WEBVTT - Surveillance: 2022 Bulls & Bears 0:00:05.120 --> 0:00:09.320 Welcome to the Bloombergs Surveillance Podcast Hometown Keene. Along with 0:00:09.440 --> 0:00:13.200 Jonathan Ferrill and Lisa are Brownwitz Jaylie, we bring you 0:00:13.320 --> 0:00:17.960 insight from the best an economics, finance, investment and international 0:00:18.000 --> 0:00:23.560 relations Fine Bloomberg Surveillance and Apple podcast SoundCloud, Bloomberg dot 0:00:23.560 --> 0:00:30.240 Com and of course on the Bloomberg termament, it's crystal 0:00:30.280 --> 0:00:34.080 ball time. It's your outlook for on the SMP five hundred, 0:00:34.240 --> 0:00:37.600 will do bottom three, top three, bottom three, most bearish, 0:00:37.760 --> 0:00:41.040 less constructive, Morgan Stanley at forty four hundred, be about 0:00:41.080 --> 0:00:45.400 forty six, Barclays at top three, Credit Swat at fifty two, 0:00:45.640 --> 0:00:48.400 we've got Deutsche Bank of fifty two fifty, and then 0:00:48.440 --> 0:00:52.839 you've got Bemo Bemo at fifty three hundred, and then 0:00:52.920 --> 0:00:56.120 rounding it out, just shaking up the whole table, going 0:00:56.200 --> 0:00:58.600 number one, a new entry in the last twenty four hours. 0:00:58.680 --> 0:01:02.080 John Stolfus goes to three thirty. He joined us now 0:01:02.200 --> 0:01:05.560 the chief investment strategist at Oppenheimer. John, let's start here, 0:01:05.560 --> 0:01:07.720 where did the extra thirty points come from? And what 0:01:07.760 --> 0:01:10.240 did Brian Baski do to you to upset you? Well? 0:01:10.440 --> 0:01:12.840 Belsky and our own pals from way back. Even though 0:01:12.840 --> 0:01:15.280 we haven't talked with each other for about a year, 0:01:15.440 --> 0:01:18.160 just pre pandemic, we ran into each other outside of 0:01:18.200 --> 0:01:20.839 the exchange. He was coming out, I was going into 0:01:20.840 --> 0:01:24.200 the exchange. But we haven't spoken. But when I looked 0:01:24.200 --> 0:01:26.640 at it, I just looked at the numbers. We were 0:01:26.640 --> 0:01:29.440 looking at the momentum that we've been seeing in these rallies, 0:01:30.160 --> 0:01:33.800 the broadening of interest in equities and the propensity of 0:01:33.840 --> 0:01:37.760 the indexes to essentially self correct in the course of 0:01:37.920 --> 0:01:41.720 rotations and rebalancing. That can cabin day to day, not 0:01:41.880 --> 0:01:44.760 waiting for weeks to week or month to month. So 0:01:44.840 --> 0:01:48.120 a healthy market, the economy coming back, we just wanted 0:01:48.160 --> 0:01:49.960 to edge it up a little bit. John, what you 0:01:50.000 --> 0:01:52.040 had to say about the Fed got my attention. We 0:01:52.080 --> 0:01:54.040 did not expect the FED to slam on the brakes, 0:01:54.040 --> 0:01:56.440 but rather we look for the central bank to pump 0:01:56.480 --> 0:01:59.800 the brakes as lightly as it can. John, What separates 0:02:00.160 --> 0:02:01.760 you and us? Why do you see it as a 0:02:01.760 --> 0:02:04.279 central bank that's gonna step on the break just pumped 0:02:04.320 --> 0:02:06.840 them as a loutly as they can, Jonathan. I think 0:02:06.840 --> 0:02:09.000 it's the context that we bring to it. You know, 0:02:09.080 --> 0:02:13.040 this is a thirty eight years on Wall Street. So 0:02:13.120 --> 0:02:16.280 I remember the Alan greenspan era gas, I even remember 0:02:16.440 --> 0:02:19.760 Walter uh and, so you know, this is a this 0:02:19.840 --> 0:02:24.799 is the Bernankee legacy of Federal Reserve. It's highly sensitive 0:02:24.840 --> 0:02:28.200 when it when it addresses it's it's mandate of full 0:02:28.280 --> 0:02:33.520 employment uh and uh and and a stable economy to 0:02:33.520 --> 0:02:36.000 to achieve that. And so we think they're going to 0:02:36.040 --> 0:02:38.960 be very careful. But the irony though of all of 0:02:39.000 --> 0:02:41.440 this is the market is freaking out because the Fed 0:02:41.520 --> 0:02:45.440 is getting really uh considering, you know, tapering at the 0:02:45.520 --> 0:02:49.440 more aggressive pace. The market has been dying for the 0:02:49.440 --> 0:02:52.840 Fed to taper. It says that if the Feds behind 0:02:52.880 --> 0:02:55.360 the curve, give it a break and let it taper, 0:02:55.720 --> 0:03:02.360 and it'll get to actually probably tweet the the benchmark 0:03:02.520 --> 0:03:07.200 right the Fed funds right probably later next years and 0:03:07.360 --> 0:03:10.160 six months to maybe nine months on from where we 0:03:10.200 --> 0:03:12.080 are now, you're touching on one of the biggest debates 0:03:12.160 --> 0:03:14.760 on Wall Street right now, does a faster taper mean 0:03:14.840 --> 0:03:17.280 a sooner rate hike? And a lot of people seem 0:03:17.360 --> 0:03:19.200 to think that the answer is yes. And can they 0:03:19.240 --> 0:03:22.880 potentially separate those two a little bit more at tomorrow's 0:03:22.919 --> 0:03:25.960 press conference is a key question My issue though, given 0:03:25.960 --> 0:03:29.240 this call, is that you're looking for twelve percent earnings 0:03:29.280 --> 0:03:33.280 growth for the SMP five hundred, a real robust consumer throughout, 0:03:34.560 --> 0:03:37.200 and yet a FED that remains patient and has the 0:03:37.240 --> 0:03:40.760 confidence to do so despite this robust data. Can you 0:03:40.800 --> 0:03:44.760 explain sort of dovetail those ideas well? We we think 0:03:44.800 --> 0:03:49.600 that the right now, you know, we think people are overspending. 0:03:49.680 --> 0:03:52.400 We think the the the what you called the the 0:03:52.440 --> 0:03:56.760 stingy checks, uh, the the amount of people saved when 0:03:56.800 --> 0:03:59.760 they weren't commuting to work, what what have you. People 0:03:59.800 --> 0:04:03.160 have more money on a relative basis, depending upon or 0:04:03.200 --> 0:04:06.680 where they fall in the income strata. Uh, and they're 0:04:06.720 --> 0:04:08.840 spending it, you know, right now at a certain pace. 0:04:09.000 --> 0:04:13.920 But the effects of gas, the gasoline pump prices going up, 0:04:14.080 --> 0:04:18.200 the effects of the prices of neat poultry and or etcetera. 0:04:18.640 --> 0:04:21.359 All of this adds up. The consumer will bring it 0:04:21.400 --> 0:04:23.400 in a little bit, but the consumer is not going 0:04:23.440 --> 0:04:27.520 to stop spending. My big thing has always been don't 0:04:27.960 --> 0:04:31.280 don't bet against the American consumer, as well as don't 0:04:31.320 --> 0:04:33.760 think that technology is gonna end. And we're going back 0:04:33.760 --> 0:04:38.200 to the abacus of the slide rule. Don't bet against 0:04:38.200 --> 0:04:40.360 the consumer. Don't bet against them. In some ways the 0:04:40.400 --> 0:04:42.920 supply chain that's been affecting the consumer as well. John, 0:04:42.960 --> 0:04:46.280 I'm interested in whether you see any risk to your 0:04:46.320 --> 0:04:49.440 overall focus from omicron from any way or indeed the 0:04:49.480 --> 0:04:52.760 way in which the consumer reacts to that. I've gotta 0:04:52.839 --> 0:04:58.400 say the omicron risk is significant. Uh. In some ways, 0:04:58.480 --> 0:05:02.440 it's just as to how is uh it is uh 0:05:02.839 --> 0:05:07.520 looked at from afar by people who are not epidemologists. Uh, 0:05:07.839 --> 0:05:10.919 by the risk and and the the the element that 0:05:11.000 --> 0:05:14.599 can cause over over concerned. I say, let's leave it 0:05:14.640 --> 0:05:17.560 to science. So far, science has done an incredible job. 0:05:17.839 --> 0:05:20.640 If we look back to when people thought it was 0:05:20.640 --> 0:05:23.400 gonna take two years, four years, or who knows when 0:05:23.400 --> 0:05:27.000 for a vaccine of efficacy, we've come a long way. Uh. 0:05:27.120 --> 0:05:30.440 Technology boosting that and UH. And then I'm sorry I 0:05:30.839 --> 0:05:33.279 missed the next part of the question. Oh, the consumer 0:05:34.160 --> 0:05:36.719 is that? Yeah? The consumer has shown you know, the 0:05:36.760 --> 0:05:39.720 consumer has shown a great desire to shop, whether they 0:05:39.760 --> 0:05:42.480 do it online or bricks and mortar, or a mix 0:05:42.480 --> 0:05:45.320 of both. H. The consumer wants to get back to 0:05:45.400 --> 0:05:48.159 the next new normal, or get to the next new normal, 0:05:48.360 --> 0:05:50.919 because I don't think we're going back to what the 0:05:50.960 --> 0:05:54.360 normal was on the memory of this pandemic for quite 0:05:54.360 --> 0:05:56.960 a few years before people forget it. So are you 0:05:56.960 --> 0:05:58.880 gonna call for Apple to be a four trillion dollar 0:05:58.920 --> 0:06:01.719 company by the end of twenty twenty two? Well get 0:06:01.920 --> 0:06:04.400 you know, the firm doesn't like me to comment on 0:06:04.600 --> 0:06:09.760 specific names. But but but needless is it related to technology? 0:06:09.800 --> 0:06:14.800 We think technology continues to be something that the investors 0:06:14.839 --> 0:06:17.880 want to have exposure to. You have to you have 0:06:18.000 --> 0:06:19.960 to break up when you're looking at We like more 0:06:20.120 --> 0:06:23.520 established companies. We think the newer wins. It's it's terrific 0:06:23.600 --> 0:06:26.400 for risk and volatility. But if that's what you want, 0:06:26.800 --> 0:06:29.440 know that you're not going to get those steady earning, 0:06:29.520 --> 0:06:34.839 steady cash flow process of innovation and a uh within 0:06:34.920 --> 0:06:38.120 a culture without a corporation that's established and a certain 0:06:38.160 --> 0:06:43.520 relationship with shareholders that gives you less volatility. Generally speaking, John, 0:06:43.520 --> 0:06:45.520 you squeezed down the extra thirty points. You are the 0:06:45.600 --> 0:06:48.279 most bullish on the street. Gun. It's the next year, John, 0:06:48.279 --> 0:06:50.719 It's great a catch up, sir, as always John Stelfas 0:06:50.760 --> 0:07:00.200 there of Oppenheimer. Thank you, John, Thank you, sir. We're 0:07:00.200 --> 0:07:01.600 gonna talk to the biggest bill on the Street. A 0:07:01.600 --> 0:07:03.360 little bit later, we have to talk to the biggest 0:07:03.360 --> 0:07:06.480 bear on the street as well, Price Target over more 0:07:06.520 --> 0:07:08.279 than Stanley, and we can catch show with Dwann Scaley, 0:07:08.279 --> 0:07:10.600 the head of market research and strategy at Morgan Stanley 0:07:10.640 --> 0:07:13.320 Wealth Management. Different side of the business down, but you 0:07:13.360 --> 0:07:16.440 work very closely with Mike Wilson, who straddles both sides 0:07:16.600 --> 0:07:18.240 at a business. So let's talk about the call for 0:07:18.240 --> 0:07:21.040 a lower equity market. What I hear from you guys 0:07:21.040 --> 0:07:23.840 going through the research, it's not a less constructive view 0:07:23.840 --> 0:07:26.480 per se on earnings, but it's about the multiple down. 0:07:26.640 --> 0:07:28.600 What's going to bring that multiple down down? What is 0:07:28.600 --> 0:07:30.480 it about the multiple that you're focused on at the moment. 0:07:31.760 --> 0:07:34.360 That's exactly right, Jonathan, Good morning and good to see you. 0:07:34.360 --> 0:07:36.880 Happy holidays to you and the team. So look, as 0:07:36.920 --> 0:07:39.840 we've been saying for the last several months, we think 0:07:39.880 --> 0:07:42.280 there's more room to go on multiple contraction. And that 0:07:42.360 --> 0:07:45.880 has historically been the cage Jonathan, as we've worked through 0:07:45.960 --> 0:07:49.200 mid cycle transitions. We think it is basically the same 0:07:49.240 --> 0:07:52.520 scenario this time around. Okay, even though we've had extraordinary 0:07:52.560 --> 0:07:58.120 circumstances in this particular cycle, given COVID, given lockdowns and reopenings, etcetera. 0:07:58.400 --> 0:08:02.280 We think things are somewhat tracking to a normal historical context, 0:08:02.560 --> 0:08:05.560 which has seen the multiple come down anywhere between ten 0:08:05.640 --> 0:08:09.520 to fifteen percent as mid cycle transitions culminated in the past. 0:08:09.520 --> 0:08:11.920 So we do think there's more room to go on valuation. 0:08:12.200 --> 0:08:14.800 And as to this point, you said, we recently haved 0:08:14.840 --> 0:08:18.800 our exposure to the equity like asset classes. Can you 0:08:18.840 --> 0:08:21.200 give us a sense of where you put the money 0:08:21.320 --> 0:08:25.360 as you took down your exposure? Sure, yeah, absolutely so, 0:08:25.360 --> 0:08:28.240 so we put some money into alternatives. We've also put 0:08:28.320 --> 0:08:31.600 some money into a shorter duration credit as well, some 0:08:31.680 --> 0:08:35.880 high quality credit and look, valuations and spreads aren't exceedingly 0:08:36.280 --> 0:08:39.120 undemanding there either, but we do think that could offer 0:08:39.240 --> 0:08:42.240 some ballast in portfolios as we go into a little 0:08:42.240 --> 0:08:44.760 bit more volatile period. You know, as you well know, 0:08:44.840 --> 0:08:48.679 we've been through this anomalous uh smooth sale upwards over 0:08:48.720 --> 0:08:51.480 the last call it, sixteen to eighteen months where we 0:08:51.520 --> 0:08:54.720 really haven't had your typical ten percent correction in the 0:08:54.760 --> 0:08:56.880 in the SMP, and we don't think that's going to 0:08:56.960 --> 0:09:02.360 continue through the winter months. Okay, brace for a ten correction? 0:09:02.679 --> 0:09:05.160 What gets us there? What's the snap element that suddenly 0:09:05.240 --> 0:09:07.640 drives us lower, is there? I mean we get PPI 0:09:07.760 --> 0:09:09.920 data a little bit later today. I know inflation has 0:09:09.960 --> 0:09:13.640 been a key area of risk. You're looking at, correct, Caroline, 0:09:13.640 --> 0:09:16.320 And so we do see a bit of a gradual 0:09:16.480 --> 0:09:20.600 online here, and positioning has already started to move that way, 0:09:20.600 --> 0:09:22.800 particularly when you look at some of the faster moving 0:09:22.840 --> 0:09:26.600 institutional funds out there. Positioning as started to lighten up 0:09:26.640 --> 0:09:30.120 more recently. But we think it's simply the market acknowledging 0:09:30.120 --> 0:09:32.400 that the Fed is about to announce this week the 0:09:32.400 --> 0:09:35.240 big event, of course, about to announce a much faster 0:09:35.760 --> 0:09:39.840 taper schedule that will conclude in March. That's gonna obviously 0:09:39.880 --> 0:09:43.400 remove the maximum accommodative stance that we've had. And even 0:09:43.400 --> 0:09:46.240 though folks have known about this, they've been preparing for it. 0:09:46.480 --> 0:09:48.880 I think there's a difference in terms of the actual 0:09:48.880 --> 0:09:51.600 effect and markets over the next several months down when 0:09:51.640 --> 0:09:53.960 they secuity market do you like? I know there's going 0:09:54.000 --> 0:09:55.800 to be much more emphasis from you and the team 0:09:56.040 --> 0:10:01.160 at individual names, individual sectors. What do you like right now, Jonathan, 0:10:01.200 --> 0:10:05.600 and this type of backdrop. We favored defensive, high quality names. Okay, 0:10:05.640 --> 0:10:09.200 so from a sector's perspective. Think healthcare, which is shaded 0:10:09.280 --> 0:10:13.760 trading extremely cheap after underperforming this year, but has all 0:10:13.800 --> 0:10:16.840 the benefits of innovation and growth, but it's not priced 0:10:16.880 --> 0:10:20.680 like many of the growth sectors. Think areas like consumer staples. 0:10:20.679 --> 0:10:24.240 I know pricing uh power was just mentioned earlier. You 0:10:24.280 --> 0:10:27.880 have to be selective. Not every global consumer franchise has pricing, 0:10:28.080 --> 0:10:29.960 so you have to do the bottom up work. And 0:10:30.000 --> 0:10:32.079 then Jonathan on the other end of the barbel we're 0:10:32.080 --> 0:10:35.400 actually not shying away from growth names either, except here's 0:10:35.440 --> 0:10:37.959 the nuance. We want to focus very much so at 0:10:38.000 --> 0:10:40.720 growth at a reasonable price. We're looking at actually names 0:10:40.760 --> 0:10:44.760 we've added to our team's portfolios recently, names like MasterCard, 0:10:45.120 --> 0:10:48.480 names like Team Mobile. These are actually structural growers that 0:10:48.520 --> 0:10:51.400 are significantly off their fifty two week haus and if 0:10:51.440 --> 0:10:53.920 we do get into an environment where rates finally start 0:10:53.960 --> 0:10:57.199 to back up into two, they won't be as acutely 0:10:57.320 --> 0:11:00.199 sensitive to higher rates as some of the really high 0:11:00.280 --> 0:11:03.360 multiple growth stops that work this year. Dan, you and 0:11:03.400 --> 0:11:06.600 others have been talking about a ten to fifteen percent correction, 0:11:06.640 --> 0:11:09.199 which is overdue. For a while a lot of people 0:11:09.200 --> 0:11:11.080 have been saying things have been flying a little, too 0:11:11.160 --> 0:11:13.520 high for too long to be really justified in any 0:11:13.520 --> 0:11:16.400 fundamental level. And yet every dip has been viable, and 0:11:16.440 --> 0:11:18.600 that dip doesn't matter how small it is, it is 0:11:18.600 --> 0:11:22.160 a viable dip. Has that made you rethink your thesis 0:11:22.200 --> 0:11:24.760 based on the fact that you're seeing cash piles increase 0:11:24.800 --> 0:11:26.880 in the at least according to the fund manager survey 0:11:26.920 --> 0:11:29.040 coming out of Bank of America, and a sense of 0:11:29.080 --> 0:11:32.839 caution among some of your peers. Uh, you know, it's 0:11:32.840 --> 0:11:35.200 a it's a fair point least. One thing I would 0:11:35.240 --> 0:11:38.480 say is that particular dynamic innovo of itself has not 0:11:38.640 --> 0:11:41.720 made us back away from the call or change the call. 0:11:42.040 --> 0:11:45.520 We do acknowledge that the individual investor, in particular, given 0:11:45.559 --> 0:11:48.880 the amount of in particular millennial wealth coming in and 0:11:48.920 --> 0:11:52.440 the new investors coming into access this market via technology 0:11:52.440 --> 0:11:55.679 and absence so forth, that has been a particularly strong 0:11:55.760 --> 0:11:59.079 force and frankly higher than we would have presumed coming 0:11:59.120 --> 0:12:02.080 into this year, But nonetheless that hasn't made us change 0:12:02.080 --> 0:12:04.200 the call. What would help us change the call, make 0:12:04.280 --> 0:12:07.040 us adjust the call would be Number one, we're wrong 0:12:07.040 --> 0:12:09.560 on rates, right, So instead of getting to two percent 0:12:09.640 --> 0:12:12.560 or two point one percent, which is Matt Hornback's call, 0:12:13.000 --> 0:12:15.480 we we hang out around these levels and equity risk 0:12:15.520 --> 0:12:18.559 premium for the SMP aren't his challenge. And number two, 0:12:18.679 --> 0:12:21.360 we've been calling for a bit of a pushback or 0:12:21.400 --> 0:12:24.200 a slowdown. And the consumer, the consumer is eaten through 0:12:24.559 --> 0:12:27.400 a tremendous amount of the savings that you just reference, 0:12:27.840 --> 0:12:31.200 and so they've also been pulling forward tremendous demand for 0:12:31.320 --> 0:12:34.240 particularly durable goods. Given we've been all at home for 0:12:34.240 --> 0:12:36.680 for so so long, we don't see some of those 0:12:36.679 --> 0:12:39.320 trends continuing as well, and that's part of our more 0:12:40.280 --> 0:12:43.560 near term caution. That being said, if we're wrong about rates, 0:12:43.600 --> 0:12:45.520 if we're wrong about the consumer, those would be some 0:12:45.559 --> 0:12:47.600 of the aspects that would change our call. And can 0:12:47.600 --> 0:12:49.240 I just like thank you You've been a good friend 0:12:49.240 --> 0:12:51.400 of this show, what aful partner over the last year. 0:12:51.480 --> 0:12:53.760 Send up best to to Mike, to Ellen, to Matt 0:12:53.800 --> 0:12:56.040 two leaks of Shallott just fantastic down as alwise and 0:12:56.080 --> 0:12:58.320 good to hit from you my pleasure. That's Kelly, thank you, 0:12:58.480 --> 0:13:00.319 enjoy the holidays and send out best to the scene. 0:13:06.760 --> 0:13:09.040 Let's begin with liftoff Mike McKee. We can do that 0:13:09.240 --> 0:13:11.840 right now with Mike Gap and the Chief US economist 0:13:11.920 --> 0:13:14.280 at Barclay's Mike Gap And I said, you were at 0:13:14.320 --> 0:13:17.199 May threatening to move to March. You've already done it. 0:13:17.240 --> 0:13:19.680 Marches the care now for liftoff, Mike, what separates you 0:13:19.720 --> 0:13:22.560 in the pack? You're at March, the packs in the summer. 0:13:22.640 --> 0:13:26.240 June out, two September. Good morning, Jonathan and Lisa, thank 0:13:26.240 --> 0:13:28.120 you for having me on. I think we would say 0:13:28.160 --> 0:13:31.160 it's it's exactly what has been just mentioned, the concern 0:13:31.200 --> 0:13:34.720 about inflation, where inflation is coming in, and I'd say 0:13:34.840 --> 0:13:38.400 it's a twofold argument for for us. One is the 0:13:38.760 --> 0:13:42.200 November Minutes say risk management is now the guiding principle 0:13:42.320 --> 0:13:45.760 of monetary policy, and in the extreme that means you 0:13:45.800 --> 0:13:49.280 don't necessarily need to meet all your liftoff criterion to 0:13:49.400 --> 0:13:52.000 move rates higher. You can just be worried about the 0:13:52.120 --> 0:13:55.720 risk of higher inflation. So that's one argument. The second 0:13:55.760 --> 0:13:59.000 would be that employment report that we received last week, 0:13:59.480 --> 0:14:02.280 very solid, a decline in the unemployment rate, a one 0:14:02.320 --> 0:14:05.680 percentage point declined in the unemployment rates since August. And 0:14:05.760 --> 0:14:08.120 we think other members will think, hey, we're probably a 0:14:08.120 --> 0:14:11.880 lot closer to maximum employment than we thought before. The 0:14:11.920 --> 0:14:15.400 economy is accelerating fairly rapidly in the in the fourth quarter, 0:14:15.480 --> 0:14:19.200 so o Macron concerns aside, which are certainly valid. There's 0:14:19.200 --> 0:14:22.120 a lot of momentum. Labor market progress has been healthy. 0:14:22.280 --> 0:14:25.000 If you're concerned about inflation, we think that puts March 0:14:25.040 --> 0:14:27.200 on the table. So that would be our argument. Michael. 0:14:27.200 --> 0:14:29.680 We were just hearing from Jonathan Stole's first overt Abenheimer, 0:14:29.680 --> 0:14:32.160 and he was saying he thinks it's different to accelerate 0:14:32.200 --> 0:14:34.840 the taper from saying that we're going to raise rates 0:14:34.840 --> 0:14:37.960 sooner at the Federal Reserve. What do you say in 0:14:38.080 --> 0:14:41.240 contrast to that, with your call going very much against that, 0:14:41.680 --> 0:14:44.120 given the fact that the Fed has basically been saying 0:14:44.200 --> 0:14:46.640 something of that nature until a sharp pivot in the 0:14:46.680 --> 0:14:50.200 past couple of weeks, right, So prior to this very 0:14:50.240 --> 0:14:52.480 sharp pivot, I would say that that was That was 0:14:52.520 --> 0:14:56.040 our view too, that you could do risk management to 0:14:56.080 --> 0:14:59.640 start taper to create optionality, but then you'd kind of 0:14:59.680 --> 0:15:02.680 watch the data under your feet as it came in 0:15:02.680 --> 0:15:04.800 in terms of deciding when to lift off. So risk 0:15:04.840 --> 0:15:08.120 management was about the beginning of taper, not necessarily about 0:15:08.200 --> 0:15:11.560 rate hikes. But if risk management is now the guiding 0:15:11.600 --> 0:15:16.720 principle in the conduct of monetary policy. Then tapering, the 0:15:16.760 --> 0:15:19.800 pace of taper, the start of hikes, the pace of hikes, 0:15:19.840 --> 0:15:22.560 all that can be done for risk management purposes. Again, 0:15:22.600 --> 0:15:25.440 it's about the risk of higher inflation, not necessarily where 0:15:25.520 --> 0:15:28.840 current inflation is. So you could argue that a decision 0:15:28.880 --> 0:15:31.920 to taper and taper more quickly does send a signal 0:15:31.960 --> 0:15:34.120 about your willingness to hike rates. So I think would 0:15:34.120 --> 0:15:36.200 be my response to that would be, it's about you know, 0:15:36.240 --> 0:15:39.040 how much you think risk management is the umbrella over 0:15:39.120 --> 0:15:42.160 all policy choices at this point in time. How significant 0:15:42.240 --> 0:15:44.440 is it from your perspective, Mike, that we have seen 0:15:44.880 --> 0:15:49.320 such aggressive rhetoric from former FETE officials, including former uber 0:15:49.400 --> 0:15:52.800 doves like a former Minneapolis FED president Coachur of Lakota 0:15:52.880 --> 0:15:55.040 coming out this morning and basically saying the FETE is 0:15:55.120 --> 0:15:59.400 risking a five type scenario where inflation looks containable and 0:15:59.520 --> 0:16:03.240 ends up not being. So I think they're there. It's 0:16:03.280 --> 0:16:06.320 a reflection of the pressure that they're getting across the board. 0:16:06.400 --> 0:16:09.240 So you saw the comments from from Congress, both sides 0:16:09.280 --> 0:16:13.000 of the aisle stating concerns about inflation for for different 0:16:13.000 --> 0:16:16.080 reasons wanting the FED to respond to it. So it's 0:16:16.120 --> 0:16:18.800 this isn't you know, necessary what i'd say, a partisan issue. 0:16:18.880 --> 0:16:22.840 It's coming from your kind of you know, your traditional economists, 0:16:22.880 --> 0:16:26.359 your non orthodox economists. It's coming from Republicans and Democrats 0:16:26.360 --> 0:16:29.360 in Congress. There is a chorus of calls for the 0:16:29.400 --> 0:16:32.640 FED to respond to this. I personally think, or we think, 0:16:33.160 --> 0:16:36.600 the risk of a sixties or seventies style inflation story 0:16:37.080 --> 0:16:40.200 is overblown. But that doesn't mean the FED shouldn't be 0:16:40.240 --> 0:16:43.359 responding to what they see are our risks to inflation 0:16:43.600 --> 0:16:46.600 in the near term. We think inflation ultimately will come 0:16:46.640 --> 0:16:50.720 down and and the FED will be will have its 0:16:50.720 --> 0:16:54.280 credibility maintained in terms of achieving two percent outcomes over 0:16:54.440 --> 0:16:56.680 over the long term. I just think the risks of 0:16:56.840 --> 0:16:59.440 a wage price spiral are overblown, and the quicker the 0:16:59.480 --> 0:17:02.680 FED move of the less likely that that it's to 0:17:03.160 --> 0:17:07.040 come to play. Mike Caroline in London here, and I'm 0:17:07.080 --> 0:17:09.760 interested in how much the other side of the Fed's 0:17:09.800 --> 0:17:14.280 mandate was of course inclusive jobs market overall, and that's 0:17:14.280 --> 0:17:16.280 had to be to certain extent put on the backbone 0:17:16.320 --> 0:17:20.119 because inflation perhaps peaches into inequality even further. But how 0:17:20.200 --> 0:17:24.120 much do you think that becomes a focus point once more? Caroline, 0:17:24.200 --> 0:17:27.679 that's it's a great point because risk management again, just 0:17:27.720 --> 0:17:29.720 to come back to this, means you may very well 0:17:29.760 --> 0:17:32.320 be lifting off even though you might not think you're 0:17:32.359 --> 0:17:35.560 at maximum employment. And the committees hasn't really gone to 0:17:35.680 --> 0:17:38.480 great lengths to clarify to you what broad based and 0:17:38.560 --> 0:17:42.320 inclusive means. It doesn't really even define what full employment 0:17:42.400 --> 0:17:44.840 is and its statement of longer run policy goals. It's 0:17:44.840 --> 0:17:47.159 more of a we'll know it when when we see it. 0:17:47.280 --> 0:17:50.920 So optically it could look, you know, difficult for them 0:17:50.920 --> 0:17:53.840 where they're raising rates, but still several million workers are 0:17:53.880 --> 0:17:57.159 are out of the workforce and participation is subdued, so 0:17:57.400 --> 0:17:59.359 it's not a great position for them to be in, 0:17:59.720 --> 0:18:01.960 but it is the one where where they're in currently. 0:18:02.200 --> 0:18:04.520 What I would say is if inflation does start coming 0:18:04.560 --> 0:18:08.120 down rapidly over the course of two then maybe they 0:18:08.160 --> 0:18:11.320 pause any rate hike cycle that they've started and and 0:18:11.400 --> 0:18:14.160 kind of shift back in the direction of saying, well, 0:18:14.160 --> 0:18:16.119 now it will be a little bit easier for us 0:18:16.160 --> 0:18:19.000 to ride out an expansion and improve labor market outcome. 0:18:19.080 --> 0:18:21.520 So right now it's about heading off risks of inflation, 0:18:21.960 --> 0:18:24.080 but there are worlds in which they could shift back 0:18:24.119 --> 0:18:27.920 to to promote full employment. How much could the strengthen 0:18:27.920 --> 0:18:31.400 the dollar be the thing that eats away at inflation 0:18:31.560 --> 0:18:35.359 at that rapid rate. So that's a great question, because 0:18:35.359 --> 0:18:37.720 in the last cycle, of course, any kind of movement 0:18:37.760 --> 0:18:41.879 to high rates came with with a lot of dollar appreciation, 0:18:41.960 --> 0:18:45.440 which fed back into lower growth and lower inflation outcomes. 0:18:46.000 --> 0:18:48.440 Um at least the FEDS shift in kind of our 0:18:48.560 --> 0:18:51.520 change and call brings, brings our rhetoric and the FEDS 0:18:51.560 --> 0:18:55.200 communication in line with where markets are. So we're not 0:18:55.240 --> 0:18:58.879 necessarily thinking a pivot at this point or rate hikes 0:18:58.880 --> 0:19:03.119 in two may bring about a much stronger dollar. H 0:19:03.240 --> 0:19:04.919 So I think you'd have to You'd have to have 0:19:04.960 --> 0:19:08.119 the FED maybe moving more rapidly than the market is expecting. 0:19:08.160 --> 0:19:10.119 I don't think that that we're there yet, so I 0:19:10.160 --> 0:19:13.520 think it's less likely, but certainly it's something that we're 0:19:13.560 --> 0:19:16.360 watching out for. I would say over the long term, 0:19:16.400 --> 0:19:18.440 it's part of the reason why the market things the 0:19:18.560 --> 0:19:21.560 terminal rate is lower, that that the FED will be 0:19:21.680 --> 0:19:25.000 raising rates more than other developed economies, which would likely 0:19:25.280 --> 0:19:28.000 keep the dollar buoyant over time, So I think it 0:19:28.080 --> 0:19:30.080 is part of the story on the terminal rate, but 0:19:30.160 --> 0:19:32.520 maybe not in the near term performance of the economy. 0:19:32.800 --> 0:19:35.560 Michael cape and worked with me here year over at 0:19:35.600 --> 0:19:38.960 three thirty tomorrow. Yeah, send the team home. That we've 0:19:38.960 --> 0:19:43.520 done for the year pretty much. Yeah. Wait seriously, of course, Mike, 0:19:43.640 --> 0:19:46.040 come on, what happens if something happens at ECB or 0:19:46.080 --> 0:19:53.600 Bank of ang are you? I'm the U S economist. 0:19:58.160 --> 0:20:01.560 Cathy Jones joined us now chief Fixed and come strategistic Chap. Kathy, 0:20:01.840 --> 0:20:04.360 We've got to talk about this bawn market. We went 0:20:04.359 --> 0:20:08.080 through it with Lisa. When we were at these levels, 0:20:08.119 --> 0:20:10.600 we were talking about a global recession. What are we 0:20:10.640 --> 0:20:15.359 doing now? Yeah, it's really a conundrum, I think for 0:20:15.400 --> 0:20:18.560 the FAT because as they try to signal that their 0:20:18.600 --> 0:20:21.240 tightening policy, all we get is a flatter yield curve 0:20:21.280 --> 0:20:24.080 and lower long term rates. And I think that that 0:20:24.200 --> 0:20:28.520 tells you that the market's view is that inflation isn't 0:20:28.520 --> 0:20:31.680 going to last a long time and the growth will 0:20:31.880 --> 0:20:36.080 decelerate next year, and that we have enough demand at 0:20:36.119 --> 0:20:38.280 the long end of the curve to prevent yields from 0:20:38.359 --> 0:20:42.240 rising very much. So it places a lot of pressure 0:20:42.280 --> 0:20:44.440 on the fat. How high can they go in terms 0:20:44.440 --> 0:20:48.200 of rate hikes and not invert the yield curve? And 0:20:48.320 --> 0:20:51.080 that's going to be probably the biggest problem they face 0:20:51.160 --> 0:20:54.320 over the next twelve months. Kathy, what would you say 0:20:54.680 --> 0:20:57.080 to the argument that the bond market, I don't want 0:20:57.080 --> 0:21:00.280 to say is wrong, but it's distorted by quantitative e sing, 0:21:00.320 --> 0:21:04.680 by the savings glut, by what's going on overseas. You know, 0:21:04.760 --> 0:21:08.640 I don't think it's distorted, but those are certainly factual. UM, 0:21:08.680 --> 0:21:12.800 that's actual evidence for that can contribute to low bond yields. 0:21:12.840 --> 0:21:15.720 And clearly, if there's one surprise that the Fed could 0:21:15.800 --> 0:21:19.360 pull off, it would be quantitative typing. Right. If they 0:21:19.359 --> 0:21:21.600 really wanted to see long term rates move up, they 0:21:21.600 --> 0:21:24.879 could start selling bonds and reducing the size of the 0:21:24.880 --> 0:21:27.480 balance sheet. I don't think that's going to happen anytime soon, 0:21:27.600 --> 0:21:29.560 but that would certainly be one way to do it. 0:21:29.840 --> 0:21:32.560 But I think the collective wisdom of the market here 0:21:32.680 --> 0:21:34.560 is that, yeah, we have a lot of factors holding 0:21:34.560 --> 0:21:38.360