WEBVTT - Surveillance: Global Market Selloff (Podcast) 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.200 --> 0:00:13.200 with Jonathan Ferrell and Lisa Brownwitz. Daily we bring you 0:00:13.280 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.840 --> 0:00:23.799 To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:31.320 and of course, on the Bloomberg terminal. Um I demanded 0:00:31.360 --> 0:00:34.479 after Friday Znight Guys, where she was the focus of 0:00:34.520 --> 0:00:38.479 attention in the markets Friday afternoon, Lori Kelvacina joins US 0:00:39.040 --> 0:00:42.800 head of US Equity Strategy at RBC Capital Markets. What's 0:00:42.800 --> 0:00:47.360 so extraordinary about the Kelvasina view, Lorie, what's the distinction 0:00:47.400 --> 0:00:53.160 that got global wall streets attention this weekend? You tell me, Tom, 0:00:53.200 --> 0:00:55.000 I mean I try to keep a cool head in 0:00:55.000 --> 0:00:57.480 in topsy turvy markets, whether it's to the upside or 0:00:57.520 --> 0:01:00.160 to the downside. Um But look, I will tell you 0:01:00.400 --> 0:01:02.680 I think we were at a crossroads. Back in mid May. 0:01:02.760 --> 0:01:04.720 We wrote a piece titled that saying that if the 0:01:04.720 --> 0:01:07.839 market kind of broke below the thirty thirty fifty type 0:01:07.880 --> 0:01:11.000 level exited growth stick air territory, that we'd be pricing 0:01:11.040 --> 0:01:13.480 in a full recession. We bounced back and we're right now, 0:01:13.600 --> 0:01:16.200 right back at that crossroads, UM, and I think it's 0:01:16.319 --> 0:01:20.640 very interesting the market did not break hundred on Friday, UM, 0:01:20.680 --> 0:01:23.560 that May nineteenth low actually ended up holding. I also 0:01:23.640 --> 0:01:27.240 thought it was interesting, frankly, UM, that the small cap space, 0:01:27.240 --> 0:01:29.120 while it did get hit as hard as the SMP 0:01:29.200 --> 0:01:32.039 five hundred, it didn't get hit materially worse on Friday. 0:01:32.280 --> 0:01:34.759 That's important because we had seen that positioning had already 0:01:34.760 --> 0:01:37.160 been washed out in the futures market. There the peak 0:01:37.200 --> 0:01:40.839 and small cap came last March versus large UM. And 0:01:41.000 --> 0:01:43.000 you know, I think we can start to sort of 0:01:43.040 --> 0:01:45.200 look for areas of the market now that have been 0:01:45.280 --> 0:01:47.440 de risked, even though there may be more risk in 0:01:47.480 --> 0:01:50.120 the aggregate. We have focused and we did this to 0:01:50.240 --> 0:01:53.440 great credit to our team Thursday and Friday. On the 0:01:53.560 --> 0:01:56.160 five year out five year view of Inflation from the 0:01:56.240 --> 0:02:00.840 University of Michigan survey, Laura, you highlight that if we 0:02:00.920 --> 0:02:06.240 have a reset to hire inflation expectations, is that good 0:02:06.280 --> 0:02:10.920 for equities or less good? I think that it keeps 0:02:10.960 --> 0:02:13.960 the value trade going forward, and I think that ends 0:02:14.040 --> 0:02:16.959 up being a destabilizing force for the equity market, simply 0:02:17.000 --> 0:02:19.600 because we do need that growth side to really stabilize. 0:02:19.639 --> 0:02:21.320 That's really where more of the market cap is in 0:02:21.320 --> 0:02:24.280 the SMP five hundred these days. But we actually just 0:02:24.360 --> 0:02:26.720 took a look at how different sectors in the market 0:02:26.760 --> 0:02:30.079 have traded in regards to that University of Michigan five 0:02:30.160 --> 0:02:32.920 year inflation expectation number. People used to make fun of 0:02:32.960 --> 0:02:34.720 me for using it. It actually, you know, turned out 0:02:34.760 --> 0:02:37.399 it was good. We had it to dust off the shelf. Um. 0:02:37.400 --> 0:02:40.400 But the reality is it's things like energy, materials, financials, 0:02:40.400 --> 0:02:42.720 and even in the big cap space rates that tend 0:02:42.760 --> 0:02:45.600 to outperform when inflation expectations are rising. So if that 0:02:45.680 --> 0:02:48.680 trend continues, it's you know, gonna let this value trade 0:02:48.800 --> 0:02:50.679 live a little bit longer and keep some pressure on 0:02:50.720 --> 0:02:52.600 the growth trade, which again is a is a pressure 0:02:52.600 --> 0:02:55.680 on the SMP. Yeah, and we've certainly seen growth bearing 0:02:55.760 --> 0:02:58.120 the bulk of the selling pressure. The Nasdaq one hundred 0:02:58.160 --> 0:03:00.359 is down twenty seven and a half percent year a date, 0:03:00.720 --> 0:03:03.280 But even beyond tech, there's been more pain for one 0:03:03.280 --> 0:03:06.760 area in particular, Lorie retail. The SNP five retailing index 0:03:07.000 --> 0:03:09.200 is down a full thirty percentage points so far in 0:03:09.240 --> 0:03:12.240 two of course, you've heard from target cutting in out 0:03:12.280 --> 0:03:16.160 like twice, the focus really being on margins. When are 0:03:16.200 --> 0:03:18.320 we going to start to see that bleeding into more 0:03:18.440 --> 0:03:21.600 areas of this market, because it started with retail, doesn't 0:03:21.680 --> 0:03:24.920 end there. It's a great question, Kayley. And one of 0:03:24.919 --> 0:03:26.720 the things we point out in our pieces that if 0:03:26.720 --> 0:03:28.840 you look at the declines we've seen in the consumer 0:03:28.880 --> 0:03:32.200 discretionary sector as well as the communication services sector, which 0:03:32.200 --> 0:03:34.640 has a lot of sort of consumer sensitive names in 0:03:34.680 --> 0:03:37.119 it as well, the declines we've already seen in those 0:03:37.120 --> 0:03:39.920 sectors are very close to the average declines that we've 0:03:39.960 --> 0:03:42.320 seen in them in the past four recessions. Now, what's 0:03:42.360 --> 0:03:46.680 interesting if we are headed into a recession, areas like financials, industrials, 0:03:46.680 --> 0:03:50.480 materials should have been underperforming. That's part of the historical 0:03:50.560 --> 0:03:54.480 recession playbook that the cyclical areas tend to underperform heading 0:03:54.520 --> 0:03:56.640 into recessions, though they of course do quite well in 0:03:56.680 --> 0:03:59.160 the rebounds. Another one that we've been talking to people 0:03:59.160 --> 0:04:01.880 a little bit about is energy. Um Energy has you know, 0:04:01.920 --> 0:04:04.760 actually done quite well this year for obvious reasons, but 0:04:04.840 --> 0:04:07.600 heading into recessions it does normally see decline. So I 0:04:07.600 --> 0:04:09.680 think it's fair to ask whether some of those winners 0:04:09.680 --> 0:04:12.360 that we've seen here to date. If this recession fear 0:04:12.440 --> 0:04:14.720 really does continue to take cold, are they going to 0:04:14.760 --> 0:04:16.680 continue to see that resilience or will there be a 0:04:16.680 --> 0:04:19.280 bit of a catchdown. Okay, so maybe you don't want 0:04:19.320 --> 0:04:21.440 to continue to buy into areas of the market that 0:04:21.480 --> 0:04:23.640 have been ripping, Laurie, but you mentioned that there are 0:04:23.680 --> 0:04:25.920 some now pockets of this market in which you've seen 0:04:26.040 --> 0:04:28.840 enough to be risking that maybe it provides some kind 0:04:28.880 --> 0:04:32.000 of an entry point. What would those be? So one 0:04:32.000 --> 0:04:34.960 place we've been putting people towards its small caps, and 0:04:35.000 --> 0:04:37.520 we're technically neutral on small cap versus large cap, but 0:04:37.560 --> 0:04:39.680 we did say if you've been underweight, now, we think 0:04:39.800 --> 0:04:41.760 is the time to remove that underweight and get back 0:04:41.760 --> 0:04:44.000 to neutral um. And really, when we look at the 0:04:44.000 --> 0:04:47.800 positioning data on the CFTC work, you've been below financial 0:04:47.800 --> 0:04:51.480 crisis lows. Valuations are cheap, not just in relative terms, 0:04:51.480 --> 0:04:53.480 but they're also getting pretty darn close to where they 0:04:53.480 --> 0:04:56.200 tend to bottom out um in in recent years if 0:04:56.200 --> 0:04:58.800 you're not in a massive recession like the financial crisis. 0:04:59.040 --> 0:05:01.920 So we've got a clearvaluation appeal. What we don't have 0:05:02.080 --> 0:05:04.640 right as a fundamental tailwind here, This is not really 0:05:04.640 --> 0:05:07.000 an area you typically want to be in when the 0:05:07.000 --> 0:05:09.920 FETE is hiking rates, when GDP growth is slowing, when 0:05:09.920 --> 0:05:12.000 I s M is falling. But we do know that 0:05:12.000 --> 0:05:14.960 that risk started to get priced in very early and 0:05:15.080 --> 0:05:18.640 historically recessions are great buying opportunities in that part of 0:05:18.680 --> 0:05:20.240 the market. And for those of you who want to know, 0:05:20.400 --> 0:05:23.719 Lori Kelvisina catch down is a phrase from cf A 0:05:23.839 --> 0:05:26.640 level five. That's that's where she got that from. You 0:05:26.640 --> 0:05:29.520 know where she probably learned that to the Great University 0:05:29.560 --> 0:05:35.600 of Virginia. She's a fellow cavalier. Oh my word, yeah, go, 0:05:35.720 --> 0:05:40.719 who's okay, Lauri Kelvisina with us. Thank you. We'll do 0:05:40.839 --> 0:05:44.400 something in dardn here in the future. RBC Capital Markets. 0:05:48.960 --> 0:05:51.880 I have been data dependent. I've been criticized for calling 0:05:51.920 --> 0:05:54.880 it a Fred parlor game. Francis Donald agrees with me, 0:05:55.360 --> 0:05:59.200 because Francis Donald is writing brilliant economics for manual life 0:05:59.240 --> 0:06:03.159 investment asking if her mother in law knows who Chairman 0:06:03.279 --> 0:06:06.040 Powell is, and you know, Francis, that your mother in 0:06:06.120 --> 0:06:08.760 law will drive. She's lovely, by the way, folks, She'll 0:06:08.839 --> 0:06:12.159 drive thirty kilometers out of her way to save ten 0:06:12.279 --> 0:06:15.560 cents a gale. And how does Chairman Powell speak to 0:06:15.600 --> 0:06:19.600 your mother in law? Well, he's not He's tried, he said, 0:06:19.720 --> 0:06:22.760 let me speak directly to the American people. But the 0:06:22.760 --> 0:06:26.960 big challenge for this Federal Reserve is that inflation expectations, 0:06:27.000 --> 0:06:30.320 which they're so desperate to control, are really not going 0:06:30.360 --> 0:06:32.680 to calm down, at least in the near term. On 0:06:32.920 --> 0:06:35.680 rate heikes, most of the general public is going to 0:06:35.760 --> 0:06:37.920 see what they're paying at the pub and what they're 0:06:37.960 --> 0:06:41.919 paying at the checkout simultaneously here that rates are rising. 0:06:42.160 --> 0:06:45.040 This is gonna be a very different communication. They're very 0:06:45.040 --> 0:06:49.080 difficult communications challenge for all central banks. Uh, they don't 0:06:49.120 --> 0:06:52.040 have the luxury of being honest about what control they 0:06:52.080 --> 0:06:55.600 have on inflation. That's the underlying problems facing Chair Powell, 0:06:56.000 --> 0:06:59.920 Legard and many other central bankers. Jeron Bernankian CNN this week, 0:07:00.000 --> 0:07:03.200 and let's get out his textbook, Able Bernankey, which is 0:07:03.240 --> 0:07:06.279 in my hallway at home. Francis, I look at Able 0:07:06.279 --> 0:07:09.640 Bernankey and back in chapter twenty two ish, it's about 0:07:09.680 --> 0:07:13.560 the effect of what the Fed does on finance. If 0:07:13.600 --> 0:07:18.520 they pop seventy beeps now or July or whenever, what 0:07:18.680 --> 0:07:24.080 does that do to North American banking. Well, it's a struggle, 0:07:24.200 --> 0:07:27.720 and it's another strain on the system. We're looking we 0:07:27.760 --> 0:07:30.520 could be inverted on the yield curve again by today 0:07:30.640 --> 0:07:33.840 or tomorrow, And unlike back in April, you're not gonna 0:07:33.840 --> 0:07:36.640 hear as much pushback that this isn't a signal or 0:07:36.680 --> 0:07:41.360 a precursor to a recession ahead. Financials are tightening, the 0:07:41.400 --> 0:07:44.160 economy is slowing. The consumer looks fine now, but all 0:07:44.240 --> 0:07:47.720 leading indicators suggests it slower. Do your political risk is up. 0:07:47.840 --> 0:07:50.600 If you made a whole table of challenges for the economy, 0:07:50.680 --> 0:07:52.880 almost every single one would tell you that for the 0:07:52.920 --> 0:07:55.040 next sense to twelve months things are going to be 0:07:55.240 --> 0:07:58.160 much more challenging. That's why this is such a difficult 0:07:58.200 --> 0:08:01.480 situation because despite all of these leading indicators, we have 0:08:01.600 --> 0:08:04.400 not seen the central banks blink. Fact last week we 0:08:04.440 --> 0:08:07.320 saw most central banks that we're seeking actually appear even 0:08:07.400 --> 0:08:10.680 more hawkish. So the hope that bad news would be 0:08:10.760 --> 0:08:13.760 good news and create a reversal in this market, it's 0:08:13.840 --> 0:08:17.320 just falling away in front of us Francis. Consumer sentiment 0:08:17.360 --> 0:08:19.560 at its lowest on record, and your mother in law 0:08:19.680 --> 0:08:23.320 driving thirty st kilometers to get a ten cents less 0:08:23.440 --> 0:08:25.760 on a gas can drive around and see a lot 0:08:25.800 --> 0:08:29.000 of variation as things just climb higher and higher. Francis, 0:08:29.040 --> 0:08:31.840 at what point does it have to reach peak negativity 0:08:31.920 --> 0:08:34.560 before you get uh some response from the Fed that 0:08:34.600 --> 0:08:37.000 can to really address this, because right now that between 0:08:37.040 --> 0:08:39.280 a rock and a hard place. If they actually come 0:08:39.280 --> 0:08:43.000 out as hawkish, perhaps I will create better sentiment underpinning 0:08:43.000 --> 0:08:46.719 markets and consumers. This is a great question. I mean, 0:08:46.840 --> 0:08:50.360 macro tends to be most valuable at inflection points in 0:08:50.400 --> 0:08:53.760 the story, and we're not at an inflection point just yet. 0:08:54.040 --> 0:08:56.760 We haven't seen a blink from central bankers, we haven't 0:08:56.800 --> 0:08:59.720 materially seen employment start to rise. All those some leading 0:08:59.720 --> 0:09:02.959 into pater suggests that gets better consumer sentiment. There's a 0:09:03.040 --> 0:09:05.600 range of indicators. A lot of people focused on University 0:09:05.600 --> 0:09:09.040 of Michigan last Friday. Consumer confidence, which waits a little 0:09:09.080 --> 0:09:11.880 bit more towards jobs, doesn't look as bad. But the 0:09:11.960 --> 0:09:14.920 challenge for consumers is we're gonna get retail sales numbers 0:09:14.960 --> 0:09:17.920 this week, and in nominal terms they might look just fine, 0:09:17.920 --> 0:09:20.160 and you'll hear a lot of the consumers good narrative, 0:09:20.240 --> 0:09:23.240 but in real terms, every single month, this is a 0:09:23.280 --> 0:09:27.240 consumer that loses purchasing power, and now initial jobless can 0:09:27.360 --> 0:09:30.480 starting to move up, so they're losing purchasing power and 0:09:30.559 --> 0:09:33.840 they're gonna start worrying about their jobs. That transition from 0:09:33.920 --> 0:09:36.960 capital to labor, well, it's looking like it was very 0:09:37.080 --> 0:09:39.520 short lived. And that's really the biggest challenge facing this 0:09:39.640 --> 0:09:42.640 consumer right now. Francis Mike Wilson over at Morgan Stanley 0:09:42.640 --> 0:09:44.520 came out and said, people are not pricing in the 0:09:44.520 --> 0:09:47.319 consumer weakness that we are going to see given exactly 0:09:47.360 --> 0:09:49.959 how much their budgets are being crimped. You have Lori 0:09:50.120 --> 0:09:52.840 Calvacino of RBC saying that if we break through the 0:09:52.920 --> 0:09:54.800 levels that lows that we have seen here to date, 0:09:55.000 --> 0:09:57.440 we could get down to thirty four hundred pretty quickly 0:09:57.559 --> 0:09:59.640 on the SMP. Do you think that this is all 0:09:59.679 --> 0:10:02.600 act that people have not taken into account how much 0:10:02.800 --> 0:10:06.600 the disposable income is getting eaten into Two of my 0:10:06.679 --> 0:10:10.400 favorite strategists, two very good calls. That's the challenge here 0:10:10.440 --> 0:10:12.679 is that the narrative has been for the last two 0:10:12.679 --> 0:10:15.120 and a half years. There were huge simulus checks. The 0:10:15.160 --> 0:10:18.680 balance sheets look good, death service ratios are fantastic, but 0:10:18.800 --> 0:10:22.520 actually real wages are declining. We're gonna start seeing challenges 0:10:22.520 --> 0:10:25.280 and jobs and that age old idea. Oh, the balance 0:10:25.280 --> 0:10:27.760 sheets are really solid. Well that's where they are now, 0:10:27.800 --> 0:10:29.480 but where they're gonna be in this next six and 0:10:29.520 --> 0:10:31.920 twelve months is more challenging. So that brings me to 0:10:31.960 --> 0:10:34.679 the question of when does the central bank really start 0:10:34.720 --> 0:10:37.000 to pivot? And it looks like what they're telling to 0:10:37.080 --> 0:10:39.920 us is they can't do it until inflation mollifies. What 0:10:40.000 --> 0:10:42.000 I'd like to see from share Powell this week because 0:10:42.000 --> 0:10:44.679 maybe some yell in type comments we want to focus 0:10:44.760 --> 0:10:47.160 a little bit more on core as opposed to headline 0:10:47.360 --> 0:10:50.319 and reminding the general public whoever is listening. My mother 0:10:50.320 --> 0:10:53.079 in law will not be listening, that they can control 0:10:53.240 --> 0:10:56.559 some segments of inflation but not other ones. That would 0:10:56.559 --> 0:10:59.120 be for the beginning seedlings of what we could hope 0:10:59.120 --> 0:11:01.360 for in terms of a of it ahead, But generally 0:11:01.400 --> 0:11:03.080 I don't think this Wednesday we're going to get it, 0:11:03.080 --> 0:11:05.440 and that's why we're not yet at an inflection point 0:11:05.440 --> 0:11:07.520 in the macro story. Are we going to get a 0:11:07.559 --> 0:11:11.160 hint at seventy five is coming in July? Francis, Oh, 0:11:11.240 --> 0:11:13.319 I'm not sure. I mean sexual banks are trying to 0:11:13.360 --> 0:11:15.240 open the door. The Bank of Canada did it last 0:11:15.280 --> 0:11:17.920 week previously that they said, oh, we're not interested in 0:11:17.960 --> 0:11:20.160 seventy five basis points, and then when asked if they 0:11:20.160 --> 0:11:22.840 would raise it by fifty basis points, they said maybe 0:11:22.840 --> 0:11:25.160 more than that. Thin. These are central banks that want 0:11:25.280 --> 0:11:28.720 full optionality. What we might get which might be helpful 0:11:28.760 --> 0:11:32.160 with a little more symmetry in that optionality. More talk 0:11:32.200 --> 0:11:35.600 about a September reassessment could be very valuable. But again 0:11:35.640 --> 0:11:37.920 I don't think we get that this week. We probably 0:11:37.960 --> 0:11:42.080 need much more indication than inflation and inflation expectations beginning 0:11:42.120 --> 0:11:45.199 to cool. Well, they're definitely not cooling yet, Francis. And 0:11:45.240 --> 0:11:48.240 as you say, the FED can't be responsible for bringing 0:11:48.240 --> 0:11:50.840 in all of the factors contributing to inflation. They can't 0:11:50.840 --> 0:11:53.640 do anything about the supply side. How confident are you 0:11:53.720 --> 0:11:56.800 in their ability to get it down towards their target 0:11:56.880 --> 0:12:01.199 without a hard landing. Not very confident if this is 0:12:01.240 --> 0:12:05.120 their current strategy. So we're reevaluating our forecasts now, and 0:12:05.160 --> 0:12:08.319 there is a very significant weak patch in most economic 0:12:08.360 --> 0:12:12.280 models between Q one and Q three. Of whether or 0:12:12.320 --> 0:12:15.760 not it tips the scales into mathematical recession depends what 0:12:15.800 --> 0:12:18.040 you're looking at But the real story is this is 0:12:18.080 --> 0:12:21.200 a material growth slow down and guess what, whether it's 0:12:21.240 --> 0:12:23.960 recession or not recession, that's not the name of the 0:12:24.040 --> 0:12:27.600 game here. That's overly binary type of focus. Francis, Thanks 0:12:27.600 --> 0:12:36.719 so much, Stephen Whiting. Let's go to your wheelhouse. Our 0:12:36.760 --> 0:12:42.560 profits threatened, Yes, um, we are in a period of 0:12:42.679 --> 0:12:46.280 very high profits and that makes them more vulnerable. We 0:12:46.320 --> 0:12:51.280 think that will be a year of decline for EPs 0:12:51.840 --> 0:12:55.480 UM at this point. Again, we don't see the need 0:12:55.600 --> 0:12:59.200 for a plunge in every industry's profits. We don't see 0:12:59.200 --> 0:13:03.160 a need to unwind all of the gains that we've 0:13:03.160 --> 0:13:06.120 had over the last couple of years. But clearly the 0:13:06.160 --> 0:13:11.320 impact of stimulus fiscal stimulus on demand bled through into 0:13:11.320 --> 0:13:13.360 profits in a positive way. That's how we had at 0:13:14.280 --> 0:13:18.600 EPs year last year. Now this means downward earnings estimate revisions. 0:13:18.600 --> 0:13:20.080 This is not going to be a year of ten 0:13:20.480 --> 0:13:23.840 EPs gains followed by another next year. I do think 0:13:24.120 --> 0:13:27.160 share prices already understand this. In other words, the drop 0:13:27.240 --> 0:13:30.800 is already uh to some extent said that these estimates 0:13:30.880 --> 0:13:34.199 or nonsense. Steve. When when we get tested like this, 0:13:35.000 --> 0:13:40.040 do companies that display free cash flow persistency. Do they 0:13:40.080 --> 0:13:43.400 go down with everything else or do they partition and 0:13:43.559 --> 0:13:48.920 separate from the gloom. They do, And it really often 0:13:48.920 --> 0:13:53.880 comes down to dividend courage, dividend delivery. Again, it's really 0:13:54.000 --> 0:13:56.880 boring stuff, but but good stuff. If we take a 0:13:56.920 --> 0:14:00.199 look at US shares that have the most consider to 0:14:00.480 --> 0:14:04.560 long run UH dividend increases UM, they fall in half 0:14:04.559 --> 0:14:07.280 as much as the broad market and they yield nearly 0:14:07.440 --> 0:14:10.280 twice as much. So UM, this is an area again 0:14:10.320 --> 0:14:13.720 to hide out in our own discretionary portfolios. We have 0:14:13.760 --> 0:14:17.920 eleven percent of all discretionary portfolios US or non US 0:14:17.960 --> 0:14:22.680 and for any asset class benchmarked to that particular type 0:14:22.680 --> 0:14:26.120 of style investing. Again, and these were not the companies 0:14:26.160 --> 0:14:29.320 that could gain in twenty They weren't the tech solutions 0:14:29.520 --> 0:14:33.120 and they weren't the really beaten down cyclicals of one. 0:14:33.480 --> 0:14:35.880 So they didn't perform terribly well for the last couple 0:14:35.880 --> 0:14:37.880 of years. And we think they're a very good place 0:14:38.240 --> 0:14:41.240 again now, UM, in a market that's far from perfect 0:14:41.440 --> 0:14:44.000 even what's the distance between now and later? And I 0:14:44.080 --> 0:14:47.680 look at Bank of America putting out this idea that's 0:14:47.720 --> 0:14:51.040 just way too existential. What did you say this idea 0:14:51.120 --> 0:14:54.080 that you have a consumer that's strong, you have corporations 0:14:54.080 --> 0:14:57.320 that are strong. How far is the distance from now 0:14:57.760 --> 0:15:00.800 to a lesser now to one that people are forecasting 0:15:00.840 --> 0:15:05.400 and the prices of stocks so so look, Um, some 0:15:05.520 --> 0:15:09.720 of the lagging indicators like inflation will take a long 0:15:09.840 --> 0:15:12.840 time to roll over, but it doesn't mean we have 0:15:12.960 --> 0:15:16.040 to assume that inflation will rise forever. And just because 0:15:16.080 --> 0:15:19.880 consumer fundamentals are are firm in many ways, you know 0:15:19.960 --> 0:15:23.680 a lot is chipping against it. So we would expect, 0:15:23.720 --> 0:15:27.880 for example, this slowdown in goods consumption to result in 0:15:28.400 --> 0:15:32.320 lesser need for employment. UM. So employment growth will be 0:15:32.360 --> 0:15:35.000 slowing down by later in the year. UM, you won't 0:15:35.000 --> 0:15:38.040 be able to say that a low unemployment rate um 0:15:38.120 --> 0:15:40.120 is the reason why nothing is going to go wrong. 0:15:40.200 --> 0:15:42.200 And I don't want to see ultra bearish here, but 0:15:42.280 --> 0:15:45.480 this is again the reasons why UM. I think from 0:15:45.480 --> 0:15:48.760 a forward looking perspective in terms of monetary policy, you 0:15:48.800 --> 0:15:52.600 can't say, well, we need to raise rates until inflation 0:15:52.720 --> 0:15:55.920 is low. By then you will have created the forward 0:15:55.960 --> 0:15:59.760 looking conditions for a much much deeper decline in the 0:16:00.000 --> 0:16:02.400 on me than you're aiming for. Alan Blinder, the former 0:16:02.600 --> 0:16:05.120 Fed Vice chair came out over the weekend in a 0:16:05.160 --> 0:16:07.440 story and said, the Chair of the Fed doesn't want 0:16:07.480 --> 0:16:09.640 to let the R words slip out of his mouth 0:16:09.680 --> 0:16:12.120 in a positive way, that we need a recession, but 0:16:12.160 --> 0:16:15.280 there are a lot of euphemisms and he'll use them. Stephen, 0:16:15.280 --> 0:16:17.320 what are we going to hear from him on Wednesday? 0:16:18.280 --> 0:16:21.760 It will be very interesting because you can't really satisfy 0:16:22.040 --> 0:16:26.040 markets over short term inflation outcomes. You know, again, we 0:16:26.040 --> 0:16:28.320 we've kind of joked around. It's like, well, you know, 0:16:28.360 --> 0:16:31.120 why don't you raise rates a thousand basis points? And 0:16:31.160 --> 0:16:33.240 it's like, what will that do to next month's CPI reading? 0:16:33.240 --> 0:16:36.160 And there's very little they can do. I think that 0:16:36.200 --> 0:16:40.520 there has been less acknowledgement than we might have seen, 0:16:40.600 --> 0:16:44.240 and everybody's it's probably spending so much time criticizing the Fed. 0:16:44.280 --> 0:16:48.120 It's too easy um for all of us. But supply 0:16:48.240 --> 0:16:53.280 shocks periods in which we have instability in the economy, 0:16:53.440 --> 0:16:55.400 think about we were just talking earlier on the break 0:16:55.800 --> 0:16:59.480 airfares have shot up by thirty two over two months. 0:16:59.480 --> 0:17:02.720 That's non annualized. What were we seeing at goods prices 0:17:03.000 --> 0:17:07.080 last year? The same thing? The sources of demanded economy 0:17:07.160 --> 0:17:10.160 or too unstable. We think monetary policy can take care 0:17:10.200 --> 0:17:13.320 of everything. It can't. These are periods where we don't 0:17:13.400 --> 0:17:17.639 stabilize short in the short term. Stephen whyn you with us, 0:17:17.680 --> 0:17:21.640 and we continue with City Group, Private Bank. I want 0:17:21.680 --> 0:17:23.919 to look at a better tape right now. Futures negative 0:17:24.600 --> 0:17:27.800 up ten ten points in negative eighties six on futures 0:17:28.040 --> 0:17:31.480 futures negative five seven yields to a little better. Really, 0:17:31.520 --> 0:17:35.080 across the Bloomberg screen, everything doing better, even the two 0:17:35.080 --> 0:17:39.000 stents spread from quick inversion two hours ago. We're now 0:17:39.080 --> 0:17:43.320 up ten basis points on the two stands spread. Kaylee, Well, 0:17:43.359 --> 0:17:45.960 on the subject of the two year, yes, things have moderated, Tom, 0:17:45.960 --> 0:17:48.040 but you are still seeing that selling pressure in the 0:17:48.040 --> 0:17:49.800 short end of the curve. I was just taking a 0:17:49.800 --> 0:17:52.159 look at what has happened to the two year treasury 0:17:52.240 --> 0:17:54.000 yield in the month of June, and keep in mind 0:17:54.040 --> 0:17:56.240 it's only June three. We're not even halfway there, and 0:17:56.240 --> 0:17:58.399 we're not yet to the Fed decision on Wednesday. That 0:17:58.480 --> 0:18:02.000 two year treasury yield is up sixty one basis points. 0:18:02.000 --> 0:18:04.840 This is a market that has moved incredibly quickly. Stephen 0:18:04.880 --> 0:18:07.119 now to price in a hundred and seventy five basis 0:18:07.160 --> 0:18:09.280 points of tightening by the Federal Reserve or hikes by 0:18:09.280 --> 0:18:12.640 the Federal Reserve by September. So I guess one word question, 0:18:14.240 --> 0:18:16.000 and I say that with a little shrug for our 0:18:16.040 --> 0:18:19.679 listeners on radio. Well, look, um, if they're going to 0:18:19.760 --> 0:18:22.000 do seventy five, it's better to do it sooner than 0:18:22.119 --> 0:18:25.840 later when policy is still at a very low interest rate. 0:18:26.359 --> 0:18:28.520 But it also goes to the fact that they've could 0:18:28.520 --> 0:18:32.520 have lost control of the dialogue over this. I mean 0:18:32.600 --> 0:18:35.800 they need a monetary policy approach that they can sustain. 0:18:36.119 --> 0:18:38.119 Just take a look at the history of FED tightening 0:18:38.160 --> 0:18:41.400 cycles over the last forty five years. When the Federal 0:18:41.480 --> 0:18:45.760 Reserve reaches its maximum policy rate, it's unly kept it 0:18:45.840 --> 0:18:50.280 before cutting seven months on average. And if you really 0:18:50.359 --> 0:18:54.320 wanted again to to deal with the longer term inflationary 0:18:54.320 --> 0:18:57.920 and balances in the economy, you want a monetary policy 0:18:57.960 --> 0:19:00.640 that you can sustain. Now again, you can gain this out. 0:19:00.680 --> 0:19:04.640 Maybe I'm the wrong person to guess this, but if 0:19:04.680 --> 0:19:06.800 you just had created a shock and awe effect where 0:19:06.800 --> 0:19:09.240 everyone believes, okay, this is under wraps, and then a 0:19:09.240 --> 0:19:11.440 couple of months later the CPI is still arising, I 0:19:11.480 --> 0:19:14.800 don't know what you've accomplished if you were tightening so 0:19:14.920 --> 0:19:17.280 much that you have a recession and then you have 0:19:17.400 --> 0:19:21.760 any easing cycle and you are doing QT. So now 0:19:21.800 --> 0:19:25.119 you've got to do QUI again, this whole approach again 0:19:25.480 --> 0:19:28.399 of the Federal Reserve going from feast to faminine back 0:19:28.800 --> 0:19:31.119 again in a pro sequable way. I mean, look, the 0:19:31.160 --> 0:19:34.160 mistake that was made was easing in a boom last year. 0:19:34.560 --> 0:19:37.600 You can make two mistakes of monetary policy, not just one. 0:19:37.920 --> 0:19:41.760 So I think again, trying to satisfy the market, uh 0:19:41.760 --> 0:19:44.280 and short term inflation outcomes might be the wrong approach, 0:19:44.320 --> 0:19:46.720 at least as far as I'm concerned. Okay, so what 0:19:46.720 --> 0:19:50.120 you're describing, Stephen is essentially Jerome Powell with an impossible 0:19:50.240 --> 0:19:52.719 job that he just can't do this right. Either you're 0:19:52.760 --> 0:19:55.879 going to upset the market potentially get inflation under control, 0:19:56.000 --> 0:19:58.480 or you don't want to move to aggressively and surprise 0:19:58.520 --> 0:20:01.080 the market. Therefore inflation as a allowed to run hotter 0:20:01.160 --> 0:20:05.680 for longer. Isn't that binary? Realistically? Well, the one thing 0:20:05.680 --> 0:20:08.720 that we just can't um dispute it is the fact 0:20:08.720 --> 0:20:13.080 that monetary policy doesn't complete control of the economy. UM 0:20:13.119 --> 0:20:16.879 there are really positive developments beneath the surface. On the 0:20:16.920 --> 0:20:19.240 supply side. You know, you could see the price of 0:20:19.280 --> 0:20:23.600 appliances was down. Okay, why well, consumer goods production is 0:20:23.640 --> 0:20:26.720 now rising four and a half percent unit terms, consumer 0:20:26.760 --> 0:20:31.159 goods consumption is falling, imports arising. If you want to 0:20:31.200 --> 0:20:33.360 get through this, you know, we need to get through 0:20:33.359 --> 0:20:36.159 the next leg event, which is going to be services, 0:20:36.240 --> 0:20:39.879 which is going to be housing related issues. Um, do 0:20:39.920 --> 0:20:43.560 you really want to create more instability? I think they're 0:20:43.600 --> 0:20:46.320 gonna be in an environment where they're trying to avoid 0:20:46.440 --> 0:20:49.600 that and still communicate effectively. Maybe they can't do both. 0:20:50.720 --> 0:20:53.640 Stephen Whiting, thank you so much. Great brief this morning 0:20:53.640 --> 0:20:56.240 with City Global Wealth Management here with some turmoil, a 0:20:56.280 --> 0:21:02.680 little bit of a pullback working with Edward a Heiman 0:21:02.800 --> 0:21:06.159 over evercre I s I, Julian Emmanuel joins us now 0:21:06.240 --> 0:21:09.560 their chief equity and quantitative strategists. You have such a 0:21:09.640 --> 0:21:12.639 privilege to work with the evercres I s I team 0:21:12.640 --> 0:21:17.080 and dovetail the micro analysis of ed Heiman into your 0:21:17.119 --> 0:21:20.879 equity work. And the heart of it is inflation comes down, 0:21:21.480 --> 0:21:24.119 but it only gets down in the vicinity of four percent. 0:21:24.200 --> 0:21:26.679 That's a change, right that that is a change, that 0:21:26.840 --> 0:21:29.960