WEBVTT - Surveillance: Supply Chains Dominate Earnings 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene, along 0:00:09.240 --> 0:00:13.080 with Jonathan Ferrell and Lisa Brownwitz jay Leie. We bring 0:00:13.119 --> 0:00:17.159 you insight from the best and economics, finance, investment and 0:00:17.280 --> 0:00:23.280 international relations. Find Bloomberg Surveillance and Apple Podcast SoundCloud, Bloomberg 0:00:23.360 --> 0:00:30.640 dot Com, and of course, on the Bloomberg Terminal. Jonathan 0:00:30.640 --> 0:00:33.880 golber joining US now chief equity strategist at Credit Sweets. 0:00:33.920 --> 0:00:35.959 I remember the morning at some point in the summer time, 0:00:36.000 --> 0:00:38.319 I've taken the morning golf and the note dropped from 0:00:38.440 --> 0:00:41.360 Jonathan Gollobert. Credit Swiss had a year end out look 0:00:41.440 --> 0:00:44.040 for next year of five thousand and Jonathan. Many people 0:00:44.120 --> 0:00:46.280 just strugged and said, Jonathan gol Up, here we go again. 0:00:46.320 --> 0:00:48.760 He's too bullish. He's too bullish, And here we are 0:00:48.760 --> 0:00:50.800 at all time highs. John, why do you think we 0:00:50.840 --> 0:00:55.480 can get to five K from where we are just north? Well, 0:00:55.640 --> 0:00:58.000 I think there's a couple of stories here. The first 0:00:58.080 --> 0:01:02.560 one is that earnings benefit from these shortages. And I 0:01:02.600 --> 0:01:06.240 know that that sounds really bizarre, but they're getting tons 0:01:06.319 --> 0:01:09.920 of pricing power and um, and that's gonna mean that 0:01:09.959 --> 0:01:12.200 the earnings are gonna are gonna be driving this. If 0:01:12.200 --> 0:01:14.600 you look at the last twelve months, the price of 0:01:14.680 --> 0:01:17.120 the stock market is up less than the than the 0:01:17.200 --> 0:01:21.800 earnings have improved, and stock multiples are actually down over 0:01:21.840 --> 0:01:24.440 the last year. So that's the number one reason. The 0:01:24.480 --> 0:01:27.120 second thing which people missed is that, and you guys 0:01:27.120 --> 0:01:30.160 are talking about it a second ago. Rising interest rates 0:01:30.280 --> 0:01:33.800 is a sign of confidence in the economy, not a 0:01:33.880 --> 0:01:36.720 problem for stocks, and that's been the story over the 0:01:36.800 --> 0:01:39.920 last month's interest rates in Brisen, Jonathan, you've absolutely now 0:01:40.000 --> 0:01:42.920 that your earnings sustained call has been great. You've got 0:01:42.959 --> 0:01:45.920 some great statistics there on how earnings have come in 0:01:46.000 --> 0:01:48.640 far better than what the gloom was. By the cell side, 0:01:49.040 --> 0:01:52.240 you're as strong as your analysts. Let's take Matthew Cabral 0:01:52.360 --> 0:01:55.560 is just one example. What does Matthew Cabral on Apple 0:01:55.760 --> 0:01:59.120 or on tech and your other forty seven analysts, what 0:01:59.200 --> 0:02:02.280 are they whispering? Do you right now? Oh? You know, 0:02:02.280 --> 0:02:06.480 I hate to talk about individuals, get them broad you know, 0:02:06.720 --> 0:02:10.080 individual stucks. But you know we're we're seeing um in 0:02:10.160 --> 0:02:13.760 many ways. What the companies are telling us is that 0:02:13.960 --> 0:02:17.200 they're saying that things are pessimistic about their ability to 0:02:17.280 --> 0:02:20.360 meet demand. And they they're they're pessimistic on you know, 0:02:20.520 --> 0:02:24.560 margin cost pressures, and then the numbers come in and 0:02:24.560 --> 0:02:27.919 and the buzz that we're hearing from companies is more 0:02:28.040 --> 0:02:30.880 negative than the results that they're delivering, and we're seeing 0:02:31.440 --> 0:02:34.000 we're seeing that across the border. One of the things 0:02:34.000 --> 0:02:36.800 I'm saying to the analystis, I know management is telling 0:02:36.800 --> 0:02:40.000 you that there's gonna be this cost ways, don't believe them. 0:02:40.040 --> 0:02:42.920 It's gonna come in better. There's there's more pricing power 0:02:43.000 --> 0:02:47.600 than they're willing to tell you in their pre announcements. Jonathan, 0:02:47.639 --> 0:02:49.440 I'm looking at the e ago function on the Bloomberg 0:02:49.440 --> 0:02:51.760 which tells you basically how earning season is stacking up 0:02:51.800 --> 0:02:54.160 so far. And you're right, the earning surprises and average 0:02:54.160 --> 0:02:57.680 of on the top line, though the average sales surprise 0:02:57.800 --> 0:03:00.799 is only about two percent. So is that just because 0:03:01.040 --> 0:03:03.640 the bar was higher on the revenue side, or is 0:03:03.680 --> 0:03:06.359 that because of some of these supply and demand issues 0:03:06.600 --> 0:03:08.680 and you actually are seeing companies not being able to 0:03:08.720 --> 0:03:10.840 pull in quite as much revenue because they don't have 0:03:10.840 --> 0:03:14.120 adequate supply. Well, well, first of all, it's two stories here. 0:03:14.160 --> 0:03:17.639 The first one is is that you always have um 0:03:17.760 --> 0:03:20.440 really small revenue beats and really big margin meats. I 0:03:20.480 --> 0:03:24.320 mean that's um atalyas UM have much more clarity on 0:03:24.360 --> 0:03:27.720 the revenue line. So that's not that that's not a typical. 0:03:28.120 --> 0:03:30.880 But the story the earning season is that everyone thought 0:03:30.880 --> 0:03:33.160 that we were gonna get cost ways and what we're 0:03:33.160 --> 0:03:37.320 actually getting is uh is demand disappointment. And you you 0:03:37.320 --> 0:03:38.960 you know, you know. I don't want to comment on 0:03:39.000 --> 0:03:42.160 an individual company, but um I was out with a 0:03:42.200 --> 0:03:45.720 bunch of chief investment officers across different firms a few 0:03:45.800 --> 0:03:48.480 nights ago, and people were saying that they thought that 0:03:48.520 --> 0:03:51.400 ad spending was gonna be a problem. Why if you 0:03:51.440 --> 0:03:54.280 can't meet demand, why would you advertise just cut your 0:03:54.320 --> 0:03:57.520 head spending, And especially in area like autos, which is 0:03:57.600 --> 0:04:00.720 so important for the ad market, why would you advertise 0:04:00.760 --> 0:04:03.560 a car that you can't deliver? So this is a 0:04:03.560 --> 0:04:05.800 big issue. When we're seeing it lots of places. I'll 0:04:05.800 --> 0:04:07.720 tell you where we're not seeing it. We're not seeing 0:04:07.720 --> 0:04:11.080 in banks. UM banks are showing up with you know, 0:04:11.320 --> 0:04:14.280 really levitating separate from everything else. And let me just 0:04:14.320 --> 0:04:16.920 make one more in one comment there, if you split 0:04:16.960 --> 0:04:19.400 the market in half, which is, how are the bank's 0:04:19.440 --> 0:04:22.239 doing and how is everything else doing? It doesn't look 0:04:22.240 --> 0:04:25.000 as good as we're talking about. The market is beating 0:04:25.000 --> 0:04:28.960 by about seven percent the bank it exclu the banks um, 0:04:29.040 --> 0:04:31.120 and it's about you know, eleven or twelve percent with 0:04:31.720 --> 0:04:33.839 so there is a bit of a bifurcation on winners 0:04:33.839 --> 0:04:36.719 and losers, Joel, before you go. Sometimes its strategist job 0:04:37.120 --> 0:04:39.679 is to walk with therapy to how people stay invested 0:04:39.720 --> 0:04:42.480 in sleep well at night, do some therapy right now, 0:04:42.520 --> 0:04:44.719 what's the one reason people should stay invested in this 0:04:44.880 --> 0:04:49.400 market through all the next year and beyond? Um? You know, I, 0:04:49.920 --> 0:04:52.880 you know, I actually John I and my my therapy 0:04:52.920 --> 0:04:56.520 is a little bit different. Um, I'm seeing a Listen, 0:04:56.520 --> 0:04:58.480 I'm a bullish you know, I'm bullish about the market 0:04:58.480 --> 0:05:01.919 and optimistic in general. But I'm seeing almost complacency. What 0:05:02.000 --> 0:05:06.080 people just saying is just ignore the ignore any bad news. 0:05:06.120 --> 0:05:08.840 Just by the depths. The feed is backing this. Everything 0:05:08.920 --> 0:05:12.039 is gonna be okay, and there are things to be 0:05:12.160 --> 0:05:15.680 concerned about, to worry about. And in many ways I'm 0:05:15.720 --> 0:05:19.160 saying to the bullish guys, um, listen, I I agree 0:05:19.200 --> 0:05:21.040 with you, but there are you know, we didn't roll 0:05:21.080 --> 0:05:24.040 off of a ton of stimulus here. We don't have 0:05:24.080 --> 0:05:27.400 clarity on what tax policy is. You know, oil prices 0:05:27.480 --> 0:05:31.040 can be disruptive. Just check to make sure that your 0:05:31.080 --> 0:05:33.599 bullishit and this is warranted. I think it is, but 0:05:33.800 --> 0:05:35.960 just you know, go and double check. The bullishness is 0:05:36.000 --> 0:05:37.520 just very strong. I'll give you a cool when I 0:05:37.520 --> 0:05:40.200 struggle to sleep later, John. Thank you, Jonathan Gullup that 0:05:40.760 --> 0:05:49.080 sas on the secondy market. The market was in line 0:05:49.120 --> 0:05:52.360 with this idea that QUEI was separate from higher interest rates. 0:05:53.040 --> 0:05:55.080 You can't say that anymore, Tom, in the same way. 0:05:55.120 --> 0:05:57.600 That's changed in the last couple of months. Let's drive 0:05:57.640 --> 0:06:00.760 this conversation forward, and we do it with someone really interesting. 0:06:00.880 --> 0:06:04.440 She is a claim for hyper hyper detailed notes and 0:06:04.560 --> 0:06:08.840 high frequency economics, taking all the wonderful granularity of her 0:06:08.880 --> 0:06:12.279 Stone and McCarthy hears or throughout Rubila for Rookie could 0:06:12.480 --> 0:06:15.960 be with us today, working always with Carl Wineber RUBYLA, 0:06:16.040 --> 0:06:18.240 what is in the details right now? If I look 0:06:18.240 --> 0:06:21.839 at your high frequency economics domestic note, which is the 0:06:22.000 --> 0:06:26.200 item that has your greatest attention? Well, good morning, thank 0:06:26.240 --> 0:06:28.520 you for having me. Uh you know, what we're looking 0:06:28.560 --> 0:06:33.120 at is how the consumer responding to high inflation pressures 0:06:33.120 --> 0:06:35.839 and what the underline trend and inflation is. And I 0:06:35.880 --> 0:06:39.279 think this whole debate around great heights and how the 0:06:39.320 --> 0:06:41.920 central Bank is going to respond is centered around these 0:06:42.200 --> 0:06:45.920 inflation high inflation readings that are lasting longer than expected 0:06:46.120 --> 0:06:50.560 and also rising inflation expectations. So I do think that 0:06:50.600 --> 0:06:53.480 what is being priced in right now is a little aggressive, 0:06:53.760 --> 0:06:55.799 and I do think that this sets up the path 0:06:55.960 --> 0:07:00.480 that UH as we see inflation moderate over the course 0:07:00.480 --> 0:07:03.800 of twenty two, that these expectations are going to reset 0:07:04.240 --> 0:07:07.840 and that's going to have implications for the yield, especially 0:07:07.920 --> 0:07:11.280 the short end. You're as good as your data can 0:07:11.360 --> 0:07:15.480 you get good made and data. Now, with the dislocations, 0:07:15.520 --> 0:07:18.760 say in the automobile business, or the dislocations at the 0:07:18.800 --> 0:07:21.720 ports on the West coast, how good is the goodness 0:07:21.720 --> 0:07:26.240 of the data you and Carl Weinberg have. It is 0:07:26.280 --> 0:07:29.520 definitely challenging right now to figure out what the underlying 0:07:29.560 --> 0:07:32.600 trends are in consumer spending or let's say, business investment, 0:07:32.680 --> 0:07:35.040 given the dislocations we're seeing on the supply side of 0:07:35.080 --> 0:07:38.520 the economy. But what we do expect is that these 0:07:38.760 --> 0:07:42.120 disruptions are going to eventually pan out and what we 0:07:42.200 --> 0:07:46.000 see beyond that is a slower pace where the impetus 0:07:46.120 --> 0:07:49.040 from for demand, which is you know, is being built 0:07:49.080 --> 0:07:53.600 into expectations of inflation resting wronger longer that is not there. 0:07:53.680 --> 0:07:56.240 You're not going to see the sugar high or fiscal 0:07:56.280 --> 0:08:02.160 posture and enhanced unemployment benefits. So as supply dynamics readjust, 0:08:02.640 --> 0:08:05.680 we do think that the demand side of this equation 0:08:05.800 --> 0:08:08.920 is also going to be tempered, and that's why we 0:08:08.960 --> 0:08:11.560 think we're going to move into a lower inflation and 0:08:11.600 --> 0:08:14.600 lower growth sort of environment. Repeat, Can you put some 0:08:14.680 --> 0:08:16.600 numbers on that for next year? Just going through the 0:08:16.600 --> 0:08:18.720 e c f C function on the Bloomberg for where 0:08:19.040 --> 0:08:21.480 the major is right now, the survey that we conduct 0:08:21.520 --> 0:08:24.800 for economists going forward twenty two real GDP at about 0:08:24.840 --> 0:08:27.800 four percent, c p I three point three percent for 0:08:27.880 --> 0:08:30.280 twenty two. For next year four and three, what are 0:08:30.280 --> 0:08:33.120 you looking for if you look at our forecasts and 0:08:33.160 --> 0:08:35.480 we are sub three percent on a que for Q 0:08:35.679 --> 0:08:37.840 four basis, you know, closer to three and a half 0:08:37.840 --> 0:08:42.000 percent on a calendar average basis, and on CPI inflation, 0:08:42.080 --> 0:08:44.800 we are still seeing higher readings and that is a 0:08:44.800 --> 0:08:47.520 function of you know, how we expect the goods and 0:08:47.559 --> 0:08:50.920 service sector. How that adjustment is going to happen, especially 0:08:50.960 --> 0:08:54.839 as you see normalization of the service sector o E 0:08:55.080 --> 0:08:57.440 ER that is a large component. So I do think 0:08:57.440 --> 0:08:59.480 that we're going to see a lift from that and 0:08:59.520 --> 0:09:02.320 the goods side. There's so much uncertainty from the supply 0:09:02.400 --> 0:09:05.120 chain side that you know, it's it's really difficult to 0:09:05.280 --> 0:09:08.600 time how or when that is going to happen. But 0:09:08.720 --> 0:09:11.280 we do expect to see elevated readings. But by the 0:09:11.280 --> 0:09:13.320 second half of the year, growth is going to be 0:09:13.760 --> 0:09:16.560 in our assessment closer to two and a half percent, 0:09:16.880 --> 0:09:20.439 and inflation readings are also going to ease quite substantially, 0:09:20.559 --> 0:09:24.199 closer to two So reveal on on those supply chain problems. 0:09:24.320 --> 0:09:29.040 That's not something that monetary policymakers are easily equipped to address. 0:09:29.120 --> 0:09:32.079 But obviously the inflation caused by it is causing central 0:09:32.120 --> 0:09:34.400 banks to get pretty uncomfortable or seeing that at the 0:09:34.400 --> 0:09:36.600 b o e S. John said, you have Russia hiking 0:09:36.600 --> 0:09:38.160 as well. On the phase of inflation at a five 0:09:38.200 --> 0:09:40.840 year high, do we run the risk of when those 0:09:40.880 --> 0:09:45.800 bottlenecks eased, we end up with policy that is too tight, Well, 0:09:45.920 --> 0:09:48.360 that is exactly you know what we have been talking about, 0:09:48.520 --> 0:09:51.560 is that this is the supply dynamic that you know, 0:09:51.720 --> 0:09:56.400 any action from the FED is really not equipped to address. 0:09:56.520 --> 0:09:59.440 So if you are looking at the expectation that demand 0:09:59.480 --> 0:10:01.520 is going to be so strong that it unlicits a 0:10:01.559 --> 0:10:04.640 FED response, we don't really subscribe to that new So 0:10:04.960 --> 0:10:08.680 I guess there is there is a chance that you know, 0:10:08.760 --> 0:10:12.960 you do see a response from the FED that you know, 0:10:13.040 --> 0:10:16.160 tamps down the economy, uh, you know, in a in 0:10:16.200 --> 0:10:18.800 a more substantial way than is needed. But I do 0:10:18.840 --> 0:10:20.920 think that all this is centered around what the FED 0:10:21.000 --> 0:10:23.640 is communicating right now, and what they're communicating is that 0:10:24.040 --> 0:10:29.080 if inflation does turn out to be you know, substantially stickier, 0:10:29.320 --> 0:10:31.240 that they are ready to respond. But I think it's 0:10:31.240 --> 0:10:34.760 a matter of managing expectations rather than them saying that, 0:10:34.840 --> 0:10:36.400 you know, we are not we are just going to 0:10:36.400 --> 0:10:39.200 sit back and and you know, let this happen. The 0:10:39.200 --> 0:10:41.800 inflation and expectations are arising, and what they need to 0:10:41.840 --> 0:10:46.000 do is manage those expectations. And this is the communication process. 0:10:46.320 --> 0:10:49.040 What they're saying is that they're not going to uh, 0:10:49.200 --> 0:10:52.040 they're not going to let this occur at a rate 0:10:52.160 --> 0:10:54.120 you know that we're seeing right now, Well, it's a 0:10:54.120 --> 0:10:56.680 good point on inflation expectations, and that brings me to 0:10:56.679 --> 0:10:58.760 a question on the consumer, because obviously we're in the 0:10:58.760 --> 0:11:00.839 thick of earning season, we're talking a lot about supply 0:11:00.880 --> 0:11:04.360 chain issues and companies raising costs because of their higher 0:11:04.400 --> 0:11:07.520 input costs are colleaguet Bloomberg Opinion Andrea Fell said put 0:11:07.520 --> 0:11:09.280 out a column on the terminal talking about the likes 0:11:09.320 --> 0:11:11.640 of Unilever, and yes, price hikes are working for them 0:11:11.640 --> 0:11:13.880 for now, but if they hike further, there may be 0:11:14.000 --> 0:11:16.200 a point in time where consumers are not going to 0:11:16.280 --> 0:11:20.160 be tolerant of them. What is your take on that? Yeah, 0:11:20.240 --> 0:11:22.559 that's that's exactly right. I mean, I do think that 0:11:22.960 --> 0:11:27.160 the expectation that these price increases are going to continue forever. 0:11:27.320 --> 0:11:31.080 I do think that, um, that is I'm not sure 0:11:31.080 --> 0:11:33.960 that that's really realistic. At some point, either the consumer 0:11:34.000 --> 0:11:36.280 steps back or you know, you have to adjust your 0:11:36.320 --> 0:11:40.800 expectations about uh, you know, wage increases or the response 0:11:40.840 --> 0:11:45.319 from just in terms of how the consumer response to uh, 0:11:45.360 --> 0:11:50.240 you know, persistently high uh or or accelerating inflation. So 0:11:50.480 --> 0:11:52.600 I do think that there will be pushed back at 0:11:52.640 --> 0:11:54.559 some point. I do think that these companies that are 0:11:54.600 --> 0:11:58.199 able to pass through the consumer is bast household balance 0:11:58.200 --> 0:12:00.160 sheet is very healthy right now, so the consumer is 0:12:00.200 --> 0:12:02.800 able to bear a little bit of this price pressure. 0:12:03.040 --> 0:12:05.360 But I do think that there's a limit to this, 0:12:05.880 --> 0:12:08.880 and in terms of you know, how successful companies will 0:12:08.920 --> 0:12:12.160 be in passing on price increases. Rebeta, thank you as always, 0:12:12.280 --> 0:12:22.160 Rebeata FERUKEI that of high frequency economics. John. What we 0:12:22.240 --> 0:12:25.280 can suggest is some girls would like to talk to us, 0:12:25.280 --> 0:12:28.320 and that would be Lizzie and Saunders. Hardcore Stones fan 0:12:28.440 --> 0:12:31.120 joins us writing it up. I'll never be your beast 0:12:31.160 --> 0:12:33.679 of burden. My back is broad, but it's a hurt. 0:12:33.760 --> 0:12:37.560 And Lizzie Saunders, you are writing on the equity markets 0:12:37.679 --> 0:12:40.840 about the beasts of burden that are out there. Which 0:12:40.880 --> 0:12:45.679 one has your attention? Well, I think there are some 0:12:45.760 --> 0:12:49.400 signs that some pressures might be easing, even though durable 0:12:49.440 --> 0:12:53.040 goods prices are still up. There's some signs of durable 0:12:53.040 --> 0:12:55.840 goods consumption is rolling over a little bit, but a 0:12:55.840 --> 0:12:58.600 little bit of rolling over in suppire delivery times. But 0:12:59.080 --> 0:13:02.600 to John's point just before I came on, it really 0:13:02.640 --> 0:13:05.240 depends on on what good or service you're talking about. 0:13:05.320 --> 0:13:08.640 Us to the timeframe associated when we get some balance 0:13:08.679 --> 0:13:12.679 back between demand and supply. But the one benefit to 0:13:13.000 --> 0:13:16.800 high prices is that it's actually easing some of the 0:13:16.880 --> 0:13:22.280 demand pressures, and the hope is that that force predates 0:13:22.360 --> 0:13:25.760 that that's need to step in more aggressively. You will 0:13:25.800 --> 0:13:29.200 be overwhelmed at Charles Schwab in the coming days with 0:13:29.360 --> 0:13:33.000 what do we do at a record standard or high 0:13:33.360 --> 0:13:41.360 What do you advise? I think I think rotational leadership ships, 0:13:41.559 --> 0:13:45.600 even some rotational corrections which have characterized much of this year, 0:13:46.160 --> 0:13:48.880 are likely to persist. But there's enough offsets when you 0:13:48.920 --> 0:13:51.960 go through these pockets of weakness that the net is 0:13:52.120 --> 0:13:57.080 it keeps the index level declines to a fairly benign degree. 0:13:57.080 --> 0:13:59.640 As we saw more recently when we had the five 0:13:59.679 --> 0:14:05.080 point drop in the SMP. You still have SMP that 0:14:05.200 --> 0:14:07.080 has had at least a tem per cent raw down 0:14:07.080 --> 0:14:10.480 this year, and the average draw down is eight and 0:14:10.520 --> 0:14:13.480 I think that type of environment is likely to persist. 0:14:13.520 --> 0:14:16.240 That's a pretty benign way to ease whether it's sent 0:14:16.320 --> 0:14:19.960 him an excess with technical excess and valuation excesses. And 0:14:20.000 --> 0:14:23.000 I think if you do more sort of volatility based 0:14:23.080 --> 0:14:26.280 rebalancing as opposed to trying to do short term market 0:14:26.320 --> 0:14:29.480 timing that helps investors stay in gear in this kind 0:14:29.480 --> 0:14:32.160 of market. Well, speaking of volatility, Lisianne, the VIX is 0:14:32.240 --> 0:14:36.320 sub fifteen we're looking at this morning. Can volatility stay 0:14:36.360 --> 0:14:40.040 this subdued into your end? Yes, I think a measure 0:14:40.120 --> 0:14:43.160 like the VIX can stay fairly subdued. But that doesn't 0:14:43.240 --> 0:14:45.480 mean you're not going to continue to see some of 0:14:45.520 --> 0:14:49.600 these underlying leadership shifts and some of the swaps that 0:14:49.640 --> 0:14:53.560 are happening even on a day to day basis, where uh, 0:14:53.760 --> 0:14:55.360 you know, you'll see energy at the top of the 0:14:55.440 --> 0:14:57.480 leader board for a day or two and check at 0:14:57.480 --> 0:14:59.720 the bottom and then you see a complete reversal of that. 0:15:00.200 --> 0:15:03.960 And I think those ships are keying off these days 0:15:04.360 --> 0:15:06.600 to a great degree, the bond market, and what what 0:15:06.760 --> 0:15:09.040 tenure yields are doing. For a while there they were 0:15:09.120 --> 0:15:12.560 those leadership ships were keying off the delta variant um. 0:15:12.760 --> 0:15:14.640 That seems to be less of a force now and 0:15:14.720 --> 0:15:17.000 let's hope that stays in the rearview mirror. Well, the 0:15:17.000 --> 0:15:19.080 bond market is John was just talking about, is pricing 0:15:19.080 --> 0:15:20.920 in a much higher rate of inflation over the next 0:15:20.920 --> 0:15:23.080 five years, with three percent on the five year break even. 0:15:23.240 --> 0:15:25.320 I was reading your note from a couple of days ago, 0:15:25.600 --> 0:15:28.080 and you said that there's a shift from pro cyclical 0:15:28.160 --> 0:15:33.880 to countercyclical inflation. Countercyclical meaning high prices drag on economic activities. 0:15:33.880 --> 0:15:37.560 So we're talking more inflation growth getting hit. Can you 0:15:37.600 --> 0:15:42.360 differentiate between that and stag inflation? Well, stagflation if you 0:15:42.560 --> 0:15:45.720 use the precise steffinition tied to what was going on 0:15:45.760 --> 0:15:49.320 in the seventies. It wasn't just weak economic growth and 0:15:49.400 --> 0:15:53.720 higher inflation. It was high and rising unemployment and to 0:15:53.760 --> 0:15:56.800 some degree, weak productivity. And we clearly don't have those 0:15:56.880 --> 0:16:00.080 ladder two factors. So whether we come up with some 0:16:00.200 --> 0:16:03.600 catching new phrase for just a slow and growth environment, 0:16:04.040 --> 0:16:06.640 I think this is more of a shift from pro 0:16:06.680 --> 0:16:08.960 cyclical inflation, which is what we had at the beginning 0:16:08.960 --> 0:16:12.000 of the reopening. Higher demand pushed up prices. Now we've 0:16:12.000 --> 0:16:16.080 got high prices pushing down demand and economic growth. I 0:16:16.120 --> 0:16:17.920 think that's a better way to think about the current 0:16:18.000 --> 0:16:21.640 environment than likening it to the seventies. Liszen Saunders, what 0:16:21.840 --> 0:16:25.840 is the new definition of the debate of pricing power? 0:16:25.960 --> 0:16:30.240 We've seen eras of discussion of pricing powers among our 0:16:30.280 --> 0:16:35.280 American corporations what's new this time. Well, I don't think 0:16:35.320 --> 0:16:40.160 we have yet kicked in the psychological component that feeds 0:16:40.160 --> 0:16:43.560 into the wage price spiral that we saw in the 0:16:43.640 --> 0:16:46.320 nine seventies. And that's a bit more esoteric. It's not 0:16:46.400 --> 0:16:50.360 as easy to measure, there's no numerics associated with it. 0:16:50.760 --> 0:16:54.680 But it's when that psychology kicks in. When workers the 0:16:54.760 --> 0:16:57.840 psyche changes, they feel they have the power to demand 0:16:57.880 --> 0:17:00.720 not just one time higher compensation ship but on a 0:17:00.760 --> 0:17:04.880 persistent basis. The power that companies feel they have when 0:17:04.880 --> 0:17:09.359 the psyche changes, to persistently pass on higher costs. I 0:17:09.640 --> 0:17:11.840 don't think we're there yet, but it's also why I 0:17:11.880 --> 0:17:15.239 think the margins story and the outlooks associated with that 0:17:15.680 --> 0:17:18.760 as we go through third quota reporting season, or maybe 0:17:18.800 --> 0:17:21.840 even more important than what the numbers are being reported 0:17:21.880 --> 0:17:24.600 for the quarter. Now, we're gonna go inside baseball here, 0:17:24.600 --> 0:17:26.680 and we can do this with a wonderful Lisa and 0:17:26.760 --> 0:17:31.720 Saunders lisenne I plotted today the value line arithmetic index 0:17:32.520 --> 0:17:37.160 minus the value line geometric index, which is one indication 0:17:37.840 --> 0:17:42.800 of the consolidation the concentration of a given broader American 0:17:42.880 --> 0:17:47.479 stock market. The slope is absolutely original. Give us an 0:17:47.640 --> 0:17:52.680 update on the dominance of profitable cash flow big tech. 0:17:53.920 --> 0:18:00.560 So I think profitability rising earnings revisions, as i've factor, 0:18:01.560 --> 0:18:05.680 is going to be increasingly important, especially if we if 0:18:05.680 --> 0:18:09.200 if this environment of weakening growth courtesy of higher inflation 0:18:09.320 --> 0:18:12.520 is less transitory than what was thought to be the case. 0:18:12.680 --> 0:18:17.080 I think focusing on those factors that sort of separate 0:18:17.160 --> 0:18:21.000 you from the masses, and the beauty of of some 0:18:21.080 --> 0:18:25.200 of those factors, especially rising earnings revisions forward looking higher 0:18:25.480 --> 0:18:29.280 profitability is it's almost a hybrid growth and value factor 0:18:29.320 --> 0:18:32.280 because of course, if you've got those rising earnings revisions, 0:18:32.680 --> 0:18:36.439 you've got a rising denominator, which means following multiples. And 0:18:37.200 --> 0:18:40.000 in addition to the volatility based rebalancing that we already 0:18:40.000 --> 0:18:43.520 talked about, I think a factor based approach makes more 0:18:43.560 --> 0:18:47.000 sense in this environment than trying to make sector calls. 0:18:47.480 --> 0:18:50.800 And I think taking advantage of weaker growth and what 0:18:50.960 --> 0:18:54.639 that means for companies that do have that sustainable growth 0:18:54.640 --> 0:18:58.440 trajectory looking forward is probably the best way to approach 0:18:58.480 --> 0:19:01.560 the market, especially if you're a stock. By always great 0:19:01.600 --> 0:19:13.800 to catch. Thanks you so much, swap right now, Kaylee Lines, 0:19:13.840 --> 0:19:16.480 and I would like to manage the message on your 0:19:16.560 --> 0:19:20.160 next air travel over to Helene Becker to say she's 0:19:20.200 --> 0:19:25.120 senior research at Analystic Cowen with Kivan Rumor barely defines 0:19:25.200 --> 0:19:30.480 the ownership of Cowen with Airlines Securities Analysis Excellence going 0:19:30.560 --> 0:19:34.120 back decades and decades, Helene Becker, I know you're gonna 0:19:34.119 --> 0:19:37.639 tell me you've never seen it like this before. What 0:19:37.800 --> 0:19:42.320 will our industry look like in twelve months. I think 0:19:42.320 --> 0:19:44.200 it's gonna be a lot better than it is now. 0:19:44.240 --> 0:19:48.520 We're still in that transition phase UM, which we expected 0:19:48.560 --> 0:19:50.760 would last. I actually thought it would last three to 0:19:50.840 --> 0:19:55.040 five years. And UM for for domestic recovery. Of course, 0:19:55.040 --> 0:19:57.520 I wasn't counting on the government giving people a lot 0:19:57.560 --> 0:20:01.840 of money UM, and I think the stimulus obviously helped travel. UM. 0:20:01.960 --> 0:20:04.600 Usually if you have time, you don't have money, and 0:20:04.640 --> 0:20:08.000 if you have money, you don't have time. So it's 0:20:08.040 --> 0:20:11.120 been over the past I would say six or nine months, 0:20:11.160 --> 0:20:14.640 we've seen a huge recovery in domestic air travel and 0:20:14.680 --> 0:20:18.480 we expect that to continue. UM. Business travel should come 0:20:18.480 --> 0:20:24.359 back in two not all the way we're thinking of 0:20:24.359 --> 0:20:27.399 the way, which you know we've talked about. And in 0:20:27.520 --> 0:20:31.400 the international next summer should be a pretty good international UM. 0:20:32.640 --> 0:20:35.359 People will want to, we'll take those trips. Tell me 0:20:35.359 --> 0:20:38.600 about the price discrimination, the idea of selling the cheapest 0:20:38.600 --> 0:20:41.280 seat and then forty seven slices up and up to 0:20:41.359 --> 0:20:44.040 a full price first class ticket. I look at the 0:20:44.160 --> 0:20:48.840 ratio of business class to economy and it's outrageous executed 0:20:48.920 --> 0:20:52.080 obviously because of COVID and all that. Are we going 0:20:52.160 --> 0:20:56.560 back to the normal price discrimination perceit of pre pandemic 0:20:56.720 --> 0:20:59.520 or is there a new new to all this now, 0:20:59.600 --> 0:21:01.119 I see? I don't you know. I don't know how 0:21:01.200 --> 0:21:06.560 to answer the question, other than to say that I think, um, 0:21:06.800 --> 0:21:09.159 people don't like to be squished in the back of 0:21:09.200 --> 0:21:12.200 the planes, and what the airlines are seeing is more 0:21:12.920 --> 0:21:16.720 more leisure travelers actually buying up too, if not first 0:21:16.760 --> 0:21:20.879 class to premium economy or whatever they call this first 0:21:20.880 --> 0:21:23.959 maybe five or seven rows um to get just a 0:21:24.000 --> 0:21:27.400 little more leg room. And you know you've heard about 0:21:27.440 --> 0:21:29.879 all the unruly passengers on board. I think part of 0:21:29.920 --> 0:21:33.480 it is just the squishiness, the wearing of the masks, 0:21:33.640 --> 0:21:38.320 the whole uncomfort level. I don't think that's going to change. Um. 0:21:38.480 --> 0:21:41.000 We we didn't talk about oil prices yet this morning, 0:21:41.080 --> 0:21:45.240 but the oil prices up sixty percent right, every year, right, 0:21:45.320 --> 0:21:48.200 So at some point capacity has to come down or 0:21:48.600 --> 0:21:51.200 airlines have to raise ticket prices. And I think ticket 0:21:51.200 --> 0:21:53.879 prices are going off well that I'm so glad you 0:21:53.920 --> 0:21:55.679 brought that up, Lane, because we heard the likes of 0:21:55.720 --> 0:21:58.280 Delta warning about that, for example, saying oil prices are 0:21:58.280 --> 0:21:59.800 going to weigh and we might not actually be pro 0:22:00.000 --> 0:22:02.280 fitable in the last quarter of the year. Why is 0:22:02.280 --> 0:22:05.840 it that airlines can't exercise enough pricing power to offset 0:22:05.880 --> 0:22:10.280 that cost. Yeah, So the issue for airlines is they 0:22:10.359 --> 0:22:14.800 sell six of their tickets within ninety days of travel, 0:22:14.960 --> 0:22:18.000 so generally you enter the first of the month having 0:22:18.040 --> 0:22:21.760 sold at almost two thirds of your seats. So the 0:22:21.920 --> 0:22:27.000 price that you've set it was using a fuel price 0:22:27.080 --> 0:22:30.480 that was established two or three months ago, So you're 0:22:30.560 --> 0:22:33.679 you're looking at the forward curve and you're trying to 0:22:33.760 --> 0:22:36.119 figure out what the price is going to look like 0:22:36.160 --> 0:22:38.840