WEBVTT - 5% Inflation for a Decade? 0:00:14.000 --> 0:00:17.439 Hello, and welcome to What Goes Up, a weekly markets podcast. 0:00:17.560 --> 0:00:19.720 My name is Mike Reagan. I'm a senior editor at 0:00:19.760 --> 0:00:23.440 Bloomberg DNA hawk Across as it reported with Bloomberg at 0:00:23.480 --> 0:00:26.160 this week on the show, Well, for the last few weeks, 0:00:26.160 --> 0:00:29.520 we've been focused on the train wreck in the crypto market, 0:00:29.720 --> 0:00:33.559 but there's been some pretty interesting developments in the traditional markets. 0:00:33.920 --> 0:00:36.839 The SMP five hundred is up almost thirteen pcent from 0:00:36.840 --> 0:00:40.400 its bear market low in October. Interest rates have stopped 0:00:40.400 --> 0:00:43.559 their alarming surge higher, and there seems to be some 0:00:43.640 --> 0:00:47.600 cautious optimism that the worst of the inflation shock, not 0:00:47.760 --> 0:00:50.360 to mention, the worst of the monetary policy tightening by 0:00:50.400 --> 0:00:54.600 the Federal Reserve, maybe behind us. But is that really 0:00:54.640 --> 0:00:57.400 the right take? Right now, we'll talk to a global 0:00:57.400 --> 0:01:00.880 macro strategist who isn't quite convinced that inflation will fall 0:01:00.920 --> 0:01:05.760 completely back to Earth anytime soon. But Volta, Before we 0:01:05.800 --> 0:01:07.840 get into that, I have to ask, have you seen 0:01:07.880 --> 0:01:11.920 the movie e T Of course? Of course, okay, you never, 0:01:12.000 --> 0:01:15.640 I never know, you know. As an eighties child, of 0:01:15.680 --> 0:01:18.240 course I had to see it. But so many eighties 0:01:18.240 --> 0:01:22.240 movies in retrospect are problematic now the whole John Hughes 0:01:23.360 --> 0:01:26.040 series of movies are have all been canceled, I think 0:01:26.080 --> 0:01:29.440 by by the problematic. I don't know that's what. That's what. 0:01:29.520 --> 0:01:31.920 I don't you know. We were dumb in the eighties. 0:01:31.959 --> 0:01:34.800 We didn't know how problematic some of those movies were. 0:01:34.840 --> 0:01:38.480 But I guess that's a little teaser for my craziest 0:01:38.480 --> 0:01:40.920 Thing in the Market segment. I will say. I'm also 0:01:41.000 --> 0:01:45.120 excited because this week's guest is a native French speaker, 0:01:45.200 --> 0:01:47.600 and I know you've been taking French lessons, so yes, 0:01:47.680 --> 0:01:49.720 but I'm so bad. Don't call me out, No, I 0:01:49.760 --> 0:01:52.240 want you to. You got to introduce them in my 0:01:52.320 --> 0:01:59.280 French is horrible. What's that mean? It's horrible? Obviously, Hello, 0:01:59.680 --> 0:02:04.160 Hi horrible. We have Vincent Tellut. I hope I did 0:02:04.160 --> 0:02:07.840 a really good job with that pronunciation. He's the director 0:02:07.880 --> 0:02:10.919 of Global micro Strategy at Stone ex Financial. Vincent, welcome 0:02:10.960 --> 0:02:13.760 back to the show. Letter to be back, but maybe 0:02:13.760 --> 0:02:15.799 just to start out. So you just had this this 0:02:15.880 --> 0:02:18.320 note doubt about the seven deadly sins within the market, 0:02:18.360 --> 0:02:21.280 and you focus on tech specifically, and I'm thinking that 0:02:21.320 --> 0:02:24.840 actually is a really good view into how you're viewing 0:02:24.919 --> 0:02:28.680 the market and everything that's been going on, especially with 0:02:28.880 --> 0:02:31.079 some of the froth and speculation that we've seen over 0:02:31.080 --> 0:02:33.440 the last year. So maybe could you just go over 0:02:33.600 --> 0:02:36.680 how you're seeing things right now. I think, you know, 0:02:36.760 --> 0:02:39.840 this really reminds me of of what happened um in 0:02:39.919 --> 0:02:44.160 the summer when we also had a slightly positive INFACI 0:02:44.160 --> 0:02:48.120 and surprise and you know, all the strategies that had 0:02:48.120 --> 0:02:52.120 issued the peak Inflacian note in January, February, March April 0:02:52.240 --> 0:02:55.720 manager got this one, uh and we had a same 0:02:55.800 --> 0:02:59.959 story monster rally, a little bit of mean stock friend 0:03:00.120 --> 0:03:03.560 z that was bad, bath and beyond back then, and 0:03:03.600 --> 0:03:06.200 then the view that all right, you know, just just 0:03:06.440 --> 0:03:08.519 a couple of more hikes and will be done, and 0:03:09.040 --> 0:03:11.840 inflation is gonna go away, and it's time to to 0:03:11.840 --> 0:03:18.960 to go back in the hyper growth highly valued unicorn 0:03:19.120 --> 0:03:23.280 that we're soaring in in in You know, again, we 0:03:23.280 --> 0:03:26.519 we've seen the movie before. The main difference between this 0:03:26.800 --> 0:03:30.800 rally and and this summers is I do believe the 0:03:30.840 --> 0:03:34.240 path of this inflation is more valid now. I mean, 0:03:34.280 --> 0:03:36.960 I was probably one of the earlier strategies to come 0:03:37.000 --> 0:03:38.960 out with the view that would have eight nine percent 0:03:38.960 --> 0:03:44.600 in fish in the US in two and even I 0:03:44.160 --> 0:03:48.640 I have to admit, yes, the economy is disinflating, inflashing 0:03:48.720 --> 0:03:52.560 is going to slow. Um Where I disagree with the 0:03:52.640 --> 0:03:54.600 markets view is that it's not going to slow back 0:03:54.640 --> 0:03:56.560 to I think that if you look at a one 0:03:56.600 --> 0:03:59.520 year swap, we're probably looking at two point nine by 0:03:59.560 --> 0:04:01.920 next year and then slowly going down to two percent 0:04:02.000 --> 0:04:04.040 after that. This is the part that I disagree with. 0:04:04.960 --> 0:04:08.280 I think we're going to look at a sustainably higher 0:04:08.320 --> 0:04:11.760 plateau of inflation around four point four or five percent. 0:04:11.920 --> 0:04:15.080 And I would actually argue that's a good thing. Uh, 0:04:15.080 --> 0:04:18.240 And that's something that the market is still not pricing. Um. 0:04:18.360 --> 0:04:21.000 So I do think that this will eventually end in tears, 0:04:21.520 --> 0:04:23.240 which is one of the reasons why I wrote this 0:04:23.320 --> 0:04:26.000 piece on on the seven. That is enough secon value 0:04:26.000 --> 0:04:28.440 to show that a lot of the behaviors that we 0:04:28.560 --> 0:04:32.520 had during double years are still there. If anything, they're 0:04:32.560 --> 0:04:37.599 even more prevalent because the business is deteriorating. So a 0:04:37.640 --> 0:04:41.160 lot of the kind of funny accounting being employees and 0:04:41.279 --> 0:04:46.560 start over hiring, buying, fake growth, we've ad all that 0:04:46.680 --> 0:04:49.560 is still happening. You know. Again, things never go in 0:04:49.600 --> 0:04:52.160 a straight line. And now it's it's kind of a 0:04:52.200 --> 0:04:55.880 time where the deflation work inflation worries of taking a 0:04:55.920 --> 0:05:00.279 step back, but I expect that they will eventually return. Yeah, 0:05:00.320 --> 0:05:03.520 I was reading that uh seven Deadly Sins note, Vincent, 0:05:03.640 --> 0:05:05.960 and let me just read out one line here because 0:05:06.000 --> 0:05:08.560 it really uh stuck with me. It's it's sort of 0:05:08.560 --> 0:05:10.360 towards the end of the note, kind of kind of 0:05:10.400 --> 0:05:13.040 where your conclusion is, and you say, the real Fed 0:05:13.080 --> 0:05:15.760 pivot will not be to cut rates in three, but 0:05:15.839 --> 0:05:20.480 to accept that a decade, a decade of five percent 0:05:20.560 --> 0:05:25.480 inflation is the least painful way to de leverage the economy, 0:05:25.640 --> 0:05:31.200 reduce inequalities, and restore sustainable growth, while a decade of 0:05:31.440 --> 0:05:34.080 five percent inflation or I guess to your point, you know, 0:05:34.440 --> 0:05:37.720 maybe four and a half five. How does that play 0:05:37.720 --> 0:05:42.800 out in the markets and with the Fed? You know, 0:05:43.320 --> 0:05:46.080 right now the Fed funds futures are are pricing at 0:05:46.080 --> 0:05:49.400 a terminal rate of right around five would this course 0:05:49.440 --> 0:05:53.280 the Fed even higher than that? And and what's really 0:05:53.360 --> 0:05:57.800 driving that five percent for a decade in inflation? You 0:05:57.800 --> 0:06:00.040 know what? What's what? Let's unpack this whole note a 0:06:00.120 --> 0:06:03.679 little bit so, and my view is that the true 0:06:03.720 --> 0:06:06.719 people of three will will not so be be so 0:06:06.839 --> 0:06:09.000 much the two or three rate cuts of the market 0:06:09.000 --> 0:06:11.200 currently has priced. So I do think we raised to 0:06:11.320 --> 0:06:14.560 five per cents, and the pace of it ultimately is irrelevant, right, 0:06:14.600 --> 0:06:17.920 I mean maybe the seventy you know bibs monster hikes 0:06:17.960 --> 0:06:22.000 are over right, So yeah, we can probably you know, 0:06:22.200 --> 0:06:24.680 afford to do a couple of fifty even twenty five. 0:06:25.279 --> 0:06:30.479 But then I think rates do not drop after you know, 0:06:30.520 --> 0:06:32.720 mid twenty three, like the futures market has it, because 0:06:32.760 --> 0:06:35.960 inflation doesn't redrop. And the reason inflation doesn't drop is 0:06:36.000 --> 0:06:38.880 because that by then inflation will be mostly about wages, 0:06:38.920 --> 0:06:42.600 and wages are I would expect will be around four 0:06:42.680 --> 0:06:46.000 or five percent by then, and I think we'll get 0:06:46.040 --> 0:06:49.440 to a point where the third will be in the 0:06:49.480 --> 0:06:52.560 position of George W. Bush after the invasion of Iraq. 0:06:53.640 --> 0:06:56.520 So you remember two thousand three, right, Well, we're going 0:06:56.640 --> 0:07:02.120 looking for w M. D Uh. We don't find them. Um, 0:07:02.200 --> 0:07:05.640 So the war is not going well, the occupation is 0:07:05.640 --> 0:07:09.080 not going well. So what do we do? We declare victory? Right, 0:07:09.520 --> 0:07:11.640 and we never talked about it after again, right, this 0:07:11.680 --> 0:07:15.400 is when you had George W. On the aircraft carry 0:07:15.120 --> 0:07:18.200 the big sign. Mission accomplished. Right. If I were J Power, 0:07:18.240 --> 0:07:20.880 I would do the exact same thing. I'd say, Hey, 0:07:21.000 --> 0:07:23.800 mission accomplished. Right. But by May I think we we'll 0:07:23.800 --> 0:07:26.520 get to maybe four or five percent inflation. We'll have 0:07:26.520 --> 0:07:28.360 four or five percent fat funds rate. So so he's 0:07:28.360 --> 0:07:31.560 done it. He's the volcan time. He's raised the fat 0:07:31.600 --> 0:07:34.040 funds rate above the you know, the rate of inflation. 0:07:34.080 --> 0:07:37.200 Mission accomplished. And then we should never talk again about 0:07:37.240 --> 0:07:40.680 what happened in one when the feed was buying you know, 0:07:41.280 --> 0:07:44.040 thirty five billion of mrtgage backed securities when we had 0:07:44.320 --> 0:07:46.960 the massive housing bubble. That that we can forget, just 0:07:47.000 --> 0:07:50.880 like we forgot about the UMD Dolph. Just get rid 0:07:50.920 --> 0:07:54.200 of that supercent target. Yes, now put that on on hold. 0:07:54.320 --> 0:07:56.080 That wouldn't be the worst thing in the world. And 0:07:56.320 --> 0:07:58.080 that's my point. I mean, if you look back at 0:07:58.120 --> 0:08:02.160 the history of the two percent target, it's it's amazed number. 0:08:02.440 --> 0:08:05.280 It came, I think from a press conference in New 0:08:05.360 --> 0:08:08.640 Zealand in the late eighties. They had a problem inflasion 0:08:08.720 --> 0:08:12.600 back then, and they had an economist on TV and 0:08:13.000 --> 0:08:15.360 you know, he was asked, what what what is I 0:08:15.440 --> 0:08:17.920 think inflation is good target? For inflation is two percent, 0:08:18.080 --> 0:08:19.840 why too, you know, not too high, not too low. 0:08:19.880 --> 0:08:22.760 I mean, there was no there's no scientific backing behind 0:08:22.760 --> 0:08:26.800 the two percent. If you look at the distribution of 0:08:27.080 --> 0:08:29.200 inflation and growth in the US, will actually notice that 0:08:29.240 --> 0:08:32.400 growth has been actually faster, Really economic growth has been faster. 0:08:32.520 --> 0:08:34.760 Inflation has been in the four to five percent range. 0:08:35.360 --> 0:08:37.480 And you can very much, very well make the case 0:08:37.559 --> 0:08:40.160 that what really hurts is when you have inflation at 0:08:40.200 --> 0:08:43.800 above ten percent or really unpredictable inflation, because this is 0:08:43.840 --> 0:08:47.800 when agents complan for the future, Investments don't get made, 0:08:47.880 --> 0:08:50.880 people wore stuff. But as long as you have stable, 0:08:51.080 --> 0:08:54.679 somewhat moderate inflation, whether it's two or four or five percent, 0:08:55.080 --> 0:08:56.880 doesn't really change things. And I think that's the way 0:08:57.000 --> 0:09:01.120 most Americans also feel like the most Americans don't don't 0:09:01.120 --> 0:09:02.840 even know what the FED does. They don't know about 0:09:02.840 --> 0:09:04.800 the two percent faction, and they just think of inflation 0:09:04.840 --> 0:09:07.559 as as whatever happened in the past, So that that's 0:09:07.559 --> 0:09:11.800 where the inflasion expectation channel comes in. So a decade 0:09:11.800 --> 0:09:13.600 of four or five percent in facition is is really 0:09:13.640 --> 0:09:16.080 not bad. I think we are in a period where 0:09:16.080 --> 0:09:20.240 we have a structurally tighter labor market, mostly because of demography, 0:09:20.360 --> 0:09:22.560 uh and also because we no longer have access to 0:09:23.080 --> 0:09:26.920 Mexican labor um. A lot of the great moderation of 0:09:26.960 --> 0:09:29.840 the past thirty years was with the product of free forces. 0:09:29.880 --> 0:09:32.640 On the labor side, you had about twelve million Mexicans 0:09:32.640 --> 0:09:35.959 that across the border between UM basically the under the 0:09:35.960 --> 0:09:39.559 tecular crisis n four and two thousand seven, and that 0:09:39.679 --> 0:09:42.000 this flow is stopped and even reversed since COVID, so 0:09:42.040 --> 0:09:44.640 we no longer have cheap labor. On the good side, 0:09:45.000 --> 0:09:47.720 it was a China shock, right, We had this massive 0:09:47.760 --> 0:09:53.520 evaluation on the RMB about at that the station crisis, 0:09:53.559 --> 0:09:56.600 the entry of China and t o them subsidizing all 0:09:56.600 --> 0:09:58.640 sorts of productions. So suddenly we have access to the 0:09:58.720 --> 0:10:02.280 supply Chaine courtesy of of Amazon and First World more 0:10:02.360 --> 0:10:05.880 than Amazon obviously. You know, if you follow what's been 0:10:05.880 --> 0:10:08.640 happening in China right now, this is maybe not why 0:10:08.679 --> 0:10:11.120 you want to supply chain and and this is not 0:10:11.200 --> 0:10:13.240 you know, if you just to get a demography of China, 0:10:13.640 --> 0:10:16.240 we'll have a massive crunch in the population of young 0:10:16.240 --> 0:10:18.360 workers in China because of the one child policy, So 0:10:19.000 --> 0:10:20.800 we don't have cheap goods from China. We don't have 0:10:20.920 --> 0:10:23.160 cheap labor from Mexico. And then the last the last 0:10:23.160 --> 0:10:26.040 part was cheap capital as the US of these massive 0:10:26.080 --> 0:10:28.480 deficits in the late nineties. But that meant is that 0:10:28.520 --> 0:10:30.120 you had all these countries that as a very large 0:10:30.120 --> 0:10:35.240 troopers Europe, Germany, Japan, uh and then Saudi Arabia, Commari, 0:10:35.280 --> 0:10:38.520 polus in countries, and these these services would flow back 0:10:38.559 --> 0:10:40.960 into the U S treasury market get a capital account 0:10:40.960 --> 0:10:43.680 because all these countries were trying to under undercat their 0:10:43.760 --> 0:10:46.520 currencies so that they could get more exports. So for 0:10:46.559 --> 0:10:48.880 the U S it worked great, right because we basically 0:10:49.040 --> 0:10:51.640 send people treasuries, send them treasuries, and then we got 0:10:51.640 --> 0:10:53.160 goods from them. So it was it was it was 0:10:53.200 --> 0:10:57.360 fantastic that channel is also clogged now Japan and Germany 0:10:57.360 --> 0:11:02.400 in Afroanic count deficits, China actually selling treasuries. So the 0:11:02.440 --> 0:11:05.199 three factors that boosted univation low. And then maybe it's 0:11:05.240 --> 0:11:07.520 so easy for us to achieve that two percent inflation 0:11:07.600 --> 0:11:11.160 are gone cheap labor, cheap good, cheap capital, so it 0:11:11.160 --> 0:11:13.640 would be a lot harder to get down to two percent. 0:11:13.679 --> 0:11:15.719 I mean, I'm sure we could like if if if 0:11:15.760 --> 0:11:17.760 Power wanted to be Vulcan and he gets the fat 0:11:17.760 --> 0:11:21.079 funds right percent, we get to two percent. You know, why, 0:11:21.240 --> 0:11:23.600 why would you want to destroy the labor market when 0:11:23.640 --> 0:11:26.760 we are seeing the gap for minority wages actually closing, 0:11:26.840 --> 0:11:29.560 We're seeing young people do better. Finally, we are seeing 0:11:29.600 --> 0:11:31.880 asset prices go down, which is a good thing. You 0:11:32.000 --> 0:11:34.640 want people to be able to buy homes. You are 0:11:34.640 --> 0:11:36.960 seeing the real value of the dead being wiped out. 0:11:37.040 --> 0:11:40.200 I mean inflation, if it doesn't go above seven eight 0:11:40.240 --> 0:11:43.599 percent is actually the medicine that we need. And we 0:11:43.679 --> 0:11:45.920 need to let that run out for a couple of 0:11:46.040 --> 0:11:47.800 years and will be in a much better place. And 0:11:47.880 --> 0:11:49.240 by the way, it's not just me saying that there 0:11:49.320 --> 0:11:51.560 was a very good outped I think in the ft 0:11:51.920 --> 0:11:53.959 about the same thing. So I think you'll see a 0:11:54.040 --> 0:11:57.360 lot more of that next year as central bankers realized 0:11:57.400 --> 0:11:59.600 that the cost of going back to back to two 0:12:00.160 --> 0:12:11.079 greatly exceed the scenario. To me sounds though like a 0:12:11.320 --> 0:12:16.520 nightmare for profit margins and US corporate profits EPs for 0:12:16.600 --> 0:12:20.080 the span is that is that the sort of bottom 0:12:20.120 --> 0:12:23.079 line conclusion from from that type of outcome. I think 0:12:23.120 --> 0:12:26.080 for now we are steal in the first order concept 0:12:26.120 --> 0:12:29.000 once of infaction when in facial invades everything, including profits, 0:12:29.080 --> 0:12:31.480 Like there's the money illusion in in terms of Kanes, 0:12:31.520 --> 0:12:35.600 everybody thinks they're getting richer. Uh And and and also 0:12:35.640 --> 0:12:38.480 because of how accounting works with with inventories, like if 0:12:38.520 --> 0:12:42.280 you if you value inventory at the lower pre infaction costs, 0:12:42.320 --> 0:12:44.880 which actually shows very very high profits. So I think 0:12:44.920 --> 0:12:46.800 that's one of the reasons why we saw profit margin 0:12:46.880 --> 0:12:51.080 spike in But as some passes, You're absolutely right, I mean, 0:12:51.360 --> 0:12:53.079 the cost of everything goes up, right, Your cost of 0:12:53.200 --> 0:12:55.120 energy goes up, the cost of labor is going up. 0:12:55.440 --> 0:12:58.319 Wages are not slowing. Maybe they're hitting a plateau, but 0:12:58.360 --> 0:13:01.240 there's something not slowing in service is and then you 0:13:01.320 --> 0:13:03.320 supply chains getting a lot more complex. If you can 0:13:03.440 --> 0:13:06.120 produce in China, you cannot do the just in time anymore. So, yes, 0:13:06.280 --> 0:13:09.400 margins would need to come down, but I mean, unless 0:13:09.440 --> 0:13:12.480 you're an owner, I would argue that's a good thing. 0:13:12.559 --> 0:13:14.040 I mean, one of the issue we had for four 0:13:14.160 --> 0:13:17.800 years is this steady expansion of margins um at the 0:13:17.880 --> 0:13:21.360 expense of labor. Uh and that contributed to the concentration 0:13:21.440 --> 0:13:25.280 of wealth one percent. Inequality issues and I think that 0:13:25.400 --> 0:13:27.880 the pendulum is finally swinging the other way in terms 0:13:27.920 --> 0:13:32.160 of sharing the you know, the value added by by 0:13:32.160 --> 0:13:35.920 the economy was being captured by a handful of monopolies 0:13:35.960 --> 0:13:38.679 and and and and their capital owners. And now the 0:13:38.800 --> 0:13:43.440 dependulm sushing back and power is swishing back towards towards labor. 0:13:43.520 --> 0:13:45.360 And I would argue that's a healthy thing after four 0:13:45.480 --> 0:13:48.160 years of concentration. I like your caveat there, unless you're 0:13:48.160 --> 0:13:51.839 an owner of stock, which might be one or two 0:13:51.920 --> 0:13:56.080 listeners out there, I hope more than two three, very 0:13:56.120 --> 0:13:59.559 hopefully vincent. I'm wondering how likely it would be for 0:14:00.240 --> 0:14:01.880 for the FED to give up on its two percent 0:14:02.920 --> 0:14:08.040 inflation target, because with that not absolutely destroy their credibility. Well, 0:14:08.800 --> 0:14:10.599 that's why they would have to be smart about it, 0:14:11.400 --> 0:14:14.120 and I think they can. There are many ways you 0:14:14.240 --> 0:14:19.480 can do it quietly without actually acknowledging. And I do 0:14:19.600 --> 0:14:23.360 agree that, you know, my whole plan only works if 0:14:24.040 --> 0:14:27.480 people believe the two percent target is still a reality, right, 0:14:27.480 --> 0:14:30.680 because what are we talking about, funny, is ultimately fincial repression. Right, 0:14:31.000 --> 0:14:35.200 So you need to convince bond holder to keep buying 0:14:35.240 --> 0:14:37.640 bonds and are at low yield and then you constantly 0:14:37.720 --> 0:14:41.520 kind of stealthily defaulting on them, but by this highly inflation. 0:14:41.600 --> 0:14:44.640 So you I don't think you know, J. Powell is 0:14:44.640 --> 0:14:47.160 going to come out and say, you know, guys, you 0:14:47.240 --> 0:14:49.840 know five years on YouTube, but there are many ways 0:14:49.880 --> 0:14:52.320 you can do it. One days is one way you 0:14:52.360 --> 0:14:55.600 could do it is called hedonic adjustment. So hedonic adjustment 0:14:55.840 --> 0:14:58.920 is something that the FEDS has developed over time to 0:14:59.000 --> 0:15:01.800 address for the fact houses get bigger, cars get better, 0:15:01.960 --> 0:15:05.400 TVs get smaller and larger story uh and and that 0:15:05.480 --> 0:15:08.320 the quality of the product increases. So they only apply 0:15:08.480 --> 0:15:10.680 that to I think about six percent on the index 0:15:10.880 --> 0:15:13.840 right now. And it's it's um it has a very 0:15:13.880 --> 0:15:18.080 strong deflational impact, right because the two thousand, for example, 0:15:18.160 --> 0:15:20.040 the phone. You know, the price of an iPhone is 0:15:20.200 --> 0:15:22.480 you know, a thousand, one thousand bucks now, but if 0:15:22.520 --> 0:15:24.760 you look in the CPI you see it come downtown 0:15:24.840 --> 0:15:28.120 down because the fat is I think correctly saying well, 0:15:28.360 --> 0:15:33.240 an iPhone is incomparably better than the the old Nokia 0:15:33.320 --> 0:15:37.320 that I'm sure Michael still uses. That's such a good 0:15:37.400 --> 0:15:41.360 dig I did have one of them. Yes, he doesn't 0:15:41.360 --> 0:15:42.880 know how to open it though he doesn't know how 0:15:42.920 --> 0:15:45.840 to plup it open. So yeah, so the so the 0:15:45.920 --> 0:15:49.440 fat has been hedonically adjusted at certain time series and 0:15:49.680 --> 0:15:54.960 others not for example, Men's out where his head on 0:15:55.000 --> 0:15:58.360 the clear justice, but our underwear is not so And 0:15:58.640 --> 0:16:02.000 I could go on with the list. Cars are hedonically adjusted, 0:16:02.040 --> 0:16:05.920 meaning when cars do get better, the price in the 0:16:06.000 --> 0:16:10.080 CPI is adjusted down, but motorcycle or not. So you 0:16:10.160 --> 0:16:11.600 have a lot of leeway. And this is like a 0:16:11.760 --> 0:16:14.120 really tiny technical thing, like you don't even need to 0:16:14.160 --> 0:16:16.400 issue a press release that you know that they could 0:16:16.480 --> 0:16:18.320 just do that that the b RS could just do 0:16:18.440 --> 0:16:21.320 that overnight, no one would notice. Uh. Another way, you 0:16:21.400 --> 0:16:24.880 could kind of adjust the index in the infasionary way, sorry, 0:16:24.880 --> 0:16:27.160 in a defasionary way, so that you actually tolerate a 0:16:27.240 --> 0:16:29.760 higher level of infation while still showing that you're technically 0:16:29.800 --> 0:16:32.400 meeting the two percent target. Would be on the rents 0:16:32.720 --> 0:16:34.920 um and the onn recurrent rents. So there's this huge 0:16:35.000 --> 0:16:37.280 debate right now about you know the way the FED 0:16:37.480 --> 0:16:41.000 computes rent and especially oh e R so shelter as 0:16:41.000 --> 0:16:43.320 a whole is about thirty percent the CPI. You have 0:16:43.360 --> 0:16:48.160 seven percent in ran on rent. These are horrible statistical 0:16:48.520 --> 0:16:53.480 monsters that the BRS computes and really and it's lagging 0:16:53.520 --> 0:16:55.640 a lot, right that that's that's what people are complaining about, 0:16:55.680 --> 0:16:57.320 is that the FED is driving in the review mirror 0:16:57.400 --> 0:16:59.880 that the real estate market is already turning, has already turned. 0:17:00.040 --> 0:17:02.720 We can see those data. But because of the way 0:17:02.760 --> 0:17:06.520 it's computing, the BS compute renting faction, that's going to 0:17:06.640 --> 0:17:08.960 keep increasing for the next twelve months. Well, maybe they 0:17:08.960 --> 0:17:11.320 could revise that, say, you know what, we just wanted 0:17:11.359 --> 0:17:13.600 to make it better closer to reality. And what that 0:17:13.640 --> 0:17:15.520 would do is that it would are you know, it 0:17:15.520 --> 0:17:18.040 wouldn't change the reality, but it would make that what 0:17:18.160 --> 0:17:21.840 would have been five pre cientifation becomes stuporcentifaction and being metric. 0:17:22.200 --> 0:17:25.480 I'd love to hear the rationale for the underwear not 0:17:25.600 --> 0:17:29.000 being adjusted. Just there's just no innovation in underwear underwear anymore. 0:17:29.000 --> 0:17:32.440 I guess maybe maybe that's it. But but but so, 0:17:33.320 --> 0:17:36.040 how does one position their investments for this type of 0:17:36.200 --> 0:17:40.160 environment you're describing, Uh, you know, it sounds like maybe 0:17:40.200 --> 0:17:43.280 take advantage of real yields if if you get if 0:17:43.320 --> 0:17:45.720 you're able to get some to boil it down in 0:17:45.760 --> 0:17:48.240 the equity market, Is it as simple as a growth 0:17:48.400 --> 0:17:51.800 versus value trade to stick with, stick with value over growth, 0:17:51.880 --> 0:17:54.840 that sort of thing. You're generally correct, Um, you know, 0:17:55.000 --> 0:17:58.200 short duration. If my scenari is correct, I would expect 0:17:58.240 --> 0:18:01.480 the yield care to steep and quite aggressively next year. Yeah. 0:18:01.600 --> 0:18:03.040 I find some of the short term rates to be 0:18:03.119 --> 0:18:05.360 quite attractive. I mean, we now have positive rear rates 0:18:05.400 --> 0:18:08.080 in the US for the first time, tips rates, you know, 0:18:08.200 --> 0:18:10.520 one five one point six percent time. I actually, if 0:18:10.800 --> 0:18:12.919 you really want to get crazy with tips going Brazil, 0:18:13.000 --> 0:18:15.840 they're like six to seven percent inflation adjusted yield on 0:18:16.000 --> 0:18:18.720 on on short term Brazilian bonds. In terms of equities, 0:18:19.000 --> 0:18:22.120 the portfolio that I've been recommending is what I call 0:18:22.160 --> 0:18:26.320 the Holy Trinity uh and it's three equity sectors with 0:18:26.680 --> 0:18:31.560 very simpol ty of to trade, Energy, healthcare, financials. That 0:18:31.760 --> 0:18:35.320 portfolio just equally spit one third one third, one third 0:18:35.840 --> 0:18:38.239 is up sixteen percent for the year. Your sixty four 0:18:38.400 --> 0:18:41.960 portfolio is down sev I would stick with that, you know, 0:18:42.119 --> 0:18:44.800 because with what I love about that Holy Trinity re 0:18:44.880 --> 0:18:47.760 portfolio is that it hedges against the free macro ris 0:18:47.840 --> 0:18:50.760 that we're facing. One, of course, is still inflation. In 0:18:50.800 --> 0:18:53.520 my opinion. You need your energy there. Energy is kind 0:18:53.520 --> 0:18:55.480 of your dark horse, you know scenario or I go 0:18:55.600 --> 0:18:57.680 if we have something that happening in Russia or trying 0:18:57.680 --> 0:19:00.399 to reopening Song suddenly whatever your cities. Energy a weapon. 0:19:00.880 --> 0:19:03.840 That's how it works. In energy was your risk off asset. 0:19:04.280 --> 0:19:09.520 So energy helges against inflation. Healthcare hedgies against recessionary risk. 0:19:10.119 --> 0:19:13.480 Healthcare is actually the most defensive sector, performs best in recession, 0:19:13.640 --> 0:19:16.480 better than utilities, especially now that you know the problem 0:19:16.560 --> 0:19:18.720 is that with a recession with higher rates, right, so, 0:19:18.800 --> 0:19:21.359 you don't want to go in your utilities or consumer stable. 0:19:21.680 --> 0:19:23.280 You want to go in a sector that actually has 0:19:23.320 --> 0:19:26.080 some potential for secular growth in addition to being defensive, 0:19:26.080 --> 0:19:28.240 which is what health care is. Uh. And then the 0:19:28.359 --> 0:19:32.600 third pillar of my holy Trinity portfolio is financials, which 0:19:32.680 --> 0:19:36.360 which I'm very excited going into Tree. If my scenario 0:19:36.520 --> 0:19:38.919 is correct. Um, so I will see is your curule 0:19:38.960 --> 0:19:42.240 step and and that's very good for banks. You'll have 0:19:42.640 --> 0:19:44.879 you know, you have about one point five tree and 0:19:44.880 --> 0:19:47.440 in reserves access reserve right now. I mean they're just 0:19:47.520 --> 0:19:49.800 gonna sit just sitting at the FED. They're gonna connect 0:19:50.160 --> 0:19:53.640 five recent from from zero. So that's about like cant 0:19:53.640 --> 0:19:56.080 readio the math. I think that's about only fifty billion subsidiy, 0:19:56.200 --> 0:19:59.480 just increasing pure profit, just for for the banks to 0:19:59.640 --> 0:20:02.679 have excess cause of the FED. Uh. And then if 0:20:02.720 --> 0:20:06.000 I'm correct that the economy is actually doing quite well, 0:20:06.160 --> 0:20:08.840 you know, like the labor market is very resilient, wedges 0:20:08.880 --> 0:20:11.960 are still growing, people are not going to default. Um, 0:20:12.160 --> 0:20:14.359 So I think the market is somewhat expricing a bit 0:20:14.440 --> 0:20:16.879 of a repeat of two thousand eight. Oh, like you know, 0:20:16.960 --> 0:20:19.320 create card bounces are going up, the you know, the 0:20:19.400 --> 0:20:22.280 housing market is including. I do not believe these things 0:20:22.280 --> 0:20:24.879 are going to happen in twenty twenty three. And as 0:20:24.920 --> 0:20:27.680 a result, think banks are going to be the leader 0:20:27.760 --> 0:20:30.680 in my holy trenity portfolio in twenty three. How about 0:20:30.760 --> 0:20:33.399 the US versus rest of the world inequities? You know, 0:20:33.520 --> 0:20:37.960 it's uh some outperformance. Uh you know global x US 0:20:38.640 --> 0:20:40.439 type of the next is these days? Is that? Uh? 0:20:41.040 --> 0:20:46.479 Is that going to continue? I think when the market 0:20:46.560 --> 0:20:53.320 starts to understand that the FED will people on inflation, um, 0:20:54.119 --> 0:20:56.639 that trend of our performance of the US will stop. 0:20:57.560 --> 0:20:59.840 It will be back to kind of the reflation trade 0:21:00.160 --> 0:21:02.760 like what we saw in two thousand three. Two thousand 0:21:02.920 --> 0:21:08.120 seven week dollar. So you want to be long emerging market, 0:21:08.119 --> 0:21:10.920 I would say emerging markets outside of China, which I've 0:21:10.960 --> 0:21:12.880 already done very well. By the way, that the one 0:21:12.920 --> 0:21:16.440 issue with with you know, global investing is is Europe. 0:21:16.600 --> 0:21:21.720 So okay, forget about Europe, forget about Japard, forget about China. 0:21:21.960 --> 0:21:24.840 Now the problem is this is really the big pieces 0:21:24.960 --> 0:21:27.720 of Europe. You know, if you look at the MSCI index, 0:21:27.800 --> 0:21:30.720 these are the three big pieces. But once you've dropped, 0:21:30.760 --> 0:21:34.439 the things that have gone down your left were actually 0:21:34.520 --> 0:21:37.680 pretty good stuff. So I call that the bim chip. 0:21:38.880 --> 0:21:45.600