WEBVTT - The Latest On Bond Markets, Fed Strategy And Investment Outlook 0:00:00.800 --> 0:00:04.040 Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside 0:00:04.040 --> 0:00:06.920 my co host Matt Miller. Every business day we bring 0:00:06.960 --> 0:00:11.520 you interviews from CEOs, market pros, and Bloomberg experts, along 0:00:11.560 --> 0:00:15.600 with essential market moving news. Find the Bloomberg Markets Podcast 0:00:15.600 --> 0:00:18.479 on Apple Podcasts or wherever you listen to podcasts, and 0:00:18.480 --> 0:00:22.080 at Bloomberg dot com slash podcast. All right, I think 0:00:22.079 --> 0:00:26.480 the topic of the day, slash week, slash month is inflation. 0:00:26.960 --> 0:00:30.640 I think the transitory arguments kind of halfway out the window, 0:00:30.680 --> 0:00:32.919 all the way out of the window, but the investors 0:00:32.960 --> 0:00:34.920 are still trying to get a handle on that. Let's 0:00:34.960 --> 0:00:37.279 check in with the professional, get his thoughts on Esta 0:00:37.360 --> 0:00:41.600 Ramo's Chief investment Officer b MO Global Asset Management in 0:00:41.640 --> 0:00:43.680 the US or now. So, thanks so much for joining 0:00:43.760 --> 0:00:46.760 us here. Let's start with inflation because it's everywhere and 0:00:46.800 --> 0:00:48.720 we we just got through a big earning season where 0:00:49.080 --> 0:00:51.519 it was certainly one of the most talked about topics 0:00:51.560 --> 0:00:54.320 on the conference calls. How do you think about the 0:00:54.360 --> 0:00:57.000 inflationary environment we're in today and how does that color 0:00:57.120 --> 0:01:02.280 your investment look? Thank you for having me um inflation 0:01:02.800 --> 0:01:06.680 we believe might actually not be as persistent as some 0:01:06.720 --> 0:01:10.440 people expect. There's a couple of reasons for that. Number One, 0:01:10.480 --> 0:01:13.360 you have strong base effects. In other words, once you 0:01:13.400 --> 0:01:17.880 have inflation ramping up as much as it has by now, 0:01:18.520 --> 0:01:22.160 but compares get easier, you can't have I mean you could, 0:01:22.360 --> 0:01:24.080 we saw it in the seventies. You can't at ten 0:01:24.480 --> 0:01:28.160 temper cent temper cent stacking up year over year unless 0:01:28.200 --> 0:01:31.960 something dramatic has changed the economy. We think a lot 0:01:32.040 --> 0:01:35.120 of the inflationary pressures we see right now are derived 0:01:35.120 --> 0:01:39.560 from COVID and COVID after effects, supply chain disruptions that 0:01:39.600 --> 0:01:42.720 are the result of COVID lockdowns, and other things like that, 0:01:43.120 --> 0:01:46.000 and all of those will be in the process or 0:01:46.080 --> 0:01:49.000 are already in the process of resolving themselves. So I 0:01:49.000 --> 0:01:52.640 wouldn't be surprised if we start to see inflation come 0:01:52.760 --> 0:01:57.080 off of these high levels and perhaps into two end 0:01:57.160 --> 0:02:01.040 up in the maybe two to four range, which is 0:02:01.040 --> 0:02:04.000 a lot lower than received right now. So it actually 0:02:04.080 --> 0:02:07.440 might turn out to be maybe the word is not transitory, 0:02:07.560 --> 0:02:11.799 but not a permanent six going forward for the next 0:02:11.840 --> 0:02:14.240 couple of years to speak, well, it was, I mean 0:02:14.240 --> 0:02:17.480 the seventies inflation was transitory. Was just that one decade 0:02:17.480 --> 0:02:22.720 pretty much. I'm curious. I'm curious um ernesto to hear 0:02:23.040 --> 0:02:26.359 what you think about transitory. I mean, you did UM 0:02:26.400 --> 0:02:28.880 your undergrad and something, Matthew, I think at M I T. 0:02:29.120 --> 0:02:33.200 And then you studied UM statistics for your PhD at Harvard. 0:02:33.440 --> 0:02:37.040 You get PhD in statistics. Well, I think that's pretty cool. 0:02:37.320 --> 0:02:39.560 You do well. I had one semester that in business. 0:02:39.560 --> 0:02:42.400 One was enough. I loved I loved it. But you don't. 0:02:42.440 --> 0:02:45.160 I'm assuming you don't really use words as vague as 0:02:45.200 --> 0:02:47.680 transitory or do they mean something different to you than 0:02:47.720 --> 0:02:49.240 they mean to the rest of us. What do you 0:02:49.240 --> 0:02:53.760 what do you think about? Well, the idea, I think 0:02:53.800 --> 0:02:57.079 positial people thought transitory was one or two months or 0:02:57.120 --> 0:03:02.160 maybe three months of high print. Uh. I think inflation 0:03:02.400 --> 0:03:06.480 as a as a compounding mechanism is not gonna last 0:03:06.520 --> 0:03:10.920 more than a few months. Uh. And that's that's basically 0:03:10.919 --> 0:03:13.840 our base case. And look, the important thing here is 0:03:13.880 --> 0:03:16.360 not so much that inflation is going to be here 0:03:16.400 --> 0:03:19.760 forever or not. Is the fact that nobody really knows. 0:03:20.080 --> 0:03:22.400 There's so many things right now that nobody really knows 0:03:22.400 --> 0:03:25.040 what it's going to look like, inflation being one of them. 0:03:25.280 --> 0:03:28.800 Do you have a huge, a very big distribution around 0:03:28.960 --> 0:03:34.000 the potential inflation outcomes, supply chain disruptions, fiscal policy and 0:03:34.080 --> 0:03:37.760 monetary policy, economic growth, earnings growth, all of these things 0:03:37.840 --> 0:03:41.640 that normally people understand or are able to forecast with 0:03:41.800 --> 0:03:45.000 some sense of accuracy. Right now, the outcomes are all 0:03:45.040 --> 0:03:47.680 over the place. So so what do we tell investors 0:03:47.760 --> 0:03:50.840 right now given all of the uncertainties around all of 0:03:50.880 --> 0:03:56.200 these potential UH disruptures or positive forces for the for 0:03:56.240 --> 0:03:59.880 the markets. The one thing you know is that stocks 0:04:00.040 --> 0:04:04.120 are the safest place to be, even though they're richly valued, 0:04:04.200 --> 0:04:08.400 because everywhere else you look things are even more expensively valued, 0:04:08.480 --> 0:04:12.080 especially bonds and let alone are more speculative assets like 0:04:12.120 --> 0:04:14.360 cryptos and so on. So so, at the end of 0:04:14.360 --> 0:04:17.080 the day, the one place where you can find refuges 0:04:17.080 --> 0:04:20.480 in stocks and within stocks, do you go growth, do 0:04:20.600 --> 0:04:22.760 you go value? To use go small cap, do you 0:04:23.040 --> 0:04:26.520 go large gap. We're thinking that right now the sweet 0:04:26.520 --> 0:04:30.760 spot is quality stocks, and by quality I mean low leverage, 0:04:30.800 --> 0:04:35.279 stable learning, profitable companies that are not necessarily your highest growers, 0:04:35.320 --> 0:04:38.880 not necessarily your your cyclical place, but companies that are 0:04:38.920 --> 0:04:42.360 relatively immune to the to the to the cyclical forces 0:04:42.720 --> 0:04:46.719 also relatively immune to interest rates, but will provide some 0:04:46.920 --> 0:04:50.360 decent return given all of the uncertainties that I just mentioned, 0:04:50.360 --> 0:04:53.440 because the world is really murky right now and we 0:04:53.480 --> 0:04:57.679 don't know how all of these forces will resolve themselves. Na, 0:04:57.680 --> 0:05:00.000 how do you feel about the valuation in this mark 0:05:00.000 --> 0:05:01.599 could place? A lot of people are raising that as 0:05:01.640 --> 0:05:03.279 a as a red flag. Yet we just had some 0:05:03.360 --> 0:05:06.400 really strong earning, So how do you think about that? Well? Also, 0:05:06.600 --> 0:05:09.240 if stocks are the only place to be, do you care? 0:05:09.320 --> 0:05:12.480 Do you care? Right? Well, that's the thing. I mean. 0:05:12.680 --> 0:05:16.200 Valuations for stocks are rich, but valuation for bonds are 0:05:16.279 --> 0:05:18.760 we been richer, So you have to put your money somewhere. 0:05:18.760 --> 0:05:21.359 You can't leave it in cash because of the because 0:05:21.400 --> 0:05:24.240 of inflation. You have to put it either in bonds 0:05:24.320 --> 0:05:27.600 or stocks. And right now stocks seem to be the 0:05:27.720 --> 0:05:33.359 least richly values of of these highly valued areas. But 0:05:33.360 --> 0:05:35.880 but yeah, that is the biggest risk to see in 0:05:35.880 --> 0:05:39.240 in in in the market, in the stock market, and 0:05:39.240 --> 0:05:41.800 in fact, I wouldn't be surprised to see some kind 0:05:41.800 --> 0:05:44.520 of a correction here of five to tem per said move, 0:05:44.600 --> 0:05:47.080 because we haven't had one for for quite a while. 0:05:47.120 --> 0:05:49.520 So but that is part of investing in the stock market. 0:05:49.560 --> 0:05:51.560 You have to put your money there, and and and 0:05:51.680 --> 0:05:55.520 put up with occasional correction. But over the next couple 0:05:55.600 --> 0:05:58.560 of years, we think you will be much more highly 0:05:58.600 --> 0:06:02.240 rewarded for being stocks that for being in bonds. At 0:06:02.279 --> 0:06:08.040 this point, what about Westchester? Real estate? Is that safe place? Well? 0:06:09.120 --> 0:06:13.440 Real estate, food and anything you talk about has been 0:06:13.520 --> 0:06:17.479 so inflated by by your very loose monetary conditions, which, 0:06:17.520 --> 0:06:20.680 by the way, we think will persist because whether you 0:06:20.760 --> 0:06:25.400 get power or or brainer, you're gonna have loose monetary policy. 0:06:25.680 --> 0:06:28.479 So so so that part of the question is good. 0:06:28.600 --> 0:06:32.720 But real estate is up through the roof. Alright, thank 0:06:32.760 --> 0:06:35.359 you so much. We really appreciate our rama's chief investment officer, 0:06:35.680 --> 0:06:43.640 BEMO Global Asset Management. Let's bring she's gonna talk rates 0:06:43.640 --> 0:06:45.839 with his managing director and global head of rate strategy 0:06:45.839 --> 0:06:50.320 at TV Securities. We had Bill Dudley, former New York 0:06:50.320 --> 0:06:52.800 Fed President in current Bloomberg opinion columns. He was on 0:06:52.839 --> 0:06:55.960 Bloomberg Television this morning kind of suggesting that maybe the 0:06:56.000 --> 0:07:00.240 Fed is falling behind the market. Here's that really late 0:07:00.360 --> 0:07:04.279 to rates? How do you think about that? So I 0:07:04.320 --> 0:07:07.400 think it all comes down to the expectation of will 0:07:07.480 --> 0:07:10.800 inflation slow down or is a being a new normal 0:07:10.880 --> 0:07:13.320 of high inflation and labor markets lack going the way 0:07:13.920 --> 0:07:18.240 I think Dudley's comments suggests that inflation his expectation as 0:07:18.280 --> 0:07:20.720 inflation states high, and so the FED will have to 0:07:20.760 --> 0:07:24.200 play catch up because they would start hiking in his 0:07:24.360 --> 0:07:27.320 view late. We're actually taking the other side of the 0:07:27.520 --> 0:07:31.200 argument that inflation is likely to decelerate, that there's still 0:07:31.280 --> 0:07:34.000 plenty of labor market slack. We're dealing with the frictions 0:07:34.000 --> 0:07:36.120 of the labor market where people have left and they 0:07:36.120 --> 0:07:38.680 have to come back, and and so our views of 0:07:38.760 --> 0:07:42.200 the FED hikes only in two thousand twenty three. So 0:07:42.600 --> 0:07:44.720 the market is pretty split. I think we have a 0:07:44.720 --> 0:07:48.280 bimodal distribution in terms of you know what what what 0:07:48.600 --> 0:07:51.640 are the inflation dynamics the labor market dynamics, And so 0:07:51.720 --> 0:07:53.880 you've got views of those who say that the FED 0:07:54.000 --> 0:07:57.640 is too slow, which is Dudley's argument. We actually think 0:07:57.680 --> 0:08:00.560 the markets pricing into early of a FED high first 0:08:00.640 --> 0:08:03.240 hike is being priced for July twenty two, right after 0:08:03.720 --> 0:08:06.880 tapering in. But we think by then the fiscal drag 0:08:07.120 --> 0:08:10.600 will actually start to show up. Both with decelerating inflation 0:08:10.640 --> 0:08:12.960 as well as growth, and think that the FED won't 0:08:12.960 --> 0:08:15.200 be able to hike next year. So well, it's a 0:08:15.240 --> 0:08:19.200 pretty split market right now. I mean, because the economy 0:08:19.240 --> 0:08:21.640 doesn't look that strong enough, doesn't look strong enough to 0:08:21.680 --> 0:08:23.400 hike into Is that what you're saying. I mean, if 0:08:23.400 --> 0:08:26.200 they hike just to stop inflation, that's not great. They 0:08:26.240 --> 0:08:29.000 need to have a healthy enough economy in which into 0:08:29.000 --> 0:08:33.280 which to do it exactly, And if it's just inflation written, um, 0:08:33.400 --> 0:08:37.200 it's not even clear that inflation will decelerate based on 0:08:37.280 --> 0:08:39.760 Fed hikes. I mean, the way it would have to work, 0:08:39.760 --> 0:08:42.760 if the FED would have to hike, tighten financial conditions, 0:08:42.760 --> 0:08:45.560 slow the cormy down, and then bring inflation so through 0:08:45.600 --> 0:08:48.040 the demand channel. But there's a lot of evidence that 0:08:48.080 --> 0:08:50.720 this is not a demand lead inflation, this is supply lead. 0:08:50.880 --> 0:08:53.640 So it's not even clear that FED hikes help. And 0:08:53.679 --> 0:08:55.760 to your point, yes, if growth is starting to slow 0:08:55.800 --> 0:08:58.400 and we think the market is underestimating the extent of 0:08:58.440 --> 0:09:01.280 fiscal drag, go to have been so strong this year 0:09:01.280 --> 0:09:04.120 because of massive fiscal stimulus, and even though we expect 0:09:04.160 --> 0:09:06.400 the one and three quarters TRILLI and build back better 0:09:06.400 --> 0:09:09.280 plan to go through. That's not a next year stimulus, 0:09:09.320 --> 0:09:12.000 that's over the next ten years, and so there's going 0:09:12.040 --> 0:09:14.360 to be a drag from the fiscal side, which will 0:09:14.400 --> 0:09:17.960 start to decelerate GDP. We've got GDP decelerating to two 0:09:17.960 --> 0:09:19.800 percent by the end of next year. So it's a 0:09:19.880 --> 0:09:23.600 very hard environment for the FED to hike as growth 0:09:23.640 --> 0:09:26.280 is slowing and if there's evidence that inflation seems to 0:09:26.280 --> 0:09:29.160 have beat. So as we think about inflation, a lot 0:09:29.200 --> 0:09:31.200 of folks are saying, you're not going to really see 0:09:31.440 --> 0:09:36.560 long term inflation until you get wage inflation. Is wage 0:09:36.559 --> 0:09:40.800 inflation something that we need to be on the lookout for, absolutely, 0:09:40.920 --> 0:09:43.400 But I think we have to really dig into the 0:09:43.440 --> 0:09:46.360 details of the wage inflation numbers. They're high right now. 0:09:46.679 --> 0:09:50.360 But we don't think this is indicative of the labor 0:09:50.400 --> 0:09:52.920 market slack having gone away. We think this is the 0:09:53.000 --> 0:09:55.120 function of the fact that a lot of people left 0:09:55.120 --> 0:09:59.320 the labor market because of COVID, because of child care reasons, 0:09:59.320 --> 0:10:02.200 summer time ins in there as well immigration. There's a 0:10:02.240 --> 0:10:06.600 bunch of factors that are responsible for a small labor market, 0:10:07.160 --> 0:10:09.680 smaller labor market than it would have been. But as 0:10:10.280 --> 0:10:13.360 the economy recovered, as we moved towards the from goods 0:10:13.360 --> 0:10:16.880 consumption to service consumption. We think people return, and so 0:10:17.000 --> 0:10:19.679 wage inflation numbers we actually think are going to decelerate 0:10:19.800 --> 0:10:22.920 as more people enter the labor force, and that's what 0:10:23.080 --> 0:10:26.480 prevents the wage price spiders. So there's a key assumption 0:10:26.520 --> 0:10:28.120 to our call that the FED won't be able to 0:10:28.160 --> 0:10:31.000 hight next year is that we just start to decelerate 0:10:31.040 --> 0:10:33.760 because people return. Now that's making an assumption that there's 0:10:33.800 --> 0:10:38.600 no further COVID spike or another variant. But yeah, so 0:10:38.960 --> 0:10:42.760 you're right, the wage component cannot be underestimated here well, 0:10:43.040 --> 0:10:45.520 and the wage growth that we've seen of late hasn't 0:10:45.600 --> 0:10:48.040 kept up with the inflation that we've seen of late. 0:10:48.120 --> 0:10:50.440 Of course, there is a time when wage growth was 0:10:50.520 --> 0:10:54.080 far ahead of inflation, and it needs to be even 0:10:54.120 --> 0:10:56.400 out of bit. What do you think the overall picture 0:10:56.480 --> 0:10:58.040 is when we get to the end of this thing 0:10:58.080 --> 0:11:00.680 pre two, people make enough more to keep up with 0:11:00.679 --> 0:11:04.840 the games and prices. I think in the near term, um, 0:11:05.400 --> 0:11:09.160 the real wage growth is negative and and low, but 0:11:09.240 --> 0:11:12.080 they've got a buffer through savings. The savings rate has 0:11:12.120 --> 0:11:15.240 gone up significantly as well. Now there's a question of 0:11:15.320 --> 0:11:17.480 do people really run down their savings. We think there 0:11:17.480 --> 0:11:20.120 will be some component of that next year, and so 0:11:20.320 --> 0:11:23.679 consumption might hold up okay, even though we just will 0:11:23.720 --> 0:11:26.080 not be able to keep up with prices. But once 0:11:26.280 --> 0:11:29.120 the savings rate comes back down to a more normal level, 0:11:29.559 --> 0:11:32.200 then I think we'll have to settle down into you know, 0:11:32.280 --> 0:11:35.120 real wages having to go up. Otherwise consumption is going 0:11:35.160 --> 0:11:37.720 to get hit, which might be a twenty three stories 0:11:38.120 --> 0:11:39.720 PREA thank you so much for joining us. We always 0:11:39.720 --> 0:11:43.400 appreciate getting your thoughts here. Pre A Misra, Managing Director 0:11:43.440 --> 0:11:47.160 and global head of Rates Strategy for TV Securities. Taking 0:11:47.200 --> 0:11:50.800 more the transitory call as it relates to inflation, and 0:11:50.800 --> 0:11:52.640 that is becoming I think a little bit out of 0:11:52.760 --> 0:11:58.520 consensus the farther we get into this. Alright, man, I 0:11:58.520 --> 0:12:01.320 went away for vacation and the ten years trading right 0:12:01.360 --> 0:12:03.840 around one point six percent, and come back a week 0:12:03.960 --> 0:12:06.920 later and it's still trading around one point six percent. 0:12:07.000 --> 0:12:10.400 But I've got a FED that's tapering its bond purchases. 0:12:10.640 --> 0:12:13.160 I've got a FED that's talking about raising rates maybe 0:12:13.440 --> 0:12:16.600 next year, Yet not much movement here in the bond market. 0:12:16.640 --> 0:12:18.920 Let's check in with somebody who does this for a living. 0:12:19.000 --> 0:12:22.640 R J. Gallows, senior portfolio manager for Federator Hermes. R J. 0:12:22.800 --> 0:12:25.040 Give us a sense of kind of how you think 0:12:25.280 --> 0:12:28.680 the FED is kind of going about its business these 0:12:28.760 --> 0:12:32.319 days in terms of tapering, in terms of disclosing, maybe 0:12:32.320 --> 0:12:35.800 how it views the in strate structure maybe mid next year, 0:12:35.800 --> 0:12:42.080 how do you view their performance? I think they probably 0:12:42.080 --> 0:12:44.040 wanted to try to find a way to rewrite the 0:12:44.160 --> 0:12:48.679 dictionary definitions of transitory. Right, there's almost no other way 0:12:48.720 --> 0:12:52.000 to put it. Um. You know, to the point of 0:12:52.000 --> 0:12:55.720 the tenure being at one sixty probably should be higher. Um. 0:12:55.840 --> 0:12:58.160 We when it comes to duration, we like to look 0:12:58.200 --> 0:13:00.480 at the average yield on market way to average yield 0:13:00.520 --> 0:13:04.480 on the Bloomberg US Treasury Index. Now that started the 0:13:04.600 --> 0:13:08.560 year at started this calendar year at fifty seven basis points. 0:13:08.600 --> 0:13:12.040 It's now a hundred and nineteen hundred nineteen is the 0:13:13.000 --> 0:13:17.640 highest it's been since pre covid um. And that's because 0:13:17.800 --> 0:13:21.080 the most FED sensitive parts of the YOK curb are 0:13:21.160 --> 0:13:23.280 very heavily weighted. If you look at the overall treasury 0:13:23.280 --> 0:13:27.160 market to three five, your securities a lot of focus 0:13:27.200 --> 0:13:29.760 on the tenure, but they may have actually obscure what's 0:13:29.800 --> 0:13:32.160 going on here the Fed has had to inflect because 0:13:32.160 --> 0:13:35.559 transitory proved to be an inapt inappropriate description of the 0:13:35.600 --> 0:13:39.480 inflation problem. Uh, They're gonna have to tighten more. Uh, 0:13:39.600 --> 0:13:42.319 So the short ends moved up quite a bit intermediate 0:13:42.400 --> 0:13:46.320 to hang on, do you think they're gonna have to tighten? 0:13:46.920 --> 0:13:48.959 Do you think they're gonna have to raise rates? Or 0:13:49.360 --> 0:13:52.120 are you saying they're gonna have to um speed up 0:13:52.200 --> 0:13:59.520 their UM taper? I think that the probably both To 0:13:59.600 --> 0:14:02.760 me eightening tapering may not be tightening, no, but it's 0:14:02.760 --> 0:14:05.840 pulling your foot off the gas. Uh. It's a precondition 0:14:05.960 --> 0:14:08.360 to getting to the more traditional method of tightening, which 0:14:08.400 --> 0:14:12.240 would be raising interest rates. And the market has come 0:14:12.240 --> 0:14:16.640 to the realization fairly quickly recently that the inflation problem 0:14:16.720 --> 0:14:20.520 isn't transitory. It's it's it's at least problematic if it 0:14:20.560 --> 0:14:24.120 may be temporary, but it's not short lived. Um. And 0:14:24.200 --> 0:14:27.240 as a result, the Fed will be doing both. The 0:14:27.240 --> 0:14:29.120 taper may in fact need to speed up. I don't 0:14:29.120 --> 0:14:31.000 think it would be too difficult for them to do 0:14:31.160 --> 0:14:34.160 to do that, Uh. And then the liftoff will will 0:14:34.200 --> 0:14:38.280 certainly come in two and maybe in multiple steps. Is 0:14:38.280 --> 0:14:40.960 there we had pre a miserable on from TV Securities 0:14:40.960 --> 0:14:42.920 on earlier r J, and she was kind of suggesting 0:14:42.960 --> 0:14:46.200 that a rate increases is not event that it can 0:14:46.200 --> 0:14:49.040 be can effect be pushed out there, but you're suggesting 0:14:49.440 --> 0:14:53.040 something sooner. I don't think that's very likely. I think 0:14:53.080 --> 0:14:55.640 that the Feds, uh, you know, we we have we 0:14:55.680 --> 0:14:58.760 now have real interest rates at record lows and economy 0:14:58.800 --> 0:15:02.240 that's apt to continue to expand. Um. Yes, there are 0:15:02.320 --> 0:15:05.640 problems that are apt to be temporary in terms of 0:15:05.720 --> 0:15:08.680 supply chain that are helping to fuel the inflation story. 0:15:08.720 --> 0:15:12.080 But the problem for the central bank uh becomes more 0:15:12.160 --> 0:15:18.400 complicated if they allow those those temporary inflation bottlenecks to 0:15:18.640 --> 0:15:23.200 be reinforced in wage, salary and price expectations. And that's 0:15:23.240 --> 0:15:27.240 where we're getting. You're seeing break even north of three. Uh. 0:15:27.480 --> 0:15:32.440 The there are wage and salary increases all over the newspapers. Uh. 0:15:32.480 --> 0:15:35.520 You can you feel it. The inflation story is starting 0:15:35.520 --> 0:15:38.320 to heat up. I don't think this is seventy six, 0:15:38.440 --> 0:15:41.280 you know, we're going on our way to nineteen seventy nine. UM. 0:15:41.400 --> 0:15:44.200 I do think the Fed, though, has to inflect back, 0:15:44.640 --> 0:15:47.320 you know, in a traditional method, which is they have 0:15:47.440 --> 0:15:50.200 to raise interest rates they're probably gonna have to get 0:15:50.240 --> 0:15:53.160 the FED funds rate, you know, materially above one and 0:15:53.160 --> 0:15:56.880 a half, maybe two, maybe even more, they say, to fifty. 0:15:56.960 --> 0:15:59.200 The market seems to doubt that the flattening of the 0:15:59.280 --> 0:16:02.440 curve is the confusion in the market. Does the Fed 0:16:02.480 --> 0:16:05.560 really have to go that much higher in order to 0:16:05.800 --> 0:16:08.840 restrain the inflation problem? If they do, then they run 0:16:09.040 --> 0:16:11.680 setting off a recession and you get that sort of 0:16:11.760 --> 0:16:14.800 twist flattening of the curve. Hence the tenure isn't rising 0:16:14.840 --> 0:16:17.280 as much in basis points as we've seen on other 0:16:17.280 --> 0:16:19.600 parts of the curve. Yeah, but we do see real 0:16:19.720 --> 0:16:23.640 yields down at one negative one twenty right, um, And 0:16:23.720 --> 0:16:27.440 that's basically the lowest they've been, right exactly. And and 0:16:27.760 --> 0:16:30.360 I don't think real yields would behave would be behaving 0:16:30.400 --> 0:16:34.280 that way if people felt that greater Fed restraint to 0:16:34.360 --> 0:16:37.040 come in the in the in the future. Here tapering tightening, 0:16:37.480 --> 0:16:41.640 um uh comes without risk. It does come with risk. 0:16:42.000 --> 0:16:44.400 People aren't sure how high the FED can go without 0:16:45.200 --> 0:16:48.200 suppressing growth, and that's why really yields are not coming 0:16:48.200 --> 0:16:50.680 off the floor. Um. I think if people had more 0:16:50.720 --> 0:16:54.400 confidence about longer term growth trajectories than really yields would 0:16:54.400 --> 0:16:57.600 be going up with nominally yields, and that's really not happening. R. J. 0:16:58.240 --> 0:17:00.640 Morgan Stanley is out with a piece today saying steer 0:17:00.760 --> 0:17:04.760 clear of US stocks and bonds. Is that something you 0:17:04.960 --> 0:17:09.400 ascribed to? Um? Well, the chief investment officer of fixed 0:17:09.440 --> 0:17:11.040 income of my company, and I have talked about this 0:17:11.040 --> 0:17:14.919 for a long time. When inflation finally comes, it's going 0:17:14.960 --> 0:17:17.880 to be tough for all financial assets. It's been striking 0:17:17.880 --> 0:17:21.040 how the stock market has bucked the inflation concerns. I 0:17:21.119 --> 0:17:24.400 think because transitory, temporary, whatever would you want to pick um? 0:17:24.800 --> 0:17:26.679 You know, people have bought into that to some degree. 0:17:26.720 --> 0:17:30.240 As that becomes more questionable, you wonder when does the 0:17:30.240 --> 0:17:32.760 stock markets start to struggle to Right now, there's a 0:17:32.800 --> 0:17:34.880 great front page story in the Wall Street Journal about 0:17:34.880 --> 0:17:37.159 companies are benefiting from the inflation sturge. They're doing this 0:17:37.320 --> 0:17:40.440 like once in a generation price increases. That's all great, 0:17:40.480 --> 0:17:43.240 but you can't keep doing that. So a lot depends 0:17:43.240 --> 0:17:46.520 in both markets, stocks and bonds on the timing of 0:17:46.600 --> 0:17:50.360 inflations return to some more tolerable level. And since that's 0:17:50.560 --> 0:17:52.680 yet unknown, I would think risk premiums need to be 0:17:52.760 --> 0:17:55.320 installed in bond yields and they should keep going up 0:17:55.880 --> 0:17:58.840 the stock market. You know, it seems to be bullethrough 0:17:58.920 --> 0:18:01.720 right now. Of surprising, all right, r J, thank you 0:18:01.800 --> 0:18:04.040 so much for joining us. We always appreciate getting your 0:18:04.040 --> 0:18:07.800 thoughts and perspective. R J. Gallos, Senior portfolio manager manager 0:18:07.840 --> 0:18:10.320 for a federator whom he's giving us his thoughts on 0:18:10.359 --> 0:18:12.960 these markets. He thinks we're going to get, in fact, 0:18:13.320 --> 0:18:20.640 a rate increase from the subtle reserve in two when 0:18:20.640 --> 0:18:23.680 Matt Miller can't fill up his Ford F one fifty 0:18:23.720 --> 0:18:27.879 truck with a hundred and fifty dollar prepaid card, that inflation, 0:18:28.440 --> 0:18:30.439 uh questions is that transitory is not going to be 0:18:30.480 --> 0:18:31.920 around for a while. Does he have to think about 0:18:31.920 --> 0:18:34.960 going electric? Let's bring in Steve Wyatt, chief investment strategist 0:18:35.000 --> 0:18:38.480 for b Okay Financial. Steve, let's start with the inflation question. 0:18:38.520 --> 0:18:41.520 It is topic to you're here, uh, in the market 0:18:41.560 --> 0:18:44.639 places here today? How do you think about inflation and 0:18:44.680 --> 0:18:46.760 how does that impact how do you put money to 0:18:46.800 --> 0:18:49.800 work these days? Yeah, thank you, good morning. I appreciate 0:18:49.800 --> 0:18:52.240 the opportunity to be back on your show today. It's 0:18:52.320 --> 0:18:54.959 the it's the sixty four dollar question for all of us, 0:18:55.000 --> 0:18:58.440 and even as we think about the markets and we're investing, 0:18:58.520 --> 0:19:01.080 if we're we're going to shift our thoughts on inflation, 0:19:01.160 --> 0:19:05.040 which we would say that in the beginning we felt 0:19:05.080 --> 0:19:08.560 like the cyclical inflationary pressures would be subsiding a little 0:19:08.560 --> 0:19:12.120 bit more quickly than they are now. Uh. But as 0:19:12.119 --> 0:19:15.240 we think about if that becomes longer term and the 0:19:15.240 --> 0:19:18.600 implications in the capital markets around the bond market, what 0:19:18.760 --> 0:19:22.280 that means from a pricing and a yield standpoint there 0:19:23.080 --> 0:19:26.199 really make it when you think about managing risk a 0:19:26.200 --> 0:19:29.760 little bit difficult, the downside risk and longer term bonds. 0:19:29.840 --> 0:19:32.440 If Rache, you're going to move up to any material 0:19:32.440 --> 0:19:37.320 amount or almost equity alike at the present time, I will, 0:19:37.359 --> 0:19:40.000 first of all, I'll tell you, Paul that I want 0:19:40.320 --> 0:19:43.159 an electric truck. But if I put an order in 0:19:43.240 --> 0:19:45.560 now for the F one fifty Lightning, or if I 0:19:45.560 --> 0:19:48.199 put it in order now for the Rivan or the 0:19:48.240 --> 0:19:51.119 cyber truck from Tesla, no matter what, I'll be waiting 0:19:51.280 --> 0:19:54.160 years before I get one of those. Your player, I'm 0:19:54.160 --> 0:19:56.280 treating which get to the front of the line. So now, 0:19:56.440 --> 0:19:59.840 which which kind of which kind of um? I think 0:20:00.040 --> 0:20:02.800 reinforces the point that inflation is going to be here 0:20:02.840 --> 0:20:05.320 for a while because I'm not going to get my 0:20:05.400 --> 0:20:09.359 lightning that I ordered today until three, so I have 0:20:09.560 --> 0:20:14.520 to buy you know, uh six point two leaders supercharged 0:20:14.920 --> 0:20:18.720 ram t r X. Now UM when you when you 0:20:18.840 --> 0:20:23.879 said Steve that it's um. It looks different compared with 0:20:23.720 --> 0:20:26.000 the with the fixed income versus the equity market. I 0:20:26.000 --> 0:20:29.600 wonder we were talking earlier with PhD from Harvard who 0:20:29.600 --> 0:20:31.560 said the equity market is the only game in town 0:20:31.640 --> 0:20:34.640 right now. Do you see it the same way? Well, 0:20:34.640 --> 0:20:37.760 I would say this look a longer term if sharply, 0:20:37.840 --> 0:20:41.640 higher interest rates or inflation are not necessarily good for equities. 0:20:42.080 --> 0:20:44.080 But if you're looking for the asset class that at 0:20:44.119 --> 0:20:47.960 least has the ability to respond to inflationary pressure and 0:20:48.000 --> 0:20:51.840 protect investors capital at least in the short run, that's 0:20:51.880 --> 0:20:55.040 that's the equity markets. If you're looking at cash or 0:20:55.040 --> 0:20:58.639 fixed income, we just think the downside risk there is 0:20:59.640 --> 0:21:02.320 even higher. Now within the equity markets, maybe there's some 0:21:02.400 --> 0:21:04.680 parts of the market that certainly do better than others, 0:21:04.800 --> 0:21:10.240 the cyclicals, energy materials. The problem is is that after 0:21:10.520 --> 0:21:14.240 twenty years a plus of disinflation, they become such a 0:21:14.320 --> 0:21:17.919 smaller part of the SMP five hundred that it's a 0:21:18.119 --> 0:21:21.240 very narrow beat, to be honest with you, because those 0:21:21.359 --> 0:21:24.240 those sectors that benefit from lower inflation have become so 0:21:24.320 --> 0:21:27.240 much larger, but they can act as an inflation hedge. 0:21:27.600 --> 0:21:32.240 Um is your point. I bought two thousand, fourteen f 0:21:32.359 --> 0:21:37.040 one fifty raptor then for fifty eight thousand dollars fully loaded. 0:21:37.480 --> 0:21:40.920 I'm ordering a new one now for eight five thousand 0:21:40.960 --> 0:21:45.040 dollars fully loaded, and it's only been it's a seven years. 0:21:45.640 --> 0:21:49.719 I'm just telling you the same product basically, um, although 0:21:49.760 --> 0:21:51.919 frankly not as good because the old one had a 0:21:51.920 --> 0:21:54.240 six point two leader narse aspected V eight and the 0:21:54.280 --> 0:21:56.440 new one has a three and a half. The same 0:21:56.520 --> 0:21:59.840 product costs more a lot more seven years later. So 0:22:00.080 --> 0:22:03.200 we do see that inflation, Paul, We do, And so Steve, 0:22:03.280 --> 0:22:06.359