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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane along

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Speaker 1: with Jonathan Farrell and Lisa A. Brawnowitz Jailey. We bring

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Speaker 1: you insight from the best and economics, finance, investment, and

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Speaker 1: international relations to find Bloomberg Surveillance on Apple podcast, Suncloud,

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Speaker 1: Bloomberg dot Com and of course on the Bloomberg terminal

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Speaker 1: right now, and this is a joy. We're gonna rip

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Speaker 1: up the script. Mark McCormick joins us. He has been

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Speaker 1: absolutely brilliant on dollar resiliency, Global head of X fact

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Speaker 1: Strategy at TV. And yes, we'll talk about euro and

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Speaker 1: we'll talk about the US dollar. The President with eleven

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Speaker 1: thirty talking about fiscal America. But what I want to

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Speaker 1: talk to Mark McCormick about is the fun and joy

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Speaker 1: when the facts change. I change. And yesterday, Mark McCormick,

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Speaker 1: you got a love note from the Bank of Canada

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Speaker 1: that the facts had changed. What is it like on

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Speaker 1: the t D desk when the facts change, as you

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Speaker 1: saw from the Bank of Canada. Yeah. Thanks. The interesting

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Speaker 1: bit is, uh, most of us aren't on the floor anymore,

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Speaker 1: so it's uh, it's taking the facts as they come

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Speaker 1: in from work from home offices. But you know what

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Speaker 1: you saw from the market is is what I think

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Speaker 1: people are really focused on is what the Bank of

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Speaker 1: Canada and what the Bank of England have done is

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Speaker 1: they're pulling things forward. And I think what the markets

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Speaker 1: are really focused on is what's the r star, what's

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Speaker 1: the terminal rate? How do these cycles evolve over the

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Speaker 1: next year, year and a half versus who moves first

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Speaker 1: and who moves fastest? And so what we know right

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Speaker 1: now in the G ten is in orgeous bank the

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Speaker 1: r b n Z, the Bank of England, the Bank

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Speaker 1: of Canada are first and their primary, and the Bank

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Speaker 1: of Canada basically said to start traders yesterday April is

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Speaker 1: a live meeting. What I think matters for the FX

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Speaker 1: market though, is really how does the how does the

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Speaker 1: rate cycle evolve over the next year, which actually hasn't changed.

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Speaker 1: So I think that's a big dynamic, especially if we

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Speaker 1: look at the Bank of England. Um, you know, we've

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Speaker 1: priced them in the fastest over the last six weeks

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Speaker 1: or so, but again, are you going to see much

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Speaker 1: more than two or three hikes in in a year

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Speaker 1: and we've already priced that in. So that's a big

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Speaker 1: element of whether or not these moves are sustainable for

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Speaker 1: some of these other currencies. On the central bank trade marks,

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Speaker 1: let's just go through what's been priced in. Bank of

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Speaker 1: England moves first, Bank of Canada follows, then the Federal

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Speaker 1: Reserve EC becoming in dead last. Is that basically entirely

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Speaker 1: priced in two currency markets at this point? Absolutely, And

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Speaker 1: I think when you think about as well, like the

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Speaker 1: first one in here was an oorgeous bank, So I

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Speaker 1: think you know what you have to think about in

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Speaker 1: the context of this is we've got central banks what

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Speaker 1: we call the hikers. We've got basically growth divergence, which

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Speaker 1: we call the growers. We've got the miners, which is

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Speaker 1: basically your term to trade, and we've also got positioning evaluations.

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Speaker 1: So those four factors is what's driving effects. And so

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Speaker 1: if you've got a negative view on the terms of

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Speaker 1: trade shock which was bad for Asia and bad for Europe,

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Speaker 1: and a rotation outside of that where we don't get

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Speaker 1: another jump in oil prices in the fourth quarter, then

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Speaker 1: Norway is really kind ofvulnerable environment given how much excess

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Speaker 1: has been priced in and the euro, you know, give

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Speaker 1: or take positioning, Euro positioning short, but euro should be

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Speaker 1: trading around one fifty on our high frequency models. You

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Speaker 1: basically have an environment here where your O knock could rally,

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Speaker 1: kind of reversing some of that. And you could also

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Speaker 1: see euro Sterling starting to come off the lows because

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Speaker 1: the Bank of England has been fully priced in, and

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Speaker 1: we're actually long dollar CAD because we don't think the

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Speaker 1: Bank of Canada dynamics changes some of those other forces

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Speaker 1: that we're talking about in terms of you know, growth divergence,

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Speaker 1: terms of trade and what's currently priced in. So mark

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Speaker 1: the short term is easier than the long term, right,

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Speaker 1: the short term is who hikes first as a competition

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Speaker 1: where you kind of have that horse race going on.

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Speaker 1: Longer term, it is a much harder story, and it's

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Speaker 1: difficult to see one economy diverge meaningfully from another when

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Speaker 1: it comes to growth and inflation. How much is the

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Speaker 1: idea of a flattening yield curve indicating a global policy

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Speaker 1: error that's going to affect the e c B, that's

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Speaker 1: going to affect the region even if they hike glass

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Speaker 1: basically that one central bank cannot escape another and that

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Speaker 1: the currencies are sort of toggling alout around this reality. Yeah,

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Speaker 1: it's a great point, because we've got kind of three

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Speaker 1: I guess you call them flation themes. You got stagflation, reflation,

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Speaker 1: and you know, the word that no one wants to

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Speaker 1: talk about is deflation. But there is an element here

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Speaker 1: that the bearish flattening of yield curves is suggesting that

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Speaker 1: monetary policy around the world two year front end rates,

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Speaker 1: whether it's US or non US. You know, first, what

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Speaker 1: we've seen is a non US average emerging markets in

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Speaker 1: G ten has ripped about fifty basis points in the

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Speaker 1: last uh month or so. Higher. US yields are are

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Speaker 1: finally following their up about fifteen basis points. But there's

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Speaker 1: an element here that the worry is bearish flattening is

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Speaker 1: indicative of weakening growth. And you know, you can some

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Speaker 1: curves have flattened. I got to interrupt. This is too

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Speaker 1: too important, folks. We're gonna go Matthew here and I

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Speaker 1: can do that with McCormick x Bloomberg mark. Are you suggesting,

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Speaker 1: for example, with a ten year US real yield, we

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Speaker 1: have a fan distribution of outcomes that leads us to

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Speaker 1: a persistent, constantly negative real yield. Exactly. Yeah, your skew

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Speaker 1: is biased negatively so your ten year real rate is

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Speaker 1: you know, essentially, if we think about it in fair

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Speaker 1: value terms, maybe has basis points to move higher. But

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Speaker 1: if we go back to the Taper tantrum, we had

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Speaker 1: a hundred basis point move because we had a three

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Speaker 1: standard aviation miss pricing on real rates. We don't exactly

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Speaker 1: mark I did. Again, I don't wanta interrupt, but this

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Speaker 1: is absolutely critical. Answer the question then, which is simple,

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Speaker 1: with a three standard deviation move, how does this filter

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Speaker 1: through the American financial system? Well, I guess the big

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Speaker 1: part of it is real rates. The plumbing of risk

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Speaker 1: premium and the plumbing of interest rates stays at very

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Speaker 1: accommodative levels. And if you look at it, a global

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Speaker 1: version of financial conditions weighted by global GDP is still

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Speaker 1: the most accommodative it has been in the last fifteen years.

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Speaker 1: So the the under you know, the plumbing of the

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Speaker 1: financial system. You know, while we're talking about how many

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Speaker 1: central banks have hikes rates and you know where we're

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Speaker 1: removing stimulus, we are still an emergency stimulus measure. In

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Speaker 1: real rates are still very accommodative for reflation, which is

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Speaker 1: a theme that I think should still probably do quite

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Speaker 1: well in the first part of next year, especially since

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Speaker 1: we're not looking for a FED hike until three, which

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Speaker 1: again would keep real rates at bay as we see

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Speaker 1: short term inflation rising but essentially decelerating into Mark, thank

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Speaker 1: you so much, greatly appreciate it. Mark McCormick with us

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Speaker 1: here today. Not a mystery. Yes, come appear at a moment.

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Speaker 1: Which is the trophy taker for the Institutional Investors Survey,

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Speaker 1: And I say an insiders, some we say I I,

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Speaker 1: I okay. And I say this with great respect for

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Speaker 1: the late Fred we Gold, who was a great mentor

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Speaker 1: of mind here Bloomberg, who helped invent the Wall Street

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Speaker 1: Journals survey, which separates earnings guessing from more of a

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Speaker 1: thoughtful view of the crops. The I survey Paul a

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Speaker 1: beauty contest. It's actually a reflection of what institutional investors,

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Speaker 1: how they value the sell side. And as a former

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Speaker 1: sell side analysts, it was the number one goal for

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Speaker 1: an analyst back in the day. I'm not sure how

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Speaker 1: much it's value today, but back in the day it

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Speaker 1: made or broke careers, and it comes back everytog I

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Speaker 1: can't convey. Not for those of you not on Global

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Speaker 1: Wall Street, the sweat factor of this announcement. I was

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Speaker 1: on the phone ones with a winner who had to

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Speaker 1: go to decide on three job offers. Literally he said, Tom,

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Speaker 1: I have to go. I've got one call and two

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Speaker 1: calls coming in in a biting word. You know, I

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Speaker 1: can't remember what he did. I think he went and

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Speaker 1: sold boords in California. But the bottom line is it's completely,

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Speaker 1: uh uh, completely part of the Wall Street heritage. Dennis

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Speaker 1: de Busher joins US now with twenty two V research

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Speaker 1: for years with Edward S. Himan at ever Cores I

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Speaker 1: s I and he is the number one strategist this year.

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Speaker 1: Gratulation for institutional investor Dennis on behalf of the Academy, Congratulations,

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Speaker 1: what did you do afterwards? Watch the Knicks? What you

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Speaker 1: do well? One? Thanks so much And to um we

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Speaker 1: know it's not a beauty contest because here I am

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Speaker 1: on the radio show, Dennis, I look at this and

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Speaker 1: it's it's a lot of hard work and it's getting

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Speaker 1: it right on a type two basis, What did you

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Speaker 1: what did you not do wrong? Forget about what you

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Speaker 1: got right? What did you avoid in getting this huge acclaim? Oh?

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Speaker 1: Thank you? And a great question to a. I think

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Speaker 1: the thing that we avoided was chasing the narrative to

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Speaker 1: jure and providing some type of way to think about

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Speaker 1: how the macro backdrop, and particularly I keep coming back

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Speaker 1: to this, the narrative is changing, and how investors should

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Speaker 1: think about that. Not necessarily, you know, how they should

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Speaker 1: be focused on whatever is coming out on Twitter or

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Speaker 1: whatever headline is coming out that could indicate some massive

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Speaker 1: change in trend, which is something you know you'll probably

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Speaker 1: be aware of. We're going through the last few days

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Speaker 1: with this yield curve lattening, So going through another one

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Speaker 1: of these periods of trying to help people understand that

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Speaker 1: and how to think about it as opposed to making

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Speaker 1: some great call. What we didn't do is chase any

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Speaker 1: big change in trend too aggressively. What is your market

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Speaker 1: call right now, Dennis? A good question. So we're biased

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Speaker 1: high in the market, you know, I think we think

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Speaker 1: fair values up at the rage. It doesn't mean we

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Speaker 1: have to it there by the end of this year. Um.

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Speaker 1: The way we come to that is basically, your implied

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Speaker 1: earnings yield on stocks relative to risk re rates. You

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Speaker 1: assume a little bit higher in ten ure yields and

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Speaker 1: earnings come in roughly where they're expected to come in

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Speaker 1: over the next three to five years, and cash returns

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Speaker 1: to day about where they are. You've got a little

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Speaker 1: bit higher on on the market. Not that exciting of

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Speaker 1: a call, quite Frankly, I think all the interest in

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Speaker 1: the market right now is in internals. That's where we focus.

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Speaker 1: So it's sectors and factors, and as you guys know,

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Speaker 1: I mean, there's a lot of macro volatility right now,

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Speaker 1: and the narratives are just kind of really you know,

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Speaker 1: exasperating that, and that's creating some opportunities on the internals

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Speaker 1: that we think are very interesting. Dennis, A lot of

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Speaker 1: folks are concerned about evaluation in this market. Yes, the

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Speaker 1: ten year you know, is at one point five six

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Speaker 1: per cent, so that gives me a little bit of comfort,

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Speaker 1: But you know, I need earnings to come through in

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Speaker 1: a big way, and it's so far in this third

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Speaker 1: quarter they've been pretty darn good. How do you feel

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Speaker 1: about evaluation? How do you think this market is earning

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Speaker 1: its way into the multiple? Yeah, I think it's it's

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Speaker 1: clearly earning its way in the market. An extend companies

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Speaker 1: are beating, Um, we're on the back end of a

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Speaker 1: profit boom. People really got this p p I verse

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Speaker 1: CPI um spread wrong. I e. If you know CPI

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Speaker 1: is lagging PPI, that means marketings contract. It's just not true.

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Speaker 1: PPI is very possibly correlated with the corporate value add

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Speaker 1: wages legs. So you know we've had a profit boom

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Speaker 1: and we are working into that multiple. From here it

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Speaker 1: gets a little bit tougher. Well, here's the important point.

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Speaker 1: I was just looking at it today. So I tend

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Speaker 1: ORR yields minus inflation expectations negative a hundred sixty basis points.

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Speaker 1: Real high yield rates on an implied basis are almost

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Speaker 1: close to zero. So I know nobody likes the Tina argument.

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Speaker 1: I like to know that everybody likes to make fun

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Speaker 1: of it. But we look at the cash return and

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Speaker 1: cash flow of these big cap tech names relative to

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Speaker 1: other things. It's the same bull story we've in talent

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Speaker 1: in the last five ten years. What's your five year view?

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Speaker 1: I want you to go all ever core SIAM is

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Speaker 1: you start two V? I mean, what what what's your

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Speaker 1: five year view on equity ownership? Stock ownership? My five

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Speaker 1: year view is much lower return than the previous cycle.

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Speaker 1: Somewhere in the four to six percent range per year. Okay, Dennis,

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Speaker 1: thank you, so congratulations, thank you so much. It's just

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Speaker 1: absolutely superb greatly greatly. I appreciate it does to prosure

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Speaker 1: with us uh this morning, winning the II survey with

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Speaker 1: twenty two v research former ever Course Strategistics, Well just amazing. Yeah.

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Speaker 1: So it's you know, it's the interesting thing. It something

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Speaker 1: going out on your own to start your own firm.

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Speaker 1: It's what a better time. He couldn't get a better

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Speaker 1: time to do that after winning the number one slot

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Speaker 1: on II gives you some you know, incremental street credit,

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Speaker 1: as they say. Lee Ferris joins, how do macro strategy

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Speaker 1: for North America at State Street? Leah's a glass half

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Speaker 1: full or half empty as we look at American g

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Speaker 1: d P at thirty. I think when it comes to

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Speaker 1: g d P um sadday is half empty. I think

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Speaker 1: this was meant to be the big reopening phase, know

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Speaker 1: Q three expectations at the start of this quarter, where

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Speaker 1: you know this was going to be a seven percent quarter,

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Speaker 1: you know, as things really got back on stream, and

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Speaker 1: now we're looking at the meeting of what two and

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Speaker 1: a half percent Atlanta Bed saying point five, which I

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Speaker 1: think is on the low side. But but even so,

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Speaker 1: it's a far cry from where the expectations were at

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Speaker 1: the start of this quarter. And it really shows well

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Speaker 1: what Delta has done and the supply side con stranger

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Speaker 1: you were talking about what they've done to activity. Are

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Speaker 1: we at a point Lee where and I think of

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Speaker 1: the great Betina Dalton at Fidelity years ago, where all

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Speaker 1: that matters is domestic final sales and that country to country,

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Speaker 1: And here talking about the US that we see the

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Speaker 1: export import mystery and the China mystery so great that

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Speaker 1: all we can fall back on is US domestic final sales.

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Speaker 1: And then there's a point to that. Yeah, I think

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Speaker 1: that's a fair point, Tom. I think you know, at

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Speaker 1: the moment, we're trying to gauge the strength of the

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Speaker 1: domestic economy, you know, with supply chains, with all the

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Speaker 1: stuff at the ports, with you know, with everything else

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Speaker 1: going on. You know, the sort of external sector of

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Speaker 1: the economy is sort of something we can't control, right, Um.

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Speaker 1: So yes, I think there is a valid point that

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Speaker 1: we should be looking at final sales to domestics, um,

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Speaker 1: And that's a better gauge of where we are in

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Speaker 1: terms of the bigger picture and the reopening the other stuff. Yet,

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Speaker 1: I mean there's so many moving parts right now in

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Speaker 1: the global economy and the US that that it's hard

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Speaker 1: to really gauge where we are. I don't think we

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Speaker 1: get a clear picture until next year. I'll be absolutely

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Speaker 1: honest with you, Okay, Ley, who is glass half empty? Right?

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Speaker 1: I mean you look out at stocks, they're hitting new highs.

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Speaker 1: You look out at bonds, they're doing all right. There

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Speaker 1: is a bearish tilt there. Who has it wrong with

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Speaker 1: how bearish they are in term of US growth? Well, lasta,

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Speaker 1: you're assuming there's a relationship between asset prices and the

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Speaker 1: real economy. Surely that broke years ago. Okay, well said,

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Speaker 1: carry on. So, I mean here's the thing, right, So

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Speaker 1: low growth now more support from policy, you know fed

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Speaker 1: You know you've talked about at the top of the

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Speaker 1: show about about how much is getting priced in in

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Speaker 1: Europe in the US as well, we have virtually two

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Speaker 1: hikes priced in next year now for the US after

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Speaker 1: this this round of sort of tightening in the market

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Speaker 1: over the last week or two. So isn't weaker data

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Speaker 1: actually pushes out that scenario? And we know that policy

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Speaker 1: has been the big driver of asset prices hold on

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Speaker 1: very low. This is really key. Are you saying that

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Speaker 1: we are still in an environment we're bad news? Is

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Speaker 1: good news in terms of markets. Yes, the longer we

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Speaker 1: get the policy support, then the better of the markets.

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Speaker 1: The longer that policy support is there, as long as

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Speaker 1: the economy is not own through session or anything disastrous.

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Speaker 1: But but if things are delayed, if we're going on

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Speaker 1: the right path but at a slower pace, which means

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Speaker 1: the policy support persists for longer, still positive for markets? Yes, overall, Yeah,

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Speaker 1: because more policy support. But what you're seeing in the

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Speaker 1: bond market is the anticipation that policy support will not

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Speaker 1: persist for longer. We're seeing a pulling forward of expectations

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Speaker 1: on when the tightening starts across the world. It's already

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Speaker 1: started in some places, and the equity markets still resilient.

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Speaker 1: So is that not a mismatch? Yes, I mean there's

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Speaker 1: no doubt there's a lot of mismatches going on at

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Speaker 1: the moment. I mean, the fact is, you look at

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Speaker 1: the curve shapes though, right, So we brought forward these

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Speaker 1: rate hikes, but then if you look at the longer end,

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Speaker 1: you would have actually dropped back down. So what we've

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Speaker 1: seen is this massive curve flattening. So you know, it's

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Speaker 1: sort of we're sort of mixed between the two at

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Speaker 1: the moment, insomuch as we're bringing forward these rate hikes

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Speaker 1: on the back of the inflation numbers. But actually when

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Speaker 1: we look at policy over the long term, we expected

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Speaker 1: to stay easy. Okay, so let's talk about that curve

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Speaker 1: flattening five thirties right now, seventy basis points between the two.

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Speaker 1: Has that been overdone? Yes, I think it's tough, but

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Speaker 1: I think it's more to do at the short end

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Speaker 1: that the rates going up. I think is is the

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Speaker 1: bigger issue. I don't think central banks are going to

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Speaker 1: act as hawkishly as anywhere near as one that the

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Speaker 1: market is sort of projecting at the moment. Particularly saw

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Speaker 1: the G three, now some of the commodity exporters Bank

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Speaker 1: Accounada we saw yesterday. Yes, they can be more aggressive.

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Speaker 1: They're going to tell wins from these commodity prices in

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Speaker 1: their domestic economies, but commodity import is generally and the

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Speaker 1: G three economies, I don't think they're going to deliver

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Speaker 1: anywhere near what the markets pricing. So I would say that, yeah,

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Speaker 1: the flattening has been overdone, but it's been overdone because

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Speaker 1: short term rates have gone up too far rather than

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Speaker 1: long end rates coming to it down too far. Very goodly, first,

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Speaker 1: thank you so much, greatly appreciated with State Street had

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Speaker 1: a macro strategy. What we're doing here, away from buying

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Speaker 1: markets should Annigan's is really looking at the tech juggernaut

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Speaker 1: and how it folds over into the rest of the

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Speaker 1: stock market. Katrina Dudley at Franklin was iconic and federated

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Speaker 1: for her analysis of technology, and we're thrilled she could

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Speaker 1: join us with Franklin Mutual's today. Katrina, I want to

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Speaker 1: talk up to about something is basic c f A

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Speaker 1: one of persistency a free cash flow? Do we massively

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Speaker 1: misjudge the generation of cash and the use of it

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Speaker 1: for shareholders? Um, If I take a look at free

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Speaker 1: cash it's one of the key metrics that you have

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Speaker 1: to look at at a company in terms of assessing

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Speaker 1: the stability or assessing the stane ability of the competitive

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Speaker 1: advantage what value investors. But we spend a lot of

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Speaker 1: time looking at cash. We take it from the net

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Speaker 1: income level and we look at what are all the

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Speaker 1: people that need to get paid UM, the legacy restructuring charges. Yes.

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Speaker 1: So there's so many things UM, and so many parts

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Speaker 1: of that cash fold statement that people just completely ignore UM.

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Speaker 1: So I think that people also very much get confused

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Speaker 1: about a resilient net income number and they forget about

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Speaker 1: looking whether or not that is a resilient free cash

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Speaker 1: I love that you're going on Graham dot and cadl

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Speaker 1: me Lisa. That's the iconic textbook out of Columbia from

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Speaker 1: a million years ago. Katrine has read six volumes of it.

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Speaker 1: Forget about it, move up the income statement and can

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Speaker 1: you partition the tech juggernaut over the rest of American industry?

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Speaker 1: Do we just simply underestimate in this great bullmarket the

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Speaker 1: ability to make profit um. I think in a tech

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Speaker 1: booll market, what people are now really focused on is

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Speaker 1: the sustainability of that profit stream over a long period

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Speaker 1: of time. And we're also focusing on the role that

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Speaker 1: interest rates and inflation are going to play, because when

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Speaker 1: you have such high multiples of earnings, which a number

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Speaker 1: of these texts stops are trading on, or you have

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Speaker 1: stocked that actually not even trading on earnings, they're trading

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Speaker 1: at thirty types sales, your interest rates become something that's very,

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Speaker 1: very sensitive because on a DCF valuation you're looking at

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Speaker 1: those terminal values and rising rates and negative for terminal values. Well, Katrina,

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Speaker 1: this really goes to the heart of the question of

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Speaker 1: the US versus Europe, where there's a greater tech dominance

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Speaker 1: excuse me, in the United States versus Europe, and there

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Speaker 1: also is this feeling that there is a different, more

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Speaker 1: stagflationary like kind of headwind facing Europe. Is the cash

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Speaker 1: persistency of European companies different than that of the US.

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Speaker 1: So the Europe doesn't have the same level of technology companies,

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Speaker 1: but it does have a number of very strong companies there,

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Speaker 1: from a cap Gemini to a software a g U

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Speaker 1: s A P is another big juggernaut. I think you

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Speaker 1: most companies can't function without an SAP supply chain solution.

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Speaker 1: So I think that Europe does have a great constitution

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Speaker 1: of technology companies, but it's not the dominant force or

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Speaker 1: a dominant percent of their markets. What they do have

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Speaker 1: is luxury stocks, which are the tech stocks of Europe.

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Speaker 1: When you think of the Louis Baton's um, you know,

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Speaker 1: Cartier and all of those very strong brands, and that

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Speaker 1: is the technology equivalent in Europe UM. I would say, however,

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Speaker 1: that those brands have got a lot longer longevity. They've

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Speaker 1: been around for multiple new centuries often UM and so

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Speaker 1: their ability to generate free cash flow has been tested

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Speaker 1: time and time again. And the stability and those franchises

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Speaker 1: I think is probably something that you as an investor

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Speaker 1: can kind of put away and you kind of wake

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Speaker 1: up in a hundred years and the stock will still

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Speaker 1: be there. Our investors, global investors under estimating the power

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Speaker 1: of a more devish ECP relative to the rest of

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Speaker 1: the world when it comes to equity performance. So some

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Speaker 1: of the the You've obviously had a lot of hawk

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Speaker 1: ish comments coming out of the b o E, the

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Speaker 1: Bank of England UM and and some commentary out of

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Speaker 1: the FED as well, so people are saying that there's

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Speaker 1: some fish pressure on the e c B. However, from

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Speaker 1: a doubbish side, we've had the Bank Lending Survey which

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Speaker 1: came out recently and showed that there's been increasing pullback

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Speaker 1: in landing or tightening of credit standards. And you combine

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Speaker 1: that with a small wise endominal yield and we've already

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Speaker 1: starting to see some signs of tightening before the ECB

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Speaker 1: has done anything. So we've got a number of programs

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Speaker 1: the ECB has um they're they're going until March of

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Speaker 1: next year. We're also expecting an announcement in December from

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Speaker 1: the e c B. Obviously they've got their their their

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Speaker 1: meeting today, but we'll get that December meeting, which is

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Speaker 1: that we're expecting some big announcements. UM. As I look

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Speaker 1: over to Europe, though, let's just compare and contrast Europe

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Speaker 1: with the United States and the positioning of two of

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Speaker 1: the central banks. You know, the the inflation concerns in

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Speaker 1: the US are much greater than that they are over

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Speaker 1: in Europe. UM. And so you know, the supply chain

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Speaker 1: pressures exist in Europe, but I don't think we've seen

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Speaker 1: the same time of tightness in the supply chain UM

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Speaker 1: in European markets. I don't think you've had the ports

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Speaker 1: as much being an issue there. The second thing is

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Speaker 1: that the labor market is the other element of the

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Speaker 1: inflation equation, and Europe's labor market has been quite sluggish. Um.

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Speaker 1: You know, you just need to look at the German

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Speaker 1: public sector workers. They were asking for a five percent

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Speaker 1: rate or wage hike, and it looks like it may

430
00:23:22,560 --> 00:23:25,240
Speaker 1: not go through. So you've got I think a lot

431
00:23:25,320 --> 00:23:28,840
Speaker 1: less pressure in the ecb UM. The economy came out

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00:23:29,280 --> 00:23:32,320
Speaker 1: UM a lot behind the US. I think they're also

433
00:23:32,720 --> 00:23:34,960
Speaker 1: taking the advantage of that, and they're going to walk

434
00:23:34,960 --> 00:23:37,880
Speaker 1: to what the FEDS doing and then they lack labor well,

435
00:23:37,880 --> 00:23:40,639
Speaker 1: talking of inflationary and labor pressures for US companies. We

436
00:23:40,760 --> 00:23:43,560
Speaker 1: just had Caterpillar earnings crossing the Bloomberg terminal, big surprise

437
00:23:43,600 --> 00:23:45,800
Speaker 1: to the upside. They beat on EPs by something like

438
00:23:46,560 --> 00:23:48,240
Speaker 1: coming in at two sixty to share, and I'm just

439
00:23:48,240 --> 00:23:51,320
Speaker 1: looking through the press release and they talk about unfavorable

440
00:23:51,359 --> 00:23:54,240
Speaker 1: manufacturing costs because of higher labor costs, higher free cost

441
00:23:54,320 --> 00:23:57,760
Speaker 1: higher material costs, and yet sales were really strong. Therefore

442
00:23:57,760 --> 00:24:00,280
Speaker 1: they were able to offset that or withstand that to

443
00:24:00,359 --> 00:24:04,800
Speaker 1: some degree. Did we grossly underestimate the ability of companies

444
00:24:04,920 --> 00:24:09,280
Speaker 1: to do that. I think that's a company by company decision.

445
00:24:09,320 --> 00:24:11,760
Speaker 1: I think it really paying so much attention to this.

446
00:24:12,160 --> 00:24:14,640
Speaker 1: You have rising costs on one side, and I think

447
00:24:14,640 --> 00:24:17,960
Speaker 1: that we've been overly focused on those rising costs. But

448
00:24:18,080 --> 00:24:21,120
Speaker 1: companies can handle rising costs if they can also get

449
00:24:21,160 --> 00:24:23,320
Speaker 1: the pricing for it. And I think that's what you're

450
00:24:23,359 --> 00:24:26,480
Speaker 1: seeing with a Caterpillar. They have had those rising costs.

451
00:24:26,520 --> 00:24:30,159
Speaker 1: But going back to brand name, what construction worker doesn't

452
00:24:30,160 --> 00:24:35,200
Speaker 1: want to have a yellow piece of equipment? That, yeah, exactly,

453
00:24:37,160 --> 00:24:40,200
Speaker 1: people tattooed Caterpillar down their leg, you know. I mean,

454
00:24:40,440 --> 00:24:43,520
Speaker 1: it's just an iconic brand name. And and and in

455
00:24:43,560 --> 00:24:46,119
Speaker 1: this case, I think you've got the power of the

456
00:24:46,200 --> 00:24:49,600
Speaker 1: brand gives you the power of pricing. Be careful, cantriner

457
00:24:49,760 --> 00:24:51,720
Speaker 1: Tim is going to roll up to bloom the headquarters

458
00:24:51,720 --> 00:25:00,000
Speaker 1: on every week and we're moving the trees around. Continue.

459
00:25:01,080 --> 00:25:03,520
Speaker 1: Oh now, I'm just distracted by that image in my head.

460
00:25:03,560 --> 00:25:07,400
Speaker 1: If someone wants to photo stop feel with the tattoo.

461
00:25:08,560 --> 00:25:11,240
Speaker 1: But okay, So Katriina talking about maybe supply chain bottlenecks

462
00:25:11,240 --> 00:25:13,480
Speaker 1: easing all of these things we heard from the automakers

463
00:25:13,480 --> 00:25:16,520
Speaker 1: as well. Forwards Atlantis b W kind of saying that

464
00:25:16,640 --> 00:25:18,679
Speaker 1: the worst of it is over. If the worst of

465
00:25:18,680 --> 00:25:21,399
Speaker 1: it is over, if margins can then expand, if some

466
00:25:21,440 --> 00:25:24,080
Speaker 1: of these supply chain issues are no longer an issue,

467
00:25:24,119 --> 00:25:26,000
Speaker 1: does that just mean the bull market rolls on and

468
00:25:26,040 --> 00:25:28,159
Speaker 1: we can continue to climb higher and higher solely on

469
00:25:28,200 --> 00:25:32,120
Speaker 1: the basis of earnings. Even if growth starts to slow. UM,

470
00:25:32,160 --> 00:25:34,600
Speaker 1: it growth starts to slow, but earnings keep going. You're right,

471
00:25:34,680 --> 00:25:37,400
Speaker 1: the market should continue to appreciate because it is very

472
00:25:37,480 --> 00:25:40,760
Speaker 1: much a reflection of the only earnings of the companies. UM.

473
00:25:40,800 --> 00:25:43,480
Speaker 1: In terms of the supply chain, I think what we're

474
00:25:43,520 --> 00:25:45,720
Speaker 1: seeing is the early parts of the supply chain is

475
00:25:45,760 --> 00:25:48,000
Speaker 1: starting to get a little more room in them, and

476
00:25:48,040 --> 00:25:50,440
Speaker 1: that will ultimately work its way all the way through

477
00:25:50,440 --> 00:25:52,800
Speaker 1: the supply chain. UM. But there are a number of

478
00:25:52,840 --> 00:25:56,080
Speaker 1: parts where there's still weak there's still tightness, and you know,

479
00:25:56,240 --> 00:25:59,120
Speaker 1: some of these are are so interconnected. So think about

480
00:25:59,160 --> 00:26:02,240
Speaker 1: logistics call UM. You know, we used to when we

481
00:26:02,240 --> 00:26:04,720
Speaker 1: were short on components, we'd have freed them into the

482
00:26:04,760 --> 00:26:07,560
Speaker 1: factory and that would speed everything up. Well, because we

483
00:26:07,600 --> 00:26:10,760
Speaker 1: haven't had flights, we don't have belly space, we don't

484
00:26:10,800 --> 00:26:13,720
Speaker 1: have the ability to do that. So UM, I think

485
00:26:13,760 --> 00:26:16,680
Speaker 1: that some of the logistics stocks costs will be new

486
00:26:16,920 --> 00:26:19,880
Speaker 1: higher for longer. But I think some of the component prices,

487
00:26:19,920 --> 00:26:21,639
Speaker 1: You're right, I think we've been able to build a

488
00:26:21,640 --> 00:26:24,399
Speaker 1: little more buffer into it UM in terms of you know,

489
00:26:24,440 --> 00:26:27,879
Speaker 1: and so the question is if you've got companies that

490
00:26:27,960 --> 00:26:30,119
Speaker 1: have gone out with the pricing equation on our you

491
00:26:30,200 --> 00:26:32,760
Speaker 1: just need to cover my higher costs. The risk on

492
00:26:32,800 --> 00:26:35,520
Speaker 1: that pricing creation there is that the companies get pushed

493
00:26:35,560 --> 00:26:37,399
Speaker 1: back on the other side. So I think you've really

494
00:26:37,400 --> 00:26:41,400
Speaker 1: got to understand the stickiness of those pricing increases, because

495
00:26:41,440 --> 00:26:43,960
Speaker 1: if they're not sticky, you will not get the earnings

496
00:26:43,960 --> 00:26:46,119
Speaker 1: growth that you wouldspect. Contrina, thank you for the clinic.

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Speaker 1: Contrina dudly with Frank the mutual today as we look

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00:26:48,560 --> 00:26:52,960
Speaker 1: at use care. This is the Bloomberg Surveillance Podcast. Thanks

499
00:26:53,000 --> 00:26:56,080
Speaker 1: for listening. Join us live week days from seven to

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00:26:56,160 --> 00:26:59,879
Speaker 1: ten am Eastern. I'm Bloomberg Radio and I'm Bloomberg Teleiver

501
00:27:00,560 --> 00:27:04,560
Speaker 1: each day from six to nine am for insight from

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00:27:04,600 --> 00:27:09,119
Speaker 1: the best in economics, finance, investment, and international relations. And

503
00:27:09,240 --> 00:27:14,400
Speaker 1: subscribe to the Surveillance podcast on Apple, podcast, SoundCloud, Bloomberg

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00:27:14,440 --> 00:27:17,760
Speaker 1: dot com, and of course on the terminal. I'm Tom

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00:27:17,840 --> 00:27:20,199
Speaker 1: keene In. This is Bloomberg