WEBVTT - Surveillance: Central Bank Policy With McCormick 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane along 0:00:09.240 --> 0:00:13.080 with Jonathan Farrell and Lisa A. Brawnowitz Jailey. We bring 0:00:13.119 --> 0:00:17.159 you insight from the best and economics, finance, investment, and 0:00:17.280 --> 0:00:22.440 international relations to find Bloomberg Surveillance on Apple podcast, Suncloud, 0:00:22.840 --> 0:00:26.320 Bloomberg dot Com and of course on the Bloomberg terminal 0:00:29.760 --> 0:00:31.280 right now, and this is a joy. We're gonna rip 0:00:31.360 --> 0:00:33.479 up the script. Mark McCormick joins us. He has been 0:00:33.600 --> 0:00:37.400 absolutely brilliant on dollar resiliency, Global head of X fact 0:00:37.440 --> 0:00:40.280 Strategy at TV. And yes, we'll talk about euro and 0:00:40.280 --> 0:00:43.120 we'll talk about the US dollar. The President with eleven 0:00:43.240 --> 0:00:46.839 thirty talking about fiscal America. But what I want to 0:00:46.840 --> 0:00:49.520 talk to Mark McCormick about is the fun and joy 0:00:50.360 --> 0:00:55.200 when the facts change. I change. And yesterday, Mark McCormick, 0:00:55.480 --> 0:00:57.600 you got a love note from the Bank of Canada 0:00:58.040 --> 0:01:00.800 that the facts had changed. What is it like on 0:01:00.880 --> 0:01:04.440 the t D desk when the facts change, as you 0:01:04.480 --> 0:01:08.920 saw from the Bank of Canada. Yeah. Thanks. The interesting 0:01:08.920 --> 0:01:11.240 bit is, uh, most of us aren't on the floor anymore, 0:01:11.240 --> 0:01:13.600 so it's uh, it's taking the facts as they come 0:01:13.600 --> 0:01:15.959 in from work from home offices. But you know what 0:01:16.000 --> 0:01:18.240 you saw from the market is is what I think 0:01:18.240 --> 0:01:20.039 people are really focused on is what the Bank of 0:01:20.040 --> 0:01:22.040 Canada and what the Bank of England have done is 0:01:22.080 --> 0:01:24.720 they're pulling things forward. And I think what the markets 0:01:24.720 --> 0:01:26.959 are really focused on is what's the r star, what's 0:01:27.000 --> 0:01:29.520 the terminal rate? How do these cycles evolve over the 0:01:29.560 --> 0:01:32.280 next year, year and a half versus who moves first 0:01:32.280 --> 0:01:34.880 and who moves fastest? And so what we know right 0:01:34.880 --> 0:01:36.600 now in the G ten is in orgeous bank the 0:01:36.720 --> 0:01:38.920 r b n Z, the Bank of England, the Bank 0:01:38.959 --> 0:01:41.480 of Canada are first and their primary, and the Bank 0:01:41.520 --> 0:01:44.920 of Canada basically said to start traders yesterday April is 0:01:44.920 --> 0:01:47.440 a live meeting. What I think matters for the FX 0:01:47.480 --> 0:01:50.080 market though, is really how does the how does the 0:01:50.200 --> 0:01:53.640 rate cycle evolve over the next year, which actually hasn't changed. 0:01:53.880 --> 0:01:56.040 So I think that's a big dynamic, especially if we 0:01:56.080 --> 0:01:58.320 look at the Bank of England. Um, you know, we've 0:01:58.360 --> 0:02:01.720 priced them in the fastest over the last six weeks 0:02:01.840 --> 0:02:04.120 or so, but again, are you going to see much 0:02:04.160 --> 0:02:06.080 more than two or three hikes in in a year 0:02:06.120 --> 0:02:08.400 and we've already priced that in. So that's a big 0:02:08.400 --> 0:02:11.400 element of whether or not these moves are sustainable for 0:02:11.480 --> 0:02:14.040 some of these other currencies. On the central bank trade marks, 0:02:14.120 --> 0:02:16.200 let's just go through what's been priced in. Bank of 0:02:16.240 --> 0:02:18.880 England moves first, Bank of Canada follows, then the Federal 0:02:18.880 --> 0:02:21.920 Reserve EC becoming in dead last. Is that basically entirely 0:02:21.960 --> 0:02:26.720 priced in two currency markets at this point? Absolutely, And 0:02:26.760 --> 0:02:28.240 I think when you think about as well, like the 0:02:28.280 --> 0:02:30.400 first one in here was an oorgeous bank, So I 0:02:30.440 --> 0:02:31.880 think you know what you have to think about in 0:02:31.919 --> 0:02:34.799 the context of this is we've got central banks what 0:02:34.840 --> 0:02:37.760 we call the hikers. We've got basically growth divergence, which 0:02:37.800 --> 0:02:40.079 we call the growers. We've got the miners, which is 0:02:40.120 --> 0:02:43.440 basically your term to trade, and we've also got positioning evaluations. 0:02:43.480 --> 0:02:46.480 So those four factors is what's driving effects. And so 0:02:46.639 --> 0:02:49.040 if you've got a negative view on the terms of 0:02:49.080 --> 0:02:51.960 trade shock which was bad for Asia and bad for Europe, 0:02:52.280 --> 0:02:54.600 and a rotation outside of that where we don't get 0:02:54.600 --> 0:02:58.120 another jump in oil prices in the fourth quarter, then 0:02:58.280 --> 0:03:02.160 Norway is really kind ofvulnerable environment given how much excess 0:03:02.160 --> 0:03:04.720 has been priced in and the euro, you know, give 0:03:04.800 --> 0:03:08.000 or take positioning, Euro positioning short, but euro should be 0:03:08.000 --> 0:03:11.960 trading around one fifty on our high frequency models. You 0:03:12.040 --> 0:03:14.800 basically have an environment here where your O knock could rally, 0:03:14.919 --> 0:03:16.880 kind of reversing some of that. And you could also 0:03:16.919 --> 0:03:20.840 see euro Sterling starting to come off the lows because 0:03:20.919 --> 0:03:23.160 the Bank of England has been fully priced in, and 0:03:23.200 --> 0:03:26.760 we're actually long dollar CAD because we don't think the 0:03:26.800 --> 0:03:29.560 Bank of Canada dynamics changes some of those other forces 0:03:29.600 --> 0:03:32.440 that we're talking about in terms of you know, growth divergence, 0:03:32.840 --> 0:03:35.520 terms of trade and what's currently priced in. So mark 0:03:35.760 --> 0:03:37.960 the short term is easier than the long term, right, 0:03:38.000 --> 0:03:40.200 the short term is who hikes first as a competition 0:03:40.240 --> 0:03:42.080 where you kind of have that horse race going on. 0:03:42.200 --> 0:03:45.040 Longer term, it is a much harder story, and it's 0:03:45.040 --> 0:03:49.040 difficult to see one economy diverge meaningfully from another when 0:03:49.040 --> 0:03:52.760 it comes to growth and inflation. How much is the 0:03:52.800 --> 0:03:56.760 idea of a flattening yield curve indicating a global policy 0:03:56.920 --> 0:03:59.160 error that's going to affect the e c B, that's 0:03:59.160 --> 0:04:01.520 going to affect the region even if they hike glass 0:04:01.600 --> 0:04:04.640 basically that one central bank cannot escape another and that 0:04:04.720 --> 0:04:09.200 the currencies are sort of toggling alout around this reality. Yeah, 0:04:09.200 --> 0:04:11.560 it's a great point, because we've got kind of three 0:04:11.880 --> 0:04:15.120 I guess you call them flation themes. You got stagflation, reflation, 0:04:15.240 --> 0:04:17.560 and you know, the word that no one wants to 0:04:17.600 --> 0:04:19.920 talk about is deflation. But there is an element here 0:04:20.000 --> 0:04:22.680 that the bearish flattening of yield curves is suggesting that 0:04:22.720 --> 0:04:26.320 monetary policy around the world two year front end rates, 0:04:26.320 --> 0:04:28.920 whether it's US or non US. You know, first, what 0:04:28.960 --> 0:04:31.919 we've seen is a non US average emerging markets in 0:04:31.920 --> 0:04:34.240 G ten has ripped about fifty basis points in the 0:04:34.320 --> 0:04:37.800 last uh month or so. Higher. US yields are are 0:04:37.839 --> 0:04:41.360 finally following their up about fifteen basis points. But there's 0:04:41.360 --> 0:04:45.080 an element here that the worry is bearish flattening is 0:04:45.120 --> 0:04:47.920 indicative of weakening growth. And you know, you can some 0:04:48.360 --> 0:04:50.560 curves have flattened. I got to interrupt. This is too 0:04:50.600 --> 0:04:52.800 too important, folks. We're gonna go Matthew here and I 0:04:52.839 --> 0:04:56.720 can do that with McCormick x Bloomberg mark. Are you suggesting, 0:04:56.760 --> 0:04:59.640 for example, with a ten year US real yield, we 0:04:59.760 --> 0:05:04.039 have a fan distribution of outcomes that leads us to 0:05:04.160 --> 0:05:11.080 a persistent, constantly negative real yield. Exactly. Yeah, your skew 0:05:11.360 --> 0:05:14.599 is biased negatively so your ten year real rate is 0:05:14.720 --> 0:05:16.320 you know, essentially, if we think about it in fair 0:05:16.400 --> 0:05:20.480 value terms, maybe has basis points to move higher. But 0:05:20.520 --> 0:05:22.880 if we go back to the Taper tantrum, we had 0:05:22.920 --> 0:05:25.200 a hundred basis point move because we had a three 0:05:25.200 --> 0:05:28.680 standard aviation miss pricing on real rates. We don't exactly 0:05:29.200 --> 0:05:30.880 mark I did. Again, I don't wanta interrupt, but this 0:05:30.960 --> 0:05:34.200 is absolutely critical. Answer the question then, which is simple, 0:05:34.200 --> 0:05:37.720 with a three standard deviation move, how does this filter 0:05:37.880 --> 0:05:43.280 through the American financial system? Well, I guess the big 0:05:43.320 --> 0:05:45.760 part of it is real rates. The plumbing of risk 0:05:45.800 --> 0:05:49.040 premium and the plumbing of interest rates stays at very 0:05:49.040 --> 0:05:52.039 accommodative levels. And if you look at it, a global 0:05:52.839 --> 0:05:56.600 version of financial conditions weighted by global GDP is still 0:05:56.640 --> 0:05:59.680 the most accommodative it has been in the last fifteen years. 0:06:00.080 --> 0:06:02.800 So the the under you know, the plumbing of the 0:06:02.839 --> 0:06:05.680 financial system. You know, while we're talking about how many 0:06:05.680 --> 0:06:08.000 central banks have hikes rates and you know where we're 0:06:08.000 --> 0:06:11.360 removing stimulus, we are still an emergency stimulus measure. In 0:06:11.400 --> 0:06:15.159 real rates are still very accommodative for reflation, which is 0:06:15.160 --> 0:06:17.640 a theme that I think should still probably do quite 0:06:17.680 --> 0:06:20.320 well in the first part of next year, especially since 0:06:20.320 --> 0:06:23.760 we're not looking for a FED hike until three, which 0:06:23.839 --> 0:06:26.279 again would keep real rates at bay as we see 0:06:26.320 --> 0:06:31.320 short term inflation rising but essentially decelerating into Mark, thank 0:06:31.320 --> 0:06:33.800 you so much, greatly appreciate it. Mark McCormick with us 0:06:34.240 --> 0:06:43.520 here today. Not a mystery. Yes, come appear at a moment. 0:06:43.600 --> 0:06:48.640 Which is the trophy taker for the Institutional Investors Survey, 0:06:48.680 --> 0:06:51.520 And I say an insiders, some we say I I, 0:06:51.640 --> 0:06:56.640 I okay. And I say this with great respect for 0:06:56.680 --> 0:06:59.240 the late Fred we Gold, who was a great mentor 0:06:59.279 --> 0:07:02.559 of mind here Bloomberg, who helped invent the Wall Street 0:07:02.640 --> 0:07:08.960 Journals survey, which separates earnings guessing from more of a 0:07:09.040 --> 0:07:13.880 thoughtful view of the crops. The I survey Paul a 0:07:13.880 --> 0:07:19.360 beauty contest. It's actually a reflection of what institutional investors, 0:07:19.680 --> 0:07:22.000 how they value the sell side. And as a former 0:07:22.000 --> 0:07:27.400 sell side analysts, it was the number one goal for 0:07:27.560 --> 0:07:29.520 an analyst back in the day. I'm not sure how 0:07:29.600 --> 0:07:31.960 much it's value today, but back in the day it 0:07:32.280 --> 0:07:36.640 made or broke careers, and it comes back everytog I 0:07:36.680 --> 0:07:38.920 can't convey. Not for those of you not on Global 0:07:38.960 --> 0:07:42.520 Wall Street, the sweat factor of this announcement. I was 0:07:42.560 --> 0:07:45.880 on the phone ones with a winner who had to 0:07:45.920 --> 0:07:51.000 go to decide on three job offers. Literally he said, Tom, 0:07:51.040 --> 0:07:53.640 I have to go. I've got one call and two 0:07:53.680 --> 0:07:57.920 calls coming in in a biting word. You know, I 0:07:57.960 --> 0:07:59.600 can't remember what he did. I think he went and 0:07:59.640 --> 0:08:04.400 sold boords in California. But the bottom line is it's completely, 0:08:05.080 --> 0:08:11.520 uh uh, completely part of the Wall Street heritage. Dennis 0:08:11.520 --> 0:08:14.320 de Busher joins US now with twenty two V research 0:08:14.680 --> 0:08:18.040 for years with Edward S. Himan at ever Cores I 0:08:18.360 --> 0:08:22.480 s I and he is the number one strategist this year. 0:08:22.600 --> 0:08:29.160 Gratulation for institutional investor Dennis on behalf of the Academy, Congratulations, 0:08:29.960 --> 0:08:32.480 what did you do afterwards? Watch the Knicks? What you 0:08:32.559 --> 0:08:37.240 do well? One? Thanks so much And to um we 0:08:37.320 --> 0:08:39.640 know it's not a beauty contest because here I am 0:08:39.640 --> 0:08:45.160 on the radio show, Dennis, I look at this and 0:08:45.240 --> 0:08:47.600 it's it's a lot of hard work and it's getting 0:08:47.600 --> 0:08:50.640 it right on a type two basis, What did you 0:08:50.960 --> 0:08:54.200 what did you not do wrong? Forget about what you 0:08:54.280 --> 0:09:00.000 got right? What did you avoid in getting this huge acclaim? Oh? 0:09:00.120 --> 0:09:02.760 Thank you? And a great question to a. I think 0:09:02.960 --> 0:09:07.760 the thing that we avoided was chasing the narrative to 0:09:07.880 --> 0:09:11.840 jure and providing some type of way to think about 0:09:12.760 --> 0:09:15.400 how the macro backdrop, and particularly I keep coming back 0:09:15.400 --> 0:09:18.280 to this, the narrative is changing, and how investors should 0:09:18.320 --> 0:09:23.040 think about that. Not necessarily, you know, how they should 0:09:23.040 --> 0:09:27.040 be focused on whatever is coming out on Twitter or 0:09:27.040 --> 0:09:31.079 whatever headline is coming out that could indicate some massive 0:09:31.240 --> 0:09:33.920 change in trend, which is something you know you'll probably 0:09:33.920 --> 0:09:36.280 be aware of. We're going through the last few days 0:09:36.320 --> 0:09:38.480 with this yield curve lattening, So going through another one 0:09:38.480 --> 0:09:42.800 of these periods of trying to help people understand that 0:09:43.160 --> 0:09:45.320 and how to think about it as opposed to making 0:09:45.360 --> 0:09:48.280 some great call. What we didn't do is chase any 0:09:48.320 --> 0:09:52.040 big change in trend too aggressively. What is your market 0:09:52.040 --> 0:09:55.720 call right now, Dennis? A good question. So we're biased 0:09:55.760 --> 0:09:57.400 high in the market, you know, I think we think 0:09:57.440 --> 0:09:59.719 fair values up at the rage. It doesn't mean we 0:09:59.760 --> 0:10:02.079 have to it there by the end of this year. Um. 0:10:02.120 --> 0:10:04.320 The way we come to that is basically, your implied 0:10:04.440 --> 0:10:07.720 earnings yield on stocks relative to risk re rates. You 0:10:07.720 --> 0:10:09.719 assume a little bit higher in ten ure yields and 0:10:09.840 --> 0:10:12.640 earnings come in roughly where they're expected to come in 0:10:12.640 --> 0:10:15.080 over the next three to five years, and cash returns 0:10:15.120 --> 0:10:17.080 to day about where they are. You've got a little 0:10:17.080 --> 0:10:20.240 bit higher on on the market. Not that exciting of 0:10:20.240 --> 0:10:22.680 a call, quite Frankly, I think all the interest in 0:10:22.679 --> 0:10:25.559 the market right now is in internals. That's where we focus. 0:10:25.600 --> 0:10:28.360 So it's sectors and factors, and as you guys know, 0:10:28.440 --> 0:10:31.400 I mean, there's a lot of macro volatility right now, 0:10:31.600 --> 0:10:33.920 and the narratives are just kind of really you know, 0:10:34.360 --> 0:10:39.080 exasperating that, and that's creating some opportunities on the internals 0:10:39.080 --> 0:10:41.599 that we think are very interesting. Dennis, A lot of 0:10:41.600 --> 0:10:45.199 folks are concerned about evaluation in this market. Yes, the 0:10:45.320 --> 0:10:47.840 ten year you know, is at one point five six 0:10:47.920 --> 0:10:49.960 per cent, so that gives me a little bit of comfort, 0:10:50.000 --> 0:10:52.640 But you know, I need earnings to come through in 0:10:52.640 --> 0:10:54.880 a big way, and it's so far in this third 0:10:54.960 --> 0:10:57.600 quarter they've been pretty darn good. How do you feel 0:10:57.640 --> 0:11:00.959 about evaluation? How do you think this market is earning 0:11:00.960 --> 0:11:03.960 its way into the multiple? Yeah, I think it's it's 0:11:03.960 --> 0:11:06.280 clearly earning its way in the market. An extend companies 0:11:06.280 --> 0:11:08.640 are beating, Um, we're on the back end of a 0:11:08.640 --> 0:11:11.959 profit boom. People really got this p p I verse 0:11:12.000 --> 0:11:17.800 CPI um spread wrong. I e. If you know CPI 0:11:17.920 --> 0:11:21.040 is lagging PPI, that means marketings contract. It's just not true. 0:11:21.360 --> 0:11:24.520 PPI is very possibly correlated with the corporate value add 0:11:25.120 --> 0:11:27.920 wages legs. So you know we've had a profit boom 0:11:27.920 --> 0:11:30.720 and we are working into that multiple. From here it 0:11:30.800 --> 0:11:33.360 gets a little bit tougher. Well, here's the important point. 0:11:33.440 --> 0:11:34.800 I was just looking at it today. So I tend 0:11:34.840 --> 0:11:38.400 ORR yields minus inflation expectations negative a hundred sixty basis points. 0:11:38.559 --> 0:11:41.160 Real high yield rates on an implied basis are almost 0:11:41.160 --> 0:11:44.440 close to zero. So I know nobody likes the Tina argument. 0:11:44.480 --> 0:11:46.000 I like to know that everybody likes to make fun 0:11:46.000 --> 0:11:48.360 of it. But we look at the cash return and 0:11:48.520 --> 0:11:50.880 cash flow of these big cap tech names relative to 0:11:50.920 --> 0:11:53.120 other things. It's the same bull story we've in talent 0:11:53.200 --> 0:11:55.640 in the last five ten years. What's your five year view? 0:11:55.840 --> 0:11:58.240 I want you to go all ever core SIAM is 0:11:58.280 --> 0:12:01.120 you start two V? I mean, what what what's your 0:12:01.200 --> 0:12:07.520 five year view on equity ownership? Stock ownership? My five 0:12:07.600 --> 0:12:10.679 year view is much lower return than the previous cycle. 0:12:11.120 --> 0:12:15.240 Somewhere in the four to six percent range per year. Okay, Dennis, 0:12:15.240 --> 0:12:18.440 thank you, so congratulations, thank you so much. It's just 0:12:19.160 --> 0:12:22.880 absolutely superb greatly greatly. I appreciate it does to prosure 0:12:22.920 --> 0:12:27.360 with us uh this morning, winning the II survey with 0:12:27.400 --> 0:12:32.200 twenty two v research former ever Course Strategistics, Well just amazing. Yeah. 0:12:32.280 --> 0:12:35.040 So it's you know, it's the interesting thing. It something 0:12:35.160 --> 0:12:37.040 going out on your own to start your own firm. 0:12:37.360 --> 0:12:39.880 It's what a better time. He couldn't get a better 0:12:39.920 --> 0:12:42.360 time to do that after winning the number one slot 0:12:42.360 --> 0:12:45.440 on II gives you some you know, incremental street credit, 0:12:45.440 --> 0:12:54.920 as they say. Lee Ferris joins, how do macro strategy 0:12:55.080 --> 0:12:59.000 for North America at State Street? Leah's a glass half 0:12:59.000 --> 0:13:02.400 full or half empty as we look at American g 0:13:02.520 --> 0:13:06.560 d P at thirty. I think when it comes to 0:13:06.640 --> 0:13:10.000 g d P um sadday is half empty. I think 0:13:10.040 --> 0:13:12.680 this was meant to be the big reopening phase, know 0:13:12.800 --> 0:13:16.440 Q three expectations at the start of this quarter, where 0:13:16.520 --> 0:13:18.400 you know this was going to be a seven percent quarter, 0:13:18.960 --> 0:13:22.240 you know, as things really got back on stream, and 0:13:22.520 --> 0:13:24.199 now we're looking at the meeting of what two and 0:13:24.240 --> 0:13:27.360 a half percent Atlanta Bed saying point five, which I 0:13:27.440 --> 0:13:29.760 think is on the low side. But but even so, 0:13:30.040 --> 0:13:32.440 it's a far cry from where the expectations were at 0:13:32.440 --> 0:13:34.480 the start of this quarter. And it really shows well 0:13:34.760 --> 0:13:37.199 what Delta has done and the supply side con stranger 0:13:37.240 --> 0:13:40.439 you were talking about what they've done to activity. Are 0:13:40.480 --> 0:13:43.040 we at a point Lee where and I think of 0:13:43.160 --> 0:13:46.920 the great Betina Dalton at Fidelity years ago, where all 0:13:46.960 --> 0:13:51.680 that matters is domestic final sales and that country to country, 0:13:51.679 --> 0:13:54.640 And here talking about the US that we see the 0:13:54.760 --> 0:13:59.680 export import mystery and the China mystery so great that 0:13:59.760 --> 0:14:03.960 all we can fall back on is US domestic final sales. 0:14:05.280 --> 0:14:07.319 And then there's a point to that. Yeah, I think 0:14:07.360 --> 0:14:09.040 that's a fair point, Tom. I think you know, at 0:14:09.040 --> 0:14:11.040 the moment, we're trying to gauge the strength of the 0:14:11.080 --> 0:14:14.400 domestic economy, you know, with supply chains, with all the 0:14:14.440 --> 0:14:16.680 stuff at the ports, with you know, with everything else 0:14:16.760 --> 0:14:20.120 going on. You know, the sort of external sector of 0:14:20.120 --> 0:14:23.240 the economy is sort of something we can't control, right, Um. 0:14:23.360 --> 0:14:26.720 So yes, I think there is a valid point that 0:14:26.840 --> 0:14:31.000 we should be looking at final sales to domestics, um, 0:14:31.000 --> 0:14:33.160 And that's a better gauge of where we are in 0:14:33.280 --> 0:14:37.080 terms of the bigger picture and the reopening the other stuff. Yet, 0:14:37.200 --> 0:14:39.480 I mean there's so many moving parts right now in 0:14:39.720 --> 0:14:42.720 the global economy and the US that that it's hard 0:14:42.760 --> 0:14:45.320 to really gauge where we are. I don't think we 0:14:45.400 --> 0:14:47.560 get a clear picture until next year. I'll be absolutely 0:14:47.600 --> 0:14:50.920 honest with you, Okay, Ley, who is glass half empty? Right? 0:14:50.960 --> 0:14:53.320 I mean you look out at stocks, they're hitting new highs. 0:14:53.360 --> 0:14:55.520 You look out at bonds, they're doing all right. There 0:14:55.560 --> 0:14:58.120 is a bearish tilt there. Who has it wrong with 0:14:58.280 --> 0:15:03.640 how bearish they are in term of US growth? Well, lasta, 0:15:03.640 --> 0:15:06.200 you're assuming there's a relationship between asset prices and the 0:15:06.200 --> 0:15:11.200 real economy. Surely that broke years ago. Okay, well said, 0:15:11.440 --> 0:15:14.000 carry on. So, I mean here's the thing, right, So 0:15:14.520 --> 0:15:18.920 low growth now more support from policy, you know fed 0:15:19.080 --> 0:15:21.240 You know you've talked about at the top of the 0:15:21.280 --> 0:15:23.640 show about about how much is getting priced in in 0:15:24.320 --> 0:15:27.080 Europe in the US as well, we have virtually two 0:15:27.160 --> 0:15:30.040 hikes priced in next year now for the US after 0:15:30.080 --> 0:15:32.600 this this round of sort of tightening in the market 0:15:32.680 --> 0:15:37.040 over the last week or two. So isn't weaker data 0:15:37.480 --> 0:15:41.000 actually pushes out that scenario? And we know that policy 0:15:41.000 --> 0:15:43.640 has been the big driver of asset prices hold on 0:15:44.280 --> 0:15:46.800 very low. This is really key. Are you saying that 0:15:46.840 --> 0:15:49.520 we are still in an environment we're bad news? Is 0:15:49.520 --> 0:15:53.400 good news in terms of markets. Yes, the longer we 0:15:53.440 --> 0:15:57.320 get the policy support, then the better of the markets. 0:15:57.320 --> 0:15:59.240 The longer that policy support is there, as long as 0:15:59.240 --> 0:16:02.360 the economy is not own through session or anything disastrous. 0:16:02.400 --> 0:16:04.880 But but if things are delayed, if we're going on 0:16:04.920 --> 0:16:08.320 the right path but at a slower pace, which means 0:16:08.360 --> 0:16:13.120 the policy support persists for longer, still positive for markets? Yes, overall, Yeah, 0:16:13.160 --> 0:16:15.640 because more policy support. But what you're seeing in the 0:16:15.640 --> 0:16:18.200 bond market is the anticipation that policy support will not 0:16:18.280 --> 0:16:20.880 persist for longer. We're seeing a pulling forward of expectations 0:16:20.880 --> 0:16:23.200 on when the tightening starts across the world. It's already 0:16:23.200 --> 0:16:26.480 started in some places, and the equity markets still resilient. 0:16:26.560 --> 0:16:30.480 So is that not a mismatch? Yes, I mean there's 0:16:30.520 --> 0:16:32.600 no doubt there's a lot of mismatches going on at 0:16:32.600 --> 0:16:36.120 the moment. I mean, the fact is, you look at 0:16:36.120 --> 0:16:38.680 the curve shapes though, right, So we brought forward these 0:16:38.760 --> 0:16:42.360 rate hikes, but then if you look at the longer end, 0:16:42.720 --> 0:16:44.640 you would have actually dropped back down. So what we've 0:16:44.640 --> 0:16:48.200 seen is this massive curve flattening. So you know, it's 0:16:48.240 --> 0:16:50.400 sort of we're sort of mixed between the two at 0:16:50.440 --> 0:16:54.600 the moment, insomuch as we're bringing forward these rate hikes 0:16:54.640 --> 0:16:57.160 on the back of the inflation numbers. But actually when 0:16:57.240 --> 0:16:59.400 we look at policy over the long term, we expected 0:16:59.400 --> 0:17:02.040 to stay easy. Okay, so let's talk about that curve 0:17:02.040 --> 0:17:05.440 flattening five thirties right now, seventy basis points between the two. 0:17:05.440 --> 0:17:10.800 Has that been overdone? Yes, I think it's tough, but 0:17:10.840 --> 0:17:12.360 I think it's more to do at the short end 0:17:12.359 --> 0:17:14.760 that the rates going up. I think is is the 0:17:14.800 --> 0:17:17.119 bigger issue. I don't think central banks are going to 0:17:17.240 --> 0:17:19.560 act as hawkishly as anywhere near as one that the 0:17:19.560 --> 0:17:23.120 market is sort of projecting at the moment. Particularly saw 0:17:23.200 --> 0:17:25.640 the G three, now some of the commodity exporters Bank 0:17:25.680 --> 0:17:28.760 Accounada we saw yesterday. Yes, they can be more aggressive. 0:17:28.800 --> 0:17:31.480 They're going to tell wins from these commodity prices in 0:17:31.560 --> 0:17:35.280 their domestic economies, but commodity import is generally and the 0:17:35.320 --> 0:17:37.680 G three economies, I don't think they're going to deliver 0:17:37.720 --> 0:17:40.920 anywhere near what the markets pricing. So I would say that, yeah, 0:17:40.920 --> 0:17:43.639 the flattening has been overdone, but it's been overdone because 0:17:43.640 --> 0:17:45.560 short term rates have gone up too far rather than 0:17:45.560 --> 0:17:48.600 long end rates coming to it down too far. Very goodly, first, 0:17:48.640 --> 0:17:50.800 thank you so much, greatly appreciated with State Street had 0:17:50.840 --> 0:17:59.359 a macro strategy. What we're doing here, away from buying 0:17:59.440 --> 0:18:02.800 markets should Annigan's is really looking at the tech juggernaut 0:18:03.240 --> 0:18:05.879 and how it folds over into the rest of the 0:18:05.960 --> 0:18:11.280 stock market. Katrina Dudley at Franklin was iconic and federated 0:18:11.320 --> 0:18:14.400 for her analysis of technology, and we're thrilled she could 0:18:14.440 --> 0:18:18.960 join us with Franklin Mutual's today. Katrina, I want to 0:18:19.000 --> 0:18:21.560 talk up to about something is basic c f A 0:18:21.720 --> 0:18:27.159 one of persistency a free cash flow? Do we massively 0:18:27.480 --> 0:18:32.040 misjudge the generation of cash and the use of it 0:18:32.119 --> 0:18:35.920 for shareholders? Um, If I take a look at free 0:18:35.920 --> 0:18:38.320 cash it's one of the key metrics that you have 0:18:38.680 --> 0:18:42.840 to look at at a company in terms of assessing 0:18:43.000 --> 0:18:47.440 the stability or assessing the stane ability of the competitive 0:18:47.440 --> 0:18:50.520 advantage what value investors. But we spend a lot of 0:18:50.560 --> 0:18:53.160 time looking at cash. We take it from the net 0:18:53.200 --> 0:18:55.320 income level and we look at what are all the 0:18:55.400 --> 0:19:00.600 people that need to get paid UM, the legacy restructuring charges. Yes. 0:19:00.680 --> 0:19:03.399 So there's so many things UM, and so many parts 0:19:03.440 --> 0:19:07.000 of that cash fold statement that people just completely ignore UM. 0:19:07.080 --> 0:19:09.640 So I think that people also very much get confused 0:19:09.640 --> 0:19:12.520 about a resilient net income number and they forget about 0:19:12.560 --> 0:19:15.000 looking whether or not that is a resilient free cash 0:19:16.080 --> 0:19:18.119 I love that you're going on Graham dot and cadl 0:19:18.359 --> 0:19:21.119 me Lisa. That's the iconic textbook out of Columbia from 0:19:21.160 --> 0:19:24.720 a million years ago. Katrine has read six volumes of it. 0:19:24.960 --> 0:19:28.160 Forget about it, move up the income statement and can 0:19:28.240 --> 0:19:33.879 you partition the tech juggernaut over the rest of American industry? 0:19:33.920 --> 0:19:38.240 Do we just simply underestimate in this great bullmarket the 0:19:38.320 --> 0:19:43.080 ability to make profit um. I think in a tech 0:19:43.119 --> 0:19:45.879 booll market, what people are now really focused on is 0:19:46.040 --> 0:19:49.320 the sustainability of that profit stream over a long period 0:19:49.359 --> 0:19:52.000 of time. And we're also focusing on the role that 0:19:52.080 --> 0:19:54.640 interest rates and inflation are going to play, because when 0:19:54.720 --> 0:19:57.280 you have such high multiples of earnings, which a number 0:19:57.280 --> 0:19:59.600 of these texts stops are trading on, or you have 0:19:59.680 --> 0:20:02.040 stocked that actually not even trading on earnings, they're trading 0:20:02.040 --> 0:20:05.800 at thirty types sales, your interest rates become something that's very, 0:20:05.920 --> 0:20:09.520 very sensitive because on a DCF valuation you're looking at 0:20:09.520 --> 0:20:14.080 those terminal values and rising rates and negative for terminal values. Well, Katrina, 0:20:14.280 --> 0:20:16.199 this really goes to the heart of the question of 0:20:16.240 --> 0:20:19.040 the US versus Europe, where there's a greater tech dominance 0:20:19.600 --> 0:20:23.440 excuse me, in the United States versus Europe, and there 0:20:23.480 --> 0:20:26.400 also is this feeling that there is a different, more 0:20:26.520 --> 0:20:31.080 stagflationary like kind of headwind facing Europe. Is the cash 0:20:31.119 --> 0:20:36.400 persistency of European companies different than that of the US. 0:20:36.440 --> 0:20:39.960 So the Europe doesn't have the same level of technology companies, 0:20:40.000 --> 0:20:42.680 but it does have a number of very strong companies there, 0:20:42.720 --> 0:20:45.680 from a cap Gemini to a software a g U 0:20:46.000 --> 0:20:48.200 s A P is another big juggernaut. I think you 0:20:48.320 --> 0:20:51.840 most companies can't function without an SAP supply chain solution. 0:20:52.280 --> 0:20:56.000 So I think that Europe does have a great constitution 0:20:56.040 --> 0:20:59.000 of technology companies, but it's not the dominant force or 0:20:59.040 --> 0:21:01.959 a dominant percent of their markets. What they do have 0:21:02.119 --> 0:21:05.320 is luxury stocks, which are the tech stocks of Europe. 0:21:05.320 --> 0:21:07.960 When you think of the Louis Baton's um, you know, 0:21:08.040 --> 0:21:11.160 Cartier and all of those very strong brands, and that 0:21:11.320 --> 0:21:15.360 is the technology equivalent in Europe UM. I would say, however, 0:21:15.440 --> 0:21:18.920 that those brands have got a lot longer longevity. They've 0:21:18.920 --> 0:21:23.000 been around for multiple new centuries often UM and so 0:21:23.080 --> 0:21:26.720 their ability to generate free cash flow has been tested 0:21:27.080 --> 0:21:31.040 time and time again. And the stability and those franchises 0:21:31.080 --> 0:21:33.960 I think is probably something that you as an investor 0:21:34.000 --> 0:21:36.640 can kind of put away and you kind of wake 0:21:36.680 --> 0:21:38.520 up in a hundred years and the stock will still 0:21:38.560 --> 0:21:42.639 be there. Our investors, global investors under estimating the power 0:21:42.880 --> 0:21:45.920 of a more devish ECP relative to the rest of 0:21:45.960 --> 0:21:50.040 the world when it comes to equity performance. So some 0:21:50.119 --> 0:21:52.200 of the the You've obviously had a lot of hawk 0:21:52.280 --> 0:21:54.320