1 00:00:05,120 --> 00:00:09,200 Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 2 00:00:09,200 --> 00:00:13,200 Speaker 1: with Jonathan Ferrell and Lisa Brownwitz. Daily we bring you 3 00:00:13,280 --> 00:00:18,600 Speaker 1: insight from the best and economics, finance, investment, and international relations. 4 00:00:18,840 --> 00:00:23,799 Speaker 1: To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com, 5 00:00:23,920 --> 00:00:31,320 Speaker 1: and of course, on the Bloomberg terminal. Um I demanded 6 00:00:31,360 --> 00:00:34,479 Speaker 1: after Friday Znight Guys, where she was the focus of 7 00:00:34,520 --> 00:00:38,479 Speaker 1: attention in the markets Friday afternoon, Lori Kelvacina joins US 8 00:00:39,040 --> 00:00:42,800 Speaker 1: head of US Equity Strategy at RBC Capital Markets. What's 9 00:00:42,800 --> 00:00:47,360 Speaker 1: so extraordinary about the Kelvasina view, Lorie, what's the distinction 10 00:00:47,400 --> 00:00:53,160 Speaker 1: that got global wall streets attention this weekend? You tell me, Tom, 11 00:00:53,200 --> 00:00:55,000 Speaker 1: I mean I try to keep a cool head in 12 00:00:55,000 --> 00:00:57,480 Speaker 1: in topsy turvy markets, whether it's to the upside or 13 00:00:57,520 --> 00:01:00,160 Speaker 1: to the downside. Um But look, I will tell you 14 00:01:00,400 --> 00:01:02,680 Speaker 1: I think we were at a crossroads. Back in mid May. 15 00:01:02,760 --> 00:01:04,720 Speaker 1: We wrote a piece titled that saying that if the 16 00:01:04,720 --> 00:01:07,839 Speaker 1: market kind of broke below the thirty thirty fifty type 17 00:01:07,880 --> 00:01:11,000 Speaker 1: level exited growth stick air territory, that we'd be pricing 18 00:01:11,040 --> 00:01:13,480 Speaker 1: in a full recession. We bounced back and we're right now, 19 00:01:13,600 --> 00:01:16,200 Speaker 1: right back at that crossroads, UM, and I think it's 20 00:01:16,319 --> 00:01:20,640 Speaker 1: very interesting the market did not break hundred on Friday, UM, 21 00:01:20,680 --> 00:01:23,560 Speaker 1: that May nineteenth low actually ended up holding. I also 22 00:01:23,640 --> 00:01:27,240 Speaker 1: thought it was interesting, frankly, UM, that the small cap space, 23 00:01:27,240 --> 00:01:29,120 Speaker 1: while it did get hit as hard as the SMP 24 00:01:29,200 --> 00:01:32,039 Speaker 1: five hundred, it didn't get hit materially worse on Friday. 25 00:01:32,280 --> 00:01:34,759 Speaker 1: That's important because we had seen that positioning had already 26 00:01:34,760 --> 00:01:37,160 Speaker 1: been washed out in the futures market. There the peak 27 00:01:37,200 --> 00:01:40,839 Speaker 1: and small cap came last March versus large UM. And 28 00:01:41,000 --> 00:01:43,000 Speaker 1: you know, I think we can start to sort of 29 00:01:43,040 --> 00:01:45,200 Speaker 1: look for areas of the market now that have been 30 00:01:45,280 --> 00:01:47,440 Speaker 1: de risked, even though there may be more risk in 31 00:01:47,480 --> 00:01:50,120 Speaker 1: the aggregate. We have focused and we did this to 32 00:01:50,240 --> 00:01:53,440 Speaker 1: great credit to our team Thursday and Friday. On the 33 00:01:53,560 --> 00:01:56,160 Speaker 1: five year out five year view of Inflation from the 34 00:01:56,240 --> 00:02:00,840 Speaker 1: University of Michigan survey, Laura, you highlight that if we 35 00:02:00,920 --> 00:02:06,240 Speaker 1: have a reset to hire inflation expectations, is that good 36 00:02:06,280 --> 00:02:10,920 Speaker 1: for equities or less good? I think that it keeps 37 00:02:10,960 --> 00:02:13,960 Speaker 1: the value trade going forward, and I think that ends 38 00:02:14,040 --> 00:02:16,959 Speaker 1: up being a destabilizing force for the equity market, simply 39 00:02:17,000 --> 00:02:19,600 Speaker 1: because we do need that growth side to really stabilize. 40 00:02:19,639 --> 00:02:21,320 Speaker 1: That's really where more of the market cap is in 41 00:02:21,320 --> 00:02:24,280 Speaker 1: the SMP five hundred these days. But we actually just 42 00:02:24,360 --> 00:02:26,720 Speaker 1: took a look at how different sectors in the market 43 00:02:26,760 --> 00:02:30,079 Speaker 1: have traded in regards to that University of Michigan five 44 00:02:30,160 --> 00:02:32,920 Speaker 1: year inflation expectation number. People used to make fun of 45 00:02:32,960 --> 00:02:34,720 Speaker 1: me for using it. It actually, you know, turned out 46 00:02:34,760 --> 00:02:37,399 Speaker 1: it was good. We had it to dust off the shelf. Um. 47 00:02:37,400 --> 00:02:40,400 Speaker 1: But the reality is it's things like energy, materials, financials, 48 00:02:40,400 --> 00:02:42,720 Speaker 1: and even in the big cap space rates that tend 49 00:02:42,760 --> 00:02:45,600 Speaker 1: to outperform when inflation expectations are rising. So if that 50 00:02:45,680 --> 00:02:48,680 Speaker 1: trend continues, it's you know, gonna let this value trade 51 00:02:48,800 --> 00:02:50,679 Speaker 1: live a little bit longer and keep some pressure on 52 00:02:50,720 --> 00:02:52,600 Speaker 1: the growth trade, which again is a is a pressure 53 00:02:52,600 --> 00:02:55,680 Speaker 1: on the SMP. Yeah, and we've certainly seen growth bearing 54 00:02:55,760 --> 00:02:58,120 Speaker 1: the bulk of the selling pressure. The Nasdaq one hundred 55 00:02:58,160 --> 00:03:00,359 Speaker 1: is down twenty seven and a half percent year a date, 56 00:03:00,720 --> 00:03:03,280 Speaker 1: But even beyond tech, there's been more pain for one 57 00:03:03,280 --> 00:03:06,760 Speaker 1: area in particular, Lorie retail. The SNP five retailing index 58 00:03:07,000 --> 00:03:09,200 Speaker 1: is down a full thirty percentage points so far in 59 00:03:09,240 --> 00:03:12,240 Speaker 1: two of course, you've heard from target cutting in out 60 00:03:12,280 --> 00:03:16,160 Speaker 1: like twice, the focus really being on margins. When are 61 00:03:16,200 --> 00:03:18,320 Speaker 1: we going to start to see that bleeding into more 62 00:03:18,440 --> 00:03:21,600 Speaker 1: areas of this market, because it started with retail, doesn't 63 00:03:21,680 --> 00:03:24,920 Speaker 1: end there. It's a great question, Kayley. And one of 64 00:03:24,919 --> 00:03:26,720 Speaker 1: the things we point out in our pieces that if 65 00:03:26,720 --> 00:03:28,840 Speaker 1: you look at the declines we've seen in the consumer 66 00:03:28,880 --> 00:03:32,200 Speaker 1: discretionary sector as well as the communication services sector, which 67 00:03:32,200 --> 00:03:34,640 Speaker 1: has a lot of sort of consumer sensitive names in 68 00:03:34,680 --> 00:03:37,119 Speaker 1: it as well, the declines we've already seen in those 69 00:03:37,120 --> 00:03:39,920 Speaker 1: sectors are very close to the average declines that we've 70 00:03:39,960 --> 00:03:42,320 Speaker 1: seen in them in the past four recessions. Now, what's 71 00:03:42,360 --> 00:03:46,680 Speaker 1: interesting if we are headed into a recession, areas like financials, industrials, 72 00:03:46,680 --> 00:03:50,480 Speaker 1: materials should have been underperforming. That's part of the historical 73 00:03:50,560 --> 00:03:54,480 Speaker 1: recession playbook that the cyclical areas tend to underperform heading 74 00:03:54,520 --> 00:03:56,640 Speaker 1: into recessions, though they of course do quite well in 75 00:03:56,680 --> 00:03:59,160 Speaker 1: the rebounds. Another one that we've been talking to people 76 00:03:59,160 --> 00:04:01,880 Speaker 1: a little bit about is energy. Um Energy has you know, 77 00:04:01,920 --> 00:04:04,760 Speaker 1: actually done quite well this year for obvious reasons, but 78 00:04:04,840 --> 00:04:07,600 Speaker 1: heading into recessions it does normally see decline. So I 79 00:04:07,600 --> 00:04:09,680 Speaker 1: think it's fair to ask whether some of those winners 80 00:04:09,680 --> 00:04:12,360 Speaker 1: that we've seen here to date. If this recession fear 81 00:04:12,440 --> 00:04:14,720 Speaker 1: really does continue to take cold, are they going to 82 00:04:14,760 --> 00:04:16,680 Speaker 1: continue to see that resilience or will there be a 83 00:04:16,680 --> 00:04:19,280 Speaker 1: bit of a catchdown. Okay, so maybe you don't want 84 00:04:19,320 --> 00:04:21,440 Speaker 1: to continue to buy into areas of the market that 85 00:04:21,480 --> 00:04:23,640 Speaker 1: have been ripping, Laurie, but you mentioned that there are 86 00:04:23,680 --> 00:04:25,920 Speaker 1: some now pockets of this market in which you've seen 87 00:04:26,040 --> 00:04:28,840 Speaker 1: enough to be risking that maybe it provides some kind 88 00:04:28,880 --> 00:04:32,000 Speaker 1: of an entry point. What would those be? So one 89 00:04:32,000 --> 00:04:34,960 Speaker 1: place we've been putting people towards its small caps, and 90 00:04:35,000 --> 00:04:37,520 Speaker 1: we're technically neutral on small cap versus large cap, but 91 00:04:37,560 --> 00:04:39,680 Speaker 1: we did say if you've been underweight, now, we think 92 00:04:39,800 --> 00:04:41,760 Speaker 1: is the time to remove that underweight and get back 93 00:04:41,760 --> 00:04:44,000 Speaker 1: to neutral um. And really, when we look at the 94 00:04:44,000 --> 00:04:47,800 Speaker 1: positioning data on the CFTC work, you've been below financial 95 00:04:47,800 --> 00:04:51,480 Speaker 1: crisis lows. Valuations are cheap, not just in relative terms, 96 00:04:51,480 --> 00:04:53,480 Speaker 1: but they're also getting pretty darn close to where they 97 00:04:53,480 --> 00:04:56,200 Speaker 1: tend to bottom out um in in recent years if 98 00:04:56,200 --> 00:04:58,800 Speaker 1: you're not in a massive recession like the financial crisis. 99 00:04:59,040 --> 00:05:01,920 Speaker 1: So we've got a clearvaluation appeal. What we don't have 100 00:05:02,080 --> 00:05:04,640 Speaker 1: right as a fundamental tailwind here, This is not really 101 00:05:04,640 --> 00:05:07,000 Speaker 1: an area you typically want to be in when the 102 00:05:07,000 --> 00:05:09,920 Speaker 1: FETE is hiking rates, when GDP growth is slowing, when 103 00:05:09,920 --> 00:05:12,000 Speaker 1: I s M is falling. But we do know that 104 00:05:12,000 --> 00:05:14,960 Speaker 1: that risk started to get priced in very early and 105 00:05:15,080 --> 00:05:18,640 Speaker 1: historically recessions are great buying opportunities in that part of 106 00:05:18,680 --> 00:05:20,240 Speaker 1: the market. And for those of you who want to know, 107 00:05:20,400 --> 00:05:23,719 Speaker 1: Lori Kelvisina catch down is a phrase from cf A 108 00:05:23,839 --> 00:05:26,640 Speaker 1: level five. That's that's where she got that from. You 109 00:05:26,640 --> 00:05:29,520 Speaker 1: know where she probably learned that to the Great University 110 00:05:29,560 --> 00:05:35,600 Speaker 1: of Virginia. She's a fellow cavalier. Oh my word, yeah, go, 111 00:05:35,720 --> 00:05:40,719 Speaker 1: who's okay, Lauri Kelvisina with us. Thank you. We'll do 112 00:05:40,839 --> 00:05:44,400 Speaker 1: something in dardn here in the future. RBC Capital Markets. 113 00:05:48,960 --> 00:05:51,880 Speaker 1: I have been data dependent. I've been criticized for calling 114 00:05:51,920 --> 00:05:54,880 Speaker 1: it a Fred parlor game. Francis Donald agrees with me, 115 00:05:55,360 --> 00:05:59,200 Speaker 1: because Francis Donald is writing brilliant economics for manual life 116 00:05:59,240 --> 00:06:03,159 Speaker 1: investment asking if her mother in law knows who Chairman 117 00:06:03,279 --> 00:06:06,040 Speaker 1: Powell is, and you know, Francis, that your mother in 118 00:06:06,120 --> 00:06:08,760 Speaker 1: law will drive. She's lovely, by the way, folks, She'll 119 00:06:08,839 --> 00:06:12,159 Speaker 1: drive thirty kilometers out of her way to save ten 120 00:06:12,279 --> 00:06:15,560 Speaker 1: cents a gale. And how does Chairman Powell speak to 121 00:06:15,600 --> 00:06:19,600 Speaker 1: your mother in law? Well, he's not He's tried, he said, 122 00:06:19,720 --> 00:06:22,760 Speaker 1: let me speak directly to the American people. But the 123 00:06:22,760 --> 00:06:26,960 Speaker 1: big challenge for this Federal Reserve is that inflation expectations, 124 00:06:27,000 --> 00:06:30,320 Speaker 1: which they're so desperate to control, are really not going 125 00:06:30,360 --> 00:06:32,680 Speaker 1: to calm down, at least in the near term. On 126 00:06:32,920 --> 00:06:35,680 Speaker 1: rate heikes, most of the general public is going to 127 00:06:35,760 --> 00:06:37,920 Speaker 1: see what they're paying at the pub and what they're 128 00:06:37,960 --> 00:06:41,919 Speaker 1: paying at the checkout simultaneously here that rates are rising. 129 00:06:42,160 --> 00:06:45,040 Speaker 1: This is gonna be a very different communication. They're very 130 00:06:45,040 --> 00:06:49,080 Speaker 1: difficult communications challenge for all central banks. Uh, they don't 131 00:06:49,120 --> 00:06:52,040 Speaker 1: have the luxury of being honest about what control they 132 00:06:52,080 --> 00:06:55,600 Speaker 1: have on inflation. That's the underlying problems facing Chair Powell, 133 00:06:56,000 --> 00:06:59,920 Speaker 1: Legard and many other central bankers. Jeron Bernankian CNN this week, 134 00:07:00,000 --> 00:07:03,200 Speaker 1: and let's get out his textbook, Able Bernankey, which is 135 00:07:03,240 --> 00:07:06,279 Speaker 1: in my hallway at home. Francis, I look at Able 136 00:07:06,279 --> 00:07:09,640 Speaker 1: Bernankey and back in chapter twenty two ish, it's about 137 00:07:09,680 --> 00:07:13,560 Speaker 1: the effect of what the Fed does on finance. If 138 00:07:13,600 --> 00:07:18,520 Speaker 1: they pop seventy beeps now or July or whenever, what 139 00:07:18,680 --> 00:07:24,080 Speaker 1: does that do to North American banking. Well, it's a struggle, 140 00:07:24,200 --> 00:07:27,720 Speaker 1: and it's another strain on the system. We're looking we 141 00:07:27,760 --> 00:07:30,520 Speaker 1: could be inverted on the yield curve again by today 142 00:07:30,640 --> 00:07:33,840 Speaker 1: or tomorrow, And unlike back in April, you're not gonna 143 00:07:33,840 --> 00:07:36,640 Speaker 1: hear as much pushback that this isn't a signal or 144 00:07:36,680 --> 00:07:41,360 Speaker 1: a precursor to a recession ahead. Financials are tightening, the 145 00:07:41,400 --> 00:07:44,160 Speaker 1: economy is slowing. The consumer looks fine now, but all 146 00:07:44,240 --> 00:07:47,720 Speaker 1: leading indicators suggests it slower. Do your political risk is up. 147 00:07:47,840 --> 00:07:50,600 Speaker 1: If you made a whole table of challenges for the economy, 148 00:07:50,680 --> 00:07:52,880 Speaker 1: almost every single one would tell you that for the 149 00:07:52,920 --> 00:07:55,040 Speaker 1: next sense to twelve months things are going to be 150 00:07:55,240 --> 00:07:58,160 Speaker 1: much more challenging. That's why this is such a difficult 151 00:07:58,200 --> 00:08:01,480 Speaker 1: situation because despite all of these leading indicators, we have 152 00:08:01,600 --> 00:08:04,400 Speaker 1: not seen the central banks blink. Fact last week we 153 00:08:04,440 --> 00:08:07,320 Speaker 1: saw most central banks that we're seeking actually appear even 154 00:08:07,400 --> 00:08:10,680 Speaker 1: more hawkish. So the hope that bad news would be 155 00:08:10,760 --> 00:08:13,760 Speaker 1: good news and create a reversal in this market, it's 156 00:08:13,840 --> 00:08:17,320 Speaker 1: just falling away in front of us Francis. Consumer sentiment 157 00:08:17,360 --> 00:08:19,560 Speaker 1: at its lowest on record, and your mother in law 158 00:08:19,680 --> 00:08:23,320 Speaker 1: driving thirty st kilometers to get a ten cents less 159 00:08:23,440 --> 00:08:25,760 Speaker 1: on a gas can drive around and see a lot 160 00:08:25,800 --> 00:08:29,000 Speaker 1: of variation as things just climb higher and higher. Francis, 161 00:08:29,040 --> 00:08:31,840 Speaker 1: at what point does it have to reach peak negativity 162 00:08:31,920 --> 00:08:34,560 Speaker 1: before you get uh some response from the Fed that 163 00:08:34,600 --> 00:08:37,000 Speaker 1: can to really address this, because right now that between 164 00:08:37,040 --> 00:08:39,280 Speaker 1: a rock and a hard place. If they actually come 165 00:08:39,280 --> 00:08:43,000 Speaker 1: out as hawkish, perhaps I will create better sentiment underpinning 166 00:08:43,000 --> 00:08:46,719 Speaker 1: markets and consumers. This is a great question. I mean, 167 00:08:46,840 --> 00:08:50,360 Speaker 1: macro tends to be most valuable at inflection points in 168 00:08:50,400 --> 00:08:53,760 Speaker 1: the story, and we're not at an inflection point just yet. 169 00:08:54,040 --> 00:08:56,760 Speaker 1: We haven't seen a blink from central bankers, we haven't 170 00:08:56,800 --> 00:08:59,720 Speaker 1: materially seen employment start to rise. All those some leading 171 00:08:59,720 --> 00:09:02,959 Speaker 1: into pater suggests that gets better consumer sentiment. There's a 172 00:09:03,040 --> 00:09:05,600 Speaker 1: range of indicators. A lot of people focused on University 173 00:09:05,600 --> 00:09:09,040 Speaker 1: of Michigan last Friday. Consumer confidence, which waits a little 174 00:09:09,080 --> 00:09:11,880 Speaker 1: bit more towards jobs, doesn't look as bad. But the 175 00:09:11,960 --> 00:09:14,920 Speaker 1: challenge for consumers is we're gonna get retail sales numbers 176 00:09:14,960 --> 00:09:17,920 Speaker 1: this week, and in nominal terms they might look just fine, 177 00:09:17,920 --> 00:09:20,160 Speaker 1: and you'll hear a lot of the consumers good narrative, 178 00:09:20,240 --> 00:09:23,240 Speaker 1: but in real terms, every single month, this is a 179 00:09:23,280 --> 00:09:27,240 Speaker 1: consumer that loses purchasing power, and now initial jobless can 180 00:09:27,360 --> 00:09:30,480 Speaker 1: starting to move up, so they're losing purchasing power and 181 00:09:30,559 --> 00:09:33,840 Speaker 1: they're gonna start worrying about their jobs. That transition from 182 00:09:33,920 --> 00:09:36,960 Speaker 1: capital to labor, well, it's looking like it was very 183 00:09:37,080 --> 00:09:39,520 Speaker 1: short lived. And that's really the biggest challenge facing this 184 00:09:39,640 --> 00:09:42,640 Speaker 1: consumer right now. Francis Mike Wilson over at Morgan Stanley 185 00:09:42,640 --> 00:09:44,520 Speaker 1: came out and said, people are not pricing in the 186 00:09:44,520 --> 00:09:47,319 Speaker 1: consumer weakness that we are going to see given exactly 187 00:09:47,360 --> 00:09:49,959 Speaker 1: how much their budgets are being crimped. You have Lori 188 00:09:50,120 --> 00:09:52,840 Speaker 1: Calvacino of RBC saying that if we break through the 189 00:09:52,920 --> 00:09:54,800 Speaker 1: levels that lows that we have seen here to date, 190 00:09:55,000 --> 00:09:57,440 Speaker 1: we could get down to thirty four hundred pretty quickly 191 00:09:57,559 --> 00:09:59,640 Speaker 1: on the SMP. Do you think that this is all 192 00:09:59,679 --> 00:10:02,600 Speaker 1: act that people have not taken into account how much 193 00:10:02,800 --> 00:10:06,600 Speaker 1: the disposable income is getting eaten into Two of my 194 00:10:06,679 --> 00:10:10,400 Speaker 1: favorite strategists, two very good calls. That's the challenge here 195 00:10:10,440 --> 00:10:12,679 Speaker 1: is that the narrative has been for the last two 196 00:10:12,679 --> 00:10:15,120 Speaker 1: and a half years. There were huge simulus checks. The 197 00:10:15,160 --> 00:10:18,680 Speaker 1: balance sheets look good, death service ratios are fantastic, but 198 00:10:18,800 --> 00:10:22,520 Speaker 1: actually real wages are declining. We're gonna start seeing challenges 199 00:10:22,520 --> 00:10:25,280 Speaker 1: and jobs and that age old idea. Oh, the balance 200 00:10:25,280 --> 00:10:27,760 Speaker 1: sheets are really solid. Well that's where they are now, 201 00:10:27,800 --> 00:10:29,480 Speaker 1: but where they're gonna be in this next six and 202 00:10:29,520 --> 00:10:31,920 Speaker 1: twelve months is more challenging. So that brings me to 203 00:10:31,960 --> 00:10:34,679 Speaker 1: the question of when does the central bank really start 204 00:10:34,720 --> 00:10:37,000 Speaker 1: to pivot? And it looks like what they're telling to 205 00:10:37,080 --> 00:10:39,920 Speaker 1: us is they can't do it until inflation mollifies. What 206 00:10:40,000 --> 00:10:42,000 Speaker 1: I'd like to see from share Powell this week because 207 00:10:42,000 --> 00:10:44,679 Speaker 1: maybe some yell in type comments we want to focus 208 00:10:44,760 --> 00:10:47,160 Speaker 1: a little bit more on core as opposed to headline 209 00:10:47,360 --> 00:10:50,319 Speaker 1: and reminding the general public whoever is listening. My mother 210 00:10:50,320 --> 00:10:53,079 Speaker 1: in law will not be listening, that they can control 211 00:10:53,240 --> 00:10:56,559 Speaker 1: some segments of inflation but not other ones. That would 212 00:10:56,559 --> 00:10:59,120 Speaker 1: be for the beginning seedlings of what we could hope 213 00:10:59,120 --> 00:11:01,360 Speaker 1: for in terms of a of it ahead, But generally 214 00:11:01,400 --> 00:11:03,080 Speaker 1: I don't think this Wednesday we're going to get it, 215 00:11:03,080 --> 00:11:05,440 Speaker 1: and that's why we're not yet at an inflection point 216 00:11:05,440 --> 00:11:07,520 Speaker 1: in the macro story. Are we going to get a 217 00:11:07,559 --> 00:11:11,160 Speaker 1: hint at seventy five is coming in July? Francis, Oh, 218 00:11:11,240 --> 00:11:13,319 Speaker 1: I'm not sure. I mean sexual banks are trying to 219 00:11:13,360 --> 00:11:15,240 Speaker 1: open the door. The Bank of Canada did it last 220 00:11:15,280 --> 00:11:17,920 Speaker 1: week previously that they said, oh, we're not interested in 221 00:11:17,960 --> 00:11:20,160 Speaker 1: seventy five basis points, and then when asked if they 222 00:11:20,160 --> 00:11:22,840 Speaker 1: would raise it by fifty basis points, they said maybe 223 00:11:22,840 --> 00:11:25,160 Speaker 1: more than that. Thin. These are central banks that want 224 00:11:25,280 --> 00:11:28,720 Speaker 1: full optionality. What we might get which might be helpful 225 00:11:28,760 --> 00:11:32,160 Speaker 1: with a little more symmetry in that optionality. More talk 226 00:11:32,200 --> 00:11:35,600 Speaker 1: about a September reassessment could be very valuable. But again 227 00:11:35,640 --> 00:11:37,920 Speaker 1: I don't think we get that this week. We probably 228 00:11:37,960 --> 00:11:42,080 Speaker 1: need much more indication than inflation and inflation expectations beginning 229 00:11:42,120 --> 00:11:45,199 Speaker 1: to cool. Well, they're definitely not cooling yet, Francis. And 230 00:11:45,240 --> 00:11:48,240 Speaker 1: as you say, the FED can't be responsible for bringing 231 00:11:48,240 --> 00:11:50,840 Speaker 1: in all of the factors contributing to inflation. They can't 232 00:11:50,840 --> 00:11:53,640 Speaker 1: do anything about the supply side. How confident are you 233 00:11:53,720 --> 00:11:56,800 Speaker 1: in their ability to get it down towards their target 234 00:11:56,880 --> 00:12:01,199 Speaker 1: without a hard landing. Not very confident if this is 235 00:12:01,240 --> 00:12:05,120 Speaker 1: their current strategy. So we're reevaluating our forecasts now, and 236 00:12:05,160 --> 00:12:08,319 Speaker 1: there is a very significant weak patch in most economic 237 00:12:08,360 --> 00:12:12,280 Speaker 1: models between Q one and Q three. Of whether or 238 00:12:12,320 --> 00:12:15,760 Speaker 1: not it tips the scales into mathematical recession depends what 239 00:12:15,800 --> 00:12:18,040 Speaker 1: you're looking at But the real story is this is 240 00:12:18,080 --> 00:12:21,200 Speaker 1: a material growth slow down and guess what, whether it's 241 00:12:21,240 --> 00:12:23,960 Speaker 1: recession or not recession, that's not the name of the 242 00:12:24,040 --> 00:12:27,600 Speaker 1: game here. That's overly binary type of focus. Francis, Thanks 243 00:12:27,600 --> 00:12:36,719 Speaker 1: so much, Stephen Whiting. Let's go to your wheelhouse. Our 244 00:12:36,760 --> 00:12:42,560 Speaker 1: profits threatened, Yes, um, we are in a period of 245 00:12:42,679 --> 00:12:46,280 Speaker 1: very high profits and that makes them more vulnerable. We 246 00:12:46,320 --> 00:12:51,280 Speaker 1: think that will be a year of decline for EPs 247 00:12:51,840 --> 00:12:55,480 Speaker 1: UM at this point. Again, we don't see the need 248 00:12:55,600 --> 00:12:59,200 Speaker 1: for a plunge in every industry's profits. We don't see 249 00:12:59,200 --> 00:13:03,160 Speaker 1: a need to unwind all of the gains that we've 250 00:13:03,160 --> 00:13:06,120 Speaker 1: had over the last couple of years. But clearly the 251 00:13:06,160 --> 00:13:11,320 Speaker 1: impact of stimulus fiscal stimulus on demand bled through into 252 00:13:11,320 --> 00:13:13,360 Speaker 1: profits in a positive way. That's how we had at 253 00:13:14,280 --> 00:13:18,600 Speaker 1: EPs year last year. Now this means downward earnings estimate revisions. 254 00:13:18,600 --> 00:13:20,080 Speaker 1: This is not going to be a year of ten 255 00:13:20,480 --> 00:13:23,840 Speaker 1: EPs gains followed by another next year. I do think 256 00:13:24,120 --> 00:13:27,160 Speaker 1: share prices already understand this. In other words, the drop 257 00:13:27,240 --> 00:13:30,800 Speaker 1: is already uh to some extent said that these estimates 258 00:13:30,880 --> 00:13:34,199 Speaker 1: or nonsense. Steve. When when we get tested like this, 259 00:13:35,000 --> 00:13:40,040 Speaker 1: do companies that display free cash flow persistency. Do they 260 00:13:40,080 --> 00:13:43,400 Speaker 1: go down with everything else or do they partition and 261 00:13:43,559 --> 00:13:48,920 Speaker 1: separate from the gloom. They do, And it really often 262 00:13:48,920 --> 00:13:53,880 Speaker 1: comes down to dividend courage, dividend delivery. Again, it's really 263 00:13:54,000 --> 00:13:56,880 Speaker 1: boring stuff, but but good stuff. If we take a 264 00:13:56,920 --> 00:14:00,199 Speaker 1: look at US shares that have the most consider to 265 00:14:00,480 --> 00:14:04,560 Speaker 1: long run UH dividend increases UM, they fall in half 266 00:14:04,559 --> 00:14:07,280 Speaker 1: as much as the broad market and they yield nearly 267 00:14:07,440 --> 00:14:10,280 Speaker 1: twice as much. So UM, this is an area again 268 00:14:10,320 --> 00:14:13,720 Speaker 1: to hide out in our own discretionary portfolios. We have 269 00:14:13,760 --> 00:14:17,920 Speaker 1: eleven percent of all discretionary portfolios US or non US 270 00:14:17,960 --> 00:14:22,680 Speaker 1: and for any asset class benchmarked to that particular type 271 00:14:22,680 --> 00:14:26,120 Speaker 1: of style investing. Again, and these were not the companies 272 00:14:26,160 --> 00:14:29,320 Speaker 1: that could gain in twenty They weren't the tech solutions 273 00:14:29,520 --> 00:14:33,120 Speaker 1: and they weren't the really beaten down cyclicals of one. 274 00:14:33,480 --> 00:14:35,880 Speaker 1: So they didn't perform terribly well for the last couple 275 00:14:35,880 --> 00:14:37,880 Speaker 1: of years. And we think they're a very good place 276 00:14:38,240 --> 00:14:41,240 Speaker 1: again now, UM, in a market that's far from perfect 277 00:14:41,440 --> 00:14:44,000 Speaker 1: even what's the distance between now and later? And I 278 00:14:44,080 --> 00:14:47,680 Speaker 1: look at Bank of America putting out this idea that's 279 00:14:47,720 --> 00:14:51,040 Speaker 1: just way too existential. What did you say this idea 280 00:14:51,120 --> 00:14:54,080 Speaker 1: that you have a consumer that's strong, you have corporations 281 00:14:54,080 --> 00:14:57,320 Speaker 1: that are strong. How far is the distance from now 282 00:14:57,760 --> 00:15:00,800 Speaker 1: to a lesser now to one that people are forecasting 283 00:15:00,840 --> 00:15:05,400 Speaker 1: and the prices of stocks so so look, Um, some 284 00:15:05,520 --> 00:15:09,720 Speaker 1: of the lagging indicators like inflation will take a long 285 00:15:09,840 --> 00:15:12,840 Speaker 1: time to roll over, but it doesn't mean we have 286 00:15:12,960 --> 00:15:16,040 Speaker 1: to assume that inflation will rise forever. And just because 287 00:15:16,080 --> 00:15:19,880 Speaker 1: consumer fundamentals are are firm in many ways, you know 288 00:15:19,960 --> 00:15:23,680 Speaker 1: a lot is chipping against it. So we would expect, 289 00:15:23,720 --> 00:15:27,880 Speaker 1: for example, this slowdown in goods consumption to result in 290 00:15:28,400 --> 00:15:32,320 Speaker 1: lesser need for employment. UM. So employment growth will be 291 00:15:32,360 --> 00:15:35,000 Speaker 1: slowing down by later in the year. UM, you won't 292 00:15:35,000 --> 00:15:38,040 Speaker 1: be able to say that a low unemployment rate um 293 00:15:38,120 --> 00:15:40,120 Speaker 1: is the reason why nothing is going to go wrong. 294 00:15:40,200 --> 00:15:42,200 Speaker 1: And I don't want to see ultra bearish here, but 295 00:15:42,280 --> 00:15:45,480 Speaker 1: this is again the reasons why UM. I think from 296 00:15:45,480 --> 00:15:48,760 Speaker 1: a forward looking perspective in terms of monetary policy, you 297 00:15:48,800 --> 00:15:52,600 Speaker 1: can't say, well, we need to raise rates until inflation 298 00:15:52,720 --> 00:15:55,920 Speaker 1: is low. By then you will have created the forward 299 00:15:55,960 --> 00:15:59,760 Speaker 1: looking conditions for a much much deeper decline in the 300 00:16:00,000 --> 00:16:02,400 Speaker 1: on me than you're aiming for. Alan Blinder, the former 301 00:16:02,600 --> 00:16:05,120 Speaker 1: Fed Vice chair came out over the weekend in a 302 00:16:05,160 --> 00:16:07,440 Speaker 1: story and said, the Chair of the Fed doesn't want 303 00:16:07,480 --> 00:16:09,640 Speaker 1: to let the R words slip out of his mouth 304 00:16:09,680 --> 00:16:12,120 Speaker 1: in a positive way, that we need a recession, but 305 00:16:12,160 --> 00:16:15,280 Speaker 1: there are a lot of euphemisms and he'll use them. Stephen, 306 00:16:15,280 --> 00:16:17,320 Speaker 1: what are we going to hear from him on Wednesday? 307 00:16:18,280 --> 00:16:21,760 Speaker 1: It will be very interesting because you can't really satisfy 308 00:16:22,040 --> 00:16:26,040 Speaker 1: markets over short term inflation outcomes. You know, again, we 309 00:16:26,040 --> 00:16:28,320 Speaker 1: we've kind of joked around. It's like, well, you know, 310 00:16:28,360 --> 00:16:31,120 Speaker 1: why don't you raise rates a thousand basis points? And 311 00:16:31,160 --> 00:16:33,240 Speaker 1: it's like, what will that do to next month's CPI reading? 312 00:16:33,240 --> 00:16:36,160 Speaker 1: And there's very little they can do. I think that 313 00:16:36,200 --> 00:16:40,520 Speaker 1: there has been less acknowledgement than we might have seen, 314 00:16:40,600 --> 00:16:44,240 Speaker 1: and everybody's it's probably spending so much time criticizing the Fed. 315 00:16:44,280 --> 00:16:48,120 Speaker 1: It's too easy um for all of us. But supply 316 00:16:48,240 --> 00:16:53,280 Speaker 1: shocks periods in which we have instability in the economy, 317 00:16:53,440 --> 00:16:55,400 Speaker 1: think about we were just talking earlier on the break 318 00:16:55,800 --> 00:16:59,480 Speaker 1: airfares have shot up by thirty two over two months. 319 00:16:59,480 --> 00:17:02,720 Speaker 1: That's non annualized. What were we seeing at goods prices 320 00:17:03,000 --> 00:17:07,080 Speaker 1: last year? The same thing? The sources of demanded economy 321 00:17:07,160 --> 00:17:10,160 Speaker 1: or too unstable. We think monetary policy can take care 322 00:17:10,200 --> 00:17:13,320 Speaker 1: of everything. It can't. These are periods where we don't 323 00:17:13,400 --> 00:17:17,639 Speaker 1: stabilize short in the short term. Stephen whyn you with us, 324 00:17:17,680 --> 00:17:21,640 Speaker 1: and we continue with City Group, Private Bank. I want 325 00:17:21,680 --> 00:17:23,919 Speaker 1: to look at a better tape right now. Futures negative 326 00:17:24,600 --> 00:17:27,800 Speaker 1: up ten ten points in negative eighties six on futures 327 00:17:28,040 --> 00:17:31,480 Speaker 1: futures negative five seven yields to a little better. Really, 328 00:17:31,520 --> 00:17:35,080 Speaker 1: across the Bloomberg screen, everything doing better, even the two 329 00:17:35,080 --> 00:17:39,000 Speaker 1: stents spread from quick inversion two hours ago. We're now 330 00:17:39,080 --> 00:17:43,320 Speaker 1: up ten basis points on the two stands spread. Kaylee, Well, 331 00:17:43,359 --> 00:17:45,960 Speaker 1: on the subject of the two year, yes, things have moderated, Tom, 332 00:17:45,960 --> 00:17:48,040 Speaker 1: but you are still seeing that selling pressure in the 333 00:17:48,040 --> 00:17:49,800 Speaker 1: short end of the curve. I was just taking a 334 00:17:49,800 --> 00:17:52,159 Speaker 1: look at what has happened to the two year treasury 335 00:17:52,240 --> 00:17:54,000 Speaker 1: yield in the month of June, and keep in mind 336 00:17:54,040 --> 00:17:56,240 Speaker 1: it's only June three. We're not even halfway there, and 337 00:17:56,240 --> 00:17:58,399 Speaker 1: we're not yet to the Fed decision on Wednesday. That 338 00:17:58,480 --> 00:18:02,000 Speaker 1: two year treasury yield is up sixty one basis points. 339 00:18:02,000 --> 00:18:04,840 Speaker 1: This is a market that has moved incredibly quickly. Stephen 340 00:18:04,880 --> 00:18:07,119 Speaker 1: now to price in a hundred and seventy five basis 341 00:18:07,160 --> 00:18:09,280 Speaker 1: points of tightening by the Federal Reserve or hikes by 342 00:18:09,280 --> 00:18:12,640 Speaker 1: the Federal Reserve by September. So I guess one word question, 343 00:18:14,240 --> 00:18:16,000 Speaker 1: and I say that with a little shrug for our 344 00:18:16,040 --> 00:18:19,679 Speaker 1: listeners on radio. Well, look, um, if they're going to 345 00:18:19,760 --> 00:18:22,000 Speaker 1: do seventy five, it's better to do it sooner than 346 00:18:22,119 --> 00:18:25,840 Speaker 1: later when policy is still at a very low interest rate. 347 00:18:26,359 --> 00:18:28,520 Speaker 1: But it also goes to the fact that they've could 348 00:18:28,520 --> 00:18:32,520 Speaker 1: have lost control of the dialogue over this. I mean 349 00:18:32,600 --> 00:18:35,800 Speaker 1: they need a monetary policy approach that they can sustain. 350 00:18:36,119 --> 00:18:38,119 Speaker 1: Just take a look at the history of FED tightening 351 00:18:38,160 --> 00:18:41,400 Speaker 1: cycles over the last forty five years. When the Federal 352 00:18:41,480 --> 00:18:45,760 Speaker 1: Reserve reaches its maximum policy rate, it's unly kept it 353 00:18:45,840 --> 00:18:50,280 Speaker 1: before cutting seven months on average. And if you really 354 00:18:50,359 --> 00:18:54,320 Speaker 1: wanted again to to deal with the longer term inflationary 355 00:18:54,320 --> 00:18:57,920 Speaker 1: and balances in the economy, you want a monetary policy 356 00:18:57,960 --> 00:19:00,640 Speaker 1: that you can sustain. Now again, you can gain this out. 357 00:19:00,680 --> 00:19:04,640 Speaker 1: Maybe I'm the wrong person to guess this, but if 358 00:19:04,680 --> 00:19:06,800 Speaker 1: you just had created a shock and awe effect where 359 00:19:06,800 --> 00:19:09,240 Speaker 1: everyone believes, okay, this is under wraps, and then a 360 00:19:09,240 --> 00:19:11,440 Speaker 1: couple of months later the CPI is still arising, I 361 00:19:11,480 --> 00:19:14,800 Speaker 1: don't know what you've accomplished if you were tightening so 362 00:19:14,920 --> 00:19:17,280 Speaker 1: much that you have a recession and then you have 363 00:19:17,400 --> 00:19:21,760 Speaker 1: any easing cycle and you are doing QT. So now 364 00:19:21,800 --> 00:19:25,119 Speaker 1: you've got to do QUI again, this whole approach again 365 00:19:25,480 --> 00:19:28,399 Speaker 1: of the Federal Reserve going from feast to faminine back 366 00:19:28,800 --> 00:19:31,119 Speaker 1: again in a pro sequable way. I mean, look, the 367 00:19:31,160 --> 00:19:34,160 Speaker 1: mistake that was made was easing in a boom last year. 368 00:19:34,560 --> 00:19:37,600 Speaker 1: You can make two mistakes of monetary policy, not just one. 369 00:19:37,920 --> 00:19:41,760 Speaker 1: So I think again, trying to satisfy the market, uh 370 00:19:41,760 --> 00:19:44,280 Speaker 1: and short term inflation outcomes might be the wrong approach, 371 00:19:44,320 --> 00:19:46,720 Speaker 1: at least as far as I'm concerned. Okay, so what 372 00:19:46,720 --> 00:19:50,120 Speaker 1: you're describing, Stephen is essentially Jerome Powell with an impossible 373 00:19:50,240 --> 00:19:52,719 Speaker 1: job that he just can't do this right. Either you're 374 00:19:52,760 --> 00:19:55,879 Speaker 1: going to upset the market potentially get inflation under control, 375 00:19:56,000 --> 00:19:58,480 Speaker 1: or you don't want to move to aggressively and surprise 376 00:19:58,520 --> 00:20:01,080 Speaker 1: the market. Therefore inflation as a allowed to run hotter 377 00:20:01,160 --> 00:20:05,680 Speaker 1: for longer. Isn't that binary? Realistically? Well, the one thing 378 00:20:05,680 --> 00:20:08,720 Speaker 1: that we just can't um dispute it is the fact 379 00:20:08,720 --> 00:20:13,080 Speaker 1: that monetary policy doesn't complete control of the economy. UM 380 00:20:13,119 --> 00:20:16,879 Speaker 1: there are really positive developments beneath the surface. On the 381 00:20:16,920 --> 00:20:19,240 Speaker 1: supply side. You know, you could see the price of 382 00:20:19,280 --> 00:20:23,600 Speaker 1: appliances was down. Okay, why well, consumer goods production is 383 00:20:23,640 --> 00:20:26,720 Speaker 1: now rising four and a half percent unit terms, consumer 384 00:20:26,760 --> 00:20:31,159 Speaker 1: goods consumption is falling, imports arising. If you want to 385 00:20:31,200 --> 00:20:33,360 Speaker 1: get through this, you know, we need to get through 386 00:20:33,359 --> 00:20:36,159 Speaker 1: the next leg event, which is going to be services, 387 00:20:36,240 --> 00:20:39,879 Speaker 1: which is going to be housing related issues. Um, do 388 00:20:39,920 --> 00:20:43,560 Speaker 1: you really want to create more instability? I think they're 389 00:20:43,600 --> 00:20:46,320 Speaker 1: gonna be in an environment where they're trying to avoid 390 00:20:46,440 --> 00:20:49,600 Speaker 1: that and still communicate effectively. Maybe they can't do both. 391 00:20:50,720 --> 00:20:53,640 Speaker 1: Stephen Whiting, thank you so much. Great brief this morning 392 00:20:53,640 --> 00:20:56,240 Speaker 1: with City Global Wealth Management here with some turmoil, a 393 00:20:56,280 --> 00:21:02,680 Speaker 1: little bit of a pullback working with Edward a Heiman 394 00:21:02,800 --> 00:21:06,159 Speaker 1: over evercre I s I, Julian Emmanuel joins us now 395 00:21:06,240 --> 00:21:09,560 Speaker 1: their chief equity and quantitative strategists. You have such a 396 00:21:09,640 --> 00:21:12,639 Speaker 1: privilege to work with the evercres I s I team 397 00:21:12,640 --> 00:21:17,080 Speaker 1: and dovetail the micro analysis of ed Heiman into your 398 00:21:17,119 --> 00:21:20,879 Speaker 1: equity work. And the heart of it is inflation comes down, 399 00:21:21,480 --> 00:21:24,119 Speaker 1: but it only gets down in the vicinity of four percent. 400 00:21:24,200 --> 00:21:26,679 Speaker 1: That's a change, right that that is a change, that 401 00:21:26,840 --> 00:21:29,960 Speaker 1: is an acknowledgment that basically what we saw last week 402 00:21:30,320 --> 00:21:33,240 Speaker 1: says well, there may be a peak somewhere in here, 403 00:21:33,280 --> 00:21:36,439 Speaker 1: because mathematically, if you get to nothing but base effects, 404 00:21:36,480 --> 00:21:38,760 Speaker 1: you probably get a peek, but it is likely to 405 00:21:38,840 --> 00:21:42,760 Speaker 1: be a higher plateau for longer. And Ed took his 406 00:21:42,840 --> 00:21:47,720 Speaker 1: inflation number for up to four percent. And that's the issue. 407 00:21:48,040 --> 00:21:51,120 Speaker 1: That's where the Fed has much less wiggle room than 408 00:21:51,280 --> 00:21:54,480 Speaker 1: we would potentially like given the stress that we're seeing 409 00:21:54,480 --> 00:21:56,840 Speaker 1: on assets since its days of c. J. Lawrence. We've 410 00:21:56,840 --> 00:22:00,040 Speaker 1: all watched the white paper with the black mark. You 411 00:22:00,119 --> 00:22:02,040 Speaker 1: got the black marker and one of my shirts once 412 00:22:02,480 --> 00:22:04,000 Speaker 1: you had to buy me a new shirt. It was 413 00:22:04,200 --> 00:22:07,200 Speaker 1: stupid black mark. Tom Oh, I'm sorry, Tom, I got you. 414 00:22:07,480 --> 00:22:09,880 Speaker 1: Is the black marker calling for a recession? Right now? 415 00:22:09,920 --> 00:22:12,800 Speaker 1: I've been nailed with the yellow highlighters the last couple 416 00:22:12,800 --> 00:22:16,480 Speaker 1: of weeks. Umh no no. Ed took his growth number 417 00:22:16,480 --> 00:22:20,119 Speaker 1: down to one point four percent for two a long 418 00:22:20,200 --> 00:22:23,920 Speaker 1: time ago, and he saw these headwinds. We still think 419 00:22:23,960 --> 00:22:27,399 Speaker 1: the base case is no recession, but obviously, again the 420 00:22:27,480 --> 00:22:30,520 Speaker 1: same math that applies to the potential peaking of inflation 421 00:22:30,640 --> 00:22:34,280 Speaker 1: also tells you that you know, one point four percent 422 00:22:34,880 --> 00:22:38,520 Speaker 1: to what could be a recessionary number. There's not a 423 00:22:38,520 --> 00:22:41,120 Speaker 1: lot of distance there, Julian. When does your a bear 424 00:22:41,160 --> 00:22:47,920 Speaker 1: case become your base case of sp uh? Well, all 425 00:22:48,000 --> 00:22:50,280 Speaker 1: I can say is when we spoke about this last week, 426 00:22:50,320 --> 00:22:53,840 Speaker 1: we certainly didn't envision three days of carnage in the 427 00:22:53,840 --> 00:22:57,440 Speaker 1: markets that that we've seen since we adopted that much 428 00:22:57,480 --> 00:23:00,960 Speaker 1: more cautious view. And frankly, you know, when you think 429 00:23:01,000 --> 00:23:04,719 Speaker 1: about it from a trading perspective, what's been missing the 430 00:23:04,880 --> 00:23:07,760 Speaker 1: entire last several months is sort of what I would 431 00:23:07,800 --> 00:23:11,120 Speaker 1: call a cathartic flush out where you get the vix 432 00:23:11,240 --> 00:23:13,880 Speaker 1: above forty, which is one of the things you need 433 00:23:14,480 --> 00:23:17,879 Speaker 1: for at least the trading bottom. This week is fraught 434 00:23:17,920 --> 00:23:20,160 Speaker 1: with peril. I got a ay questions, but Lesa's you're 435 00:23:20,280 --> 00:23:22,600 Speaker 1: just folks. I just want to, you know, in the 436 00:23:22,680 --> 00:23:24,879 Speaker 1: carners that we've got here, in the more data checks, 437 00:23:24,880 --> 00:23:27,640 Speaker 1: we need to point out that it is the Bramo 438 00:23:27,800 --> 00:23:32,160 Speaker 1: base case bearcase. Yeah, well, this week is brought frought 439 00:23:32,200 --> 00:23:34,560 Speaker 1: with peril, Julian. I mean, I couldn't say it better 440 00:23:34,600 --> 00:23:38,639 Speaker 1: than than you know myself. Going forward, then, how do 441 00:23:38,680 --> 00:23:41,359 Speaker 1: you determine if we've hit catharsis just a forty level 442 00:23:41,359 --> 00:23:43,280 Speaker 1: on the VIX or is there something more? Is there 443 00:23:43,320 --> 00:23:46,639 Speaker 1: some sort of forced selling, a disorderly unwind that we 444 00:23:46,680 --> 00:23:49,639 Speaker 1: have yet to see despite all the pain. So what 445 00:23:49,840 --> 00:23:54,080 Speaker 1: we are likely to see, regardless of you know, whether 446 00:23:54,119 --> 00:23:58,200 Speaker 1: the markets decisively take out the May twenty low, which 447 00:23:58,280 --> 00:24:03,119 Speaker 1: looks like is a distinct stability today, uh, certainly into Wednesday, 448 00:24:03,320 --> 00:24:06,560 Speaker 1: is you're gonna have an enormous amount of volume at 449 00:24:06,600 --> 00:24:09,560 Speaker 1: mid month and the end of the month, quadruple witching 450 00:24:10,000 --> 00:24:13,640 Speaker 1: the Russell Index rebalance. We'd love to see that kind 451 00:24:13,640 --> 00:24:17,240 Speaker 1: of volume, you know, twenty billion shares, perhaps twenty five 452 00:24:17,280 --> 00:24:21,360 Speaker 1: billion shares on a day, along with the vix UH 453 00:24:21,440 --> 00:24:24,879 Speaker 1: surging towards those levels. Those are the kinds of recipes 454 00:24:25,280 --> 00:24:29,600 Speaker 1: for a Catharsis that we think you need really to 455 00:24:29,800 --> 00:24:33,240 Speaker 1: entice buyers back. And the less several weeks has not 456 00:24:33,480 --> 00:24:38,600 Speaker 1: been about selling overwhelming. It's been about a complete lack 457 00:24:38,640 --> 00:24:41,439 Speaker 1: of buying well. And yet the case remains Julian that 458 00:24:41,480 --> 00:24:44,600 Speaker 1: we've already seen this immense selling pressure, and even before today, 459 00:24:44,640 --> 00:24:47,120 Speaker 1: the SMP five hundred has already teetered on the edge 460 00:24:47,119 --> 00:24:49,760 Speaker 1: of bear market territory. You already have a tenure yield 461 00:24:49,960 --> 00:24:53,120 Speaker 1: that has at three four and we've only just seen 462 00:24:53,160 --> 00:24:56,560 Speaker 1: the start of quantitative tightening. It only really has just begun, 463 00:24:56,640 --> 00:24:59,440 Speaker 1: because of course these markets are anticipatory there forward looking 464 00:24:59,520 --> 00:25:01,359 Speaker 1: how long is are going to be until this market 465 00:25:01,400 --> 00:25:03,680 Speaker 1: is looking even further out and saying, well, the Fed's 466 00:25:03,680 --> 00:25:05,959 Speaker 1: gonna actually have to pump on the brakes here a 467 00:25:05,960 --> 00:25:08,480 Speaker 1: little bit and we start to see things reversing. Well, 468 00:25:09,040 --> 00:25:12,359 Speaker 1: that is that is a question that watching the bond market, 469 00:25:12,440 --> 00:25:15,320 Speaker 1: and one of our core thess around the view that 470 00:25:16,119 --> 00:25:19,280 Speaker 1: two was going to be volatile, you know, before Russian 471 00:25:19,400 --> 00:25:23,280 Speaker 1: invaded Ukraine, was the fact that the correlation between stocks 472 00:25:23,320 --> 00:25:27,200 Speaker 1: and bonds in a higher inflation environment was flipping from 473 00:25:27,320 --> 00:25:30,639 Speaker 1: risk on risk off. Of that's been twenty five years 474 00:25:30,760 --> 00:25:35,080 Speaker 1: along to a positive correlation. We will be looking for 475 00:25:35,600 --> 00:25:38,200 Speaker 1: the ten year yield, the ascent in the ten year 476 00:25:38,280 --> 00:25:41,360 Speaker 1: yield to start to moderate a little bit. It wouldn't 477 00:25:41,400 --> 00:25:44,560 Speaker 1: be a surprise if we get towards three and a 478 00:25:44,640 --> 00:25:47,840 Speaker 1: half uh in the near term to start to see 479 00:25:47,880 --> 00:25:51,639 Speaker 1: some buyers come into bonds that would stabilize stocks. Okay, 480 00:25:51,640 --> 00:25:53,800 Speaker 1: so maybe there's going to be eventually an entry point 481 00:25:53,840 --> 00:25:55,920 Speaker 1: to buy the dip into bonds or do you see 482 00:25:55,960 --> 00:25:58,480 Speaker 1: any entry points at this time in the equity market 483 00:25:58,520 --> 00:26:01,520 Speaker 1: anywhere that valuations have come in enough that it actually 484 00:26:01,600 --> 00:26:06,600 Speaker 1: is safe to dip your toe back in. Yet, I 485 00:26:06,640 --> 00:26:11,800 Speaker 1: think there are pockets of value, pockets of stocks that 486 00:26:11,880 --> 00:26:16,360 Speaker 1: have been proven, you know, still growing earnings in this environment, 487 00:26:16,720 --> 00:26:21,000 Speaker 1: and that are returning cash. Remember, in in an environment 488 00:26:21,280 --> 00:26:26,120 Speaker 1: where we are focused on return of capital, companies that 489 00:26:26,200 --> 00:26:29,520 Speaker 1: can return capital successfully, our names you want to own, 490 00:26:29,560 --> 00:26:31,800 Speaker 1: are they going to return cost cutting? Because if we 491 00:26:31,840 --> 00:26:34,680 Speaker 1: get an ed him in four percent stability and inflation, 492 00:26:35,040 --> 00:26:39,040 Speaker 1: I'm a corporation. I have to adjust, you do, and 493 00:26:39,040 --> 00:26:44,720 Speaker 1: And part of the dynamic here that's causing this incremental 494 00:26:45,040 --> 00:26:48,960 Speaker 1: market pricing closer to recession being a base case is 495 00:26:49,000 --> 00:26:52,359 Speaker 1: the fact that all of these factors together is going 496 00:26:52,440 --> 00:26:56,560 Speaker 1: to cause pressure in the labor market, which paradoxically, again 497 00:26:57,160 --> 00:26:59,400 Speaker 1: the FED would wish to see a little bit of that. 498 00:26:59,640 --> 00:27:03,000 Speaker 1: But you know, the difference between soft soft dish and 499 00:27:03,160 --> 00:27:06,600 Speaker 1: something else is very fine. Julian Emmanuel, thank you so much. 500 00:27:06,600 --> 00:27:17,480 Speaker 1: With every core I s I because Brands is talking 501 00:27:17,520 --> 00:27:20,280 Speaker 1: about a gallon of gas, there's an entire another story 502 00:27:20,280 --> 00:27:24,680 Speaker 1: in hydrocarbons. Daraikun joins US now Head of Commodities dws 503 00:27:25,160 --> 00:27:27,080 Speaker 1: UH and we're just thrilled a good join us here 504 00:27:27,160 --> 00:27:29,320 Speaker 1: on what I've ignored and I've been remiss on the 505 00:27:29,440 --> 00:27:32,560 Speaker 1: star way, which is natural gas. No one talks about 506 00:27:32,560 --> 00:27:35,080 Speaker 1: the price of a gallon of natural gas, do they. 507 00:27:36,080 --> 00:27:38,920 Speaker 1: It's much less known. But outside of US, I'm sure 508 00:27:38,920 --> 00:27:42,320 Speaker 1: people are very concerned about high price of natural gas. 509 00:27:42,960 --> 00:27:46,000 Speaker 1: US natural gas has kind of multiple times of the 510 00:27:46,040 --> 00:27:49,919 Speaker 1: price since beginning of the year, and um that strong 511 00:27:50,040 --> 00:27:55,760 Speaker 1: demand couple with limited production growth and now more robust 512 00:27:55,920 --> 00:27:58,880 Speaker 1: export demand has driven off the US price as well. 513 00:27:59,119 --> 00:28:01,960 Speaker 1: You you are so go to the fundamentals of all 514 00:28:02,000 --> 00:28:06,400 Speaker 1: of this and the underlying fundamentals of export import pressure 515 00:28:06,520 --> 00:28:10,640 Speaker 1: of hydrocarbons in the United States. Describe right now who's 516 00:28:10,640 --> 00:28:14,159 Speaker 1: gonna win the battle. Do we export more? Do we 517 00:28:14,240 --> 00:28:17,080 Speaker 1: keep it instead of exporting it? Do we start to 518 00:28:17,280 --> 00:28:21,560 Speaker 1: import hydrocarbons again? At this point in the near term, 519 00:28:22,480 --> 00:28:26,520 Speaker 1: we are fairly maxed out on export capacity and that 520 00:28:26,560 --> 00:28:32,879 Speaker 1: won't change until we anticipate four and beyond. And there 521 00:28:32,880 --> 00:28:37,000 Speaker 1: are scheduled projects to come online to convert our natural 522 00:28:37,040 --> 00:28:40,719 Speaker 1: gas into liquid form that can be exported. Our export 523 00:28:40,760 --> 00:28:44,640 Speaker 1: capacity to Mexico via pipelines fairly maxed out, and we 524 00:28:44,680 --> 00:28:48,560 Speaker 1: always have some import and export between Canada and US 525 00:28:48,640 --> 00:28:52,320 Speaker 1: to deliver gas from places that's less accessible in each country, 526 00:28:53,200 --> 00:28:57,520 Speaker 1: but most of those pipelines are in maximum capacity. In 527 00:28:57,560 --> 00:28:59,440 Speaker 1: the near term one not going to see a significant 528 00:28:59,480 --> 00:29:04,440 Speaker 1: dynamic change. UM. Even how low US price still is 529 00:29:05,200 --> 00:29:08,520 Speaker 1: compared to the global price, were less than about between 530 00:29:08,520 --> 00:29:11,480 Speaker 1: a half to a third of global price, the pressure 531 00:29:11,480 --> 00:29:14,840 Speaker 1: will be there for us to export more once that 532 00:29:15,000 --> 00:29:18,560 Speaker 1: pipeline UM, I'm sorry, it wants that capacity to explore 533 00:29:18,600 --> 00:29:24,920 Speaker 1: liquid natural gas increases from natural gas to crude gas, 534 00:29:24,920 --> 00:29:28,520 Speaker 1: refined goods gasoline and diesel. The fact that we're seeing 535 00:29:28,840 --> 00:29:34,280 Speaker 1: such incredible lifts in gasoline prices really basically regardless of 536 00:29:34,320 --> 00:29:37,760 Speaker 1: what happens in the brand crude market. At what point 537 00:29:38,160 --> 00:29:40,960 Speaker 1: the prices fall enough for it to actually matter for 538 00:29:41,040 --> 00:29:45,120 Speaker 1: refined goods given the lack of refineries, Well, that's a 539 00:29:45,160 --> 00:29:48,320 Speaker 1: great question. I think in the near term we still 540 00:29:48,360 --> 00:29:52,440 Speaker 1: see strong draws from gasoline inventory. Up to this point, 541 00:29:52,680 --> 00:29:56,560 Speaker 1: we should have been seeing seasonal build in gasoline inventory 542 00:29:56,760 --> 00:30:01,160 Speaker 1: as refiners prepare for summer, and we've seemed just opposite, 543 00:30:01,400 --> 00:30:05,320 Speaker 1: so that natural demand raw will continue. I think that 544 00:30:06,600 --> 00:30:09,760 Speaker 1: the solution to gasoline high gasoline price really comes from 545 00:30:09,880 --> 00:30:13,920 Speaker 1: demand reduction. We have to see a significant remnt reduction 546 00:30:14,520 --> 00:30:17,840 Speaker 1: to allow for the price to fall. We still see 547 00:30:17,960 --> 00:30:21,080 Speaker 1: quite a bit of pinned up driving demand and that's 548 00:30:21,160 --> 00:30:23,880 Speaker 1: driving the castling price right now. So how long we're 549 00:30:23,920 --> 00:30:27,000 Speaker 1: at what level will that demand destruction really start to 550 00:30:27,120 --> 00:30:30,120 Speaker 1: kick in? How far away are we from that? Well, 551 00:30:30,160 --> 00:30:33,880 Speaker 1: anticipating a year from now, we'll probably seek less of 552 00:30:33,920 --> 00:30:37,760 Speaker 1: that recovery demand from COVID nineteen x China and that 553 00:30:37,800 --> 00:30:41,320 Speaker 1: should help with the price next summer. Unfortunately, for this 554 00:30:41,360 --> 00:30:44,640 Speaker 1: summer we probably won't see that realized. Well, you mentioned China. 555 00:30:44,720 --> 00:30:48,040 Speaker 1: Obviously COVID zero still an overhanging that economy. You're still 556 00:30:48,040 --> 00:30:51,440 Speaker 1: seeing large parts of it dealing with restrictions to contain 557 00:30:51,480 --> 00:30:55,240 Speaker 1: the virus Shanghai just one example. If and when China 558 00:30:55,360 --> 00:30:58,160 Speaker 1: opens back up, what does that do to this entire 559 00:30:58,200 --> 00:31:01,520 Speaker 1: supply and demand dynamic globally. That's a great question. The 560 00:31:01,560 --> 00:31:06,400 Speaker 1: time means very important. Uh. We do anticipate the additional 561 00:31:06,440 --> 00:31:11,000 Speaker 1: stimulus program as well announced ahead of time, both fiscal 562 00:31:11,240 --> 00:31:15,400 Speaker 1: and monetary, to help with demand growth. In China. However, 563 00:31:15,640 --> 00:31:18,400 Speaker 1: it's very difficult to tell exactly when that's going to 564 00:31:18,440 --> 00:31:22,720 Speaker 1: take place. UM. Even recently we've seen additional lockdown efforts 565 00:31:22,720 --> 00:31:26,240 Speaker 1: again from Shanghai just because of the zero policy. Zero 566 00:31:26,360 --> 00:31:31,200 Speaker 1: COVID nineteen faction policy is still in effect. UM. Without 567 00:31:31,360 --> 00:31:34,840 Speaker 1: that being resolve, we don't see the demand coming back up. 568 00:31:35,200 --> 00:31:38,560 Speaker 1: We do hope though, in the next twelve month, as 569 00:31:38,640 --> 00:31:40,560 Speaker 1: the demand go down, we have to spend themand go 570 00:31:40,600 --> 00:31:43,760 Speaker 1: down x China because of the old interest rate moves 571 00:31:43,920 --> 00:31:46,360 Speaker 1: US has made and other countries are like to follow. 572 00:31:47,040 --> 00:31:51,480 Speaker 1: Uh we are hoping that the demand from China will 573 00:31:51,520 --> 00:31:56,120 Speaker 1: help balance that down a downward movement and keep the 574 00:31:56,200 --> 00:32:00,400 Speaker 1: price stabilized in the near term. The way uh In 575 00:32:00,560 --> 00:32:03,080 Speaker 1: City Group put out a report overnight where they were 576 00:32:03,120 --> 00:32:07,480 Speaker 1: talking about how the amount of GDP destruction from where 577 00:32:07,640 --> 00:32:10,640 Speaker 1: gas prices, where oil prices are right now is really 578 00:32:10,640 --> 00:32:13,200 Speaker 1: reminiscent of what we saw in the nineteen seventies. Do 579 00:32:13,240 --> 00:32:15,880 Speaker 1: you think that that oil shock analogy is the right one? 580 00:32:16,600 --> 00:32:20,680 Speaker 1: It's similar. We do see both in both situations. We 581 00:32:20,720 --> 00:32:26,040 Speaker 1: see sharp rising oil prices and we've seen artificial constraints 582 00:32:26,080 --> 00:32:29,760 Speaker 1: on supply which we're resulting as we have seen before. 583 00:32:29,840 --> 00:32:34,320 Speaker 1: Eventually we're going to see demand destruction, whether we see 584 00:32:34,320 --> 00:32:39,000 Speaker 1: a significant destruction that leads to a significant economic downturn 585 00:32:39,600 --> 00:32:42,800 Speaker 1: or a more moderate, a soft landing scenario that will 586 00:32:42,840 --> 00:32:46,080 Speaker 1: determine the outcome of oil price going forward. Are we 587 00:32:46,160 --> 00:32:47,920 Speaker 1: thank you so much? Are we coming with us today 588 00:32:48,000 --> 00:32:50,800 Speaker 1: with DWS here on commodities. We'll get them back here soon, 589 00:32:50,840 --> 00:32:55,240 Speaker 1: particularly on the commodity dynamics of China. This is the 590 00:32:55,240 --> 00:32:59,520 Speaker 1: Bloomberg Surveillance Podcast. Thanks for listening. Join us live week 591 00:32:59,600 --> 00:33:03,080 Speaker 1: days from seven to ten am Eastern on Bloomberg Radio 592 00:33:03,280 --> 00:33:06,880 Speaker 1: and on Bloomberg Television each day from six to nine 593 00:33:06,960 --> 00:33:11,360 Speaker 1: am for insight from the best in economics, finance, investment, 594 00:33:11,520 --> 00:33:18,240 Speaker 1: and international relations. And subscribe to the Surveillance podcast on Apple, podcast, SoundCloud, 595 00:33:18,400 --> 00:33:22,000 Speaker 1: Bloomberg dot com, and of course on the terminal. I'm 596 00:33:22,040 --> 00:33:24,680 Speaker 1: Tom Keene, and this is Bloomberg