WEBVTT - Surveillance: Ban the Phillips Curve, Says Sahm 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane along 0:00:09.200 --> 0:00:13.080 with Jonathan Ferrell and Lisa A. Brawmowitz Jailey. We bring 0:00:13.119 --> 0:00:17.159 you insight from the best and economics, finance, investment, and 0:00:17.239 --> 0:00:23.280 international relations. Find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg 0:00:23.360 --> 0:00:29.320 dot Com, and of course, on the Bloomberg Terminal. How 0:00:29.360 --> 0:00:34.440 do you prepare for how do you wrap up this year? Um, 0:00:34.520 --> 0:00:37.040 let's bring in Katherine Rooney Vera to talk about that. 0:00:37.080 --> 0:00:40.080 She is the head of Global macro research at Boltic, 0:00:40.240 --> 0:00:42.920 so she's one of those top down people. UM. Kathan, 0:00:42.920 --> 0:00:45.120 thanks so much for joining us, coming into the studio 0:00:45.159 --> 0:00:49.640 and cold, dark and wet New York. Are you from Miami? 0:00:49.880 --> 0:00:52.279 I'm from New Jersey, but I live in You live 0:00:52.280 --> 0:00:54.600 in Miami, which would probably rather be in Miami. I'd 0:00:54.680 --> 0:00:59.560 rather be there as well. So what do you think about? UM, 0:00:59.600 --> 0:01:03.080 you know this conundrum. We're at a point where it 0:01:03.120 --> 0:01:06.520 doesn't seem like a recession really is even priced in yet, 0:01:06.760 --> 0:01:10.600 and that's pretty crazy given that everyone expects a recession. Yeah, 0:01:10.640 --> 0:01:13.679 I think we're already beyond talking about recession and everyone's 0:01:13.720 --> 0:01:17.080 talking about recovery before recession. Has actually happened, and something 0:01:17.160 --> 0:01:20.360 Kayleie mentioned it's all about inflation. Yes, it's about inflation, 0:01:20.440 --> 0:01:22.520 but for me, it's all about the labor market because 0:01:22.560 --> 0:01:27.160 the labor market remains so strong and five six um 0:01:28.080 --> 0:01:31.440 increases in salaries are not commensurate with a two percent 0:01:31.480 --> 0:01:33.920 inflation target. So my view, and you and I have 0:01:33.920 --> 0:01:37.839 talked about this previously, Kaylee, is that the FED knows, 0:01:37.959 --> 0:01:40.520 in my view, that it has to get unemployment higher, 0:01:40.560 --> 0:01:44.399 and that it's horrible to say. Um. But by the way, 0:01:44.400 --> 0:01:46.280 we're gonna talk with Cloudy Asam a little bit later. 0:01:46.319 --> 0:01:50.200 She of the Psalm rule, and she thinks that's a 0:01:50.240 --> 0:01:53.560 mistake to to to think to argue that, you know, 0:01:53.600 --> 0:01:57.040 the Phillips curve um still alive and well, and you've 0:01:57.040 --> 0:02:00.560 got to push up unemployment in order to pull down inflations. Well, 0:02:00.600 --> 0:02:02.840 I'd like to hear her view on where the NEHRU 0:02:03.440 --> 0:02:06.560 is right now. Um, I think it's around four pot. 0:02:07.240 --> 0:02:11.000 You know, we're at three point seven. So so for 0:02:11.080 --> 0:02:13.919 the natural level of unemployment, if it is in fact 0:02:13.960 --> 0:02:17.200 four point nine percent, anything below that is in fact inflationary, 0:02:17.280 --> 0:02:20.560 So we're we're what's her view on wage price spiral? UM? 0:02:20.600 --> 0:02:23.919 You know, if we look at and I'm writing these questions, 0:02:25.320 --> 0:02:29.680 look at history UM and unemployment move of of that 0:02:29.760 --> 0:02:34.360 amount has never not coincided with an economy already in 0:02:34.480 --> 0:02:38.240 recession UM. So I think that's important to note. The 0:02:38.280 --> 0:02:40.640 yield curve is pricing in recession. We know that, but 0:02:41.120 --> 0:02:44.680 there could be a normalization next year. And my thing is, 0:02:45.400 --> 0:02:48.640 you know, everyone's talking about how the ft isn't gonna cut, 0:02:48.680 --> 0:02:51.880 But if you look also at history the past four 0:02:51.880 --> 0:02:57.960 team monetary cycles, the last hike versus the first cut, 0:02:58.000 --> 0:03:00.720 that timing is much shorter than you think. It's on 0:03:00.840 --> 0:03:04.239 average four months. Okay, so maybe historically that is true. 0:03:04.240 --> 0:03:06.040 But if you listen to the Federal Reserve and Chairman 0:03:06.080 --> 0:03:08.320 Pal now, they are saying we are not going to 0:03:08.360 --> 0:03:10.560 do that. We are talking higher for longer. We are 0:03:10.600 --> 0:03:13.440 not giving up until inflation is back to our target, 0:03:13.440 --> 0:03:15.160 which right now is two per cent. So even if 0:03:15.200 --> 0:03:18.600 inflation is cooling, we are still far far away from that. 0:03:18.919 --> 0:03:21.720 What gives you the conviction that the Fed is actually 0:03:21.760 --> 0:03:24.840 not going to tolerate the weakness in the labor market 0:03:24.840 --> 0:03:27.080 and in the broader economy as they say they will, 0:03:27.200 --> 0:03:30.840 and have to make that pivot well, I think it's 0:03:30.880 --> 0:03:33.560 going to have to come down to how far the 0:03:33.680 --> 0:03:37.200 labor market rules over. So I think unemployment goes to four. 0:03:38.160 --> 0:03:41.480 That's the neighru you know, it's hard to estimate, but 0:03:43.280 --> 0:03:45.960 thot seven in unemployment. So I do think the FED 0:03:46.040 --> 0:03:48.720 needs to force the labor markets roll over because their 0:03:48.720 --> 0:03:50.960 supply side forces and their demand side. We all talk 0:03:51.000 --> 0:03:53.160 about both of them. The supply side forces are improving. 0:03:53.480 --> 0:03:57.600 You know, used car lots are packed now, I've seen 0:03:57.640 --> 0:04:00.680 prices come down considerably. She knows us hearing what you'll 0:04:00.720 --> 0:04:05.040 respond to passively. I know you love um. So, so 0:04:05.080 --> 0:04:07.920 I do think supply side forces are improving. Um, you 0:04:08.000 --> 0:04:10.480 have China reopening, which you guys are talking all morning about, 0:04:10.560 --> 0:04:14.320 especially you've been up so early. Um. But demand side 0:04:14.480 --> 0:04:16.960 really hasn't taken that hit yet. By the way, we 0:04:17.360 --> 0:04:21.360 also got a one point seven trillion dollar omnibus in 0:04:21.440 --> 0:04:23.960 my notes to talk about as well. So we do 0:04:24.040 --> 0:04:28.720 have inflationary impulses, but that's going to aggravate the demand side, 0:04:28.720 --> 0:04:33.400 which hasn't yet rolled over. Consumption is still pretty good. Um, 0:04:33.440 --> 0:04:36.599 it's been very resilient. If you look at Conference Board 0:04:36.880 --> 0:04:39.000 that's been very resilient and that has a very strong 0:04:39.000 --> 0:04:42.440 correlation with the unemployment rate. So if unemployment moves higher, 0:04:42.640 --> 0:04:47.440 Conference board consumer confidence drops, you get a rollover in consumption. UM. 0:04:47.920 --> 0:04:50.640 People are still spending even though inflation is very high. 0:04:50.680 --> 0:04:52.880 It's because they have jobs well. And when people are 0:04:52.920 --> 0:04:55.920 still spending, and maybe they're doing it by leveraging up 0:04:55.960 --> 0:04:58.640 more So, now all that pandemic stimulus money and savings 0:04:58.640 --> 0:05:01.080 built up has evaporated it essentially. But what does that 0:05:01.080 --> 0:05:03.600 mean for corporate earnings? Because in theory, if people are 0:05:03.640 --> 0:05:06.440 still out there spending tolerating higher prices, you're going to 0:05:06.520 --> 0:05:09.279 be able to continue passing on your higher input costs. 0:05:09.279 --> 0:05:11.560 And in theory that would mean margins hold up and 0:05:11.680 --> 0:05:15.280 profits hold up, so you have nominal growth and inflation. 0:05:15.400 --> 0:05:17.840 So I I do think that next inflation is going 0:05:17.880 --> 0:05:20.120 to come down. I do believe in a recession. I've 0:05:20.160 --> 0:05:22.520 I've been out of consensus on that since virtually the 0:05:22.520 --> 0:05:25.080 beginning of this year. UM calling for recession is the 0:05:25.080 --> 0:05:28.760 next phase of the economic cycle. Stagflation to recession was 0:05:28.880 --> 0:05:33.120 my outlook piece for twenty two UM, and I do 0:05:33.200 --> 0:05:36.360 think that that that we could get earnings having to 0:05:36.360 --> 0:05:40.680 be revised lower UM and nominal growth in in my view, yeah, 0:05:40.680 --> 0:05:43.360 it's positive, but real growth. Next year I have at 0:05:43.360 --> 0:05:45.839 minus zero point four percent, so that's year every year, 0:05:46.000 --> 0:05:49.159 So I have three quarters baked in of negative sequential 0:05:49.720 --> 0:05:52.160 annualized growth in the US. I just want to make 0:05:52.160 --> 0:05:57.760 one point to the consumer, because savings rates have fallen substantially. 0:05:57.760 --> 0:05:59.760 I mean, we, you know, during the pandemic, shot up 0:05:59.800 --> 0:06:02.800 to you know, record highs for American savings rates and 0:06:02.800 --> 0:06:04.800 now we're you know, over twelve percent and now we're 0:06:04.800 --> 0:06:06.920 back down to about two percent on savings rates. But 0:06:06.960 --> 0:06:08.599 I was talking to Mike McKee about this and he 0:06:08.680 --> 0:06:11.920 pulled up bank balances. I've got the index in there 0:06:12.120 --> 0:06:14.120 if the controller wants to bring that. Bank balances are 0:06:14.120 --> 0:06:17.040 still holding pretty high right now. They started to roll 0:06:17.080 --> 0:06:20.599 over a little bit, but they're still pretty fat. So 0:06:20.960 --> 0:06:24.000 the US consumer shouldn't be counted out quite yet. There 0:06:24.040 --> 0:06:27.000 you see. And you can find this on your Bloomberg 0:06:27.080 --> 0:06:30.320 terminal for those listening on Yes, absolutely sorry if you're 0:06:30.320 --> 0:06:33.359 listening on radio. Let's just say they build up big 0:06:33.400 --> 0:06:36.240 time during the pandemic and we show this um and 0:06:36.279 --> 0:06:41.000 they have held their pretty well. However, Kayley points out, 0:06:41.040 --> 0:06:43.160 you know, credit card debt is starting to climb again, 0:06:43.160 --> 0:06:45.920 the consumers starting to leverage up. How do you take 0:06:46.000 --> 0:06:48.960 this all into account with and put it into your 0:06:49.000 --> 0:06:52.000 investment strategy? What are you doing right now? Are you 0:06:52.240 --> 0:06:55.400 still defensive? And when do we find an inflection point 0:06:55.440 --> 0:06:57.960 when you really can turn around start investing again. It's 0:06:58.600 --> 0:07:01.600 a good a good thought. I'm still defensive going into 0:07:01.680 --> 0:07:05.080 next year. I still like energy utility staples. I still 0:07:05.120 --> 0:07:07.560 I think you still have to remain defensive. But once 0:07:07.600 --> 0:07:11.119 you do get that change in UM in the labor market, 0:07:11.160 --> 0:07:14.000 I think that's where the market drops a bit further. 0:07:14.320 --> 0:07:17.320 I think we could go lower in the smp UM 0:07:17.360 --> 0:07:20.160 and then I think we start talking about the FEDS 0:07:20.160 --> 0:07:22.840 guidance turning a little more devilish. So I am in 0:07:22.880 --> 0:07:28.160 the camp where UM the labor market determines how quickly 0:07:28.640 --> 0:07:32.360 the FED could stop talking about higher for longer? And yes, 0:07:32.360 --> 0:07:35.080 the Feds all in now, but the policy mistake has 0:07:35.120 --> 0:07:38.600 already been made, all right. Katherine R. Nuvera of Baltic, 0:07:38.680 --> 0:07:40.720 thank you so much for joining us in studio. How 0:07:40.760 --> 0:07:43.720 are you getting back to Miami? What airline are you flying? Oh? Gosh, 0:07:43.720 --> 0:07:46.560 thank god, not Southwest? But I'm not not not far 0:07:46.600 --> 0:07:49.880 better spirit, oh Man for tall people like you and 0:07:49.960 --> 0:07:53.720 I that's very complicated. Yeah, it's difficult, and I don't 0:07:53.920 --> 0:08:05.760 envy you. That I want to bring in right now 0:08:05.840 --> 0:08:09.760 Cloudy Assam, founder of PSALM Consulting. She's a former Federal 0:08:09.800 --> 0:08:14.200 Reserve economist and one of my favorites because Cloudy, I 0:08:14.200 --> 0:08:18.679 can see, Uh, you care about people in your work, 0:08:18.760 --> 0:08:22.360 which is something that doesn't always come through an economist research. 0:08:22.600 --> 0:08:24.800 You also went to Dennis In University, but I feel 0:08:24.840 --> 0:08:28.160 more like you're an Oberlin person. So I want to 0:08:28.200 --> 0:08:31.720 talk about the recent column you wrote banned the Phillips 0:08:31.760 --> 0:08:34.640 curve and the idea or uh, is it banned the 0:08:34.640 --> 0:08:38.120 Phillips curve? Yes, the idea is that to get inflation down, 0:08:38.240 --> 0:08:41.439 the FED has to push unemployment up, which I guess 0:08:41.480 --> 0:08:44.440 makes sense because otherwise how else do they affect sticky 0:08:44.480 --> 0:08:48.840 services prices? How is that wrong? And what should the 0:08:48.840 --> 0:08:51.720 FED be doing differently in order to, you know, in 0:08:51.840 --> 0:08:58.439 order not to destroy the lives of working Americans. So 0:08:58.520 --> 0:09:02.199 I think what a big US two, which has been 0:09:02.240 --> 0:09:06.480 extremely disorientating. Right, We've had fifty year low unemployment, We've 0:09:06.480 --> 0:09:10.640 had forty year high inflation. It is time to put 0:09:10.800 --> 0:09:13.600 at least to scrutinize the rules of thumb like the 0:09:13.640 --> 0:09:16.240 Phillips curve that have been used by macro economists for 0:09:16.240 --> 0:09:19.080 a long time, to think about what's that trade off. 0:09:19.559 --> 0:09:22.959 The low unemployment just means that people have less money 0:09:22.960 --> 0:09:26.880 to spend. Most Americans, it's their paycheck, right, And low 0:09:27.040 --> 0:09:30.840 unemployment means that people all the way up and like 0:09:30.960 --> 0:09:34.679 working up into the middle class, they have money. That is, 0:09:35.080 --> 0:09:38.400 that's not a bad way to think, baby about the 0:09:38.440 --> 0:09:41.800 tradeoff when it's all demand driven, right, A lot of 0:09:41.840 --> 0:09:45.559 stimulus checks, a lot of money, big wage increases. But honestly, 0:09:46.120 --> 0:09:49.000 we have a pandemic, it is still affecting China other 0:09:49.080 --> 0:09:51.880 parts of the world, and we have a war in Europe, 0:09:52.240 --> 0:09:54.960 so that you really shouldn't use the Philip curve. It's 0:09:55.000 --> 0:09:57.079 a really nice rule of thumb. It would be great 0:09:57.160 --> 0:10:00.200 if it worked and helped the Fed calibrate everything. But 0:10:00.600 --> 0:10:02.600 come on, like this is a lesson. At this point, 0:10:02.679 --> 0:10:06.600 we are in uncharted territory and thus we gotta think 0:10:06.760 --> 0:10:09.280 we got to dig deeper in terms of what the 0:10:09.320 --> 0:10:13.880 Fed does. So how else, because inflation also is I mean, 0:10:14.720 --> 0:10:17.760 Ronald Reagan, I'm sure one of your favorite presidents Um 0:10:17.800 --> 0:10:21.120 described it as like an armed robber or you know, 0:10:21.280 --> 0:10:26.239 a boogeyman um that really steals from especially the working classes. 0:10:26.760 --> 0:10:30.120 And it's very high right now. And then if you 0:10:30.160 --> 0:10:34.559 look at the non accelery Inflation rate of Unemployment NEHRU UM, 0:10:34.600 --> 0:10:37.800 that shows that when unemployment is below a certain level, 0:10:37.920 --> 0:10:40.720 it's gonna be inflationary. Right We were talking with Katherine 0:10:40.760 --> 0:10:43.480 Rooney vera earlier who said that unless you get up 0:10:43.480 --> 0:10:46.720 to four point nine percent, these low levels of unemployment 0:10:47.160 --> 0:10:51.240 are inflationary. Do you disagree with that? The NEHRU is 0:10:51.280 --> 0:10:53.280 a made up number. I mean, it's with a lot 0:10:53.280 --> 0:10:56.720 of judgment and data. But running up until COVID started 0:10:56.800 --> 0:10:59.920 the Federal Reserve, most of the macroeconomics community was like, 0:11:00.120 --> 0:11:03.000 this thing is broken. In many ways, the Federal Reserve 0:11:03.080 --> 0:11:05.480 showed they have no idea what NEHRU is. Despite a 0:11:05.520 --> 0:11:10.320 lot of effort, it moved consistently downward after the Great 0:11:10.360 --> 0:11:13.560 Recession because unemployment kept going down and down and inflation 0:11:13.640 --> 0:11:17.080 did not spike. And we really don't know given all 0:11:17.080 --> 0:11:21.120 the disruptions in the labor market, particularly the massive drop 0:11:21.120 --> 0:11:23.760 in the labor force participation, it hasn't come back that 0:11:23.840 --> 0:11:27.000 affects the unemployment rate, the things that we have looked 0:11:27.000 --> 0:11:29.480 to as signals as a way to think about what 0:11:29.480 --> 0:11:32.880 what is this equaliberate like, what would normal and sustainable 0:11:32.960 --> 0:11:36.560 look like? It's really hard to know what that is 0:11:36.600 --> 0:11:38.720 at this point. Now you gotta do something, and I 0:11:38.720 --> 0:11:40.840 think this is where the FED has to get back. 0:11:40.960 --> 0:11:45.360 Leaning into the data. We have seen inflation coming down 0:11:45.480 --> 0:11:49.640 without wage growth really slowing, and so that tells you 0:11:49.679 --> 0:11:52.800 there is at least some relief that comes without the 0:11:52.840 --> 0:11:57.360 Fed pumping high interest rate increases, fast interest rate increases 0:11:57.440 --> 0:11:59.800 into the economy. It's time to be a little more 0:12:00.000 --> 0:12:05.079 action and really look at the early stages of the data. 0:12:05.200 --> 0:12:08.160 It takes a long time to get to consumer price inflation. 0:12:09.200 --> 0:12:11.960 On the subject of consumer price inflation or really just 0:12:12.160 --> 0:12:15.760 inflation generally, the FED looking obviously the PCs a flatter 0:12:16.880 --> 0:12:19.160 and the idea of made up numbers, or at least 0:12:19.240 --> 0:12:23.199 arbitrary numbers. Two percent it's what the FED said its 0:12:23.240 --> 0:12:25.800 target at. Granted it went moved to average inflation targeting, 0:12:25.840 --> 0:12:28.000 but still that's what they're striving for. Something like that 0:12:28.040 --> 0:12:31.679 two percent number. Is that no longer a number fitting 0:12:32.120 --> 0:12:34.120 of the new world in which we live. In post 0:12:34.160 --> 0:12:38.199 pandemic post or still ongoing more in Ukraine. If we're 0:12:38.200 --> 0:12:43.880 looking at structurally lower labor force participation, structurally higher energy costs, 0:12:44.320 --> 0:12:48.480 should they be rethinking two percent. It's far too early 0:12:48.559 --> 0:12:52.520 to have that discussion, and I think, honestly it it 0:12:52.679 --> 0:12:56.520 muddies the water, and it makes the FED fight even 0:12:56.640 --> 0:12:59.880 harder to get two percent. They are extremely concerned about 0:13:00.000 --> 0:13:02.679 a quote unquote credibility. I mean, I'm not sure who 0:13:02.840 --> 0:13:05.320 right now still questions the FED is going to fight inflation, 0:13:05.400 --> 0:13:08.560 but I guess they're out there, and there is still 0:13:08.559 --> 0:13:11.319 a path as we come out of the pandemic, as 0:13:11.360 --> 0:13:14.240 the supply change, as the rotation and the in the 0:13:14.240 --> 0:13:17.560 economy from goods back to services happens, we have a 0:13:17.640 --> 0:13:20.520 path back to two percent. It's far too early. That's 0:13:20.520 --> 0:13:23.199 a conversation for maybe this time next year, the middle 0:13:23.240 --> 0:13:27.400 of the year after. But it's I don't see any 0:13:27.440 --> 0:13:29.640 reason for the FED to be moving that two percent 0:13:29.679 --> 0:13:32.160 target if we get back to something that looks kind 0:13:32.200 --> 0:13:35.000 of sort of like normal. On the other end of this, well, 0:13:35.600 --> 0:13:41.080 they couldn't even get two percent before COVID showed up. Okay, 0:13:41.080 --> 0:13:44.319 fair enough, but it raises the question of especially as 0:13:44.440 --> 0:13:46.559 you mentioned China, how it's still been shut off from 0:13:46.559 --> 0:13:47.959 the world. It led to a lot of supply chain 0:13:48.000 --> 0:13:51.000 issues that were very inflationary. Now it's opening back up 0:13:51.559 --> 0:13:55.240 rather rapidly and the surgeons dealing with currently aside in 0:13:55.280 --> 0:13:57.719 the medium term, in theory, that's going to mean more 0:13:57.760 --> 0:14:01.360 demand for commodities, could be a few of inflation. How 0:14:01.400 --> 0:14:03.960 do you filter that back into your thinking about the 0:14:04.000 --> 0:14:07.319 trajectory inflation and how monetary policy has to respond to it. 0:14:07.400 --> 0:14:08.880 And that's not the only thing, right We've got a 0:14:08.920 --> 0:14:13.560 one point seven trillion dollar omnibus, you've got deglobalization, which 0:14:13.600 --> 0:14:16.439 has to lead to at least some inflation as well 0:14:16.520 --> 0:14:21.080 or at least less disinflation. M hm. So absolutely what's 0:14:21.080 --> 0:14:24.000 happening in China and reopening as a wild card. And 0:14:24.200 --> 0:14:27.520 we know that the FED has very limited tools to 0:14:27.560 --> 0:14:31.560 deal with commodity price inflation, the energy inflation. We still 0:14:31.600 --> 0:14:34.320 have a lot of food inflation and that is not 0:14:34.440 --> 0:14:37.400 something that interest rates are going to chip away at. 0:14:38.040 --> 0:14:42.760 And you know, what's happening in China is extremely um disruptive, 0:14:42.800 --> 0:14:46.520 tragic as they're trying to reopen, and every time COVID 0:14:46.600 --> 0:14:49.240 came back was in the United States or big waves globally. 0:14:49.400 --> 0:14:53.120 It set us back in terms of getting back to normal. Right, 0:14:53.160 --> 0:14:55.840 this has been very disruptive as things closed down open 0:14:55.880 --> 0:14:59.040 back up. So I totally agree on the commodity space 0:14:59.080 --> 0:15:02.120 that that could be a tough one and that that 0:15:02.320 --> 0:15:04.800 was a lot of the problems that FED had a 0:15:04.800 --> 0:15:08.800 lot of the inflation um concerns of the past year 0:15:08.840 --> 0:15:12.720 when we had the big spike in energy prices, particularly gasoline. 0:15:13.000 --> 0:15:15.360 So yeah, we are not out of this. There is 0:15:15.400 --> 0:15:17.600 a path back to something that looks like normal and 0:15:17.600 --> 0:15:21.040 the United States. On the globalization, I would be very 0:15:21.080 --> 0:15:24.240 careful about taking the last few years, which have been 0:15:24.280 --> 0:15:27.000 extraordinary with a pandemic and a war in Europe, to 0:15:27.120 --> 0:15:31.120 project big structural changes. That takes time, fair and it's 0:15:31.200 --> 0:15:34.640 very difficult to do. Claudia, you know, for years now, 0:15:34.840 --> 0:15:38.600 income inequality has been on policymakers radar, and you could 0:15:38.640 --> 0:15:43.680 argue that that's what drove the big populist forces that 0:15:43.720 --> 0:15:49.120 we've seen um globally. Has the pandemic made income inequality 0:15:49.160 --> 0:15:51.520 worse or have we made any progress in pushing back 0:15:51.520 --> 0:15:57.000 against that we during the pandemic. So in what we've 0:15:57.040 --> 0:16:01.280 seen so far, the fiscal Paul, let's see the labor 0:16:01.360 --> 0:16:05.920 market coming back strong. That made a big difference for 0:16:06.520 --> 0:16:10.440 you know, the bottom fifty, middle class on down because 0:16:10.520 --> 0:16:14.400 for the first time in many decades, we have had 0:16:14.400 --> 0:16:19.480 a job full recovery and that really makes a difference 0:16:19.600 --> 0:16:24.200 for the vast majority of people now that and and 0:16:24.280 --> 0:16:28.600 so you see in wealth inequality data that the increase 0:16:28.680 --> 0:16:31.960 in what you know, families bottom have in the bank, 0:16:32.120 --> 0:16:35.600 it is it is enormous relative particularly to after the 0:16:35.640 --> 0:16:38.880 Great Recession. So we have done some things to narrow 0:16:38.920 --> 0:16:41.960 that inequality now. I mean, the top is doing well 0:16:42.400 --> 0:16:45.600 right even with some correction right now in the stock prices, 0:16:45.680 --> 0:16:48.440 and our our billionaires out there, I mean they really 0:16:48.600 --> 0:16:52.600 got their recovery came fast as usual. And yet this 0:16:52.720 --> 0:16:55.880 is I think it opens up some big questions. It's like, 0:16:55.920 --> 0:16:59.720 can our economy handle a job full recovery? And we 0:16:59.760 --> 0:17:01.800 need to have those So there's a lot to figure 0:17:01.800 --> 0:17:06.000 out why this caused so much disruption, and yet we 0:17:06.040 --> 0:17:10.040 really did help people who haven't gotten a lot of help. Claudia, 0:17:10.080 --> 0:17:12.320 great having on the program. Thanks so much for joining us. 0:17:12.520 --> 0:17:16.240 Really love reading your research and your pieces. Cloudy Assam. 0:17:16.320 --> 0:17:20.360 There of some consulting talking to us about maybe UH, 0:17:20.400 --> 0:17:22.840 the FED should look at things a little bit differently 0:17:22.880 --> 0:17:30.800 than UM it typically has. I think, UH, for Tesla, 0:17:31.240 --> 0:17:35.240 for big tech, for crypto, it has been an annus horribilis, 0:17:35.480 --> 0:17:38.560 as the Queen would have put it. Well, you know what, 0:17:38.640 --> 0:17:40.920 I got that from Christina Hooper she joins US now 0:17:41.200 --> 0:17:44.960 chief Global Market Strategists at Investco UM and Christina, I 0:17:45.040 --> 0:17:48.800 guess you got that from her, Majesty, Queen Elizabeth, But 0:17:48.920 --> 0:17:52.960 she wasn't talking about stocks and bonds. What does three 0:17:53.080 --> 0:17:57.520 look like? If we've had, you know, the pandemic leading 0:17:57.560 --> 0:18:02.280 into incredible inflation, and the war in Ukraine making it worse, 0:18:02.359 --> 0:18:07.120 the FED hiking us UH into maybe a recession, how 0:18:07.160 --> 0:18:12.879 does look any better? Well? I think that after several 0:18:13.040 --> 0:18:17.640 extraordinary years, and when by by extraordinary, I mean extraordinarily 0:18:17.840 --> 0:18:21.159 bad and traumatic, UM, what we're getting to is a 0:18:21.200 --> 0:18:26.240 more normal environment UM where we're likely to see UM 0:18:26.320 --> 0:18:31.400 the FED ease what has been a dramatic level of tightening. 0:18:31.480 --> 0:18:35.440 So I don't mean ease per se, but UH certainly 0:18:35.800 --> 0:18:39.040 down shift its tightening and ultimately hit a pause button. 0:18:39.359 --> 0:18:43.440 In the first half, probably the first quarter of UM, 0:18:43.440 --> 0:18:47.280 we're likely to see inflation continue to moderate significantly in 0:18:47.320 --> 0:18:51.760 te so something of a return to normal. It's not 0:18:51.840 --> 0:18:55.360 going to be an easy transition UM, but I suspect 0:18:55.480 --> 0:18:58.120 that is going to be a lot more normal than 0:18:58.160 --> 0:19:01.600 the last three years, but normal of at least the 0:19:01.680 --> 0:19:05.560 last decade or so. Christina has been leadership by big 0:19:05.600 --> 0:19:08.360 tech and stocks being able to fly high because money 0:19:08.480 --> 0:19:11.320 was free and with low borrowing costs, it's okay to 0:19:11.320 --> 0:19:13.320 have a higher multiple. That is not really the world 0:19:13.320 --> 0:19:15.879 we have lived in two and in theory, that's not 0:19:15.960 --> 0:19:19.080 going to change incredibly quickly. So just using a stock 0:19:19.119 --> 0:19:21.800 like Tesla as an example, how much more do you 0:19:21.840 --> 0:19:26.600 think those stocks need to deflet? How much more devaluation 0:19:26.920 --> 0:19:31.160 could be coming for certain pockets of the equity market. Well, 0:19:31.280 --> 0:19:36.120 clearly tech is under pressure. UM, the high valuation areas 0:19:36.160 --> 0:19:39.120 of the stock market are under significant pressure, and that 0:19:39.160 --> 0:19:43.119 doesn't change overnight. In fact, when we get to more 0:19:43.280 --> 0:19:47.399 of a risk on environment, as global risk appetite grows, 0:19:47.800 --> 0:19:52.480 we're likely to see a movement towards UM, lower valuation 0:19:52.600 --> 0:19:56.080 names more cyclicals. I don't think this is going to 0:19:56.119 --> 0:19:59.480 be a time where we see tech rebound dramatically because 0:19:59.600 --> 0:20:02.600 raiths are so much higher. Now we will go through 0:20:02.680 --> 0:20:07.040 an adjustment period. Um, we've already started that process, and 0:20:07.320 --> 0:20:11.000 we could see more of that in But again it's 0:20:11.000 --> 0:20:13.280 going to be a more normal environment, which means we're 0:20:13.359 --> 0:20:17.639 unlikely to see outsized gains by tech. Um, we're really 0:20:17.720 --> 0:20:22.240 unlikely to see big gains by stocks in general. But 0:20:22.320 --> 0:20:25.040 I do hold that hope and I believe strongly that 0:20:25.080 --> 0:20:29.480 we're likely to see a positive, uh single digit return environment. 0:20:29.560 --> 0:20:33.359 For example, the SMP fire, you know, Christina Yester, we 0:20:33.359 --> 0:20:35.159 were talking with Matt Merlely and Miller tay Back and 0:20:35.160 --> 0:20:37.480 he pointed out, we're looking at I think seventeen point 0:20:37.520 --> 0:20:40.800 three times earnings forward earnings on the SMP five hundred 0:20:40.880 --> 0:20:44.720 now since World War Two. In any recession, if we 0:20:44.760 --> 0:20:49.159 do get a recession, valuations have dropped to fifteen before 0:20:49.200 --> 0:20:52.360 the bear market ended and turned around. Do you expect 0:20:52.400 --> 0:20:54.720 that we could fall that far, because that would put us, 0:20:55.000 --> 0:20:57.919 you know, at thirty or maybe even below before we 0:20:57.960 --> 0:20:59.840 can turn around and climb back up into the end 0:20:59.840 --> 0:21:03.320 of the year. Well, we have to keep in mind 0:21:03.359 --> 0:21:07.200 that this is a very compressed economic cycle, so things 0:21:07.240 --> 0:21:10.119 are moving a lot faster than they typically do. So 0:21:10.160 --> 0:21:12.040 I think We're going to see a number of different 0:21:12.080 --> 0:21:15.399 forces converge at the same time, so we will have 0:21:15.680 --> 0:21:20.080 that headwind of downward revisions to earnings. I mean, that's 0:21:20.119 --> 0:21:23.480 a given. We haven't seen that priced in yet. But 0:21:23.560 --> 0:21:26.719 having said that, UM, we also have a market looking 0:21:26.880 --> 0:21:30.480 ahead to the potential for the FED to cut rates 0:21:30.520 --> 0:21:33.000 by the end of the year, and certainly just hitting 0:21:33.000 --> 0:21:37.920 the pause button will take pressure off risk assets. So 0:21:37.960 --> 0:21:42.280 I think that we could actually see earnings downwardly revised 0:21:42.320 --> 0:21:45.760 at the same time, we could potentially see UM as 0:21:45.840 --> 0:21:50.760 the year progresses, UM some movement towards multiple expansion. Okay, 0:21:50.800 --> 0:21:53.840 so that's all on the equity side, Christina, But we 0:21:54.320 --> 0:21:56.280 know that, or at least we have heard that, there 0:21:56.280 --> 0:22:00.720 are now alternatives to equities. Those have emerged. Tara, right, 0:22:00.800 --> 0:22:05.000 Tara Tara? I think Tara Tara. I didn't never, I 0:22:05.040 --> 0:22:07.720 was never sure about, but I'll say Tara. Okay. So, however, 0:22:07.760 --> 0:22:09.840 you want to pronounce the acronym t A R A 0:22:10.160 --> 0:22:12.640 rather than Tina t I N A, which was there 0:22:12.720 --> 0:22:15.679 was no alternative for equities. It seems that that world 0:22:15.720 --> 0:22:19.479 has now changed. How are you viewing bonds into the 0:22:19.480 --> 0:22:21.600 new year, and how much you want to be allocated 0:22:21.840 --> 0:22:25.840 in that asked class rather than into equities. That's a 0:22:25.840 --> 0:22:29.160 great question. And of course fixed income had an annus 0:22:29.280 --> 0:22:33.560 horribilious in two as well. UM. That's part and parcel 0:22:33.640 --> 0:22:35.920 of of what we saw in terms of a dramatic 0:22:36.359 --> 0:22:39.240 um tightening cycle on the part of the FED and 0:22:39.520 --> 0:22:42.479 other central nights. So where we find ourselves is today 0:22:42.920 --> 0:22:45.440 UM is looking out on a year in which we're 0:22:45.560 --> 0:22:47.719 unlikely to see much more in the way of rate 0:22:47.760 --> 0:22:51.399 high certainly relative to what we saw in two. That 0:22:51.560 --> 0:22:54.520 gives some breathing room for fixed income. At the same time, 0:22:54.600 --> 0:22:58.880 we've seen yields go up significantly, UM, making as as 0:22:58.880 --> 0:23:02.520 you pointed out, many areas of fixed income quite attractive. 0:23:03.160 --> 0:23:07.960 I would focus on investment grade credit UM as we 0:23:08.040 --> 0:23:11.920 see this struggle between a risk on and risk off environment. UM. 0:23:12.119 --> 0:23:16.679 The the level of of the maturity wall is pretty 0:23:16.720 --> 0:23:19.399 low right now. UM. We don't see a lot of 0:23:19.880 --> 0:23:23.160 debt maturing in the next eighteen or so months. UM, 0:23:23.200 --> 0:23:26.520