WEBVTT - Surveillance: Market Value With Joseph Cohen 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 Ferroll 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 --> 0:00:30.200 and of course, on the Bloomberg Terminal. Emmy Joseph Cohen 0:00:30.280 --> 0:00:32.880 has been a partner since Goldben Sachs. Since I think 0:00:32.920 --> 0:00:35.440 it was two thousand eight, I can't remember. It's back 0:00:35.479 --> 0:00:38.680 a few years. She is their advisory director and senior 0:00:38.800 --> 0:00:43.280 investment strategists and arguably no one has ordered America to 0:00:43.360 --> 0:00:47.360 participate in the equity markets like Abby Joseph Cohen. We're 0:00:47.360 --> 0:00:50.640 thrilled she could join us this morning. Abby reaffirmed this 0:00:50.680 --> 0:00:54.640 morning why we need to participate in the stock market 0:00:54.760 --> 0:00:59.600 given the sum of all our fears. Tom Will, good 0:00:59.600 --> 0:01:02.520 morning to you, um, and thank you for inviting me 0:01:02.600 --> 0:01:05.400 to to be here today. UM. You know, what we 0:01:05.480 --> 0:01:08.200 know about the stock market over a long period of 0:01:08.240 --> 0:01:12.520 time is that if you have confidence in the economic outlook, 0:01:12.600 --> 0:01:16.560 equities are usually the best place to be UM, and 0:01:16.640 --> 0:01:19.360 clearly that has been the case now for an extended 0:01:19.400 --> 0:01:22.559 period and I think that one of the important things 0:01:22.640 --> 0:01:27.480 for investors to think about now is valuation. UM. You 0:01:27.800 --> 0:01:30.600 you want to participate in equities, but you want to 0:01:30.600 --> 0:01:33.399 make sure that you're doing it at the right price. UM. 0:01:33.440 --> 0:01:36.120 And one of the things that you and your colleagues 0:01:36.160 --> 0:01:39.600 have spoken about very clearly already this morning is that 0:01:39.720 --> 0:01:44.240 interest rates UM maybe becoming less friendly uh than they 0:01:44.240 --> 0:01:48.640 have been towards valuation. When we look at the valuation 0:01:48.720 --> 0:01:52.280 models that are used by so many investors and so 0:01:52.360 --> 0:01:57.080 many analysts, including those at Goldman Sacks, there's this general 0:01:57.160 --> 0:02:00.760 sense that the market is roughly at fair value, and 0:02:00.960 --> 0:02:03.560 that sounds like, you know, not bad um, if you 0:02:03.640 --> 0:02:07.160 believe that this will in fact be a protracted economic 0:02:07.480 --> 0:02:12.000 recovery and then expansion. Uh, not a bad thing. However, 0:02:12.440 --> 0:02:14.639 we're sort of on a knife s edge. Um. The 0:02:14.760 --> 0:02:19.440 valuation becomes less appealing um if interest rates rise. Uh. 0:02:19.480 --> 0:02:23.160 My colleague David Costin, who does this specific forecast, has 0:02:23.160 --> 0:02:25.160 been saying for a while now that he thinks that 0:02:25.280 --> 0:02:28.079 fair value off with the S and P five hundred 0:02:28.160 --> 0:02:31.680 this year is fort which is pretty much where we are. 0:02:32.120 --> 0:02:35.200 One more point, and that is, when you're at fair value, 0:02:35.600 --> 0:02:40.600 there's no margin for error. Um. If there are disappointments, UM, 0:02:40.800 --> 0:02:45.160 be it on interest rates, the disappointment on OPEQ, for example, 0:02:45.639 --> 0:02:48.440 over the last few days. That's where you start to 0:02:48.480 --> 0:02:52.359 see a big increase in volatility within the market itself. 0:02:52.400 --> 0:02:54.800 So many would so many would say, Abby Joseph Cohen, 0:02:54.919 --> 0:02:57.240 that none of what we're living right now was in 0:02:57.280 --> 0:03:02.040 your economic textbooks at Cornell a few years ago, for example. 0:03:02.080 --> 0:03:04.639 And I do this for my colleague John Farrell. How 0:03:04.680 --> 0:03:08.120 do you respond to the confidence to invest given this 0:03:08.280 --> 0:03:14.959 colossally odd negative real yield? Um? Great question that we're 0:03:15.000 --> 0:03:19.240 asking ourselves as well, uh, Tom, And and the answer 0:03:19.520 --> 0:03:25.880 is carefully, very carefully. UM. We are in an unprecedented 0:03:25.960 --> 0:03:30.400 period both with regard to an extended length of time 0:03:30.480 --> 0:03:32.920 for these negative real yields. By the way, they've been 0:03:32.960 --> 0:03:36.160 negative real yields in Europe now for quite a period 0:03:36.160 --> 0:03:39.640 of time. UM. And we are also in an unusual 0:03:39.680 --> 0:03:43.480 period with regard to nominal interest rates. So when we 0:03:43.560 --> 0:03:47.120 run our models, we're looking at both those nominal and 0:03:47.160 --> 0:03:53.680 real yields and recognize that we truly are in uncharted territory. UM. 0:03:53.720 --> 0:03:56.680 So let me say one more thing, as somebody who 0:03:56.840 --> 0:04:00.400 used to be a quantitative anialist. UM. I to say 0:04:00.440 --> 0:04:04.000 I'm a reformed quant um. I use these models as 0:04:04.000 --> 0:04:07.880 a starting point. UM. I don't use them um as gospel. 0:04:08.000 --> 0:04:11.760 I use them to give me some direction. Are we undervalued, 0:04:12.280 --> 0:04:16.000 fairly valued, overvalued? And then once we have that general 0:04:16.040 --> 0:04:19.720 sense of direction, what could go wrong and what could 0:04:19.720 --> 0:04:22.480 go right? Um? And as we take a look at 0:04:22.520 --> 0:04:26.520 things now, the things that could go wrong include, UH, 0:04:26.640 --> 0:04:30.560 commodity prices. We've seen what OPEC has done. This, by 0:04:30.560 --> 0:04:32.600 the way, it could be more of a problem for 0:04:33.000 --> 0:04:37.200 markets outside the United States. In the US, commodity prices 0:04:37.240 --> 0:04:40.360 are actually a fairly small component of our total cost. 0:04:41.200 --> 0:04:44.320 The second thing that I'm perhaps even more worried about 0:04:45.160 --> 0:04:48.040 has to do with public health. UM. You know, we 0:04:48.040 --> 0:04:53.840 we've had these incredible vaccines, extraordinarily effective, and now we're 0:04:53.880 --> 0:04:57.560 sort of bumping into problems with regard to distribution. In 0:04:57.640 --> 0:04:59.840 the United States. We think this will be a re 0:05:00.000 --> 0:05:03.560 regional issue rather than nationwide. But you take a look 0:05:03.560 --> 0:05:07.480 at the reopening of places like Europe, this is much 0:05:07.480 --> 0:05:12.480 more problematic. The distribution in Europe of their mr NA 0:05:12.960 --> 0:05:18.000 vaccines UM really has been lagging. It's one of the 0:05:18.000 --> 0:05:23.159 reasons there for GDP expectation in Europe continent is below 0:05:23.240 --> 0:05:25.760 what we what we look like and John, you've absolutely 0:05:25.839 --> 0:05:28.360 nailed that. On world travel or the luck thereof, for 0:05:28.480 --> 0:05:30.960 the airlines have suffered because of that time and a 0:05:31.040 --> 0:05:33.719 cyclical story of many ways, sector to sector. The airlines 0:05:33.760 --> 0:05:36.360 have peaked in the minds of some people. They're struggling now. 0:05:36.360 --> 0:05:38.360 The banks are starting to struggle a little bit as well. 0:05:38.400 --> 0:05:40.520 Over the last month. Abe, what was interesting in your 0:05:40.560 --> 0:05:43.080 response to Tom is that you turn to your process 0:05:43.640 --> 0:05:45.480 and for the following question, I'm less interested in the 0:05:45.520 --> 0:05:47.839 call and far more interest in the process. The debate 0:05:47.960 --> 0:05:50.719 right now on the cyclicals is the debate has always 0:05:50.720 --> 0:05:53.000 been over the last six months. Is it just a 0:05:53.040 --> 0:05:57.400 short term reopening trade or something more durable, something more sustainable? 0:05:57.960 --> 0:06:01.719 What is your progress process? Rather to distinguish between the 0:06:01.760 --> 0:06:05.520 two things, what are the signposts you look for? Well, 0:06:05.560 --> 0:06:11.560 we're also looking at the idiosyncratic opportunities, because just because 0:06:11.560 --> 0:06:15.400 a particular company happens to be in a particular sector 0:06:15.600 --> 0:06:20.160 or industry, according to the SMP definition, doesn't tell us 0:06:20.400 --> 0:06:22.800 as much as we need to know. So we're really 0:06:22.839 --> 0:06:29.440 looking at how individual companies have positioned and or repositioned themselves. UM. 0:06:29.520 --> 0:06:32.600 I happen to believe that there will be a movement 0:06:32.680 --> 0:06:37.840 ahead in capex. UM. UH, we think there will be 0:06:37.920 --> 0:06:41.560 an infrastructure bill of some sort UM. Obviously we're not 0:06:41.640 --> 0:06:45.200 privy to the negotiations now in the Congress. We think 0:06:45.200 --> 0:06:49.000 there's a desperate need for spending on infrastructure, but there's 0:06:49.040 --> 0:06:53.400 also a need for private engagement in CAPEX. One of 0:06:53.440 --> 0:06:56.640 the things that we have seen UM in the last 0:06:56.680 --> 0:06:59.800 decade or so has been this decline in the use 0:06:59.839 --> 0:07:04.240 of corporate cash flow for these purposes. UM. We have 0:07:04.400 --> 0:07:07.760 seen much more of it than usual go into things 0:07:07.880 --> 0:07:12.960 like UH dividend payment and share repurchases UM. Those dividend 0:07:13.040 --> 0:07:17.320 payments UM may continue to increase, but if you are 0:07:17.520 --> 0:07:20.920 a corporate CFO and you look at your current share price, 0:07:21.400 --> 0:07:24.000 you say, do I really want to be repurchasing at 0:07:24.040 --> 0:07:26.800 these levels? And that's one thing that, in addition to 0:07:26.880 --> 0:07:30.880 the need to expand physical capacity, main fact lead to 0:07:31.000 --> 0:07:34.920 improvements in CAPEX. So the short answer to your question, John, is, 0:07:35.400 --> 0:07:37.679 we do think that there will be a movement towards 0:07:37.920 --> 0:07:42.320 some of the industrials. UH. And let's recognize that industrials 0:07:42.480 --> 0:07:44.400 are all over the lot and we need to look 0:07:44.720 --> 0:07:48.640 too at the international trade aspects of this. Some of 0:07:48.680 --> 0:07:52.920 the companies that have repositioned themselves well for the twenty 0:07:52.960 --> 0:07:57.360 one century needs, including things like renewable energy and more 0:07:57.400 --> 0:08:02.360 efficient processes, UH, the use of improved metallurgy and so on. 0:08:02.760 --> 0:08:05.280 Some of these are US companies, some of them are 0:08:05.360 --> 0:08:09.880 outside the United States but are important suppliers to US companies. 0:08:09.960 --> 0:08:11.560 Do you think that the impetus so for some of 0:08:11.560 --> 0:08:14.160 that capex spending and the potential for that UH to 0:08:14.200 --> 0:08:16.520 finally sort of maybe get back to levels that we 0:08:16.560 --> 0:08:20.160 saw in previous generations, that that's going to come completely 0:08:20.200 --> 0:08:22.360 at the behest of these companies, or do you need 0:08:22.360 --> 0:08:25.040 a little bit more government government involvement to sort of 0:08:25.040 --> 0:08:28.120 move this along? Abbey, Yeah, Well, let me be careful 0:08:28.240 --> 0:08:30.920 when when I discussed the numbers here, because I don't 0:08:30.960 --> 0:08:33.600 think we're going back to where we were twenty years 0:08:33.640 --> 0:08:36.640 ago as a percentage of the total use of cash flow. 0:08:37.120 --> 0:08:39.199 Because of the change in the composition of the S 0:08:39.280 --> 0:08:42.199 and P five, we now have so many more service 0:08:42.240 --> 0:08:46.760 oriented companies that are not heavy duty industrial spenders. So 0:08:47.200 --> 0:08:50.040 we need to be looking at things industry by industry. 0:08:50.120 --> 0:08:52.760 So I do think that there will be a movement 0:08:52.800 --> 0:08:56.840 back towards more capex UM. The thing that worries me 0:08:56.960 --> 0:09:03.120 most about government spending has been the significant d emphasis 0:09:03.240 --> 0:09:07.360 of spending on things by the government that corporations don't 0:09:07.400 --> 0:09:10.560 usually spend on. And let me be more specific, and 0:09:10.640 --> 0:09:13.840 that is over the last several decades, in fact, going 0:09:13.920 --> 0:09:18.520 back to eighteen sixty, the US government has been one 0:09:18.559 --> 0:09:23.240 of the major investors in long term basic research UM. 0:09:23.280 --> 0:09:25.640 And what we have seen over the last twenty years 0:09:26.200 --> 0:09:29.720 has been a decline in basic research spending as a 0:09:29.760 --> 0:09:32.880 percentage of the federal budget. UM. I think this is 0:09:32.920 --> 0:09:34.720 a mistake. You know, we have to keep in mind, 0:09:34.800 --> 0:09:38.719 for example, that those terrific mr NA vaccines that we 0:09:38.800 --> 0:09:42.640 all are so happy to have now, uh, that initial 0:09:42.760 --> 0:09:47.640 research was done by spending given by the n I 0:09:47.840 --> 0:09:53.480 h M ten fifteen years ago. We forget uh you 0:09:53.600 --> 0:09:56.480 get that cod It's going to be David's David. David's 0:09:56.600 --> 0:09:59.200 very worried you might make a because David custom right 0:09:59.240 --> 0:10:01.240 now is forty three three hundred year n t K 0:10:01.840 --> 0:10:05.560 and we couldn't be bored by that. Right now, tell 0:10:05.600 --> 0:10:09.080 you that that was my granddaughter calling. What did she say? 0:10:09.840 --> 0:10:18.079 It's it's her sixth birthday today. Just say hello, so 0:10:18.160 --> 0:10:21.760 happy birthday. I will call her in just a minute. 0:10:22.120 --> 0:10:24.400 Because I let you go happy. It's going to catch up. 0:10:24.679 --> 0:10:26.480 We think this is more important. You want to make 0:10:26.520 --> 0:10:28.920 a more important point than sound happy birthday. I'm going 0:10:28.960 --> 0:10:30.839 to sing happy birthday to her, and you don't want 0:10:30.840 --> 0:10:35.439 to hear everyway. So basically, the federal government has been 0:10:35.679 --> 0:10:40.600 the basic provider of funds for research but also for infrastructure, UM, 0:10:40.760 --> 0:10:43.200 and we have seen a notable decline in that overlay 0:10:43.320 --> 0:10:45.280 twenty years. We just need to get back to where 0:10:45.360 --> 0:10:48.199 you were, UM and that would be extraordinarily helpful for 0:10:48.320 --> 0:10:50.920 long term economic growth. Abby, Thank you. It's going to 0:10:50.960 --> 0:10:57.400 catch up in their government Sacks advisory director, senior investment 0:10:57.480 --> 0:11:03.839 strategist joining us now. The former governor of the Federal 0:11:03.840 --> 0:11:07.360 Reserve System, Frederick Michigan is a Columbia University and one 0:11:07.400 --> 0:11:10.200 thing I know for certain is everything he's ever written 0:11:10.320 --> 0:11:14.120 has paid great respect to markets as an observer of 0:11:14.240 --> 0:11:17.959 what our economics does. Rick Michigan, you, Peter Hooper and 0:11:18.000 --> 0:11:20.199 am your SUFI. A number of years ago to three 0:11:20.280 --> 0:11:24.720 years ago talked about a monetary policy, a federal reserve 0:11:24.800 --> 0:11:29.480 of Phillips curve that was hibernating, is our traditional monetary 0:11:29.600 --> 0:11:34.000 policy hibernating, and someday we'll get back to it, or 0:11:34.040 --> 0:11:37.040 are we moving on to some form of new paradigm. 0:11:37.920 --> 0:11:41.680 So I think you're right, we're hibernating that the FED 0:11:41.880 --> 0:11:46.040 I think very well, maybe behind the curve that they 0:11:46.559 --> 0:11:51.120 have basically two UH elements here, which is one is 0:11:51.240 --> 0:11:53.559 that they've gone to this average inflation target, which I 0:11:53.600 --> 0:11:55.640 actually think is a good thing, but haven't defined it 0:11:55.760 --> 0:11:59.079 well enough to actually anchor insputations the way they should, 0:11:59.200 --> 0:12:01.400 so I think that's a alumn But the other is 0:12:01.600 --> 0:12:04.760 that they basically have said that the Phillips curve UH 0:12:05.360 --> 0:12:09.480 is not something they're particularly worried about. But on the 0:12:09.559 --> 0:12:11.079 other hand, I think they will find out that that 0:12:11.280 --> 0:12:13.839 that it is hibernating and that there is an issue, 0:12:14.280 --> 0:12:16.960 and I think that the FED will actually end up 0:12:17.120 --> 0:12:18.719 doing what it has to do, but it may be 0:12:18.800 --> 0:12:21.280 a little bit late. So I don't think that it's 0:12:21.320 --> 0:12:23.679 so much that that I think that they're gonna be 0:12:24.840 --> 0:12:29.280 a month by reality. I think that's what's gonna happen here. Unfortunately, 0:12:29.280 --> 0:12:31.400 I think that they they maybe a little bit too 0:12:31.440 --> 0:12:35.520 complacent about the fact that the economy is running very hot, 0:12:36.120 --> 0:12:38.640 that that inflation I think is gonna be less temporary 0:12:38.640 --> 0:12:40.480 than they think it is. It's true that there is 0:12:40.520 --> 0:12:44.679 a supply shock which is temporary, but the real reality 0:12:44.760 --> 0:12:48.000 here is just demand is really jumped a lot because 0:12:48.080 --> 0:12:51.280 of of a very expansion and fiscal policy and pent 0:12:51.440 --> 0:12:55.240 up demand because most Americans are financially much better off 0:12:55.280 --> 0:12:57.480 than they were before the pandemic, and they have been 0:12:57.520 --> 0:12:59.679 able to stand rick every time. The point we look 0:12:59.720 --> 0:13:02.280 at the American economy over the last six months, yet 0:13:02.320 --> 0:13:04.000 today called it the last seven months since the end 0:13:04.040 --> 0:13:06.559 of last year, has improved with the exception of the 0:13:06.640 --> 0:13:10.199 participation rate in the labor market. How complicated do you 0:13:10.240 --> 0:13:12.360 think that is? Does that complicate things for the FED 0:13:12.600 --> 0:13:16.760 that this participation rate has just flattened out? Well, I 0:13:16.840 --> 0:13:20.480 think it's a it's a surprise from what we've what 0:13:21.480 --> 0:13:24.360 the typically happened before the pandemic. But you know, we 0:13:24.480 --> 0:13:26.440 have a situation where a lot of people are at 0:13:26.480 --> 0:13:29.199 basically uh, wondering whether they want to go back to 0:13:29.240 --> 0:13:32.240 work the same way after the shift in terms of 0:13:32.679 --> 0:13:35.720 or work at home. Uh, And so it does complicate 0:13:35.800 --> 0:13:39.160 things in terms of the deciding how tight the labor 0:13:39.240 --> 0:13:42.000 market is. I think the labor market is a little 0:13:42.040 --> 0:13:44.640 bit tighter than it used to be. That the three 0:13:44.679 --> 0:13:46.400 and a half percent unemployment looked like that some of 0:13:46.480 --> 0:13:49.600 the natural rate of unemployment. It may be somewhat higher 0:13:49.679 --> 0:13:52.160 in this case. So it is complicating things, but not 0:13:52.240 --> 0:13:54.679 unaware that they can't figure out. So I think as 0:13:54.720 --> 0:13:58.040 soon as I think a key issue here is a 0:13:58.160 --> 0:14:00.680 central bank never should take its eye off the inflation ball, 0:14:01.160 --> 0:14:04.160 and inflation has been very high, and if it's not 0:14:04.280 --> 0:14:06.079 as temporary as the FED thinks it's going to be, 0:14:06.520 --> 0:14:09.600 they need to move and move relatively fast at that point. 0:14:10.360 --> 0:14:13.240 Are they already too late? Though, Rick, I think there 0:14:13.280 --> 0:14:15.760 may be a little bit behind the curve. So you know, 0:14:16.000 --> 0:14:18.880 the issue is that, uh, in some sense there there 0:14:18.960 --> 0:14:21.320 is a little concern about deja whu all over again 0:14:21.400 --> 0:14:24.080 in terms of the sixties, where the FED was in 0:14:24.160 --> 0:14:27.400 a very similar situation, very combinating monetary policy with with 0:14:27.600 --> 0:14:31.560 very expansionary EPISCO policy. I don't think we're going back 0:14:31.560 --> 0:14:33.560 to the sixties, but I think that they that they 0:14:33.560 --> 0:14:35.800 are a little bit behind the curve here, uh, and 0:14:36.000 --> 0:14:37.800 so that it's going to be more costly for them 0:14:37.840 --> 0:14:40.680 to get inflation under control. UH. And that's added to 0:14:40.720 --> 0:14:43.440 the fact that I think they haven't managed their new 0:14:43.720 --> 0:14:47.120 monetary policy strategy as well as they could. Uh. The 0:14:47.240 --> 0:14:49.720 results inflation expectations may not be anchored as well as 0:14:49.760 --> 0:14:51.640 they should be. I want to go back to the 0:14:51.760 --> 0:14:56.920 mathematics of Rick Michigan, and the mathematics describes folks the 0:14:57.120 --> 0:15:00.800 path of putting the genie back in the bottle Rick 0:15:00.920 --> 0:15:04.400 michikin how do we put the fiscal genie back in 0:15:04.440 --> 0:15:08.480 the bottle? I don't know if we can. Uh. The 0:15:08.560 --> 0:15:11.520 only thing that's sort of a bipartisans in Congress is 0:15:12.000 --> 0:15:15.440 UH the unwillingness to worry about budget deficits. UH that 0:15:15.720 --> 0:15:18.520 that I failed. The Biden bill that was passed was 0:15:19.000 --> 0:15:21.760 was much too large. It was I think a bad bill. UH. 0:15:21.920 --> 0:15:25.360 That it had paying a hundred paying a big checks 0:15:25.400 --> 0:15:27.160 to people who are earning a hundred fifty thousand dollars 0:15:27.200 --> 0:15:29.000 who were not at all hurt by the pandemic was 0:15:29.040 --> 0:15:31.360 a bad idea. I think they should have had more 0:15:31.400 --> 0:15:34.280 contingency in terms of the three hundred dollar payment in 0:15:34.600 --> 0:15:36.880 terms of undeployment insurance, which I think is creating some 0:15:37.000 --> 0:15:40.840 problems for them. Uh so. Uh, and then uh, there 0:15:40.880 --> 0:15:44.120 really is is no one in Congress right now who's 0:15:44.160 --> 0:15:47.080 really very serious about balancing the budget. The Republicans are 0:15:47.120 --> 0:15:50.000 perfectly happy to say let's not spend when in fact 0:15:50.280 --> 0:15:52.880 the Democrats are doing it. But on the other hand, 0:15:53.120 --> 0:15:57.680 they certainly were not the uh serious about getting fiscal 0:15:57.680 --> 0:16:00.360 policy under control during the Trump error. So I think 0:16:00.400 --> 0:16:03.000 we do have a problem here, Rick, Just find a 0:16:03.080 --> 0:16:05.280 question from me. I'm just talking at the Bloomberg right now. 0:16:05.520 --> 0:16:07.760 We just had a break a one thirty on tens 0:16:08.280 --> 0:16:11.920 to four decimal points. You're lower, the session is six 0:16:12.520 --> 0:16:14.440 for you, You're saf from your perspective, What on earth 0:16:14.480 --> 0:16:16.880 does this bond market tell you? I told anymore? And 0:16:16.920 --> 0:16:18.760 at this point with a yield on a tenure of 0:16:18.800 --> 0:16:21.800 one thirty, yeah, I think I tend to different. I 0:16:21.840 --> 0:16:24.760 think that there's more potential for problems in terms of 0:16:24.800 --> 0:16:29.880 inflation in the bond market is things. Uh so, may rather, 0:16:30.000 --> 0:16:32.240 I should tell you. I hope that the bond markets right, 0:16:32.280 --> 0:16:34.520 and that is right, the inflation will not be a problem. 0:16:34.560 --> 0:16:36.280 I think there will be much better for the economy. 0:16:36.840 --> 0:16:39.080 But I think that the balance of risks here now 0:16:39.240 --> 0:16:42.280 is one where there's much more danger. So I think 0:16:42.320 --> 0:16:44.160 complacency one of the things I worry about a little 0:16:44.160 --> 0:16:47.000 bit of complacency in general in the markets, not just 0:16:47.160 --> 0:16:49.920 in terms of the bond market, brols, the stock market, 0:16:50.400 --> 0:16:52.920 and that could could that could be a problem, not 0:16:53.040 --> 0:16:55.480 to to distant future. Rick, it's gonna cash. You have 0:16:55.600 --> 0:16:59.400 come back soon. Rich Miskin there of Columbia University, Thank you, sir. 0:17:03.880 --> 0:17:05.960 Let's take off the morning with Jim Cartamo can Standard 0:17:05.960 --> 0:17:09.680 investment management fixed income portfolio manager. Jim, Let's go strike 0:17:09.720 --> 0:17:13.320 the number one question, the ex cyclical trite, the inflation trite? 0:17:13.400 --> 0:17:16.800 Is they still on? Well, good morning, thanks for having 0:17:16.840 --> 0:17:19.200 me on your show, and I do think it's still on, 0:17:19.480 --> 0:17:23.199 but we we have shifted down gears. So so let 0:17:23.280 --> 0:17:24.920 me just kind of unpack this and go through this 0:17:25.280 --> 0:17:28.680 little what we what we have to understand is that 0:17:28.960 --> 0:17:31.159 the delta or the rate of change, is really what 0:17:31.320 --> 0:17:34.680 matters the most to bond investors. So in the first 0:17:34.760 --> 0:17:36.720 quarter and even in parts of the second quarter, what 0:17:36.800 --> 0:17:40.479 we were seeing is rising growth, rising inflation, and an 0:17:40.680 --> 0:17:45.120 increase in policy easiness. Policy was getting easier. At this point, 0:17:45.280 --> 0:17:47.520 what the market is sensing is that we're past the peak. 0:17:47.840 --> 0:17:51.160 Growth is going to decelerate, inflation is likely to decelerate, 0:17:51.520 --> 0:17:53.800 and policy were past the peak, and policy and we're 0:17:53.800 --> 0:17:56.639 already starting to talk about ways to take that away. Now, 0:17:56.720 --> 0:17:59.000 that doesn't mean that the level of growth is bad, 0:17:59.400 --> 0:18:03.000 that doesn't mean that the level of inflation is too low, 0:18:03.359 --> 0:18:06.920 or that the level of policy easiness is is that 0:18:07.119 --> 0:18:09.280 that that policy is too tight. But what it does 0:18:09.400 --> 0:18:12.320 mean is that we're not going is that we're past 0:18:12.400 --> 0:18:15.960 the peak. So essentially the reflation trade that we're talking 0:18:16.000 --> 0:18:17.879 about is still going to be there, it's just going 0:18:17.920 --> 0:18:21.440 to take a bit longer to actually achieve these goals. So, 0:18:21.600 --> 0:18:24.080 for example, if we start to think about the more 0:18:24.280 --> 0:18:27.479 macro elements that make up the reflation trade, right, there 0:18:27.520 --> 0:18:30.640 are three of those. One is that you got higher 0:18:30.720 --> 0:18:34.120 tenure yields. Then you've got higher tenure yields or higher 0:18:34.240 --> 0:18:37.520 long term yields, and a steepening of the curve, which 0:18:37.560 --> 0:18:40.400 is pretty rare in and of itself, and you also 0:18:40.480 --> 0:18:43.640 got a weaker dollar. So what happened is when everybody 0:18:43.720 --> 0:18:47.639 got into the reflation trades, they were underweight treasuries, they 0:18:47.720 --> 0:18:50.520 had curve s deepeners on, and they were short the dollars, 0:18:50.880 --> 0:18:53.000 and now that that at the rate of change, of 0:18:53.040 --> 0:18:55.680 the pace of that move is starting to decline. The 0:18:55.760 --> 0:18:59.240 second derivative, as they say, people are unwinding their short 0:18:59.280 --> 0:19:02.200 in the dollar, they're taking off their curve steepeners, and 0:19:02.240 --> 0:19:04.840 they're buying back they're under in the U. S. Treasuries, 0:19:04.920 --> 0:19:08.280 and that's what's making this all happen. Okay, Jim brilliantly explained. 0:19:08.320 --> 0:19:10.520 But I want to go to let's talk some math here, folks. 0:19:10.600 --> 0:19:14.320 It is math Wednesday here on Bloomberg Surveillance. Okay, you 0:19:14.400 --> 0:19:17.359 mentioned the delta. If I look at the convexity and 0:19:17.520 --> 0:19:21.639 is is um Galley? Oh, Steven Galley over it? Nord 0:19:21.880 --> 0:19:24.960 says today it's a bear squeeze. Okay, fine. The delta 0:19:25.040 --> 0:19:28.040 is the first derivative. The gamma is the second derivative. 0:19:28.240 --> 0:19:32.679 Right now, are you observing a convexity trade that overshoots 0:19:32.720 --> 0:19:36.320 to the all climback on the reflation trade or is 0:19:36.480 --> 0:19:41.360 there some substance to this lower yield market that we're 0:19:41.400 --> 0:19:44.520 in now? So so, I do think that there is 0:19:44.560 --> 0:19:47.680 a convexity component to this to the extent that you 0:19:47.800 --> 0:19:50.840 can't overshoot lower I do think the tenure Treasury eels 0:19:50.880 --> 0:19:54.240 can get down to one one point five, but I 0:19:54.320 --> 0:19:57.159 think Tom, it's going to get hard to really get 0:19:57.240 --> 0:20:00.399 below that for any real material period of time, at 0:20:00.480 --> 0:20:02.440 least given what we know right now with the with 0:20:02.520 --> 0:20:04.920 the expectations for growth, I mean growth this year is 0:20:04.920 --> 0:20:07.440 supposed to come in somewhere around eight percent in the US. 0:20:07.600 --> 0:20:09.600 Next year it's somewhere around four or four and a 0:20:09.640 --> 0:20:12.639 half percent. It's quite hard for ten year yields to 0:20:12.760 --> 0:20:15.680 stay as low, especially as the FED starts to pull 0:20:15.760 --> 0:20:19.080 back and taper even a little bit. So I think 0:20:19.119 --> 0:20:22.040 this is a correction. The reflation trade is still with us, 0:20:22.440 --> 0:20:24.960 but it's gonna take some time for these positions to 0:20:25.000 --> 0:20:26.960 get cleaned up. Okay, you know, Romaine, this is where 0:20:27.000 --> 0:20:29.160 you step in. If Lisa was here, she'd be talking 0:20:29.200 --> 0:20:31.480 to third derivative, go at it. Okay, all right, I'm 0:20:31.480 --> 0:20:33.159 gonna stick with the first derivative for right now, and 0:20:33.200 --> 0:20:35.320 that it remains the Fed. Jim here, and we talk 0:20:35.359 --> 0:20:37.200 about the messaging coming out of them. It seemed like 0:20:37.240 --> 0:20:39.840 a few weeks ago there was general consensus, at least 0:20:39.840 --> 0:20:42.480 the perception that there was consensus at the Fed. Here, 0:20:42.960 --> 0:20:45.480 it doesn't seem that's the case anymore here, and I'm 0:20:45.480 --> 0:20:48.040 wondering how you view the messaging coming out of the 0:20:48.080 --> 0:20:51.040 FED and how the market's interpreting it. So that's a 0:20:51.040 --> 0:20:53.760 great question remain because for the past couple of weeks, 0:20:53.880 --> 0:20:56.760 the hawks at the FED have been absolutely winning the 0:20:56.920 --> 0:20:59.920 narrative in the marketplace, and now I think it's become 0:21:00.000 --> 0:21:02.520 a lot more dubbish where people are taking the doves 0:21:02.920 --> 0:21:06.040 a lot more seriously at this point. So look, I mean, 0:21:06.320 --> 0:21:08.160 what did the FED tell us in in the middle 0:21:08.200 --> 0:21:11.040 of June at their FOMC meeting. Effectively, they said it's 0:21:11.080 --> 0:21:13.760 time to start talking about talking about tapering and and 0:21:14.000 --> 0:21:16.920 and and we need to see further substantial progress. Well, look, 0:21:17.000 --> 0:21:20.840 the data is good right now. The problem is is 0:21:20.880 --> 0:21:23.639 that it's not good enough. And I think that's the 0:21:23.720 --> 0:21:25.600 debate at the FED. It's not whether or not the 0:21:25.720 --> 0:21:28.600 data is good. It's always about is a good enough 0:21:28.840 --> 0:21:30.560 to get us to the next level, which is for 0:21:30.640 --> 0:21:33.879 the FED to enact a policy change. And right now, 0:21:34.119 --> 0:21:36.639 I would argue that the data is good, but I 0:21:36.800 --> 0:21:39.800 just don't see how. I just don't see an acceleration 0:21:39.880 --> 0:21:42.040 in the in the data to the point where we're 0:21:42.080 --> 0:21:44.800 going to have unanchored inflation, and that's going to cause 0:21:44.880 --> 0:21:47.720 the FED to actually start to act sooner rather than later. 0:21:48.119 --> 0:21:51.159 So look the mid two thousand twenty three dot the 0:21:51.280 --> 0:21:54.040 expectation for the FED to high grades in mid two 0:21:54.080 --> 0:21:57.080 thousand twenty three. I think that's valid. The problem is 0:21:57.240 --> 0:22:00.440 that the markets had started to push that in already 0:22:00.480 --> 0:22:03.000 to the end of two for the first rate hikes. 0:22:03.080 --> 0:22:06.359 Some had even earlier than that. So I think that's 0:22:06.440 --> 0:22:10.120 all going away, and as people push back their expectations 0:22:10.200 --> 0:22:14.520 for FED rate hikes, probably into that mid to late area, 0:22:15.080 --> 0:22:17.119 bond yields are going to fall on that. Jim the 0:22:17.160 --> 0:22:19.440 economic te to Cantani you so much, how the market 0:22:19.480 --> 0:22:22.080 responds to it, Cantani a little more sometimes what you'll 0:22:22.080 --> 0:22:25.480 read on that over the last couple of weeks, Yeah, 0:22:25.520 --> 0:22:27.159