Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane along
Speaker 1: with Jonathan Farrell and Lisa A. Brawnowitz Jailey. We bring
Speaker 1: you insight from the best and economics, finance, investment, and
Speaker 1: international relations to find Bloomberg Surveillance on Apple podcast, Suncloud,
Speaker 1: Bloomberg dot Com and of course on the Bloomberg terminal
Speaker 1: right now, and this is a joy. We're gonna rip
Speaker 1: up the script. Mark McCormick joins us. He has been
Speaker 1: absolutely brilliant on dollar resiliency, Global head of X fact
Speaker 1: Strategy at TV. And yes, we'll talk about euro and
Speaker 1: we'll talk about the US dollar. The President with eleven
Speaker 1: thirty talking about fiscal America. But what I want to
Speaker 1: talk to Mark McCormick about is the fun and joy
Speaker 1: when the facts change. I change. And yesterday, Mark McCormick,
Speaker 1: you got a love note from the Bank of Canada
Speaker 1: that the facts had changed. What is it like on
Speaker 1: the t D desk when the facts change, as you
Speaker 1: saw from the Bank of Canada. Yeah. Thanks. The interesting
Speaker 1: bit is, uh, most of us aren't on the floor anymore,
Speaker 1: so it's uh, it's taking the facts as they come
Speaker 1: in from work from home offices. But you know what
Speaker 1: you saw from the market is is what I think
Speaker 1: people are really focused on is what the Bank of
Speaker 1: Canada and what the Bank of England have done is
Speaker 1: they're pulling things forward. And I think what the markets
Speaker 1: are really focused on is what's the r star, what's
Speaker 1: the terminal rate? How do these cycles evolve over the
Speaker 1: next year, year and a half versus who moves first
Speaker 1: and who moves fastest? And so what we know right
Speaker 1: now in the G ten is in orgeous bank the
Speaker 1: r b n Z, the Bank of England, the Bank
Speaker 1: of Canada are first and their primary, and the Bank
Speaker 1: of Canada basically said to start traders yesterday April is
Speaker 1: a live meeting. What I think matters for the FX
Speaker 1: market though, is really how does the how does the
Speaker 1: rate cycle evolve over the next year, which actually hasn't changed.
Speaker 1: So I think that's a big dynamic, especially if we
Speaker 1: look at the Bank of England. Um, you know, we've
Speaker 1: priced them in the fastest over the last six weeks
Speaker 1: or so, but again, are you going to see much
Speaker 1: more than two or three hikes in in a year
Speaker 1: and we've already priced that in. So that's a big
Speaker 1: element of whether or not these moves are sustainable for
Speaker 1: some of these other currencies. On the central bank trade marks,
Speaker 1: let's just go through what's been priced in. Bank of
Speaker 1: England moves first, Bank of Canada follows, then the Federal
Speaker 1: Reserve EC becoming in dead last. Is that basically entirely
Speaker 1: priced in two currency markets at this point? Absolutely, And
Speaker 1: I think when you think about as well, like the
Speaker 1: first one in here was an oorgeous bank, So I
Speaker 1: think you know what you have to think about in
Speaker 1: the context of this is we've got central banks what
Speaker 1: we call the hikers. We've got basically growth divergence, which
Speaker 1: we call the growers. We've got the miners, which is
Speaker 1: basically your term to trade, and we've also got positioning evaluations.
Speaker 1: So those four factors is what's driving effects. And so
Speaker 1: if you've got a negative view on the terms of
Speaker 1: trade shock which was bad for Asia and bad for Europe,
Speaker 1: and a rotation outside of that where we don't get
Speaker 1: another jump in oil prices in the fourth quarter, then
Speaker 1: Norway is really kind ofvulnerable environment given how much excess
Speaker 1: has been priced in and the euro, you know, give
Speaker 1: or take positioning, Euro positioning short, but euro should be
Speaker 1: trading around one fifty on our high frequency models. You
Speaker 1: basically have an environment here where your O knock could rally,
Speaker 1: kind of reversing some of that. And you could also
Speaker 1: see euro Sterling starting to come off the lows because
Speaker 1: the Bank of England has been fully priced in, and
Speaker 1: we're actually long dollar CAD because we don't think the
Speaker 1: Bank of Canada dynamics changes some of those other forces
Speaker 1: that we're talking about in terms of you know, growth divergence,
Speaker 1: terms of trade and what's currently priced in. So mark
Speaker 1: the short term is easier than the long term, right,
Speaker 1: the short term is who hikes first as a competition
Speaker 1: where you kind of have that horse race going on.
Speaker 1: Longer term, it is a much harder story, and it's
Speaker 1: difficult to see one economy diverge meaningfully from another when
Speaker 1: it comes to growth and inflation. How much is the
Speaker 1: idea of a flattening yield curve indicating a global policy
Speaker 1: error that's going to affect the e c B, that's
Speaker 1: going to affect the region even if they hike glass
Speaker 1: basically that one central bank cannot escape another and that
Speaker 1: the currencies are sort of toggling alout around this reality. Yeah,
Speaker 1: it's a great point, because we've got kind of three
Speaker 1: I guess you call them flation themes. You got stagflation, reflation,
Speaker 1: and you know, the word that no one wants to
Speaker 1: talk about is deflation. But there is an element here
Speaker 1: that the bearish flattening of yield curves is suggesting that
Speaker 1: monetary policy around the world two year front end rates,
Speaker 1: whether it's US or non US. You know, first, what
Speaker 1: we've seen is a non US average emerging markets in
Speaker 1: G ten has ripped about fifty basis points in the
Speaker 1: last uh month or so. Higher. US yields are are
Speaker 1: finally following their up about fifteen basis points. But there's
Speaker 1: an element here that the worry is bearish flattening is
Speaker 1: indicative of weakening growth. And you know, you can some
Speaker 1: curves have flattened. I got to interrupt. This is too
Speaker 1: too important, folks. We're gonna go Matthew here and I
Speaker 1: can do that with McCormick x Bloomberg mark. Are you suggesting,
Speaker 1: for example, with a ten year US real yield, we
Speaker 1: have a fan distribution of outcomes that leads us to
Speaker 1: a persistent, constantly negative real yield. Exactly. Yeah, your skew
Speaker 1: is biased negatively so your ten year real rate is
Speaker 1: you know, essentially, if we think about it in fair
Speaker 1: value terms, maybe has basis points to move higher. But
Speaker 1: if we go back to the Taper tantrum, we had
Speaker 1: a hundred basis point move because we had a three
Speaker 1: standard aviation miss pricing on real rates. We don't exactly
Speaker 1: mark I did. Again, I don't wanta interrupt, but this
Speaker 1: is absolutely critical. Answer the question then, which is simple,
Speaker 1: with a three standard deviation move, how does this filter
Speaker 1: through the American financial system? Well, I guess the big
Speaker 1: part of it is real rates. The plumbing of risk
Speaker 1: premium and the plumbing of interest rates stays at very
Speaker 1: accommodative levels. And if you look at it, a global
Speaker 1: version of financial conditions weighted by global GDP is still
Speaker 1: the most accommodative it has been in the last fifteen years.
Speaker 1: So the the under you know, the plumbing of the
Speaker 1: financial system. You know, while we're talking about how many
Speaker 1: central banks have hikes rates and you know where we're
Speaker 1: removing stimulus, we are still an emergency stimulus measure. In
Speaker 1: real rates are still very accommodative for reflation, which is
Speaker 1: a theme that I think should still probably do quite
Speaker 1: well in the first part of next year, especially since
Speaker 1: we're not looking for a FED hike until three, which
Speaker 1: again would keep real rates at bay as we see
Speaker 1: short term inflation rising but essentially decelerating into Mark, thank
Speaker 1: you so much, greatly appreciate it. Mark McCormick with us
Speaker 1: here today. Not a mystery. Yes, come appear at a moment.
Speaker 1: Which is the trophy taker for the Institutional Investors Survey,
Speaker 1: And I say an insiders, some we say I I,
Speaker 1: I okay. And I say this with great respect for
Speaker 1: the late Fred we Gold, who was a great mentor
Speaker 1: of mind here Bloomberg, who helped invent the Wall Street
Speaker 1: Journals survey, which separates earnings guessing from more of a
Speaker 1: thoughtful view of the crops. The I survey Paul a
Speaker 1: beauty contest. It's actually a reflection of what institutional investors,
Speaker 1: how they value the sell side. And as a former
Speaker 1: sell side analysts, it was the number one goal for
Speaker 1: an analyst back in the day. I'm not sure how
Speaker 1: much it's value today, but back in the day it
Speaker 1: made or broke careers, and it comes back everytog I
Speaker 1: can't convey. Not for those of you not on Global
Speaker 1: Wall Street, the sweat factor of this announcement. I was
Speaker 1: on the phone ones with a winner who had to
Speaker 1: go to decide on three job offers. Literally he said, Tom,
Speaker 1: I have to go. I've got one call and two
Speaker 1: calls coming in in a biting word. You know, I
Speaker 1: can't remember what he did. I think he went and
Speaker 1: sold boords in California. But the bottom line is it's completely,
Speaker 1: uh uh, completely part of the Wall Street heritage. Dennis
Speaker 1: de Busher joins US now with twenty two V research
Speaker 1: for years with Edward S. Himan at ever Cores I
Speaker 1: s I and he is the number one strategist this year.
Speaker 1: Gratulation for institutional investor Dennis on behalf of the Academy, Congratulations,
Speaker 1: what did you do afterwards? Watch the Knicks? What you
Speaker 1: do well? One? Thanks so much And to um we
Speaker 1: know it's not a beauty contest because here I am
Speaker 1: on the radio show, Dennis, I look at this and
Speaker 1: it's it's a lot of hard work and it's getting
Speaker 1: it right on a type two basis, What did you
Speaker 1: what did you not do wrong? Forget about what you
Speaker 1: got right? What did you avoid in getting this huge acclaim? Oh?
Speaker 1: Thank you? And a great question to a. I think
Speaker 1: the thing that we avoided was chasing the narrative to
Speaker 1: jure and providing some type of way to think about
Speaker 1: how the macro backdrop, and particularly I keep coming back
Speaker 1: to this, the narrative is changing, and how investors should
Speaker 1: think about that. Not necessarily, you know, how they should
Speaker 1: be focused on whatever is coming out on Twitter or
Speaker 1: whatever headline is coming out that could indicate some massive
Speaker 1: change in trend, which is something you know you'll probably
Speaker 1: be aware of. We're going through the last few days
Speaker 1: with this yield curve lattening, So going through another one
Speaker 1: of these periods of trying to help people understand that
Speaker 1: and how to think about it as opposed to making
Speaker 1: some great call. What we didn't do is chase any
Speaker 1: big change in trend too aggressively. What is your market
Speaker 1: call right now, Dennis? A good question. So we're biased
Speaker 1: high in the market, you know, I think we think
Speaker 1: fair values up at the rage. It doesn't mean we
Speaker 1: have to it there by the end of this year. Um.
Speaker 1: The way we come to that is basically, your implied
Speaker 1: earnings yield on stocks relative to risk re rates. You
Speaker 1: assume a little bit higher in ten ure yields and
Speaker 1: earnings come in roughly where they're expected to come in
Speaker 1: over the next three to five years, and cash returns
Speaker 1: to day about where they are. You've got a little
Speaker 1: bit higher on on the market. Not that exciting of
Speaker 1: a call, quite Frankly, I think all the interest in
Speaker 1: the market right now is in internals. That's where we focus.
Speaker 1: So it's sectors and factors, and as you guys know,
Speaker 1: I mean, there's a lot of macro volatility right now,
Speaker 1: and the narratives are just kind of really you know,
Speaker 1: exasperating that, and that's creating some opportunities on the internals
Speaker 1: that we think are very interesting. Dennis, A lot of
Speaker 1: folks are concerned about evaluation in this market. Yes, the
Speaker 1: ten year you know, is at one point five six
Speaker 1: per cent, so that gives me a little bit of comfort,
Speaker 1: But you know, I need earnings to come through in
Speaker 1: a big way, and it's so far in this third
Speaker 1: quarter they've been pretty darn good. How do you feel
Speaker 1: about evaluation? How do you think this market is earning
Speaker 1: its way into the multiple? Yeah, I think it's it's
Speaker 1: clearly earning its way in the market. An extend companies
Speaker 1: are beating, Um, we're on the back end of a
Speaker 1: profit boom. People really got this p p I verse
Speaker 1: CPI um spread wrong. I e. If you know CPI
Speaker 1: is lagging PPI, that means marketings contract. It's just not true.
Speaker 1: PPI is very possibly correlated with the corporate value add
Speaker 1: wages legs. So you know we've had a profit boom
Speaker 1: and we are working into that multiple. From here it
Speaker 1: gets a little bit tougher. Well, here's the important point.
Speaker 1: I was just looking at it today. So I tend
Speaker 1: ORR yields minus inflation expectations negative a hundred sixty basis points.
Speaker 1: Real high yield rates on an implied basis are almost
Speaker 1: close to zero. So I know nobody likes the Tina argument.
Speaker 1: I like to know that everybody likes to make fun
Speaker 1: of it. But we look at the cash return and
Speaker 1: cash flow of these big cap tech names relative to
Speaker 1: other things. It's the same bull story we've in talent
Speaker 1: in the last five ten years. What's your five year view?
Speaker 1: I want you to go all ever core SIAM is
Speaker 1: you start two V? I mean, what what what's your
Speaker 1: five year view on equity ownership? Stock ownership? My five
Speaker 1: year view is much lower return than the previous cycle.
Speaker 1: Somewhere in the four to six percent range per year. Okay, Dennis,
Speaker 1: thank you, so congratulations, thank you so much. It's just
Speaker 1: absolutely superb greatly greatly. I appreciate it does to prosure
Speaker 1: with us uh this morning, winning the II survey with
Speaker 1: twenty two v research former ever Course Strategistics, Well just amazing. Yeah.
Speaker 1: So it's you know, it's the interesting thing. It something
Speaker 1: going out on your own to start your own firm.
Speaker 1: It's what a better time. He couldn't get a better
Speaker 1: time to do that after winning the number one slot
Speaker 1: on II gives you some you know, incremental street credit,
Speaker 1: as they say. Lee Ferris joins, how do macro strategy
Speaker 1: for North America at State Street? Leah's a glass half
Speaker 1: full or half empty as we look at American g
Speaker 1: d P at thirty. I think when it comes to
Speaker 1: g d P um sadday is half empty. I think
Speaker 1: this was meant to be the big reopening phase, know
Speaker 1: Q three expectations at the start of this quarter, where
Speaker 1: you know this was going to be a seven percent quarter,
Speaker 1: you know, as things really got back on stream, and
Speaker 1: now we're looking at the meeting of what two and
Speaker 1: a half percent Atlanta Bed saying point five, which I
Speaker 1: think is on the low side. But but even so,
Speaker 1: it's a far cry from where the expectations were at
Speaker 1: the start of this quarter. And it really shows well
Speaker 1: what Delta has done and the supply side con stranger
Speaker 1: you were talking about what they've done to activity. Are
Speaker 1: we at a point Lee where and I think of
Speaker 1: the great Betina Dalton at Fidelity years ago, where all
Speaker 1: that matters is domestic final sales and that country to country,
Speaker 1: And here talking about the US that we see the
Speaker 1: export import mystery and the China mystery so great that
Speaker 1: all we can fall back on is US domestic final sales.
Speaker 1: And then there's a point to that. Yeah, I think
Speaker 1: that's a fair point, Tom. I think you know, at
Speaker 1: the moment, we're trying to gauge the strength of the
Speaker 1: domestic economy, you know, with supply chains, with all the
Speaker 1: stuff at the ports, with you know, with everything else
Speaker 1: going on. You know, the sort of external sector of
Speaker 1: the economy is sort of something we can't control, right, Um.
Speaker 1: So yes, I think there is a valid point that
Speaker 1: we should be looking at final sales to domestics, um,
Speaker 1: And that's a better gauge of where we are in
Speaker 1: terms of the bigger picture and the reopening the other stuff. Yet,
Speaker 1: I mean there's so many moving parts right now in
Speaker 1: the global economy and the US that that it's hard
Speaker 1: to really gauge where we are. I don't think we
Speaker 1: get a clear picture until next year. I'll be absolutely
Speaker 1: honest with you, Okay, Ley, who is glass half empty? Right?
Speaker 1: I mean you look out at stocks, they're hitting new highs.
Speaker 1: You look out at bonds, they're doing all right. There
Speaker 1: is a bearish tilt there. Who has it wrong with
Speaker 1: how bearish they are in term of US growth? Well, lasta,
Speaker 1: you're assuming there's a relationship between asset prices and the
Speaker 1: real economy. Surely that broke years ago. Okay, well said,
Speaker 1: carry on. So, I mean here's the thing, right, So
Speaker 1: low growth now more support from policy, you know fed
Speaker 1: You know you've talked about at the top of the
Speaker 1: show about about how much is getting priced in in
Speaker 1: Europe in the US as well, we have virtually two
Speaker 1: hikes priced in next year now for the US after
Speaker 1: this this round of sort of tightening in the market
Speaker 1: over the last week or two. So isn't weaker data
Speaker 1: actually pushes out that scenario? And we know that policy
Speaker 1: has been the big driver of asset prices hold on
Speaker 1: very low. This is really key. Are you saying that
Speaker 1: we are still in an environment we're bad news? Is
Speaker 1: good news in terms of markets. Yes, the longer we
Speaker 1: get the policy support, then the better of the markets.
Speaker 1: The longer that policy support is there, as long as
Speaker 1: the economy is not own through session or anything disastrous.
Speaker 1: But but if things are delayed, if we're going on
Speaker 1: the right path but at a slower pace, which means
Speaker 1: the policy support persists for longer, still positive for markets? Yes, overall, Yeah,
Speaker 1: because more policy support. But what you're seeing in the
Speaker 1: bond market is the anticipation that policy support will not
Speaker 1: persist for longer. We're seeing a pulling forward of expectations
Speaker 1: on when the tightening starts across the world. It's already
Speaker 1: started in some places, and the equity markets still resilient.
Speaker 1: So is that not a mismatch? Yes, I mean there's
Speaker 1: no doubt there's a lot of mismatches going on at
Speaker 1: the moment. I mean, the fact is, you look at
Speaker 1: the curve shapes though, right, So we brought forward these
Speaker 1: rate hikes, but then if you look at the longer end,
Speaker 1: you would have actually dropped back down. So what we've
Speaker 1: seen is this massive curve flattening. So you know, it's
Speaker 1: sort of we're sort of mixed between the two at
Speaker 1: the moment, insomuch as we're bringing forward these rate hikes
Speaker 1: on the back of the inflation numbers. But actually when
Speaker 1: we look at policy over the long term, we expected
Speaker 1: to stay easy. Okay, so let's talk about that curve
Speaker 1: flattening five thirties right now, seventy basis points between the two.
Speaker 1: Has that been overdone? Yes, I think it's tough, but
Speaker 1: I think it's more to do at the short end
Speaker 1: that the rates going up. I think is is the
Speaker 1: bigger issue. I don't think central banks are going to
Speaker 1: act as hawkishly as anywhere near as one that the
Speaker 1: market is sort of projecting at the moment. Particularly saw
Speaker 1: the G three, now some of the commodity exporters Bank
Speaker 1: Accounada we saw yesterday. Yes, they can be more aggressive.
Speaker 1: They're going to tell wins from these commodity prices in
Speaker 1: their domestic economies, but commodity import is generally and the
Speaker 1: G three economies, I don't think they're going to deliver
Speaker 1: anywhere near what the markets pricing. So I would say that, yeah,
Speaker 1: the flattening has been overdone, but it's been overdone because
Speaker 1: short term rates have gone up too far rather than
Speaker 1: long end rates coming to it down too far. Very goodly, first,
Speaker 1: thank you so much, greatly appreciated with State Street had
Speaker 1: a macro strategy. What we're doing here, away from buying
Speaker 1: markets should Annigan's is really looking at the tech juggernaut
Speaker 1: and how it folds over into the rest of the
Speaker 1: stock market. Katrina Dudley at Franklin was iconic and federated
Speaker 1: for her analysis of technology, and we're thrilled she could
Speaker 1: join us with Franklin Mutual's today. Katrina, I want to
Speaker 1: talk up to about something is basic c f A
Speaker 1: one of persistency a free cash flow? Do we massively
Speaker 1: misjudge the generation of cash and the use of it
Speaker 1: for shareholders? Um, If I take a look at free
Speaker 1: cash it's one of the key metrics that you have
Speaker 1: to look at at a company in terms of assessing
Speaker 1: the stability or assessing the stane ability of the competitive
Speaker 1: advantage what value investors. But we spend a lot of
Speaker 1: time looking at cash. We take it from the net
Speaker 1: income level and we look at what are all the
Speaker 1: people that need to get paid UM, the legacy restructuring charges. Yes.
Speaker 1: So there's so many things UM, and so many parts
Speaker 1: of that cash fold statement that people just completely ignore UM.
Speaker 1: So I think that people also very much get confused
Speaker 1: about a resilient net income number and they forget about
Speaker 1: looking whether or not that is a resilient free cash
Speaker 1: I love that you're going on Graham dot and cadl
Speaker 1: me Lisa. That's the iconic textbook out of Columbia from
Speaker 1: a million years ago. Katrine has read six volumes of it.
Speaker 1: Forget about it, move up the income statement and can
Speaker 1: you partition the tech juggernaut over the rest of American industry?
Speaker 1: Do we just simply underestimate in this great bullmarket the
Speaker 1: ability to make profit um. I think in a tech
Speaker 1: booll market, what people are now really focused on is
Speaker 1: the sustainability of that profit stream over a long period
Speaker 1: of time. And we're also focusing on the role that
Speaker 1: interest rates and inflation are going to play, because when
Speaker 1: you have such high multiples of earnings, which a number
Speaker 1: of these texts stops are trading on, or you have
Speaker 1: stocked that actually not even trading on earnings, they're trading
Speaker 1: at thirty types sales, your interest rates become something that's very,
Speaker 1: very sensitive because on a DCF valuation you're looking at
Speaker 1: those terminal values and rising rates and negative for terminal values. Well, Katrina,
Speaker 1: this really goes to the heart of the question of
Speaker 1: the US versus Europe, where there's a greater tech dominance
Speaker 1: excuse me, in the United States versus Europe, and there
Speaker 1: also is this feeling that there is a different, more
Speaker 1: stagflationary like kind of headwind facing Europe. Is the cash
Speaker 1: persistency of European companies different than that of the US.
Speaker 1: So the Europe doesn't have the same level of technology companies,
Speaker 1: but it does have a number of very strong companies there,
Speaker 1: from a cap Gemini to a software a g U
Speaker 1: s A P is another big juggernaut. I think you
Speaker 1: most companies can't function without an SAP supply chain solution.
Speaker 1: So I think that Europe does have a great constitution
Speaker 1: of technology companies, but it's not the dominant force or
Speaker 1: a dominant percent of their markets. What they do have
Speaker 1: is luxury stocks, which are the tech stocks of Europe.
Speaker 1: When you think of the Louis Baton's um, you know,
Speaker 1: Cartier and all of those very strong brands, and that
Speaker 1: is the technology equivalent in Europe UM. I would say, however,
Speaker 1: that those brands have got a lot longer longevity. They've
Speaker 1: been around for multiple new centuries often UM and so
Speaker 1: their ability to generate free cash flow has been tested
Speaker 1: time and time again. And the stability and those franchises
Speaker 1: I think is probably something that you as an investor
Speaker 1: can kind of put away and you kind of wake
Speaker 1: up in a hundred years and the stock will still
Speaker 1: be there. Our investors, global investors under estimating the power
Speaker 1: of a more devish ECP relative to the rest of
Speaker 1: the world when it comes to equity performance. So some
Speaker 1: of the the You've obviously had a lot of hawk
Speaker 1: ish comments coming out of the b o E, the
Speaker 1: Bank of England UM and and some commentary out of
Speaker 1: the FED as well, so people are saying that there's
Speaker 1: some fish pressure on the e c B. However, from
Speaker 1: a doubbish side, we've had the Bank Lending Survey which
Speaker 1: came out recently and showed that there's been increasing pullback
Speaker 1: in landing or tightening of credit standards. And you combine
Speaker 1: that with a small wise endominal yield and we've already
Speaker 1: starting to see some signs of tightening before the ECB
Speaker 1: has done anything. So we've got a number of programs
Speaker 1: the ECB has um they're they're going until March of
Speaker 1: next year. We're also expecting an announcement in December from
Speaker 1: the e c B. Obviously they've got their their their
Speaker 1: meeting today, but we'll get that December meeting, which is
Speaker 1: that we're expecting some big announcements. UM. As I look
Speaker 1: over to Europe, though, let's just compare and contrast Europe
Speaker 1: with the United States and the positioning of two of
Speaker 1: the central banks. You know, the the inflation concerns in
Speaker 1: the US are much greater than that they are over
Speaker 1: in Europe. UM. And so you know, the supply chain
Speaker 1: pressures exist in Europe, but I don't think we've seen
Speaker 1: the same time of tightness in the supply chain UM
Speaker 1: in European markets. I don't think you've had the ports
Speaker 1: as much being an issue there. The second thing is
Speaker 1: that the labor market is the other element of the
Speaker 1: inflation equation, and Europe's labor market has been quite sluggish. Um.
Speaker 1: You know, you just need to look at the German
Speaker 1: public sector workers. They were asking for a five percent
Speaker 1: rate or wage hike, and it looks like it may
Speaker 1: not go through. So you've got I think a lot
Speaker 1: less pressure in the ecb UM. The economy came out
Speaker 1: UM a lot behind the US. I think they're also
Speaker 1: taking the advantage of that, and they're going to walk
Speaker 1: to what the FEDS doing and then they lack labor well,
Speaker 1: talking of inflationary and labor pressures for US companies. We
Speaker 1: just had Caterpillar earnings crossing the Bloomberg terminal, big surprise
Speaker 1: to the upside. They beat on EPs by something like
Speaker 1: coming in at two sixty to share, and I'm just
Speaker 1: looking through the press release and they talk about unfavorable
Speaker 1: manufacturing costs because of higher labor costs, higher free cost
Speaker 1: higher material costs, and yet sales were really strong. Therefore
Speaker 1: they were able to offset that or withstand that to
Speaker 1: some degree. Did we grossly underestimate the ability of companies
Speaker 1: to do that. I think that's a company by company decision.
Speaker 1: I think it really paying so much attention to this.
Speaker 1: You have rising costs on one side, and I think
Speaker 1: that we've been overly focused on those rising costs. But
Speaker 1: companies can handle rising costs if they can also get
Speaker 1: the pricing for it. And I think that's what you're
Speaker 1: seeing with a Caterpillar. They have had those rising costs.
Speaker 1: But going back to brand name, what construction worker doesn't
Speaker 1: want to have a yellow piece of equipment? That, yeah, exactly,
Speaker 1: people tattooed Caterpillar down their leg, you know. I mean,
Speaker 1: it's just an iconic brand name. And and and in
Speaker 1: this case, I think you've got the power of the
Speaker 1: brand gives you the power of pricing. Be careful, cantriner
Speaker 1: Tim is going to roll up to bloom the headquarters
Speaker 1: on every week and we're moving the trees around. Continue.
Speaker 1: Oh now, I'm just distracted by that image in my head.
Speaker 1: If someone wants to photo stop feel with the tattoo.
Speaker 1: But okay, So Katriina talking about maybe supply chain bottlenecks
Speaker 1: easing all of these things we heard from the automakers
Speaker 1: as well. Forwards Atlantis b W kind of saying that
Speaker 1: the worst of it is over. If the worst of
Speaker 1: it is over, if margins can then expand, if some
Speaker 1: of these supply chain issues are no longer an issue,
Speaker 1: does that just mean the bull market rolls on and
Speaker 1: we can continue to climb higher and higher solely on
Speaker 1: the basis of earnings. Even if growth starts to slow. UM,
Speaker 1: it growth starts to slow, but earnings keep going. You're right,
Speaker 1: the market should continue to appreciate because it is very
Speaker 1: much a reflection of the only earnings of the companies. UM.
Speaker 1: In terms of the supply chain, I think what we're
Speaker 1: seeing is the early parts of the supply chain is
Speaker 1: starting to get a little more room in them, and
Speaker 1: that will ultimately work its way all the way through
Speaker 1: the supply chain. UM. But there are a number of
Speaker 1: parts where there's still weak there's still tightness, and you know,
Speaker 1: some of these are are so interconnected. So think about
Speaker 1: logistics call UM. You know, we used to when we
Speaker 1: were short on components, we'd have freed them into the
Speaker 1: factory and that would speed everything up. Well, because we
Speaker 1: haven't had flights, we don't have belly space, we don't
Speaker 1: have the ability to do that. So UM, I think
Speaker 1: that some of the logistics stocks costs will be new
Speaker 1: higher for longer. But I think some of the component prices,
Speaker 1: You're right, I think we've been able to build a
Speaker 1: little more buffer into it UM in terms of you know,
Speaker 1: and so the question is if you've got companies that
Speaker 1: have gone out with the pricing equation on our you
Speaker 1: just need to cover my higher costs. The risk on
Speaker 1: that pricing creation there is that the companies get pushed
Speaker 1: back on the other side. So I think you've really
Speaker 1: got to understand the stickiness of those pricing increases, because
Speaker 1: if they're not sticky, you will not get the earnings
Speaker 1: growth that you wouldspect. Contrina, thank you for the clinic.
Speaker 1: Contrina dudly with Frank the mutual today as we look
Speaker 1: at use care. This is the Bloomberg Surveillance Podcast. Thanks
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