to catch 0:14:21.840 --> 0:14:23.440 up running poll and tell pink lea mill of that, 0:14:23.480 --> 0:14:34.280 Shanna Basbook CEO. Let us return John to May seven 0:14:34.840 --> 0:14:38.720 of two thousand twenty one. The survey was what a 0:14:38.840 --> 0:14:42.200 millionaire this or that? Nine hundred thousand oops, and it 0:14:42.320 --> 0:14:45.760 came in a little lower. Stephen Stanley, like all of us, 0:14:45.800 --> 0:14:48.960 sobered up that day with Amber's pier Pont chief Economists 0:14:48.960 --> 0:14:52.560 and joins us right now, Stephen Stanley, why is this 0:14:52.640 --> 0:14:56.440 time around different than the joy of May seven, two 0:14:56.480 --> 0:15:00.120 thousand twenty one? Right? Well, I think that was the 0:15:00.200 --> 0:15:03.400 day that we realized just how severe the supply side 0:15:03.400 --> 0:15:06.239 constraints were on the labor market. And as an economist, 0:15:06.680 --> 0:15:08.960 you know, I've been trained, the FED economists have been 0:15:08.960 --> 0:15:12.360 trained for decades that when you look at the peril numbers, 0:15:12.360 --> 0:15:14.160 when you look at the unemployment rate, what you're really 0:15:14.160 --> 0:15:16.840 trying to get at is the strength of demand in 0:15:16.880 --> 0:15:20.280 the labor market. And we knew that demand was very strong. 0:15:20.360 --> 0:15:22.640 In the spring. We had seen a big peril number 0:15:23.120 --> 0:15:26.120 uh the month before, and what we've learned in the 0:15:26.160 --> 0:15:29.200 intervening months is that demand is indeed very strong, but 0:15:29.280 --> 0:15:33.320 there there have been some pretty severe supply side constraints. 0:15:33.360 --> 0:15:36.280 People are not flocking back into the labor force in 0:15:36.320 --> 0:15:38.960 the numbers that we had hoped, you know, for the 0:15:38.960 --> 0:15:43.120 reasons that everyone suggested, health concerns, childcare issues, and the 0:15:43.160 --> 0:15:47.120 supplemental unemploment benefits, and the latter two of those should 0:15:47.160 --> 0:15:50.360 be starting to ease now. Um. Obviously remote schooling should 0:15:50.360 --> 0:15:51.920 be less of an issue in the summer than it 0:15:52.000 --> 0:15:55.080 was during the school year, and the supplemental unemployment but 0:15:55.120 --> 0:15:58.000 if it's have expired about half the states, so um, 0:15:58.040 --> 0:16:00.560 I think that's one story that we're likely to see 0:16:00.560 --> 0:16:03.760 in July. The other one, with regard to payrolls is 0:16:03.760 --> 0:16:06.360 is just a seasonal quirk, which is, you know, the 0:16:06.360 --> 0:16:10.360 the education the seasonality around education workers is pretty extreme 0:16:10.400 --> 0:16:13.560 and obviously they're being um, you know, they're they're not 0:16:13.680 --> 0:16:16.880 on the payroll in the summer, and so to the 0:16:16.920 --> 0:16:19.720 extent that schools weren't operating full bore, you would have 0:16:19.720 --> 0:16:23.120 a smaller number of education related layoffs in July, and 0:16:23.160 --> 0:16:25.760 therefore the seasonal in justused number in July for the 0:16:25.880 --> 0:16:29.400 education workers is likely to be up very sharply, Stephen. 0:16:29.440 --> 0:16:32.080 You're anticipating the supply side of this economy to respond 0:16:32.160 --> 0:16:35.120 from September on woods. If it doesn't, can you see 0:16:35.120 --> 0:16:38.880 wage pressures persisting, this inflation re pressure persisting in a 0:16:38.880 --> 0:16:42.800 way that could reshape the conversation of the Fed. Absolutely, 0:16:42.880 --> 0:16:44.760 I think that's the that may be the problem for 0:16:44.800 --> 0:16:47.000 the FED. As long as demand is as strong as 0:16:47.000 --> 0:16:49.720 it has been, then you know, it's it's a pay 0:16:49.760 --> 0:16:51.400 me now, pay me later thing. Either we're going to 0:16:51.440 --> 0:16:54.480 get a very strong recovery and economic activity as the 0:16:54.480 --> 0:16:58.320 supply side normalizes, if it normalizes quickly, or if it doesn't, 0:16:58.320 --> 0:17:00.160 we're going to continue to see these bottle now x 0:17:00.200 --> 0:17:03.400 that have helped to generate wage and price pressures. So um, 0:17:03.520 --> 0:17:08.399 neither of those scenarios is really entirely uh consistent with 0:17:08.520 --> 0:17:10.679 the sort of monetary policy that the FED is running. 0:17:10.800 --> 0:17:12.600 There is, of course, very little they can do about 0:17:12.600 --> 0:17:15.520 the supply side of the economy, Stephen, except let demand 0:17:15.560 --> 0:17:18.400 writ for long enough that the supply side eventually responds. 0:17:18.600 --> 0:17:22.520 But if the participation rate doesn't recover, that surely changes 0:17:22.720 --> 0:17:24.800 the path of things for the Federal Reserve. At what 0:17:24.880 --> 0:17:27.240 point do you think that's conversation could gain a little 0:17:27.280 --> 0:17:29.679 bit more traction. Is that a year end conversation or 0:17:29.680 --> 0:17:33.000 a new year conversation? Well, I mean they've they've been 0:17:33.080 --> 0:17:37.320 pointing September right, school starts again, the unemployment benefits expiring 0:17:37.359 --> 0:17:40.359 the other states. Um, so you know, let's see what 0:17:40.400 --> 0:17:43.040 happens in September and the months forward. I think things 0:17:43.080 --> 0:17:46.080 may pick up even before September. But if they don't 0:17:46.240 --> 0:17:50.320 and we're still talking about these same issues in October, November, 0:17:50.320 --> 0:17:52.000 and then yeah, I think that definitely needs to have 0:17:52.040 --> 0:17:55.919 a pretty tough conversation around that. Stephen. You keep mentioning 0:17:55.960 --> 0:17:58.800 the enhancement employment benefits rolling off in September, and there 0:17:58.800 --> 0:18:00.640 have been a number of states that have already ended 0:18:01.000 --> 0:18:03.840 them in large measure, and some studies have shown that 0:18:03.880 --> 0:18:07.159 they haven't really added that many more jobs in other states, 0:18:07.160 --> 0:18:10.320 that they aren't necessarily on the forefront. The early data 0:18:10.400 --> 0:18:12.960 does it should suggest that perhaps there's more a slack 0:18:13.000 --> 0:18:15.560 of the economy, or less slack in the economy than 0:18:15.600 --> 0:18:18.800 people think. You know, I think it may be early 0:18:18.840 --> 0:18:21.800 to tell. Obviously, this July peril number will be the 0:18:21.840 --> 0:18:24.120 first one where we'll get a gauge on that um 0:18:24.240 --> 0:18:27.240 on a you know, in terms of the really big 0:18:27.359 --> 0:18:31.640 national data UM we've seen, we've definitely seen some impact 0:18:31.680 --> 0:18:33.720 on the claims numbers, so we know that fewer people 0:18:33.760 --> 0:18:36.639 are collecting benefits in those states. Um. You know, the 0:18:36.680 --> 0:18:38.760 presumption is you think they you know, a lot of 0:18:38.760 --> 0:18:41.000 them would want to go out and uh and get 0:18:41.000 --> 0:18:44.120 a job. So and there's certainly plenty of opening. So UM, 0:18:44.160 --> 0:18:45.760 we'll see what happens. I think you don't have to 0:18:45.760 --> 0:18:47.080 give it a month or two before we have a 0:18:47.119 --> 0:18:50.320 better sense of exactly what's going on. The inflationary pressures meanwhile, 0:18:50.359 --> 0:18:52.920 that we are seeing in wages. We've been talking about 0:18:52.920 --> 0:18:56.800 Goldman Sacks raising their entry level salaries this morning, Others 0:18:56.880 --> 0:18:59.000 doing the same credit squeeze coming out and saying that 0:18:59.000 --> 0:19:01.639 they were going to also. Hey, initial associates have a 0:19:01.760 --> 0:19:05.560 hundred thousand dollars a year. Question, is this just isolated 0:19:05.600 --> 0:19:09.040 to the white collar jobs, to the more hiring paying professions, 0:19:09.320 --> 0:19:13.560 or you seeing it consistently and evenly throughout all careers. No. 0:19:13.680 --> 0:19:15.960 I mean, I think most of the headlines over the 0:19:16.040 --> 0:19:18.000 last few months have been more on the lower end 0:19:18.000 --> 0:19:20.399 of the spectrum. You know, the Walmarts of the world 0:19:20.400 --> 0:19:22.840 and the fast food restaurants and and you know a 0:19:22.840 --> 0:19:26.679 lot of cross really across the restaurant industry having to 0:19:26.800 --> 0:19:30.399 raise wages to get people in the door. Um. So 0:19:30.560 --> 0:19:33.520 I don't think that it's that it's just white collar 0:19:33.680 --> 0:19:36.640 or blue collar or service sector. I think it's it's 0:19:36.680 --> 0:19:38.639 kind of across the board. And I think part of 0:19:38.720 --> 0:19:41.320 what's going on, I think this is directly applicable maybe 0:19:41.359 --> 0:19:45.520 to the to the Wall Street headlines is after the pandemic, 0:19:45.520 --> 0:19:48.480 people are kind of reexamining the whole work life balance issue, 0:19:48.560 --> 0:19:51.560 and it may be that people are inclined to either 0:19:51.760 --> 0:19:54.280 work a little less or if they're gonna work really hard, 0:19:54.320 --> 0:19:57.640 they want to get compensated more, um, you know, more 0:19:57.720 --> 0:20:01.000 for it. So, um, let's see how that all plays out. 0:20:01.040 --> 0:20:02.960 I mean, as the dust settles and we get back 0:20:02.960 --> 0:20:05.240 to normal. Um, it may take a couple of years 0:20:05.240 --> 0:20:07.159 before we have a good handle on that, but you 0:20:07.160 --> 0:20:09.000 know that that is something that you could see as 0:20:09.080 --> 0:20:11.159 a as a big factor for the economy moving forward. 0:20:11.320 --> 0:20:14.760 Steven Stanley, it's real sophisticated Monday question. Which is the 0:20:14.800 --> 0:20:18.640 horse and which is the cart? If there's an inflation 0:20:18.960 --> 0:20:23.760 adjusted wage which is negative. Does that lead to wage 0:20:23.800 --> 0:20:27.760 increases or is there some other mystery thing that leads 0:20:27.880 --> 0:20:33.639 us out to a wage breakout? Well, I think that's so. 0:20:33.720 --> 0:20:36.520 There are two things, really um that should be driving 0:20:36.520 --> 0:20:40.399 that wage picture. One is the inflation story, and in 0:20:40.440 --> 0:20:43.600 particular inflation expectations, and that's I think why the FED 0:20:44.000 --> 0:20:46.960 is so focused on that. So if inflation just bulges 0:20:47.080 --> 0:20:50.439 up once and people don't expect it to last, then 0:20:50.480 --> 0:20:54.120 they're not necessarily gonna storm into the boss's office and say, hey, 0:20:54.160 --> 0:20:56.359 I need a race to make up for this five 0:20:56.359 --> 0:20:59.000 percent inflation we're going to see forever. The second thing 0:20:59.080 --> 0:21:01.560 is the leverage that workers have in the labor market. 0:21:01.640 --> 0:21:04.280 And right now, the labor market, despite the level of 0:21:04.280 --> 0:21:06.320 the unemployment rate, I would argue, the labor market is 0:21:06.359 --> 0:21:09.879 as tight, if not tighter, than any we've seen in decades. 0:21:10.080 --> 0:21:12.399 And so, yeah, workers have a lot of leverage in 0:21:12.440 --> 0:21:15.240 that sort of an environment, and you know, we'll see 0:21:15.240 --> 0:21:18.040 if that persists, and if it does, I think workers 0:21:18.080 --> 0:21:21.360 are going to continue to to be able to demand 0:21:21.480 --> 0:21:24.400 higher wages and and then you do run that risk 0:21:24.480 --> 0:21:26.760 of of kind of you know, one step in front 0:21:26.800 --> 0:21:29.159